Did an out-of-state manufacturer create Florida corporate-income-tax nexus through inventory and a Florida affiliate's personnel?

Subject

Nexus Determination

Plain-English summary

The out-of-state manufacturer had Florida corporate-income-tax nexus. It maintained inventory in Florida for international shipments and used real property associated with its Florida affiliate to store that inventory.

The affiliate's Florida personnel acted for the manufacturer in sales, order handling, billing, collections, demonstrations, technical training, customer complaints, and other support. Sales representatives also occasionally sold products from sample inventory. Those activities exceeded Public Law 86-272's protection for solicitation of tangible-goods orders.

What this means for you

An affiliate's in-state actions can be attributed to an out-of-state company when the affiliate acts as its representative. Inventory, fulfillment, collections, service, and support can move the activity beyond protected solicitation.

Common questions

Q: Did the manufacturer have Florida nexus? Yes.

Q: Was sales solicitation the only Florida activity? No.

Q: Did affiliate personnel matter? Yes; they acted as the manufacturer's agents in multiple functions.

Citations and references

• Fla. Stat. § 220.11(1) — corporate income tax privilege
• Fla. Admin. Code r. 12C-1.011 — activities creating Florida corporate-tax nexus
• 15 U.S.C. §§ 381-384 — Public Law 86-272
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01C1-004

Original ruling text

SUMMARY

QUESTION: Does Company A (which is incorporated in Delaware
and domiciled in Connecticut) have nexus for corporate
income tax in Florida?

ANSWER - Based on Facts Below: Company A has nexus in
Florida because it has exceeded the protections provided by
P.L. 86-272 and it is deemed to be conducting business in
Florida, under the provisions of the statute and rule, by
maintaining inventory in Florida and having an affiliate
corporation in Florida act as agent.

Mar 07, 2001

RE: Technical Assistance Advisement 01C1-004
Corporate Income Tax
Request for Nexus Determination
Section 220.11, F.S.
Rule 12C-1.011, F.A.C.
XXX, FEI# XX ("Company A")
XXX, FEI#XX ("Company B")
XXX, FEI#XX ("Company C")
(former parent)
XXX. ("Company D") (new parent)

Dear :

Your letter dated XX, requests a nexus determination for Company
A. Your letter dated XX, provides additional information. This
response to your request constitutes a Technical Assistance
Advisement under Chapter 12-11, Florida Administrative Code, and
is issued to you under authority of Section 213.22, Florida
Statutes.

FACTS SUPPLIED BY TAXPAYER

Company A is incorporated in XXX and domiciled in XXX. Company

A is a manufacturer of XXX and is a member of a controlled group
of corporations. Company A's parent company, Company C, and its
affiliate company, Company B, are incorporated in XXX and
domiciled in XXX. Company C and Company B have nexus for
Florida corporate income tax.

Company A maintains an inventory in Florida, which fluctuates
from less than XX in value to as much as XX. This inventory is
temporarily stored in Florida to be combined with Company B's
products for shipments to international customers. With the
exception of the inventory and sample product held by sales
people, Company A holds no other real or personal property in
Florida. Company A has no employees who are Florida residents,
but Company B personnel in Florida act as agents of Company A
when performing all billing and collection efforts for Company
A.

Company B also provides various other managerial and
administrative support to Company A, for which Company B charges
Company A. Company A products are sold directly to XXX and XXX
in the United States via Company B's sales personnel, who are
considered agents for Company A. Sales personnel typically work
out of their own personal residences, for which they are not
reimbursed. Company B has approximately XX sales
representatives in Florida acting as sales agents for Company A.

Sales personnel solicit sales via direct contact with XXX and
XXX. Generally, customer orders for Company A's product are
received by customer service personnel at Company B's home
office in XXX, who process the orders for credit approval,
shipment and billing. Sales orders taken directly by Company B's
sales personnel, as agents for Company A, are also forwarded to
XXX for processing. Shipments to customers in North America are
made via common carrier (FOB shipping point) from Company A's
facility in XXX. Orders from international customers are filled
from inventory maintained in Florida. In connection with sales
solicitation, sales personnel must demonstrate the features of
the product and offer limited technical training to Company A's
customers as it pertains to specific XXX applications.

Company B's sales personnel maintain a minimum supply of sample

Company A products that are typically given away as free samples
in order to facilitate the sales process. Occasionally, when
customers have low inventories, sales personnel will deliver one
to three boxes of products and send paperwork to Company B's
home office in XXX for processing. Less than XX percent of
Company A's sales are made from sales persons' sample
inventories.

