How did Florida require an online advertising company to source receipts when ordinary cost-of-performance sourcing distorted Florida activity?

Plain-English summary

The Florida Department of Revenue required an online advertising company to use alternative apportionment because the ordinary cost-of-performance method did not fairly reflect its Florida business activity.

The taxpayer earned revenue only when an independent third-party user interacted with advertising, making user activity central to the income-producing event. For the advertising program having a Florida connection, the Department required a ratio based on users in Florida divided by users in the jurisdictions where the taxpayer operated.

The ruling distinguished another redacted advertising stream whose relevant activity occurred on the taxpayer's non-Florida property and had no Florida connection. The user-based method applied to the stream described as involving Florida activity rather than indiscriminately to all receipts.

What this means for you

Online advertising businesses

When revenue is triggered by user action, infrastructure cost location may not fairly measure market activity. Maintain reliable user-location statistics by revenue stream.

Corporate tax teams

Alternative apportionment is rare and fact-specific. Separate revenue products and identify the actual event that earns the receipt before designing a factor.

Common questions

Q: Did Florida accept ordinary cost-of-performance sourcing?
A: No.

Q: What alternative did the Department require?
A: A user-location ratio for the advertising revenue stream connected to Florida activity.

Citations and references

• Fla. Stat. §§ 220.15, 220.152, and 213.22
• Fla. Admin. Code rr. 12C-1.0152 and 12C-1.0155
• Roger Dean Enterprises v. State, Department of Revenue, 387 So. 2d 358 (Fla. 1980)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 12C1-015

Original ruling text

Interim
Executive Director
Marshall Stranburg

QUESTION: What portion of Taxpayer’s advertising receipts should be sourced to Florida and included
in the numerator of the sales factor?
ANSWER: The Department requires the Taxpayer to use an alternative apportionment because the
standard apportionment does not fairly apportion income to Florida.

December 26, 2012

XXX
XXX
XXX

Re:

Technical Assistance Advisement 12C1-015
XXX. (FEIN: XXX) (hereinafter referred to as “Taxpayer”)
Tax: Corporate Income Tax
Issue: Income Calculation
Sections 220.15, 220.152 Florida Statutes (F.S.)
Rules 12C-1.0152, 12C-1.0155, Florida Administrative Code (F.A.C.)

Dear XXX:
This is in response to your request dated XXX, for a Technical Assistance Advisement (TAA) pursuant to
s. 213.22, F.S., and Rule 12-11, F.A.C., regarding the income calculation for Taxpayer. An examination
of your letter has established that you have complied with the statutory and regulatory requirements for
issuance of a TAA. Therefore, the Department is hereby granting your request for a TAA.
FACTS SUPPLIED BY TAXPAYER
Taxpayer provides numerous XXX services, such as XXX, XXX, XXX, and XXX XXX. Taxpayer’s
primary income producing activity is displaying XXX on its XXX and XXX. In XXX, XXX of
Taxpayer’s revenues came from XXX, and over XXX and XXX.
XXX enables XXX to reach a XXX, XXX. XXX pertains to XXX placed on Taxpayer’s XXX. XXX
also provides a service called “XXX.” XXX allow XXX to XXX XXX, XXX, XXX, and XXX, so that
Child Support Enforcement – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – James McAdams, Director  Information Services – Tony Powell, Director

www.myflorida.com/dor
Tallahassee, Florida 32399-0100

Technical Assistance Advisement 12C1-015
Page 2

XXX can be placed on what the XXX sees as relevant XXX. The Taxpayer earns revenue when the XXX
is XXX by an XXX.
The XXX program pertains to XXX placed on Taxpayer XXX (third-party) XXX as well as XXX placed
on XXX. XXX is a free program that allows XXX in the Taxpayers XXX of XXX to serve XXX, XXX,
XXX, and XXX that are targeted to XXX and audience by XXX XXX on their XXX. Taxpayer only
earns revenue for the XXX service if a XXX 1 an XXX, something completely outside the control of the
Taxpayer.
ISSUE
What portion of Taxpayer's XXX should be sourced to Florida and included in the numerator of the sales
factor.
LAW
Section 220.02(1), 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 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)
Section 220.15, F.S., states in part:
1

The XXXt is XXX by an XXX user XXX on the XXX.

Technical Assistance Advisement 12C1-015
Page 3

(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. If any factor described
in subsection (2), subsection (4), or subsection (5) has a denominator that is zero or is
determined by the department to be insignificant, the relative weights of the other factors in
the denominator of the apportionment fraction shall be as follows: . . .
Section 220.152, F.S., states:
Apportionment; other methods. --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-1.0152, F.A.C., states in part:
(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

Technical Assistance Advisement 12C1-015
Page 4

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….
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. (Emphasis supplied)
ANALYSIS
The Florida sales factor is a measurement of receipts received from business activity conducted in Florida.
Section 220.15(5), F.S., provides the general proposition that 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.”
Section 220.15, F.S., provides a definition of "sales," which is "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(1), F.A.C., defines sales, for purposes of the sales
factor, as “all gross receipts received by a taxpayer from transactions and activities in the regular course of
its trade or business.”
If the standard apportionment factors do not fairly represent the extent of a taxpayer’s tax base attributable
to this state, a taxpayer can petition the Department or the Department may require alternative
apportionment pursuant to s. 220.152, F.S. If alternative apportionment is applied, it could result in:
separate accounting, the exclusion of any one or more factors, the inclusion of one or more additional
factors which fairly represents the taxpayer’s tax base attributable to this state, or the employment of any
other method which produces an equitable apportionment.

