ATTORNEYS FOR PETITIONER:                         ATTORNEYS FOR RESPONDENT:
JEROME L. WITHERED                                CURTIS T. HILL, JR.
ZACHARY T. WILLIAMS                               ATTORNEY GENERAL OF INDIANA
WITHERED BURNS LLP                                WINSTON LIN
Lafayette, IN                                     DEPUTY ATTORNEY GENERAL
                                                  Indianapolis, IN



                               IN THE                                            FILED
                         INDIANA TAX COURT                                  08/31/2017, 3:23 pm
                                                                                 CLERK
                                                                             Indiana Supreme Court
                                                                                Court of Appeals
                                                                                  and Tax Court
SCHILLI LEASING, INC.,                          )
                                                )
      Petitioner,                               )
                                                )
         v.                                     ) Cause No. 49T10-1306-TA-00054
                                                )
INDIANA DEPARTMENT OF                           )
STATE REVENUE,                                  )
                                                )
      Respondent.                               )


                     ON APPEAL FROM A FINAL DETERMINATION OF
                    THE INDIANA DEPARTMENT OF STATE REVENUE

                                  FOR PUBLICATION
                                   August 31, 2017

FISHER, Senior Judge

      Schilli Leasing, Inc. has appealed the Indiana Department of State Revenue’s

final determination assessing it with unpaid sales and use tax liabilities for the 2008,

2009, and 2010 tax years (the years at issue). Schilli Leasing’s appeal presents one

issue for the Court to decide: whether the retail transactions giving rise to those unpaid

liabilities were exempt from sales and use taxes under Indiana Code § 6-2.5-5-27,

Indiana’s public transportation exemption. Upon review, the Court finds that they were

not exempt.
                           FACTS AND PROCEDURAL HISTORY

       Schilli Leasing, located in Remington, Indiana, is a full-service truck leasing

company owned by Thomas R. Schilli. (Jt. Stip. Facts ¶¶ 2-4; Pet’r Trial Ex. 1 at 31.)

Schilli Leasing is in the business of acquiring vehicles that it then leases to third-parties,

including four other companies owned by Mr. Schilli: Wabash Valley Transportation,

Inc. (“WVT”); Schilli Specialized, Inc. (“SSI”); Schilli Specialized of Texas, Inc. (“SST”);

and Midwest Shuttle Services, Inc. (“MSS”). (Jt. Stip. Facts ¶ 3; Trial Tr. at 21, 31, 41-

42, 60; Pet’r Trial Ex. 4 at 2.) WVT, SSI, and SST “are companies [that] haul freight for

hire.” (Jt. Stip. Facts ¶ 6; Trial Tr. at 10-11.) MSS is a “freight preparation” company:

common carriers hire MSS to load, tarp, and secure their customers’ freight onto trailers

and then move those trailers a short-distance for pick-up by the motor carriers. (See Jt.

Stip. Facts ¶ 7; Trial Tr. at 12-13, 33-34.)

       In conjunction with its leasing program, Schilli Leasing operates numerous

garage facilities throughout the country where it provides maintenance and repair

services for its vehicles. (See Trial Tr. at 11, 39-40, Pet’r Trial Ex. 1 at 3.) Schilli

Leasing also provides WVT, SSI, and SST, and MSS with several services not available

to its other lessees. For instance, it purchases all their fuel and it provides them with




1
 During trial, Schilli Leasing offered five exhibits as evidence. (See Trial Tr. at 4-5; Pet’r Trial
Exs. 1-5.) The Court notes that each of those five exhibits had been previously filed in
conjunction with the parties’ joint stipulation of facts and designated as confidential. (Compare
Pet’r Trial Exs. 1-5 with Jt. Stip. Facts, Exs. 1-5.) Because Schilli Leasing did not make
provisions to maintain the confidentiality of those documents at trial, (compare Trial Tr. at 4-5
with Ind. Administrative Rule 9(G)(5)(a)(i)(b)), their confidentiality has been waived.


