Could a corporation exclude a large sale of Florida business real property from its corporate income-tax sales factor?

Plain-English summary

The Florida Department of Revenue required a corporation to include gross receipts from selling Florida real property used in its business in the corporate income-tax sales factor.

The corporation's request to exclude the proceeds as alternative apportionment was filed after the return's extended due date, outside the deadline in the rule. The Department also concluded that the request would fail even if timely. A large change in the sales factor did not by itself prove that the standard formula operated unreasonably and arbitrarily or attributed income to Florida out of all proportion to the business conducted there.

Florida therefore required the standard apportionment method and did not allow the property-sale proceeds to be removed from the sales factor.

What this means for you

Multistate corporations

An unusual or one-time asset sale does not automatically justify removing receipts from Florida's standard apportionment formula.

Corporate tax advisors

File an alternative-apportionment petition by the applicable return due date, including extensions, and support it with clear evidence of gross distortion and a fair alternative.

Common questions

Q: Was the alternative-apportionment request timely?
A: No.

Q: Was a significant increase in the sales factor enough to prove distortion?
A: No.

Q: Did the property-sale proceeds remain in the Florida sales factor?
A: Yes.

Citations and references

• Fla. Stat. §§ 220.15, 220.152, and 213.22
• Fla. Admin. Code rr. 12C-1.0152 and 12C-1.0155

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 15C1-001

Original ruling text

Executive
Director
Marshall Stranburg

QUESTIONS: 1. WHETHER THE TAXPAYER’S FLORIDA SALES FACTOR FOR THE
2013 TAX YEAR SHOULD INCLUDE GROSS RECEIPTS FROM THE SALE OF REAL
PROPERTY USED IN ITS BUSINESS?

2. WHETHER THE TAXPAYER MAY USE AN ALTERNATIVE APPORTIONMENT
   METHOD, WHICH WOULD EXCLUDE RECEIPTS FROM THE SALE OF ITS REAL
   PROPERTY FROM THE SALES FACTOR?
   ANSWER:
   THE TAXPAYER FILED ITS PETITION TO USE ALTERNATIVE
   APPORTIONMENT WITH THE DEPARTMENT OUTSIDE THE TIME PROVIDED BY
   RULE 12C-1.052, F.A.C. FLORIDA LAW REQUIRES THE TAXPAYER TO INCLUDE THE
   GROSS RECEIPTS FROM THE SALE OF REAL PROPERTY USED IN THE BUSINESS IN
   DETERMINING ITS FLORIDA SALES FACTOR. ADDITIONALLY, AS THE TAXPAYER
   HAS FAILED TO SHOW THAT USE OF THE APPORTIONMENT METHOD PROVIDED
   BY SECTION 220.15, F.S., CAUSES ITS TAX BASE ATTRIBUTABLE TO FLORIDA TO
   BE UNREASONABLY AND ARBITRARILY REPRESENTED, THE TAXPAYER IS
   REQUIRED TO USE THE APPORTIONMENT METHOD PROVIDED BY SECTION 220.15,
   F.S., IN APPORTIONING ITS INCOME TO FLORIDA AND CANNOT EXCLUDE THE
   PROCEEDS FROM THE SALE OF THE REAL PROPERTY FROM THE SALES FACTOR.
   March 23, 2015
   Re:

Technical Assistance Advisement 15C1-001
Corporate Income Tax
Request to Use Alternative Apportionment
Sections: 220.15 and 220.152, F.S.
Rule 12C-1.0152, F.A.C.
XXXXX (hereinafter “Taxpayer”)

Dear Sir or Madam:
This is in response to XXXXX request dated XXXXX, for a Technical Assistance Advisement
(TAA) pursuant to section 213.22, Florida Statutes (F.S.), and Rule Chapter 12-11, Florida
Administrative Code (F.A.C.), regarding whether the Taxpayer may use an alternative
apportionment factor. An examination of the letter has established that the request complies with
the statutory and regulatory requirements for issuance of a TAA. Therefore, the Florida
Department of Revenue (hereinafter “the Department”) is hereby granting your request for a
TAA.
Child Support Enforcement – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – Howard Moyes, Interim Director  Information Services – Damu Kuttikrishnan, Director

