Indiana Law Review 1998 Developments in Indiana Taxation Lawrence A. Jegen, III* Gregory J. Duncan** Introduction Both the 110th Indiana General Assembly and the Indiana Tax Court contributed changes and clarifications to all ofthe major, and many of the minor, Indiana tax laws in 1998. This Article highlights the more interesting developments for the period of October 1, 1997 through September 30, 1998. I. General ASSEMBLY Legislation There were hundreds of 1998 legislative changes that impacted Indiana taxation, many ofwhich had a direct effect on both broad and narrow segments of Indiana residents. Many of the changes were attempts to fine-tune existing laws, but significant policy changes surfaced in the following major areas: state offices and administration; state and local income taxes; sales and use taxes; and property taxes. A. Tax Administration The general assembly enacted one bill containing four provisions that have an impact on tax administration.' The first provision establishes a registration center^ that is charged with servicing the registration of commercial motor vehicles by the owners.^ The motor carrier services division of the Indiana Department of State Revenue ("IDSR") is to supervise the registration center."* The new law also establishes the motor carrier regulation fund to pay for the development and operation of the registration center.^ The funds are not to be used for gasoline tax or special fuel tax administration, as had been done prior to the new law. In addition, the new law provides for an extension oftime to file a claim for a refund if a taxpayer's federal income tax liability is modified by the Internal Revenue Service ("IRS") and if the modification results in a reduction ofthe tax legally due.^ Normally, a claim for a refund must be filed within three years after the later of the due date of the return or the date of payment.^ The * Thomas F. Sheehan Professor of Tax Law and Policy, Indiana University School of Law—Indianapolis. B.A., Beloit College; M.B.A., J.D., University of Michigan; LL.M., New York University. * J.D. Candidate, 1999, Indiana University School of Law—Indianapolis; B.S., 1996, Purdue University. 1. H.R. 1 157, 1 10th Leg., 2d Reg. Sess. §§ 16, 17, 19, 26 (Ind. 1998). 2. See iND. Code § 6-8. l-4-4(a) (1998) (eff Mar. 13, 1998). 3. See id. 4. See id. § 6-8.1 -4-4(b). 5. /^. §8-2.1-23-1. 6. Id §6-8.1 -9- 1 (f) (eff Jan. 1 , 1 999). 7. See id § 6-8. 1-9- 1(a). 1 004 INDIANA LAW REVIEW [Vol. 32: 1 003 new law extends the amount oftime to file a claim for a refund to the later of the normal three-year period or six months after the taxpayer is notified of the modification by the IRS.^ The final change made with respect to tax administration allows Indiana taxpayers to elect to round amounts reported on a return to the nearest whole dollar.^ If the amount is greater than or equal to fifty cents, then the amount may be rounded up to the nearest whole dollar;^^ and, if the amount is less than fifty cents, then the amount may be rounded down to the nearest whole dollar. ^^ By the literal terms of the statute, a taxpayer is allowed to pick and choose which items or amounts the taxpayer wants to round, which could nominally decrease the amount of a taxpayer's liability. However, this provision is in conformity with federal filing provisions and is expected to have a minimal impact on collections. B. Gross Income Taxation In the area of income taxation, the general assembly enacted one bill that contained four key provisions.^^ The first provision is a conforming amendment that changes a reference to the taxation of a small business' gross income to the federal law, which defines "passive investment income."'^ The second provision changes the dates for quarterly payment of gross income tax by withholding agents. ^"^ Had the law not been changed, a withholding agent would have been required to make only yearly payments. The general assembly also changed all references in the Indiana Code to the Internal Revenue Code ("IRC") as the IRC was in effect on January 1, 1998.^^ The final change in the area of income taxation requires Indiana residents to notify the IDSR of any modifications to the taxpayer's federal return or federal tax liability.'^ As the Indiana law was originally written, only nonresidents were required to notify the IDSR of such modifications. C Adjusted Gross Income Taxation In the area of adjusted gross income tax, the general assembly enacted one bill that contained two key provisions.'^ The first provision specifies that the capital gain portion, rather than the ordinary income portion (as under the old law), of certain lump sum distributions are added back to adjusted gross income 8. Id. §§ 6-8.1-9-l(f)(l), (2) (eff. Jan. 1, 1999). 9. See id. § 6-8.1-6-4.5 (retroactive to Jan. 1, 1998). 10. See id §6-8.1-6-4.5(1). 11. See id §6-8.1-6-4.5(2). 12. H.R. 1 157, 1 10th Leg., 2d Reg. Sess. §§ 1, 2, 4, 5 (Ind. 1998). 13. Ind. Code § 6-2.1-3-24.5(c) (1998) (retroactive to Jan. 1, 1998). 14. Id § 6-2.1-6-3.1 (retroactive to Jan. 1, 1998). 15. See id § 6-3-1-1 1 (retroactive to Jan. 1, 1998). 16. See id. § 6-3-4-6 (retroactive to Jan. 1, 1998). 17. H.R. 1 157, 1 10th Leg., 2d Reg. Sess. §§ 3, 13 (Ind. 1998). 1999] TAXATION 1005 for state tax purposes.'^ For purposes of the financial institutions tax, the second provision adds a deduction from income concerning bad debt reserves for building and loan associations, mutual savings banks, and certain cooperative banks to correspond to federal tax law.^^ Federal tax law changed the way in which thrifts calculate their allowable bad debt deductions for federal tax purposes, and Indiana merely conformed its laws to correspond to the federal change. The new deduction will accommodate accounting method changes required under the IRC for federal and state saving institutions. Without the change, Indiana would realize a windfall for taxing the recapture income from the savings institutions. D. Sales and Use Taxation In the area of sales and use taxation, the general assembly enacted into law one bill that contained three key provisions.^° The first provision provides that hard cider is an alcoholic beverage if the cider has at least .5%, but not more than 7%, of alcohol by volume.^^ "Hard cider" is defined as a wine, "except for alcoholic beverage tax purposes."^^ The new law creates a hard cider excise tax at a rate of $0.1 15 per gallon upon the manufacture, sale, or gift of hard cider within Indiana.^^ As a result of the new law, the excise tax with respect to hard cider is now the same as the excise tax with respect to beer. The wine excise tax rate is $0.47 per gallon. Thus, the new law reduces the excise tax rate on hard cider by $0,355 per gallon. E. Tax Credits In the area of tax credits, the general assembly enacted one bill that allows for two tax credits.^"* The first credit is titled "Military Base Recovery Tax Credit." The new law establishes a state tax credit for rehabilitation of buildings that are located on military base facilities designated by the Indiana Enterprise Zone Board if a qualified investment is made.^^ The credit is nonrefundable but may be carried forward to future years and applied against ftiture state tax liability.^^ The credit is based on the amount of qualified investment for the rehabilitation of a building. For buildings between twenty and thirty years old, the credit is equal to 1 5% of the qualified investment;^^ for buildings between 18. IND. CODE § 6-3-l-3.5(a)(7) (1998) (retroactive to Jan. 1, 1998). 19. Id. § 6-5.5-l-2(a)(2)(D) (retroactive to Jan. 1, 1998). 20. H.R. 11 57, 1 10th Leg., 2d Reg. Sess. §§ 21, 22, 24 (Ind. 1998). 21. Ind. Code § 7.1-1-3-9.5(2) (1998) (eff. July 1, 1998). 22. Id. § 7.1-1-3-49 (eff. July 1, 1998). 23. Id § 7.1-4-4.5-1 (eff. July 1, 1998). 24. H.R. 1319, 1 10th Leg., 2d Reg. Sess. §§ 2, 3, 14, 16, 20 (Ind. 1998). 25. Ind. Code § 6-3.1-1 1.5-18(a) (1998) (retroactive to Jan. 1, 1998). 26. See id §§ 6-3.1-1 1.5-19(a), (b). 27. See id §6-3.1-11.5-1(1). 1 006 INDIANA LAW REVIEW [Vol. 32: 1 003 thirty and forty years old, the credit is equal to 20% of the qualified investment;^* and for buildings at least forty years old, the credit is equal to 25% of the qualified investment.^^ Any part of the credit may be assigned to a lessee of the recovery site.^^ Additionally, a taxpayer who substantially reduces or ceases operations in another area of Indiana in order to relocate within the military base recovery site may not claim the credit.^ ^ This limitation prevents a taxpayer from claiming the credit if the taxpayer was motivated to relocate only to take advantage of the credit. In essence, the credit was established to enhance economic development and not to provide a credit to taxpayers who merely relocate their business operations, which does little to benefit the economy. The second tax credit is titled the "Community Revitalization Enhancement District Tax Credit." The new law grants a taxpayer a credit against both Indiana and local tax liability if a qualified investment is made.^^ The amount of the credit equals 25% of the qualified investment." The tax credit is available for a qualified investment made for the redevelopment or rehabilitation of property that is located within a community revitalization enhancement district in a county having a population of individuals between 108,950 and 1 12,000, e.g., Monroe County or a municipality in Monroe County.^'* To be designated a "district," Monroe County is required to submit an application to the Advisory Commission on Industrial Development.^^ For the advisory commission to designate an area as a district, the commission must find all ofthe following: the area contains a building or buildings with at least one million square feet that is vacant or about to become vacant due to relocation of an employer;^^ at least 1000 fewer persons are employed currently as compared to the prior ten-year period,*^^ there are significant obstacles to redeveloping the area, including obsolete buildings and infrastructure, utility problems, accessibility problems, topographical obstacles or environmental contamination;^* the unit has expended, appropriated, pooled, set aside, or pledged at least $100,000 for purposes of addressing the redevelopment obstacles;^^ and the area is located in a county having a population of individuals between 108,950 and 1 12,000."**^ Additionally, an area can only be designated a "district" for a period of up to fifteen years."*' The law 28. See id. §6-3.1-11.5-1(2). 29. See id. §6-3.1-11.5-1(3). 30. 5eej£/. §6-3.1-1 1.5-18(c). 31. See id §6-3.1-11.5-23. 32. Id § 6-3.1-19-3(a) (eff. Jan. 1, 1999). 33. See id §6-3. 1-1 9-3(b). 34. See id § 36-7-13-12(b)(5) (eff. July 1, 1998). 35. See id § 36-7- 13- 10(a). 36. See id §§ 36-7- 13- 12(b)(1)(A), (B). 37. See id § 36-7- 13- 12(b)(2). 38. See id §§ 36-7- 13- 12(b)(3)(A) to (F). 39. See id § 36-7- 13- 12(b)(4). 40. See id § 36-7- 13- 12(b)(5). 41. ^ee /t/. § 36-7-13-12(c). 1999] TAXATION 1007 also provides that a "unit," the person or persons redeveloping the area, may issue bonds to finance the cost of addressing redevelopment obstacles or problems."^^ Thus, it need not be the unit's own money that the unit is pledging to cure the defects with the redevelopment area. Like the military base recovery tax credit, the revitalization credit is a nonrefundable credit that can be carried forward against any future state tax liability,"*^ and any part of the credit may be assigned to a lessee of the redeveloped property .'*'* In addition, a taxpayer who substantially reduces or ceases operations in another area of the state in order to relocate within the district may not claim the credit."*^ Notwithstanding the limitation on the availability ofthe credit, a taxpayer may claim the credit if the taxpayer had existing operations within the district and the relocation represents an expansion of the taxpayer's operations within the district/^ F. Local Option Taxes With respect to local option taxes, the general assembly enacted a law that contains three key provisions."*^ The first of these provisions permits a county having a population of individuals between 37,000 and 37,800,"*^ e.g., Jackson County, to impose a County Adjusted Gross Income Tax ("CAGIT") at a rate of 1 . 1% on adjusted gross income for not more than four years."*^ After the county imposes the CAGIT for four years, the rate must be reduced to 1 .0%.^° The funds generated by the additional 0.1% must be used to pay the costs ofoperating and maintaining a jail and juvenile detention center opened in 1998.^^ The new law also allows a county having a population between 12,600 and 13,000,^2 e.g., Pulaski County, to impose a CAGIT at a rate of 1 3%P The gross revenues from the additional 0.3% must be used to pay the costs ofoperating and maintaining ajail and justice center.^"* However, with respect to this credit, there is no requirement that the jail and justice center be opened after a specific date in order to use the fiinds. The new law permits a CAGIT rate of 1 3% for four years, and after the four-year period, requires the county to reduce its CAGIT rate to 1 .0%.^^ The new law also provides that the county council may decrease the 42. Id. § 36-7- 13- 16(a). 43. See id. §6-3.1-19-4. 44. See id § 6-3. 1-1 9-3 (c). 45. See id §6-3.1-19-5. 46. See id §§ 6-3.1-19-5(1), (2). 47. H.R. 1 157, 1 10th Leg., 2d Reg. Sess. §§ 7, 8, 1 1 (Ind. 1998). 48. iND. CODE § 6-3.5-1. l-2.5(a) (1998) (eff. July 1, 1998). 49. Id § 6-3.5-1. l-2.5(c). 50. See id. 51. See id § 6-3.5-1.1 -2.5(d)(2). 52. Id § 6-3.5-1. l-3.5(a) (eff. Mar. 13, 1998). 53. Id § 6-3.5-1. l-3.5(c). 54. See id § 6-3. 5- 1.1 -3. 5(d)(2). 55. Id § 6-3.5-1. l-3.5(c). 1 008 INDIANA LAW REVIEW [Vol. 32: 1 003 tax rate or rescind the tax in the same manner as other reductions or rescissions under the county's CAGIT law.^^ The final provision in the new law relating to local option taxes increases limits on the CAGIT plus County Economic Development Income Tax ("CEDIT") rates. Normally, a county's CAGIT plus CEDIT rate may not exceed 1 .25%.^^ However, the new law increases the limit to 1 .35% for the 37,000 to 37,800 population counties^^ and to 1 .55% for the 12,600 to 13,000 population counties. ^^ G. Property Taxation In the area of property tax, the general assembly enacted three bills.^° The first bill^^ provides that a county having a population of between 400,000 and 700,000, e.g.. Lake County, may remove real property from the list of property eligible for tax sale if the taxpayer and the county treasurer agree to a mutually satisfactory arrangement for the payment of the delinquent property taxes in full.^^ The property may be removed from the list if the agreement between the county treasurer and the taxpayer is in writing, signed by the taxpayer, and provides for full payment of delinquent taxes within one year.^^ Prior to this legislation, property could not be removed from the tax sale list until all past due tax and other costs were paid in full. However, under the new law, if the taxpayer misses a payment, the county auditor is required to place the property back on the list of property eligible for sale at a tax sale.^"^ The new law also allows cities having a population between 110,000 and 120,000,^^ 33,850 and 35,000,^ and 75,000 and 90,000,^^ e.g., Gary, Hammond, and East Chicago, to offer property within their jurisdiction for sale at an expedited second tax sale if the property fails to receive the minimum amount in a county tax sale and the county auditor and city mayor agree to such an expedited tax sale.^^ Additionally, the new law allows cities such as Gary, Hammond, and East Chicago to acquire a lien and a tax sale certificate if the 56. Id. §§ 6-3.5-1. l-2.5(c) (eff. July 1, 1998), 6-3.5-1. l-3.5(c) (eff. Mar. 13, 1998). 57. See id. § 6-3.5-7-5(c). 58. Id § 6-3.5-7-5(h). 59. Id § 6-3.5-7-5(1). 60. H.R. 1002, 1 10th Leg., 2d Reg. Sess. §§ 1-6 (Ind. 1998); H.R. 1272, 1 10th Leg., 2d Reg. Sess. §§ 1, 3, 4, 6, 7, 10, 12, 13 (Ind. 1998); S. 327, 1 10th Leg., 2d Reg. Sess. §§ 1, 2 (Ind. 1998). 61. H.R. 1272, 1 10th Leg., 2d Reg. Sess. (Ind. 1998). 62. IND. Code § 6-1. 1-24- 1.2(c) (1998) (eff. July 1, 1998). 63. See id § 6- 1.1 -24- 1.2(d). 64. Id §6- 1.1 -24- 1.2(e). 65. Id § 6-1 66. Id § 6-1 67. Id § 6-1 68. Id § 6-1 l-24-5.6(a)(l) (eff. July 1, 1998) (expires June 30, 2001). l-24-5.6(a)(2). l-24-5.6(a)(3). l-24-5.6(c). 1999] TAXATION 1009 property is not sold at the city's tax sale.^^ Under the new law, if the property is sold to a purchaser or acquired by the city, then the deed would be transferred in 120 days, if the property is not redeemed by then7° However, the county auditor is not required to issue a deed to the city if it is determined that the property contains hazardous wasted* Prior to the new law, the usual redemption period was one year. The shortened redemption period is intended to encourage taxpayers to pay more expeditiously. The new law grants the county the power to enter the property in order to conduct environmental investigations.^^ The proceeds from the sale of any property by the city are: First, to be applied against the costs of the salef^ second, to the payment of such taxes removed;^"* and third, any surplus is to be deposited in the city's general fund.^^ The fiscal body, e.g., of Gary, Hammond, and East Chicago, must approve sales of property valued at $10,000 or greater, leases with annual payments of at least $5000, transfers of gift property back to the grantors, and transfers to a neighborhood development corporation.^^ In a noncode provision, the new law allows the cities, e.g., of Gary, Hammond, and East Chicago, to conduct an additional tax sale of properties within the city's jurisdiction on which at least six property tax installments are delinquent.^^ All of these provisions are expected to help the cities, e.g., Gary, Hammond, and East Chicago and Lake Count\% to quickly sell or otherwise dispose of real property on which there is a property tax delinquency. This provision is intended to help get taxable property back onto the tax rolls sooner and should reduce long-term collection expenses and increase the cash flow to the cities and county. The fact that the cities can take possession of the property may also encourage some taxpayers to pay in a more timely fashion. The second bilF^ contained two key provisions. The first provision requires a county auditor to include the name of the owner of a tract of real property eligible for sale at a tax sale in the notice of the tax sale.^^ If the property is ovmed by more than one individual, then the name of at least one owner must be included in the notice of the tax sale.^^ Prior to this legislation, when parcels of real property went to tax sale, the county auditor had to prepare a notice that included various information such as a list of parcels for sale, the minimum sale ^.§6-1.1 -25-4(e) (eff July 1 , 1 998). i 69. Id. §§ 6-l.l-24-6.6(b), (c) (eff July 1, 1998) (expires June 30, 2001). 70. Id. §§ 6-l.l-25-4.2(b), (c) (eff July 1, 1998) (expires Sept. 30, 2001) 71. See 72. See id 73. See id § 6-l.l-25-9.5(b)(l) (eff July 1, 1998) (expires Dec. 31, 2001). 74. See id § 6-l.l-25-9.5(b)(2). 75. See id § 6-l.l-25-9.5(b)(3). 76. See id §§ 36-1-1 l-3.2(b)(l) to (3) (eff. July 1, 1998). 77. H.R. 1272, 1 10th Leg., 2d Reg. Sess. § 13 (Ind. 1998) (eff. Mar. 13, 1998) (expires Jan 2001). 78. S. 327, 1 10th Leg., 2d Reg. Sess. (Ind. 1998). 79. IND. CODE § 6-l.l-24-2(a)(6)(A) (1998) (eff July 1, 1998). 80. See id § 6-1. l-24-2(a)(6)(B). 1010 INDIANA LAW REVIEW [Vol. 32: 1 003 price, and information regarding redeeming the property, but not the name of the owner of the property.