United States

Indiana-based online participant revenue properly sourced out of state


On Nov. 30, 2017, the Indiana Tax Court issued its decision in The University of Phoenix, Inc. v. Indiana Dep’t of State Revenue, finding that the University of Phoenix could source online campus revenue from Indiana-based online participants to locations outside of Indiana, explaining that the university followed the state’s statutory procedure when sourcing certain income to Indiana. The issue was whether the university’s online campus revenue could be sourced to Indiana based on a student’s billing address.

The university offers classes in both traditional in-person campus locations, including in Indiana, as well as through an online-learning platform. For tax years 2009, 2010 and 2011, the university filed its Indiana adjusted gross income tax returns sourcing its receipts attributable to its Indiana ground campus to Indiana. The university sourced its receipts from its online platform participants to other locations, regardless of a participant’s billing address, because the university took the position that the majority of the income-producing activities from its online classes were performed outside of Indiana. The online platform was maintained from Arizona, California and Washington and online instructors could be located in any location, although the vast majority were located in Arizona. Finally, online participants received assistance in completing their degree from a designated “graduation team.” Over 6,000 graduation team members were located in Arizona, while only three were located in Indiana. 

The Indiana Department of State Revenue subsequently concluded that the university should have sourced all receipts from online particpants with an Indiana billing address to Indiana. The department contended that the university’s only “income-producing activity” was providing the opportunity to an online class in return for payment, and therefore, revenue from an Indiana-based online participant should be sourced to Indiana. Consequently, the department issued proposed assessments for additional adjusted gross income tax liabilities, interest and penalties against the university for the years at issue.

On appeal, the Indiana Tax Court explained that the university properly defined its income-producing activities to include its online platform, classroom instruction, curriculum development, and the graduation team because the income-producing activity not only included what the students directly pay for, i.e., the class itself, but also included acts a seller directly engaged in with the purpose of generating revenue.

The court then explained that Indiana Code section 6-3-2-2, which defines income and apportionment, states that when income-producing activities are performed in Indiana and in other states, the income from the sale of those services is only sourced to Indiana if a greater proportion of the income-producing activates are performed in Indiana than are performed in any other state. In addition, Indiana Code section 6-3-2-2(f)(2) considers the location of the greater proportion of income-producing activities to be the where the greater proportion of the costs of performing the income-producing activities are located. Accordingly, the department erred in using a market-based sourcing approach as opposed to a cost-based analysis when determining where to source the receipts from the students with Indiana billing addresses.   

Lastly, the court explained that the university was correct that Indiana Code section 6-3-2-2(f)(2) provides an “all-or-nothing” method for sourcing service income. The university was not required to take a transaction-by-transaction approach as the basis for its cost study when defining its income-producing activities. Accordingly, because the greater proportion of the university’s income-producing activity occurred outside of Indiana, the university was not required to source the online campus receipts from students with Indiana billing addresses to Indiana.      

Taxpayers should consider that a cost of performance sourcing state requires an in-depth analysis of where and what activities constitue income-producing. Here, even though the participants were located in the state, the revenue generated from their attendance was able to be sourced to other locations, resulting in more favorable tax treatment. 


Subscribe to Tax Insights

How can we help you with state & local tax planning?