                                                 2
temporary freight storage services.2 (See Trial Tr. at 17-18, 23-25, 55, 58.) Schilli

Leasing also operates a “bunkhouse” at each of its garage facilities that provides

overnight accommodations, showers, laundry facilities, and use of a “courtesy car” to

the drivers of WVT, SSI, SST, and MSS while their vehicles are being serviced, while

they are on federally-mandated rest periods, or while they are attending employment

orientation/training. (Jt. Stip. Facts ¶ 4; Trial Tr. at 12, 22, 45-46, 55, 61.) While Schilli

Leasing charges WVT, SSI, SST, and MSS for these services and accommodations, it

appears that they do not involve an exchange of money per se but are reflected as

“accounting allocations” in each company’s respective financial records. (See Trial Tr.

at 17-18, 21, 23-24, 33, 41-42, 58, 60-61.)

       Although Schilli Leasing, WVT, SSI, SST, and MSS are all owned by the same

individual, they are separate corporate entities.3 (Trial Tr. at 29-30.) Mr. Schilli set up

his companies in this fashion – as opposed to a singular corporation or a group of

companies controlled by a holding company – so that each company could take

advantage of the best insurance rates available to it as well as to put its management

closer to its work force and finances. (Trial Tr. at 16-17.)




2
  For instance, if one of those companies damages the freight it is transporting, it brings the
“salvage” to Schilli Leasing’s facility in Remington for storage until its disposal. (Trial Tr. at 23-
25, 55.) (See also Trial Tr. at 56 (indicating that Schilli Leasing sometimes stores the freight of
those companies to protect it from extreme temperatures).)
3
  Mr. Schilli also owns two other companies: Schilli Distribution Services, Inc. (“SDS”) and
Schilli Transportation Services, Inc. (“STS”). (Jt. Stip. Facts ¶ 3.) SDS “is a warehousing and
logistics business [that] handles and houses freight for hauling, and coordinates . . . work with
[WVT, SSI, SST, and other] third-parties who deliver freight to SDS and who pick freight up from
SDS facilities.” (Jt. Stip. Facts ¶ 8.) STS not only brokers freight for WVT, SSI, and SST but
also provides various administrative services (e.g., IT, human resources, and accounting) to all
of the companies owned by Mr. Schilli. (Trial Tr. at 8-10.)


                                                  3
       In 2012, after completing an audit, the Department determined that Schilli

Leasing had been deficient in remitting sales and use taxes during the years at issue.

(See Pet’r Trial Ex. 1 at 1-2.) Specifically, it found that Schilli Leasing failed to:

          collect sales tax on its charges to MSS for vehicle lease payments,
          fuel, and repair parts;

          collect sales tax on its charges to WVT, SSI, and SST4 for vehicle
          lease payments, temporary freight storage, and bunkrooms;

          remit use tax on its purchases of “bunkhouse improvements,”
          including a water softener, as well as a forklift and a laser jet printer
          that were used in one of its repair shops;

          remit use tax on its purchases of items used in its repair shops, such
          as uniforms, gloves, towels, toilet tissue, and sidewalk salt.

(Compare Pet’r Trial Ex. 1 with Pet’r Trial Exs. 4 at 5-9, 5 at 5-13 and Pet’r V. Pet. Set

Aside Final Determination Indiana Dep’t Revenue at ¶ 9.) As a result of these findings,

the Department issued Proposed Assessments to Schilli Leasing totaling $223,041.48

for the years at issue. (See Pet’r Trial Ex. 2.)

       Schilli Leasing protested the Proposed Assessments, claiming that the retail

transactions identified by the Department in its audit and upon which the Proposed

Assessments were based were exempt from taxation under the public transportation

exemption. (Jt. Stip. Facts ¶¶ 12-13; Pet’r Trial Exs. 3, 4.) The Department conducted




4
 Based on the evidence before the Court, it is unclear whether Schilli Leasing billed WVT, SSI,
and SST directly or if it billed STS. (Compare Pet’r Trial Ex. 4 at 6 with Pet’r Trial Ex. 5 at 7.)


                                                4
a hearing and, on May 15, 2013, issued a Letter of Findings denying the protest.5 (See

Jt. Stip. Facts ¶ 14; Pet’r Trial Ex. 5.)

       Schilli Leasing initiated an original tax appeal on June 4, 2013.           The appeal

proceeded to trial in November of 2016. The Court heard oral argument on January 25,

2017. Additional facts will be supplied when necessary.

                                  STANDARD OF REVIEW

       This Court reviews final determinations of the Department de novo. See IND.

