In PENN Entertainment, Inc. v. Indiana Department of State Revenue,¹ the Indiana Supreme Court (court) held that the state's income tax add-back statute does not require taxpayers to add back unapportioned wagering excise taxes paid to other states when calculating Indiana adjusted gross income. The court, in reversing a decision of the Indiana Tax Court (Tax Court), determined the add-back provision applies only to direct income taxes and their functional equivalents, not to wagering excise taxes.

The taxpayer operates gaming facilities in multiple states and pays wagering excise taxes imposed by states other than Indiana, which are deductible for federal income tax purposes. The Indiana Department of Revenue (DOR) assessed the taxpayer, requiring it to add back these out-of-state wagering excise tax deductions. Indiana Code Section 6-3-1-3.5(b)(3) requires taxpayers to add back any deduction for state taxes based on or measured by income. In 2024, the Tax Court upheld the assessment on the grounds that the add-back statute applied to the wagering excise taxes.

In reversing the Tax Court's decision, the court observed that Indiana Code Section 6-3-1-3.5(b)(3) applies only to direct income taxes imposed by other states and the functional equivalent of income taxes (i.e., taxes "measured by" income). Because wagering excise taxes cover only intrastate transactions and are not subject to apportionment, the court found that wagering excise taxes paid to other states are not functional equivalents of income taxes. Accordingly, the court ruled the wagering excise taxes fall outside the scope of the add-back statute. The court emphasized that the statute should be interpreted according to its plain language and legislative intent, which was to prevent double deductions for income-based taxes, not to capture all state taxes that might reduce federal taxable income.

Implications

The court's decision clarifies that specialized taxes paid by gaming and entertainment companies that are not income-based or subject to apportionment should not be subject to Indiana's add-back requirements While this case involved wagering excise taxes, the court's reasoning may extend to other types of non-income taxes paid to other states, including gross receipts taxes, franchise taxes not based on income or other excise taxes. Taxpayers that have added back non-income taxes in prior years may want to consider amending returns to claim a refund. The statute of limitations for claiming refunds in Indiana is three years from the due date of the return or payment of the tax, whichever is later.