Court Opinion

ID: 9946293
Source: CourtListenerOpinion
Date Created: 2024-02-29 17:05:00.327601+00
Date Added: 2024-06-11T14:25:40.462657
License: Public Domain

ATTORNEYS FOR PETITIONER:                     ATTORNEYS FOR RESPONDENT:
MARK J. RICHARDS                              THEODORE E. ROKITA
MATTHEW J. EHINGER                            ATTORNEY GENERAL OF INDIANA
JOSHUA W. SCHLAKE                             LYDIA A. GOLTEN
ICE MILLER LLP                                THOMAS L. MARTINDALE
Indianapolis, IN                              J. DEREK ATWOOD
                                              DEPUTY ATTORNEYS GENERAL
                                              Indianapolis, IN

                              IN THE
                        INDIANA TAX COURT

PENN ENTERTAINMENT, INC. (f/k/a PENN           )
NATIONAL GAMING, INC.),                        )                                         FILED
                                               )
                                                                                     Feb 28 2024, 4:30 pm
      Petitioner,                              )
                                               )                                         CLERK
                                                                                     Indiana Supreme Court
             v.                                ) Case No. 22T-TA-00015                  Court of Appeals
                                                                                          and Tax Court
                                               )
INDIANA DEPARTMENT OF STATE                    )
REVENUE,                                       )
                                               )
      Respondent.                              )

    ORDER ON THE PARTIES’ CROSS-MOTIONS FOR SUMMARY JUDGMENT

                                  FOR PUBLICATION
                                   February 28, 2024

Baker, Special Judge.

      PENN Entertainment, Inc., f/k/a Penn National Gaming, Inc. (“PENN”), has

challenged the Indiana Department of State Revenue’s (the “Department”) denial of its

tax protest. The Department had assessed additional corporate income taxes against

Penn for the 2015, 2016, and 2017 tax years, after concluding that PENN should have

included in its Indiana tax base the value of certain payments made to other state

governments, as required by Indiana Code § 6-3-1-3.5(b). PENN argues it does not
have to add back those payments, claiming the Department misapplied the governing

statute. PENN further claims that adding back the value of the out-of-state payments

violates its rights under the United States Constitution and the Indiana Constitution.

       The matter is before the Court on the parties’ cross-motions for summary

judgment. Upon review, the Court grants summary judgment for the Department and

denies PENN’s motion.

                          FACTS AND PROCEDURAL HISTORY1

       PENN, a Pennsylvania company, operated a casino in Indiana through a

subsidiary company. (See Joint Stipulation of Facts (“Jt. Stip.”) ¶¶ 1,3.) PENN also

owned other entities which operated gaming and entertainment ventures in California,

Delaware, Florida, Illinois, Iowa, Kansas, Maryland, Massachusetts, Maine, Missouri,

Mississippi, New Jersey, New Mexico, Nevada, Ohio, Pennsylvania, and West Virginia.

(See Jt. Stip. ¶ 4.)

       On its 2015, 2016, and 2017 Indiana adjusted gross income tax (“AGIT”) returns,

PENN reported the value of income taxes it had paid in other states. (See Jt. Stip. ¶ 5.)

PENN had deducted those payments from its federal income tax returns, and added the

value of those taxes back to its Indiana tax base. (See Jt. Stip. ¶ 5.)

       The Department audited PENN’s AGIT returns for the years at issue. (See Jt.

Stip. ¶ 8.) Afterwards, the Department determined certain payments by PENN to other

state governments also needed to be added back to the calculation of PENN’s Indiana

tax base. (See Jt. Stip. ¶ 10.) As a result, the Department determined PENN owed

1
  The parties have designated evidence that contains confidential information. Accordingly, the
Court will provide only that information necessary for the reader to understand its disposition of
the issues presented. See Ind. Access to Court Records Rule 9(A)(2)(d) (2024).
                                                2
additional taxes for 2015, 2016, and 2017, plus interest and penalties. (See Jt. Stip. ¶

10.)

       PENN protested the Department’s proposed assessments of additional taxes.

(See Jt. Stip. ¶ 10.) Following an administrative hearing, the Department eliminated the

assessment of penalties but otherwise denied PENN’s protest. (See Jt. Stip. ¶ 11.)

Next, PENN requested rehearing, which the Department denied. (See Jt. Stip. ¶ 12.)

