Should gross receipts from product sales between members of a Florida consolidated group be included in the sales factor?

Plain-English summary

The Florida Department of Revenue included a consolidated group's gross receipts from intercompany product sales in its corporate-income-tax sales factor. Products were first sold to affiliated entities that then sold them to foreign affiliates or unrelated foreign customers.

The Department found substantive sales rather than mere bookkeeping entries: ownership transferred, consideration was paid through intercompany receivable and payable accounts, goods were delivered to an identifiable destination, and the affiliates recorded gross profit in separate profit-and-loss accounts.

The lack of a separate invoice for every intercompany transfer did not defeat the result because the taxpayer's sales system and accounting entries evidenced the transactions.

What this means for you

Consolidated corporate groups

Intercompany elimination for computing consolidated income does not automatically answer the sales-factor question. Analyze whether the transaction is a substantive sale.

Accounting and transfer-pricing teams

Maintain title-transfer terms, delivery records, intercompany agreements, settlement accounts, and entity-level profit records.

Accountants and tax professionals

This is expressly a facts-specific result. Changes in how ownership, delivery, payment, or profit are documented could change the conclusion.

Common questions

Q: Were intercompany receipts included?
A: Yes, under the specific facts presented.

Q: Why did Florida treat the transfers as sales?
A: There was title transfer, consideration, delivery, sales destination, and separately recorded gross profit.

Q: Were individual invoices required?
A: Not here. The accounting system and intercompany records provided evidence of the sales.

Citations and references

• Fla. Stat. §§ 220.15(5), 220.131(4), and 213.22
• Fla. Admin. Code r. 12C-1.0155

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 18C1-005

Original ruling text

QUESTION: WHETHER INTERCOMPANY SALES SHOULD BE INCLUDED IN THE
SALES FACTOR FOR PURPOSES OF APPORTIONMENT?
ANSWER: GIVEN THE SPECIFIC CIRCUMSTANCES INVOLVED IN THIS CASE, THE
GROSS RECEIPTS RECEIVED FROM INTERCOMPANY SALES SHOULD BE
INCLUDED IN THE SALES FACTOR.
May 21, 2018
XXXXX
XXXXX
XXXXX
XXXXX

Re:

Technical Assistance Advisement – 18C1-005
Corporate Income Tax – Sales Factor
Sections 220.15, Florida Statutes (“F.S.”)
Rule 12C-1.0155, Florida Administrative Code (“F.A.C.”)
XXXXX (“Taxpayer”)
FEIN: XXXXX

Dear XXXXX:
Your letter dated XXXXX, requests a Technical Assistance Advisement (“TAA”) relating to the
computation of the sales factor for purposes of apportioning taxable income. This response to
your request constitutes a Technical Assistance Advisement under Chapter 12-11, Florida
Administrative Code, and is issued to you under the authority of s. 213.22, Florida Statutes.
FACTS SUPPLIED BY TAXPAYER
Taxpayer is a XXXXX. Taxpayer files a consolidated Florida corporate income tax return, which
includes affiliated companies XXXXX (“XXXXX”) and XXXXX (“XXXXX”).
XXXXX, is a Delaware corporation XXXXX. XXXXX consists of two subunits: (1) XXXXX (“XXXXX”);
and (2) XXXXX. XXXXX sells Taxpayer’s products to Taxpayer’s foreign affiliates. XXXXX is a
subsidiary XXXXX. Specifically, XXXXX sells to unrelated third parties in foreign markets. All
Taxpayer products sold to foreign affiliates or foreign customers are first sold to either XXXXX.

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May 21, 2018
Florida Department of Revenue
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XXXXX uses intercompany accounts to charge foreign affiliates for the products. However,
XXXXX directly invoices foreign customers for the products sold.
Taxpayer utilizes a global cash management system. Specifically, intercompany accounts are
used to manage receivables and payable positions, which eliminates the need to make multiple
cash movements to account for intercompany activity. Taxpayer maintains a receivable and/or
payables account with XXXXX, XXXXX and other related entities. The sales transactions to either
XXXXX are reflected as sales on the books of Taxpayer or its subsidiaries. Sales transactions
between Taxpayer and XXXXX are made pursuant to a contractual agreement between
Taxpayer and XXXXX. Taxpayer states that separate invoices are not issued for each
intercompany product sale since the payments for product sales are handled through the
receivable and/or payable accounts. However, data extracted from Taxpayer’s primary sales
system shows accounting entries that provide evidence that sales are made. These accounting
records reflect the fact that there has been a transfer of ownership of the products from the
selling entity to either XXXXX.
The income of both XXXXX is included in the computation of Florida consolidated income. Sales
of XXXXX to foreign affiliates and the sales of XXXXX to unrelated foreign customers are the
subject of this TAA request.
ISSUE PRESENTED
Whether Taxpayer’s gross receipts from intercompany product sales to XXXXX should be
included in the sales factor for purposes of apportionment?
LEGAL AUTHORITY
Section 220.15(5), F.S., states in part:
(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…
Section 220.131(4), F.S., states:
(4) The computation of consolidated taxable income for the members of an
affiliated group of corporations subject to tax hereunder shall be made in the
same manner and under the same procedures, including all intercompany
adjustments and eliminations, as are required for consolidating the incomes of
affiliated corporations for the taxable year for federal income tax purposes in

