The Florida Department of Revenue has recently released several Technical Assistance Advisements (TAAs) which provide taxpayers with guidance regarding some potentially contentious corporate income tax issues. Specifically, the TAAs address: (i) sourcing revenues from sales of items other than tangible personal property for apportionment factor purposes;1 (ii) discontinuing consolidated filing;2 and (iii) computing taxpayer income for purposes of the capital investment tax credit program.3
Sales Factor Sourcing
The Department, in two separate TAAs addressing sales factor sourcing, applied market-based sourcing principles to source revenues from services for apportionment factor purposes, in contrast to the cost of performance language contained in the state's regulation.
In the first sourcing TAA, the taxpayer specialized in data collection services, and generated revenues through multiple channels, including what the taxpayer characterized as its "Buy" and "Watch" segments of its business. Its Buy segment collected data via devices used by unrelated third-party individuals located around the country and then provided related data, information, and analytics to its customers. Using similar methods, the Watch segment also collected and provided data and analytics to its customers. The raw data and information gathered was transmitted to and stored at the taxpayer's data centers across the country. The taxpayer formatted the data and made it available to customers in a readable format on its servers. Each contract for Buy and/or Watch services represented an item of income. The taxpayer requested guidance from the Department regarding whether the sales revenue generated from the Buy and Watch segments constituted Florida gross receipts for sales factor purposes.
In the second sourcing TAA, ten taxpayers headquartered outside Florida which filed separate Florida corporation income tax returns, requested guidance with respect to sourcing both their licensing fees and advertising revenue earned from customers. The taxpayers packaged and distributed originally produced and third-party television content to customers across the United States, some of which were located in Florida. The taxpayers also owned and developed content for specific cable television channels, and also licensed the right to broadcast these channels to unrelated cable television and satellite television network operators throughout the United States. Some of the taxpayers held partnership interests in a partnership that also engaged in the business of owning and developing television content, as well as licensing. Specifically, the taxpayers requested guidance on how to apportion their revenue earned from licensing and distributing content to unrelated operators and from the sale of advertising spots in the licensed programming.
The Department, in both instances, cited Florida statutes and regulations governing computation of the sales factor, which provide that the numerator of the sales factor includes receipts attributed to Florida which were derived from transactions and activities in the regular course of the taxpayer's trade or business.4 While the Department has set forth numerous rules within a regulation interpreting sales factor sourcing, the Department concentrated on the sourcing rule covering "other sales in Florida."5 Under this rule, receipts from the sales of services are attributed to Florida if the income-producing activity which gave rise to the receipt is performed in Florida, or if the activity is performed in numerous jurisdictions but the greater proportion of such activity is performed in Florida than in any other state, based on costs of performance.6 By definition, "income-producing activity" is defined as "the transactions and activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits."7
With respect to the taxpayer in the first TAA, the Department noted the difficulty in applying the cost of performance rule in practice, and cited two instances where courts from other states narrowly considered income-producing activities to include only the actual sale of services to customers, rather than considering the costs of performing those services.8 In both of these cases, the courts sourced the taxpayers' gross receipts from sales of services to the market state (the state in which the customer resided) reasoning that the direct sale to the customer at the customer's domicile is where the income-producing activity occurred. In analyzing the income-producing activity, the Department noted, "the most important factor to determine is where the customer is located."9 In support of this conclusion, the Department cited an observation by Walter Hellerstein regarding application of the Uniform Division of Income for Tax Reporting Act cost of performance rule for attributing receipts from services (which language is akin to the Department's rule) that the rule often fails to serve the purpose of the sales factor to reflect the contribution of the market state to the taxpayer's income.10
The Department concluded that the income-producing activity of the taxpayer in the first TAA was not the collection of data because there is no transaction involved, but instead occurs in the transaction when the taxpayer sells the final service to its customer and receives compensation for the service in return. The treatment of each individual transaction as an income-producing activity, rather than considering the activities of the business line as a whole, was crucial to this conclusion. Thus, for both the Buy and Watch segments of the taxpayer's business, the Department determined that the income-producing activity occurred in Florida if the taxpayer's customer was located in Florida. Additionally, the Department noted that the same market-based sourcing treatment would result if the Department applied the rule governing the sourcing of charges to Florida customers for direct access to a database, which rule is also included within the Department's sales factor regulation.11
