Were federally insured student-loan notes held by a private program administrator immune or exempt from Florida intangible tax?

Plain-English summary

The student-loan receivables were subject to Florida intangible tax. Participation in the federally created, regulated, and insured FFEL program did not make the private corporation a federal agency or instrumentality. The loans were funded privately, and neither the loans nor the receivables were directly issued or owned by the federal government.

The accounts-receivable exemption also failed. Each receivable was supported by a note that the Department treated as negotiable, even though federal law strictly limited permitted assignments and transferring a loan to an ineligible lender could end federal insurance protection.

What this means for you

Federal regulation, insurance, and program participation did not create tax immunity for this private entity. The ruling distinguished direct federal obligations from private notes connected to a federal program and treated note support as disqualifying for the ordinary accounts-receivable exemption.

Common questions

Q: Did federal loan insurance make the administrator tax immune? No.

Q: Were the notes direct obligations of the United States? No. The private lender used its own funds, while the federal government insured against default.

Q: Did strict assignment restrictions make the notes nonnegotiable? No. The Department still treated the notes as negotiable and denied the accounts-receivable exemption.

Citations and references

• Fla. Stat. § 199.052(1) — intangible-tax return filing
• Fla. Stat. §§ 199.023(13)-(14) — ministerial functions and processing activities
• Fla. Stat. § 199.185(1)(d) and (l) — federal obligations and accounts-receivable exemptions
• Fla. Admin. Code r. 12C-2.0062(5) — servicing agreements
• 20 U.S.C. § 1076; 34 C.F.R. §§ 682.100(a), 682.401(17) — FFEL funding and assignment rules
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02C2-007

Original ruling text

SUMMARY

QUESTION: Will the corporation have tax immunity as a
result of the federal student loan program or will the
receivables be considered accounts receivable for an
exemption from tax?

ANSWER - Based on Facts Below. No,the private entity does
not have tax immunity as a result of the Florida student
loan program nor are the receivables considered accounts
receivable and are not exempt tax.

Sep 25, 2002

Re: Technical Assistance Advisement No. 02C2-007
Intangible Tax-Federal Student Loan Program
Sections 199.052(1), 199.023(13), 199.023(14),
199.185(1)(d) and (1)(1), F.S.,
Rule 12C-2.0062(5), F.A.C.
XXX (hereinafter Taxpayer)

Dear :

Your letter requesting a Technical Assistance Advisement
has been referred to this office for response. The specific
scenario for which advice has been requested is summarized
below.

Facts as Presented by Petitioner

The Taxpayer is organized under the laws of a state other
than Florida. It administers a federally created, regulated and
insured federal student loan program. In order to participate
in the program as an administering agent and in accordance with
requirements of federal law, the Taxpayer services federal
student loans through a trust agreement with an out-of-state
bank. The Taxpayer's involvement is directly through the
Federal Family Education Loan ("FFEL") Program, enacted by the

U.S. Congress, and authorized by the U.S., Department of
Education under the Federal Higher Education Act of 1965, as
amended ("Act").

Federal Family Education Loan Program

The FFEL program, created by the U.S. Congress, was
developed to encourage lenders to act as program administering
agents and to make federal loans to vocational, undergraduate,
and graduate students enrolled at eligible postsecondary
institutions.

The material aspects of the FFEL program are regulated by
the federal government. The U.S. Department of Education is
responsible for the FFEL Program under Title IV of the Federal
Higher Education Act of 1965, as amended. An institution that
does not fall within the Act's definition of "eligible lender"
must operate this program only through a trust or similar
arrangement with an eligible lender. The Taxpayer has a trust
agreement with a state-regulated bank, which qualifies as an
eligible lender under the Act.

The types of student loans under the FFEL Program which the
Taxpayer is currently authorized to make are Stafford loans,
Parent Loans to undergraduate Students ("PLUS") and federal
consolidation loans. The PLUS loans are made to parents of
dependents students. The consolidation loan program allows
multiple FFEL, Federal Direct Student Loans and other federal
student loan programs to be combined into one single aggregate
federal insured student loan with an extended repayment term.
The FFEL Program involves strict requirements and eligibility
for both the administering agents and the borrowing
participants. An institution must be a two or four-year
college/university or proprietary school. Among other criteria,
the school's eligibility is regulated by the default rate on
guaranteed loan to its students. The Act restricts eligible
administering lenders in who it may or may not deny
participation to, defined by school type, geographic location or
default experience.

