Indiana’s Income-Tax Add-Back Applies Only to Apportioned Income Taxes (and Apportioned Functional Equivalents), Not Unapportioned Wagering Excise Taxes

1. Introduction

In PENN Entertainment, Inc. v. Department Of State Revenue (Ind. June 29, 2026), the Indiana Supreme Court resolved a recurring multistate corporate tax question embedded in Indiana’s “add-back” statute, Indiana Code section 6-3-1-3.5(b)(3). The case arose after an audit in which the Indiana Department of State Revenue (“the Department”) assessed additional Indiana adjusted gross income tax against PENN Entertainment, Inc. (“Penn”), a multistate casino operator, for tax years 2015–2017.

The dispute centered on whether Penn, when computing Indiana adjusted gross income starting from federal taxable income, had to “add back” not only apportioned net income taxes paid to other states (which Penn did), but also unapportioned state wagering taxes paid elsewhere (which Penn treated as ordinary business deductions and did not add back).

The Indiana Tax Court upheld the Department’s assessment, relying on Indiana precedent and its own prior decision. The Indiana Supreme Court granted review and reversed, holding that the add-back statute reaches only direct income taxes and excise taxes that function as income taxes (i.e., taxes subject to constitutional apportionment), and therefore does not reach unapportioned wagering excise taxes.

Key Issue

Whether out-of-state wagering taxes—excise taxes imposed on intrastate gambling transactions and not subject to apportionment—are “taxes based on or measured by income” that must be added back under Indiana Code section 6-3-1-3.5(b)(3).

Parties

  • Petitioner: PENN Entertainment, Inc. (f/k/a Penn National Gaming, Inc.)
  • Respondent: Indiana Department of State Revenue

2. Summary of the Opinion

The Court held that Indiana’s add-back provision in Indiana Code section 6-3-1-3.5(b)(3) does not require adding back unapportioned wagering excise taxes paid to other states. The statutory phrase “taxes based on or measured by income” covers:

  1. Direct income taxes (“based on” income), and
  2. Functional equivalents of income taxes (“measured by” income), i.e., apportioned excise/franchise/privilege-type taxes that must be apportioned under the federal Constitution.

Because the disputed wagering taxes were unapportioned and imposed only on intrastate gambling transactions, they were not income taxes and not functional equivalents. The Court reversed the Tax Court and remanded with instructions to enter summary judgment for Penn.

3. Analysis

3.1 Precedents Cited

A. Constitutional apportionment framework

  • MeadWestvaco Corp. ex rel. Mead Corp. v. Ill. Dep't of Revenue, 553 U.S. 16 (2008)
    Role in this Opinion: Provided the Due Process and Commerce Clause foundation for why states must tax only income with a sufficient nexus and must avoid unfair apportionment. The Court used MeadWestvaco to anchor the opinion’s core premise: when states tax income from interstate commerce, apportionment is constitutionally required, and the add-back mechanism is best understood as an apportionment tool.
  • Philadelphia Eagles Football Club, Inc. v. City of Philadelphia, 823 A.2d 108 (Pa. 2003)
    Role in this Opinion: Cited (via a parenthetical collecting authority) for the proposition that intrastate transactions are not subject to apportionment requirements. This mattered because Penn’s wagering taxes were imposed on intrastate gambling activity—supporting their classification as unapportioned excise taxes outside the add-back’s purpose.

B. Indiana’s controlling add-back precedent and its proper reading

  • Consolidation Coal Co. v. Ind. Dep't of State Revenue, 583 N.E.2d 1199 (Ind. 1991)
    Role in this Opinion: The Court treated Consolidation Coal as the primary Indiana precedent interpreting the same add-back statute. Consolidation Coal held that West Virginia’s “Business and Occupation Tax” had to be added back. The Tax Court had read Consolidation Coal broadly (especially through Aztar), but the Supreme Court clarified Consolidation Coal’s true logic: the add-back applies to taxes that function like income taxes—i.e., broad-based, income-measured business activity taxes that are constitutionally apportionable.

    Key move: The Court distinguished broad, unified business-activity taxes (like the West Virginia tax in Consolidation Coal) from narrow, activity-specific wagering taxes (like West Virginia’s table games tax in this case), emphasizing statutory structure, breadth, and apportionment implications.
  • Aztar Indiana Gaming Corp. v. Indiana Department of State Revenue, 806 N.E.2d 381 (Ind. T.C. 2004)
    Role in this Opinion: The Department relied heavily on Aztar, where the Tax Court required add-back of Indiana’s Riverboat Wagering Tax. The Supreme Court rejected Aztar’s reading that Consolidation Coal created a simple property-tax vs. non-property-tax dividing line and expressly stated: it “disapprove[s]” that analysis. This is a significant doctrinal clarification: the add-back question turns on whether a tax is an income tax or its functional equivalent (apportioned), not on a broad “non-property” categorization.

