Could a unitary business allocate Florida start-up expenses and use separate accounting instead of standard apportionment?

Plain-English summary

A nationwide business expected its new Florida operations to generate losses for several years. It asked to allocate Florida recruiting, payroll, stocking, utilities, and similar expenses to Florida as nonbusiness expenses and to use separate accounting or another alternative apportionment method.

Florida found the expenses and Florida operations unitary with the taxpayer's operations elsewhere. Because the expenses could be included in apportionable income without violating due process, they could not be separately allocated to Florida as nonbusiness expenses.

Florida also found that the standard property, payroll, and sales formula fairly reflected the taxpayer's Florida business activity. A comparison showing projected Florida losses under separate accounting did not establish that the statutory formula was unreasonable, arbitrary, grossly distorted, or out of proportion to Florida business. Alternative apportionment through separate accounting was denied.

What this means for you

Temporary losses in a new Florida operation do not by themselves justify separate accounting. A unitary taxpayer seeking alternative apportionment must establish the required distortion in the statutory formula, not merely show that geographic books produce a different result.

Common questions

Could the Florida expenses be treated as nonbusiness expenses? No. They were unitary business expenses that could be included in apportionable income.

Did projected Florida losses prove distortion? No. The ruling found that separate geographic accounting did not capture the contributions to income from the unitary business as a whole.

Was alternative apportionment allowed? No. The standard three-factor formula fairly represented the Florida tax base on the presented facts.

Citations and references

• Fla. Stat. § 220.03(1)(r) (nonbusiness income)
• Fla. Stat. § 220.15 (property, payroll, and sales apportionment)
• Fla. Stat. § 220.152 (alternative apportionment)
• Fla. Admin. Code rr. 12C-1.0152 and 12C-1.016 (alternative apportionment and nonbusiness income)
• Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983)
• Roger Dean Enterprises v. State, Department of Revenue, 387 So. 2d 358 (Fla. 1980)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06C1-006

Original ruling text

SUMMARY
QUESTION: May the Taxpayer treat certain expenses in Florida as nonbusiness income/expenses allocable to
Florida? May the Taxpayer use an alternative apportionment in Florida? If so, is separate accounting the appropriate
alternative apportionment?
ANSWER - Based of Facts Below: The expenses are unitary with the Taxpayer's business operations and can be
included in apportionable income without violating the Due Process Clause of the United States Constitution.
Therefore, the Taxpayer's expenses for its Florida operations cannot be allocated to Florida. The standard three factor
apportionment contained in s. 220.15, F.S., will fairly represent the extent of a taxpayer's tax base attributable to
Florida. The standard three factor apportionment does not operate unreasonably and arbitrarily. Nor does it apportion
to Florida a percentage of income which is out of all proportion to the business transacted in Florida. Therefore,
alternative apportionment in the form of separate accounting in Florida is not warranted and is not permitted.

August 9, 2006

Re: Technical Assistance Advisement 06C1-006
Corporate Income Tax - Alternative Apportionment, Nonbusiness Income
Sections 220.152 and 220.03(1)(r), F.S.
XXX hereinafter referred to as "Taxpayer"
Dear :
XXX letter dated XX, requests a Technical Assistance Advisement concerning whether the Taxpayer may use an
alternative apportionment factor for the XXX into Florida, and whether expenses related to the XXX in Florida will be
allowed as a nonbusiness expense deduction in computing its Florida corporate income tax liability. This response to
the request constitutes a Technical Assistance Advisement under Chapter 12-11, Florida Administrative Code, and is
issued under the authority of s. 213.22, Florida Statutes.
FACTS
The Taxpayer owns XXX throughout the United States. In XX, the Taxpayer XXX in Florida and anticipates XXX into
Florida in the XXX. Currently, the Taxpayer operates XXX in Florida.
The Taxpayer generates profits from its XXX operations throughout the United States.(FN 1) However, the Taxpayer
anticipates that for a period of approximately XX, it will not generate taxable income from its Florida XXX. The
Taxpayer indicates that this result is a function of mature XXX having an existing XXX and efficient operations that
generate income, while XXX take several years to develop their operations and XXX. The Taxpayer states that XXX
generate tax losses for at least several years. Therefore, the Taxpayer asserts that tax due to Florida under the

