How should a multistate service provider source its receipts for Florida corporate-income-tax apportionment?

Plain-English summary

The Florida Department of Revenue ruled that the taxpayer's service receipts should be sourced on a market basis to the location of the customer receiving the service. Florida receipts belonged in both the numerator and denominator of the sales factor when the relevant customer, transaction, or originating activity identified in the ruling was located in Florida.

The public copy heavily redacts the taxpayer's business, service categories, customers, and the factual triggers for three separate revenue streams. Those missing facts prevent a reliable public description of which particular services were sourced by residence, facility location, or transaction origin.

The ruling also concluded that the redacted services were not "personal services" under the cited rule and rejected reliance on TAAs issued to other taxpayers with different facts.

What this means for you

Multistate service providers

Identify where the customer receives the benefit or where the relevant market activity occurs for each distinct revenue stream. Do not assume the provider's office location alone controls.

Corporate tax teams

Document customer locations and the facts tied to each service. This public ruling is useful for its market-sourcing direction but not as a detailed industry template because the operative facts are redacted.

Accountants and tax professionals

Avoid filling the redactions with assumptions. Apply section 220.15 and Rule 12C-1.0155 to the taxpayer's actual services and verify current Florida sourcing law.

Common questions

Q: What sourcing method did the Department use?
A: Market sourcing to the location of the customer receiving the service.

Q: What services did the taxpayer provide?
A: The public TAA redacts the descriptions, so they cannot be stated reliably.

Q: Did Florida treat the services as personal services?
A: No. The Department concluded the cited personal-services rule did not apply.

Q: Can another taxpayer rely on the older TAAs discussed in the request?
A: The Department said those TAAs involved other taxpayers and different facts and did not apply here.

Citations and references

• Fla. Stat. §§ 220.15(5) and 213.22
• Fla. Admin. Code r. 12C-1.0155(2)(l)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 18C1-011

Original ruling text

QUESTION: How should the taxpayer source its income from different types of services it
provides?
ANSWER: The taxpayer should source its income from different types of services it provides to
the location of the customer to which the services are provided, on a market basis.

September 27, 2018
XXX
XXX
XXX
XXX
Re:

Technical Assistance Advisement 18C1-011
Request for Sales Sourcing Guidance
Section 220.15, F.S.
Rule 12C-1.0155, F.A.C.
XXX (“the taxpayer”)
FEIN: XXX

Dear XXX:
This is in response to your request dated XXX, for a Technical Assistance Advisement (“TAA”)
pursuant to s. 213.22, F.S., and Rule Chapter 12-11, F.A.C., regarding guidance on the sourcing
of sales. An examination of your letter has established that you have complied with the
statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is
hereby granting your request for a TAA.
FACTS SUPPLIED BY TAXPAYER
The taxpayer is headquartered in XXX. The taxpayer files its federal and Florida corporate
income tax returns on a consolidated basis. The taxpayer and its affiliate offer XXX.
The taxpayer also has a XXX, for use by XXX.
The taxpayer also provides XXX.

XXX
September 27, 2018
Florida Department of Revenue
Page 2

ISSUE
The taxpayer is requesting guidance on the proper sourcing of income for the types of services
it offers, for Florida corporate income tax purposes.

LAW
Section 220.15(5)(a), F.S., states:
(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:

1. Rental income is included in the term if a significant portion of the taxpayer’s
   business consists of leasing or renting real or tangible personal property; and
2. Royalty income is included in the term if a significant portion of the taxpayer’s
   business consists of dealing in or with the production, exploration, or development of
   minerals.
   Rule 12C-1.0155, F.A.C., states in part:
   (2) Florida sales. The numerator of the sales factor includes gross receipts attributed to
   Florida 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.

(l) Other Sales in Florida. Gross receipts from other sales shall be attributed to Florida if
the income producing activity which gave rise to the receipts is performed wholly within
Florida. Also, gross receipts shall be attributed to Florida if the income producing activity
is performed within and without Florida but the greater proportion of the income
producing activity is performed in Florida, based on costs of performance. The term
“income producing activity” applies to each separate item of income and means the
transactions and activity directly engaged in by the taxpayer for the ultimate purpose of
obtaining gains or profits. Where independent contractors are used to complete a

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contract, the term “income producing activity” will include amounts paid to the
independent contractors.

