Could a multistate company use one cost-of-performance method to source its service and software receipts for Florida's corporate income tax sales factor?

Plain-English summary

A national company earned several kinds of service and software revenue from activities performed inside and outside Florida. It proposed using a cost-of-performance method to apportion its sales.

Florida rejected that across-the-board approach. The sales-factor rules focus on each separate item of income and the activity that produced it. Operations performed by the company in Florida, other services actually conducted in Florida, and related ancillary receipts were attributable to Florida under the applicable activity rules.

Software licensing had its own rule: license fees were Florida sales to the extent the software was used in Florida. The advisement also warned that apportionment is fact-intensive and that changing business facts could change the result.

What this means for you

Do not assume every service receipt follows a single sourcing formula. Break revenue into its actual income-producing activities, then apply the specific Florida rule for services, other receipts, or software licensing.

Common questions

Could the taxpayer use its proposed cost-of-performance method? No.

How were software-license fees sourced? To Florida to the extent the software was used in Florida.

Were activities physically performed in Florida included? Yes, when they produced the relevant receipts.

Citations and references

• Fla. Stat. § 220.15(5) (sales-factor apportionment)
• Fla. Admin. Code r. 12C-1.0155(2)(e), (h), and (l) (services, software, and other sales)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08C1-002

Original ruling text

SUMMARY
QUESTION: How should the taxpayer compute the sales factor in apportioning income from
multiple revenue sources?
ANSWER: The taxpayer is required to apportion its income based upon where the income
producing activity occurs. The taxpayer may not use the cost of performance method to
apportion its income.
March 27, 2008

RE:

Technical Assistance Advisement 08C1-002
Corporate Income Tax – Sales Factor
Section 220.15, Florida Statutes (F.S.)
Rule 12C-1.0155, Florida Administrative Code (F.A.C.)
XXX (“Taxpayer”)

Dear :
Your letter of XXX, requests advice concerning the method of calculating the Florida numerator
of the Taxpayer’s sales factor for 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 authority of § 213.22, Florida Statutes.
FACTS SUPPLIED BY THE TAXPAYER
The Taxpayer is a corporation headquartered outside Florida. It is a XXX company that
specializes in XXX. XXX includes XXX, XXX, XXX, XXX, and XXX. It is a national
company with facilities across the nation serving over XXX major retailers, wholesalers, and
manufacturers. Taxpayer represents that it is not under audit by the Department of Revenue, and
that the issues addressed in the requested Technical Assistance Advisement are not the subject of
ongoing litigation.
The Taxpayer contracts to perform XXX (XXX) for a XXX (XXX), XXX. In addition, the
Taxpayer provides XXX at the customer’s request, which may include the XXX. There are two
basic contract agreements: (1) XXX agreement; and (2) XXX agreement. The following XXX
services are provided by the Taxpayer:
1.
2.
3.
4.

XXX;
XXX;
XXX;
XXX.

