Could a taxpayer exclude business-asset sale proceeds or treat payments to contractor entities as payroll?

Plain-English summary

A multistate taxpayer sold business assets in a transaction producing a large gain. It also had stopped paying certain professionals directly and instead paid separate professional associations and corporations whose employees performed the work. These changes increased its Florida apportionment factor.

Florida required the asset-sale proceeds to remain in the sales factor because they were gross receipts from business assets and were not within the listed exclusions. Payments to the professional entities could not enter the taxpayer's payroll factor because they were not compensation paid to its own employees.

The changed result did not establish material distortion. The taxpayer did not show by clear and cogent evidence that the standard formula operated unreasonably or arbitrarily, failed to reflect Florida activity, or taxed extraterritorial value. Alternative apportionment was denied.

What this means for you

A higher factor caused by business restructuring is not enough for alternative apportionment. Relief requires evidence of distortion in the statutory formula, not merely a lower-tax alternative calculation.

Common questions

Were the business-asset sale proceeds included? Yes. Florida included the gross receipts in the sales factor.

Could fees to professional entities be treated as payroll? No. The fees were not compensation paid by the taxpayer to its employees.

Did a departure from the taxpayer's historical factor prove distortion? No. The ruling attributed the change to the taxpayer's own business decisions and found the required proof lacking.

Citations and references

• Fla. Stat. § 220.15(4)-(5) (payroll and sales factors)
• Fla. Stat. § 220.152 (alternative apportionment)
• Fla. Admin. Code r. 12C-1.0152 (departure from standard apportionment)
• Fla. Admin. Code r. 12C-1.0154 (payroll factor)
• Fla. Admin. Code r. 12C-1.0155 (sales factor)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06C1-005

Original ruling text

SUMMARY
QUESTION: Does the standard apportionment factor, which would include the sale of business assets in the sales
factor and exclude payments under a contract from the payroll factor, fairly represent the extent of the taxpayer's tax
base attributable to Florida?
ANSWER - Based on Facts Below: The inclusion of the proceeds from the sale of assets that were used in the
taxpayer's business in conjunction with a change in the payroll factor is found not to materially distort the
apportionment factor or tax extraterritorial values. Therefore, the taxpayer's request for alternative apportionment was
not granted.

July 21, 2006

Re: Technical Assistance Advisement 06C1-005
Corporate Income Tax - Apportionment - Other Methods
Section 220.152, F.S.
XXX, hereinafter referred to as "Taxpayer"
XXX, hereinafter referred to as "Old Parent"
Dear :
Your letter dated XX, requests a Technical Assistance Advisement concerning whether the Taxpayer may use an
alternative apportionment factor for its short tax year ending XX. This response to your request constitutes a Technical
Assistance Advisement under Chapter 12-11, Florida Administrative Code, and is issued to you under the authority of
s. 213.22, Florida Statutes.
FACTS
The Taxpayer is included in the federal consolidated filing of Old Parent. The Taxpayer files separate income tax
returns in Florida. The Taxpayer holds contracts with XXX with low to medium XXX to provide XXX. The Taxpayer
operates in XX states, with its administrative operation located in Florida.
The Taxpayer indicates that various states prohibit the corporate practice of XXX. Therefore, the Taxpayer has no
XXX employees for tax year ending XX. Rather, the Taxpayer contracts with the XXX through their XXX (PA) or XXX
(PC) and pays a fee to the PA or PC. However, in prior tax years, a number of the Taxpayer's XXX were paid a salary
for administrative services. This compensation was paid to XXX in the various states in which the Taxpayer operates,
in roughly the proportion to which the Taxpayer pays fees to the PAs and PCs for tax year ending XX. The Taxpayer
stopped directly paying XXX a salary during the tax year ending XX, and no actual payroll was paid to XXX during tax
year ending XX. In addition, during tax year ending XX, the Taxpayer moved the payroll expense of business and