ANALYSIS
Subsection 220.02(1), F.S., provides that it is the intent of the Florida Legislature to impose a
corporate income tax on every taxpayer in each taxable year, for the privilege of conducting
business, deriving income, or being incorporated in this state. Subsection 220.15(5), F.S.,
defines the sales factor as 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., describes
how the receipts from different types of sales activities are computed, and then provides
information on the computation of the Florida portion of those receipts. Rule 12C-1.0155(2),
F.A.C., provides that the numerator of the sales factor includes gross receipts attributed to
Florida which were derived by a taxpayer from transactions and activities in the regular course
of its trade or business. In this case, the taxpayer's activities do not constitute the sale of
tangible personal property. Therefore, the discussion below will focus on the sourcing of sales
other than tangible personal property, namely the sale of services.
Pursuant to Rule 12C-1.0155(2)(l), F.A.C., sales are attributed to Florida if the income producing
activity which gave rise to the receipt is performed wholly within Florida. "Income producing
activity" is defined in Rule 12C-1.0155(2)(l), F.A.C., as "the transactions and activity directly
engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits."
The following two cases illustrate Florida’s position on the interpretation of Rule 12C1.0155(2)(l), F.A.C. In Heller Western v. Arizona Department of Revenue1, Heller Western2
borrowed money from its Illinois parent in order to lend money to Arizona businesses. Any
loan over one million dollars had to be approved by its parent in Illinois and its headquarters in
California. The California office also monitored the progress of loans made in Arizona and paid
the interest expense on the loans from the parent company to Heller Western in Arizona. Prior
to 1978, Heller Western sourced the interest earned from loans to Arizona customers3 to
Arizona. After 1978, Heller Western sourced the interest earned from loans to Arizona
customers outside Arizona. Heller Western argued that pursuant to A.C.A.R.R. R15-2-1358(b)(5)(j)(1978) (an Arizona rule similar to Rule 12C-1.0155(2)(l), F.A.C.), borrowing money from
1

775 P.2d 1113 (Ariz. Sup. Ct. 1989).
Heller Western is a branch of a California corporation. The California corporation is a subsidiary of a corporation
domiciled in Illinois.
3
Customer is used interchangeably with consumer.
2

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September 27, 2018
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its parent was part of its income producing activity in Arizona, and that since more than fifty
percent of the costs associated with the borrowing occurred outside of Arizona, the income
earned from lending money in Arizona should not be sourced to Arizona. The Arizona
Department of Revenue (“Arizona”) disagreed and argued that the interest earned from loans
to Arizona consumers should be sourced to Arizona because “only the activities of the Arizona
branch office immediately resulted in generating income from the Arizona loans. Thus, only
those activities qualify as ‘income producing activity.’”4
The Arizona Supreme Court ruled in favor of Arizona and stated, “[w]e believe that the term,
‘income producing activity,’ in our regulation contemplates only direct sales payment activity by
the consumer, which in this case occurred in Arizona.”5 This position was further elaborated by
the Court:
. . . Further, those activities are uniformly local to the situs of the consumer…. For
example, payments for interstate transportation of freight are allocated to the state
where the freight is delivered, not purchased, because that is where the consumer is.
However, payments for interstate transportation of people on a common carrier are
allocated to the state where the ticket is purchased, not the traveler's destination,
again because that is where the consumer is. Finally, payments resulting from business
generated by interstate telephone calls are allocated to the state where the customer
placed or received the call; whether the seller called the consumer or the consumer
called the seller, it is the consumer's situs that is determinative. . . 6
The Court states that sourcing sales made to Arizona consumers to Arizona was a “logical
conclusion.”7 The Court compares the interest earned from loans to a retailer selling goods and
states:
Heller Western can no more argue that its receipts from Arizona loan consumers
should not be taxed due to its out-of-state involvement in procuring its ‘inventory’
than a retailer who is engaged in extensive dealings out of state to buy his
merchandise could argue that he should not be taxed on the goods he sells to
consumers here.8
The Arizona Supreme Court held that based on the “consumer location orientation…‘income
producing activity’ contemplates direct solicitation, negotiation, and sales activities with