CODE § 6-8.1-5-1(i) (2017). As a result, the Court is not bound by either the evidence or

the issues presented to the Department at the administrative level. See Horseshoe

Hammond, LLC v. Indiana Dep’t of State Revenue, 865 N.E.2d 725, 727 (Ind. Tax Ct.

2007), review denied.

                                             LAW

       Indiana imposes both a sales tax and a use tax. The sales tax is imposed on

retail transactions that occur in Indiana. See IND. CODE § 6-2.5-2-1(a) (2008). The use

tax is imposed on the storage, use, or consumption of tangible personal property in

Indiana if that property was acquired in a retail transaction, regardless of where that

transaction occurred. IND. CODE § 6-2.5-3-2(a) (2008). The use tax is complementary

to the sales tax because it is primarily designed to reach out-of-state sales of tangible

personal property that are subsequently used in Indiana. Horseshoe Hammond, 865

N.E.2d at 727; Morton Bldgs., Inc. v. Indiana Dep’t of State Revenue, 819 N.E.2d 913,

915 (Ind. Tax Ct. 2004), abrogated on other grounds. “This complementary formulation

5
  In its audit report, the Department found that certain transactions between Schilli Leasing and
Shelton Wholesale Company were taxable. (See Pet’r Trial Ex. 1 at 6-7.) Schilli Leasing
challenged the Department’s findings and Department subsequently sustained Schilli Leasing’s
challenge. (Compare Pet’r Trial Ex. 4 at 7 with Pet’r Trial Ex. 5 at 10-12.) As a result, the
taxability of those transactions is not at issue in this case.
                                               5
exists to ensure that the Indiana sales tax may not be avoided by purchasing products

in states where there is no sales tax or where there is a lower sales tax.” Morton, 819

N.E.2d at 915 (citations omitted). “Accordingly, the use tax bites where the sales tax

does not.” Id. (citation omitted).

       The Indiana legislature has enacted numerous statutes, however, that exempt

certain retail transactions from taxation.        See generally, e.g., IND. CODE § 6-2.5-5

(2008). One of those statutes, Indiana Code § 6-2.5-5-27, is at issue in this case; it

states that “[t]ransactions involving tangible personal property and services are exempt

from the [sales] tax, if the person acquiring the property or service directly uses or

consumes it in providing public transportation for persons or property.” IND. CODE § 6-

2.5-5-27 (2008) (amended 2013). See also IND. CODE § 6-2.5-3-4(a)(2) (2008) (making

the exemption applicable to the use tax).            For purposes of this exemption, the

Department has defined “public transportation” as “the movement, transportation, or

carrying of persons and/or property for consideration by a common carrier, contract

carrier, household goods carrier, carriers of exempt commodities, and other specialized

carriers performing public transportation service for compensation by highway, rail, air,

or water[.]” 45 IND. ADMIN. CODE 2.2-5-61(b) (2008).

                                         ANALYSIS

       In litigating its appeal, Schilli Leasing has stipulated to the fact that “[it] does not

transport property owned by third-parties for consideration.” (Jt. Stip. Facts ¶ 5.) (See

also Trial Tr. at 30, 59-60.) Thus, because Schilli Leasing does not provide public

transportation, the underlying retail transactions at issue do not qualify for the public




                                              6
transportation exemption.6      See I.C. § 6-2.5-5-27; 45 I.A.C. 2.2-5-61(b). Nonetheless,

Schilli Leasing contends that it does not owe any sales or use tax on the transactions

identified by the Department’s audit because its “business activities fall squarely with[in]

the express language of the public transportation exemption statute[.]” (See, e.g., Pet’r

Corrected Post-Trial Br. (“Pet’r Br.”) at 10 (emphasis omitted).) Schilli Leasing has

advanced two arguments in support of its contention.

                                               1.