       On November 16, 2022, PENN filed this original tax appeal. The Department

moved for summary judgment on November 6, 2023, and PENN cross-moved for

summary judgment on November 7. The Court held a hearing on the parties’ cross-

motions on January 26, 2024. Additional facts will be supplied as necessary.

                                STANDARD OF REVIEW

       The Tax Court reviews final determinations of the Department de novo. IND.

CODE § 6-8.1-5-1(i) (2024). The Court is therefore not bound by the evidence or the

issues raised at the administrative level. Subaru-Isuzu Auto., Inc. v. Indiana Dep’t of

State Revenue, 782 N.E.2d 1071, 1073 (Ind. Tax Ct. 2003).

       “Summary judgment is designed to provide speedy resolution to those cases – or

those parts of cases – that may be determined as a matter of law because there are no

factual disputes.” Vodafone Ams., Inc. v. Indiana Dep’t of State Revenue, 991 N.E.2d

626, 627 (Ind. Tax Ct. 2013) (citations omitted). A court shall grant a motion for

summary judgment “if the designated evidentiary matter shows that there is no genuine

issue as to any material fact and that the moving party is entitled to a judgment as a

matter of law.” Ind. Trial Rule 56(C). Cross-motions for summary judgment do not alter

the standards for determining whether summary judgment is warranted. Horseshoe

                                             3
Hammond, LLC v. Indiana Dep’t of State Revenue, 865 N.E.2d 725, 727 (Ind. Tax Ct.

2007), review denied. The parties have stipulated to all material facts, leaving only

questions of law.

                                         ANALYSIS

                     I.     Application of Indiana Code § 6-3-1-3.5

       The parties disagree as to whether specific payments submitted by PENN to

other state governments should, by statute, be included in the calculation of PENN’s

Indiana adjusted gross income. “When this Court is confronted with a question of

statutory construction, its function is to determine and implement the intent of the

legislature in enacting that statutory provision.” DeKalb Cnty. E. Cmty. Sch. Dist. v.

Dep’t of Loc. Gov’t Fin., 930 N.E.2d 1257, 1260 (Ind. Tax Ct. 2010) (citation omitted).

“In general, the best evidence of the legislature’s intent is found in the actual language

used within the statute itself.” Id. (citation omitted). The General Assembly instructs

that “[w]ords and phrases shall be taken in their plain, or ordinary and usual, sense.”

IND. CODE § 1-1-4-1(1) (1991). “Nevertheless, a statute must not be construed so

narrowly that it does not give effect to legislative intent because the intent of the

legislature embodied in a statute constitutes the law.” Gen. Motors Corp. v. Indiana

Dep’t of State Revenue, 578 N.E.2d 399, 404 (Ind. Tax Ct. 1991), aff’d, 599 N.E.2d 588

(Ind. 1992) (citation omitted).

       For business entities such as PENN, Indiana defines “adjusted gross income” the

same as federal “taxable income” is defined in Section 63 of the Internal Revenue Code

(“IRC”) with certain adjustments. IND. CODE § 6-3-1-3.5(b) (2015). IRC § 63 defines

taxable income as “gross income minus the deductions allowed” by the Code. 26

                                              4
USCA § 63 (2014). The allowable deductions include payment of state income taxes.

26 USCA § 164 (2014).

        Next, the General Assembly directs Indiana businesses calculating adjusted

gross income to “[a]dd an amount equal to any deduction or deductions allowed or

allowable pursuant to [IRC § 63] for taxes based on or measured by income and levied

at the state level by any state of the United States.” I.C. § 6-3-1-3.5(b)(3). This

subsection is known as the “add-back provision.” See Subaru-Isuzu, 782 N.E.2d at

1076.

        PENN does not deny that some of its out-of-state tax payments should be

included in its Indiana tax base. PENN instead argues the specific out-of-state

payments at issue, which are discussed below, should not be added to its Indiana tax

base because the payments were for “un-apportioned excise taxes, privilege fees, and

other non-tax payments” that are not measured by income. (Pet’r Br. Supp. Mot.

Summ. J. (“Pet’r Br.”) at 13.)

        In Consolidation Coal Company v. Indiana Department of State Revenue, 583

N.E.2d 1199 (Ind. 1991), the Indiana Supreme Court considered whether an out-of-state

tax, specifically “West Virginia’s Business and Occupation Tax,” was “based on or

measured by income” for purposes of Indiana Code section 6-3-1-3.5(b)(3).