standard apportionment factor will not be related to the operations conducted within Florida.(FN 2)
The Taxpayer indicates that it could separately incorporate an entity to handle its Florida operations, which would
separate the income of its Florida operations from the income of its operations outside Florida. However, in an effort to
mitigate additional legal filings as well as to keep the corporate structure as lean as possible, the Taxpayer would
prefer to not separately incorporate a Florida entity. The Taxpayer would prefer to use separate accounting or an
alternative apportionment method to calculate its Florida income tax liability.
In addition, the Taxpayer indicates that it incurs expenses of approximately XXX to XXX. These XXX expenses
consist of recruiting, payroll, stocking, utilities, and other similar expenses. The Taxpayer indicates that these XXX
expenses are easily identifiable to each XXX. The Taxpayer is requesting that the XXX expenses related strictly to
Florida XXX be allowed as a nonbusiness expenses deduction in computing its Florida income tax liability.(FN 3)
For tax year one (presumed to be XX)(FN 4), the Taxpayer estimates that it will have the following factors using
standard apportionment:
Florida Payroll

XXX

Total Payroll

XXX

Florida Sales

XXX

Total Sales

XXX

Florida Property

XXX

Total Property XXX

Florida Payroll Factor XXX Florida Weighted Payroll Factor XXX
Florida Sales Factor

XXX Florida Weighted Sales Factor XXX

Florida Property Factor XXX Florida Weighted Property Factor XXX
XXX Florida Apportionment Factor

XXX

For tax year two (presumed to be XX), the Taxpayer estimates that it will have the following factors using standard
apportionment:
Florida Payroll

XXX

Total Payroll XXX

Florida Sales

XXX

Total Sales

Florida Property

XXX

Total Property XXX

XXX

Florida Payroll Factor XXX Florida Weighted Payroll Factor XXX
Florida Sales Factor

XXX Florida Weighted Sales Factor XXX

Florida Property Factor XXX Florida Weighted Property Factor XXX
XXX Florida Apportionment Factor XXX
For tax year three (presumed to be XX), the Taxpayer estimates that it will have the following factors using standard
apportionment:
Florida Payroll

XXX

Total Payroll

XXX

Florida Sales

XXX

Total Sales

XXX

Florida Property

XXX

Total Property

XXX

Florida Payroll Factor XXX Florida Weighted Payroll Factor XXX
Florida Sales Factor

XXX Florida Weighted Sales Factor XXX

Florida Property Factor XXX Florida Weighted Property Factor XXX
XX Florida Apportionment Factor XX
For tax year four (presumed to be XX), the Taxpayer estimates that it will have the following factors using standard
apportionment:
Florida Payroll

XXX

Total Payroll

XXX

Florida Sales

XXX

Total Sales

XXX

Florida Property

XXX

Total Property XXX

Florida Payroll Factor XXX Florida Weighted Payroll Factor XXX
Florida Sales Factor

XXX Florida Weighted Sales Factor XXX

Florida Property Factor XXX Florida Weighted Property Factor XXX
XX Florida Apportionment Factor

XX

For tax year five (presumed to be XX), the Taxpayer estimates that it will have the following factors using standard
apportionment:
Florida Payroll

XXX

Total Payroll XXX

Florida Sales

XXX

Total Sales

Florida Property

XXX

Total Property XXX

XXX

Florida Payroll Factor XXX Florida Weighted Payroll Factor XXX
Florida Sales Factor

XXX Florida Weighted Sales Factor XXX

Florida Property Factor XXX Florida Weighted Property Factor XXX
XX Florida Apportionment Factor

XX
QUESTIONS

May the Taxpayer treat the XXX expenses related to XXX Florida XXX as nonbusiness income/expenses allocable to
Florida?
May the Taxpayer use an alternative apportionment XXX in Florida? If so, is separate accounting the appropriate
alternative apportionment?

