Did a disregarded LLC's sales to its owner enter Florida's corporate sales factor?

Subject

Sales Apportionment

Plain-English summary

Sales by the disregarded single-member LLC to its corporate owner entered Florida's sales factor only when the related income was reported on the federal and Florida returns. If the interdivisional income was disregarded and did not appear on those returns, the related sales did not enter the factor.

Florida treated the LLC as a division of its owner, so the owner's return had to reflect the LLC's activities consistently with the income that generated the apportionable base.

What this means for you

The ruling tied apportionment receipts to reported income rather than treating every internal invoice as an independent sale. It distinguished transactions between divisions from ordinary intercompany sales between separate members of an affiliated group.

Common questions

Q: Were all LLC-to-owner invoices included in the sales factor? No. Inclusion depended on whether the related income was reported.

Q: What if the income was disregarded for federal and Florida purposes? The related sales could be excluded from the Florida sales factor.

Q: Why was the LLC treated as a division? The proposed single-member LLC would be disregarded for federal and Florida income-tax filing.

Citations and references

• Fla. Stat. § 220.02(1) — legislative intent and LLC treatment
• Fla. Stat. § 220.13(2)(j) — LLC taxable income
• Fla. Stat. § 220.15(5) — sales factor
• Fla. Admin. Code r. 12C-1.0155(1)(j) — intercompany sales
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00C1-005

Original ruling text

SUMMARY

QUESTION: Should sales of a single member LLC to its parent
company be included in the sales apportionment factor for
Florida corporate income tax purposes, when the LLC is
treated as a division of the parent company for federal and
Florida corporate income tax purposes?

ANSWER - Based on Facts Below: The sales of the LLC should
be included in the sales apportionment factor for Florida
corporate income tax purposes if the income from those
sales is reported on the federal and Florida income tax
returns. If the income from those sales is not reported on
the federal and Florida income tax returns, the sales
should not be included in the sales apportionment factor.

May 19, 2000

Re: Technical Assistance Advisement 00C1-005
Corporate Income Tax - Sales Apportionment
ss. 220.02, 220.13, and 220.15, F.S.
XXX, hereinafter referred to as "A"
XXX, hereinafter referred to as "LLC"

Dear:

The taxpayer's letter of XX, and your letter of XX, requested a
Technical Assistance Advisement on the proper calculation of the
sales apportionment factor for Florida corporate income tax
purposes. 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

"A" will form a subsidiary as a single member limited liability
company (LLC). "A" is included in its parent company's

consolidated income tax return for both federal and Florida
corporate income tax purposes. "LLC" will be treated as a
division of "A" for federal and Florida income tax filing
purposes. "LLC" will purchase tangible personal property which
will be sold to "A" or to other unrelated entities.

QUESTION

Should "LLC's" sales to "A" be included in the sales
apportionment factor for Florida corporate income tax purposes?

DISCUSSION AND ANALYSIS OF LAW

Subsection 220.02(1), F.S., states:

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 intended that any
limited liability company that is classified as a
partnership for federal income tax purposes and formed
under chapter 608 or qualified to do business in this state
as a foreign limited liability company not be subject to
the tax imposed by this code. 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. (emphasis supplied)

Paragraph 220.13(2)(j), F.S., states:

"Taxable income," in the case of a limited liability
company, other than a limited liability company classified
as a partnership for federal income tax purposes, as
defined in and organized pursuant to chapter 608 or
qualified to do business in this state as a foreign limited
liability company or other than a similar limited liability
company classified as a partnership for federal income tax
purposes and created as an artificial entity pursuant to
the statutes of the United States or any other state,
territory, possession, or jurisdiction, if such limited
liability company or similar entity is taxable as a
corporation for federal income tax purposes, means taxable
income determined as if such limited liability company were
required to file or had filed a federal corporate income
tax return under the Internal Revenue Code; (emphasis
supplied)

Subsection 220.15(5), F.S., states in part:

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....

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....

(j) Intercompany sales. When a consolidated return is
filed, intercompany sales may be included in the sales
factor. Indications that the amounts may be included as
sales include the following factors:

1. Amounts called sales on the books;

2. Amounts invoiced as sold to related party;

3. Actual payment from related party; or

4. Amounts included in consolidated federal income tax
   return as "gross receipts or sales."

The 1998 Florida Legislature amended subsection 220.02(1), F.S.,
to state that its intent was to exclude LLC's classified as
partnerships for federal income tax purposes, from taxation
under Chapter 220, F.S. The amendment to paragraph
220.13(2)(j), F.S., reflects that intent, as well.

Therefore, the amendments to Chapter 220, F.S., exclude only
those LLC's taxed as partnerships for federal income tax
purposes, from its provisions. LLC's filing as other types of
entities for federal income tax purposes remain subject to the
provisions of Chapter 220, F.S., and are treated, for Florida
corporate income tax purposes, as they are for federal income
tax purposes.

Subsection 220.15(5), F.S., states that the sales factor is
comprised of the taxpayer's total sales for the taxable year,
and, in paragraph 220.15(5)(a), F.S., defines "sales" to be all
"gross receipts of the taxpayer," with the exception of specific

sources of income.

Intercompany transactions are normally included in the Florida
apportionment factor, because the apportionment factor is
intended to provide a measure of business activity, which
generates federal taxable income, and ultimately, Florida net
income, which is taxed. This is consistent with the concept of
Rule 12C-1.0155(1)(j), F.A.C., which provides for the inclusion
of intercompany sales in the Florida sales factor.

However, for sales between divisions of an entity the provisions
of this rule would not apply, as the rule addresses transactions
between two members of the same affiliated group; and LLC's do
not usually meet the definition of a qualified affiliated group
member. This distinction should be considered in determining how
the income and apportionment treatment should be determined, and
would not necessarily be the same as for other affiliated group
members.

An LLC which is disregarded for federal purposes, and whose
income and activities are included on the return of its owner,
for federal income tax purposes, will be treated similarly for
Florida Corporate Income Tax purposes. To the extent these
activities are reflected on the return of the owner, the
apportionment factors which relate to those activities should
also be included in the factors of the owner. The apportionment
factors relating to income which has been disregarded for
federal income tax purposes and which is not reflected on the
owner's federal income tax return may be excluded from the
factors which are included on the Florida corporate income tax
return.

As apportionment factors are part of the methodology used to
determine the extent of Florida activities, and subsequently,
the Florida share of federal income, this treatment should
generate a formula which fairly represents the appropriate
portion of Florida income and activities.

In this case, where the LLC will be treated as "A's" division
for income tax filing purposes, rather than as a separate
company, the same principal would apply. Therefore, the LLC's

income from sales to "A" should be included in the Florida sales
apportionment factor if the income is reported on the federal
and Florida income tax returns. Conversely, if the income from
the LLC's sales to "A" is not reported on the federal and
Florida income tax returns, it would not be required to be
included in the sales apportionment 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
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,

Suzanne C. Paul
Technical Assistance and
Dispute Resolution

SCP/
Control No.: 41078