Technical Assistance Advisement 12C1-015
Page 5

In Florida, 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. 2
Rule 12C-1.0152, F.A.C., provides for an adjustment to the apportionment formula if the standard formula
leads to a grossly distorted result. This rule references two court cases, which are discussed below.
In Norfolk and Western Railway Co. v. Missouri State Tax Commission, 390 U.S. 317 (1980), the U.S.
Supreme Court found the application of the apportionment formula unconstitutional where the taxing state
imposed an ad valorem property tax on the railroad rolling stock, using the familiar single-factor mileage
formula apportionment basis. The taxpayer presented evidence showing the actual inventory of rolling
stock in Missouri on tax day was less than half (approximately $7,600,000 versus assessed value of
$19,981,000) the value assessed using Missouri’s apportionment formula. The taxpayer further
demonstrated that its calculation of the tax-day value was representative of the value of rolling stock
located within the state throughout the year and in the preceding year. The Supreme Court in Norfolk
noted that it is not necessary for a state to demonstrate that its use of the mileage formula yields an exact
measure of value. However, the Supreme Court further stated that:
[W]hen a taxpayer comes forward with strong evidence tending to prove that the mileage
formula will yield a grossly distorted result in its particular case, the State is obliged to
counter that evidence or to make the accommodations necessary to assure that its taxing
power is confined to its constitutional limits. If it fails to do so and if the record shows that
the taxpayer has sustained the burden of proof to show that the tax is so excessive as to
burden interstate commerce, the taxpayer must prevail. 3
In Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123 (1931), North Carolina tried to
apportion income of a manufacturing concern using a formula based on the ratio of the value of the
taxpayer’s real and tangible personal property located in North Carolina over the value of its real and
tangible property located everywhere times its entire income. The taxpayer was able to show that such a
one-factor (property) apportionment formula “operated unreasonably and arbitrarily” in attributing income
to the state that was “out of all proportion” to the taxpayer’s activities in the state. The Court concluded
that proof the formula produced a tax on 83% of the taxpayer’s income when only 17% of that income
actually had its source in the State would be enough to invalidate the assessment under the Due Process
Clause. The type of distortion present in Hans Rees’ is largely remedied today by use of a three-factor

2
3

Id. at 363.
Id. at 329.

Technical Assistance Advisement 12C1-015
Page 6

apportionment formula. The three factors now generally used by states to apportion the income of most
businesses (like the taxpayer in Hans Rees’) to their state are sales, property, and payroll.
This advisement addresses the computation of the XXX sales that should be sourced to Florida and
included in the numerator of the sales factor. The Taxpayer argues that the cost of performance
methodology pursuant to Rule 12C-1.0155(2)(l), F.A.C., should apply to its XXX income. Taxpayer also
argues that none of the income producing activity should be sourced to Florida because a greater
proportion of the costs were performed outside the state of Florida. The Department rejects this argument
because the cost of performance methodology does not fairly represent the extent of the Taxpayer’s tax
base attributable to Florida. The Department, pursuant to the authority of s. 220.152, F.S., Rule 12C1.0152, F.A.C., and the cited case law, is permitted to require a departure from the applicable method of
apportionment where that method does not accurately and fairly reflect business activity in Florida.
Therefore, the Department requires that the Taxpayer file its Florida corporate income tax returns based
upon an alternative apportionment methodology as described below.
The income producing activity from both XXX and XXX is performed by an XXX. The income
producing activity is unique in this case because the Taxpayer does not earn revenue for merely XXX the
XXX, as in XXX and other XXX, but earns revenue when an XXX is actually XXX. The income
producing activity is also unique because it is not directly performed by the Taxpayer’s customer, but is
triggered by an independent third-party. In order to source the income producing activity to Florida, the
income producing activity must be performed in Florida. Sourcing the XXX income based upon the
location of the XXX would be insufficient to determine the income that should be sourced to Florida,
because the location of the XXX does not determine the income producing activity. The more important
factor in determining the income producing activity is the location of the XXX.
The XXX XXX are XXX Taxpayer’s XXX XXX. The income producing activity for XXX would involve
an iXXX, some of whom are located in Florida, XXX on an XXX on Taxpayer’s XXX, which is not
located in Florida. XXX from XXX does not have any connection with Florida, and the income producing
activity is not performed in Florida.
In regards to XXX, the XXX are on the Taxpayer’s XXX, and not on Taxpayer’s XXX. The income
producing activity involves an XXX, some of whom are located in Florida, XXX the XXX on Taxpayer’s
XXX, some of which are located in Florida. XXX from XXX do have a connection with Florida, and the
income producing activity is performed in Florida.
Consequently, a fair methodology of sourcing XXX sales from XXX to Florida is to source the XXX
revenue based upon total XXX in Florida over total XXX in countries in which the Taxpayer operates. An
XXX, XXX, provides statistics of users throughout the world and provides the Department such a
methodology, based on XXX, to measure XXX sales in Florida. This methodology ensures that there is
an accurate and fair reflection of Taxpayer’s business activity in Florida. Therefore, XXX sales from
XXX will be sourced to Florida under a XXX methodology, based on the number of XXX in Florida
divided by XXX in jurisdictions in which Taxpayer operates its XXX (currently in all of XXX, XXX,
XXX, and the XXX).

Technical Assistance Advisement 12C1-015
Page 7

CONCLUSION

Under the authority provided in s. 220.152, F.S., the Department requires the Taxpayer to use the
alternative apportionment discussed above.
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 documents are public records under
Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details, which might lead to identification of the taxpayer, must be
deleted before disclosure. In an effort to protect the confidentiality of such information, we request you
provide the undersigned with an edited copy of your request for Technical Assistance Advisement, backup
material and response within fifteen days of the date of this advisement.

Sincerely,

Affan Qureshi, Esq.
Senior Attorney
Technical Assistance and Dispute Resolution
(850)717-7602
ID #133809