Consolidation Coal Co. v. Indiana Dep’t of State Revenue, 583 N.E.2d 1199, 1200 (Ind.

1991). The Court determined the General Assembly’s use of the phrase “based on or

measured by income” in the statute “suggests a broader inquiry than would be

appropriate if the legislature had provided for adding back, say, ‘taxes on income.’” Id.

at 1201. In essence, Indiana Code section 6-3-1-3.5(b)(3) permits “the add-back of

                                             5
taxes based on income but not those such as property or excise taxes.” Id. at 1202.

Turning to the tax in question, the Court noted it was “a tax on the privilege of doing

business in that state.” Id. Even so, West Virginia calculated the amount of tax owed

using “gross proceeds of sales,” derived from “tangible property,” rather than the value

of property held. Id. The Indiana Supreme Court determined West Virginia’s privilege

tax was measured by income and thus subject to the add-back provision. Id.; see also

Aztar Ind. Gaming Corp. v. Indiana Dep’t of State Revenue, 806 N.E.2d 381, 386 (Ind.

Tax Ct. 2004) (determining payments made for Indiana’s Riverboat Wagering Tax were

subject to the add-back provision because the tax was measured by receipts, even

though the tax was an excise tax), review denied.

       This Court reached a contrary result on different facts in First Chicago NBD

Corporation v. Department of State Revenue, 708 N.E.2d 631 (Ind. Tax. Ct. 1999). In

that case, this Court was called on to apply a subsection of Indiana Code § 6-5.5-1-2.

See First Chicago NBD Corp. v. Dep’t of State Revenue, 708 N.E.2d 631, 632 (Ind. Tax

Ct. 1999). That statute, which defines adjusted gross income for financial institutions,

included an add-back provision that was substantially similar to the one in Indiana Code

§ 6-3-1-3.5(b)(3). See, e.g., IND. CODE § 6-5.5-1-2(a)(1)(C) (2024) (requiring add-backs

for out-of-state taxes “based on or measured by income”). The Department alleged

Michigan’s Single Business Tax (“MSBT”) was “based on or measured by income,” First

Chicago, 701 N.E.2d at 632, and thus First Chicago NBD Corporation needed to add

the value of its MSBT payments back to its Indiana taxable income.

       The Tax Court disagreed with the Department, determining the MSBT was a

value added tax. Although the taxpayer’s income was part of the calculation of the tax

                                             6
owed, the income was “merely an effort to measure, in part, the value added by the

production of a product.” Id. at 634. At its core, the MSBT measured the value added

from the production process, not income derived from sales. Id. Further, the Tax Court

noted Michigan’s courts have determined the MSBT is not a tax measured by income.

Id. The Court concluded the MSBT was not “based on or measured by income,”

concluding “no tax that is measured by income adds costs of production.” Id. at 635.

As a result, First Chicago did not have to add back the value of the MSBT payments to

its Indiana income base. Id.

      In the current case, the parties focus on PENN’s out-of-state payments to ten

states. (See Pet’r Br. at 27; Resp’t Br. Supp. Summ. J. at 12-14.) Each state’s taxes may

be summarized as follows:

      Illinois: PENN paid taxes to the State of Illinois pursuant to 230 Illinois Compiled

Statutes act 10, section 13(a), which imposes a “wagering tax” on licensed gambling

companies, calculated based on “adjusted gross receipts.” See 230 ILL. COMP. STAT.

10/13 (2015).

      Maine: Under Revised Maine Statutes Annotated title 8, section 1036, PENN paid

an amount for the state’s administrative expenses, measured by “gross slot machine

income,” as well as percentages of “income from table games” and “net slot machine

income.” See ME. REV. STAT. tit. 8, § 1036 (2015).

      Massachusetts: Massachusetts General Laws chapter 23K, section 55 requires

gaming licensees to pay daily taxes calculated by “gross gaming revenue.” MASS. GEN.

LAWS ch. 23K, § 55 (2015).

      Mississippi:   PENN paid a license fee, calculated by “gross revenue,” under

                                           7
Mississippi Code Annotated section 75-76-177. MISS. CODE ANN. § 75-76-177 (2015).

      Missouri: Missouri Revised Statutes section 313.822 required PENN and other

gaming companies to pay a tax based on “adjusted gross receipts.” MO. REV. STAT. §

313.822 (2015).

      Nevada: Under Nevada Revised Statutes section 463.370, the state collects a

license fee from gaming companies, measured using the companies’ “gross revenue.”