With respect to the taxpayers in the second TAA, the Department cited to the cost of performance rule in the Department's regulation and considered the income-producing activity underlying the licensing fees and advertising revenue to be the delivery of the programming content to the operators. Performance was deemed to occur when the license period began and the operator could access the content. The income-producing activity occurred where the operator was located, since the location was where the programming content was delivered and the operator had the right to access the content. Since the taxpayers did not have direct contact with and received no revenue directly from the individual customers of the operators, the location of these individuals was irrelevant to determining the taxpayers' Florida sales factors. Similarly, sourcing revenue from the sale of advertising time depended on where the advertiser was located. For both revenue streams, Florida sales were found to result for the taxpayer when its customers (either operators or advertisers) were located in Florida.12
Deconsolidation
Two taxpayers were granted permission to discontinue filing consolidated corporate income tax returns in separate TAAs issued by the Department. Requirements for an affiliated group of corporations to stop filing a consolidated income tax return are clearly stated in the Florida statutes and further defined by regulation.13
With respect to the taxpayer in the first deconsolidation TAA, the Department granted permission to discontinue filing consolidated returns based on four conditions: (i) that the deconsolidation was in effect as of a specific date; (ii) that the taxpayer had no realized but unrecognized income or expense items that could be recognized at a later date; (iii) that the "taxpayer group" would not become part of a consolidated Florida corporate income tax return prior to the year ending five years after the date of deconsolidation; and (iv) that any deferred gains realized but not yet recognized for Federal tax purposes, were required to be reported in total for the period ending prior to the deconsolidation.14 The taxpayer at issue had grown substantially since beginning the filing of Florida consolidated returns, and that change in circumstances was sufficient for the Department to consider and approve the deconsolidation request.
In the second deconsolidation TAA, a taxpayer was granted permission to discontinue filing consolidated corporate income tax returns as the taxpayer's federal affiliated group ceased to exist by operation of law (due to an acquisition by a corporation that claimed not to have nexus with Florida).15 The Department cited relevant Florida statutes and regulations requiring this conclusion as support, including a provision requiring Florida to follow federal income tax concepts in the interpretation and administration of its corporate income tax.16 Under federal income tax consolidated regulations, following the acquisition, the acquired taxpayer's historic affiliated group ceased to exist, and the taxpayer became a subsidiary of the acquirer and a member of the acquiror's affiliated group.17 Therefore, the Department was compelled to follow this conclusion for purposes of the Florida consolidated election.
Income Calculation for Capital Investment Tax Credit
Businesses that create jobs in connection with a qualifying project in Florida and meet specified requirements are entitled to a capital investment tax credit (CITC) against their Florida corporate income tax liability.18 Two taxpayers requested guidance from the Department in separate TAAs concerning the method by which income generated by or arising out of a "qualified capital investment project" should be computed for purposes of determining the amount of the CITC.
As required, both taxpayers had previously received letters of certification from the Florida Department of Economic Opportunity approving their applications and certifying them eligible for the CITC.19 Once approved, taxpayers eligible for the program are entitled to an annual tax credit against the corporate income tax imposed for up to 20 years.20 The maximum amount of annual credit permitted is limited to the lesser of: (i) 5 percent of the eligible capital costs; (ii) 100 percent of the annual corporate income tax liability generated by or arising out of the project (for cumulative capital investments of at least $100 million); or (iii) the income tax due on the Florida corporate income tax return that includes the income generated by or arising out of the project.21
In both cases, the Department noted the need for the taxpayers eligible for the CITC to use a pro forma financial statement on a separate entity basis, in conjunction with generally accepted accounting principles and the applicable Florida statutes, to determine the annual taxable income associated with the project. For purposes of determining the annual credit limit based on the annual corporate income tax liability generated by the project, the taxpayer's Florida apportionment factor of the project (rather than the overall apportionment factor of the taxpayer's filing group) should be applied to the project's annual taxable income multiplied by the Florida corporate income tax rate of 5.5 percent.22
Commentary
The advice provided in TAAs is solely binding on the Department with respect to the specific facts and circumstances included in the request for advice.23 Generally, however, the guidance provided is indicative of the Department's current position and handling of taxpayers in similar situations.
