Income/Franchise:
Indiana: Tax Base and Apportionment Calculations for Foreign Corporation in Toll Manufacturing Arrangement

Revenue Ruling 2024-02CCP, Ind. Dept. of Rev. (1/3/25). An Indiana Department of Revenue ruling involving a foreign corporation (domiciled outside the United States) that is a partner in a United States partnership (“toll manufacturer”) with which it engages in a contract manufacturing arrangement wherein i) the partnership performs the manufacturing activity in various states (including Indiana) but does not take title to the inventory/raw materials during production, and ii) the foreign corporation subsequently sells the finished goods to the toll manufacturer for ultimate sale to customers nationwide concludes that, based on the provided information, the foreign corporation:

1. Must exclude its income from the sale of finished goods to the toll manufacturer for Indiana adjusted gross income tax purposes, and
2. Correspondingly, must exclude any such receipts from the sale of finished goods to the toll manufacturer from its Indiana apportionment factor.

Under the facts, the foreign corporation and toll manufacturer have a unitary relationship; the foreign corporation has Indiana nexus due to its partnership interest in the toll manufacturer doing business in Indiana; and the foreign corporation does not have US payroll or property – other than the raw materials and work in process inventory used in the toll manufacturing process. Additionally, the ruling notes that the foreign corporation is protected from US federal income taxation on its income pursuant to a tax treaty between the corporation and its resident nation; however, the foreign corporation is not protected from federal income taxation on its income derived from the toll manufacturer.

Pursuant to these facts, the ruling explains that because application of the treaty with the corporation’s federal taxable income results in it not including its profit/loss from the sale of finished goods to the toll manufacturer on Line 1 of its federal corporate income tax return, such income is also excluded from its Indiana adjusted gross income. However, because the corporation’s income from its ownership in the toll manufacturer must be included in the corporation’s federal taxable income, it also must include its share of income from the toll manufacturer in its Indiana adjusted gross income. Moreover, to prevent any unfair representation of its income from an apportionment perspective, the corporation’s receipts from the sale of finished goods to the toll manufacturer must be excluded from its Indiana apportionment factor – from both its numerator and denominator – but the foreign corporation must include its share of the toll manufacturer’s receipts for Indiana apportionment purposes. Please contact us with any questions.