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

Technical Assistance Advisement
Page 2

The Department contacted XXXXX, to request a power of attorney authorizing XXXXX to
represent the Taxpayer in this matter. To date, the Department has not received the power of
attorney, and this response is being sent directly to the Taxpayer.
FACTS SUPPLIED BY TAXPAYER
The Taxpayer owned an XXXXXXX it sold in XXXX. In previous years, the XXXXX
generated steadily increasing XXX revenue for the Taxpayer, which was included in the
Taxpayer’s Florida sales apportionment factor percentage. When the Taxpayer sold the
XXXXX, the inclusion of the gross receipts from that sale increased the Taxpayer’s Florida sales
factor as compared to prior tax years.
The Taxpayer asserts that the sale of the XXXXX materially distorted its Florida sales factor.
The Taxpayer believes exclusion of the gross receipts from the sale of the XXXXX from its
Florida sales factor for the XXXXX tax year would better reflect the appropriate Florida tax base
and requests permission to exclude the gross proceeds from the sale of the XXXXX from its
sales apportionment factor.
LEGAL AUTHORITY
Section 220.15, F.S., states in part:
(1) Except as provided in ss. 220.151 and 220.152, and 220.153, 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: . . .
Section 220.152, F.S., states:
Apportionment; other methods. --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

Technical Assistance Advisement
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(4) The employment of any other method which will produce an equitable
apportionment.
Rule 12C-1.0152, F.A.C., states:
(1)(a) A departure from the applicable method of apportionment required under the
provisions of Section 220.15 or Section 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 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 12C-1.0511, 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.).
(2) The party seeking to use an alternative formula must prove that the alternative
formula fairly and accurately apportions income to Florida based upon business activity
in Florida.
(3) A departure from the regularly applicable apportionment method will be authorized
only in limited and specific cases where unusual fact situations (which ordinarily will
be unique and nonrecurring) produce a result that is incongruous with the results of
previous tax years under the regularly applicable apportionment method.
(4) A taxpayer must petition the Department for a departure from the required
apportionment method by filing, on or before the due date for filing of the return for the
taxable year, with extension, either: a written request for a technical assistance
advisement under Section 213.22, F.S., and Rule Chapter 12-11, F.A.C.; or, a petition
for a declaratory statement under Section 120.565, F.S.

Technical Assistance Advisement
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(a) The taxpayer must file the request or petition with Technical Assistance and Dispute
Resolution, P. O. Box 7443, Tallahassee, Florida 32314-7443.
(b) The taxpayer’s request or petition must include a summary of the evidence to
support the taxpayer’s contention that the applicable apportionment formula results in
taxation of extraterritorial values and to demonstrate that the regular formula operates to
unreasonably and arbitrarily attribute income to Florida far out of proportion to the
business transacted in Florida. The taxpayer must also furnish evidence that the use of
an alternative method fairly and accurately apportions income to Florida.
Rule 12C-1.0155(2)(c), F.A.C., states:
Real Property. Gross receipts from the sale, lease, rental, or licensing of real property
are in Florida if the real property is located in Florida.
ISSUES PRESENTED

1. Whether the Taxpayer’s Florida sales factor for the XXXXX tax year should include gross
   receipts from the sale of its XXXXX?
2. Whether the Taxpayer may use an alternative apportionment method, which would exclude
   receipts from the sale of its XXXXX from the sales factor?
   DISCUSSION AND ANALYSIS
   The Taxpayer wishes to exclude the gross receipts from the sale of its XXXXX from its Florida
   sales factor for the XXXXX tax year, because the Taxpayer believes including that income
   materially distorts its sales factor. 1 The Taxpayer notes that Rule 12C-1.0155(1)(b), F.A.C.,
   permits taxpayers to petition the Department for permission to exclude gross receipts arising
   from the occasional sale of fixed assets used in the regular course of trade or business if the
   amounts would materially distort the sales factor.
   However, Rule 12C-1.0152(4), F.A.C., requires that taxpayers requesting to use an alternative
   apportionment method petition the Department for a departure from the required apportionment
   method on or before the due date for filing the Florida tax return for the taxable year, including
   extension. As the Taxpayer’s XXX tax year end was XXXXX, its due date for filing the return
   was XXXXX. The Taxpayer’s extended due date was XXXXX, and the return was filed in
   XXXXX. Therefore, the Taxpayer’s request dated XXXXX is outside the time provided by Rule
   12C-1.0152(4), F.A.C., for requesting alternative apportionment for the XXXXX tax year, and
   the Department cannot grant approval to exclude the gross receipts from the sale of its XXXXX
   from the Florida sales factor for that year.