The application and eligibility process for participation

by a student or school is strictly controlled by the federal
government, including the application information, to whom the
application is to be sent, the manner and process of review,
approval or disapproval, the loan amount, payment terms and
conditions. By requirement of the program, approved loans are
disbursed by the Taxpayer directly to the institution. The
student receives only a disclosure statement.

Collection of FFEL Program Loans and Guaranty Agencies

The student loans in this program are substantially
guaranteed as to principal and interest by certain authorized
state or non-profit guaranty agencies, which are directly
reinsured by the federal government. There are federal
requirements which must be met in order to maintain guaranteed
coverage.

In October 1998 the Act was reauthorized to included new
and more stringent requirements for determining when a FFEL
Program loan is considered to be in default. Under the
reauthorized Act, loans which are 270 days past due are
considered to be in default. The delinquency claims must then be
filed with the guarantor no later than the 360th day of
delinquency or loss of guarantee could occur. The guarantors in
the program have the backing of the full faith and credit of the
federal government. If a guarantor's administrative or
financial condition falls below specified levels or the Federal
Secretary of Education concludes that the Department of
Education is in danger of financial collapse, the Secretary is
allowed to take actions to assure the continued payment of
claims, including the transfer of guarantees to another agency
or paying claims directly to lenders. The lenders in this
program do not pursue FFEL Program borrowers in federal or state
courts due to the requirement that defaulted loans be presented
to the applicable guaranty agency, which then collects on behalf
of the federal Department of Education or directly subrogates
the claim to the Department of Education.

Mandated Quality and Regulatory Reviews

The Taxpayer is required to implement policies and

procedures to monitor and review ongoing processes that have and
impact on the loans in order to maintain compliance
accountability with the Federal Department of Education's
restrictions, regulations and reporting requirements.

Subject Federal Student Loan Portfolio

The portfolio is comprised primarily of receivables in the
form of loans originated through the FFEL Program. The Taxpayer
also administers a portfolio of Health Professions Education
loans ("HEAL"), which consists of guaranteed student loans in
designated health professions under a federally insured loan
program administered by the U.S. Department of Health and Human
Services. These loans are subject to federal government review
in the same way as the FFEL Program.

Request for Advisement

Did the Florida legislature intend to tax or exempt, under
Chapter 199, Florida Statutes, certain intangibles directly
resulting from a U.S. Government enacted, regulated, enforced,
insured, and maintained, federal student loan program? Are the
loans exempt receivables under Florida Statutes?

Does the "Supremacy Clause" of the U.S. Constitution and
well established principals of intergovernmental immunity
prohibit the state of Florida from taxing student loan
receivables arising directly out of a U.S. Government enacted,
regulated, enforced, insured and maintained, federal student
loan program, when that program is administered by a third party
contractor acting as a direct agent of the U.S. Government?

Provisions of Law and Discussion

Section 199.052(1), F.S., provides:

An annual intangible tax return must be filed with the
department by every corporation authorized to do business
in this state or doing business in this state and by every
person, regardless of domicile, who on January 1 owns,
controls, or manages intangible personal property which has

a taxable situs in this state. For purposes of this
chapter, "control" or "manage" does not include any
ministerial function or any processing activity. The
return shall be due on June 30 of each year. It shall list
separately the character, description, and just valuation
of all such property.

Section 199.023(13), F.S., states:

"Ministerial function" means an act the performance of
which does not involve the use of discretion or judgment.

Section 199.023(14), F.S., provides:

"Processing activity" means an activity undertaken to
administer or service intangible personal property in
accordance with such terms, guidelines, criteria, or
directions as are provided solely by the owner of the
property. Methods, systems, or techniques chosen by the
processor to implement such terms, guideline, criteria, or
direction are not considered the exercise of management or
control.