       First, Schilli Leasing argues that Indiana Code § 6-2.5-5-27 simply applies to all

“transportation-related transactions” and thus, to the extent it has shown that

“everything” it does is related to the transportation industry and the ultimate transport of

freight, the transactions at issue are exempt. (See Pet’r Br. at 8-10; Pet’r Reply Br. at 1-

2.) (See also Pet’r Br. at 12-19 (maintaining that because its leasing of trucks, its repair

of trucks, and its provision of rest accommodations to truck drivers are “directed to the

ultimate movement of freight,” they are “necessary and integral” parts of the

6
  With respect to those transactions where Schilli Leasing sold goods or services to WVT, SSI,
SST, and MSS, its obligation to collect sales tax was contingent upon whether the purchasers
provided public transportation, not whether it provided public transportation. See, e.g., IND.
CODE §§ 6-2.5-2-1(b), 5-27 (2008). While Schilli Leasing made general claims that the vehicles
it leases to WVT, SSI, and SST “are used exclusively for the hauling of freight in the
transportation industry” and that the services performed by MSS “are part of the transportation
process,” (see, e.g., Pet’r V. Pet. Set Aside Final Determination Indiana Dep’t Revenue at ¶
9(B); Pet’r Corrected Post-Trial Br. (“Pet’r Br.”) at 2, 6, 14-15; Pet’r Reply Br. at 3), those
statements do not demonstrate to the Court that those entities are in fact exempt. See, e.g.,
Carnahan Grain, Inc. v. Indiana Dep’t of State Revenue, 828 N.E.2d 465, 467 (Ind. Tax Ct.
2005) (stating that in order to be entitled to the public transportation exemption, it must be
shown that an entity is predominantly engaged in transporting the property of another, rather
than its own property); Indiana Waste Sys. Ind., Inc. v. Indiana Dep’t of State Revenue, 644
N.E.2d 960, 961-62 (Ind. Tax Ct. 1994) (discussing methodologies for demonstrating how an
entity is predominately engaged in transporting the property of another versus its own). See
also, e.g., Galligan v. Indiana Dep’t of State Revenue, 825 N.E.2d 467, 483-84 (Ind. Tax Ct.
2005) (explaining that there is no better way to prove entitlement to an exemption than to
provide copies of the exemption certificate that were to be provided to the retail merchant at the
point of sale), review denied; IND. CODE § 6-2.5-8-8 (2008) (amended 2015) (outlining
presentation of exemption certificates).
                                                7
transportation process); Trial Tr. at 27 (stating, for example, that Schilli Leasing’s repair

services “support the maintenance of the truck, and if you don’t maintain the truck, the

truck doesn’t move, [and] transportation doesn’t happen”).) Schilli Leasing’s argument

is premised on its belief that the Department’s regulation defining public transportation

is invalid because it “impermissibly narrows” the application of the exemption statute by

requiring a taxpayer to actually haul freight to be considered “providing public

transportation.” (See, e.g., Pet’r Br. at 8-10, 19-21; Pet’r Reply Br. at 1-3 (contending

that public transportation is a process comprised of a “bundle of services,” the hauling of

freight of which is just one).)    The Court does not find Schilli Leasing’s argument

persuasive.

       The plain language of the public transportation exemption necessarily links the

person who acquired property to the use or consumption of it in his provision of public

transportation. I.C. § 6-2.5-5-27. See also, e.g., Wendt LLP v. Indiana Dep’t of State

Revenue, 977 N.E.2d 480, 484 (Ind. Tax Ct. 2012) (stating that while the public

transportation exemption applies broadly, its application is nonetheless confined to that

property   “used   within   a   taxpayer’s   continuous process of        furnishing   public

transportation” (emphasis added)); DeKalb Cnty. E. Cmty. Sch. Dist. v. Dep’t of Local

Gov't Fin., 930 N.E.2d 1257, 1260 (Ind. Tax Ct. 2010) (explaining that the Court will not

read a statute in such a way that results in an absurdity). The Department’s definition of

public transportation in 45 I.A.C. 2.2-5-61(b) is therefore consistent with, and does not

impermissibly narrow, the scope of Indiana Code § 6-2.5-5-27.              Schilli Leasing’s

Proposed Assessments will therefore not be reversed on this basis.




                                             8
                                             2.

       In the alternative, Schilli Leasing explains that while each of the Schilli

companies is a separate corporate entity, they are “interdependent,” relying on each

other “to succeed and exist.” (Pet’r Br. at 29.) Schilli Leasing posits that the Court

should therefore disregard the separate corporate existence of each of the Schilli

companies and treat them instead “as a single diverse ground transportation company”

whose “inter-company transactions” qualify for the public transportation exemption.