C. Supporting tax-characterization authorities

  • Miles v. Dep't of Treasury, 199 N.E. 372 (Ind. 1935)
    Role in this Opinion: Used to explain that the distinction between a net income tax and an excise measured by income can be “theoretical,” reinforcing that labels do not control. The Court leveraged Miles to support a functional approach: focus on whether the tax operates like an income tax in the apportionment context.
  • Cal-Roof Wholesale, Inc. v. State Tax Comm'n, 410 P.2d 233 (Or. 1966)
    Role in this Opinion: Cited to illustrate that in tax parlance a corporation tax “measured by income” may be an excise tax, while one “based upon income” may be an income tax— reinforcing that “excise” and “income” are not mutually exclusive categories.
  • Ind. Dep't of State Revenue v. Fort Wayne Nat'l Corp., 649 N.E.2d 109 (Ind. 1995)
    Role in this Opinion: Quoted for the proposition that “excise tax” is a collective term that can include franchise and privilege taxes—supporting the Court’s view that some excises are functional income taxes.

D. Commerce Clause/apportionment treatment of franchise/privilege taxes

  • Glatfelter Pulpwood Co. v. Commonwealth, 61 A.3d 993 (Pa. 2013)
    Role in this Opinion: Demonstrated that even when a state labels its corporate income tax as an “excise” on the privilege of earning income, it remains subject to apportionment.
  • Miss. State Tax Comm'n v. Murphy Oil USA, Inc., 933 So. 2d 285 (Miss. 2006)
    Role in this Opinion: Cited as another example of apportionment requirements applied to a franchise tax—supporting the Court’s “functional equivalent” category.
  • Tyler Pipe Indus. v. Wash. State Dep't of Revenue, 483 U.S. 232 (1987) and Lamtec Corp. v. Dep't of Revenue, 246 P.3d 788 (Wash. 2011)
    Role in this Opinion: Used to illustrate what a broad-based business and occupation tax looks like and why it is unlike a transaction-specific excise tax, supporting the functional-equivalence framework.
  • Owens-Illinois Glass Co. v. Battle, 154 S.E.2d 854 (W. Va. 1967)
    Role in this Opinion: Provided context on the breadth and unified construction of West Virginia’s business-and-occupation tax (the tax at issue in Consolidation Coal), supporting the Court’s distinction.

E. Standards of review and stare decisis

  • Merch. Warehouse Co. v. Ind. Dep't of State Revenue, 87 N.E.3d 12 (Ind. 2017) and Korakis v. Mem'l Hosp. of S. Bend, 225 N.E.3d 760 (Ind. 2024): cited for summary-judgment/de novo review principles.
  • State v. Timbs, 169 N.E.3d 361 (Ind. 2021): invoked to decline revisiting Consolidation Coal’s holding that “based on or measured by income” is not limited to net-income taxes.

F. Statutory-interpretation method and subsequent amendments

  • Estabrook v. Mazak Corp., 140 N.E.3d 830 (Ind. 2020) and Andrew Nemeth Props., LLC v. Panzica, 271 N.E.3d 1100 (Ind. 2025): cited to emphasize courts interpret text and that similarity to other states’ statutes suggests adoption of conventional policy.
  • Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633 (1990) and United Nat'l Ins. Co. v. DePrizio, 705 N.E.2d 455 (Ind. 1999): used to treat subsequent legislative amendments cautiously; the Court suggested the later “wagering taxes” phase-out likely reflected an intent to abrogate Aztar rather than to concede Aztar was correct.

3.2 Legal Reasoning

A. The Court’s interpretive anchor: apportionment mechanics and the add-back’s function

The opinion’s central move is methodological: it treats Indiana Code section 6-3-1-3.5(b)(3) not as a free-standing definitional puzzle, but as part of the architecture of multistate income apportionment.

Because states frequently begin with federal taxable income, a structural issue arises: federal taxable income is computed after deducting state income taxes. If Indiana were to apportion that already-reduced base, it would understate the “taxable pie” and create what the Court calls double apportionment (other states remove their apportioned income taxes from the base; then Indiana applies its apportionment fraction to the shrunken base). The add-back provision fixes that by restoring the deduction for apportioned income taxes before Indiana takes its slice.

B. Parsing the statute: “based on” vs. “measured by” income

The Court rejected both parties’ extreme readings:

  • Against Penn’s narrow reading: The Court reaffirmed (without revisiting) Consolidation Coal Co. v. Ind. Dep't of State Revenue that the phrase is not limited to net-income taxes; it can include gross-income-type taxes.
  • Against the Department’s broad reading: The Court rejected the notion that any tax calculated with “reference to revenue” is “measured by income.” That approach would convert the add-back from an apportionment-correction tool into a mechanism for inflating the tax base.

Instead, the Court adopted a two-category functional test:

  1. Taxes “based on” income: direct income taxes.
  2. Taxes “measured by” income: excise/franchise/privilege taxes that function as income taxes—critically, taxes that are apportioned (or constitutionally apportionable) because they reach interstate business income.

