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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowThe Indiana Supreme Court last week narrowed the state’s income tax add-back requirements for casinos, preventing the Department of Revenue from inflating taxable income with unapportioned gaming taxes.
The June 29 opinion overturned the Indiana Tax Court’s 2024 decision against Penn Entertainment Inc., a Pennsylvania company operating casinos in Indiana, which argued that the Department of State Revenue added back to its tax base taxes that were not subject to Indiana’s “add-back” provision. Previously ruling in favor of the department, the Tax Court held that the state has a rational interest in ensuring that taxpayers’ income base includes amounts that the taxpayer deducted from their federal income taxes.
But the Supreme Court determined that the statute’s language refers to direct income taxes and their functional equivalents – not unapportioned excise taxes. This means that the wagering taxes Penn paid to other states did not have to be added back.
The Indiana Department of Revenue told The Indiana Lawyer in a written statement on Monday that it will not comment on the court’s decision.
The court said the add-back statute is essentially a tool for accurate apportionment and is generally understood to cover only two categories of apportioned taxes: state income taxes and excise taxes that either substitute for or are functionally equivalent to income taxes.
However, the court said, the statute does not cover unapportioned excise taxes.
And since the court determined that none of Penn’s excise taxes at issue were apportioned, the company did not need to add them back.
“The add-back statute undoes other states’ prior apportionment for their income taxes, preventing artificial deflation of the tax base,” Justice Derek Molter wrote in the opinion. “Because the wagering excise taxes were never apportioned, there is no apportionment to undo.”
Molter explained the issue by comparing it to a pie.
The “pie” is the company’s overall adjusted gross income, while Indiana’s “slice” is that portion of income attributable to the state under the apportionment formula.
A company must first determine how big the pie is. Then Indiana takes only its share of the pie based on a specific formula. According to Molter, Indiana uses a “single-factor sales formula” to apportion its net income tax base. Under this formula, the state calculates the taxpayer’s in-state sales as a fraction of the total worldwide sales and multiplies that fraction by the adjusted gross income, according to the opinion.
However, several concerns may arise, which are the core of Penn and the Department of Revenue’s dispute.
If the calculated size of the overall gross income is underestimated, then the state’s slice will be too small, and so will the resulting tax.
But if the size of the overall gross income is overestimated, then the state’s slice will be too big, and the company will be over-taxed.
So to prevent underestimating the size of the gross income, Molter said, states usually require a company to add back to its adjusted gross income the federal deduction for apportioned income taxes it pays to other states.
But unapportioned taxes, such as sales or utilities taxes, which cover only intrastate transactions and are not subject to an apportionment formula, are different, Molter said.
“Those costs, regardless of the state where they were incurred, contributed to taxable income across all taxing states—they were costs of producing income that went into the pie from which all the income-generating states will take their slice and so should be deductible,” Molter wrote. “Adding those costs back would artificially inflate the tax base and the resulting tax.”
On its federal tax returns for 2015, 2016 and 2017, Penn deducted about $9.2 million for net income taxes it paid to other states, according to court documents. Penn also deducted about $2 billion in unapportioned wagering excise taxes it paid to other states.
On Penn’s Indiana tax returns for those years, Penn added back the $9.2 million deduction for state-level apportioned net income taxes, but it did not add back the $2 billion in state-level unapportioned wagering taxes.
In February 2021, the Department of Revenue audited Penn for 2015, 2016 and 2017, concluding that Indiana Code § 6-3-1-3.5(b)(3) also required Penn to add back the wagering taxes it paid to 10 states. After adding back the wagering taxes, the department determined that Penn owed, before penalties and interest, an additional $8.8 million for the three years.
Penn protested the department’s assessment and later appealed to the Indiana Tax Court in 2022.
The Tax Court granted the Department of Revenue’s motion for summary judgment, but the Supreme Court’s decision remanded the case for summary judgment in favor of Penn.
The case is PENN Entertainment, Inc. (f/k/a Penn National Gaming, Inc.) v. Department of State Revenue, 24S-TA-00382.
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