Indiana Amends Sourcing, Financial Institutions Tax Rules

Indiana recently updated its income tax sourcing rules with retroactive effect and clarified guidance on its financial institutions tax. 

Sourcing Changes 

Indiana has finalized 45 IAC 3.1-1-55.5, which provides detailed guidance on the implementation of market-based sourcing for receipts from services and intangibles. The regulation replaces the cost of performance method and applies retroactively to January 1, 2019. It finalizes LSA Document #19-688(E), which was published in 2019 to implement the statutory shift introduced by Senate Enrolled Act 563 (2019). 

Key provisions include:

• Market-Based Sourcing: Receipts from services and intangibles are sourced to Indiana if the benefit is received in the state. The rule introduces a hierarchical, multistep approach to determine whether receipts from services and intangibles should be sourced to Indiana. Each tier begins with the most direct sourcing indicator and moves to customer billing address or a reasonable approximation when direct information is not available.  
• Scope of Transactions:The rule applies to various transactions, including: 
  • Sale, rental, lease, or license of real property;
  • Rental, lease, or license of tangible personal property;
  • In-person services, aside from those specifically excluded, such as legal and accounting services;
  • Services delivered by physical or electronic means;
  • Professional services to individuals and businesses;
  • Licensing or leasing of intangible property, including production and marketing intangibles;
  • Sales or exchanges of intangible property; and
  • Sale, exchange, or assignment of tax credits.
• Exclusions: Some receipts are excluded from this rule, such as those from insurance premiums, motorsports racing, repatriated foreign dividends under IRC Section 965, and global intangible low-taxed income under IRC Section 951A. 
• Reference to Multistate Tax Commission (MTC) Guidelines: The rule generally aligns with the MTC’s general allocation and apportionment regulations, providing industry-specific guidance for sectors like transportation, construction, and publishing. However, it also specifies instances when Indiana’s approach diverges from the MTC recommendations. 

Financial Institutions Tax Changes

The Indiana Department of Revenue has updated Information Bulletin #200, which provides guidance on the financial institutions tax. The revised bulletin aims to streamline compliance and address areas that have historically prompted questions or audit issues. 

Key changes include:

• Combined Reporting Requirements: Financial institutions that are part of a unitary group must file a combined return that includes only entities transacting business in Indiana. Information Bulletin #200 clarifies the adjustments allowed when a combined return does not fairly reflect Indiana-source income. 
• Net Operating Loss (NOL) Calculations: The bulletin provides detailed guidance on NOL computations, including specifying that a taxpayer without a federal NOL will not have an Indiana NOL, even if an NOL would be created as a result of modification. NOLs may be carried forward 15 years, but they may not be carried back. The bulletin also includes scenarios involving the discharge of indebtedness.
• Federal Return Alterations: In the event of a federal return alteration, an amended Indiana return is due to the Department no later than 180 days after the alteration is made or within the normal time limit for claiming a refund for a tax period. A failure to report the modification by amended return leaves the statute of limitations open for departmental adjustment.