Nev. Rev. Stat. § 463.370 (2015).

      New Mexico: PENN paid the state “an excise tax” under New Mexico Statutes

Annotated section 60-2E-47. N.M. STAT. ANN. § 60-2E-47 (2015). The tax is calculated

based on “the net take” of for-profit gaming licensees. Id.

      Ohio: During the years at issue, PENN paid Ohio a “casino tax” that is calculated

from “gross casino revenue.” Ohio Revised Code Annotated § 5753.02. OHIO REV. CODE

ANN. § 5753.02 (2015).

      Pennsylvania: Two statutory taxes are at issue, a “table game tax” under 4

Pennsylvania Consolidated Statutes section 13A62, and a “slot machine tax” under 4

Pennsylvania Consolidated Statutes section 1403. 4 PA. CONS. STAT. §§ 13A62, 1403

(2015). Under both statutes, Pennsylvania calculates the amounts due by “daily gross”

revenue.

      West Virginia: Finally, PENN paid West Virginia a tax for “the privilege of holding

a [gaming] license” under West Virginia Code section 29-22C-26. W. VA. CODE § 29-22C-

26 (2015). The tax is calculated based on “adjusted gross receipts from the operation of

West Virgina Lottery table games.” Id.

      These taxes are more like the privilege tax at issue in Consolidation Coal than

                                            8
the value added tax involved in First Chicago. In First Chicago, income was incidental

to the calculation of value added through a production process. The out-of-state taxes

in PENN’s case more closely resemble the licensing tax discussed in Consolidation

Coal. Even though Mississippi and Nevada style their payment requirements as

licensing fees, they calculate amounts owed using a licensee’s gaming income.

       PENN argues that the out-of-state payments should not be included in the

calculation of PENN’s Indiana adjusted gross income because Indiana Code section 6-

3-1-3.5 sets forth a “net income tax,” not a gross income tax. (Pet’r Br. at 33-34.) In

support, PENN cites Smith v. Indiana Department of State Revenue, 122 N.E.3d 489,

(Ind. Tax Ct. 2019), in which the Court distinguished between gross income and

adjusted gross income. But Smith provides little guidance here because it is

procedurally and factually dissimilar to the current case. In Smith, the key question was

whether the Department had timely issued assessments to taxpayers, and the Court’s

discussion of gross income versus adjusted gross income was in the context of the

statute of limitations set forth in Indiana Code section 6-8.1-5-2(b) (2011). See Smith v.

Indiana Dep’t of State Revenue, 122 N.E.3d 489, 494 (Ind. Tax Ct. 2019). PENN’s case

involves a different statute. In any event, the out-of-state tax at issue in Consolidation

Coal was a tax on gross proceeds, and the Indiana Supreme Court determined

Consolidation Coal’s tax payments should be added back to its Indiana adjusted gross

income. 583 N.E.2d at 1202.

       Next, PENN argues requiring it to add back the out-of-state tax payments would

conflict with the Department’s regulations governing adjusted gross income. (Pet’r Br.

at 34.) This argument misses the mark. PENN cites: (1) 45 IAC 3.1-1-42 (consistency

                                             9
in taxpayer reporting); (2) 45 IAC 3.1-1-55 (defining “income producing activity” in the

context of sales other than sales of tangible personal property); (3) 45 IAC 3.1-1-6

(explaining when a corporation is considered “taxable in another state” for purposes of

Indiana’s adjusted gross income tax); (4) 45 IAC 3.1-1-74 (explaining the circumstances

under which a taxpayer may get credit for paying income tax in another state); (5) 45

IAC 15-3-2 (discussing the relationship between statutes and regulations); and (6) 45

IAC 15-5-7(e) (defining income in the context of the statute of limitations for

assessments). (See Pet’r Br. at 34.) None of these regulations conflicts with the

application of the add-back provision to PENN’s out-of-state tax payments.

       PENN also points to the following in support of its argument that out-of-state

taxes are merely excise taxes not subject to being added back: (1) the legislative

history of the add-back provision; (2) the Auditor’s Guide that the Department used at

the time the provision was enacted; (3) the Audit Manual the Department currently uses;

(4) guidance from the Multistate Tax Commission, of which Indiana is an associate

member; and (5) an expert opinion provided by Professor Richard Pomp. (Pet’r Br. at

21-23, 25, 30-32.) This Court has reviewed these materials but cannot depart from the

“broader inquiry” into the nature of PENN’s out-of-state tax payments, as required by

the Indiana Supreme Court in Consolidation Coal. Consolidation Coal, 583 N.E.2d at

1201. In summary, the out-of-state taxes at issue are based on income or measured by

income for purposes of the add-back provision, and by statute PENN’s tax payments

must be included in its Indiana tax base for the years in question. The law is with the

Department on this issue.

