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Justices reverse Tax Court in UPS case

June 21, 2012

The Indiana Supreme Court found that two reinsurance companies of the United Parcel Service are foreign companies that don’t do business within Indiana, so they aren’t exempt from Indiana adjusted gross income tax.

In Indiana Department of Revenue v. United Parcel Service, Inc., 49S10-1107-TA-417, UPS argued its two affiliated reinsurance companies – UPINSCO, formed under the laws of the U.S. Virgin Islands and UPS Re, formed under the laws of Bermuda – are subject to Indiana’s gross premium privilege tax statute, so they would be exempt from adjusted gross income tax here.

In Indiana, insurance companies are required to pay tax on earned premiums in lieu of state corporate income tax. The premium tax works like an excise tax allowing a foreign insurer to do business in Indiana, wrote Justice Robert Rucker.

UPS contracted with several companies to provide workers’ compensation insurance and liability insurance for damage to its packages, but UPINSCO and UPS Re ultimately insured UPS’s risks.

UPS sought to exclude in 2000 and 2001 from its federal taxable income the income of its affiliates UPINSCO and UPS Re. The Indiana Department of State Revenue disallowed the exclusion and claimed UPS underpaid taxes in 2001. The Indiana Tax Court granted summary judgment for UPS and denied the department’s motion. The Tax Court reasoned that because UPS was “subject to” the premium tax under Indiana Code 6-3-2-2.8(4), it was exempt from the adjusted gross income tax.

The justices concluded that the affiliates were not doing business in Indiana. The record shows – and the parties don’t dispute – that the reinsurance transactions took place between foreign companies as neither the primary insurers nor the affiliates are organized under the laws of Indiana, Rucker wrote.

“… even assuming UPINSCO and UPS Re reinsured Indiana risks, there is no evidence in the record before us that the reinsurance transactions took place in the State of Indiana,” he wrote. “Because this is a necessary condition in order to be ‘subject to’ the premium tax, UPS failed in its burden of establishing that it is entitled to summary judgment as a matter of law. Because we are definitely and firmly convinced the Tax Court’s determination to the contrary is in error, we reverse the grant of summary judgment in favor of UPS and remand this cause for further proceedings.”

 

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