Regarding Servicing agreements, Rule 12C-2.0062(5), F.A.C.,
provides:

Servicing agreements. A servicing agreement, whereby the
servicing agent performs ministerial functions or
processing activities regarding intangible personal
property, does not confer management or control over the
intangible personal property on the servicing agent.

Section 199.185(1)(d), F.S., also exempts from intangible
personal property tax notes, bonds and other obligations issued
by the U.S. Government and its agencies.

Regarding property exempt from annual and nonrecurring tax,
s. 199.185(1)(l), F.S., provides:

All accounts receivable arising or acquired in the ordinary
course of a trade or business which are owned, controlled,

or managed by a taxpayer. This exemption does not apply to
accounts receivable that arise outside the taxpayer's
ordinary course of trade or business. The purposes of this
chapter, the term "accounts receivable" means a business
debt that is owned by another to the taxpayer or the
taxpayer's assignee in the ordinary course of trade or
business and is not supported by negotiable instruments.
Accounts receivable include, but are not limited to, credit
card receivables, charge card receivables, credit
receivables, margin receivables, inventory or other floor
plan financing, lease payments past due, conditional sales
contracts, retail installment sales agreements, financing
lease contracts, and a claim against a debtor usually
arising from sales or services rendered and which is not
necessarily due or past due. The examples specified in
this paragraph shall be deemed not to be supported by
negotiable instruments. The term "negotiable instrument"
means a written document that is legally capable of being
transferred by endorsement or delivery. The term
"endorsement" means the act of a payee or holder in writing
his or her name on the back of an instrument without
further qualifying words other than "pay to the order of"
or "pay to" whereby the property is assigned and
transferred to another.

The receivables generated as a result of the Taxpayer's
involvement in the loan program are supported by a note. The
transfer of such note is subject to strict restrictions of the
federal government under the Act. 34CFR 682.401(17), which
states the terms of assignment of the loans, provides that the
guaranty agency must allow a loan to be assigned only if the
loan is fully disbursed and then is assigned to an eligible
lender, a guaranty agency, an educational institution, a federal
or state agency or an organization or corporation acting on
behalf of such an agency, or the secretary. The loans or loan
portfolio may be transferred to a non-eligible lender but will
lose its insurance protection under the program upon such
transfer.

The United States Code 20 USC s. 1076, indicates that loans
may be issued directly from funds fully owned by the eligible

lender or from funds held by the lender in a trust. 34CFR
682.100(a) provides that the four programs, collectively
referred to in the regulations as "the Federal Family Education
Loan, FFEL programs", which are programs the taxpayer
administers, are programs in which the lender uses their own
funds to make loans to enable a student or his or her parents to
pay the cost of the student's attendance in a postsecondary
school. The federal government insures against default on
repayment of the loans to the eligible lender.

Position of the Department

Section 199.185(1)(d), F.S., provides that intangible
personal property that is directly issued by the U.S. Government
is exempt from the Florida intangible tax. Therefore, notes
receivable or other receivables arising from loans directly
issued by the U.S. Government would not be subject to tax.

One question to be answered here is whether the Taxpayer is
an instrumentality or agency of the federal government.

Although the program is a government sponsored program, the
Taxpayer was formed and created as a private corporation. The
Taxpayer, as a private corporation is not a tax immune body and
would not be entitled to the tax exemption granted to the
federal government and its agencies. While the federal
government insures the loans, the loans are issued from the
private funds of the Taxpayer. The receivables created as a
result of the loans are backed by a note. The note is
negotiable, although several restrictions apply to the manner in
which the transfer is made. Since the receivables are backed by
notes, the receivables do not qualify as accounts receivables
for an exemption under s. 199.185(1)(l), F.S.

Additionally, the note can be transferred to non-eligible
lenders outside the program. Neither the loans nor the
receivables are directly issued or owned by the federal
government and, therefore, intangible personal property tax
would apply to the receivables.

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 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,

Celestine Grantham
Senior Tax Specialist
Technical Assistance and Dispute Resolution
Office of General Counsel

CG/mh