Did a captive support subsidiary owe communications and gross-receipts tax on services used only to support its affiliated communications group?

Plain-English summary

The Florida Department of Revenue concluded that a captive support-services subsidiary's communications purchases were excluded from Florida communications services tax and gross receipts tax as internal use by its affiliated communications-services group.

The subsidiary used telephone, fax, conferencing, and data services only to perform accounting, tax, audit, legal, cost-control, and related support for group members engaged in the communications business. It served no outside customers and was fully funded through intercompany allocations.

The subsidiary was not itself providing communications services and should not register as a communications dealer. It could document the exclusion with the advisement or the suggested internal-use statement. If the purchases later failed to qualify, the Department would look solely to the subsidiary for tax, interest, and penalties.

What this means for you

Affiliated communications groups

The support entity's activities and customers must remain tied to the group's communications-services business for the internal-use exclusion.

Captive service companies

Do not register as a dealer merely to claim the exclusion when you do not sell communications services; use the prescribed documentation and accept purchaser liability if the facts change.

Common questions

Q: Were the subsidiary's communications purchases taxable?
A: No, on the stated internal-use facts.

Q: Should the subsidiary register as a communications dealer?
A: No.

Citations and references

• Fla. Stat. §§ 202.11(13)(b)6. and 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 13A19-001

Original ruling text

Interim
Executive Director
Marshall Stranburg

Re:

January 18, 2013

Technical Assistance Advisement - TAA 13A19-001
Communications Services Tax – Internal Use of Communications Services
Section: 202.11(13)(b)6., Florida Statutes (F.S.)
Petitioner: XXX[“Taxpayer”]

Dear XXX:
This letter is a response to your petition dated XXX, for the Department's issuance of a
Technical Assistance Advisement ("TAA") concerning the above referenced party and
matter. Your petition has been carefully examined and the Department finds it to be in
compliance with the requisite criteria set forth in Chapter 12-11, Florida Administrative
Code. This response to your request constitutes a TAA and is issued to you under the
authority of s. 213.22, F.S.

Presented Facts
Your petition states that Taxpayer is an indirect wholly owned subsidiary of XXX
(hereinafter “Parent”). Parent’s operating subsidiaries provide XXX services to
customers throughout the United States and in Florida. These XXX services include
XXX products and services.
Taxpayer is in the business of providing various support services (“Support Services”) to
Parent and its subsidiaries (“Parent Group”). These Support Services include:

1. Preparing detailed accounting entries, internal financial reports and receivables,
   payables, payroll, property, general ledger and financial statements;
2. Overseeing the management accounting functions, collecting cast data, instituting
   cost control measures, preparing labor, material, overhead reports and special cost
   studies, and reviewing the allocation of overhead costs;
3. Determining the liability of the Parent Group to federal, state, and local taxing
   authorities for income, license, sales, property, and payroll taxes;
4. Preparing tax returns and supporting schedules, analyzing tax accounting rules
   and reviewing laws and regulations to ensure timely and correct implementation
   of tax law changes;
5. Performing internal audit functions for the Parent Group, conducting compliance
   audits, testing internal controls and information systems, ensuring that company
   Child Support Enforcement – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
   Property Tax Oversight – James McAdams, Director  Information Services – Tony Powell, Director

www.myflorida.com/dor
Tallahassee, Florida 32399-0100

Technical Assistance Advisement
Page 2

policies and procedures are followed, and establishing processes to discover and
prevent fraud; and

6. Pursuing tax rulings, providing audit defense, litigating lawsuits brought against
   and by Parent Group, and ensuring that federal, state, and local tax laws are
   followed in contracts between Parent Group and their customers.
   Taxpayer is a separate legal captive entity that is under common control with entities that
   are either registered dealers of communications services or would be registered dealers if
   present in Florida. Taxpayer does not sell or provide Support Services to any entity other
   than members of the Parent Group. Taxpayer’s operational costs (including salaries,
   overhead costs, real estate, insurance, and other operational and capital expenses) are
   fully funded by an intercompany allocation from Parent. Taxpayer pays salaries to its
   employees as compensation for the performance of duties required in order for Taxpayer
   to perform the Support Services to members of the Parent Group.
   Taxpayer purchases communications services from members of the Parent Group and
   from unrelated communications services providers. These communications services
   XXX allowing Taxpayer to place and receive telephone calls, send and receive facsimile
   transmissions, carry on audio and video conferences, and to transmit and receive data.
   Taxpayer uses the communications services it purchases to provide the Support Services
   to members of the Parent Group.
   Issue
   Is Taxpayer’s internal use of communications services it purchases to provide Support
   Services to members of the Parent Group excluded from communications services tax?
   Taxpayer’s Position
   Taxpayer asserts that its purchase and use of communications services solely to provide
   Support Services to members of the Parent Group constitute internal use of such
   communications services that are used in connection with the business of the Parent
   Group in providing communications services and such purchases and use by Taxpayer
   are excluded from communications services tax under s. 202.11(13)(b)6., F.S. In support
   of Taxpayer’s assertion, it states the predominant business of the Parent Group as a whole
   is the business of selling communications services. Although Taxpayer is not in the
   business of providing communications services, it is completely dedicated to the support
   of the Parent Group business. Taxpayer maintains that the dealer status of the Parent
   Group as a whole should be taken into account in determining whether purchases of
   communications services by Taxpayer qualify for exclusion.
   Taxpayer also asserts that it would be appropriate for it to register as a dealer of
   communications services so that it could provide a valid exemption certificate to dealers

