Did an out-of-state company's controlled network of Florida distributors create corporate income-tax nexus?

Plain-English summary

Florida ruled that an out-of-state seller had corporate income-tax nexus through contracted Florida distributors even though the company had no Florida property or payroll.

The distributors bought products wholesale and sold them at retail, but their relationship went well beyond independent solicitation. The company imposed minimum sales and sponsorship duties, controlled marketing methods and websites, restricted intellectual-property use and media contact, extended product-liability coverage, collected sales tax for distributors, and imposed a noncompete.

Florida treated the distributors as company representatives conducting its business in the state. Their activities exceeded solicitation protected by Public Law 86-272, so the company had to keep filing Florida corporate returns and was not entitled to the requested refund for the reviewed year.

What this means for you

Calling sellers independent contractors does not decide nexus. Contractual control and in-state activities beyond soliciting orders can make them representatives of the out-of-state company.

Common questions

Did the company need Florida property or employees? No, not under these facts.

Why did Public Law 86-272 not protect it? Distributor activity and company control exceeded pure solicitation.

Did the ruling approve the company's separate-return or intercompany-fee treatment? No.

Citations and references

• Fla. Stat. §§ 220.02 and 220.11, Fla. Admin. Code r. 12C-1.011, and Public Law 86-272, as cited and discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 10C1-002

Original ruling text

TAX: Corporate Income Tax
TAA NUMBER: 10C1-002
ISSUE: Nexus
STATUTE CITES: S. 220.02, F.S.
RULE CITES: Rule 12C-1.011, F.A.C.
QUESTION: Does the taxpayer’s sale of its products in Florida through contracted distributors
create Florida corporate income tax nexus?
ANSWER: The taxpayer’s sale of its products in Florida through its contracted distributors
creates Florida corporate income tax nexus.
February 26, 2010

RE:

Technical Assistance Advisement 10C1-002
Corporate Income Tax - Nexus
Sections 220.02 and 220.11, Florida Statutes (F.S.)
XXX, (hereinafter referred to as “the taxpayer”)

Dear XXX:
This letter is in response to your letter of XXX, requesting a ruling as to whether the taxpayer
has nexus for purposes of Florida’s corporate income tax. This response constitutes a Technical
Assistance Advisement (TAA) under Chapter 12-11, Florida Administrative Code, and is issued
to you under the authority of section 213.22, Florida Statutes.
FACTS AS PROVIDED BY TAXPAYER
The taxpayer contracts with individuals to distribute XXX. The distributors purchase the
products from the taxpayer at wholesale prices and sell them to the public at retail prices. The
taxpayer has no property or payroll in Florida. After its XXX Florida corporate income tax
return had been filed, the taxpayer’s accounting firm questioned whether the taxpayer had
sufficient nexus to require it to file a return.
LEGAL AUTHORITY
Subsection 220.02(1), F.S., states, in part:
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. . . .

Technical Assistance Advisement 10C1-002
Page 2
Subsection 220.11(1), F.S., states, in part:
A tax measured by net income is hereby imposed on every taxpayer for
each taxable year . . . for the privilege of conducting business, earning or
receiving income in this state, or being a resident or citizen of this state. . .
ISSUE PRESENTED
Whether the taxpayer has nexus for purposes of Florida’s corporate income tax.
DISCUSSION AND ANALYSIS
In subsection 220.02(1), F.S., the Florida Legislature expressed its intent to tax corporations for
the “privilege of conducting business, deriving income, or existing within” Florida. Subsection
220.11(1), F.S., imposes the tax on corporations for exercising those privileges.
Information on the taxpayer’s site states that those wishing to become a distributor of the
taxpayer’s products must be sponsored by someone who is already a distributor for the taxpayer,
must complete an application, and must pay a fee. A copy of the contract that individuals who
are distributors of the taxpayer’s products enter into with the taxpayer has been provided. This
contract sets forth minimum sales levels that must be achieved to remain a distributor, to sponsor
other distributors, to achieve higher levels of income, and to rise to higher positions within the
distributor hierarchy, which include XXX. Additionally, the contract requires sponsors of other
taxpayer distributors to XXX. Sponsors are required to document the XXX of their
responsibilities as a sponsor, and may be required to provide evidence of the fulfillment of those
duties. Failure to provide such documented evidence upon request may result in disciplinary
action. Sponsors must also ensure that the distributors they sponsor have XXX.
The contract restricts the way in which the taxpayer’s distributors market and promote their
businesses to the manner set forth in official literature and in a manner consistent with policies.
The contract states that the marketing opportunity offered by the taxpayer cannot be offered
“through, or in conjunction with, any other system, program or offering.”
The contract further restricts the use of the taxpayer’s trade names, trademarks, service marks,
designs, images, symbols and other intellectual property rights, and provides that these are the
property of the taxpayer, and may not be used without prior written permission, except as
outlined in this section. Distribution of video or audio recordings of company events, training,
and speeches are copyrighted and require prior written permission for distribution. The contract
puts strict restrictions on what may appear on Web sites maintained by distributors to advertise
their business and provides that any logos, tag lines, or other items developed by a distributor
that the company considers useful in marketing its products become the taxpayer’s property.
The taxpayer also restricts the contact a distributor may have with the media, restricts the way in
which products may be advertised, and prohibits its distributors from engaging in telemarketing
or “cold calls” to sell its products.