marketing personnel based in XXX from a related entity to the Taxpayer. It is these business and marketing personnel
that generated the sales (XXX) of the Taxpayer.
On XX, the Taxpayer was sold to XXX. This sale is being treated as an I.R.C. section 338 (h)(10) transaction. The
main asset of the Taxpayer is the XXX. The Taxpayer's basis in the XXX was zero; so the revaluation of the XXX by
the I.R.C. section 338(h)(10) transaction produced a large gain. For tax year ending XX, the Taxpayer's federal
taxable income from operations is approximately XX and the gain from the I.R.C. section 338(h)(10) treatment of the
sale of the XXX of approximately XX.(FN 1)
For tax year ending XX, Taxpayer's reported Florida apportionment factor was XX percent. The Taxpayer's weighted
sales, payroll, and property factors were XX, XX, and XX, respectively.
For tax year ending XX, Taxpayer's reported Florida apportionment factor was XX percent. The Taxpayer's weighted
sales, payroll, and property factors were XX, XX, and XX, respectively.
For tax year ending XX, the Taxpayer indicates that its Florida apportionment factor will be XX percent. The Taxpayer
believes that its weighted sales, payroll, and property factors will be XX, XX, and XX, respectively.
QUESTION
Does the standard apportionment factor, which includes the sale of XXX in the sales factor and excludes the
payments made to the PAs and PCs from the payroll factor, fairly represent the extent of a taxpayer's tax base
attributable to Florida? If the answer is no, is the Taxpayer's alternative apportionment methodology appropriate in this
situation?
LAW
Section 220.02, F.S., states in part:
(1) It is the intent of the Legislature in enacting this code to impose a tax upon all corporations, organizations,
associations, and other artificial entities which derive from this state or from any other jurisdiction permanent and
inherent attributes not inherent in or available to natural persons, such as perpetual life, transferable ownership
represented by shares or certificates, and limited liability for all owners.... It is the intent of the Legislature to subject
such corporations and other entities to taxation hereunder for the privilege of conducting business, deriving income, or
existing within this state. This code is not intended to tax, and shall not be construed so as to tax, any natural person
who engages in a trade, business, or profession in this state under his or her own or any fictitious name, whether
individually as a proprietorship or in partnership with others, or as a member or a manager of a limited liability
company classified as a partnership for federal income tax purposes; any estate of a decedent or incompetent; or any
testamentary trust. However, a corporation or other taxable entity which is or which becomes partners with one or
more natural persons shall not, merely by reason of being a partner, exclude from its net income subject to tax its
respective share of partnership net income. This statement of intent shall be given preeminent consideration in any
construction or interpretation of this code in order to avoid any conflict between this code and the mandate in s. 5, Art.

VII of the State Constitution that no income tax be levied upon natural persons who are residents and citizens of this
state.
...
(3) It is the intent of the Legislature that the income tax imposed by this code utilize, to the greatest extent possible,
concepts of law which have been developed in connection with the income tax laws of the United States, in order to:
(a) Minimize the expenses of the Department of Revenue and difficulties in administering this code;
(b) Minimize the costs and difficulties of taxpayer compliance; and
(c) Maximize, for both revenue and statistical purposes, the sharing of information between the state and the Federal
Government.
(4) It is the intent of the Legislature that the tax imposed by this code be prospective in effect only. Consistent with this
intention and the intent expressed in subsection (3), it is hereby declared to be the intent of the Legislature that:
(a) "Income," for purposes of this code, including gains from the sale, exchange, or other disposition of property, be
deemed to be created for Florida income tax purposes at such time as such income is realized for federal income tax
purposes;
(b) No accretion of value, no accrual of gain, and no acquisition of a right to receive or accrue income which has
occurred or been generated prior to November 2, 1971, be deemed to be "property," or an interest in property, for any
purpose under this code; and
(c) All income realized for federal income tax purposes after November 2, 1971, be subject to taxation in full by this
state and be taxed in the manner and to the extent provided in this code.
...
Section 220.11, F.S., states in part:
(1) 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.
...
Section 220.15, F.S., states in part:
(1) Except as provided in ss. 220.151 and 220.152, adjusted federal income as defined in s. 220.13 shall be
apportioned to this state by taxpayers doing business within and without this state by multiplying it by an
apportionment fraction composed of a sales factor representing 50 percent of the fraction, a property factor
representing 25 percent of the fraction, and a payroll factor representing 25 percent of the fraction. If any

factor described in subsection (2), subsection (4), or subsection (5) has a denominator that is zero or is determined by
the department to be insignificant, the relative weights of the other factors in the denominator of the apportionment
fraction shall be as follows:...
(4) The payroll factor is a fraction the numerator of which is the total amount paid in this state during the
taxable year or period by the taxpayer for compensation and the denominator of which is the total
compensation paid everywhere during the taxable year or period.
(a) As used in this subsection, the term "compensation" means wages, salaries, commissions, and any other
form of remuneration paid to employees for personal services.
(b) Compensation is paid in this state if:

1. The employee's service is performed entirely within the state; or
2. The employee's service is performed both within and without the state, but the service performed without the state
   is incidental to the employee's service within the state; or
3. Some of the employee's service is performed in the state, and
   a. The base of operations or, if there is no base of operations, the place from which the service is directed or
   controlled is in the state, or
   b. The base of operations or the place from which the service is directed or controlled is not in any state in which
   some part of the service is performed and the employee's residence is in this state.
   ...
   (5) The sales factor is a fraction the numerator of which is the total sales of the taxpayer in this state during
   the taxable year or period and the denominator of which is the total sales of the taxpayer everywhere during
   the taxable year or period.
   (a) As used in this subsection, the term “sales” means all gross receipts of the taxpayer except interest, dividends,
   rents, royalties, and gross receipts from the sale, exchange, maturity, redemption, or other disposition of securities.
   However:
   ... (Emphasis Supplied)
   Section 220.152, F.S., states:
   If the apportionment methods of ss. 220.15 and 220.151 do not fairly represent the extent of a taxpayer's tax base
   attributable to this state, the taxpayer may petition for, or the department may require, in respect to all or any part of
   the taxpayer's tax base, if reasonable:
   (1) Separate accounting;

(2) The exclusion of any one or more factors;
(3) The inclusion of one or more additional factors which will fairly represent the taxpayer's tax base attributable to this
state; or
(4) The employment of any other method which will produce an equitable apportionment.
Rule 12C-1.0152, F.A.C., states in part:
(1)(a) A departure from the applicable method of apportionment required under the provisions of ss. 220.15 or
220.151, F.S., shall be permitted only where the method does not accurately and fairly reflect business activity in
Florida. An alternative method may not be invoked, either by the Department of Revenue or by the taxpayer,
merely because it reaches a different apportionment percentage than the regularly applicable formula.
However, if the applicable formula will lead to a grossly distorted result in a particular case, a fair and
accurate alternative method is appropriate (see Norfolk and Western Railway Co. v. Missouri State Tax
Commission, 390 U.S. 317, 88 S. Ct. 995, 19 L. Ed. 2d 1201 (1968), which is incorporated by reference in Rule 12C1.0511, F.A.C.).
(b) A taxpayer seeking to utilize an alternative apportionment method must show by clear and cogent
evidence that the regularly applicable formula would result in taxation of extraterritorial values (see Butler
Bros. v. McColgan, 315 U.S. 501, 62 S. Ct. 701, 86 L. Ed. 991 (1942), which is incorporated by reference in Rule 12C1.0511, F.A.C.). This can be shown only if the regularly applicable formula is demonstrated to operate
unreasonably and arbitrarily in apportioning to Florida a percentage of income which is out of all proportion
to the business transacted in Florida and does not accurately and fairly reflect business activity in Florida
(see Hans Rees’ Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123, 51 S. Ct. 385, 75 L. Ed. 879 (1931),
which is incorporated by reference in Rule 12C-1.0511, F.A.C.). (Emphasis Supplied)
Rule 12C-1.0154, F.A.C., states in part:
(1) The total amount "paid" to employees is determined upon the basis of the taxpayer's accounting method. If the
taxpayer has adopted the accrual method of accounting, all compensation properly accrued shall be deemed to have
been paid.
(a) Notwithstanding the taxpayer's method of accounting, at the election of the taxpayer, compensation paid to
employees may be included in the payroll factor by use of the cash method if the taxpayer is required to report such
compensation under such method for unemployment compensation purposes.
...
(2)(a) The term "compensation" means wages, salaries, commissions, and any other form of remuneration
paid to employees for personal services.
(b) Amounts considered compensation include deferred compensation, value of board, rent, housing, lodging, and
other benefits or services furnished to employees by the taxpayer in return for personal services provided that such