*^ Most counties already include the property owner's name in the tax sale notice, but for those counties that do not, the county is now required to include such information in the notice. The second provision requires the county auditor to mail a copy of a tax sale notice by certified mail, return receipt requested, to a mortgagee who requests by certified mail a copy of the notice.^^ Prior to the new law, the county auditor was required to mail a copy of a tax sale notice to a requesting mortgagee by certified mail. Now, the county auditor must mail such notice by certified mail, return receipt requested.^^ The third new law^"^ enacted by the general assembly relating to property taxes has five important provisions. The first provision requires a county to notify a taxpayer, by mail, at the taxpayer's last known address, that the taxpayer overpaid taxes before the excess tax payment may be transferred to the county general fund.^^ Prior to this new law, if a taxpayer overpaid a local tax or special assessment, the taxpayer could file a claim for refund within three years after November tenth ofdie year during which the payment was made.*^ The new law requires a county treasurer to give written notice to taxpayers who made overpayments ofmore than $5.00.*^ The notice must include all ofthe following: a statement that the taxpayer may be entitled to a refund because of an overpayment;^^ the amount of the reftind;^^ instructions for claiming the refund;^ the date on or before which the refund must be claimed;^^ and, a statement that the refund will be reduced by any amount which is applied to property taxes which are delinquent.^^ The notice is intended to increase the likelihood that a taxpayer will file a claim for refund for an overpayment of taxes. The second provision provides that, before an owner records a transfer of ownership for a property interest that is created from a larger existing parcel or a combination of smaller existing parcels, the owner is required to pay the property taxes for which the due date has passed before the county auditor may transfer the property on the last assessment list or apportion the assessed value ofthe property.^^ Prior to this provision, before an owner could record a transfer of ownership for such a parcel of property, the owner was required to pay all 81. See id. § 6-1.1 -24-2(a). 82. Id. § 6-l.l-24-3(b) (eff. July 1, 1998). 83. See id. 84. H.R. 1002, 1 10th Leg., 2d Reg. Sess. (Ind. 1998). 85. iND. CODE § 6-l.l-26-6(d) (1998) (eff. July 1, 1998). 86. See id § 6-1.1 -26-6(c). 87. Id § 6-l.l-26-6(d) (eff. July 1, 1998). 88. Seeid^6'\.\'26'6{di){\). 89. See id § 6-1.1 -26-6(d)(2). 90. See id § 6-1.1 -26-6(d)(3). 91. See id § 6-1.1 -26-6(d)(4). 92. See id § 6-1.1 -26-6(d)(5). 93. Id § 6-l.l-5-5.5(d) (eff. July 1, 1998). 1999] TAXATION 1011 property taxes "due and owing."^"* The new law relaxes this requirement and only requires an owner to pay all property taxes that are "due" before such property can be transferred.^^ The third provision requires an assessing official to consolidate existing contiguous parcels of real property into a single parcel if the assessing official has knowledge that an improvement to the real property is located on or otherwise significantly affects the parcels.^ The new law added the requirement that an assessing official "have knowledge" of such an improvement before the assessing official is required to consolidate the contiguous parcels.^^ The fourth provision provides that, in addition to serving a written demand for payment of delinquent taxes by certified or registered mail or in-person service by the treasurer or his deputy, a county treasurer may also serve a written demand "by proof of [a] certificate of mailing."^* With respect to this change, the new law increases the fee a county treasurer can charge from $5.00 to $8.00 if registered or certified mail is used in making a demand for payment of delinquent taxes. ^^ The final provision relating to property taxes provides that property tax refunds are to be paid after the June or December settlement and apportionment of property taxes, or after both the June and December settlement and apportionment of property taxes.^^ Prior to this provision, if a refund was made to a taxpayer, the county auditor deducted the refund from the December distribution oftaxes. ^°^ This provision grants the county auditor an optional and quicker reimbursement method of distributing tax refunds. H. Innkeeper and Other Local Taxes In the area of innkeeper taxes and other local taxes, the general assembly enacted three bills that contained three significant provisions. '°^ The first of these provides that a county fiscal body adopting an ordinance to impose or rescind the county innkeeper's tax or to change the tax rate must send a certified copy ofthe ordinance to the IDSR.^^^ Additionally, the new law provides that the county fiscal body adopting the ordinance must specify the effective date of the ordinance that must take effect on the first day of a month at least thirty days 94. Id. §6-l.l-5-5.5(d). 95. Id. § 6-l.l-5-5.5(d) (eff. July 1, 1998). 96. Id § 6-1.1-5-16 (eff. July 1, 1998). 97. Id 98. Id § 6-l.l-23-l(a)(3) (eff July 1, 1998). 99. Id § 6-l.l-23-7(a)(l)(A) (eff July 1, 1998). 1 00. M § 6- 1 . 1 -26-5(b) (eff. July 1 , 1 998). 101. See id ^6'\.\-26-5{h). 102. H.R. 1157, 1 10th Leg., 2d Reg. Sess. § 20 (Ind. 1998); H.R. 1002, 1 10th Leg., 2d Reg. Sess. § 7 (Ind. 1998); H.R. 1097, 1 10th Leg., 2d Reg. Sess. § 6 (Ind. 1998). 103. Ind. Code § 6-9-29-1.5(b) (1998) (eff. July 1, 1998). 1012 INDIANA LAW REVIEW [Vol. 32:1003 after adoption. '^'^ The second key provision expands the use of the Allen County food and beverage tax to include new expansions of the county's coliseum. Prior to the new law, Allen County could only use money from the coliseum expansion fund as the coliseum existed on the date that the ordinance establishing the food and beverage tax was adopted. The new law allows for acquisitions, improvement, remodeling, or expansion of the coliseum as the coliseum existed before January 1, 1998.^^^ The new law also clarifies that money set aside for debt reserve prior to July 1, 1998 may not be used for acquisition, improvement, remodeling, or expansion of the coliseum.^^^ The third provision requires the city-county council of a consolidated first class city, e.g., Indianapolis, to offer tickets for sale to the public by a "box office at the facility" or through "an authorized agent ofthe facility" before the council can impose a county admissions tax on the sale of tickets to an event. ^^^ /. Tax On Financial Institutions In the area oftax on financial institutions, the general assembly enacted one bill containing one key provision.^^^ The new law changes a reference to the provisions under which trust companies are established.^^^ Because of the change, a regulated financial corporation in Indiana includes a trust company that is formed under Indiana Code section 28-12.^^^ II. Indiana Tax Court Opinions AND Decisions A. Indiana Property Taxes—Real Property Taxes I. Town of St. John v. State Board of Tax Commissioners (^'St. John IIF)}^^—This case originated when the plaintiffs filed suit and the tax court held that Indiana's property tax assessment system violated the Indiana Constitution. ^^^ However, the Indiana Supreme Court reversed the tax court decision and remanded the case for a determination of whether Indiana's assessment "system results in a uniform and equal rate of assessment and a just 104. Id. §6-9-29-1. 5(a). 105. Id. § 6-9-23-8(a)(l)(B) (eff. July 1, 1998). 106. Id § 6-9-23-8(c). 107. Id §§ 6-9-13-l(a)(2)(A), (B) (eff. Mar. 11, 1998). 108. H.R. 1 157, 1 10th Leg., 2d Reg. Sess. § 14 (Ind. 1998). 109. iND. Code § 6-5.5-l-17(c)(8) (1998) (retroactive to Jan. 1, 1998). 110. See id 111. 690 N.E.2d 370 (Ind. Tax Ct. 1997) [hereinafter St. John III], supplemented, 691 N.E.2d 1387 (Ind. Tax Ct. 1998) [hereinafter St. John IV\, clarified, 698 N.E.2d 399 (Ind. Tax Ct. 1998) [hereinafter St. John V\, affd in part, rev 'd in part, 702 N.E.2d 1034 (Ind. 1998) [hereinafter St. John VI]. 112. St. John III, 690 N.E.2d at 372 (citing Town of St. John v. State Bd. of Tax Comm'rs, 665 N.E.2d 965 (Ind. Tax Ct. 1996) [hereinafter St. John /]). 1999] TAXATION 1013 valuation based on property wealth."^ *^ The tax court determined the following issues on remand: (1) whether Indiana's property tax assessment system violated article X, section 1 of the Indiana Constitution; (2) whether the system violated article I, section 12 of the Indiana Constitution; (3) whether the system violated the federal Due Process Clause of the Fourteenth Amendment to the U.S. Constitution, procedurally or substantively; and, (4) whether the system violated the federal Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution.'^"* The tax court discussed each issue separately. Indiana imposes a tax on the value of real property and the value of real property is defined by statute as the "True Tax Value."' '^ "'[T]rue tax value does not mean fair market value . . . [but rather] the value determined under the rules of the state board of tax commissioners.'"''^ The Indiana State Board of Tax Commissioners ("ISBTC") is required by statute to assess property according to the laws of Indiana."^ In an attempt to execute its statutory duties, the ISBTC has promulgated regulations for determining the true tax value of real property."^ Under the regulations, the value of non-agricultural land is determined by a county land valuation commission."^ The county commission determines the value of land based on sales data for the county and forwards such values to the ISBTC for approval. '^° The ISBTC then either approves or modifies such values.'^' Thus, the ISBTC has final say as to the value of the property. '^^ The final value of the property is reduced to a County Land Valuation Order. Therefore, the value of property as determined by the county approximates the land's fair market value because sales data is used as the basis for the county's determination of value. '^^ A county agricultural land advisory committee determines the true tax value of agricultural land'^"* by starting at a base rate of $495 per acre and adjusting that rate to reflect the soil's crop production capacity. '^^ Thus, the value of agricultural land approximates the land's earning capacity. '^^ 1 13. Id. (citing Town of St. John v. State Bd. of Tax Comm'rs, 675 N.E.2d 318 (Ind. 1996) [hereinafter St. John //]). 114. Id. 115. See id at 372-73 (citing iND. CODE § 6-1. 1-31 -6(b)(7) (1998)). 1 16. Id at 373 (quoting iND. CODE § 6- 1.1 -31 -6(c) (1998)). 117. See id (citing iND. CODE § 6-1.1-35-1 (1998)). 118. See id 119. See id 120. See id 121. See id. ni. See id at 373 n.2. 123. See id aX373. 124. See id (citing I^fD. CODE § 6-1.1-4-13) (1998)). 125. See id (citing iND. ADMIN. CODE tit. 50, rs. 2.2-5-6(5), 2.2-5-7 (1996)). 126. See id. Though it appears that agricultural land is valued entirely based on the land's earning capacity, this is not true. It depends upon what factors were taken into account in determining the base rate of $495 per acre. 1014 INDIANA LAW REVIEW [Vol. 32: 1003 By regulation, the true tax value of an improvement is the cost of reproduction minus physical or obsolescence depreciation.'^^ Though "[rjeproduction cost is defined as the * whole-dollar cost of reproducing the item[,]' [t]he 'reproduction cost' of an improvement ... is not the actual cost of reproducing the item. Rather, it is the 'reproduction cost' as specified in the [ISBTC's] cost schedules."'^^ The cost schedules currently in effect represent 1985 reproduction costs, reduced by 15% for all items contained in the schedule. '^^ The cost schedules are classified into different types of improvements and assigned a model. The model has many amenities that are assumed to exist in the property being taxed. If an amenity does not exist, as presumed in the model, or if additional amenities are present, then the value of the improvement is adjusted upward or downward to reflect the lack of similarity to the model. '^° The schedules are the only information that can be used in arriving at the improvement's true tax value.'^' The true tax value of property can only be determined by reference to ISBTC regulations; external evidence is disregarded by the ISBTC.'^^ "As a result, evidence of an improvement's actual reproduction cost or evidence of the actual value of land is irrelevant under the True Tax Value system."'^^ The court next examined the claim that Indiana's property tax assessment system violated Indiana Constitution article X, section 1 . The court attempted to determine the intent ofthe framers in requiring the legislature "to provide for a 'uniform and equal rate of property assessment and taxation,' and to secure a 'just valuation for taxation of all property, both real and personal.'"'^"* In doing this, the court looked to history: "Delegate Read stated that he knew of farms 'which were of equal value assessed at a difference of fifty perc, and farms of less value than others at a much higher rate.'"'^^ After examining this comment and several others, the court reached the conclusion that the delegates "evaluated [the] fairness [of article X, section 1], not by any rules of assessment, but rather based on a real world understanding about what the particular property was worth." '^^ According to the court, it was apparent that the framers intended property assessments to be made based on a property's actual worth, as determined by reference to "real world values."'^^ Using the perceived intent of the framers, the court examined whether the 127. See id. (citing IND. ADMIN. CODE tit. 50, rs. 2.2-2-l(c), 2.2-7-9 (1996)). 1 28. Id. (quoting iND. Admin. Code tit. 50, r. 2.2-7-7. 1 (f)(8) ( 1 996)). 129. See id. dX^mn.5. 130. SeeiddX'ilA. 131. See id. 132. See id. 133. Id 134. Id. (quoting iND. CONST, art. X, § 1(a)). 135. Id. at 375 (quoting 1 Report of the Debates and Proceedings of the Convention for the Revision of the Constitution of State of Indiana 946 (1850)). 136. Id 137. Id 1999] TAXATION 1015 current tax system resulted in uniformity and equality. The ISBTC argued that the system "is an effort to provide uniformity and equality . . . ."'^^ However, the court noted that the tax commissioners testified at trial that "they [were] unaware of any way under the True Tax Value system to measure whether there is equality among the various classes of property."'^^ Uniformity and equality "requires that the property tax system be based on objectively verifiable data [to ensure] that taxpayers have a means to evaluate the taxing authorities' assessment of their property."^"*^ After finding that uniformity and equality requires resort to objectively verifiable data, the court examined whether the use of cost schedules satisfied this requirement. As previously stated, "the cost schedules were generated by using the 1985 prices of items found in buildings reduced [15%] across the board."'"*' The ISBTC regulations were the only means by which a complaining taxpayer could challenge the cost schedules. "Because the present system does not allow comparison of assessments to objective data, it cannot satisfy the constitutional requirements of uniformity and equality in property assessment."''*^ Without use of objectively verifiable data, a taxpayer cannot challenge an assessment and a court has no way to review such an assessment for uniformity and equality."*^ Because the current true tax value system does not provide for uniformity and equality, as measured by reference to objectively verifiable data, the court held that the system was in violation of article X, section 1 of the Indiana Constitution. '"*"* The court next addressed whether Indiana's property tax system violated Due Course of Law, article I, section 12 of the Indiana Constitution. The petitioners argued that Indiana's system lacked due process, basing their argument on the fact that in Indiana, "every person, for injury done to him in his person, property, or reputation, shall have remedy by due course of law.""*^ The ISBTC countered that the "regulations provide all the process that is constitutionally due."'"*^ To satisfy due process, the ISBTC must use ascertainable standards in rendering a decision.'"*^ Not only must the regulations provide a taxpayer with the right to challenge an assessment, "they must also provide an opportunity to be heard 'in a meaningful manner.'"'"** The court examined some examples'"*^ and held that 138. Mat 376. 139. Id. 140. Id. 141. Id 2X3,11. 142. /t/. at 378. 143. See id. 144. Mat 382. 145. Id. at 383 (quoting IND. CONST, art. I, § 12). 146. Id HI. See id. at 383-84 (quoting Harrington v. State Bd. of Tax Comm'rs, 525 N.E.2d 360, 361 (Ind. Tax Ct. 1988) (citations omitted)). 148. Id at 384 (quoting Mathews v. Eldridge, 424 U.S. 319, 333 (1976)). 149. Id. at 385 (noting that in determining "neighborhood desireability," no objective standards were used); id. at 385-86 (noting that taxpayers have no meaningful opportunity to 1016 INDIANA LAW REVIEW [Vol. 32: 1 003 "[t]he [t]rue [t]ax [v]alue system violates due process because it deprives taxpayers of their right to introduce real world, objective evidence in order to challenge assessments." ^^° The court next addressed petitioners claim that the true tax value system violated the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution, procedurally and substantively. As to procedural due process, the petitioners argued that taxpayers are not provided a meaningful opportunity to respond because real world information is irrelevant according to ISBTC regulations. Therefore, procedural due process was violated because the refusal to consider such information acts as a conclusive presumption against the taxpayer.'^' The ISBTC contended that the presumption was merely a necessary substantive rule of law.^^^ Finding the petitioners' argument unpersuasive, the court rejected the claim that procedural due process was violated. ^^^ The petitioners next argued that the tax system violated their substantive due process rights. The petitioners claimed that because of this violation, they paid a disproportionate amount oftaxes.^^'* To show that one's substantive rights have been violated, the petitioners must demonstrate either that 1) the law infringes "fundamental rights [or] liberties which are, objectively, 'deeply rooted in this Nation's history and tradition,' and 'implicit in the concept of ordered liberty,' such that 'neither liberty norjustice would exist if they were sacrificed;'" or 2) the law is "arbitrary and unreasonable, having no substantial relation to the public health, safety, morals, or general welfare." ^^^ Because the petitioners did not assert that a fundamental right was violated, the court reviewed the petitioners' claim under the arbitrary and unreasonable standard. '^^ The ISBTC argued that the system results in taxpayers paying their fair share. ^^^ The court found that the ISBTC's action passed the rational basis test and held that petitioners failed to demonstrate a substantive due process challenge the determination of a neighborhood's boundaries because the ISBTC limits the use of comparison properties outside one's subdivision, as determined by the ISBTC); id. at 386 (finding that "there are no objective standards to determine whether an opinion of condition is correct"); id. (finding that in determining grade factors, particularly when an "A" grade factor is adjusted upward, there are no ascertainable standards in deciding a grade factor other than the subjective beliefs of the hearing officer); and id. (finding that in determining obsolescence, "there are no objective standards used for measuring obsolescence"). 150. Mat 388. 151. SeeidsLt3S9. 1 52. See id. 153. Mat 390. 