                                             10
                       II. PENN’s Federal Constitutional Claims

       PENN argues the Department’s proposed assessments under the add-back

provision, as applied here, violate PENN’s rights under the Commerce Clause, the Due

Process Clause, and the Equal Protection Clause. (Pet’r Br. at 40.) This Court

addresses each in turn, noting as a general principle that “[d]uly promulgated statutes

enjoy a strong presumption of constitutionality, and the party challenging the

constitutionality bears the burden to overcome the presumption.” Mid-America Mailers,

Inc. v. State Bd. of Tax Comm’rs, 639 N.E.2d 380, 386 (Ind. Tax Ct. 1994) (citation

omitted).

                                  A. Commerce Clause

       Section Eight, Clause Three of the United States Constitution provides,

“Congress shall have Power . . . To regulate Commerce with foreign Nations, and

among the several States . . . .” U.S. CONST. art. I, § 8, cl. 3. “The Commerce Clause

forbids the States to levy taxes that discriminate against interstate commerce or that

burden it by subjecting activities to multiple or unfairly apportioned taxation.”

MeadWestvaco Corp. v. Illinois Dep’t of Revenue, 553 U.S. 16, 24 (2008) (citations

omitted). A tax complies with the Commerce Clause’s requirements when the tax “is

applied to an activity with a substantial nexus with the taxing State, is fairly apportioned,

does not discriminate against interstate commerce, and is fairly related to the services

provided by the State.” Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).

PENN claims the Department’s proposed assessments violate all four elements of the

standard set forth in Complete Auto.

                                             11
                                    Substantial Nexus

       The “substantial nexus” element of the standard is met when “an entity has a

physical presence in the taxing state.” Asplundh Tree Expert Co. v. Indiana Dep’t of

State Revenue, 38 N.E.3d 744, 749 (Ind. Tax Ct. 2015) (citation omitted), review

denied. There is no dispute that PENN owns and operates a casino in Indiana through

a subordinate business entity.

       PENN argues its out-of-state tax payments have no connection with Indiana

because all of the transactions on which the payments are based occurred outside

Indiana. (Pet’r Br. at 41-42.) But PENN’s physical presence in the state is dispositive.

See Hoosier Energy Rural Elec. Coop., Inc. v. Indiana Dep’t of State Revenue, 572

N.E.2d 481, 485 (Ind. 1991) (taxpayer’s physical presence in State established

sufficient nexus; the fact that the transaction at issue – a sale of an intangible asset –

occurred out-of-state was not relevant).

                                   Fair Apportionment

       A state tax on interstate commerce must be fairly apportioned to prevent

excessive taxes on transactions “as each state takes its bite out of the interstate

transaction as it passes through each taxing state.” Id. There are two tests for fair

apportionment: a tax must be both “internally and externally consistent.” Indiana-

Kentucky Elec. Corp. v. Indiana Dep’t of State Revenue, 598 N.E.2d 647, 656 (Ind. Tax

Ct. 1992) (citations omitted).

       “Internal consistency is preserved when the imposition of a tax identical to the

one in question by every other State would add no burden to interstate commerce that

intrastate commerce would also not bear.” Oklahoma Tax Comm’n v. Jefferson Lines,

                                             12
Inc., 514 U.S. 175, 185 (1995). “This test asks nothing about the degree of economic

reality reflected by the tax, but simply looks to the structure of the tax at issue to see

whether its identical application by every State in the Union would place interstate

commerce at a disadvantage as compared with commerce intrastate.” Id.

       PENN argues the Department’s application of the add-back provision to its out-

of-state payments violates the internal consistency test because Indiana added back the

full amount of the payments, and if every other state did not, PENN’s tax debt would

increase by “eighteen times” the regular amount. (Pet’r Br. at 44.) But PENN’s

argument relates to the size of its tax bill, not whether the tax at issue disadvantages

interstate commerce. And PENN concedes elsewhere that Indiana apportions its fair

share of interstate taxes only after the add-back process is complete. (Pet’r Br. at 25.)