amounts constitute income to the recipient under the federal Internal Revenue Code.
(c) In the case of employees not subject to the Internal Revenue Code, e.g., those employees in foreign countries, the
determination of whether such benefits or services would constitute income to the employees shall be made as
though such employees were subject to the federal Internal Revenue Code.
(3) Only amounts paid directly to employees are included in the payroll factor.
(a) The term "employee" means any officer of a corporation, or any individual who, under the usual common-law rules
applicable in determining the employer-employee relationship, has the status of an employee. Generally, a person
will be considered to be an employee if he is included by the taxpayer as an employee for purposes of the
payroll taxes imposed by the Federal Insurance Contributions Act; except that, since certain individuals are
included within the term "employees" in the Federal Insurance Contributions Act who would not be employees under
the usual common-law rules, it may be established that a person who is included as an employee for purposes of the
Federal Insurance Contributions Act is not an employee for purposes of this rule. Payments made to an
independent contractor or any other person not properly classifiable as an employee are excluded.
(b)1. The business which is considered to be the common-law employer must include an employee's salary in
the payroll factor, even though a common paymaster is used. The common paymaster may not include the salary of
an individual for whom it is not the common-law employer.

2. Salary reimbursement payments to an affiliated corporation for employees loaned to a corporation may not
   be included in the payroll factor. This provision is not intended to exclude payments to an affiliated corporation
   acting as a common paymaster from being included in the payroll factor if the reimbursements are for common-law
   employees.
   (c) The wages paid to an individual who is employed directly by an employment agency, such as a temporary agency
   or a leasing company, are not included in the payroll factor. The employment agency would include the wages paid to
   that individual.
   (4) Compensation paid in Florida.
   (a) If compensation paid to employees is included in the payroll factor by use of the cash method of accounting or if
   the taxpayer is required to report such compensation under such method for unemployment compensation purposes,
   it shall be presumed that the total wages reported by the taxpayer to Florida for unemployment compensation
   purposes constitutes compensation paid in Florida except for compensation excluded by these rules. The presumption
   may be overcome by satisfactory evidence that an employee's compensation is not properly reportable to Florida for
   unemployment compensation purposes.
   (b) If the employee's services are performed both within and without this state, the employee's compensation will be
   attributed to this state:

1. If the employee's base of operations is in this state;

2. If there is no base of operations in any state in which some part of the service is performed, but the place from
   which the service is directed or controlled is in this state; or
3. If the base of operations or the place from which the service is directed or controlled is not in any state in which
   some part of the service is performed, but the employee's residence is in this state.
   a. The term "base of operations" is the place of more or less permanent nature from which the employee starts his
   work and to which he customarily returns in order to receive instructions from the taxpayer or communications from his
   customers or other persons or to replenish stock or other materials, repair equipment or perform any other functions
   necessary to the exercise of his trade or profession at some other point or points.
   b. The term "place from which the service is directed or controlled" refers to the place from which the power to direct
   or control is exercised by the taxpayer.
   ... (Emphasis Supplied)
   Rule 12C-1.0155(1)(b), F.A.C., states:
   Sales of business assets. If a taxpayer derives receipts from the sale of equipment used in its business, such
   receipts constitute a "sale." For example, a truck express company owns a fleet of trucks and sells its trucks under
   a regular replacement program. The gross receipts from the sales of the trucks are included in the sales factor. If
   amounts of gross receipts arising from an incidental or occasional sale of a fixed asset used in the regular
   course of the taxpayer's trade or business would materially distort the sales factor, the taxpayer may petition
   the Department, or the Department is authorized to require, pursuant to s. 220.152, F.S., and Rule 12C-1.0152,
   F.A.C., an adjustment to the sales factor. (Emphasis Supplied)
   Rule 12C-1.0155(1)(f), F.A.C., states:
   Income from intangible personal property.
4. Where the income producing activity in respect to business income from intangible personal property can be readily
   identified, such income is included in the denominator of the sales factor and, if the income producing activity occurs
   in this state, in the numerator of the sales factor as well. For example, usually the income producing activity can be
   readily identified in respect to interest income received on deferred payments on sales of tangible personal property
   and income from the sale, licensing, or other use of intangible personal property. The sale or licensing of the use of a
   trade name, trademark, or patent will be attributable to the state in which the trade name, trademark, or patent is
   used.
5. Where business income from intangible property cannot readily be attributed to any particular income producing
   activity of the taxpayer, such income cannot be assigned to the numerator of the sales factor for any state and shall
   be excluded from the denominator of the sales factor. For example, where business income in the form of dividends

received on stock, royalties received on patents or copyrights, or interest received on bonds, debentures or
government securities results from the mere holding of the intangible personal property by the taxpayer, such
dividends and interest shall be excluded from the denominator of the sales factor.