4

Id. at 1116.
Id.
6
Id.
7
Id. at 1117.
8
Id.
5

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consumers in this state.”9 As a result, all sales were sourced to Arizona, regardless of where
most of the costs of performance occurred.
In Ameritech Publishing, Inc. v. Wisconsin Department of Revenue10, Ameritech was in the
business of selling advertising for placement in telephone directories. The advertising services
at issue were sold entirely within Wisconsin. However, the vast majority of the costs of
performance of the advertising services occurred outside Wisconsin. The final product, a
telephone book containing the advertisements, was delivered to Wisconsin via common carrier.
Ameritech initially sourced the sales of these services to Wisconsin. However, it later filed
amended returns seeking refunds arguing that the sale of its services should not be sourced to
Wisconsin pursuant to WIS. STAT. s. 71.25(9)(d) ((1999) similar to Rule 12C-1.0155(2)(l), F.A.C.),
because the majority of the costs of performance occurred outside Wisconsin, and the
telephone books were delivered to Wisconsin via common carrier.
The Wisconsin Department of Revenue (“Wisconsin”) disagreed and argued that Ameritech’s
income producing activity occurred within Wisconsin for several reasons. First, Wisconsin
argued that Ameritech had significant sales for the four years at issue, and if Ameritech’s
argument was accepted, Ameritech would pay no tax in one of the years and receive a refund
of two million dollars for two of the years. Second, Wisconsin argued that Ameritech’s position
was unreasonable because large amounts of the income producing activity would not be
sourced to Wisconsin, where the advertising occurred. Wisconsin also argued that the Tax
Appeals Commission’s finding that Ameritech’s income producing activity was “furnishing its
customers access to a Wisconsin audience was reasonable….”11 Finally, Wisconsin argued that
Ameritech’s position that solicitation and advertising production were the income producing
activities was “belied by the fact that these activities were not specified in the contract,” and
that not all of its customers used these services.12
The Wisconsin Court of Appeals ruled in favor of Wisconsin and upheld the Tax Appeals
Commission’s finding that the:
. . .‘[I]ncome-producing activity’ associated with [Ameritech]'s service from 1994 to
1997 was, at bottom, the provision of access to a Wisconsin audience. Advertisers paid
[Ameritech] to reach Wisconsin consumers through this familiar and well-established
advertising medium. It is undisputed that, in the course of providing this service,
[Ameritech] employees working in offices outside of Wisconsin executed tasks related
to the sale and production of the ads. But [Ameritech]’s customers did not pay
primarily for [Ameritech] to service their accounts, design their advertisements, or

9

Id.
No. 2009AP445 (App. Ct. IV 2009), 788 N.W.2d 383 (Wis. Ct. App. 2010)
11
Id. at ¶ 30
12
Id.
10

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send their ad copy with the completed directory to the printer. They paid for the
broad access [Ameritech] could provide to a Wisconsin audience.13
The Wisconsin Court of Appeals also agreed that the income producing activity occurred in
Wisconsin, not in the other states in which a majority of the costs of performance occurred and
stated:
Moreover, the Commission reasonably concluded that this service of providing access
to Wisconsin consumers is income-producing activity performed within the state of
Wisconsin under WIS. STAT. § 71.25(9)(d). During the relevant period, API acted as a
gatekeeper for its advertisers to the Wisconsin market; API's customers paid a monthly
toll to reach that market via a venerable advertising medium. API's income was
dependent primarily upon its status as a telephone directory publisher, and its ability
to offer advertisers access to a pool of local consumers (Wisconsin consumers in this
case) through this medium. Thus, regardless which state API's sales persons and
advertising production staff was located, API's primary service of providing access to a
Wisconsin audience was performed in the state of Wisconsin.14
The Wisconsin Court of Appeals stated that the Tax Appeals Commission reasonably relied on
The Hearst Corporation v. DOR15 in order to determine the income producing activity. In
Hearst, WISN-TV was a television broadcaster located in Wisconsin. WISN-TV generated
revenue from local and national advertisements. The administration of the local
advertisements occurred within Wisconsin, while the administration of the national
advertisements occurred outside Wisconsin. WISN-TV argued that the income producing
activity in regard to national advertisement was performed outside Wisconsin since all the costs
of performance occurred outside Wisconsin. The Tax Appeals Commission in Hearst ruled that
the income producing activity was the broadcasting of the national advertisement in Wisconsin,
despite the fact that the costs of performance of the advertisement occurred outside
Wisconsin. The Tax Appeals Commission reasoned that:
“[T]he network and national advertising revenues are based upon the showing or
broadcasting thereof. Without broadcasting there is no income.” The Commission
further found that “advertisers choose spots based upon the demographic profile of
the audience viewing the particular programming during which the spots occur or are
available, and that the advertisers are buying the spots due to the programming and
its demographic makeup.” In its findings of fact, the Commission concluded “the
income producing activity is the actual broadcasting of the programming desired by

