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Indiana Tax Court Finds for Taxpayer in Online Education Case

Tax Development Dec 06, 2017

In Indiana LOF 02-20140445, 1/28/15, the Indiana Department of Revenue (“Department”) held that an online education company was required to source receipts to Indiana based on the market for its courses. That position was overturned by the Indiana Tax Court in Univ. of Phoenix v. Department of Revenue, Indiana Tax Court Doc. 2017-98382, release date, 11/30/2017. In a thorough and well-reasoned opinion, Judge Wentworth analyzed both the facts presented and the law and regulations to determine that Indiana is an “all or nothing” state that uses an operational approach to determine cost of performance.

The University of Phoenix is an accredited education service provider headquartered in Phoenix, Arizona. It used a cost accounting specialist to analyze its structure, who determined that the company had four general categories of service that generated revenue: 1) the eCampus platform, 2) the online campus faculty members, 3) curriculum development, and 4) the graduation team consisting of enrollment, academic, and financial advisors. The taxpayer presented evidence of the direct costs for each of these revenue streams. In each case, the majority of costs were incurred outside of Indiana. 

The Department argued that each item of income must be analyzed on a transaction-by-transaction basis, and that the only income-producing activity was providing the opportunity to attend an online class in return for a payment. The Department contended because the payments related to online class participation by Indiana residents, the “cost of performance” was in Indiana. 

The Court reasoned that the term “income-producing activity” found in the  Indiana statute and regulation1 does not focus on the benefit derived from the buyer’s perspective, but rather is based on the seller’s acts. The Department merely presented an out-of-state case2 based on statutes and regulations that materially differed from Indiana law. The Department did not provide any other evidence or assert any argument as to why an alternative apportionment methodology utilizing a “market-based” approach was more appropriate than the statutory cost of performance method. As a result, the Court found for the plaintiff and allowed the taxpayer to exclude the online tuition it received from Indiana residents from the numerator of its Indiana apportionment factor.

1 I.C. § 6-3-2-2(f); 45 I.A.C. 3.1-1-55
2 AT&T v. DOR, 358 P. 3d 973 (Or.2015)


Mary Bernard