154. See id 155. Id (quoting Washington v. Glucksberg, 117 S. Ct. 2258, 2268 (1997) (citations omitted); Euclid v. Ambler Realty Co., 272 U.S. 365, 395 (1926)). 156. Mat 390-91. 157. Seeidat39\. 1999] TAXATION 1017 claim.'^« The petitioners' last argument was that the system violated the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution "because it is irrational and produces arbitrary results."'^^ The Fourteenth Amendment states that "no state shall 'deny to any person within its jurisdiction the equal protection of the laws.'"'^^ The petitioners claimed that their equal protection rights were violated because the true tax value system applies different assessment standards to different types of property. The petitioners also argued that their equal protection rights were violated because market values are not used in assessment. However, "so long as the classification is rationally related to a legitimate state interest" the system will be valid.^^^ The ISBTC maintained that the "'classifications are rationally related to the legitimate governmental purposes of establishing a property taxation system that is understandable, easy to use, uniform across types of real property, and values like properties alike. '"^^^ Though the system differentiates among different classes of property, the court found that this was not enough to support a claim of equal protection violation. ^^^ Additionally, "even though [the system] is not based on market information"'^"^ and because the classifications "are not [arbitrary] under a federal equal protection standard[,]"'^^ the court held that the system "is constitutional on equal protection grounds . . . ."'^^ Thus, the tax court found that Indiana's true tax value system did not violate the U.S. Constitution, but struck down the law as unconstitutional based on provisions in Indiana's Constitution. 2. Zakutansky v. State Board ofTax Commissioners.'^^—^Zakutansky owned property located three rows offthe shore of Lake Michigan. Pursuant to Indiana Code section 6-1.1-4-13.6 the county and ISBTC promulgated a land order to be used in assessing property in the county. '^^ Zakutansky' s land was assessed at $350 per front foot and, disagreeing with the assessment, he appealed to the County Board of Review ("CBOR"). The CBOR reduced the assessment. Still unsatisfied, Zakutansky petitioned the ISBTC. However, the ISBTC denied the protest, believing that so long as the county complied with a valid land order, a taxpayer could not protest.'^^ Zakutansky alleged that the ISBTC's determination violated the requirement of a uniform and equal rate of property assessment and 158. Id. 159. Id. 160. Id. (quoting U.S. CONST, amend. XIV, § 1.) 161. Id (citing City of Cleburne v. Cleburne Living Ctr., 473 U.S. 432, 440 (1985)) 162. Id at 393 (quoting ISBTC's Trial Brief, at 17). 163. Id 164. Mat 396. 165. Id 166. Id Sit 391. 167. 691 N.E.2d 1365 (Ind. Tax Ct. 1998). 168. See id at 1367 (citing iND. CODE § 6-1.1-4-13.6 (1998)). 169. See id 1018 INDIANA LAW REVIEW [Vol. 32: 1 003 taxation '^^ and that an incorrect depth table was used in calculating the property's base rate.'^' Zakutansky submitted evidence as to the valuation of similar property within the neighborhood but not within his specific subdivision.'^^ The ISBTC contended that because the land order was valid and Zakutansky's property was valued consistently with other property within his subdivision, the assessment pursuant to the land order must also be valid. Therefore, the ISBTC did not consider the evidence submitted by Zakutansky in making its decision, believing that Zakutansky' s only remedy was to challenge the land order. However, the court stated that the purpose ofthe right guaranteed by Indiana's Constitution is to protect taxpayers from governmental abuse; therefore, the court found that the ISBTC was obligated to review assessments challenged by a taxpayer. '^^ Additionally, "[i]f an otherwise valid [l]and [o]rder results in an individual assessment that is not uniform and equal, the [l]and [ojrder as applied to the assessment yields to the constitution."'^"^ Moreover, the court determined that the ISBTC was obligated to consider surrounding properties, regardless of the subdivision involved, when assessing property. '^^ In this case, Zakutansky introduced into evidence a list of comparable property in his neighborhood, property record cards for each property, and pictures of the properties. '^^ The comparable properties were assessed at rates ranging from $100 to $150 per front foot, rates significantly less than the rate used for his property. Because the ISBTC did not testify as to any of the comparable properties and having already determined that the ISBTC had an obligation to consider comparable property within the neighborhood, the court remanded the case to the ISBTC to determine the rate that was applicable to Zakutansky's property, which rate was to be the same rate that was used for comparable properties. '^^ The court next addressed whether the ISBTC used an incorrect depth table in calculating the base rate of Zakutansky' s property. Zakutansky submitted evidence stating that the ISBTC did not consider any other depth factors within the neighborhood in determining the depth factor of his property and alleged that such error was arbitrary and capricious. Finding that Zakutansl^^ bore his burden of going forward and that the hearing officer did not consider Zakutansky' s evidence, the court remanded this issue to the ISBTC for a determination of the predominant lot depth of the neighborhood at issue. '^^ 170. See id. (citing IND. CONST, art. X, § 1(a)). 171. See id. 172. See id. at 1368. 173. Id 174. Id (citing iND. CODE § 1-1-2-1 (1998)). 175. Id at 1369 (citing Vonnegut v. State Bd. ofTax Comm'rs, 672 N.E.2d 87, 90 (Ind. Tax Ct. 1996)). 176. See id. 177. Id at 1370. 178. Id at 1370-71. 1999] TAXATION 1019 3. Town of St. John v. State Board of Tax Commissioners (''St. John /p') 179—Yj^jg opinion supplements the tax court's earlier decision in St. John III}^^ In St. John III, the court determined Indiana's property tax assessment system to be unconstitutional'^' and retained jurisdiction to determine a date upon which the system must comply with the Indiana Constitution.'^^ The ISBTC argued that the date of the next general reassessment, March 1, 2001, should suffice as an appropriate date upon which taxpayers may have their assessments tested against "real world values," as mandated by the court in ^S*^. John IlV^^ The petitioners countered that the ISBTC should be required to have such a system in place within thirty days.'^'* In balancing the desire to avoid creating chaos among the taxing agencies by implementing such a sweeping change immediately and the desire to protect the constitutional rights of Indiana taxpayers, the court held that the ISBTC must "consider all competent real world evidence presented to the [ISBTC] by persons filing appeals on or after May 1 1 , 1999 "185 4. Talesnick v. State Board of Tax Commissioners.'*^—Talesnick owned property in the Eagle Ridge subdivision off the banks of the Eagle Creek Reservoir. As compared to other subdivisions in the reservoir area, the Eagle Ridge subdivision did not have city water, sewers, fire hydrants, or city- maintained streets.'*^ The ISBTC promulgated a land order, in accordance with statute, to be used by county officials in assessing property.'** Under the land order, the base value of properties in Eagle Ridge subdivision could range between $90,000 and $1 10,000 for the first acre of land owned. '*^ Talesnick' s land was assessed at the highest amount allowed under the land order. After the CBOR denied Talesnick's request to alter the assessment, he petitioned the ISBTC for review.'^ The ISBTC denied Talesnick's protest and increased the assessed value of the home. Talesnick brought suit alleging that the land was 179. 691 N.E.2d 1387 (Ind. Tax Ct. 1998), clarified, 698 N.E.2d 399 (Ind. Tax Ct. 1998), affdinpart, rev 'd in part, 102^.E.2d 1034 (Ind. 1998). 180. 690 N.E.2d 370 (Ind. Tax Ct. 1997). 181. /^. at 398. 182. Id 183. See St. John IV, 691 N.E.2d at 1388. 184. See id. 185. Id. at 1390. But note, this opinion was affirmed in part and reversed in part by the Indiana Supreme Court in State Board ofTax Commissioners v. Town ofSt. John, 702 N.E.2d 1034 (Ind. 1998), handed down on December 4, 1998. That case will be discussed in the 1999 Developments in Indiana Taxation covering the period of October 1, 1998 through September 30, 1999. 1 86. 693 N.E.2d 657 (Ind. Tax Ct. 1 998). 187. See id at 65S. 188. See id (citing iND. CODE § 6-1.1-4-13.6 (Supp. 1997) (as amended at Ind. Code § 6- 1.1-4-13.6(1998)). 189. See id. 190. See id. 1 020 INDIANA LAW REVIEW [Vol. 32: 1 003 given an improper value and that an increase in value of the home was invalid because he was not given an opportunity to respond to the increase in assessment.'^' Talesnick presented evidence that comparable properties in other subdivisions were valued at the same amount as the Talesnick's property, despite the lack of amenities (city water, sewage, and street maintenance) present on the other properties. '^^ Talesnick also presented evidence that a water flowage easement encumbered more ofhis land than compared with other property within the subdivision; therefore, his property was assessed at a higher comparable amount than his neighbor's property. '^^ Talesnick argued that the property was entitled to a negative influence factor for the property due to the lack of amenities. "A negative influence factor is justified in instances where property has a 'condition peculiar to the land that dictates an adjustment, either positive or negative, to the extended value to account for variations from the norm.'"'^"* The court, citing Vonnegut v. State Board ofTax Commissioners, ^'^^ remanded the case to the ISBTC because the ISBTC failed to consider any evidence of comparable properties outside Talesnick's subdivision, and ordered that the ISBTC consider comparable properties within other subdivisions when examining the assessment of Talesnick's property, taking into account the evidence presented by Talesnick. '^^ After the hearing officer inspected the property, the hearing officer increased the assessment of the home, claiming that the original assessment miscalculated the square footage of the finished basement. Talesnick argued that he was not given an opportunity to respond to the increase in assessment. The court pointed out that by statute'^^ the ISBTC may raise the assessed value of property during a taxpayer initiated petition for review. '^^ However, the court remanded the case to the ISBTC for a remeasurement of the basement, because there was confusion about the actual finished square footage in the basement.'^^ The court did not address Talesnick's lack of opportunity to respond because it ordered the remeasurement.^^^ 5. Garcia v. State Board of Tax Commissioners.^^'—The Garcias' home consisted of 10,000 square feet of living space, including an indoor swimming 191. See id. at 659, 661. 192. Mat659&n.6. 193. Mat 660. 1 94. Id. (quoting IND. ADMIN. CODE tit. 50, r. 2.1-2-1(1 992) (recodified at IND. ADMIN. CODE tit. 50, r. 2.2-4- 1 0(a)(9) ( 1 996))). 195. 672 N.E.2d 87 (Ind. Tax Ct. 1996). 1 96. Talesnick, 693 N.E.2d at 660. 197. Id at 661 (citing iND. CODE § 6-l.l-15-4(a) (1998)). 198. Id 199. Mat 662. 200. Id 201. 694 N.E.2d 794 (Ind. Tax Ct. 1998). 1999] TAXATION 1021 pool with an area of 27 1 7 square feet.^°^ The home contained many amenities including cherry wood cabinets, vaulted ceilings, unusually large water and gas supply lines, and more than twenty windows on the front of the home?°^ The home was given an "A + 10" grade by the county assessor.^^'^ The Garcias unsuccessfully petitioned the CBOR for review of the assessment. The Garcias then petitioned the ISBTC to review the assessment. The ISBTC reduced the grade to "A + 4." Still unsatisfied with the result, the Garcias brought suit alleging that it was error to use an "A + 4" grade factor for their home and swimming pool enclosure. ^°^ Indiana assesses property according to its true tax value.^^ "The [t]rue [t]ax [v]alue of a residential improvement is calculated by determining the whole dollar cost of reproducing the improvement as determined under the rules and regulations of the [ISBTC]."^^^ Assessors use cost schedules to determine the base cost of reproducing a dwelling. Grade factors ranging from "A" to "E" are then used to differentiate among the quality of homes.^°^ The grade factor determination is a subjective decision made by the assessor. However, ISBTC regulations define different characteristics to aid assessors in differentiating among the grades. For example, "A" grade dwellings are those having "outstanding architectural style and design and ... are constructed with the finest quality materials and workmanship throughout."*^^^ "A" grade dwellings are given a grade factor of 160%; "B" grade dwellings are given a grade factor of 120%; "C" grade dwellings are given a grade factor of 100%; "D" grade dwellings are given a grade factor of 80%; and, "E" grade dwellings are given a grade factor of60%.^'° The ISBTC also recognized that sometimes dwellings fall somewhere between the grade factors; therefore, this must be taken into account.^^^ All grade factors between "A" and "E" can be given an indication of plus or minus two, or plus or minus one. This indicates that a grade falls somewhere between one oftwo grade letters. Also, grades falling below "E" can 202. See id. at 795. 203. See id. 204. See id. (citing IND. ADMIN. CODE tit. 50, r. 2. 1-3-2 (1992) (recodified at Ind. Admin. Code tit. 50, r. 2.1-3-2 (1996))). 205. Id at 796. 206. Id (citing iND. CODE § 6-1.1-31-6 (1998)). 207. See id (citing iND. ADMIN. CODE tit. 50, rs. 2.2-7-7. 1, 2.2-7-9, 2.2-2-l(c) (1996)). 208. See id. (citing iND. ADMIN. CODE tit. 50, r. 2. 1-3-2 (1992) (recodified at iND. ADMIN. CODE tit. 50, r. 2.2-7-6(e) ( 1 996)). 209. Id. (quoting iND. ADMIN. CODE tit. 50, r. 2. 1 -3-2 ( 1 992) (recodified at iND. ADMIN. CODE tit. 50, r. 2.1-3-2 (1996))). "B" grade dwellings are "architecturally attractive dwellings with good quality materials and workmanship throughout." Id. "C" are moderately attractive with average quality of materials used; "D" are constructed with economy quality materials; and "E" are dwellings with very cheap quality of material and workmanship used. Id. at 796-97. 210. See id. at 797 (citing iND. ADMIN. CODE tit. 50, r. 2.1-3-2 (1992) (recodified at Ind. Admin. Code tit. 50, r. 2.2-7-6(e) (1996))). 211. See id 1022 INDIANA LAW REVIEW [Vol. 32:1003 be given a negative indication such that "E - 4" v^ould equal 0%. Additionally, grades falling above "A" can be given an indication such that a property designated "A + 10" is priced at 360% of its base price.^'^ The problem with the true tax value system, when viewed by the court, was that an assessor was given no guidance in differentiating among an "A + 1" and an "A + 10." Thus, the court held that allowing an assessor complete autonomy and subjectivity in assessing a 200% difference in base price without providing ascertainable standards was arbitrary and capricious.^^^ The court relied on St. John IlP^^ in holding that ascertainable standards are required to apprise a taxpayer of the appropriate standards that an agency will consider when making a grade factor decision, and to ensure that a reviewing court can effectively review the agency action.^ '^ The Garcias next argued that the ISBTC erred in applying an "A + 4" grade factor to the swimming pool enclosure. A separate schedule is used to classify swimming pool enclosures, and this schedule classifies swimming pools as type- 1, type-2, or type-3, depending upon whether the enclosure is unfinished, semi- finished, or finished, respectively.^*^ A table is then applied to assign cost ranges depending on the area and type of the enclosure. However, the table only includes areas of up to 1000 and the Garcias' enclosure was 2717 square feet.^*^ The hearing officer merely located the cost amount of a 1000 square foot, type-3 enclosure ($21.55 per square foot) and calculated the total value by applying an "A + 4" grade factor. The hearing officer reasoned that if the home was given an A + 4 rating, then the swimming pool enclosure should have the same factor.^** However, the court first noted that according to ISBTC regulation, the hearing officer should have extrapolated the average cost per square foot in reaching a value to apply to a swimming pool enclosure greater than 1000 square feet.^*^ The Garcias also argued, and the court agreed, that grade factors are not to be applied to swimming pool enclosures.^^° The court compared swimming pool enclosures to cost schedules for similar improvements (gazebos, greenhouses, car sheds, etc.), with respect to which the applicable regulation specifically provided for grade factors to apply. Because the regulation under consideration did not contain a similar statement, the court held that in the absence of specific language to the contrary, grade factors were not to be applied 212. See id. (citing IND. ADMIN. CODE tit. 50, r. 2. 1-3-2 (1992) (recodified at IND. ADMIN. CODE tit. 50, r. 2.2-7-6(e) (1996))). 213. Mat 798. 214. 690 N.E.2d 370 (Ind. Tax Ct. 1997). 215. Gama, 694 N.E.2d at 796. 216. See id. at 798. 217. See id. 218. See id diim-99. 219. M at 799 (citing Ind. Admin. Code tit. 50, r. 2.1-3-4(1 992) (recodified at Ind. Admin. Code tit. 50, r. 2.2-9-3 (1996))). 220. Id 1999] TAXATION 1023 to swimming pool enclosures, but rather, the extrapolated amount was to be applied to the total square footage. ^^' B. Indiana Property Taxes—Business Real Property Taxes 1. Wareco Enterprises, Inc. v. State Board of Tax Commissioners .^^^ — Wareco appealed the ISBTC's final determination of a real property assessment by filing a Form 133 Petition for Correction of Errors. Wareco alleged that there was an error in calculating the perimeter to area ratio ("PAR"), an error in the base rate calculations, and an error in the use of the depreciation tables.^^^ A hearing officer was assigned to review the petition and made recommendations to the ISBTC to correct errors. Despite the recommendations, the ISBTC issued a final determination claiming that either the assessments were correct or that the errors could not be corrected using Form 133.^^'* The court found that because the hearing officer supplied ample evidence to show that the assessments were incorrect, the only issue remaining was whether Form 133 is the necessary form to correct such errors. The court has "held that '[t]he only errors subject to correction by a Form 133 are those which can be corrected without resort to subjective judgment. '"^^^ The PAR is used to calculate the total square foot area of a building. The applicable regulations state that adjustments to the PAR should be made to reflect variations in use or wall height.^^^ The court noted that according to the regulations, it is only necessary to measure the exterior walls in order to calculate the PAR and the court determined that these were objective measurements.^^^ The ISBTC claimed that PAR is a subjective determination and not correctable by filing a Form 133 Petition for Correction of Errors. The court held that, even though the hearing officer used a different method of calculating PAR than did the county board, the calculation of PAR under either method is objective and therefore correctable using Form 133.^^^ Wareco next argued that the base rate was incorrectly calculated. The ISBTC again reiterated the ISBTC's position that the base rate calculation is a subjective determination that cannot be corrected with Form 133. Models are used to establish the base rate of a building presumed to have the same interior and mechanical components as the model.