Also, PENN points to no evidence that Indiana will fail to follow the standard

apportionment process here. Thus, the Department’s assessments will not

disadvantage interstate commerce even if other states sought to add back PENN’s out-

of-state payments in their jurisdictions.

       Turning to the test of external consistency, courts look to “the economic

justification for the State’s claim upon the value taxed, to discover whether a State’s tax

reaches beyond that portion of value that is fairly attributable to economic activity within

the taxing State.” Jefferson Lines, 514 U.S. at 185 (citations omitted).

       PENN claims the Department’s assessments draw in value that is not fairly

attributable to Indiana because the payments resulted from purely out-of-state

transactions. (Pet’r Br. at 45.) But PENN has conceded that the Department can add

back the value of the federal tax deductions PENN took for payment of other states’

                                             13
income taxes, as long as Indiana takes only its portion of the added-back amount. (Id.

at 25.) The Department will likewise apportion the value of the out-of-state payments at

issue here, so that Indiana will tax only value fairly attributable to Indiana. The

Department’s use of the add-back provision here is not externally inconsistent.

                   Nondiscrimination Against Interstate Commerce

       A state “impermissibly discriminates against interstate commerce when the

state’s taxing power effectively increases the tax burden for out-of-state transactions,

thereby coercing taxpayers to conduct intrastate rather than interstate business.”

Rhoade v. Indiana Dep’t of State Revenue, 774 N.E.2d 1044, 1050 (Ind. Tax. Ct. 2002)

(citation omitted). PENN argues the Department’s assessments are discriminatory

because they would result in PENN being doubly taxed for the same transaction – once

in the state in which the transaction occurred, and then a second time in Indiana. (Pet’r

Br. at 42.) But there is no dispute that once the Department adds back the out-of-state

tax payments to PENN’s tax base, the Department must apportion the payments to take

only Indiana’s fair share of the payments. And nothing suggests that the Department, in

following that process, will coerce PENN or other business taxpayers to engage in

intrastate rather than interstate business. Under these circumstances, the assessments

do not discriminate against interstate commerce.

               Fair Relation of Taxation to Services Provided by State

       “[C]itizens of the State of Indiana are expected to contribute their fair share of the

state tax burden which pays for the multitude of services provided to the citizens by the

State.” Hoosier Energy, 572 N.E.2d at 485. PENN argues adding back the value of its

out-of-state tax payments to its adjusted gross income is so disproportionate as to

                                             14
distort its tax base out of all fair relation to the benefits Indiana provides. (Pet’r Br. at

46.) PENN cites Columbia Sportswear USA Corp. v. Indiana Department of State

Revenue, 45 N.E.3d 888 (Ind. Tax Ct. 2015), review denied, but that case is

inapplicable. That case does not address the Commerce Clause. See Columbia

Sportswear USA Corp. v. Indiana Dep’t of State Revenue, 45 N.E.3d 888 (Ind. Tax Ct.

2015), review denied. In any event, there is no dispute that the Department must

apportion the out-of-state tax payments so that PENN pays only Indiana’s fair share of

those payments.

       Finally, PENN argues the Commerce Clause envisions that states must

“apportion ‘net income’ not ‘gross income’ or ‘gross receipts’ . . . .” (Pet’r Reply Br. at

24.) But the United States Supreme Court has “rejected this formal distinction” between

gross receipts and net income when considering whether a state tax violates the

Commerce Clause. Comptroller of Treasury of Maryland v. Wynne, 575 U.S. 542, 551

(2015). PENN has failed to demonstrate the Department’s assessments violate the

Commerce Clause.

                                  B. Due Process Clause

       The Fourteenth Amendment to the Constitution guarantees no state shall

“deprive any person of life, liberty, or property, without due process of law . . . .” U.S.

CONST. amend. XIV, § 1. “Substantive due process requires that taxation not be

arbitrary, oppressive, or unjust.” Spencer Cnty. Assessor v. AK Steel Corp., 61 N.E.3d

406, 420 (Ind. Tax Ct. 2016) (citations omitted), review denied. The United States

Supreme Court has stated:

       The Court applies a two-step analysis to decide if a state tax abides by the
       Due Process Clause. First, and most relevant here, there must be some

                                               15
       definite link, some minimum connection, between a state and the person,
       property or transaction it seeks to tax. Second, the income attributed to
       the State for tax purposes must be rationally related to values connected
       with the taxing State.