As a part of the ongoing sales process, Company B's sales
representatives may be required to address customer complaints
concerning Company A's products, credit, shipping, or similar
complaints arising from the purchase or use of products.
However, Company B's sales personnel do not make collections on
regular or delinquent accounts or repossess property. Instead,
other Company B personnel (not its sales representatives) in
Florida perform all credit and collection efforts with respect
to sales of Company A's products.

The stock of the parent, Company C, was acquired on XX, by a
non-Florida corporation, Company D. Company D has no nexus for
Florida corporate income tax.

LEGAL AUTHORITY

Section 220.11(1), F.S., provides:

A tax measured by net income is hereby imposed on every
taxpayer for each taxable year commencing on or after
January 1, 1972, and for each taxable year which begins
before and ends after January 1, 1972, for the privilege of
conducting business, earning or receiving income in this
state, or being a resident or citizen of this state. Such
tax shall be in addition to all other occupation, excise,
privilege, and property taxes imposed by this state or by
any political subdivision thereof, including any
municipality or other district, jurisdiction, or authority
of this state.

Rule 12C-1.011, F.A.C., provides in pertinent part:

(1) The following activities, notwithstanding others within

the meaning of taxable privileges described in s. 220.02,
F.S., will be construed as conducting business, earning or
receiving income in this state, or constitute those
activities of a resident or citizen of this state for
purposes of this tax, and corporations participating
therein are subject to taxation unless exempted by the
constitution or the laws of the United States or this
state....

(b) Maintaining an office or other place of business in
this state. If a salesman holds out his home as an office,
the corporation will be deemed to maintain an office in
this state, regardless of whether the salesman is
reimbursed for "office space".

(c)1. Owning or leasing real or tangible personal property
in this state....

(e) Maintaining in this state an inventory or merchandise
or material for sale, distribution or manufacture,
regardless of whether in public, owned or rented
warehouses....

(h) Assembling, installing, servicing or repairing the
taxpayer's products in this state by its agents or
employees.

(i) Accepting orders in this state by its employees....

(k) Making sales that are approved in the state by
"independent contractors" who do not hold themselves out as
engaged in selling, or soliciting orders for the sale of
more than one principal; or making sales through the use of
representatives in this state, when activities engaged in
exceed those protected by P.L. 86-272 (15 U.S.C. ss. 381384), which is incorporated by reference in Rule 12C1.0511, F.A.C.

(l) Having employees that are present in the state and that
perform functions other than the solicitation of sales
within Florida.

(m) Performing any service within the state....

(2) The following activities will not, in themselves,
subject a foreign (non-Florida) corporation to the
income/franchise tax. However, these exempted activities
will not relieve a corporation from taxation if the
corporation is otherwise subject to taxation....

(d) Salesmen of the corporation soliciting sales of
tangible personal property within Florida, provided none of
the activities itemized in subsection (1), or any other
activities which will subject the corporation to tax, are
performed. The fact that the salesmen reside within the
state will not subject the corporation to the tax.

(e) Salesmen maintaining samples to demonstrate the product
or give free samples to a customer. The samples may not be
sold....

ISSUE PRESENTED

Has Company A established nexus in Florida for corporate income
tax?

DISCUSSION AND ANALYSIS

Company A is conducting business in Florida and earning or
receiving income in Florida in several ways. Company A holds
inventory in Florida. Although there is no mention in your
letters of where the inventory is stored in Florida, it would
appear from the information provided that it is stored with
Company B. Part of the charges made to Company A by Company B
may be for the lease or license to use the real property owned
or rented by Company B to store the inventory, although it may
not be specifically identified as such. Company A is using real
property in Florida which it does not own. The inventory is
stored in Florida to be combined with Company B products for
shipment to customers.

Company B is the representative of Company A in many ways. The

Florida employees of Company B act as representatives of Company
A when selling the product of Company A; accepting, approving,
and processing sales orders; billing and collecting for the
product; demonstrating the product; providing technical training
to the customers; handling Florida customer complaints
concerning the products, credit or any other complaint; and when
providing other managerial and administrative support to Company
A. In addition to filling North American sales from the
inventory stored in Florida, salesmen periodically sell boxes of
products from their sample inventory.

CONCLUSION

Company A has established nexus in Florida and is subject to
corporate income tax in Florida.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advice as specified in Section 213.22, F.S. Our
response is based on those facts and specific situation
summarized above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of Section 213.22, F.S. Confidential information
must be deleted before public disclosure. In an effort to
protect confidentiality, we request you provide the undersigned
with an edited copy of your request for Technical Assistance
Advisement, the backup material and this response, deleting
names, addresses and any other details which might lead to
identification of the taxpayer. Your response should be
received by the Department within 15 days of the date of this
letter.

Sincerely,

Kathleen Marsh, CPA
Technical Assistance and Dispute Resolution
(850) 922-9409

KAM/km
Control No. 43185