13

Id. at ¶34.
Id. at ¶35.
15
Wis. Tax Rptr (CCH) ¶203-149 (WTAC 1990)
14

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the advertiser and the commercial spots during that programming and, thus, is in
Wisconsin.”16
In both Heller Western and Ameritech, the majority of the taxpayer’s costs of performance
occurred outside the state in which their customers resided and where the income producing
activity actually occurred. The taxpayers in both cases argued that sales should be sourced to
the state in which the majority of the costs of performance occurred instead of where the
customer was located and where the income producing activity occurred. However, the courts
in the two cases held that the income producing activities were the actual sale of services to its
customers, as opposed to the costs of performing those services. The courts in both cases
sourced the taxpayer’s gross receipts from the sale of services to the market state, the state in
which the customer resided, reasoning that the direct sale to the customer at the customer’s
domicile is where the income producing activity occurred. In analyzing the income producing
activity, the most important factor to determine is where the customer is located.
The background of the adoption of the sales apportionment factor for the Florida corporate
income tax is also helpful for this analysis. When the adoption of the corporate income tax was
being debated by the Florida legislature in 1971, there were two options available to measure
the receipts for the sales apportionment factor: the pure destination test, also known as the
market state test, or the combined destination and origin test.17 The pure destination test
sources the goods sold to the market state or the state where the goods are consumed. The
combined destination and origin test assigns the sales to the state from which the goods were
shipped if the taxpayer was not doing business in the state of the purchase or if the purchaser
was the federal government.
The Florida legislature adopted the pure destination test and assigned fifty percent of the
apportionment factor to the sales factor.18 Florida deviated from weighting the three
apportionment factors equally because Florida is a consumer state. Had the legislature adopted
equal weighting for the three factors, foreign corporations that do not relocate personnel and
property to Florida would pay proportionately less tax on their income than local corporations
that have significant payroll and property factors assigned to Florida. 19 When analyzing each
portion of the receipts, a determination must be made as to the final destination of the product
or service being sold.
The term "income producing activity" is defined as "the transactions and activity directly
engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits."20 The word
16

Id. at ¶18.
England, Arthur. Corporate Income Taxation in Florida: Background, Scope, and Analysis. 1972. p.14–15. Print.
18
Id. at 15.
19
Id.
20
Rule 12C-1.0155(2)(l), F.A.C.
17

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“and” signifies that both transactions and activities must exist in order for any activity to be
considered the income producing activity. The word “transaction” is used several times in the
Florida Statutes and Rules, but is not defined. Black’s Law Dictionary21 defines “transaction” as:

1. The act or an instance of conducting business or other dealings.
2. Something performed or carried out; a business agreement or exchange.
3. Any activity involving two or more persons.
   The taxpayer is entitled to receive income from XXX. Such XXX is associated with a specific
   location in a specific state, in which the XXX, or other issue which gave rise to the XXX occurred.
   Therefore, the income producing activity which generates income for the taxpayer and its
   affiliate is XXX associated with such XXX. To the extent that the XXX, for which the XXX is
   located or resides in Florida, such income should appear in both the numerator and the
   denominator of the Florida sales factor computed in the taxpayer’s Florida corporate income
   tax return.
   The taxpayer also has a XXX. In this instance, the taxpayer receives income from XXX at the
   specific location XXX. If a XXX from the taxpayer’s XXX is XXX in Florida, such income should
   appear in both the numerator and the denominator of the Florida sales factor computed in the
   taxpayer’s Florida corporate income tax return.
   The taxpayer also provides XXX, through its affiliates. The affiliates are typically engaged by
   XXX. The affiliates involved in this activity also XXX. Again, this activity is provided to XXX at
   specific locations in specific states, and income derived from it should appear in both the
   numerator and the denominator of the Florida sales factor computed in the taxpayer’s Florida
   corporate income tax return, when the XXX with which the income is associated is located in
   Florida, or when the XXX originates or occurs in Florida.
   While the letter requesting this TAA references Rule 12C-1.0155(2)(e), F.A.C., that rule
   paragraph addresses taxpayers that provide “personal services.” Section 448(d)(2)(A), I.R.C.,
   defines “personal services” as involving “the performance of services in the fields of health, law,
   engineering, architecture, accounting, actuarial science, performing arts, or consulting, . . . .”
   As the taxpayer and its affiliates are hired by parties that XXX, to provide XXX to them, but the
   taxpayer and its affiliates do not provide XXX themselves, the taxpayer and its affiliates do not
   provide “personal services.” Therefore, that rule does not apply to the taxpayer and its
   affiliates.
   Additionally, the TAA’s referenced in this TAA request that were previously issued by the
   Department were issued to other taxpayers based on their specific facts and circumstances, do
   not appear to reflect the activities of this taxpayer, and do not apply to this taxpayer.
   21

716 (2nd Pocket Edition 2001)

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CONCLUSION
The income the taxpayer and its affiliate receive from XXX should appear in both the numerator
and the denominator of the Florida sales factor computed in the taxpayer’s Florida corporate
income tax return, when the XXX is located or resides in Florida.

The income the taxpayer receives from XXX should appear in both the numerator and the
denominator of the Florida sales factor computed in the taxpayer’s Florida corporate income
tax return, when a XXX from the taxpayer’s XXX located in Florida.
The income the taxpayer and its affiliates receive from providing XXX should appear in both the
numerator and the denominator of the Florida sales factor computed in the taxpayer’s Florida
corporate income tax return, when the XXX with which the income is associated is located in
Florida, or when the XXX originates or occurs in Florida.
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.
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
Suzanne C. Paul
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 717-6794

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SCP/
cc: XXXX
XXXX
XXXX
XXXX
AMS No.: 7000018513