^^^ The regulations provide schedules 221. Mat 800. 222. 689 N.E.2d 1299 (Ind. Tax Ct. 1997). 223. ^ee/c/. at 1299-1300. 224. SeeiddXnOO. 225. Id. at 1301 n.2 (quoting Bock Prod., Inc. v. State Bd. of Tax Comm'rs, 683 N.E.2d 1368, 1372 (Ind. Tax Ct. 1997)). 226. See id. at 1301 (citing iND. ADMIN. CODE tit. 50, r. 2.1-4-1 (1992) (recodified at iND. Admin. Code tit. 50, r. 2.2-10-2 (1996))). 227. Id 228. Id 229. See id. at 1302 (citing iND. ADMIN. CODE tit. 50, r. 2.1-4-3 (1992) (recodified at iND. 1 024 INDIANA LAW REVIEW [Vol, 32: 1 003 showing the costs of components that are used to adjust for variations?^^ The hearing officer testified that there was no heat in portions ofthe building and that the building did not have a partition wall as presumed by the model.^^^ Additionally, the hearing officer testified that a mistake in calculating the PAR would result in an error in calculating the base rate.^^^ Finding that the base rate calculation is an "uncomplicated" determination not requiring subjective judgment, and correctable using Form 133, the court held that it was arbitrary and capricious not to do so.^" The court next addressed Wareco's claim that an incorrect depreciation life was used. The ISBTC applied a forty-year life to the building as opposed to a thirty-year life.. Applying the regulations, a light pre-engineered building has a thirty-year life and all fire resistant buildings not listed elsewhere in the regulation have a forty-year life.^^"* The testimony of the hearing officer established that the building was a light pre-engineered building; therefore, subject to a thirty-year life. The court held that no subjective determination was required to find that the building has a thirty-year life under the tables provided in the regulation and, therefore, correction using Form 133 was appropriate.^^^ 2. Indianapolis Historic Partners v. State Board of Tax Commissioners.^^^ — Indianapolis Historic Partners ("IHP") owned a three-story apartment building known as "The McKay." In 1989, the ISBTC established a county land valuation commission in each county;^^^ the commission was given the power to determine the value of land in its own county.^^^ The Marion County commission adopted schedules that provide acreage values for both apartment land and commercial land. The schedules place maximum limits upon which an acre of apartment or commercial land can be valued. The apartment land schedule also established criteria for which the land should be valued according to very good, good, average, fair, or poor standards.^^^ The ISBTC subsequently approved the county order.2*° During the 1989 assessment. The McKay was assessed at a value per square foot using the commercial land schedule instead ofthe apartment land schedule. IHP brought suit alleging that the ISBTC applied the incorrect schedule.^'*^ The Admin. Code tit. 50, r. 2.2-10-6.1 (1996))). 230. See id. (citing IND. ADMIN. CODE tit. 50, r. 2. 1-4-3 (1992) (recodified at IND. ADMIN. Code tit. 50, r. 2.2-10-6.1 (1996))). 23 1 . See id. 232. See id. 233. Id 234. See id. (citing iND. Admin. CODE tit. 50, r. 2.1-5-1 (1992) (repealed)). 235. Id at 1302-03. 236. 694 N.E.2d 1224 (Ind. Tax Ct. 1998). 237. See id at 1225 (citing iND. CODE Ann. § 6-1.1-4-13.6 (West 1989 & Supp. 1997)). 238. See id 239. Seeid.dX\125n.\. 240. See id. 9X MIS. 241. SeeiddXnie. 1999] TAXATION 1025 ISBTC contended that it could use the commercial land schedule to value The McKay. The ISBTC set forth several reasons for this contention including that the building: was located in an urban area; was on a small parcel of land; was on platted land; and, did not have amenities, such as, a pool or wooded rolling hills (as set forth in the schedule as characteristics to look for when determining whether the land is good, very good, average, etc.)?"*^ At trial, the ISBTC also contended that because the property was on land of less than one acre, the ISBTC could use the commercial land schedule to value the property. The court found that the plain language of the county order in classifying the schedule as "Apartment Land" mandated that the schedule would apply to all land upon which an apartment is situated.^"*^ In holding that use of the commercial land schedule for apartment buildings was erroneous, the court sarcastically stated that "[a] contention that land being used for industrial purposes should be assessed using the rural residential schedule of the Land Valuation Order would never be allowed to stand [and] [n]either should a contention that land upon which apartments have been constructed should be assessed using commercial values . . . ''^^ The ISBTC made the following three arguments to demonstrate that it was entitled to use the commercial land schedule in valuing The McKay: The county order was to be applied as written; IHP cannot challenge the values in the order; and, as the assessing expert, the ISBTC's decision should control. ^"^^ As to the ISBTC 's first argument, the court merely reiterated that according to the plain language ofthe county order, the ISBTC was applying the order as written by disallowing use ofthe commercial land schedule for apartment land.^"*^ As to the second argument, the court pointed out that IHP was not challenging the values underlying the order, but rather, arguing that the schedules were improperly applied .^"^^ As to ISBTC's third argument, the court merely stated that "[t]he State Board has presented no expertise here. Expertise is demonstrated by expert action, not a will to power."^"*^ After determining that use of the commercial land schedule was error, the court addressed whether the assessment violated the requirement of uniformity and equality in assessment as guaranteed by the Indiana Constitution.^"*^ The court stated that "[l]and [o]rders have the force of law and are to be complied with as long as the applied [l]and [o]rder results in constitutional assessments."^^^ In the absence of evidence demonstrating that The McKay was functionally distinct from other land upon which apartments are located, the court held that 242. See id. 243. Id. at 1227. 244. Id 245. See id 246. Id 247. Id 248. Id at 1228. 249. Id. (citing IND. Const, art. X, §1) 250. Id at 1229. 1026 INDIANA LAW REVIEW [Vol. 32:1003 the use of the commercial land schedule violated the mandates of the Indiana Constitution.^^' 3. Dana Corp. v. State Board of Tax Commissioners.^^^—Dana challenged the ISBTC's final determination ofthe assessment ofDana's property and moved for summary judgment. Dana contended that any property assessment made pursuant to ISBTC regulations is arbitrary, capricious, and an abuse of discretion because the regulations provide no ascertainable standards upon which a taxpayer would know or a court could review such a decision.^" The ISBTC maintained, and the court agreed, that Dana had merely attempted to enjoy retroactive effect of the court's holding in St. John IIlP^ In St. John III, the court limited its holding to all assessments and appeals made on or after May 1 1, 1999. After that date, a taxpayer can facially challenge the property tax assessment system as unconstitutional, using St. John Ill'm support of such claim.^^^ However, the court recognized that it would continue to entertain "as applied" challenges to the current system.^^^ The court then turned to whether Dana had supplied sufficient evidence to warrant summary judgment for an as applied challenge. Finding that Dana had not supplied any evidence to demonstrate that no genuine issue of material fact exists, the court denied the motion for summary judgment.^^^ 4. Wetzel Enterprises, Inc. v. State Board of Tax Commissioners.^^* — Wetzel owned .4 acres of land and improvements made upon the land. During the 1989 general reassessment, Wetzel's property was increased in value over the previous reassessment. Wetzel did not appeal the assessment; however, a county assessor did file a petition for review with the Vanderburgh CBOR. In 1991, the CBOR reduced the assessed value, retroactive to 1989.^^^ Eight months after the CBOR's decision, the same county assessor filed a petition for review with the ISBTC. Wetzel did not receive notice of a hearing on the matter.^^° Subsequently, on February 23, 1996, the ISBTC issued its final determination of assessment, invalidating the CBOR's reduction.^^' The ISBTC argued that only a specific taxpayer can file a petition for review with the CBOR and that any action taken by the CBOR with respect to Wetzel's property was invalid. The court pointed out that the relevant statute included language such that a CBOR could review an assessment brought to its attention by "any person" and that filing a petition for review was a way for "any person" 251. Id at 1230. 252. 694 N.E.2d 1244 (Ind. Tax Ct. 1998), 253. See id. at 1246. 254. 690 N.E.2d 370 (Ind. Tax Ct. 1997). 255. See Dana, 694 N.E.2d at 1247. 256. Id 257. Id at 1248. 258. 694 N.E.2d 1259 (Ind. Tax Ct. 1998) 259. See id at 1260. 260. See id at 1261. 261. See id. 1999] TAXATION 1027 to bring an assessment to the CBOR's attention.^^^ However, the court believed that the issue of the case was whether the ISBTC could review the CBOR's assessment more than four years after Wetzel received and paid the reduced tax bills.'"' There are two ways in which the ISBTC can review an assessment: (1) when a taxpayer files a petition for review, or (2) where the ISBTC decides to sua sponte review an assessment.'"'* In this case, a petition was filed. However, a petition must be filed within thirty days after the CBOR's determination.'"^ Here, the petition was filed eight months after the CBOR's final determination. In limited circumstances, the ISBTC can review untimely filed petitions.'"" In any event, whether by petition or sua sponte, the ISBTC can only alter assessments if done so within three years after the assessment was made.'"^ In this case, the ISBTC attempted to alter an assessment made four years prior. Even if the ISBTC could establish that it could review the assessment sua sponte, it failed to provide Wetzel with proper notice and a hearing. Therefore, the court held that the ISBTC could not alter the CBOR's reduction in value.'"^ 5. Zakutansky v. State Board ofTax Commissioners.'"^—^Zakutansky owned a marina consisting of land, several pole bams, and a series of docks. The property was assessed and Zakutansky sought review of the assessment. Still unsatisfied with the determination on review, Zakutansky appealed the decision, making three claims of error.'^° First, Zakutansky argued that a sloped retaining wall was incorrectly assessed. The wall had been valued by the assessor using a per-square-foot basis rather than a per-linear basis, as required by regulation.'^' Though the ISBTC agreed to correct the mistake, the ISBTC maintained that an "A" grade factor was appropriate. Grade factors are used to differentiate among properties because of quality of materials and workmanship.'^' Zakutansky offered evidence tending to show that an "A" grade was not appropriate. The evidence proffered showed that the wall was deteriorating, there were no footings or metal rods supporting the concrete and the cost of building a similar wall was substantially less than the 262. Id. at 1261 n.5 (citing IND. Code § 6-1.1-13-5 (1998)). 263. /^. at 1261. 264. See id. at 1261-62 (citing iND. CODE § 6-1.1-15-3 (1998); iND. CODE 6-1.1-14-10 (1998)). 265. See id at 1262 (citing iND. CODE § 6-1.1-15-3 (1998)). 266. See id. (citing State Bd. of Tax Comm'rs v. New Energy Co. of Indiana, 585 N.E.2d 38, 39 (Ind. Ct. App. 1992) (holding that the ISBTC may consider untimely filed applications for deductions)). 267. See id (citing iND. CODE §§ 6-1.1-9-4, 6-1.1-14-1 1 (1998)). 268. Id at 1263. 269. 696 N.E.2d 494 (Ind. Tax Ct. 1 998). 270. See id. at 495. 271. See id. (citing iND. ADMIN. CODE tit. 50, r. 2.1-4-5 (1992) (recodified at iND. ADMIN. Code tit. 50, r. 2.2-12-5 (1996))). 272. SeeiddXA95r\.\. 1028 INDIANA LAW REVIEW [Vol. 32:1003 value assigned by the ISBTC. Because Indiana's tax system is not based on fair market value, however, the court stated that evidence of reproduction cost is not determinative (though it is probative of the quality of materials and workmanship).^^^ Even though the evidence of reproduction cost was not dispositive, the ISBTC was still required to support its finding of an "A" grade with substantial evidence. The court held that the ISBTC had not presented substantial evidence justifying an "A" grade other than the unsupported subjective opinions of the hearing officer and remanded the issue to the ISBTC.'^'* Zakutansky next argued that the ISBTC used an incorrect schedule in valuing the pole bams located on the land. The ISBTC used the general commercial- mercantile cost schedule rather than the agricultural schedule .^^^ The ISBTC contended that the ISBTC used the appropriate schedule due to the use of the bams by Zakutansky. The court held that actual use of the property is not dispositive; but rather, physical features are used to determine which schedule is to be used.^^^ Thus, the court held that the schedule for agricultural pole bams was to be used in this case.^^^ Zakutansky's third argument was that the ISBTC improperly assessed the land. Zakutansky claimed that the land was subjected to a restrictive easement preventing construction on portions of the land. Furthermore, the only utility servicing the land was electricity.^^^ Zakutansky then presented evidence of comparable properties that were assessed at a lesser rate than his. The ISBTC had not considered the other properties when making its determination. Therefore, the court held that the ISBTC was required to consider such comparable properties and remanded the issue to the ISBTC.^^^ 6. King Industrial Corp. v. Indiana State Board ofTax Commissioners.^^° — King, a tool and die manufacturer, used four buildings in its operations. The buildings were assessed in 1993.^^^ King filed a petition for review with the CBOR, which did not change the assessment. King then filed petition for review with the ISBTC, claiming that King was entitled to a kit adjustment. The ISBTC denied the adjustment and King appealed.^^^ The ISBTC has provided for a 50% reduction in base price for "kif 273. Mat 496. 274. Id. 275. See id. 276. Id at 497 (citing Herb v. State Bd. ofTax Comm'rs, 656 N.E.2cl 890, 893 (Ind. Tax Ct. 1995)). 277. Id 278. See id. 279. Id at 498 (citing Taiesnick v. State Bd. ofTax Comm'rs, 693 N.E.2d 657 (Ind. Tax Ct. 1998)). 280. 699 N.E.2d 338 (Ind. Tax Ct. 1998). 281. See id at 339. 282. Id 1999] TAXATION 1029 buildings (i.e., light pre-engineered buildings).^^^ Kit buildings are made of light weight and inexpensive materials and come pre-fabricated such that they can be assembled like a kit.^^"* To clarify what was intended to qualify for a kit adjustment, the ISBTC published Instructional Bulletin 91-8. The bulletin contained several examples of kit characteristies.^^^ Though the bulletin was intended to clarify the definition of a kit building, the court believed that it made such a determination more confusing than before due to the use of vague terminology that left many decisions to the subjective discretion of the assessors.^^^ The bulletin also discussed using grade factors in conjunction with the kit adjustment. Thus, a building could be given a 50% reduction as qualifying for the kit adjustment and then adjusted upward for additional amenities, or a building could be denied a kit adjustment and then adjusted downward to reflect a lack of amenities.^^^ Either way the determination was intended to compute the building's true tax value.^^^ King argued that it was entitled to the 50% adjustment because its buildings contained at least ten of the characteristics listed in the bulletin. To the contrary, the ISBTC argued that King was not entitled to the adjustment because the buildings did not satisfy several of the other characteristics contained in the bulletin. However, the court pointed out that none of the characteristics noted by the ISBTC absolutely disqualified the buildings from receiving the kit adjustment and stated that "a building may still qualify for the kit adjustment even though it contains minor enhancements."^^^ King also argued that the ISBTC applied an incorrect grade factor ("D + 1 ") to its buildings. Based on this information, the court found that the ISBTC had in no way supported its determination that a grade factor of "D + 1" should be used as opposed to any other grade factor.^^ In light of the fact that the hearing officer testified that he may have made a mistake, the court remanded the issue to the ISBTC, holding that the ISBTC had acted arbitrarily and capriciously and that its determination was unsupported by substantial evidence.^^' 7. Barth, Inc. v. State Board of Tax Commissioners.^^^—Barth owned two parcels of land upon which four buildings are constructed. Barth filed a Form 133 Petition for Correction of Error for the assessed value of its property for the tax years 1989 through 1991.^^^ The petition was subsequently denied by both 283. See id. 284. See id. 285. See id. 286. Id 287. See id 3.1341. 288. See id 289. Id at 342 (citing Componx, Inc. v. State Bd. of Tax Comm'rs, 683 N.E.2d 1372, 1375 (Ind. TaxCt. 1997)). 290. Id 291. Mat 343. 292. 699 N.E.2d 800 (Ind. Tax Ct. 1 998). 293. SeeidatSOl. 1030 INDIANA LAW REVIEW [Vol. 32: 1003 the county auditor and the ISBTC. Thereafter, Barth appealed to the court, claiming that the base rates used were incorrect, that the buildings were entitled to a kit adjustment for 1991, and that two of the buildings should have been depreciated using a thirty^year rather than a forty-year life expectancy table.^^'* Form 133 petitions can be filed to correct only objective errors?^^ Thus, only in cases where error can be corrected without resorting to subjective judgment can a taxpayer use Form 133.^^'' The ISBTC argued that any changes in the base rate would be subjective in nature and could not be corrected using Form 133. However, it is incumbent upon the ISBTC to investigate a taxpayer's claim in order to determine whether the taxpayer is challenging objective or subjective determinations .^^^ The ISBTC failed to investigate the allegations, therefore the court discussed Barth's arguments. Base rate is a factor used in calculating the reproduction cost of an improvement.^^^ Base rates are calculated by first selecting the model most representative of the physical characteristics of the improvement at issue and then second, applying the pricing schedule to adjust for additional or non-existent components or amenities.^^^ A model presumes that many components exist within the subject improvement in setting a property's value. If any components are absent or if any additional amenities exist, the schedule assigns a cost to be deducted or added to the model's base rate.^^^ In this case, Barth argued that its buildings lacked many of the components presumed to be included in the model, such as a lack of partitioning and a lack of interior finish. As to whether these errors, if any, could be corrected using a Form 133 depends upon the nature of the features that are not present. For example, when the pricing schedule lists a cost for the feature alleged not to be present, it results in a simple observation of fact without resort to subjective judgment.^^^ The court remanded this issue to the ISBTC because the ISBTC had failed to consider whether the base rate was correctable using a Form 133.