LAW
Section 220.02, F.S., states in part:
(1) 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 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.
...
(3) It is the intent of the Legislature that the income tax imposed by this code utilize, to the greatest extent possible,
concepts of law which have been developed in connection with the income tax laws of the United States, in order to:
(a) Minimize the expenses of the Department of Revenue and difficulties in administering this code;
(b) Minimize the costs and difficulties of taxpayer compliance; and
(c) Maximize, for both revenue and statistical purposes, the sharing of information between the state and the Federal
Government.
(4) It is the intent of the Legislature that the tax imposed by this code be prospective in effect only. Consistent with this
intention and the intent expressed in subsection (3), it is hereby declared to be the intent of the Legislature that:
(a) "Income," for purposes of this code, including gains from the sale, exchange, or other disposition of property, be
deemed to be created for Florida income tax purposes at such time as such income is realized for federal income tax
purposes;
(b) No accretion of value, no accrual of gain, and no acquisition of a right to receive or accrue income which has
occurred or been generated prior to November 2, 1971, be deemed to be "property," or an interest in property, for any
purpose under this code; and
(c) All income realized for federal income tax purposes after November 2, 1971, be subject to taxation in full by this

state and be taxed in the manner and to the extent provided in this code.
...
Section 220.03(1)(r), F.S., states:
"Nonbusiness income" means rents and royalties from real or tangible personal property, capital gains, interest,
dividends, and patent and copyright royalties, to the extent that they do not arise from transactions and activities in the
regular course of the taxpayer's trade or business. The term "nonbusiness income" does not include income from
tangible and intangible property if the acquisition, management, and disposition of the property constitute integral
parts of the taxpayer's regular trade or business operations, or any amounts which could be included in
apportionable income without violating the due process clause of the United States Constitution. For purposes
of this definition, "income" means gross receipts less all expenses directly or indirectly attributable thereto.
Functionally related dividends are presumed to be business income. (Emphasis Supplied)
Section 220.11, F.S., states in part:
(1) A tax measured by net income is hereby imposed on every taxpayer for each taxable year commencing on or after
January 1, 1972, and for each taxable year which begins before and ends after January 1, 1972, for the privilege of
conducting business, earning or receiving income in this state, or being a resident or citizen of this state. Such tax
shall be in addition to all other occupation, excise, privilege, and property taxes imposed by this state or by any
political subdivision thereof, including any municipality or other district, jurisdiction, or authority of this state.
...
Section 220.15, F.S., states:
(1) Except as provided in ss. 220.151 and 220.152, 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....
(2) The property factor is a fraction the numerator of which is the average value of the taxpayer's real and tangible
personal property owned or rented and used in this state during the taxable year or period and the denominator of
which is the average value of such property owned or rented and used everywhere.
(a) Real and tangible personal property owned by the taxpayer shall be valued at original cost. Real and tangible
personal property rented by the taxpayer shall be valued at 8 times the net annual rental rate paid by the taxpayer
less any annual rental rate received from subrentals.
(b) The average value of real and tangible personal property shall be determined by averaging the value at the
beginning and the end of the taxable year or period, unless the department determines that an averaging of monthly
values during the taxable year or period is reasonably required to reflect properly the average value of the taxpayer's
real and tangible personal property.

...
(4) The payroll factor is a fraction the numerator of which is the total amount paid in this state during the taxable year
or period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere
during the taxable year or period.
...
(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....
(7) The term "everywhere," as used in the computation of apportionment factor denominators under this section,
means "in all states of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or
possession of the United States, and any foreign country, or any political subdivision of the foregoing."
... (Emphasis Supplied)
Section 220.152, F.S., states:
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
(4) The employment of any other method which will produce an equitable apportionment.
Rule 12C-1.015(3), F.A.C., states:
(3) General Method.
(a) All corporations doing business within and without Florida, except insurance companies, transportation services,
and taxpayers who have been given prior permission to use an alternate method of apportioning income, are required
by s. 220.15, F.S., to apportion their business income to Florida based upon a three factor formula. Business income
is adjusted federal income.
(b) The three factor formula measures Florida's share of adjusted federal income by ratios of the taxpayer's property,
payroll, and sales in Florida to total property, payroll, and sales located or occurring everywhere....

