If he has an IN ID card, then I would consider him an IN resident. However, without being 100% on ATF rules, I would have also passed on the sale. It could have been fine, but not worth risking it just to sell a gun. There are other buyers out there without the gray area.
While you probably did the right thing, Indiana has some strange reciprocity agreements with adjoining states. My daughter was going to grad school in that bastion of freedom, Chicago. She maintained her Indiana drivers license as well as an Indiana permanent address even though she was living in an apartment in Chicago for a full 5 years. All her taxes were filed in Indiana, and she paid Indiana state tax, with the Illinois tax waived as she was still considered an Indiana resident even though she had an Illinois mailing address.
Even though I agree that when you don't feel right about a sale or purchase, it is best to do exactly what you did and walk away. Based on the way my daughter was considered an Indiana resident although living in Illinois, you probably could have made the transaction with no problems. Based on knowing ATF, you probably did the safe thing.
Too bad that state lines are considered walls instead of just crossable property lines.