3. In the case of a taxpayer engaged in the sale, assignment, or licensing of intangible personal property such as
   patents and copyrights, "sales" includes the gross receipts therefrom.
   Rule 12C-1.0155(2)(f), F.A.C., states:
   (f) Intangible personal property in Florida.
4. The rental, leasing, licensing, or other use of a trade name, trademark, or patent to a business entity located in
   Florida will be considered a Florida sale. The mere holding of intangible personal property is not, of itself, an income
   producing activity.
5. Franchises. The franchise fees paid to rent, lease, license, or otherwise use a trade name and system of sales are
   Florida sales if the franchise location is in the state.
   Rule 12C-1.016(1)(b)2., F.A.C., states in part:
   Gains or losses from sales of assets. Gain or loss from the sale, exchange or other disposition of real or tangible or
   intangible personal property constitutes business income if the property while owned by the taxpayer was used in the
   taxpayer's trade or business....
   DISCUSSION
   The Taxpayer is requesting the use of an alternative apportionment factor for Florida because it believes the standard
   apportionment factor, which includes the sale of XXX and excludes the payments made to the PAs and PCs from the
   payroll factor, produces a grossly distorted result. The Taxpayer asserts that the payments it makes to the PAs and
   PCs should be treated as payroll for the Taxpayer. The Taxpayer believes that such a change produces an
   apportionment factor closer to its historical apportionment factor. The Taxpayer indicates that if Florida allows the
   payments made to the PAs and PCs as payroll, the Taxpayer will seek permission to employ this allocation
   methodology in other states where it files corporate income tax returns.
   The Taxpayer's Florida apportionment factor increased from XX percent in tax year ending XX, to XX percent for tax
   year ending XXX.(FN 2) This increase in the apportionment factor is why the Taxpayer is asking for alternative
   apportionment. This increase is not the result of a change in the weighted sales factor or the weighted property factor,
   as these factors remain basically the same from tax year to tax year.(FN 3) However, the weighted payroll factor
   increases from XX percent in tax year ending XX, to XX percent for tax year ending XX. This increase in the payroll
   factor is the result of the Taxpayer making several substantial changes in the way it operates prior to tax year ending
   XX. These changes produced a change in the payroll factor, thereby increasing the Taxpayer's overall apportionment
   factor.

First, the Taxpayer's affiliated group moved several Florida administrative employees (business and marketing
personnel) from a related entity into the Taxpayer. This shift of Florida employees within the Taxpayer's affiliated
group, by itself, would have caused the Taxpayer's Florida payroll factor to increase. Likewise, this shift of Florida
employees within the Taxpayer's affiliated group, by itself, would have caused the Taxpayer's overall apportionment
factor to increase.(FN 4)
Second, and more importantly, the Taxpayer ceased paying wages directly to its XXX employees. Instead, the
Taxpayer contracted with PAs and PCs for XXX services and paid fees directly to the PAs and PCs. The PA or PC
then paid wages to its XXX employees. This change in the Taxpayer's business practice eliminated the Taxpayer's
non-Florida payroll, as the Taxpayer no longer had XXX employees throughout the United States.(FN 5) The
Taxpayer's elimination of its non-Florida payroll left 100 percent of its remaining payroll located in Florida. As a result,
the Taxpayer's weighted Florida payroll factor increased to XX percent (an increase of approximately XX). Likewise,
the Taxpayer's overall apportionment factor increased to XX percent (an increase of approximately the same amount XX).
Florida Standard Apportionment Factor
Subsection 220.15(4), F.S., provides the intent of the Legislature and states that the payroll factor is a fraction the
numerator of which is the total amount paid in this state during the taxable year or period by the taxpayer for
compensation and the denominator of which is the total compensation paid everywhere during the taxable year or
period. This subsection further provides that the term "compensation" means wages, salaries, commissions, and any
other form of remuneration paid to employees for personal services. Since the Taxpayer's payments to the PAs and
PCs are not compensation paid by the Taxpayer, the payments to the PAs and PCs are not included in the Taxpayer's
payroll factor.
Subsection 220.15(5), F.S., provides the intent of the Florida Legislature and states that the sales factor is a fraction,
the numerator of which is the total sales of the taxpayer in this state during the taxable year or period, and the
denominator of which is the total sales of the taxpayer everywhere during the taxable year or period. This subsection
further provides that the term "sales" means all gross receipts of the taxpayer except interest, dividends, rents,
royalties, and gross receipts from the sale, exchange, maturity, redemption, or other disposition of securities. Since
the sale of these business assets (XXX) is a gross receipt of the Taxpayer, which is not interest, a dividend, a rent, a
royalty, or a receipt from the disposition of securities, the standard Florida apportionment methodology would include
the proceeds from the sale of the XXX in the sales factor.
Following Florida's standard apportionment law, the Taxpayer's apportionable/business income of approximately XXX
is subject to a Florida apportionment factor of XX.(FN 6)
Alternative Apportionment
Alternative apportionment is very rare. The Department has only allowed alternative apportionment on a few
occasions. The Florida Supreme Court recognized this fact in Roger Dean Enterprises v. State, Department of
Revenue, 387 So.2d 358 (Fla. 1980).