Technical Assistance Advisement 08C1-002
Page 2
Only the XXX services are performed in Florida. The XXX service is performed outside
Florida, and no XXX or XXX services are performed in Florida. The XXX, XXX and XXX
services are provided to the customers that may use the Florida facilities.
The following is a summary of the two basic contract agreements, their payment terms, and the
Taxpayer’s position on its income producing activities as they relate to the contract services.
XXX
Under the XXX agreement, the customer contracts with the Taxpayer or its subsidiaries to
establish and operate a XXX and XXX. The XXX agreement designates the XXX and may
provide for XXX. The XXX agreement also XXX may be XXX the XXX. The Taxpayer is not
responsible for XXX from XXX or XXX for the XXX.
The customer XXX to one of the XXX on XXX or by XXX. The XXX of XXX is not
dependent upon the XXX to a XXX. Because the Taxpayer is XXX, XXX will occur XXX. The
XXX of these XXX by customer and XXX.
The Taxpayer operates a XXX in Florida, where it XXX for the XXX. The XXX serves the
XXX. When XXX are received at a XXX, the XXX employees. XXX. For example, a
customer may XXX. XXX.
XXX
Under a XXX agreement, the Taxpayer provides XXX. A written agreement provides the
specific terms, but the XXX and the XXX, XXX. The Taxpayer may also XXX, and it may
provide other services such as XXX, XXX, XXX, and XXX with respect to XXX and XXX.
The customer engages the Taxpayer to XXX. XXX at the XXX, the XXX.
The XXX, regardless of XXX, is XXX to XXX. XXX are then created in XXX and sent by the
Taxpayer to XXX to support XXX. In accordance with XXX, XXX the XXX and are sent to the
XXX. The XXX, XXX, or XXX is XXX the XXX and XXX. Some XXX from the XXX, while
other XXX.
Payment terms
Under the terms of these contracts, the Taxpayer provides a XXX. The Taxpayer is paid XXX.
For internal reporting purposes, the Taxpayer XXX. The XXX.
The XXX is merely a XXX used to determine the XXX. This XXX includes the XXX (XXX),
XXX (XXX), and XXX. The XXX and XXX are included in the XXX and are not XXX. The
XXX is determined XXX when the terms of the contract require XXX in Florida. The XXX
under such contract is XXX. The Taxpayer maintains a XXX that allows customers to XXX.

Technical Assistance Advisement 08C1-002
Page 3
TAXPAYER’S POSITION
The Taxpayer contends that the cost of performance method should be utilized in apportioning
its sales to Florida.
LEGAL AUTHORITY
Section 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(2)(e), F.A.C., states:
(e) Personal Services

1. Gross receipts for the performance of personal services are attributable to this
   state if such services are performed in this state.
   2.a. If services relating to a single item of income are performed partly within and
   partly without this state, the gross receipts for the performance of such services
   shall be attributable to this state only if a greater portion of the services were
   performed in this state, based on costs of performance.
   b. The term “costs of performance” means direct costs determined in a manner
   consistent with generally accepted accounting principles and in accordance with
   accepted conditions or practices in the taxpayer’s trade or business. Where
   independent contractors are used to complete a contract, the term “costs of
   performance” will include amounts paid to the independent contractors.
2. Where services are performed partly within and partly without this state, the
   services performed in each state may constitute a separate income producing
   activity, even though the client is billed a lump sum amount. In such cases, the
   gross receipts for the performance of services attributable to this state shall be
   measured by the ratio which the time spent in performing such services in this
   state bears to the total time spent in performing such services everywhere. Time
   spent in performing services includes the amount of time expended in the
   performance of a contract or other obligation which gives rise to such gross
   receipts. Personal services not directly connected with the performance of the
   contract or other obligation, as for example, time expended in negotiating the
   contract, are excluded from the computations.

Technical Assistance Advisement 08C1-002
Page 4
Rule 12C-1.0155(2)(h), F.A.C., entitled “Computer related sales,” provides in part:

1. Hardware delivered in Florida constitutes Florida sales.
2. Canned software programs are Florida sales if delivered to a customer in
   Florida.
3. Customized software programs are Florida sales when the customization of the
   programs is done in Florida. That is, when technical advice to customize a
   program is rendered on site in Florida, the sale will be considered a Florida sale.
4. Licensing fees for software are Florida sales to the extent the software is used
   in Florida.
5. Interactive Networks. . . .
   Rule 12C-1.0155(2)(l), F.A.C., states:
   (l) Other Sales in Florida. Gross receipts from other sales shall be attributed to this state if
   the income producing activity which gave rise to the receipts is performed wholly within
   this state. Also, gross receipts shall be attributed to this state if the income producing
   activity is performed within and without this state but the greater proportion of the
   income producing activity is performed in this state, 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
   contract, the term “income producing activity” will include amounts paid to the
   independent contractors.
   ISSUE PRESENTED
   What is the appropriate method for computing the numerator (and denominator) of the sales
   factor for purposes of the Florida corporate income tax?
   DISCUSSION AND ANALYSIS
   Generally speaking, the purpose of apportionment is to reasonably and logically divide the tax
   base among the 50 states by measuring the business activities that are the source of a taxpayer’s
   income. A state may then subject its apportioned share of the tax base to an income tax using a
   statutory formula. Under traditional three-factor apportionment, these business activities are
   measured by comparing a taxpayer’s payroll, property, and sales (gross receipts) within and
   without the state. Apportionment is a measurement of business activity; it is not a tax. For
   example, if 10% of a corporation’s income-producing business activities are in Florida, then an
   apportionment formula will theoretically attribute 10% of that corporation’s income to that state
   (by using the traditional three factors of sales/revenues, payroll, and property), and the state may
   subject that 10% to its income tax.
   Rule 12C-1.0155(2)(l), F.A.C., focuses on each separate item of income and the activities which
   produce that income. To paraphrase that rule, sales are attributed to Florida if the income