^°^ The court next addressed Barth's contention that it was entitled to a kit adjustment. Subject to ISBTC regulations, kit buildings are entitled to a 50% reduction in base rate. By order, the ISBTC required all county assessors to reassess all improvements entitled to the 50% reduction. However, the county assessor did not grant Barth a kit adjustment and this was claimed as error. By bulletin, the ISBTC instructed taxpayers challenging the denial of a kit 294. See id. 295. See id. at 802. 296. See id (citing Bock Prod., Inc. v. State Bd. of Tax Comm'rs, 683 N.E.2d 1368, 1370 (Ind.TaxCt. 1997)). 297. See id at 803 n.6 (citing Wareco Enter, v. State Bd. ofTax Comm'rs, 689 N.E.2d 1299, 1302 (Ind.TaxCt. 1997)). 298. See id at 802. 299. See id 300. See id. 301. See id. at 803 (citing Wareco Enter., 689 N.E.2d at 1302). 302. Id 1999] TAXATION 1031 adjustment to file a Form 133.^^^ At the administrative level, the ISBTC found no error in the assessment because two ofthe buildings were given a grade factor of"D" and the other two were given a grade of "C - 2."^^ The ISBTC believed that instead of receiving the kit adjustment, the buildings were given a lower grade which already compensated for the denial ofthe adjustment; therefore, the ISBTC did not reach the issue of whether the buildings were entitled to the kit adjustment in the first place. However, the court held that the "plain language of the regulation admits of no exceptions and requires [that] the kit adjustment [] be given where the building qualifies for the adjustment, whether local assessing officials have previously decided to give the building a lower grade or not."^°^ Because the ISBTC failed to consider whether Barth was entitled to the kit adjustment, the court remanded the issue to the ISBTC. If on remand the ISBTC determines that Barth is entitled to the kit adjustment, the ISBTC would be allowed to adjust the grade factors to prevent a windfall in favor ofBarth even though, generally, the ISBTC cannot maJce subjective corrections with respect to a Form 133.'^ Finally, Barth argued that two ofthe buildings should have been depreciated using a thirty-year rather than a forty-year life expectancy table. The ISBTC countered that to correct the error, if any, would require subjective judgment and therefore it need not consider Barth 's argument. However, the court reiterated that the ISBTC has a duty to investigate a taxpayer's claim in order to determine whether the taxpayer is challenging objective or subjective determinations.^^^ Light pre-engineered buildings are depreciated using a thirty-year life expectancy table and all fire-resistant buildings, not listed elsewhere in the regulations, are depreciated using a forty-yeair life expectancy table.^^^ Thus, the court believed that the real issue was whether the buildings were classified as "light pre- engineered."^°^ Because Barth used Form 133, only objective errors can be corrected. Objective errors are those that require an uncomplicated (or straight forward true or false) application of the regulations. Thus, if on remand the ISBTC determines that the buildings are entitled to a kit adjustment, then the buildings should be depreciated using the thirty-year table because kit buildings are by definition light pre-engineered buildings. However, if on remand it is determined that the buildings are not entitled to the kit adjustment, then there would be a factual question as to whether the buildings are in fact light pre- engineered, which would require resort to subjectivejudgment; therefore, the fact could not be correctable using Form 133.^^° 303 . See id. at 804 n. 1 (citing Instructional Bulletin 92- 1 ). 304. See id. at 804. 305. Id. (citations omitted). 306. See id. at 807. 307. Id at 805-06. 308. See id. at 808 (citing IND. Admin. Code tit. 50, r. 2.1-5-1 (1992) (recodified at IND. Admin. Code tit. 50, r. 2.2-10-7 (1996))). 309. Id 310. See id. 1 032 INDIANA LAW REVIEW [Vol. 32: 1 003 C. Indiana Real Property—Business Real Property Taxes ("Obsolescence Adjustment ") I. North Park Cinemas, Inc. v. State Board ofTax Commissioners.^^'—^After the 1989 general assessment, North Park Cinemas ("North Park") petitioned the CBOR for an obsolescence depreciation adjustment, which was granted. However, Musgrave, a member of the CBOR, petitioned the ISBTC seeking review of the CBOR's determination. At the hearing, Musgrave merely stated that North Park was not entitled to the adjustment.^ '^ North Park did not appear at the hearing, but a county deputy assessor did appear and presented evidence that adjustments had been given to other businesses in the area. A hearing officer was assigned to the case, who inspected the property and spoke with the owner ofNorth Park.^'^ The hearing officer gave North Park an opportunity at that time to present additional evidence as to why North Park was entitled to the adjustment, but North Park did not do so. Four years later, the ISBTC issued a final determination stating that North Park was not entitled to the adjustment.^''* North Park appealed, claiming that neither Musgrave nor the ISBTC presented sufficient evidence to satisfy their respective burdens of proof. North Park also alleged that the ISBTC's final determination was arbitrary, capricious, and unsupported by substantial evidence, and in any event, that the denial of the adjustment violated the Indiana Constitution.^'^ The court first addressed the admissibility of evidence not submitted to the ISBTC. North Park attempted to introduce property cards into evidence at trial to show that other theaters within the area had received obsolescence adjustments. However, the court, relying on State Board ofTax Commissioners V. Gatling Gun Club, Inc.^^^ held that the trial court can only consider evidence that was presented to the ISBTC.^'^ North Park then argued that Musgrave failed to satisfy her burden of proof when she challenged the CBOR's determination. A member of a CBOR, by statute, may challenge the CBOR's determination.^'* However, the court found that Musgrave, as a board member, did not bear the burden of proof, and that a hearing officer does not owe a duty to make a case for a party,^'^ but instead, it is the affirmative duty of a property owner to present evidence on its own behalf to support a claim of an obsolescence depreciation adjustment. ^^° 311. 689 N.E.2cl 765 (Ind. Tax Ct. 1997). 312. See id. ai 761. 313. See id. 314. See id 315. See id a.i767'6S. 316. 420 N.E.2d 1324 (Ind. Ct. App. 1981). 3 1 7. North Park, 689 N.E.2d at 768. 318. See id at 766 (citing iND. CODE ANN. § 6-l.l-15-3(b) (1998)). 319. Mat 769. 320. Id 1999] TAXATION 1033 Next, the tax court addressed whether the ISBTC failed on its burden of proof. The court gave little merit to this argument, stating that a party appealing an adverse administrative decision bears the burden of proof.^^^ North Park also argued that the ISBTC 's final determination was arbitrary, capricious, and unsupported by substantial evidence. However, the court relied on the following evidence in making its own decision: Musgrave presented evidence to the ISBTC that Musgrave believed North Park was not entitled to the depreciation adjustment. The deputy county assessor, acting on behalf ofNorth Park, made only a bare assertion that the theater business is seasonal and therefore entitled to the adjustment received by other seasonal businesses.^^^ The hearing officer then examined the property, discussed the findings with the owner ofNorth Park, and gave North Park ten days to respond with additional evidence. North Park failed to respond and four years later a final determination was issued.^^^ Based on these facts, the court concluded that the ISBTC's final determination was not arbitrary and capricious or unsupported by substantial evidence. ^^"^ Finally, the court addressed North Park's contention that the denial of the obsolescence depreciation adjustment violated "the requirement ofa uniform and equal rate ofproperty assessment and taxation."^^^ North Park attempted to show that, because other theaters within the area had received an adjustment. North Park was also entitled to an adjustment. The ISBTC argued that it was not required to compare similar properties in making an assessment. The court recognized that the ISBTC is required to assess similar properties consistently and that the property record cards can be used to establish that the ISBTC did not follow the mandate of the Indiana Constitution.^^^ However, because North Park failed to present this evidence at the administrative level, the court reaffirmed that North Park was not entitled to use such evidence in court.^^^ The most important aspect of this case is that a party subject to a Petition for Review, even if instituted by a third party, must present evidence before the ISBTC in order to preserve potential error on appeal to the tax court. 2. Canal Square Limited Partnership v. State Board of Tax Commissioners.^^^—In this case. Canal Square owned land with apartment buildings constructed on the land. In 1991, the apartments were assessed as new construction and Canal Square petitioned for review with the CBOR.^^^ The CBOR decreased the valuation. Still unsatisfied, Canal Square petitioned for 321. Id. at 770 (citing Meridian Hills Country Club v. State Bd. ofTax Comm'rs, 512 N.E.2d 911,913(Ind.TaxCt. 1987)). 322. See id. 323. SeeiddXllX. 324. Id 325. Id. (citing IND. CONST, art. X, § 1(a)). 326. Id 327. Id2Xll\-12. 328. 694 N.E.2d 801 (Ind. Tax Ct. 1998). 329. See id at 802. 1034 INDIANA LAW REVIEW [Vol. 32:1003 review with the ISBTC."^ The ISBTC held a hearing and entered a final determination, decreasing the valuation due to an obsolescence adjustment. At the hearing, an expert witness testified on behalf of Canal Square. The expert testified that using recognized appraisal principles and based on a study compiled by the expert, the functional and economic obsolescence affecting the property equaled 34.35%. The expert concluded that because of this evidence. Canal Square was entitled to an obsolescence adjustment of 34.35%."^ However, the ISBTC allowed an obsolescence adjustment ofonly 10%. Canal Square appealed the ISBTC's final determination, disputing the obsolescence adjustment and the amount of value assigned to the apartment land. In general, if a taxpayer establishes a prima facie case of obsolescence, then the ISBTC must rebut the evidence or at a minimum enter conclusions or findings supporting a different result or the ISBTC's final determination will be reversed.^^^ Thus, the court evaluated the sufficiency of evidence presented by Canal Square. In arriving at the conclusion that Canal Square was entitled to a 34.35% obsolescence adjustment, the expert testified that he used three approaches for valuing the apartment property: the income capitalization approach; the comparable sales approach; and the cost approach."^ Using these three approaches, different market values were calculated. The expert reconciled the difference between the market values and reached a final estimate of $10,600,000.^^"* In accordance with ISBTC regulations, the expert then estimated obsolescence under the cost approach."^ The expert identified several sources of obsolescence, "including a narrow floor plan, excessive construction features required to meet the City of Indianapolis' Canal Corridor Design Guidelines, and the presence of an electrical power substation on the property site."^^^ The expert then quantified the effect of the sources in arriving at an obsolescence amount and concluded that the difference between the replacement cost value (after depreciation) and the value as determined by the income capitalization and comparable sales methods was attributable to obsolescence.^^^ The court agreed that such an approach could be used in calculating obsolescence.^^^ Having found that Canal Square submitted sufficient evidence to establish a prima facie case of obsolescence level, the court next addressed whether the ISBTC rebutted the evidence. The court found that the ISBTC did not provide any evidence to support its determination that Canal Square was only entitled to 330. See id. 331. See id. at 803. 332. See id. at 805. 333. See id. 334. See id 335. Id at 806 (citing iND. ADMIN. CODE tit. 50, r. 2. 1 -5- 1 ( 1 996)). 336. Id 337. See id. 338. Id at 807 (citing Thomtown Tel. Co. v. State Bd. ofTax Comm'rs, 588 N.E.2d 6l3, 619 (Ind. Tax Ct. 1994)). 1999] TAXATION 1035 a 10% obsolescence adjustment."^ In its final determination, the ISBTC did not even discuss or attempt to dispute the validity of the expert's testimony. The court pointed out the hearing officer's testimony in which the expert stated that he based his opinion merely on twenty-three years of experience .^^° The court, citing Western Select Properties v. State Board ofTax Commissioners,^^^ found that 10% was chosen based upon the subjective belief of the hearing officer, and for no other reason, and held that this required reversal. ^'^^ Finally, the tax court discussed whether the ISBTC applied an incorrect value to Canal Square's land. The court remanded the determination of the amount to the ISBTC for calculation in accordance with the county land order.^*^ 3. Clark v. State Board of Tax Commissioners.^**—Clark, an owner oftwo apartment buildings (Wood and Salisbury), filed a petition for review of the real property assessment with the CBOR. The CBOR did not change the assessment and Clark petitioned the ISBTC, which reduced the assessed value. Still unsatisfied, Clark appealed to the tax court claiming that an improper amount of obsolescence depreciation was applied.^*^ The court discussed the arguments made with respect to each property separately. a. The Woodproperty.—With respect to the Wood property, Clark argued that a "C" grade factor was inappropriate. A "C" grade building is constructed of average quality materials and workmanship and is in conformity with all features of the model used in the pricing schedule. The property was assessed using a general commercial residential ("OCR") pricing schedule for apartment buildings. This schedule presumes that the buildings have concrete back-up walls^*^ and Clark's property did not have concrete back-up walls. However, just because a building does not contain all the features of the model does not mandate that the building be given a grade less than "C."^*^ A "C" grade may still be appropriate if the building contains other features, such as higher quality materials, to make up for the lack of a feature listed in the pricing schedule. The court found that Clark established a prima facie case of error, and thus the burden was shifted to the ISBTC to show why a "C" grade was appropriate.^*^ This could be accomplished by showing the existence of the other features that were not considered in the model. The ISBTC asserted that the Wood property possessed other features, such as nice brickwork, and argued that this was sufficient to support the ISBTC's burden of proof.^*^ The ISBTC pointed to the 339. Id. 340. Id. at 808. 341. 639 N.E.2d 1068, 1073 (Ind. Tax Ct. 1994). 342. Canal Square, 694 N.E.2d at 808. 343. /^. at 810. 344. 694 N.E.2d 1230 (Ind. Tax Ct. 1998). 345. See id. at 1233. 346. See id. at 1235. 347. See id at 1236. 348. Id 349. See id at 1237. 1036 INDIANA LAW REVIEW [Vol. 32:1003 hearing officer's conclusion that the "pluses and minuses" balanced each other out and therefore a "C" grade was appropriate. However, the court noted that the ISBTC's findings must be supported by substantial evidence.^^^ Finding that there was no substantive evidence describing the particular "pluses and minuses" to determine whether the pluses outweighed or equaled the minuses, other than the mere conclusory statement, the court held that the ISBTC failed to bear its burden and remanded the issue to the ISBTC for further consideration.^^* Clark next argued that the obsolescence depreciation adjustment of 5% was inadequate. The term "obsolescence" is defined as functional (caused by internal factors) loss of value or economic (caused by external factors) loss of value. Clark proffered maintenance records indicating excessive costs due to the fact that Clark catered to students. Clark also pointed out a lack of parking spaces, lack of an elevator, and building code violations.^^^ In rendering a decision on obsolescence, an assessor must identify the causes of the obsolescence, and in addition, quantify the amount of obsolescence.^^^ The court determined that because Clark established a prima facie case that other factors, not considered by the ISBTC, contributed to obsolescence, the burden of proof shifted to the ISBTC. However, the court also determined that the ISBTC rebutted the prima facie case by recognizing that the property experienced a high occupancy rate.^^"^ By rebutting the evidence, the burden shifted back to Clark to show that even though the occupancy rate was high, obsolescence was still justified.^^^ For example, Clark might have demonstrated that Clark had to reduce rent in order to maintain the high occupancy rate. Because Clark failed to do this, the challenge on this basis failed.^^^ Clark also argued that the determination of a 5% obsolescence adjustment, as opposed to some other quantity, by the ISBTC was unsupported by substantial evidence. When the hearing officer was asked why she used 5%, as opposed to 10%, the hearing officer merely stated that it was in her discretion to select an amount of obsolescence.^^^ The court agreed with Clark and determined that the amount of obsolescence was not supported by substantial evidence.^^^ In its final determination, the ISBTC referenced no substantive or factual evidence indicating that 5% was chosen based on anything other than the subjective judgment of the hearing officer. Therefore, the court remanded this issue to the ISBTC for further consideration. 350. Id. at 1237-38 (citing Talesnick v. State Bd. of Tax Comm'rs, 693 N.E.2ci 657, 661-62 (Ind. Tax Ct 1998); Thomtown Tel. Co. v. State Bd. of Tax Comm'rs, 629 N.E.2d 962, 965 (Ind. Tax Ct. 1994)). 351. Mat 1238. 352. See id. 353. See id. (citing iND. ADMIN. CODE tit. 50, r. 2. 1-5-1 (1996)). 354. Id at 1239. 355. See id. 356. See id. 357. SeeiddXMAO. . 358. Id • 1999] TAXATION 1037 The court voiced its disgust with the current process when evaluating obsolescence depreciation adjustments.^^^ Taxpayers were given two avenues for attacking an obsolescence determination. A taxpayer could present evidence of other causes of obsolescence not considered by the ISBTC or demonstrate that the ISBTC's decision was not supported with substantial evidence. In the court's view, the taxpayer was allowed to present a "half-hearted" case of obsolescence and still secure reversal of a final determination.^^ To ameliorate this perceived problem, the tax court will not consider taxpayer complaints concerning obsolescence in cases where the [ISBTC] holds a hearing concerning an assessment (whether on a Form 131 Petition or otherwise) after the date of this opinion [April 24, 1998], unless the taxpayer has identified the causes of the alleged obsolescence and presented probative evidence that would support a quantification of obsolescence at the administrative level.^^' The court discussed the way in which a taxpayer could satisfy this burden.^^^ This was a bold step by the court in an attempt to make judicial review more efficient. h. The Salisbury property.—The Salisbury property was given a "C" grade factor. Clark argued that a "C" grade was inappropriate because there were no concrete back-up walls, as presumed by the pricing schedule, on any floors other than in the basement. This was a sufficient showing to establish a prima facie case, which shifted the burden to the ISBTC. Finding that the ISBTC failed to overcome this burden, the court reversed the final determination and remanded the issue to the ISBTC.