There is a very strong presumption in favor of normal three-factor apportionment and against the applicability of relief
provisions.... The relief provision should be used where the statute reaches arbitrary or unreasonable results so that
its application could be attacked successfully on constitutional grounds.... Departures from the basic formula should
be avoided except where reasonableness requires.
In Moorman Manufacturing Co. v. Bair, Director of Revenue of Iowa, 437 U.S. 267 (1978), the U.S. Supreme Court
stated:
... [the] claim that the Constitution invalidates an apportionment formula whenever it may result in taxation of some
income that did not have its source in the taxing state is incorrect.
437 U.S. at 272.
The Taxpayer believes that the standard Florida apportionment factor produces a grossly distorted result, which taxes
extraterritorial values and apportions more income to Florida than Florida is constitutionally allowed to tax. As a result
of this belief, the Taxpayer is requesting permission to use an alternative apportionment factor. The Taxpayer is not
requesting relief under the language in Rule 12C-1.055(1)(b), F.A.C., which provides that if amounts of gross receipts
arising from an incidental or occasional sale of a fixed asset used in the regular course of the taxpayer's trade or
business would materially distort the sales factor, the taxpayer may petition the Department, or the Department is
authorized to require, pursuant to s. 220.152, F.S., and Rule 12C-1.0152, F.A.C., an adjustment to the sales factor.
Since the change in the apportionment factor is caused by a change in the payroll factor, Rule 12C-1.055(1)(b),
F.A.C., is not applicable. Instead, the Taxpayer is requesting relief under section 220.152, F.S., and Rule 12C-1.0152,
F.A.C.
Rule 12C-1.0152, F.A.C., provides for an adjustment to the apportionment formula if the standard formula leads to a
grossly distorted result. This rule requires the Taxpayer to show by clear and cogent evidence that the apportionment
formula results in taxation of extraterritorial values. The Taxpayer must demonstrate that the apportionment formula
operates unreasonably and arbitrarily in apportioning income to Florida, and that it is out of all proportion to the
business transacted in Florida and does not accurately and fairly reflect business activity in Florida.
The Taxpayer has shown that its payroll factor, as well as its overall apportionment factor, increases substantially
when the changes that the Taxpayer made in the way it operates its business are included in the payroll factor for its
tax year ending XX. The Taxpayer has also shown that its income substantially increases as a result of its choice to
use I.R.C. section 338(h)(10) for the sale of the Taxpayer to another entity. Now, we must consider whether the
inclusion of the income from the proceeds from the sale of the Taxpayer's XXX [I.R.C. section 338(h)(10) transaction
treated as sale of business assets] in conjunction with the changes the Taxpayer made in its operations that affected
its payroll apportionment factor results in the taxation of extraterritorial values.
In Norfolk, supra, the U.S. Supreme Court found the application of the apportionment formula unconstitutional where
the taxing state imposed an ad valorem property tax on the railroad rolling stock, using the familiar single-factor
mileage formula apportionment basis. The taxpayer presented evidence showing that the actual inventory of rolling

