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ATTORNEYS FOR PETITIONER Gregory F. Zoeller Attorney General of Indiana Andrew W. Swain Timothy A. Schultz Deputy Attorneys General Indianapolis, Indiana

ATTORNEYS FOR RESPONDENT Jeffrey S. Dible Indianapolis, Indiana Martin I. Eisenstein Stacy O. Stitham Lewiston, Maine

FILED
Mar 16 2012, 11:26 am
of the supreme court, court of appeals and tax court

In the

CLERK

Indiana Supreme Court
No. 49S10-1108-TA-514 INDIANA DEPARTMENT OF STATE REVENUE,

Petitioner (Appellee below), v. AOL, LLC, Respondent (Appellant below).

Appeal from the Indiana Department of State Revenue, No. 04-20080029R April Bruce, Hearing Officer On Petition for Review from the Indiana Tax Court, No. 49T10-0903-TA-00007 The Honorable Thomas G. Fisher, Judge

March 16, 2012 Shepard, Chief Justice.

Under a complex series of arrangements with people like paper suppliers, printers, and packagers, AOL procured promotional mailers it sent to Indiana residents. None of the players in these transactions, AOL says, should owe sales or use tax. The Tax Court agreed. We reverse.

Facts and Procedural History

AOL, LLC is an online service provider that allows its customers, known as members, to access the Internet, e-mail, instant messaging, and other proprietary content using AOL's client software. AOL conducted this business first as America Online, Inc., a Delaware corporation, and then as AOL, LLC after reorganizing itself into a Delaware limited liability company in 2006.

To sign up new members, AOL mailed packages containing copies of its client software on compact discs to prospective members. A prospective member could not access AOL's service without obtaining and installing AOL's client software on her computer. After signing up new members, AOL sought to retain them by sending them letters, brochures, and other promotional materials printed on paper.

A standard CD-ROM package contained the following components: (1) a CD storing a copy of AOL's client software; (2) a paper carrier or plastic case enclosing the CD; (3) printed promotional materials and instructions; and (4) terms and conditions of use. The package also bore a unique certificate number and password printed on its surface to allow a prospective member to sign up for AOL's service.

AOL did not physically manufacture the CD-ROM packages itself.

Instead, AOL

contracted with third-party vendors to produce the individual components and with third-party assembly houses to assemble the final packages from those individual components.

Roughly thirty-five percent of the time, AOL supplied its vendors with the necessary CDs, sometimes blank and other times already imprinted with AOL's client software. When AOL supplied blank CDs, the vendors charged AOL for imprinting the CDs with copies of AOL's client software and for applying graphics to the surface of the CDs. (Appellant's App. at 107.) When AOL supplied CDs already imprinted with its client software, the vendors charged

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only for applying graphics to the surface of the CDs. The rest of the time, the vendors supplied their own CDs.

As for the other individual components, AOL generally supplied its vendors with the paper and plastic necessary for producing the CD-ROM packages. AOL apparently also

supplied its vendors with some additional individual components sourced from Asia. In contrast, the vendors generally supplied raw materials like ink and glue.

Next, the vendors would usually send the individual components to assembly houses that produced the final packages. The assembly houses would then print the unique certificate numbers and passwords on the CD-ROM packages. Occasionally, a single vendor would

perform all these steps without the involvement of an assembly house. AOL and the Department stipulate that the CD-ROM packages constituted a final product separate and distinct from the individual components, which merely constituted raw materials. (Appellant's App. at 106.)

As with the CD-ROM packages, AOL itself did not physically print or produce the promotional materials it sent to current members, either. Instead, AOL contracted with letter shops to print and produce the promotional materials.

Even so, AOL provided its letter shops with the paper they used to print the promotional materials. Occasionally, AOL also provided other raw materials, such as ink and glue, but the letter shops usually purchased their own. Regardless, AOL and the Department stipulate that the promotional materials constituted a final product separate and distinct from any raw materials used to produce them, just as in the case of the CD-ROM packages. (Appellant's App. at 110.)

All these vendors, assembly houses, and letter shops were located outside Indiana, and they completed all their production and assembly steps outside Indiana, too. None of these entities paid sales or use taxes on the CD-ROM packages or the promotional materials. Once they finished producing and assembling the CD-ROM packages and printing the promotional materials, the vendors, assembly houses, and letter shops mailed them from shipment points

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outside Indiana to prospective customers throughout the United States, including people in Indiana.

Between January 2003 and June 2007, AOL paid use taxes to the Indiana Department of State Revenue based on the number of CD-ROM packages and promotional materials it sent to prospective members in Indiana. In December 2006, however, AOL filed with the Department a claim for a refund of $349,551 it paid in use taxes between January 1, 2003, and November 30, 2006, plus interest. In June 2007, AOL filed a second claim for a refund of $21,913 it paid in use taxes between May 1, 2006, and June 30, 2007, plus interest.

After an investigation, the Department denied both the 2003 and the 2006 claims in written decisions. AOL filed an original tax appeal. The Tax Court reversed the Department's determination. AOL, LLC v. Ind. Dep't of State Revenue, No. 49T10-0903-TA-7, 940 N.E.2d 870 (Ind. Tax Ct. 2011) (table). Noting that AOL owned all the raw materials provided to the assembly houses and letter shops, the Tax Court held that AOL did not purchase any tangible personal property in a retail transaction with either the assembly houses or the letter shops. Id. at *9. Instead, it held that AOL merely purchased assembly, printing, and mailing services. Id. at *10. We granted review. Ind. Dep't of State Revenue v. AOL, LLC, ___ N.E.2d ___ (Ind. 2011) (table); see also Ind. Appellate Rule 63(A).

Standard of Review

Summary judgment is appropriate when the record shows that no genuine issues of material fact remain for trial and the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C). On appeal, we extend cautious deference to a decision within the special expertise of the Tax Court and will not reverse it unless the decision was clearly erroneous. Ind.

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Dep't of State Revenue v. Belterra Resort Ind., LLC, 935 N.E.2d 174 (Ind. 2010), modified on reh'g, 942 N.E.2d 796 (Ind. 2011). But we will set aside the Tax Court's decision on matters of tax law on summary judgment if we are definitely and firmly convinced that an error occurred. Id. at 177.

AOL Purchased Tangible Personal Property in Retail Transactions

Indiana imposes both sales and use taxes. The sales tax, also known as the state gross retail tax, applies to retail transactions that occur in Indiana. Ind. Code

Download Indiana Department of State Revenue v. AOL, LLC.pdf

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