^^^ The Salisbury property was awarded a 5% obsolescence adjustment. Clark proffered similar evidence of obsolescence as he did for the Wood property (i.e., lack of an elevator, building code violations, and high maintenance costs), which the court determined was sufficient to establish a prima facie case and shift its burden of proof to the ISBTC.^^ The court again found that the ISBTC satisfied its burden of proof by considering the high occupancy rate of the property. The burden then shifted back to Clark who failed to proffer additional evidence. However, as with the Wood property, the court held that the ISBTC's determination of a 5% adjustment lacked a sufficient evidentiary basis and remanded this issue to the ISBTC.^^^ Finally, Clark argued that the ISBTC erred in applying the general commercial mercantile ("GCM") pricing schedule rather than the GCR schedule. 359. Id. at 1241. 360. Id. 361. Id 362. Id at 1242 n. 18. 363. Id at 1243. 364. Id (citing GTE N., Inc. v. State Bd. of Tax Comm'rs, 634 N.E.2d 882, 887 (Ind. Tax Ct. 1994)). 365. Id 1038 INDIANA LAW REVIEW [Vol. 32:1003 Clark argued that under ISBTC regulations, the property had only three stories instead of four and was subject to the GCR schedule. The GCM schedule only applies to apartment buildings with four or more stories.^^^ Clark's argument rests on the contention that the basement floor is not considered in determining how many stories an apartment building contains. If the basement floor were not included, there would only be three stories and the GCR schedule would be applicable. However, the court pointed out that "basement" was defined by regulation as a "story" and held that the basement could be included when determining which pricing schedule to apply .^^^ 4. Lake County Trust Co. v. State Board of Tax Commissioners.^^^—Lake County Trust Company ("LCTC"), a real property owner with buildings constructed on the land, sought review of the ISBTC's final determination denying LCTC an economic obsolescence adjustment. LCTC leased the buildings to another company. Under the terms of the lease, LCTC was responsible for all property taxes assessed on the land and buildings.^^^ LCTC presented evidence that other comparable properties did not provide for tax payment by the property owner and, therefore, the property in this case was less profitable as a result of the lease. Based on this difference, an expert testified, LCTC should be entitled to an economic obsolescence adjustment.^^^ The term "obsolescence" refers to the "'diminishing of a property's desirability and usefulness brought about by either functional inadequacies and overadequacies inherent in the property itself, or adverse economic factors external to the property. "'^^* ISBTC regulations provide for functional and economic loss ofvalue.^^^ ISBTC regulations list several permissible causes of economic obsolescence, including "[mjarket acceptability of the product or devices for which the property was constructed or is currently used."^^^ LCTC argued that the market acceptability of the product, here the real estate under lease, justified an obsolescence depreciation adjustment.^^'* The ISBTC countered that the facts of the case did not compare to any of the listed causes of economic obsolescence and that LCTC was not entitled to an adjustment. LCTC responded that the list of causes in the regulation was not an exhaustive list and, in any event, LCTC believed that the "market acceptability of the product" cause 366. See IND. ADMIN. CODE tit. 50, r. 2.2-1 1-5.1(2)(B) (1996). 367. ClarK 694 N.E.2d at 1244 (citing iND. Admin. Code tit. 50, r. 2.1-6-1 (1992) (recodified at iND. ADMIN. CODE tit. 50, r. 2.2-16-2(43) (1996))). 368. 694 N.E.2d 1253 (Ind. Tax Ct. 1998). 369. See id. dX\255. 370. See id. 371. Id. (quoting iND. ADMIN. CODE tit. 50 r. 2. 1 -6- 1 ( 1 992) (recodified at iND. Admin. Code tit. 50, r. 2.2-16-2(43) (1996)). 372. See id (citing iND. ADMIN. CODE tit. 50 r. 2.2- 1 0-7(e)(2) ( 1 996)). 373. Id. (quoting iND. Admin. Code tit. 50 r. 2. 1-5-1 (1992) (recodified at iND. Admin. Code tit. 50, r. 2.2-10-7 (1996)). 374. See id 1999] TAXATION 1039 fit the facts of this case.^^^ The court agreed with LCTC that the list ofcauses ofeconomic obsolescence was not exhaustive, but also determined that the real estate of LCTC did not fit within any ofthe causes listed in the regulation.^^^ The court found depreciation includes loss in value from all causes and thus, the list was not meant to be exhaustive.^^^ The court then turned to whether the denial of an obsolescence adjustment was arbitrary and capricious. LCTC presented evidence that the market value ofthe property, as determined by what a willing buyer would pay, was depressed by as much as 48% because ofthe lease terms. However, because Indiana's property assessment tax system is not based on market value, the court found that the fact that a willing buyer would not pay as much because of the provisions in the lease was not dispositive.^^^ Rather, to show economic obsolescence, LCTC was required to show that some factors external to the property caused the loss of value. In holding that LCTC failed to demonstrate economic obsolescence, the court pointed out that LCTC merely made a bad business decision that LCTC would like to now change.^^^ 5. Loveless Construction Co. v. State Board of Tax Commissioners.^^° — Loveless Construction ("Loveless") leased office space in a building that Loveless owned. After the building was assessed. Loveless filed a petition for review with the CBOR and with the ISBTC. Still unsatisfied with the results of review, Loveless appealed to the tax court, claiming it was entitled to an obsolescence adjustment greater than 5%.^^^ By statute, a taxpayer is entitled to an adjustment for a loss in value caused by obsolescence.^^^ Loveless first argued that the ISBTC's allowance of a 5% obsolescence adjustment was unsupported by the evidence.^^^ The ISBTC countered that Loveless had not demonstrated that any additional obsolescence was warranted.^*'* The court determined that even if Loveless had failed to demonstrate that additional obsolescence was appropriate, which the court did not believe was the case, it was still incumbent upon the ISBTC to support the grant of 5% as opposed to any other figure .^^^ Having found that the ISBTC could not explain the facts relied upon in choosing the 5% figure, other than the subjective belief of the hearing officer, the court held that the ISBTC had not 375. Seeid.dLi\251. 376. Id at 1257, 1258. 3 77. Id. at 1 256 (citing IND. ADMIN. CODE tit. 50 r. 2.1-5-1(1 992) (recodified at IND. Admin. Code tit. 50, r. 2.2-10-7 (1996)). 378. Id at 1258. 379. Id at 1259. 380. 695 N.E.2d 1045 (Ind. Tax Ct. 1998). 381. See id sA 1047. 382. Id. (citing iND. ADMIN. CODE tit. 50, r. 2. 1-5-1 (1992) (recodified at Ind. Admin. Code tit. 50, r. 2.2- 1 0-7(e) ( 1 996))). 383. See id at 1048. 384. See id 385. Id 1 040 INDIANA LAW REVIEW [Vol. 32: 1 003 supported the finding with substantial evidence.^^^ The court next examined whether Loveless had presented sufficient evidence to demonstrate that an obsolescence adjustment for an amount greater than 5% was justified. Loveless presented financial statements showing a decrease in income over a three-year period.^^^ Further evidence presented tended to demonstrate that in order to keep the property fully occupied, Loveless had to change from net leases to gross leases.^^^ Gross leases result in less gross income for the property owner because the lessor is required to pay expenses such as utilities and taxes.^^^ A "cause of economic obsolescence is a decrease in the '[mjarket acceptability of the product or devices for which the property was constructed or is currently used."'^^° The product in this case was the office space, and the court found that the change in lease terms from net leases to gross leases was evidence that the market considered the leases worth less than it had previously.^^^ Consequently, the court held that Loveless had established a prima facie case of economic obsolescence and the ISBTC's failure to consider such in rendering its final assessment determination constituted an abuse of discretion.^^^ The court remanded the case to the ISBTC for consideration of the amount of obsolescence to which Loveless was entitled, because neither party had supported its respective conclusion with substantial evidence.^^^ D. Indiana Property Taxes—Business Personal Property Tax In Monarch Steel Co. v. State Board ofTax Commissioners^^^ Monarch Steel ("Monarch"), a steel service center located in Indiana, purchased steel plates, bars, and coils from companies inside and outside Indiana and sold such to customers both inside and outside Indiana.^^^ In general. Monarch resold the bars and coils in the same form as received by Monarch. However, Monarch usually cut or changed the steel plates before reselling them.^^^ Monarch argued that because of its operations. Monarch was entitled to an interstate commerce exemption for its business personal property for the tax years 1987 through 1995.^^^ Indiana allows inventory to be exempt from property tax when located within Indiana if the inventory is merely within Indiana to be repackaged or is in 386. Id. 387. See id. at 1048-49. 388. See id 389. See id. atl048n.2. 390. Id. at 1049 (quoting IND. ADMIN CODE tit. 50, r. 2.1-5-1 (1992) (recodified at Ind. Admin. Code tit. 50, r. 2.2-10-7 (1996))). 391. Id 392. Id at 1050. 393. Id 394. 699 N.E.2d 809 (Ind. Tax Ct. 1998). 395. See id. 396. See id 397. See id 1999] TAXATION 1041 transit to a final destination (and kept within its original package).^^* At the ISBTC hearing, Monarch provided the hearing officer with a box of receipts that Monarch alleged would prove that it was entitled to the exemption.^^^ The ISBTC argued that simply giving the hearing officer a box of receipts, without more, did not present sufficient evidence that Monarch was entitled to the exemption."*^ The court noted that although the ISBTC is required to consider evidence submitted by a complaining taxpayer, the ISBTC is not required to make the case for the taxpayer."^^^ Here, Monarch did not attempt to aid the hearing officer in understanding the invoices and provided no other evidence to the hearing officer as to why it was entitled to the exemption."*^^ The hearing officer asked Monarch for information regarding the invoices, but Monarch failed to respond.'^^^ Based on these facts, the court held that Monarch failed to support its case with substantial evidence and upheld the ISBTC's final determination denying the exemption. '^^'^ E. Charitable Exemption From Indiana Taxes J. Sangralea Boys Fund, Inc. v. State Board of Tax Commissioners.'^^^ — Sangralea Boys Fund ("Sangralea"), a not-for-profit company, provided assistance and education to disrupted children. In 1987, Sangralea leased part of its property to other not-for-profit organizations. For the years 1992 and 1993, both the CBOR and the ISBTC denied Sangralea' s request for property exemptions."^^^ At issue was the interpretation of Indiana's exemption statute, which provides that "[a]ll or part of a building is exempt from property taxation if it is owned, occupied, and used by a person for educational ... or charitable purposes.'"*^^ The ISBTC maintained that to be entitled to the exemption, the unity of ownership, occupation, and use ofthe property must be by a single entity."^^^ The current form of the statute is a recodification of a similar prior statute ."^^^ The 1975 recodification included an uncodified savings clause stating that the '"substantive operation and effect of any law repealed . . . shall continue without 398. See id. at 81 1 (citing IND. CODE §§ 6-1.1-10-29, -29.3, -30(a), (b), & (d) (1998)). 399. See id 400. See id 401. M at 812 (citing North Park Cinemas, Inc. v. State Bd. of Tax Comm'rs, 689 N.E.2d 765, 769 (Ind. Tax Ct. 1997)). 402. See id 403. See id 404. Id 405. 686 N.E.2d 954 (Ind. Tax Ct. 1997). 406. See id at 955. 407. Id at 956 (quoting iND. CODE § 6-l.l-10-16(a) (1998)). 408. See id 409. Seeid at 957 (discussing iND. CODE ANN. § 6-1.1-10-16 (West 1989) (amended 1993, 1995)). 1042 INDIANA LAW REVIEW [Vol. 32:1003 interruption if that law is reenacted, in the same or restated form, by this act.""*^° The ISBTC claimed that this savings clause meant that the prior interpretation of unity of ownership by a single entity continued after promulgation of the new statute. However, the court believed that the general assembly did not reenact the law in the same or restated form as contemplated by the savings clause, but instead eased the restrictions for obtaining a property exemption.'* ^^ The court, in a footnote, also stated that even if the language of the statute had remained unchanged, the liberal construction that had been given to the Act would result in the same conclusion."*^^ The court examined State Board of Tax Commissioners v. Wright,^^^ wherein the court of appeals liberally construed the prior statute to allow a charitable organization flexibility in carrying out the charitable organization's mission and believed the same rationale applied to the facts of this case."*^"* The court supported its conclusion by examining other statutes passed with the same act. Section 6-1.1-10-37 of the Indiana Code provides that if property is leased from a tax-exempt entity to a taxable entity, it becomes taxable as if owned by the lessee."*'^ TTie court held that Indiana Code section 6-1.1-10-16 "does not require a single entity to own, occupy, and use a piece of property before it can be exempted from taxation."**^ "Stated differently: a piece of property must be owned for charitable purposes; a piece of property must be occupied for charitable purposes; a piece of property must be used for charitable purposes.'"*'^ This case potentially will have significant ramifications for tax- exempt organizations because tax-exempt organizations may now come together in an effort to more efficiently and effectively fulfill their missions without losing the tax benefits of their status. 2. Alte Salems Kirche, Inc. v. State Board of Tax Commissioners."*^^—^Alte Salem Kirche ("Alte Salem"), a non-denominational church, owned a church building, a bam, and a mobile home, but not the land upon which these structures were located. The land was owned by Burgdorf, a director of the church."*'^ According to Burgdorf, the mobile home was rented out to different persons for the purposes of having someone on the property to prevent vandalism and having a way to obtain insurance.'*^^ The bam was used to store equipment and picnic tables. Alte Salem was organized for the purpose of providing a place where 410. Id. (quoting Act of Mar. 18, 1975, No. 45, § 5, 1975 Ind. Acts 247, 466). 411. Id. 412. Mat957n.5. 413. 215 N.E.2d 57 (Ind. App. 1966). 414. 5aA2gra/ea,686N.E.2dat957. 415. See id at 958 (citing iND. CODE § 6-1.1-10-37 (1998)). 416. Mat 959. 417. Id 418. 694N.E.2d810(Ind.TaxCt. 1998). 419. See id 420. See id 1999] TAXATION 1043 "people could attend to their spiritual needs.'"*^' Though the purpose of the church building was to provide a place where people could tend to their spiritual needs, the church building was often used by other churches and even other organizations not related to religion (e.g., Girl Scouts).'*^^ In this case, Alte Salem argued that it was entitled to an exemption for the improvements on the land and certain personal property, including the mobile home, for 1990.'*^^ By statute, "'[a]ll or part of a building is exempt from property taxation if it is owned, occupied, and used by a person for educational, literary, scientific, religious, or charitable purposes.""*^'* Thus, if the improvements and personal property were used for religious or charitable purposes, Alte Salem would be entitled to an exemption. Alte Salem contended that it did use the improvements and personal property in furtherance of such goals. On the other hand, the ISBTC found that Alte Salem presented no evidence supporting the claim for exemption in light of the fact that in 1990 the property had primarily been used for non-religious activities such as picnics and reunions."^^^ However, the court found sufficient uncontroverted evidence to conclude that the property likely was used for religious purposes."*^^ According to the ISBTC, the court could only look at activities taking place in 1990 to determine whether Alte Salem engaged in religious activities. However, the court, citing Governours Square Apartments V. State Board ofTax Commissioners, '^^^ found that evidence of events occurring in other tax years, if relevant, is probative and should be considered by the ISBTC ."^^^ In cases such as this, the issue of primary concern is the purpose for which the property is being used and events outside the tax year in issue may be helpful in the determining this purpose."^^^ Additionally, the fact that the church building may have been used for activities other than religion does not lead to the conclusion that exempt purposes were not furthered.'^^^ The court held that the ISBTC failed to consider all relevant evidence and remanded the issue to the ISBTC so it could consider evidence of activities conducted in years other than 1990."'^ Alte Salem also argued that the bam and mobile home should be exempt from tax."*^^ The ISBTC did not address this issue in its final determination."*" The ISBTC, believing that Alte Salem did not use the property for exempt 421. Mat 813. 422. See id. 423. See id. at S12. 424. Id (quoting IND. CODE § 6-l.l-10-16(a) (1998)). 425. SeeidatSU. 426. Id 427. 528 N.E.2d 864, 866 (Ind. Tax Ct. 1988) (citations omitted). 428. Alte Salems, 694 N.E.2d at 814. 429. See id 430. See id. 431. Mat 816. 432. SeeiddX%\5. 433. See id 1044 INDIANA LAW REVIEW [Vol. 32:1003 purposes, merely assumed that the bam and mobile home would not be exempt if the church building was not exempt."^^"^ Property that is "'incidental and necessary for the effective welfare of [an] exempt religious institution' is exempt from property taxation."*^^ The court, finding that the ISBTC did not consider Alte Salem's argument, also remanded to the ISBTC the issue of whether the bam and mobile home were "incidental and necessary" to an exempt purpose."*^^ 3. Trinity Episcopal Church v. State Board of Tax Commissioners."*^^ — Shortly after Trinity Episcopal Church ("Trinity") purchased a building and a parking lot, Midtown Community Mental Health Center ("Midtown") became interested in the property for use as a mental health center."^^^ Midtown, however, did not have the necessary capital to renovate the building."*^^ Consequently, Trinity and Midtown entered into an agreement whereby Trinity would finance the renovations and Midtown would repay the costs over a long-term lease. On July 12, 1995, shortly after the renovations were completed, Midtown leased the property from Trinity .'^'^^ The ISBTC granted Trinity an exemption for the parking lot because it was owned, occupied, and used for exempt purposes. However, because the building was vacant on March 1, 1995, the date of the assessment, the exemption for the building was denied."*"*' Trinity appealed, contending that it was entitled to an exemption. "'All or part of a building is exempt from property taxation if it is owned, occupied, and used by a person for educational, scientific, religious, or charitable purposes. "'"*^^ The court, relying on the similar case of Foursquare Tabernacle Church of God in Christ v. State Board of Tax Commissioners,'^*^ held that Trinity was entitled to an exemption.'*"*"* In Foursquare, the court held that "property acquired for future use in ftirtherance of exempt purposes may qualify for a property tax exemption under section 6-1.1-10-16."