(See Pet’r Br at 4-5, 29.) (See also Trial Tr. at 15-17, 20, 27-30; Pet’r Trial Ex. 4 at 1-2.)

As support for its position, Schilli Leasing relies entirely upon the “unitary business

principle.” (See Pet’r Br. at 24-29.)

       Under the unitary business principle, affiliated corporate entities may be taxed as

a unitary business when they are functionally integrated, centrally managed, and benefit

from economies of scale. See, e.g., Allied Signal, Inc. v. Dir., Div. of Taxation, 504 U.S.

768, 781 (1992); Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 180 n.19

(1983); Exxon Corp. v. Wisconsin Dep’t of Revenue, 447 U.S. 207, 224 (1980). The

Court need not engage in the exercise of determining whether the Schilli companies

constitute a unitary business, however, because the unitary business principle is a

corporate income tax concept that has no application in the sales and use tax arena.

Indeed, the United States Supreme Court has declared the unitary business principle as

the “linchpin of apportionability in the field of state income taxation[.]” Mobil Oil Corp. v.

Comm’r of Taxes of Vermont, 445 U.S. 425, 439 (1980). Moreover, apportionment

does not play a role in the imposition and collection of sales and use taxes. See, e.g.,

Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 186 (1995) (stating that



                                              9
“[a] sale of goods is most readily viewed as a discrete event facilitated by the laws and

amenities of the place of sale, and the transaction itself does not readily reveal the

extent to which completed or anticipated interstate activity affects the value on which a

buyer is taxed”).) (See also Trial Tr. at 67-68, 83 (where Schilli Leasing acknowledges

that the unitary business principle has not, through any statute, administrative

regulation, or case law, been applied in the context of sales and use taxes).)7

Consequently, Schilli Leasing’s Proposed Assessments will not be reversed on this

basis either.

                                        CONCLUSION

       For all the reasons stated above, the Court AFFIRMS the Department’s final




7
  In its brief, Schilli Leasing refers the Court to a 2012 opinion in which the Michigan Court of
Appeals held that the unitary business principle applied to Michigan’s single business tax, a
“value-added” tax. Schilli Leasing contends that based on the following language from that
case, “[t]here is no legitimate reason why the unitary business principle cannot be applied to
Indiana’s sales and use tax[:]”

          While the unitary business principle is frequently applied to test the
          constitutionality of the apportionment of income-based taxes, no case has
          held that the unitary business principle is only applicable to income-based
          taxes; nor would such a holding reasonably follow from the line of cases
          applying the unitary business principle.

(Pet’r Br. at 28 (quoting Reynolds Metals Co., LLC v. Dep’t of Treasury, No. 300001, 2012 WL
954278, at *5 (Mich. Ct. App. March 20, 2012)).) The case goes on to say, however, that

          apportionment is necessary in order to determine both income-based and
          value-added tax liability when dealing with interstate businesses.
          Therefore, we conclude that the unitary business principle applies to value-
          added taxes, such as [Michigan’s single business tax], because the
          underlying realities of both income-based and value-added taxes require
          apportionment[.]

Reynolds Metals, 2012 WL 954278, at *5.


                                               10
determination.8




8
   Alternatively, Schilli Leasing has asked the Court to reverse the Proposed Assessments
because they are based on the Department’s “faulty use of statistical sampling” during the audit.
(See, e.g., Pet’r Br. at 29.) The only evidence presented with respect to this issue was the trial
testimony of Schilling Leasing’s accountant that “we had a problem” with the fact that the
statistical sample used 1) invoiced accounts receivable which included intercompany transfers
and 2) total fuel sales which included the use of out-of-state fuel, which presumably created a
“base number that . . . was too high.” (Compare Trial Tr. at 79-80 with Pet’r Br. at 29 and Pet’r
Reply Br. at 6.) From this testimony, it is impossible to ascertain how or why the Department’s
audit sample was “faulty.” Accordingly, the Court declines Schilli Leasing’s invitation to reverse
the Proposed Assessments on this basis.
                                               11