Rule 12C-1.015(11), F.S., states:
If it appears to the Executive Director, or the Executive Director's designee, that any agreement, understanding, or
arrangement exists between any taxpayers, or between any taxpayer and any other person, which causes any
taxpayer's income subject to tax to be reflected improperly, or inaccurately, the Executive Director, or the Executive
Director's designee, is authorized to adjust the sales, property, and payroll factors to properly reflect the net income of
such taxpayer.
Rule 12C-1.0152, F.A.C., states:
(1)(a) A departure from the applicable method of apportionment required under the provisions of ss. 220.15 or
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 12C-1.0511, 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 this state.
(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 shall 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 s. 213.22, F.S., and Department of Revenue Rule Chapter 12-11,
F.A.C.; or, a petition for a declaratory statement under s. 120.565, F.S.
(a) The taxpayer shall 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. (Emphasis Supplied)
Rule 12C-1.016, F.A.C., states in part:
(1) "Nonbusiness income" means all income other than business income. For a determination of nonbusiness income,
see s. 220.03(1)(r), F.S.
(a) The classification of income by the labels occasionally used, such as manufacturing income, compensation for
services, sales income, interest, dividends, rents, royalties, gains, operating income, nonprotein income, etc., is of no
import in determining whether income is business or nonbusiness income. Income of any type or class and from any
source is business income if it arises from transactions and activity occurring in the regular course of a trade or
business. Accordingly, the critical element in determining whether income is "business income" or "nonbusiness
income" is the identification of the transactions and activity which are the elements of a particular trade or business.
In general, all transactions and activities of the taxpayer which are dependent upon or contribute to the
operations of the taxpayer's economic enterprise as a whole constitute the taxpayer's trade or business and
will be transactions and activity arising in the regular course of, and will constitute integral parts of, a trade or
business.
...
(2) Nonbusiness income is not subject to apportionment, but is allocated as provided in s. 220.16, F.S. (Emphasis
Supplied)
DISCUSSION
Nonbusiness Income
Section 220.03(1)(r), F.S., defines "nonbusiness income" as "rents and royalties from real or tangible personal
property, capital gains, interest, dividends, and patent and copyright royalties, to the extent that they do not arise from
transactions and activities in the regular course of the taxpayer's trade or business. The term "nonbusiness income"
does not include income from tangible and intangible property if the acquisition, management, and disposition of the
property constitute integral parts of the taxpayer's regular trade or business operations, or any amounts which could
be included in apportionable income without violating the due process of the United States Constitution."
(Emphasis Supplied)
The emphasized language is part of a 1984 amendment to the nonbusiness income definition enacted by the Florida
Legislature after the Florida Supreme Court decision in Brunner Enterprises, Inc. v. Department of Revenue, 452
So.2d 550, at 553 (Fla., 1984). With the passage of the amendment, only such amounts of income are considered