1

XXXXX

Technical Assistance Advisement
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Even if we were to entertain Taxpayer’s request as timely, we would note that in Florida,
alternative apportionment is very rare. 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 the 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.
Id. at 363.
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 references two relevant court cases.
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 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 tried 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 North Carolina over the value of its real and tangible property
located everywhere times its entire income. The taxpayer was able to show that such a onefactor (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 the formula produced a tax on 83% of the taxpayer’s income when
only 17% of that income actually had its source in the State would be enough to invalidate the
assessment under the Due Process Clause. See Moorman Manufacturing Co. v. Bair, Director

Technical Assistance Advisement
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of Revenue of Iowa, 437 U.S. 267 (1978). The type of distortion present in Hans Rees’ is largely
remedied today by use of a three-factor 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.
Rule 12C-1.0152, F.A.C., and the cited case law require 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, that it is out of all proportion to the business transacted in
Florida, and that it does not accurately and fairly reflect business activity in Florida. There is no
doubt that the Taxpayer’s income increased substantially as a result of the sale of the XXXXX.
As a result, the increase in income that resulted from the sale of a business asset in Florida would
also increase the Taxpayer’s Florida sales factor and its tax liability. Even though the change in
the apportionment factor before and after the sale is significant, we do not believe that the
regular apportionment factor would operate unreasonably and arbitrarily in apportioning to
Florida a percentage of the income attributable to business transacted in the state.
While section 220.152, F.S., authorizes a taxpayer to petition the Department to use an
alternative apportionment method if the methods of sections 220.15 and 220.151, F.S., do not
fairly represent the Taxpayer’s tax base attributable to Florida, the Taxpayer is also required to
show that use of the apportionment method provided by section 220.15, F.S., causes its tax base
attributable to Florida to be unfairly represented. Here, Florida law requires the Taxpayer to
include the gross receipts from the sale of the XXXXX, in computing its Florida apportionment
factor. The Taxpayer has not shown that using this apportionment method causes its tax base
attributable to Florida to be unfairly represented. Therefore, the Department could not approve
an alternative apportionment method even if the Taxpayer’s request had been submitted timely.
CONCLUSION
Based on the discussion above, the Taxpayer filed its petition to use alternative apportionment
with the Department outside of the time provided by Rule 12C-1.052, F.A.C. Florida law
requires the Taxpayer to include the gross receipts from the sale of the XXXXX in determining
its Florida sales factor. Additionally, as the Taxpayer has failed to show that use of the
apportionment method provided by section 220.15, F.S., causes its tax base attributable to
Florida to be unreasonably and arbitrarily represented, the taxpayer is required to use the
apportionment method provided by section 220.15, F.S., in apportioning its income to Florida
and cannot exclude the proceeds from the sale of the XXXXX from the sales factor.
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 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.

Technical Assistance Advisement
Page 7

You are further advised that this response, your request and related documents are public records
under chapter 119, F.S., which are subject to disclosure to the public under the conditions of s.
213.22, F.S. Your name, address, and any other details, which might lead to identification of the
taxpayer, must be deleted before disclosure. In an effort to protect the confidentiality of such
information, we request you provide the undersigned with an edited copy of your request for
Technical Assistance Advisement, backup material and response within fifteen days of the date
of this advisement.
Sincerely,

Suzanne C. Paul
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 717-6794
Record ID: 184734