North Carolina Dep’t of Revenue v. The Kimberley Rice Kaestner 1992 Fam. Tr., 139 S.

Ct. 2213, 2220 (2019) (internal quotations and citations omitted).

       PENN argues the Department should not have applied the add-back provision to

the out-of-state payments because they stem from transactions with no connection to

Indiana. (Pet’r Br. at 50.) In Kaestner, the United States Supreme Court was asked to

determine whether the State of North Carolina could tax a trust whose beneficiary lived

in North Carolina, even if neither the trust nor the trustee were based in the state, the

trust was governed by a different state’s laws, and the beneficiary neither received any

distributions from the trust during the years in question nor had the right to demand any

distributions. Kaestner, 139 S. Ct. at 2223. The trust argued it had insufficient links to

be subjected to North Carolina’s taxing authority, and being forced to pay taxes to that

state violated its rights under the Due Process Clause. Id. at 2219. The Court

concluded the state’s relationship to the object of its tax was “too attenuated” to justify

exercise of the state’s power to tax. Id. at 2222.

       By contrast, PENN has ample contacts with Indiana due to operating a casino

here through a subsidiary. And PENN has conceded the Department has a sufficient

connection to at least some of its out-of-state tax payments, because PENN included its

out-of-state income tax payments in its Indiana tax base for the years in question.

       Next, PENN further argues the income the Department attributes to PENN from

these payments is not rationally related to Indiana’s taxing authority. (Pet’r Br. at 50.) A

tax imposed by a State “cannot be ‘out of all appropriate proportion to the business

                                             16
transacted by the appellant in that State.’” Exxon Corp. v. Wisconsin Dep’t of Revenue,

447 U.S. 207, 220 (1980) (quoting Hans Rees’ Sons v. State of N. Carolina ex rel.

Maxwell, 283 U.S. 123 (1931)).

       In this case, the Department has proposed to apportion the added-back amounts

so that Indiana will tax only its proportional share of PENN’s income. PENN argues the

amount added to its tax base is disproportionately high, but PENN conducts business in

numerous states, and the out-of-state tax payments at issue reflect PENN’s

multifaceted operations. Ultimately, Indiana will take only its proportional share of the

payments, in compliance with the requirements of the Due Process Clause.

                               C. Equal Protection Clause

       The Equal Protection Clause of the Fourteenth Amendment provides, “No State

shall . . . deny to any person within its jurisdiction the equal protection of the laws.” U.S.

CONST. amend. XIV, § 1. “[T]he Equal Protection Clause does not require that all

persons be treated identically or equally; rather, equal protection analysis is implicated

only if an individual has been treated differently from similarly situated persons.” UACC

Midwest, Inc. v. Indiana Dep’t of State Revenue, 667 N.E.2d 232, 239 (Ind. Tax Ct.

1996) (citation omitted). “Consequently, under federal equal protection analysis, absent

a showing that the challenged classification involves a suspect class or trammels on

fundamental rights, the classification is presumed valid and will be upheld as long as it

is rationally related to a legitimate state interest.” AK Steel Corp., 61 N.E.3d at 417

(citation omitted). “Sufficient differences in the method of doing business may be

justification for separate classification and differential tax treatment.” Sunshine

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Promotions, Inc. v. Ridlen, 483 N.E.2d 761, 766 (Ind. Ct. App. 1985) (citations omitted),

trans. denied.

       In support of its Equal Protection Clause claim, PENN notes the Department’s

audit manual provides that some out-of-state tax payments are not necessarily subject

to being added back. (Pet’r Br. at 52.) PENN reasons that the Department is treating

PENN unfairly by inconsistently enforcing the add-back provision, that is, requiring it to

add back the payments at issue while excluding other tax payments. (Pet’r Br. at 52.)

       PENN does not point to any example of the Department applying the add-back

provision against another taxpayer in a way that resulted in disparate treatment.