nonbusiness income where to apportion such amounts under a formula mechanism would constitute a violation of the
Due Process Clause of the United States Constitution. See Section 11, Chapter 84-549, Laws of Florida, effective for
taxable years beginning on or after September 1, 1984. The 1984 amendment represents language added to the term
"nonbusiness income" immediately after and in response to the Florida Supreme Court decision in Brunner
Enterprises ("Thus, we hold that out-of-state investment income earned by a foreign corporation doing business in
Florida is only taxable under the Florida Corporate Income Tax Code if the Florida enterprise is part of a unitary
business"). Accordingly, since at least 1984, the Florida Department of Revenue has recognized that "the linchpin of
apportionability in the field of state income taxation is the unitary business principle." See also Mobil Oil Corporation v.
Commissioner of Taxes of Vermont, 445 U.S. 425, at 439 (1980).
The Unitary Business Principle is the U.S. Constitutionally accepted principle and method for determining the income
and activities which are to be apportioned under a single formula. The indicia of a unitary business are functional
integration, centralization of management, and economies of scale. See Container Corp. of America v. Franchise Tax
Board, 463 U.S. 159, at 179 (1983), and Allied-Signal, Inc. v. Director, Division of Taxation, 504 U.S. 768, at 783
(1992). These factors or contributions of profitability have been described where functional integration is where
various part of business supply each other with goods or services, centralization of management is where a single
team directs activities or when managers rotate among business operations, and economies of scale is where costs
are trimmed by coordinating similar operations. See P. Hartman, Federal Limitations on State and Local Taxation 598599 (Supp. 1995).
In this case, the Taxpayer makes no arguments or assertions to indicate that the XXX expenses of its Florida XXX will
be anything other than unitary business expenses. The Taxpayer does not address the indicia of a unitary business
(functional integration, centralization of management, or economies of scale); nor does the Taxpayer provide any
arguments that the XXX expenses cannot be included in apportionable income without violating the Due Process
Clause. Based on the facts of the Taxpayer's situation, the Taxpayer's Florida operations, including the XXX
expenses, are unitary with its operations outside Florida. Since the Taxpayer's operations as a whole and its Florida
XXX expenses are unitary, the Florida XXX expenses can be apportioned under Florida and Federal Law without
violating the Due Process Clause of the United States Constitution and therefore, cannot be subtracted as
nonbusiness income/expenses in Florida.
Alternative Apportionment
The Taxpayer is requesting the use of an alternative apportionment factor for Florida because it believes that the
standard three factor apportionment methodology will tax income that is not being generated in Florida. The Taxpayer
is XXX into Florida and believes that its XXX in Florida will not be profitable for several years.(FN 5) The Taxpayer's
operations in Florida are very similar, if not identical, to its operations outside Florida. The Taxpayers Florida
operations are unitary with its operations outside Florida.
Per s. 220.15, F.S., the Florida apportionment factor is based upon the activities of the Taxpayer. In the facts
provided, the Taxpayer has only one activity, its XXX operations. The standard three factor apportionment provides
Florida with a part of the income from the Taxpayer's XXX operations, as a whole, based on the Taxpayer's:

1. sales in Florida (sales from the Taxpayer's XXX operations in Florida) over its sales everywhere;

2. payroll in Florida (payroll, which allows the Taxpayer to operate its XXX in Florida) over its payroll everywhere; and
3. property in Florida (generally value of the buildings and property of the Taxpayer's XXX located in Florida) over its
   property everywhere.
   Under the standard apportionment factor, Florida is receiving a share of the income from the Taxpayer's operation of
   its XXX, as a whole. The Florida apportionment formula is substantially patterned after the UDITPA apportionment
   provisions. The U.S. Supreme Court has indicated its approval of the "three-factor apportionment formula" stating that
   this apportionment formula has met its approval and has become "something of a benchmark against which other
   apportionment formulas are judged." See Moorman Mfg. Co. v. Bair, 437 U.S. 267, 282 (1978).
   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 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.
   In Moorman Manufacturing, the U.S. Supreme Court stated:
   ... [the] claim that the Constitution invalidates an apportionment formula whenever it may result in taxation of some
   income that did not have its source in the taxing state is incorrect.
   437 U.S. at 272.
   We also note that the U.S. Supreme Court in Wisconsin v. J.C. Penny Co., 311 U.S. 435, 444 (1940) stated:
   A State is free to pursue its own fiscal policies, unencumbered by the Constitution, if by the practical operation of a tax
   the State has exerted its power in relation to the opportunities which it has given, to protection which it has afforded, to
   benefits which it has conferred by the fact of being an orderly, civilized society.
   The Department has only allowed alternative apportionment on a few occasions, and in each of those instances, the
   facts and circumstances of the Taxpayer were very unique. In contrast, the facts provided by the Taxpayer in this
   request appear to be very common, as such a situation would probably occur every time an entity XXX into Florida, or
   XXX into new areas of Florida. The situation expressed by the Taxpayer might even occur with a substantial
   revamping of Florida operations with XXX, XXX, or XXX. Since the situation expressed by the Taxpayer is very
   common and is not unique, alternative apportionment does not seem appropriate from the outset.
   The Taxpayer asserts that this standard apportionment will provide Florida with more income than it is constitutionally
   allowed to tax because the standard apportionment factor will provide Florida with income when the Taxpayer's