*"*^ Therefore, it was only necessary that Trinity establish that it had the intent to use the building in furtherance of an exempt purpose as of the date of the assessment. On the other hand, the ISBTC, citing Stark v. Kreyling,^^ argued that only those facts existing on March 1, 1995 could be taken into account in determining whether Trinity 434. See id. 435. Id. (quoting LeSea Broad. Corp. v. State Bd. of Tax Comm'rs, 525 N.E.2d 637, 639 (Ind. Tax Ct. 1988) (other citations omitted)). 436. Mat 816. 437. 694 N.E.2d 816 (Ind. Tax Ct. 1998). 438. Seeid^i^M. 439. See id. 440. See id. 441. See id. 442. Id at 818 (quoting iND. CODE ANN. § 6-l.l-10-16(a) (West Supp. 1997) (amended at IND. CODE § 6-l.l-10-16(a) (1998)). 443. 550 N.E.2d 850 (Ind. Tax Ct. 1990). 444. Trinity, 694 N.E.2d at 8 1 8. 445. Id. (citing Foursquare, 550 N.E.2d at 854). 446. 188 N.E. 680, 681 (Ind. 1934). 1999] TAXATION 1045 was exempt from property tax."^^ Because the renovations were not complete on March 1, 1998, the ISBTC argued that Trinity was not entitled to an exemption."^^ According to the court, Trinity had the requisite intent to use the property for exempt purposes in light of the fact that it had incurred significant renovation expenses and already had an agreement with Midtown."*"*^ Therefore, the court held that it was an abuse of discretion to deny Trinity the exemption. '^^^ F. Indiana Procedures For Tax Administration—Indiana State Board ofTax Commissioners In Kent Co. v. State Board of Tax Commissioners,^^^ Kent owned real property that was assessed during the 1989 general assessment."*^^ Kent petitioned the CBOR to review the assessment, filing a Form 130.'^^^ The CBOR issued a final assessment with which Kent disagreed. Kent then filed a Form 131 Petition for Review with the ISBTC.'*^'* The ISBTC issued a final determination, lowering the assessment and Kent did not appeal the determination."*^^ During the assessment review process, Kent paid property taxes based on the 1988 assessed value of its property."^^^ After the ISBTC issued its final determination, the county treasurer sent Kent a revised tax bill that was higher than the initial tax bill, because it was based on the 1988 assessed value."*^^ Kent then filed a petition for review with the CBOR and the CBOR denied the petition, stating that the petition was not timely filed."*^^ Kent sought review with the ISBTC, which took no action for over twelve months."*^^ The issue before the court was whether the court had jurisdiction to determine a challenge to the assessed property value. Kent argued that the initial tax bills reflected the ISBTC s assessment for each year as opposed to the 1988 assessment, and that as a result, the increase in tax liability was a sua sponte assessment, completed without notice and an opportunity for a hearing."^ The court addressed two claims made by Kent: (1) 447. See Trinity, 698 N.E.2d at 819. 448. See id. 449. Mat 818. 450. /^. at 819. 45 1 . 685 N.E.2d 1 1 56 (Ind. Tax Ct 1 997). 452. See id. 453. See id at 1 156 n.2 (citing iND. CODE § 6-1.1-15-1 (1998) (amended eff. Jan. 1, 1999); iND. Admin. Code tit. 50, r. 4.2-3-3 (1996)). 454. See id at 1 156 n.3 (citing iND. CODE § 6-1.1-15-3 (1998) (amended eff. Jan. 1, 1999); iND. Admin. Code tit. 50, r. 4.2-3-3 (1996)). 455. SeeiddXWSe. 456. See id at 1 1 56-57 (citing iND. CODE §6-1.1-15-1 0(a)(2) ( 1 998)). 457. SeeiddXnSl. 458. See id. 459. See id 460. See id. See also iND. CODE §§ 6-1.1-9-4, -14-11 (1998) (requiring notice and an opportunity for a hearing). 1 046 INDIANA LAW REVIEW [Vol. 32: 1 003 whether the 1989 assessment was incorrect; and (2) whether the notice given as to the increase in assessment was improper."^^^ As to the first of Kent's claims, the court held that it had "no jurisdiction to entertain any dispute about the validity of the 1989 assessment."^^^ What Kent really is seeking to do here is collaterally attack the 1989 assessment as it applied to the tax years in issue. The time to assert error in the 1989 assessment as it applied to the tax years in issue in this Court was December 21, 1992 (forty-five days after the final determination by the State Board). After the forty-five days expired, this Court had no jurisdiction to hear Kent's appeal of the 1989 assessment as applied to the tax years at issue. (Of course, Kent's failure to appeal the State Board's final determination did not foreclose Kent's ability to challenge the 1989 assessment as it applied to other years.) Kent cannot confer that jurisdiction by reinitiating the Form 130/13 1 process and then filing an original tax appeal. Therefore, this Court has no jurisdiction to evaluate Kent's assertion that the 1989 assessment was erroneous as applied to the tax years in issue."*^^ As to the second of Kent's claims, the court held that the revised tax bill was valid."^ When a challenge is made, a taxpayer must make property tax payments based on the immediately preceding year."*^^ However, any increased amount in dispute need not be paid until after the petition for review is finally adjudicated."^^^ As the review process progressed, taxes accrued for the years 1990 through 1992 and Kent paid the property taxes for those years based on the 1988 assessment. Kent claimed that the initial tax bills represented an assessment and that the revised tax bill, sent only after final adjudication of the review process, constituted a sua sponte increase in assessment. The court pointed out that the initial tax bills were required by statute only as a provisional tax liability subject to change by the outcome of the 1989 assessment under review."^^^ "Because the use of the 1988 value did not constitute an assessment, the subsequent revision of Kent's tax liability to reflect the [ISBTC's] final determination of the assessed value of Kent's property did not constitute a [sua sponte] increase in assessment."^^^ Because the action was not a sua sponte increase in assessment, notice and an opportunity for a hearing were not required."*^^ Therefore, the court dismissed Kent's tax appeal because the court lacked jurisdiction and entered summary judgment in favor of the 461. ^ert^685N.E.2datll57. 462. /J. at 1161. 463. Id. at 1 158-59 (citation omitted). 464. Id. at 1161-62. 465. See id at 1 160 (citing IND. CODE § 6-l.l-15-10(a)(2) (1998)), 466. See id. 467. Mat 1161. 468. Id 469. See id. 1999] TAXATION 1047 ISBTC."'" G. Indiana Sales and Use Taxes 1. Rotation Products Corp. v. Department of State Revenue.'*^'—Rotation Products Corporation ("RPC") repairs and remanufactures roller bearings/^^ After inspection of non-operational roller bearings, RPC determined whether the damaged roller bearings were to be scrapped, remanufactured, or merely cleaned and polished/^^ When RPC remanufactured the bearings, the inner and outer rings were ground down, and as a consequence, the thickness of the rings changed."^^"* As a result ofthe change in thickness, a new rolling cage and rollers had to be fabricated so that the cage and rollers would fit between the new inner and outer rings."*^^ The Indiana Department of State Revenue ("IDSR") and RPC disputed whether the equipment used and the materials consumed in remanufacturing the non-operational roller bearings were exempt from sales tax. The IDSR denied the exemption for the tax years 1990 through 1992 and RPC appealed."^^^ Indiana imposes a sales tax"*^^ on retail transactions in Indiana and a use tax'*^^ on tangible personal property used in Indiana. However, the general assembly has provided several exemptions from sales and use taxes, including "[t]ransactions involving manufacturing machinery, tools, and equipment ... if the person acquiring that property acquires it for direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of other tangible personal property"*^^ and "[t]ransactions involving tangible personal property ... if the person acquiring that property acquires it for direct consumption as a material to be consumed in the direct production of other tangible personal property in the person's business of manufacturing, processing, refining, repairing."**^ The purpose behind exempting equipment and materials from the sales and use taxes is to encourage economic growth and limit multiple taxation."**' The central issue in this case was whether the remanufacture of non-operational roller bearings constituted new tangible personal property within the meaning of the exemption statute. The IDSR argued that RPC merely repaired the damaged bearings to a useful 470. /^. at 1161-62. 471. 690 N.E.2d 795 (Ind. Tax Ct. 1998). 472. See id. at 797. 473. See id. 474. See id. 475. See id 476. See id. at 796. 477. See id at 797 (citing iND. CODE § 6-2.5-2-1 (1998)). 478. See id (citing iND. CODE § 6-2.5-3-2 (1998)). 479. See id at 798 (citing iND. CODE § 6-2.5-5-3(b) (1998)). 480. Id (citing iND. CODE § 6-2.5-5-5. 1(b) (1998)). 481. See id 1048 INDIANA LAW REVIEW [Vol. 32:1003 condition; thus, a service activity was performed that is subject to sales tax."*^^ The IDSR claimed that any form of repair could not be considered "production" within the meaning of the exemption statute because such repair was a service activity ."^^^ RPC countered that it took raw materials (unuseable roller bearings) and transformed them into a new, useable product."*^"* The tax court determined that a repair activity could constitute production: "[A]t some point, the repair activity is so extensive in nature and so transforms the object such that it cannot be characterized as a mere service. Rather, the repair activity produces a new product and therefore constitutes exempt activity."**^ The court stated that to constitute "production," the activity in question must generally entail a substantial amount of work that caused the end product to be "'substantially different from the component materials used.'""^^^ To determine whether an activity constitutes "production" within the meaning ofthe exemption statute, the court focused on the following factors: (1) "the substantiality and complexity of the work done on the existing article and the physical changes to the existing article, including the addition of new parts;""^^^ (2) "a comparison ofthe article's value before and after the work;"*^^ (3) "how favorably the performance ofthe remanufactured article compared with the performance ofnewly manufactured articles of its kind;"*^^ and, (4) "whether the work performed was contemplated as a normal part of the life cycle of the existing article."^^ The court then evaluated the remanufacturing process of the roller bearings to determine whether RPC produced new tangible personal property during such process. The court determined that RPC performed substantial and complex work such that the bearings were physically changed during the process due to the grinding and polishing of the old rings, along with fabrication of a new rolling cage and elements.'*^^ Second, the court found that the value of the remanufactured roller bearing was significantly increased over the value of the non-operational bearing.'^^^ Third, the court found that the remanufactured bearing was at least as good or better than a newly manufactured roller bearing, as evidenced by RPC's guarantee that the load capacity would be greater than the load capacity was when the roller bearings were new.'*^^ Finally, the court found 482. See id. at 800. 483. See id. 484. See id. 485. Mat 801. 486. Id. at 802 (quoting Mechanics Laundry & Supply, Inc. v. Department of State Revenue, 650 N.E.2d 1223,1229 (Ind. Tax Ct. 1994)). 487. Id at 802-03. 488. Id at 803. 489. Id 490. Id 491. Id 492. Id 493. Id 1999] TAXATION 1049 that the remanufacturing was not contemplated as a normal part of the life-cycle of the roller bearing, particularly because of the fact that when a customer took the non-operational bearing to RPC, it was not known at that time whether the bearings could even be salvaged/^"^ Upon evaluation of the four factors, the court held that RPC produced "other tangible personal property" as contemplated by the exemption statute.'*^^ The court further held that even if RPC only cleaned and polished the inner and outer rings (as opposed to additionally fabricating a new roller cage), RPC would still be entitled to the exemption for cleaning and polishing because those processes are integral parts of the operation of producing other tangible personal property."*^ TTie court also found that granting an exemption in this case would further serve the legislative purposes of encouraging economic growth and avoiding multiple taxation or tax pyramiding. ''^^ This case may give a greater number of companies the ability to claim an industrial tax exemption, providing the companies satisfy the above-stated four factors. Notably, new tangible personal property must be produced that is sufficiently different fi*om the beginning product. Additionally, to be entitled to an exemption for repairs, the process must not be one contemplated during the ordinary life cycle of the original product. 2. Indianapolis Fruit Co. v. Department of State Revenue."*^*—Indianapolis Fruit, a supplier of fruits and vegetables, received bananas and tomatoes in an unmarketable form."*^ The bananas arrived green and unripe. In order to market the bananas, Indianapolis Fruit exposed the bananas to ethylene gas. Additionally, Indianapolis Fruit inspected the pulp for temperature, firmness, temperature damage and overall quality.^°° Indianapolis Fruit controlled the environment of the bananas throughout the ripening process and but for this process, the bananas would have turned from green to black, instead of from green to yellow.^^^ The ripening process also converted the starch within the banana into sugar.^^^ During the ripening process, which lasted between four to eight days, the bananas were inspected several times a day.^^^ The tomato ripening process was similar to the banana ripening process. However, Indianapolis Fruit usually did not expose the tomatoes to ethylene gas because many of its suppliers performed this activity .^^'^ The tomatoes were 494. Id. 495. Id. at 804. 496. Id. (citing Department of State Revenue v. Cave Stone, Inc. 457 N.E.2d 520, 524 (Ind. 1983). 497. Id at 805. 498. 691 N.E.2d 1379 (Ind. Tax Ct. 1998). 499. SeeidyiUU. 500. See id. 501. See id. 502. See id. 503. SeeiddXU%2. 504. See id. 1050 INDIANA LAW REVIEW [Vol. 32: 1003 placed in a controlled environment and the temperature, humidity, and air circulation were monitored.^^^ Once the tomatoes ripened, they were either shipped in bulk or packaged by Indianapolis Fruit for later shipment.^^^ In addition to the banana and tomato ripening processes, Indianapolis Fruit operated a garden cut facility that supplied fresh fruits and vegetables to grocery stores and restaurants.^^^ Employees in direct contact with the food were required to wear hair restraints, lab coats, vinyl gloves, and neoprene aprons and sleeves.^^^ Those employees who were not in direct contact with food were only required to wear hair restraints. ^^^ Indiana imposes a sales tax^'° on retail transactions and a use tax^^^ on tangible personal property used within Indiana. Indiana also provides exemption from such taxes. The IDSR denied Indianapolis Fruit exemptions for the materials and machinery used in the banana and tomato processes and denied an exemption for the protective clothing worn in the garden cut facility. Indianapolis Fruit appealed. The company contended that the tangible personal property used in the banana and tomato ripening processes were exempt from sales and use taxes.^'^ Indianapolis Fruit also claimed that the machinery, tools, and equipment used to produce "other tangible personal property" were exempt from taxation.^ ^^ Before materials or machinery can be exempt from sales and use taxation, it must be shown that the taxpayer engaged in "production" within the meaning of the statute.^ '"^ Once it is established that an activity constitutes production, the taxpayer must demonstrate that the items claimed to be exempt are "integral and essential to that production."^*^ For a product to satisfy this element, the product must be placed in a "'form, composition, or character substantially different from that in which [they] w[ere] acquired. '"^^^ Indianapolis Fruit contended that it was engaged in activities constituting production. The court first examined whether the banana ripening process constituted production of "other tangible personal property." Indianapolis Fruit argued that it changed unripe and non-marketable bananas into ripened marketable bananas, and therefore, it engaged in production.^^^ The IDSR 505. See id. 506. See id. 507. See id. 508. See id. 509. See id. 510. See id at 1383 (citing IND. CODE § 6-2.5-2-1 (1998)). 511. See id (citing iND. CODE § 6-2.5-3-2 (1998)). 512. See id (citing iND. CODE §§ 6-2.5-5-1, -2 (1998)). 513. See id (citing iND. CODE § 6-2.5-5-3(b) (1998)). 514. 5ee /V/. at 1383. 515. Id. at 1384 (citing Department of State Revenue v. Cave Stone, 457 N.E.2d 520, 524 (Ind. 1983)). 516. See id. at 1385 (quoting iND. ADMIN. CODE tit. 45, r. 2.2-5-10(k) (1996)). 517. See id. 1999] TAXATION 1051 countered that Indianapolis Fruit merely controlled the banana's ripeness.^'^ However, the court found that because the bananas underwent a substantial change, the process constituted production.^ ^^ The court focused on the fact that without action by Indianapolis Fruit, the bananas would not have ripened, and because there was production, the court held that Indianapolis Fruit was entitled to an exemption for all items "integral and essential" to the ripening process. ^^° The court described the "integral and essential" items as all items from the beginning of the process (when the bananas were placed in the ripening booths) to the end of the process (when the bananas were packaged for shipment).^^^ The court next addressed whether the tomato ripening process constituted production of "other tangible personal property" as contemplated by the exemption statute. The court held that the tomato ripening process did not constitute production.^^^ Unlike the banana ripening process, Indianapolis Fruit did not trigger the ripening of the tomatoes. Rather, Indianapolis Fruit merely awaited the ripening of the tomatoes before distribution.^^^ Though Indianapolis Fruit did control the environment and increase the marketability ofthe tomatoes, it did not actively induce the ripening.^^"^ Indianapolis Fruit was not entitled to receive an exemption merely because the tomatoes ripened while in their possession.^^^ To be considered production, Indianapolis Fruit would have to do something more than passively await the tomatoes to ripen.^^^ The court also denied an exemption for the packaging ofthe tomatoes for resale.^^^ Even though packaging may be an integral part of a production process, this did not mean that the packaging in and of itself constituted production because "the packaging [did] not change[] the 'form, composition, or character' of the tomatoes."^^^ As to an exemption for the protective clothing worn by employees in the garden cut facility, the court held that Indianapolis Fruit was entitled to the exemption because the clothing was necessary to prevent contamination, as provided for in an IDSR regulation.^^^ 3. White River Environmental Partnership v. Department of State Revenue.^^^—White River Environmental Partnership ("WREP") treats wastewater so that it can be discharged into the White River.^^' The wastewater 518. See id at 1384-85. 519. Id. at 1385. 520. Id 521. Id 522. Id 523. See id. 524. See id. 525. See id. 526. See id 527. Id at 1386. 528. Id. (quoting IND. ADMIN. CODE tit. 45, r. 2.2-5-8(k)(1996)) 529. Id 530. 694 N.E.2d 1248 (Ind. Tax Ct. 1998). 531. See id at 1249. 