C. The dispositive distinction: apportioned vs. unapportioned

The Court treated apportionability as the key indicator of functional equivalence because the statute’s purpose is to prevent double apportionment. Unapportioned excise taxes imposed on intrastate transactions do not implicate that risk: there was no “first apportionment” to undo.

Applying that distinction, the Court held the wagering taxes at issue—imposed on intrastate gambling transactions in other states—are ordinary business expenses deductible under I.R.C. § 162 and not add-back items under Indiana Code section 6-3-1-3.5(b)(3).

D. Rejecting the Department’s “apportionment formula solves everything” defense

A notable part of the reasoning is the Court’s insistence on separating (1) the tax base from (2) the apportionment fraction. The Department argued that because Indiana uses a valid sales-factor apportionment formula, it can only ever tax Indiana’s “share.” The Court responded: apportionment is applied after the base is computed; artificially inflating the base (by adding back ordinary expenses like wagering taxes) causes Indiana to tax more than its fair share even if the fraction is unchanged.

This is the opinion’s practical core: the add-back should prevent an artificially deflated base, not authorize an artificially inflated one.

E. Treatment of Aztar and legislative amendment

The Court’s disapproval of Aztar Indiana Gaming Corp. v. Indiana Department of State Revenue is doctrinally significant. It narrows and clarifies add-back doctrine: the test is not “non-property taxes,” but “income taxes and their apportioned functional equivalents.”

The Court also discounted the inference drawn from the legislature’s 2017 amendment phasing out wagering-tax add-backs (Indiana Code section 6-3-1-3.5(c)). It treated that change as more likely a response to (and correction of) Aztar than as confirmation of the Department’s broad interpretation.

3.3 Impact

A. Immediate doctrinal impact in Indiana

  • Rule clarified: Indiana Code section 6-3-1-3.5(b)(3) requires add-back only for (i) direct income taxes and (ii) apportioned excise taxes that function like income taxes. Unapportioned, transaction-specific excise taxes (including wagering taxes on intrastate activity) are outside the statute.
  • Tax Court precedent curtailed: The Supreme Court expressly disapproved the interpretive approach used in Aztar Indiana Gaming Corp. v. Indiana Department of State Revenue, which is likely to constrain similar “measured by income” arguments in future Department audits.

B. Practical impact on taxpayers and administration

  • Multistate taxpayers gain a clearer compliance line: add back apportioned income-type taxes, but not ordinary business taxes imposed on intrastate transactions elsewhere. This reduces the risk that Indiana will effectively convert its net income tax into something closer to a gross receipts tax through base inflation.
  • Audit posture shift: The Department’s “reference to revenue” approach is rejected, which may limit aggressive add-back positions aimed at expense categories that are large but unapportioned (industry-specific excises, transaction taxes, certain regulatory levies).
  • Industry significance: For gaming and similarly regulated industries, large out-of-state excise burdens will generally remain deductible in the Indiana base, avoiding the compounding effect the Court identified.

C. Broader state-tax implications

The opinion aligns Indiana with the mainstream purpose of add-back statutes as described in state-tax commentary and multistate practice: to prevent double apportionment (understating the base), not to deny deductions for ordinary business expenses (inflating the base). It may be persuasive authority in other jurisdictions facing similar statutory language (“based on or measured by income”) when taxpayers challenge attempts to sweep in unapportioned excise taxes.

4. Complex Concepts Simplified

  • Apportionment: When a business operates in multiple states, each state can tax only the portion of income connected to that state. A formula (often based on sales) calculates each state’s “slice.”
  • Tax base vs. apportionment fraction: First you compute total taxable profit (the “pie”); only then do you apply a fraction to determine the state’s slice. A correct fraction cannot fix a distorted base.
  • Add-back statute: Because federal taxable income is reduced by deductions (including some state taxes), states sometimes require “adding back” certain deductions to avoid undercounting the pie before slicing it.
  • “Based on” vs. “measured by” income: “Based on” typically means a direct income tax; “measured by” can include a franchise/privilege excise tax that uses income as the yardstick. The Court held the latter category is included only when the excise tax functions like an income tax in the apportionment sense.
  • Apportioned vs. unapportioned taxes: Apportioned taxes apply to interstate business and must be limited by a formula. Unapportioned excise taxes apply to intrastate transactions and do not use an apportionment formula; they behave like ordinary operating costs.

5. Conclusion

PENN Entertainment, Inc. v. Department Of State Revenue establishes a clear interpretive rule for Indiana’s corporate add-back statute: Indiana Code section 6-3-1-3.5(b)(3) reaches only income taxes and apportioned excise taxes that are functional equivalents of income taxes. It does not require add-back of unapportioned wagering excise taxes imposed on intrastate transactions.

The decision re-centers add-back doctrine on its constitutional and structural purpose—accurate apportionment—rejects a base-inflationary “revenue reference” theory, and disapproves the Tax Court’s broader approach in Aztar Indiana Gaming Corp. v. Indiana Department of State Revenue. As a result, the opinion is likely to reshape Indiana audit positions and provide multistate taxpayers a more administrable boundary between add-back taxes and deductible business expenses.