The Department's use of market-based sourcing principles in situations where the cost of performance rule has been invoked is becoming increasingly common in Florida practice, both in recent TAAs and in audits of taxpayers. The Department's analysis, particularly in the first TAA is interesting for its focus on several court decisions in other states, as well as a seminal state and local tax treatise analyzing the model law on which Florida's regulation is based. Also, the first TAA addressed the potential applicability of a market-based sourcing rule used to source receipts from access to a database. It is notable that the Department did not solely rely on that particular rule within the regulation to come to the market-based sourcing conclusion, and rather went into a detailed analysis of how it could interpret the cost of performance rule in a market-facing manner. Florida taxpayers with significant revenues from sales of other than tangible personal property should be aware of the Department's interpretation of the regulation governing such sales, as well as the Department's positions in TAAs and at audit, which may not be easily gleaned from the plain language in the Department's regulation.
The guidance provided by the Department in the deconsolidation TAAs appears to be consistent with prior guidance which allows deconsolidation in specific instances, generally when significant changes in a business occur. As merger and acquisition activity continues to build momentum in the marketplace, taxpayers that have filed on a consolidated basis in Florida should consider whether their particular circumstances warrant or even require a change in filing methodology. At the same time, these taxpayers should evaluate whether gains from deferred intercompany transactions realized during the period of Florida consolidation may be triggered by such a deconsolidation.
Finally, CITC-eligible taxpayers should be aware of the detailed guidance provided by the Department in these TAAs with respect to how to compute credit limitations. This appears to be the first guidance from the Department addressing this issue and should be useful to taxpayers engaged in compliance efforts.
Footnotes
1 Technical Assistance Advisement No. 13C1-011, Florida Dept. of Rev., Nov. 21, 2013 (released Feb. 17, 2014); Technical Assistance Advisement No. 13C1-004, Florida Dept. of Rev., May 21, 2013 (released Feb. 18, 2014).
2 Technical Assistance Advisement No. 13C1-008, Florida Dept. of Rev., Oct. 25, 2013 (released Feb. 17, 2014); Technical Assistance Advisement No. 13C1-010, Florida Dept. of Rev., Nov. 21, 2013 (released Feb. 17, 2014).
3 Technical Assistance Advisement No. 13C1-006R, Florida Dept. of Rev., Dec. 10, 2013 (released Feb. 17, 2014); Technical Assistance Advisement No. 13C1-005, Florida Dept. of Rev., Jun. 19, 2013 (released Feb. 18, 2014).
4 FLA. STAT. ANN. § 220.15(5); FLA. ADMIN. CODE ANN. r. 12C-1.0155(2).
5 FLA. ADMIN. CODE ANN. r. 12C-1.0155(2)(l).
6 Id.
7 Id.
8 Heller Western v. Arizona Department of Revenue, 775 P.2d 1113 (Ariz. 1989); Ameritech Publishing, Inc. v. Wisconsin Department of Revenue, 788 N.W. 2d 383 (Wis. Ct. App. 2010).
9 Technical Assistance Advisement No. 13C1-011, Florida Dept. of Rev., Nov. 21, 2013 (released Feb. 17, 2014).
10 Hellerstein & Hellerstein: State Taxation (WG&L), Paragraph 9.18[3][a], 2012.
11 FLA. ADMIN. CODE ANN. r. 12C-1.0155(2)(h)(5).
12 Technical Assistance Advisement No. 13C1-004, Florida Dept. of Rev., May 21, 2013 (released Feb. 18, 2014).
13 FLA. STAT. ANN. § 220.131; FLA. ADMIN. CODE ANN. r. 12C-1.0131.
14 Technical Assistance Advisement No. 13C1-008, Florida Dept. of Rev., Oct. 25, 2013 (released Feb. 17, 2014).
15 Technical Assistance Advisement No. 13C1-010, Florida Dept. of Rev., Nov. 21, 2013 (released Feb. 17, 2014).
16 FLA. STAT. ANN. §§ 220.02(3), 220.131(3)(b)(1); FLA. ADMIN. CODE ANN. r. 12C-1.0131(3)(e).
17 Treas. Reg. § 1.1502-75(d)(1).
18 FLA. STAT. ANN. § 220.191(2).
19 FLA. ADMIN. CODE ANN. r. 12C-1.091.
20 FLA. STAT. ANN. § 220.191(2)(d).
21 Id.
22 Technical Assistance Advisement No. 13C1-006R, Florida Dept. of Rev., Dec. 10, 2013 (released Feb. 17, 2014); Technical Assistance Advisement No. 13C1-005, Florida Dept. of Rev., Jun. 19, 2013 (released Feb. 18, 2014).
23 FLA. STAT. ANN. § 213.22.
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