Technical Assistance Advisement 10C1-002
Page 3
The taxpayer maintains product liability insurance which extends coverage to Independent
Distributors, as long as they are marketing products in accordance with Company Policies and
applicable laws and regulations. The taxpayer collects sales tax on behalf of its distributors, in
states where sales tax is required to be collected, and remits it to the taxing authorities in those
states.
The contract imposes a non-compete agreement on distributors, which provides that during the
time an individual is a distributor, and for six months after cancellation of a Distributor
Agreement, the distributor is prohibited from attempting to recruit or enroll the taxpayer’s
customers or distributors for other direct selling business ventures directly or through a third
party. It also prohibits presenting or assisting in the presentation of other business opportunities,
offering literature, tapes, or promotional materials for another direct selling business to the
taxpayer’s customers or distributors, or allowing anyone else to recruit the taxpayer’s customers
or distributors for another business venture, as well as selling or promoting any competing nontaxpayer products to the taxpayer’s customers or distributors.
Responses to the nexus questionnaire state that the taxpayer’s distributors order products and pay
for them, usually by credit card, at which time the taxpayer drop ships them to the distributor’s
customer. Orders are approved in Idaho, and approval of the credit card transaction serves as
approval of the order. Distributors are trained through the use of training manuals and marketing
materials provided by the taxpayer. The taxpayer also holds an annual training conference in
Idaho.
The contract provided with the request for this TAA states that the taxpayer’s distributors are
independent contractors -- they contract and sell the taxpayer’s products, but, in addition, are
contractually bound to maintain specified levels of sales, to sponsor other distributors, and to rise
to higher positions within the distributor hierarchy. Additionally, as outlined above, the taxpayer
imposes strict restrictions on the activities that may be conducted by its distributors and on the
way in which the activities may be conducted, and imposes a non-compete agreement on its
distributors. In short, these representatives are more than independent contractors.
In Scripto, Inc. v. Carson, 105 So.2d (Fla. 1958), Aff’d. 362 U.S. 207 (1960), the Court found
that individuals with whom the principal had contracted to conduct its business were “just as
much representatives of the appellant under the subject statute as if they were salaried employee
solicitors operating pursuant to identical limitations of contract.”
In Western Acceptance Co. v. State, Dept. of Rev., 472 So.2d 497,(Fla. 1st DCA 1985), Aff’d. 486
So.2d 598, (Fla. 1986), “[b]oth the hearing officer and DOR concluded that, because Acceptance
owned or leased no property other than cash and receivables, had no offices or employees, and
relied upon and utilized the offices, property and employees of Supply in conducting the
business of financing consumer contracts, Acceptance's business activities, in substance, were
conducted by and were the direct result of Supply's activities. Therefore Acceptance was found
to be actually doing business in Florida because, ‘but for’ Supply's activities on Acceptance's
behalf, Acceptance could not have otherwise conducted any business or earned any income.” 472
So.2d at 502.

Technical Assistance Advisement 10C1-002
Page 4
Similarly, the distributors, whose levels are identified as XXX, with whom this taxpayer
contracts to sell its product are its representatives and conduct its business in Florida according
to the terms of the contract they enter into with the taxpayer.
Based on the information provided, the activities of the XXX, that is, the Distributors, exceed the
pure solicitation of sales and, therefore, exceed those activities which would cause the taxpayer
to be protected by Public Law 86-272. 1 This is true regardless of whether the distributors are
called independent marketing Distributors, or any other label one wishes to assign to them. In
addition, the taxpayer exerts far more control over the activities of its Distributors than it would
be allowed to exert on those of independent contractors.
The information available indicates that the activities of the taxpayer in Florida exceed those
protected by Public Law 86-272, and that the taxpayer has corporate income tax nexus for
Florida. Therefore, the taxpayer should have filed a Florida corporate income tax return for the
2007 tax year and would not be due a refund of the tax it paid for that tax year. The taxpayer
should also file returns for tax years subsequent to 2007.
CONCLUSION
The taxpayer has nexus for Florida and should continue to file Florida corporate income tax
returns and remit the tax due. The taxpayer is not due a refund of the tax it paid for the XXX tax
year.
As a reminder, Technical Assistance Advisements are based on full disclosure of all relevant
facts, and the lack of disclosure of a material fact by the Taxpayer may adversely affect the
response provided in this Technical Assistance Advisement. This Technical Assistance
Advisement does not address whether the Taxpayer’s separate returns will be valid nor whether
the transfer of income via management fees and intellectual property fees to Company S is
permissible under Florida law.
This response constitutes a Technical Assistance Advisement under section 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 section 213.122, 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, Florida Statutes, and are subject to disclosure to the public under the
conditions of section 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 materials and
1

Public Law 86-272 restricts the authority of a state to impose its income tax on a taxpayer whose sole activity
within the state is the solicitation of sales of tangible personal property.

Technical Assistance Advisement 10C1-002
Page 5
this response, deleting the 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/tlg
Record ID: 67365