United States

Indiana: Detailed Study Supported Taxpayer’s Costs of Performance Methodology

Dec 19, 2016
From KPMG TaxWatch

Loading the player...

The Indiana Department of Revenue recently addressed whether a taxpayer was entitled to use a costs of performance methodology to source its service receipts. The taxpayer at issue, a provider of direct mail services, had an Indiana location, as well as two locations outside of the state. The taxpayer generated revenue from preparing and distributing advertising materials to Indiana customers, delivering pre-printed advertising materials to Indiana customers, and selling advertising space on labels used to deliver advertising materials. On its original returns, the taxpayer sourced its receipts to the states in which it delivered mail on behalf of its customers. The taxpayer subsequently filed amended Indiana returns using a costs of performance methodology. These returns were later audited. The auditor made numerous adjustments to the taxpayer’s sourcing, which resulted in additional tax due. The taxpayer protested this treatment, arguing that the “overwhelming” costs associated with preparing advertising materials for delivery into Indiana occurred in another state. The activities in Indiana, the taxpayer asserted, were limited to assembling and addressing packages for delivery to the post office.

Upon review, the Department agreed that the taxpayer had provided information—a detailed study—sufficient to conclude that the majority of its direct costs were incurred in a state other than Indiana and that costs associated with the taxpayer’s Indiana location—including assembling and addressing the mailings—were much lower than that its costs of creating, managing, and maintaining the marketing data which was the foundation of the taxpayer's mail services. The Department concluded that apportioning the taxpayer’s income based on the cost of rendering its mailing services more fairly reflected that income. Please contact Marc Caito at 317-951-2434 with questions on Letter of Findings 02-20150523 (Nov. 30, 2016).


For more information about TWIST or to view archived episodes, please visit our TWIST homepage.

 Subscribe to TWIST via iTunes, or  Subscribe via RSS.

To receive TWIST e-mails each Monday morning, make sure that state, local and indirect is checked off as one of your topics of interest on the KPMG TaxWatch registration site.


The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.