1052 INDIANA LAW REVIEW [Vol. 32:1003 treatment process is very extensive. As wastewater enters, WREP adds chemicals to control odors and coagulate the solids, and the water then goes through a process that removes plant matter and egg shells.^^^ Next, the larger solids are removed, followed by aeration that allows bacteria to attack any remaining solids. Finally, the wastewater is disinfected and ultimately discharged into the White River.^^^ Indiana imposes a sales tax,^^"* with certain exemptions, on retail transactions and a use tax^^^ on tangible personal property stored, used, or consumed within Indiana. WREP argued that it was entitled to the consumption exemption and the environmental quality exemption.^^^ The consumption exemption provides, in part, that transactions are exempt from sales tax "'if the person acquiring the property acquires it for direct consumption as a material to be consumed in the direct production of other tangible personal property. '"^^^ The environmental quality exemption provides that sales are exempt from tax if: "(1) the property constitutes, is incorporated into, or is consumed in the operation of a device, facility, or structure predominantly used and acquired for the purpose of complying with any state . . . environmental quality statute[] . . .; and (2) the person acquiring the property is engaged in the business of manufacturing, processing, refining, mining, or agriculture."^^^ Both provisions require that WREP engage in production to receive the exemption. WREP argued that it was engaged in "production" because it makes clean water that can be used in irrigation, ash that can be used in making brick, and sludge that can be used as a fertilizer.^^^ Additionally, WREP substantially changes the wastewater it receives.^'*^ The court agreed that WREP changed the wastewater to a "'a form, composition, or character substantially [sic] different from that in which it was acquired. '"^"^^ However, this change in the form or composition of wastewater did not establish the fact that WREP engaged in production as contemplated by the exemption provision.^"*^ In this case, the products of the wastewater treatment facility were not sold; therefore, there was no need for an exemption to prevent tax pyramiiding, a major purpose of the 532. See id. 533. See id. 534. See id at 1251 (citing IND. CODE § 6-2.5-2-1 (1998)). 535. See id (citing iND. CODE § 6-2.5-3-2 (1998)). 536. See id (citing iND. CODE § 6-2.5-5-30 (1998)). 537. Id (quoting iND. CODE § 6-2.5-5-5.1 (1998)). 538. Id (quoting iND. CODE § 6-2.5-5-30 (1998)). 539. See id ^X\25\. 540. See id. 541. Id (quoting iND. ADMIN. CODE tit. 45, r. 2.2-5- 10(k) (1996)). 542. See id. 1999] TAXATION 1053 exemption provision.^'*^ Despite the fact that wastewater treatment is an important public interest that would be promoted by granting an exemption, the court held that the statute was not meant to grant an exemption in this case because WREP had not engaged in "production of other tangible personal property" as contemplated by the exemption provision.^"^"* The court noted that it was up to the general assembly, not the courts, to address any inadequacies of the exemption statute. 4. Hyatt Corp. v. Department of State Revenue.^"*^—Hyatt purchased unprepared food for the purpose of preparing and serving complimentary meals to certain members and employees.^"*^ The IDSR instituted an audit and discovered an unpaid tax liability .^'^^ During the proceedings, Hyatt contended that it was entitled to offset the tax liability with use tax erroneously paid on its food purchases.^"*^ However, Hyatt paid the assessment and then filed a claim for a refund for the amount of overpayment of use tax.^"*^ The IDSR denied the refund claim and Hyatt appealed.^^^ Indiana imposes a sales tax^^^ on retail transactions and a use tax^^^ on tangible personal property stored, used, or consumed within Indiana. Indiana also provides for exemption from certain sales and use taxes. Hyatt claimed that its purchases of food were exempt under an exemption statute that provides: "Sales of food for human consumption are exempt from the state gross retail tax."^^^ The exemption provision also defined "food for human consumption" and listed several types of food that were not to be considered food for human consumption.^^"* Hyatt argued that it was entitled to an exemption because its activities were not listed as an exclusion from the exemption. The IDSR made several arguments contending that Hyatt was not entitled to an exemption. First, the IDSR argued that Hyatt could not claim an exemption because it did not sell the prepared food and consequently had not collected or paid sales tax on the food.^^^ According to the IDSR, this meant that the food purchases were taxable. Second, the IDSR attempted to show that Hyatt did not fall within the class of persons that the general assembly intended to benefit.^^^ However, the court viewed the IDSR's arguments as attempts to add restrictions 543. See id. dX\25\-52. 544. Seeid.2X\251. 545. 695 N.E.2d 1051 (Ind. Tax Ct. 1998). 546. See id. at 1052. 547. See id. 548. See id 549. See id. 550. See id. 551. See id. at 1053 (citing iND. CODE § 6-2.5-2-1 (1998)). 552. See id (citing iND. CODE § 6-2.5-3-2(a) (1998)). 553. Id at 1054 (quoting iND. Code § 6-2.5-5-20 (1998)). 554. See id 555. See id ?X\055. 556. SeeiddX\()5A. 1 054 INDIANA LAW REVIEW [Vol. 32: 1 003 to the availability of the exemption.^^^ The plain language of the statute had no such restrictions and the court refused to read such restrictions into the exemption provisions.^^* The court held that Hyatt was entitled to a tax exemption for the purchase of food and stated: "But that escape is with the legislature's blessing; consequently, it is not for this court to prevent the escape simply because it deems a taxpayer unworthy of receiving an exemption. The legislature decides which taxpayer deserves to escape taxation."^^^ H. Indiana Motor Carrier Fuel Taxes In Bulkmatic Transport Co. v. Department of State Revenue, Bulkmatic Transport ("Bulkmatic") is a trucking company that serves customers both inside and outside Indiana.^^ Power take off ("PTO") equipment, attached to the delivery truck, was used to unload cargo. The PTO equipment was powered by fuel from the same tank as the engine and the average amount of fuel consumed during an unloading was seven gallons.^^^ Trucking companies are taxed on the fuel consumed while using Indiana roads.^^^ The companies are taxed on the percentage of fuel used in Indiana by calculating the amount of miles traveled on Indiana highways compared to the total amount of fuel consumed on all nationwide highways.^^^ The fuel used by PTO equipment, assuming the equipment is powered from the same tank as the engine, is also used in determining the amount of tax owed. Indiana has an exemption statute for the use of fuel during offloading with PTO equipment to ameliorate the additional tax liability.^^ However, the general assembly limited the exemption to carriers who use PTO equipment "'in Indiana. '"^^^ The exemption amount is not determined by the amount of fuel consumed during unloading with PTO equipment, but rather a motor carrier is reimbursed 15% of the total amount of tax paid for fuel consumption when PTO equipment is used "in Indiana." Bulkmatic argued that the exemption statute was unconstitutional as violative ofthe Commerce Clause ofthe U.S. Constitution. The Commerce Clause grants Congress the "'Power . . . [t]o regulate Commerce . . . among the several States. '"^^^ The court stated that the tax would be upheld if '"the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the 557. See id. at 1056. 558. Id. 559. Id at 1055-56. 560. See id. di nil. 561. 5ee/V/. at 1372-73. 562. See id at 1372 (citing IND. Code §§ 6-6-4.1-4, -4.5 (1998)). 563. Seeid^iUlZ. 564. See id. 565. Id (quoting iND. CODE § 6-6-4. 1 -4(d) (1998)). 566. Id. at 1374 (quoting U.S. CONST, art. I, § 8, cl. 3). 1999] TAXATION 1055 services provided by the State. '"^^^ Bulkmatic argued that requiring the PTO equipment to be used "in Indiana" in order to qualify for the exemption discriminates against interstate commerce/^^ The IDSR countered that this system was not discriminatory because it treats in-state and out-of-state companies equally.^^^ The court noted that the U.S. Supreme Court has held that it is unconstitutional to "'tax ... a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the state. '"^^° The court discussed three cases and how they affected the outcome of this case. In Camps Newfound/Qwatonna v. Town ofHarrison^^^ the U.S. Supreme Court invalidated a property tax as violating the Commerce Clause because charitable organizations that catered to non-residents were given a reduced tax exemption as compared with charitable organizations catering to residents. The Supreme Court reasoned that the exemption statute encouraged organizations to limit the out-of-state participants .^^^ Similar to Camps Newfound^ the Bulkmatic court stated that limiting the exemption to offloads "in Indiana" encouraged carriers to limit deliveries to customers within Indiana to take advantage of the tax exemption. In Boston Stock Exchange v. State Tax Commission,^^^ New York imposed a tax on sales of securities. However, New York taxed out-of-state transactions more heavily than in-state transactions .^^^ The Supreme Court ruled that the exemption for in-state status was discriminatory.^^^ The tax court analogized Boston Stock Exchange to Bulkmatic^ finding that "[l]ike the New York exemption scheme, the 'in Indiana' exemption does not result in 'substantially evenhanded treatment' of motor carriers."^^^ Additionally, the court discussed Westinghonse Electric Corp. v. Tully^^^ wherein the Supreme Court again struck down a New York statute because the statute placed a '"discriminatory burden on commerce to sister States. '"^^^ Like Westinghouse, the statute in Bulkmatic impermissibly discriminated against out-of-state interests.^^^ According to the IDSR, the exemption did not discriminate against interstate commerce. The IDSR claimed that because it did not differentiate between in- state and out-of-state companies, the statute did not violate interstate 567. Id. at 1376 (quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)). 568. See id. ai 1315. 569. See id 570. Id at 1376 (quoting Fulton Corp. v. Faulkner, 516 U.S. 325, 331 (1996)). 571. 520 U.S. 564(1997). 572. Id at 579. 573. Bulkmatic, 691 N.E.2d at 1376-77. 574. 429 U.S. 318(1977). 575. See Boston Stock Exch., 429 U.S. at 3 19. 576. Id 577. Bulkmatic, 691 N.E.2d at 1378. 578. 466 U.S. 388(1984). 579. Id. at 406 (citing Boston Stock Exch., 429 U.S. at 33 1). 580. Bulkmatic, 691 N.E.2d at 1378. 1056 INDIANA LAW REVIEW [Vol. 32: 1003 commerce.^^' However, the court found that because the exemption statute encouraged deliveries into Indiana and taxed transactions more heavily once the deliveries crossed state lines, the statute violated the Commerce Clause.^^^ The IDSR also contended that the statute provided a generous exemption from taxes and was merely a means of assuring calculation ofthe amount of such exemption.^^^ However, the court stated that a generous intent or purpose does not insulate a statute from the mandates of the Commerce Clause.^^"^ Finally, the IDSR claimed that this was not a case of discrimination, but rather a lack of exactness. According to the IDSR, even though two companies may be taxed differently for using the same amount of Indiana's highway, it was not required to formulate precisely the amount of fuel consumed and tax owed.^^^ However, the court stated that if a statute is found to discriminate against interstate commerce, then the statute must be struck down as violating the Commerce Clause.^^^ The court held that the "'in Indiana' limitation on Indiana's motor carrier fiiel tax exemption discriminated against interstate commerce and ... is not allowed under the Commerce Clause."^^^ /. Indiana Excise Taxes In Horrall v. Indiana Department ofState Revenue, ^^^ Horrall appealed a final determination of the IDSR claiming that the IDSR erroneously assessed a Controlled Substance Excise Tax ("CSET") and that Horrall was entitled to a refund ofthe tax that was paid by levy.^^^ Horrall made the following challenges to the legality of the IDSR's assessment: (1) Horrall was an ultimate user of the marijuana and not liable for the tax; (2) other persons are liable for the tax; (3) the date of the assessment. May 20, 1997, renders the assessment fatally defective because Horrall was incarcerated on that date and did not possess the marijuana on that date; and (4) the tax statute was void for vagueness.^^^ A CSET is a tax imposed on those who possess a controlled substance, unless such person has a legal justification for possessing the controlled substance.^^^ Horrall argued that because he was an ultimate user, he had a legal justification.^^^ However, an ultimate user is defined by statute as "a person who 581. See id. 582. Id. 583. See id. at 1379. 584. Id 585. See id. 586. Id 587. Id 588. 687 N.E.2d 1219 (Ind. Tax Ct. 1997). 589. Id at 1220. 590. See id. 591. See id at 1220-21 (citing iND. CODE § 6-7-3-5 (1998)) 592. See id. at 1221. 1999] TAXATION 1057 lawfully possess a controlled substance."^^^ Consequently, Horrall's challenge to the assessment on this basis failed. Horrall next argued that others possessed or manufactured the controlled substance on the same day that Horrall was assessed the CSET and therefore, he cannot be liable for the tax.^^"* However, the court pointed out that even though others may be obligated to pay a tax, it would not relieve Horrall from his liability .^^^ Similarly, even if Horrall did not manufacture the marijuana, it is possession of such substance that triggers a tax liability.^^^ Horrall also argued that the assessment was defective because the notice of assessment listed a day in which he was incarcerated, and therefore, he could not have possessed the marijuana on that date.^^^ The IDSR countered that this technical error did not prejudice Horrall in any way. The court stated that the purpose of the notice of proposed assessment is to inform the taxpayer that he may owe taxes, provide protest information, and begin the running of the sixty- day period in which to file a written protest.^^* Pointing out that the notice of proposed assessment serves an important function, the court determined that because Horrall was not prejudiced (he did not fail to file a written protest nor was the preparation of his case impaired), his claim must fail.^^ Finally, Horrall argued that the statute making possession of marijuana criminal was void for vagueness.^°° Statutes are required to be sufficiently definite so that an individual will know what conduct is legal or illegal, and the court held that the statute in question was "exceedingly clear."^^ Ultimately, the court found that Horrall was liable for the tax because he unlawfully possessed a controlled substance.^^^ An important aspect ofthis case is the fact that the court held, absent actual prejudice to a taxpayer, that no relief will be afforded when there is merely a slight factual error in a notice of proposed assessment. What the court will consider a "slight" factual error or what types of error actually prejudice a taxpayer were not determined in this case; these may become hurdles for future petitioning taxpayers. J. Indiana Inheritance Taxes In Department ofState Revenue v. Estate ofPhelps,^^ Phelps, the decedent. 593. Id (citing IND. CODE § 35-48-1-27 (1998)). 594. See id. 595. Id 596. See id 597. See id. 598. Id 599. Id at 1221-22. 600. See id at 1222. 601. Id 602. Id 603. 697 N.E.2d 506 (Ind. Tax Ct. 1998). 1058 INDIANA LAW REVIEW [Vol. 32: 1003 died testate on December 3, 1994.^ By the terms of the decedent's last will and testament, the decedent's spouse received all tangible personal property and her interest in the marital home. The remainder passed by a residuary clause into a revocable trust.^^^ Under the trust, the spouse received $200,000. The other assets were divided into two trusts, one marital and the other non-marital.^^ The marital trust granted the surviving spouse an income interest for life, remainder to the children.^^^ The corpus of the trust could be invaded for the surviving spouse's care, comfort, or maintenance. On July 17, 1995, the estate filed an Indiana inheritance tax return, attaching the decedent's will and the trust agreement.^^ On November 29, 1995, within the twelve-month period for which inheritance returns are due, the estate filed a second Indiana inheritance tax return, this time attaching a qualified terminable interest property ("QTIP") election.'^' Indiana imposes an inheritance tax on certain transfers at death and the amount is based on the fair market value of the property.^^^ Property passed to a surviving spouse is exempt from Indiana inheritance tax.^^' However, the remainder interest (the value of the remainder to the children) is subject to Indiana inheritance taxation unless a QTIP election is filed within the proper time and in the proper form.^*^ The IDSR regulations provide the form with which an election must substantially comply .^^^ In this case, the estate did not file a QTIP election on July 17, the date the estate filed its original inheritance tax return. Therefore, the court held that the estate did not make a proper QTIP election in filing the first inheritance retum.^^"* Although the second inheritance return did have a QTIP election attached to the return, by regulation a QTIP election "'must be in writing, signed by a person authorized to make the election, and attached to the original Indiana inheritance tax return at the time it is filed. '"^'^ Any mistake in making a QTIP election is treated as an irrevocable election not to treat the transaction as a QTIP transfer.^'^ The IDSR argued that because the QTIP election was not "attached to the original inheritance tax return," the election was invalid. The estate, however, claimed that because the phrase, "attached to the original inheritance tax return," was not defined by statute or under the regulations, the court should apply the 604. See id. at 508. " . 605. See id. 606. See id. 607. See id 608. See id 609. See id at 508-09. 610. See id at 509 (citing IND. CODE §§ 6-4.1-2-1, 6-4.1-5-1.5 (1998)). 611. See id (citing iND. CODE § 6-4. 1 -3-7(a) ( 1 998)). 612. See id (citing iND. CODE ANN. § 6-4. l-3-7(c) (1998)). 613. See id at 5 1 (citing iND. ADMIN. CODE tit. 45, r. 4. 1 -3-5(b)(4) ( 1 996)). 614. Id 615. Id (quoting Ind. Admin. CODE tit. 45, r. 4.1-3-5(b)(3) (1996)). 6 1 6. See id. (citing iND. ADMIN. CODE tit. 45, r. 4. 1 -3-5(e) ( 1 996)). 1999] TAXATION 1059 federal regulations applicable to QTIP elections.^^^ Under the federal regulations, a second filing of an inheritance return could be used in making the QTIP election so long as the second return was filed within the time when the inheritance return could be filed, which the estate did in this case.^'^ However, the IDSR pointed out that a QTIP election "'cannot be made on an amended inheritance tax return. '"^'^ The estate countered, stating that it filed a supplemental inheritance tax return and not an "amended" inheritance tax return, arguing that a supplemental return is one filed before the due date ofthe retum.^^° However, the court found that the intent ofthe regulation, which has the force of law, was that failure to attach a QTIP election to the initial inheritance tax return must result in not treating the transfer as a QTIP transfer.^^* Though the court sympathized with the estate's position, it held that the estate had failed to file a valid QTIP election.^^^ 617. See id. 618. See id. 619. Id. (quoting IND. ADMIN. CODE tit. 45, r. 4.1-3-5(c) (1996)). 620. SeeiddXSW. 621. Id. (citing iND. ADMIN. CODE tit. 45, r. 4.1-3-5(e) (1996)). 622. Id