activities in Florida will probably not earn any income for five tax years under a separate accounting determination.
We are aware that the U.S. Supreme Court has set certain standards for apportioning income under the Due Process
and Commerce Clause provisions of the U.S. Constitution. The U.S. Supreme Court stated; "The second and more
difficult requirement is what might be called external consistency—the factor or factors must actually reflect a
reasonable sense of how income is generated." See Container Corp. of America v. Franchise Tax Board, 463 U.S.
159, 169 (1983). It should be pointed out that in Container it was argued by the taxpayer that the lower costs of
production attributed to certain foreign subsidiaries resulted in the greater profitability of foreign subsidiaries being
assigned to California. The Container Court rejected this argument
stating that California payroll and other California factors, although not reflected in taxpayer's accounting, contribute to
the same production.
The taxpayer attempts to justify the need for separate accounting by comparing the estimated net incomes or taxable
incomes from its Florida operations on a separate accounting basis with the estimated apportioned net income or
taxable income from all of the Taxpayer's operations using the standard Florida apportionment factor. Accordingly, the
taxpayer argues that separate accounting is constitutionally required. When a taxpayer made a similar argument
before the U.S. Supreme Court, the Court in Container Corp., supra, stated:
[A]ppellant argues that its foreign subsidiaries are significantly more profitable than it is, and that the three-factor
formula, by ignoring that fact and relying instead on indirect measures of income such as payroll, property, and sales,
systematically distorts the true allocation of income between appellant and the subsidiaries. The problem with this
argument is obvious: the profit figures relied on by appellant are based on precisely the sort of formal geographical
accounting whose basic theoretical weaknesses justify resort to formula apportionment in the first place....
[S]eparate [geographical] accounting, while it purports to isolate portions of income received in various States, may
fail to account for contributions to income resulting from functional integration, centralization of management, and
economies of scale. Because these factors of profitability arise from the operation of the business as a whole, it
becomes misleading to characterize the income of the business as having a single identifiable 'source.' Although
separate geographical accounting may be useful for internal auditing, for purposes of state taxation it is not
constitutionally required.
The Container Court continued its analysis with regard to separate accounting and the three-factor formula, and
stated in part:
Both geographical accounting and formula apportionment are imperfect proxies of an ideal which is not only difficult to
achieve in practice, but also difficult to describe in theory. Some methods of formula apportionment are particularly
problematic because they focus on only a small part of the spectrum of activities by which value is generated.
Although we have generally upheld the use of such formulas, see, Moorman Mfg. Co.; Underwood Typewriter Co.,
supra, we have on occasion found the distortive effect of focusing on only one factor so outrageous in a particular
case as to require reversal. In Hans Rees' Sons, Inc. v. North Carolina ex rel Maxwell, 283 U.S. 123 (1931), for
example, an apportionment method based entirely on ownership of tangible personal property resulted in an

