How did Florida source customized-software and other service receipts for the corporate income tax sales factor?

Plain-English summary

The Department applied two sourcing rules to the taxpayer's receipts for Florida's corporate income tax sales factor.

Receipts from customizing software were sourced to the state where the customization activities occurred. Because the taxpayer performed those activities outside Florida, those receipts were not sourced to Florida under the described facts.

Receipts from the taxpayer's other services were sourced to the customer's location. A Florida customer's receipts went into both the numerator and denominator of the Florida sales factor; an out-of-state customer's receipts went only into the denominator.

The Department rejected the cost-of-performance method because the taxpayer's activities were not "personal services" within the cited federal definition.

What this means for you

The ruling did not apply one sourcing rule to every receipt. It separated software customization from the taxpayer's other services and looked respectively to the activity location and customer location.

Common questions

Where were software-customization receipts sourced? Where the customization work took place.

Where were the other service receipts sourced? To the customer's location.

Could the taxpayer use cost-of-performance sourcing? No, because its activities were not the qualifying personal services described in the ruling.

What issues did the TAA leave open? It did not decide the validity of separate returns or the permissibility of transferring income through management and intellectual-property fees.

Citations and references

• Fla. Stat. § 220.15; Fla. Admin. Code r. 12C-1.0155; and I.R.C. § 448(d)(2)(A), as cited in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09C1-003

Original ruling text

SUMMARY
QUESTION: How should income from the taxpayer’s software customizing and other activities
be sourced for purposes of Florida’s sales factor?
ANSWER: Income derived from customizing software should be sourced to the state in which
the software customizing activities take place. Income derived from the other services provided
by the taxpayer should be sourced to the location of the customer to whom the service is
provided.

September 30, 2009

RE:

Technical Assistance Advisement 09C1-003
Corporate Income Tax – Apportionment
Section 220.15, Florida Statutes
Rule 12C-1.0155, Florida Administrative Code
XXX, hereinafter referred to as “the taxpayer”

Dear:
This letter is in response to your letter postmarked XXX, requesting a ruling concerning
apportionment of the taxpayer’s income for purposes of Florida’s corporate income tax. This
response constitutes a Technical Assistance Advisement under Chapter 12-11, Florida
Administrative Code (F.A.C.), and is issued to you under the authority of section 213.22, Florida
Statutes (F.S.).
FACTS AS PROVIDED BY TAXPAYER
Your letter postmarked XXX, states that the taxpayer is headquartered in Florida, and provides
its services to the XXX in Florida and throughout the United States. The taxpayer files corporate
income tax returns in XXX or more states.
The taxpayer provides XXX.
In some instances, the taxpayer provides customized software to its customers. The software
enhancements are performed outside Florida.
LEGAL AUTHORITY
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

Technical Assistance Advisement 09C1-003
Page 2
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. . . .
(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. . . .
Rule 12C-1.0155, F.A.C., states, in part:
(1) For the purposes of the sales factor, the term “sales” means all gross receipts
received by the taxpayer from transactions and activities in the regular course of
its trade or business.
(2) Florida sales. The numerator of the sales factor shall include gross receipts
attributed to this state which were derived by the taxpayer from transactions and
activities in the regular course of its trade or business. All interest income, service
charges, carrying charges, or time-price differential charges incident to such gross
receipts shall be included regardless of the place where the account records are
maintained or the location of the contract or other evidence of indebtedness.
ISSUE PRESENTED
How income from the taxpayer’s activities should be apportioned for purposes of Florida’s
corporate income tax.
DISCUSSION AND ANALYSIS
Subsection 220.15(1), F.S., authorizes taxpayers that are doing business within and without
Florida to apportion their income as directed by section 220.15, F.S. Subsection 220.15(5), F.S.,
addresses the computation of the Florida sales factor, which is used in computing the Florida
apportionment factor.
The information provided in your letter postmarked XXX, states that the taxpayer provides XXX
services. Rule 12C-1.0155(1), F.A.C., defines “sales” as all income received in the regular
course of a taxpayer’s trade or business, and indicates which receipts should be included in the
denominator of the Florida sales factor. Rule 12C-1.0155(2), F.A.C., defines “Florida sales,”
and indicates which of a taxpayer’s receipts should be included in the numerator of the Florida
sales factor.
Rule 12C-1.0155(2)(h), F.A.C., generally provides for sourcing computer related sales to the
location of the customer, and, as was noted in your letter, Rule 12C-1.0155(2)(h)3., F.A.C.,
specifically provides that income from customizing software programs should be included in the
numerator of the sales factor when the customizing activities take place in Florida. Your letter

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states that the taxpayer’s software customizing activities take place outside Florida. Therefore,
income received from the sales of customized software should be sourced to the state in which
the software customizing activities take place.
As you also noted in your letter, the “costs of performance” method of apportionment is not
addressed in the statute and has limited application. In that the taxpayer’s activities are not those
defined as “personal services” by section 448(d)(2)(A), I.R.C., the taxpayer would not be eligible
to use the costs of performance method of apportionment.
Based on the construction of Florida’s corporate income tax statute the income received by the
taxpayer for providing XXX, should be sourced to the location of the customer to whom the
service is provided. Therefore, if the customer to whom the service is provided is located in
Florida, the income from providing the service should be included in both the numerator and the
denominator of the Florida sales factor. If the customer to whom the service is provided is
located in another state, the income from providing the service would be included only in the
denominator of the Florida sales factor.
CONCLUSION
Income derived from customizing software should be sourced to the state in which the software
customizing activities take place. Income derived from providing XXX, should be sourced to the
location of the customer to whom the service is provided.
As a reminder, Technical Assistance Advisements are based on full disclosure of all relevant
facts, and the lack of disclosure of a material fact by the Taxpayer may adversely affect the
response provided in this Technical Assistance Advisement. This Technical Assistance
Advisement does not address whether the Taxpayer’s separate returns will be valid nor whether
the transfer of income via management fees and intellectual property fees to Company S is
permissible under Florida law.
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 213.122, 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, Florida Statutes, 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 materials and
this response, deleting the names, addresses and any other details which might lead to

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Page 4
identification of the Taxpayer. Your response should be received by the Department within 15
days of the date of this letter.
Sincerely,

Suzanne C. Paul
Technical Assistance and
Dispute Resolution

SCP/
Record ID 67848