Further, the audit manual discusses adding back out-of-state taxes, but the manual

does not definitively list which taxes must or must not be added back. Instead, the

manual states, “[b]ased on the applicable Indiana statutes, regulations, and case law,

and analysis of the specific application of the taxes, DOR determined that taxes [that]

may not be required to be added back could include, but [are] not limited to the following

[list of out-of-state taxes].” (See Jt. Stip. Ex. B. at JSF000044- JSF000045). The

manual further provides, “[b]ased on the applicable Indiana statutes, regulations, and

case law, and analysis of these specific application of the taxes, DOR determined that

taxes [that] required being added back include, but [are] not limited to the following [list

of out-of-state taxes].” (Id. at JSF000045). Thus, the manual does not mandate

disparate treatment of taxpayers. Further, although PENN claims the audit manual

does not require the Department to add back out-of-state excise taxes, the manual

specifically lists excise taxes from Hawaii, Oregon, and Tennessee as potentially being

subject to the add-back provision. (Id. at JSF000045). PENN has failed to prove

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disparate treatment, and for that reason, its Equal Protection claim must fail. See

UACC Midwest, 667 N.E.2d at 240 (rejecting cable broadcaster’s Equal Protection

claim; petitioner could not demonstrate the Department had treated it differently from

similarly situated businesses).

         On a related topic, PENN also argues the Department’s assessments violate

Article 1, section 23 of the Indiana Constitution. PENN’s argument on this constitutional

provision merely states that the Equal Protection Clause and section 23 apply the

“same standard.” (Pet’r Br. at 52 n.118.) But the Indiana Supreme Court has

determined otherwise. See Collins v. Day, 644 N.E.2d 72, 80 (Ind. 1994) (setting forth

separate standard for addressing claims under section 23). The Court will not further

address the issue in the absence of argument from PENN under the Collins standard.2

                  III. PENN’s Preserved Indiana Constitutional Claim

         PENN argues the Department’s proposed assessments, as applied here, violate

the Indiana Constitution’s Due Course of Law Clause. (Pet’r Br. at 40.) Article 1,

Section 12 provides, in relevant part: “All courts shall be open; and every person, for

injury done to him in his person, property, or reputation, shall have remedy by due

course of law.” IND. CONST. art. 1, § 12. The party claiming a statute violates the

Indiana Constitution bears the burden of proof, and all doubts are resolved against that

party. State Bd. of Tax Comm’rs v. Town of St. John, 702 N.E.2d 1034, 1037 (Ind.

1998).

2
 PENN cites Championship Wrestling, Inc. v. State Boxing Comm’n, 477 N.E.2d 302 (Ind. Ct.
App. 1985), trans. denied, for the principle that claims under the Equal Protection Clause and
section 23 are addressed using the same standard. The Indiana Court of Appeals issued its
decision in Championship Wrestling prior to the Indiana Supreme Court’s decision in Collins.
The Supreme Court’s precedent is controlling.
                                              19
       Indiana’s courts employ the same methodology when analyzing a claimed denial

of procedural due process of the Due Course of Law Clause as the Supreme Court

uses to analyze claimed violations of the Due Process Clause. Doe v. O’Connor, 790

N.E.2d 985, 988 (Ind. 2003). As for substantive due process, the Indiana Supreme

Court has stated, “there is a strain of Article I, Section 12 doctrine that is analogous to

federal substantive due process. . . . [I]n general this doctrine imposes the requirement

that legislation interfering with a right bear a rational relationship to a legitimate

legislative goal . . . .” McIntosh v. Melroe Co., 729 N.E.2d 972, 976 (Ind. 2000).

       PENN’s claim under the Due Course of Law Clause is substantive in nature,

arguing the Department’s application of add-backs here is neither “rational” nor

“fundamentally fair.” (Pet’r Br. at 50.) But Indiana has a rational interest in ensuring

that taxpayers’ income base includes amounts that the taxpayers deducted from their

federal income taxes. PENN acknowledges the general point, because it did add back

some amounts to its Indiana tax base reflecting payments of other state’s income taxes.

The added-back amounts are substantial (before Indiana calculates and takes only its

proportional share), but PENN is a large business with operations in many states. The

Court cannot conclude the Department’s proposed assessments violate PENN’s

substantive due process rights under Indiana’s Due Course of Law Clause.

       In summary, as to the parties’ arguments under the federal and state

constitutions, the law is with the Department rather than PENN. The Department is

entitled to judgment as a matter of law.

                                              20
                                  CONCLUSION

      For the foregoing reasons, the Court DENIES PENN’s motion for summary

judgment and GRANTS the Department’s motion for summary judgment.

      SO ORDERED this 28th day of February 2024.

                                             John G. Baker
                                             Special Judge, Indiana Tax Court

Distribution:
Mark J. Richards, Matthew J. Ehinger, Joshua W. Schlake, Lydia A. Golten, Thomas L.
Martindale, J. Derek Atwood

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