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tortappealmotionsummary judgmentwillcorporationcase lawmotion for summary judgment

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Sherwin-Williams Co. v. Indiana Dept. of State Revenue, 673 N.E.2d 849

Facts

Sherwin-Williams, an Ohio corporation, regularly invested its working capital in various securities as part of its business activities. Initially, the company treated the interest income from these investments as non-business income allocated to Ohio. However, after the Department assessed additional taxes, Sherwin-Williams conceded that the interest income was business income but argued that the denominator of the sales factor should include the gross proceeds from its investment activities, including both interest and principal. The Department denied this claim, leading to the appeal.

Sherwin-Williams is an Ohio Corporation qualified to conduct business in Indiana. Its principal business consists of manufacturing and selling paint and related products. However, as part of its normal business activities, Sherwin-Williams regularly invests its working capital in a variety of securities.

Issue

Whether the denominator of Sherwin-Williams' sales factor should be increased to include the principal or capital element of investments made outside of Indiana.

Rule

The sales factor is defined as a fraction where the numerator is the total sales of the taxpayer in the state during the taxable year, and the denominator is the total sales of the taxpayer everywhere during the taxable year. 'Sales' are defined as all gross receipts of the taxpayer not allocated under specific provisions.

The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the taxable year, and the denominator of which is the total sales of the taxpayer everywhere during the taxable year.

Analysis

The court analyzed the definitions of 'gross receipts' and determined that only the interest income from the sale of investment securities should be included in the sales factor's denominator. The Department's position was that including the principal would distort the apportionment formula, as it could lead to the same funds being counted multiple times. The court found support in case law from New Jersey, which held that only income derived from the sale or redemption of short-term obligations should be included in the receipts fraction.

The Court finds no Indiana case law addressing this issue but finds the following case from the New Jersey Tax Court instructive. In AT & T v. Director, Division of Taxation, a cash management pool was maintained at AT & T's general headquarters in New York for the purpose of investing excess cash in short-term securities. The Tax Court agreed with the director, holding that 'only the income, including realized appreciation, derived from the sale or redemption of short-term obligations is includible in the receipts fraction as business receipts.'

Conclusion

The court affirmed the Department's decision, concluding that 'gross receipts' for the purpose of the sales factor includes only the interest income and not the return of principal from the sale of investment securities. Sherwin-Williams' motion for summary judgment was denied, and summary judgment was granted in favor of the Department.

Thus, the principal included in the proceeds of sale or redemption of short-term investments is not includible in the receipts fraction.

Who won?

Indiana Department of State Revenue prevailed in the case because the court upheld its determination that only interest income should be included in the sales factor's denominator, thereby affirming the Department's assessment.

The Department was correct in including only the interest earned as part of the total receipts in the denominator of the sales factor of the apportionment formula.

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