stock in Missouri on tax day was less than half (approximately $7,600,000 versus assessed value of $19,981,000) the
value assessed using Missouri's apportionment formula. The taxpayer further demonstrated that its calculation of the
tax-day value was representative of the value of rolling stock located within the state throughout the year and in the
preceding year. The Supreme Court in Norfolk, at page 329, noted that it is not necessary for a state to demonstrate
that its use of the mileage formula yields an exact measure of value. However, the Supreme Court further stated that:
[w]hen a taxpayer comes forward with strong evidence tending to prove that the mileage formula will yield a grossly
distorted result in its particular case, the State is obliged to counter that evidence or to make the accommodations
necessary to assure that its taxing power is confined to its constitutional limits. If it fails to do so and if the record
shows that the taxpayer has sustained the burden of proof to show that the tax is so excessive as to burden interstate
commerce, the taxpayer must prevail.
In the Hans Rees' case, supra, North Carolina attempted to apportion income of a manufacturing concern using a
formula based on the ratio of the value of the taxpayer's real and tangible personal property located in XXX over the
value of its real and tangible property located everywhere times its entire income. The taxpayer was able to
demonstrate that such a one-factor (property) apportionment formula "operated unreasonably and arbitrarily" in
attributing income to the state that was "out of all proportion" to the taxpayer's activities in the state. The Court
concluded that proof that the formula produced a tax on XX of the taxpayer's income when only XX of that income
actually had its source in the State would suffice to invalidate the assessment under the Due Process Clause. See
Moorman Manufacturing. The type of distortion present in Hans Rees' is largely remedied today by use of a threefactor apportionment formula. The three factors now generally used by states to apportion the income of most
businesses (like the taxpayer in Hans Rees') to their state, are sales, property, and payroll.
In both of these court cases, the standard apportionment methodology for the state exceeded the true apportionment,
as determined by the court, by far more than 100 percent. In this case, the standard Florida apportionment factor
exceeds the Taxpayer's suggested alternative apportionment factor by only about XX percent. The difference in
apportionment in this case is far less than any of the differences found to be unconstitutional by the U.S. Supreme
Court.
In addition, even though the Taxpayer's apportionment factor increases, this increase is the result of the Taxpayer
changing the manner in which it operates. It is accepted that taxpayers are generally free to choose the manner by
which to structure their affairs, even when motivated by tax reduction considerations. See Gregory v. Helvering, 293
U.S. 465 (1935); Rice’s Toyota World. Inc. v. Commissioner, 81 T.C. 184, 196 (1983), affd. on this issue 752 F.2d 89
(4th Cir. 1985). Once having done so, however, they are bound by the tax consequences of that choice, whether
contemplated or not, and they may not enjoy the benefits of some other path they might have chosen to follow, but did
not. (Don E. Williams Co. v. Commissioner, 429 U.S. 569 (1977); Commissioner v. National Alfalfa Dehydrating, 417
U.S. 134 (1974).) Here, the Taxpayer chose the form of the sale (I.R.C. section 338(h)(10)), and the Taxpayer is
bound by that choice, which includes the generation of approximately XX in taxable income in tax year ending XX.
The Taxpayer also made choices in the manner in which it operates and where it operates. The Taxpayer chose to
have its base of operations in Florida, and it chose the manner in which it ensured XX were available to meet the
requirements of the XXX. The Taxpayer is bound by these decisions and cannot now change them.