attribution to North Carolina of between 66% and 85% of the taxpayer's income over the course of a number of years,
while a separate accounting analysis purposely skewed to resolve all doubts in favor of the State resulted in an
attribution of no more than 21.7%. We struck down the application of the one-factor formula to that particular
business, holding that method, "albeit fair on its face, operates so as to reach profits which are no just sense
attributable to transactions within its jurisdiction." Id., at 134.
The three-factor formula used by California has gained wide approval precisely because payroll, property, and sales
appear in combination to reflect a very large share of the activities by which value is generated. It is therefore able to
avoid the sorts of distortions that were present in Hans Rees’ Sons, Inc.
Accordingly, we conclude that the Florida's standard "three-factor apportionment formula' (the U.S. Supreme Court's
benchmark formula), for apportioning the income of a unitary business would stand constitutional muster. See also
Colgate-Palmolive Company, Inc. and Subsidiaries v. Glen L. Bower, Director, Illinois Department of Revenue, Case
No: 01-L-50195 (Ill. Circuit Court, October 15, 2002).
The Taxpayer also cites Rule 12C-1.0152, F.A.C., which provides for an adjustment to the apportionment formula if
the standard formula leads to a grossly distorted result. This rule requires 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. However, as noted above, this is very rare and is very difficult to
establish.
It is our position that the net income, or taxable income analysis, of the taxpayer for its estimated Florida income is
flawed. Even if such computations were correct under a separate accounting approach, such separate accounting
does not consider the many subtle transfers of value which exist throughout the entire domain of a unitary business.
These subtle values can only be quantified with any degree of accuracy through the use of formulary apportionment,
and even that methodology is a rough estimate of the income earned within the state jurisdiction. See Allied-Signal,
Inc. v. Director, Division of Taxation, supra, wherein the Court citing Adams Express Co. v. Ohio State Auditor, 165
U.S. 194, 220-221 (1897), held; "The Court [Adams Express] held that, consistent with the Due Process Clause, a
State could base its tax assessments upon 'the proportionate part of the value resulting from the combination of the
means by which the business was carried on, a value existing to an appreciable extent throughout the entire domain
of operation.'" (Emphasis supplied)
In regards to the use of separate accounting to invalidate a three factor apportionment factor consisting of property,
payroll, and sales, Hellerstein at section 8.15[1], states in part:
After considering the Court's decisions in Exxon, Container, and Trinova, only the most sanguine taxpayer would
harbor the hope that the Supreme Court may still be moved by separate accounting evidence to invalidate the
application of a three-factor formula to the income (or other tax base) of a unitary business. The deference the Court
has displayed toward state apportionment formulas in general, and towards the three-factor formula in particular, is
likely to overcome any separate accounting demonstration that a taxpayer is capable of making.

Again, we conclude that the Florida's standard "three-factor apportionment formula" (the U.S. Supreme Court's
benchmark formula), for apportioning the income of a unitary business would stand constitutional muster. See also
Colgate-Palmolive. We also conclude that the standard three factor apportionment formula accurately and fairly
reflects the Taxpayer's business activity in Florida and it does not produce a grossly distorted result.
CONCLUSION
Based upon the discussion above, the standard three factor apportionment contained in s. 220.15, F.S., will fairly
represent the extent of a taxpayer's tax base attributable to Florida during the Taxpayer's XXX of operations in Florida.
The standard three factor apportionment does not operate unreasonably and arbitrarily. Nor does it apportion to
Florida a percentage of income which is out of all proportion to the business transacted in Florida. Therefore,
alternative apportionment in the form of separate accounting for the XXX in Florida is not warranted and is not
permitted.
The XXX expenses are unitary with the Taxpayer's business operations and can be included in apportionable income
without violating the Due Process Clause of the United States Constitution. Therefore, the Taxpayer's XXX expenses
for its Florida XXX cannot be allocated to 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 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,
Robert DuCasse
Technical Assistance and Dispute Resolution
RCD/
Record ID: 21421

FOOTNOTE 1. Although the Taxpayer has not stated that it expects to have an overall positive income from all of its

operations for the XXX, we presume that to be the case. We subsequently confirmed this fact with the Taxpayer.
FOOTNOTE 2. The Taxpayer verbally stated that it was granted similar treatment for its XXX other states.
FOOTNOTE 3. XXX expenses related to XXX outside Florida would not be treated as nonbusiness expenses and
would not be removed from the income calculation for Florida.
FOOTNOTE 4.Taxpayer verbally indicated that its tax year end is the XXX of each year. Therefore, year one covers
the period from about XXX to XXX.
FOOTNOTE 5. The Taxpayer indicates that even in later years, its Florida apportionment factor will be overstated
because the property factor is based on the cost of the property. Since Florida realty is very expensive and since it
was one of the XXX, its cost compared to the cost of XXX is very high.