Technical Assistance Advisement 08C1-002
Page 5
producing activity which gave rise to the receipt is within Florida. “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.” On the other hand, Rule 12C-1.0155(2)(e)1., F.A.C.,
which pertains to personal services, focuses on where those services are performed. The term
“personal services” has a limited meaning and does not include the type of services rendered in
this case. Regardless, Rule 12C-1.0155(2)(e)3., F.A.C., goes on to provide that where services
are performed within and without Florida, such services may constitute separate income
producing activities, even though the client is billed a lump sum amount. The Taxpayer is
required to attribute sales from operations to Florida based upon the XXX that are XXX by the
XXX in Florida. The XXX are ancillary to XXX and should be sourced the same way. The
sales associated with the XXX are not attributed using a cost of performance methodology.
The Taxpayer also provided some of its XXX to establish a XXX under XXX and XXX. To the
extent that those activities were engaged in by the Taxpayer in Florida, those sales are
attributable to Florida. In addition, pursuant to these agreements, Taxpayer received XXX from
the licensing of proprietary software. Rule 12C-1.0155(2)(h)4., F.A.C., specifically provides
that “[l]icensing fees for software are Florida sales to the extent that the software is used in
Florida.” Under this specific rule, the income from the licensing of such software is attributed to
Florida to the extent it is used in Florida. XXX with XXX a XXX in Florida would also be
attributed to Florida.
Next, the Taxpayer stated in the facts that no XXX services are performed in Florida, but then
went on to state that XXX, XXX and XXX services are provided to customers that may use the
Florida facilities. Any XXX, XXX, or XXX that are conducted in Florida, whether at XXX, or
at the XXX, or elsewhere in Florida, are attributable to Florida and are included in the numerator
of the sales apportionment factor.
Finally, your request details the way that the Taxpayer conducts its business and generates its
income. That request also cites a number of exceptions to these general practices. The
Department can provide general information regarding the apportionment of income, and the
Department can provide responses to specific questions. However, apportionment can be a fact
intensive process, and it may be dependant upon the application of the law to those specific facts.
Each business entity operates differently, and business methods and facts change over time.
Therefore, this Technical Assistance Advisement should not be used as the sole basis for
determining how the Taxpayer’s income should be apportioned, especially since the underlying
facts may have changed.
CONCLUDING STATEMENT
The cost of performance method may not be used by the Taxpayer to source or attribute its sales.
This response constitutes a Technical Assistance Advisement under § 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 § 213.22, F.S. Our response is based on those facts and specific
situation summarized above. You are advised that subsequent statutory or administrative rule

Technical Assistance Advisement 08C1-002
Page 6
changes or judicial interpretations of the statutes or rules upon this advice is based may subject
future transactions to a different treatment than expressed in this response.
You are further advised that this response, your request and related back-up documents are
public records under Chapter 119, F.S., and are subject to disclosure to the public under the
conditions of § 213.22, F.S. Confidential information must be deleted before public disclosure.
In an effort to protect confidentiality, we request that 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 the identification
of the Taxpayer. Your response should be received by the Department within 15 days of the date
of this letter.
Sincerely,
Gary A. Moreland
Technical Assistance and Dispute Resolution
Record ID: 37343