The Taxpayer has also not shown that any overlap of taxation exists between the states as a result of using the
standard Florida apportionment factor. Since most states use a three factor apportionment factor similar to Florida, it is
likely that the other states in which the Taxpayer operates would have a zero property factor and a zero payroll factor.
(FN 7) Even if some overlap in taxation were present, the U.S. Supreme Court stated in Moorman Manufacturing, 437
U.S. at 277:
Even assuming some overlap, we could not accept appellant's argument that Iowa, rather than Illinois, was
necessarily at fault in a constitutional sense. It is, of course, true that if Iowa had used Illinois’ three-factor formula, a
risk of duplication in the figures computed by the two States might have been avoided. But the same would be true
had Illinois used the Iowa formula. Since the record does not reveal the sources of appellant's profits, its Commerce
Clause claim cannot rest on the premise that profits earned in Illinois were included in its Iowa taxable income and
therefore the Iowa formula was at fault for whatever overlap may have existed.... The only conceivable constitutional
basis for invalidating the Iowa statute would be that the Commerce Clause prohibits any overlap in the computation of
taxable income by the States. If the Constitution were read to mandate such precision in interstate taxation, the
consequences would extend far beyond this case. For some risk of duplicative taxation exists whenever the States in
which a corporation does business do not follow identical rules for the division of income.... The prevention of
duplicative taxation, therefore, would require national uniform rules for the division of income. Although the adoption of
a uniform code would undeniably advance the policies that underlie the Commerce Clause, it would require a policy
decision based on political and economic considerations that vary from State to State. The Constitution, however, is
neutral with respect to the content of any uniform rule.... It is clear that the legislative power granted to Congress by
the Commerce Clause of the Constitution would amply justify the enactment of legislation requiring all States to
adhere to uniform rules for the division of income. It is to that body, and not this Court, that the Constitution has
committed such policy decisions....
Although there is a difference in the apportionment factors between excluding or including the payments the Taxpayer
made to the PAs and PCs, we do not believe that extraterritorial values are being taxed by Florida. The regular
apportionment factor, which excludes the Taxpayer's payments to the PAs and PCs, does not operate unreasonably
and arbitrarily in apportioning to Florida a percentage of income that is out of all proportion to the business transacted
in Florida. The Taxpayer is based in Florida and has 100% of its employees located or based in Florida. The
Taxpayer's suggestion that extraterritorial values are being taxed and that an alternative apportionment results in less
tax due to the State of Florida is insufficient proof.
We recognize that the Taxpayer's apportionment factor has changed over the years. However, all of the changes in
the apportionment factor are the result of the Taxpayer making business decisions that impacted the Taxpayer's
Florida apportionment factor. The Taxpayer's apportionment factor changed when it started filing separate Florida
corporate income tax returns instead of being included in the consolidated filing of its old parent. The Taxpayer's
apportionment factor also changed when it started contracting with PAs and PCs to meet its obligations under the
XXX.
The Taxpayer has not shown by clear and cogent evidence that Florida’s normal apportionment calculation results in
taxation of extraterritorial values. The Taxpayer receives the benefits and protections of Florida law, and there is no
question that Florida may constitutionally tax the sale of the business assets (XX) used in the Taxpayer's business. In

addition, it is clear that the payroll apportionment factor includes the actual payroll of the Taxpayer, as it was designed
and intended to do, and excluding the payments made to a PA or PC is not unconstitutional. As a result, the Taxpayer
has not demonstrated that the standard Florida apportionment formula operates unreasonably and arbitrarily in
apportioning the Taxpayer's income to Florida, or that the apportionment formula is inaccurate and does not fairly
reflect the Taxpayer's business activity in Florida for tax year ending XX.
CONCLUSION
Florida law requires the Taxpayer to include the proceeds from the Taxpayer's sale of business assets in its
apportionment factor. Florida law also does not allow the Taxpayer to include payments made to a PA or PC in the
payroll factor, as the payment made to a PA or PC is not payroll of the Taxpayer, and the employees of a PA and PC
are not employees of the Taxpayer. Based on the discussion above, the standard Florida apportionment factor is
found not to materially distort the apportionment factor or tax extraterritorial values.
This response constitutes a Technical Assistance Advisement under s. 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 s. 213.22,
F.S. Our response is based on those facts and the 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 s. 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,
Robert DuCasse
Technical Assistance and Dispute Resolution
RCD/
Control No.: 61504

FOOTNOTE 1 While the Taxpayer's request makes no mention of this point, we presume from the nature of this
request that the Taxpayer acknowledges that the proceeds from the I.R.C. section 338(h)(10) transaction are
business income.
FOOTNOTE 2 For tax year ending XX, the Taxpayer's apportionment factor was XX. The Taxpayer was included in
consolidated filings for tax years ending prior to XX.

FOOTNOTE 3 We note that even with the inclusion of the substantial proceeds (XXX) from the I.R.C. section
338(h)(10) transaction, the Taxpayer's weighted sales factor remains basically the same as it was in prior tax years.
FOOTNOTE 4 We note that the Taxpayer's decision to house its business and marketing personnel in another entity
in prior tax years had the effect of reducing the Taxpayer's Florida apportionment factor in those prior years below
what it might otherwise have been. This decision also increased the Florida apportionment of the entity that previously
housed the business and marketing personnel for the Taxpayer.
FOOTNOTE 5 The XXX' wages are now being paid by the PA or PC. The XXX are now employees of the PA or PC
and would be included in the payroll factor of the PA or PC.
FOOTNOTE 6 The apportionment factor is provided by the Taxpayer and these figures have not been audited.
FOOTNOTE 7 Most states recognize the location of property and payroll in a manner similar to Florida's. Therefore,
most states would recognize in their apportionment factors that all of the Taxpayer's property and payroll is located in
Florida (outside their state).