Technical Assistance Advisement
Page 3

of communications services from which Taxpayer purchases communications services to
be used to provide Support Services to members of the Parent Group.

Discussion, Analysis, and Conclusion
Section 202.11(13), F.S., provides in part the following:
(13) “Sales price” means the total amount charged in money or other
consideration by a dealer for the sale of the right or privilege of using
communications services in this state, including any property or other service, not
described in paragraph (a), which is part of the sale and for which the charge is
not separately itemized on a customer’s bill or separately allocated under
subparagraph (b)8. The sales price of communications services may not be
reduced by any separately identified components of the charge which constitute
expenses of the dealer, including, but not limited to, sales taxes on goods or
services purchased by the dealer, property taxes, taxes measured by net income,
and universal-service fund fees.

(b) The sales price of communications services does not include charges for any
of the following:

6. A dealer’s internal use of communications services in connection with its
   business of providing communications services.
   The sales price of communications services does not include a dealer’s internal use of
   communications services in connection with its business of providing communications
   services. In order for purchases of communications services to be considered used “in
   connection with” a dealer’s business of providing communications services, the activities
   in which those services are used must be associated with the provision of
   communications services.

In the instant case, Parent and Parent Group’s internal use of communications services in
connection with its business of providing communications services is excluded from
communications services tax.
Parent and Parent Group are in the business of providing communications services and
related services to customers throughout the United States and in Florida. These entities
should, therefore, be registered with the Department as providers of communications
services. Support Services are provided to members of the Parent Group by Taxpayer.
Taxpayer, a wholly owned subsidiary of Parent, purchases communications services
XXX, allowing Taxpayer to place and receive telephone calls, send and receive facsimile
transmissions, carry on audio and video conferences, and to transmit and receive data.

Technical Assistance Advisement
Page 4

Taxpayer purchases communications services only to provide Support Services and only
to provide these services to members of the Parent Group in connection with Parent
Group’s business of XXX services. Taxpayer’s purchase and use of communications
services constitute Parent Group’s internal use of communications services XXX.
Therefore, Taxpayer’s purchases of communications services are excluded from
communications services tax and gross receipts tax. Please note that if the Department
determines the communications services purchased by Taxpayer do not qualify for an
exclusion from tax pursuant to s. 202.11(13)(b)6., F.S., the Department will look solely to
Taxpayer for any taxes, interest, or penalty that may be due.
In providing Support Services, Taxpayer is not providing communications services and
therefore, should not register as a dealer of communications services. Taxpayer may
purchase communications services that it uses to provide Support Services to members of
the Parent Group not subject to tax by providing communications services providers a
copy of this Technical Assistance Advisement or by providing the following suggested
statement:
Exclusion from “Sales Price” for Purchases of Communications Services for Internal Use
Date: ___
To: _____ (Selling Dealer’s Business Name)
_____ (Selling Dealer’s Address)
I, the undersigned, am a representative of __ (Taxpayer) identified below.
The purchases of communications services made on or after _ from the
business identified above are for use by __ (Taxpayer) identified below.
The charges for the purchases of communications services from the dealer identified
above will be billed to and paid directly by the __ (Taxpayer) identified
below. These purchases are excluded from the Florida communications services tax, the
local communications services tax, and the gross receipts tax, on __
(Taxpayer’s) purchase of communications services because these communications
services are being purchased for a dealer’s internal use in connection with its business of
providing communications services, pursuant to section 202.11(13)(b)6., F.S.
__ (Taxpayer) affirms that if the communications services purchased in this
case do not qualify for the exclusion provided in s. 202.11(13)(b)6., F.S., the Department
will look solely to ____ (Taxpayer) for any tax, interest, and penalties due on
the communications services purchased.
Under penalties of perjury, I declare that I have read the foregoing and that the facts
stated in it are true.

AUTHORIZED SIGNATURE ON BEHALF OF ____ (Taxpayer)

Technical Assistance Advisement
Page 5

PRINTED NAME OF AUTHORIZED SIGNATORY AND TITLE
_______(Taxpayer’s name)
_______(Taxpayer’s address)
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 predicated upon
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 from that which is 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 10 days of the date of this letter.
Sincerely,

Gary L. Gray
Program Administrator
Technical Assistance and Dispute Resolution
850-717-6777
Control #137100