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May 21, 2018
Florida Department of Revenue
Page 3

accordance with s. 1502 of the Internal Revenue Code, and the amount shown as
consolidated taxable income shall be the amount subject to tax under this code.
Rule 12C-1.0155, F.A.C., states in part:
(1) For the purposes of the sales factor, the term “sales” means all gross receipts
received by the taxpayer from transactions and activities in the regular course of
its trade or business.

(j) Intercompany sales. When a consolidated return is filed, intercompany sales
may be included in the sales factor. Indications that the amounts may be
included as sales include the following factors:

1. Amounts called sales on the books;
2. Amounts invoiced as sold to related party;
3. Actual payment from related party; or
4. Amounts included in consolidated federal income tax return as “gross
   receipts or sales.”
   Rule 12C-1.015(7)(a), F.A.C., states:
   (7) Consolidated Returns.
   (a) Section 220.131(5), F.S., requires members of an affiliated group which file a Florida
   consolidated income tax return to use the general apportionment method prescribed by
   Section 220.15, F.S., unless an alternative method is determined to be more appropriate
   by the Department.
   Rule 12C-1.0155(1)(j), F.A.C., states:
   (1) For the purposes of the sales factor, the term “sales” means all gross receipts
   received by the taxpayer from transactions and activities in the regular course of its
   trade or business…
   (j) Intercompany sales. When a consolidated return is filed, intercompany sales may be
   included in the sales factor. Indications that the amounts may be included as sales
   include the following factors:
5. Amounts called sales on the books;
6. Amounts invoiced as sold to related party;
7. Actual payment from related party; or
8. Amounts included in consolidated federal income tax return as “gross receipts or
   sales.”

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May 21, 2018
Florida Department of Revenue
Page 4

DISCUSSION
Taxpayer asserts that all its products sold outside of the United States are initially sold to a
wholly-owned subsidiary, who then sells to the products to foreign customers or foreign
affiliates. In addition, Taxpayer argues that the intercompany sales filed on its consolidated
returns satisfies each of the requirements set forth in Rule 12C-1.0155(1)(j), F.A.C. and is similar
to the methodology set forth in Department of Revenue v. Anheuser-Busch, 527 So.2d 877
(1988).
Section 220.15(5)(a), F.S., defines "sales," as "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., provides the definition of 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.” In addition, Rule 12C-1.0155(1)(j),
F.A.C., regulates intercompany sales. It provides that intercompany sales may be included in the
sales factor.
Rule 12C-1.0155(1)(j), F.A.C., provides factors that may indicate that those amounts may be
included as sales. Those factors are:
1.
2.
3.
4.

Amounts called sales on the books;
Amounts invoiced or sold to related party;
Actual payment from a related party; or
Amounts included in consolidated federal income tax as “gross receipts or sales”.

In Department of Revenue v. Anheuser-Busch1, Metal Container Corp. (“MCC”) manufactured
beer cans for Anheuser-Busch Inc. (“ABI”). The two corporations were affiliates and filed a
consolidated corporate income tax for both Federal and Florida purposes. When MCC
transferred the beer cans to ABI, the transactions were invoiced to ABI. ABI made payments
indirectly to MCC by journal entry, and MCC delivered the cans to ABI. ABI and MCC argued
that they were one taxpayer for purposes of apportionment and so the intercompany
transactions between them should be eliminated from the sales factor. The Appellate Court
disagreed and stated that “[t]his overlooks the well-established law that each of the two or
more corporations joining in a consolidated return is none the less a taxpayer.” 2 The Appellate
Court found the “indicia of a sale” sufficient to constitute a sale, and stated:

1
2

527 So.2d 877 (1988 Fla. 1st DCA)
Id. at 881 (citing Woolford Realty Co. v. Rose, 286 U.S. 319, 328, (1932)).

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May 21, 2018
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Without unduly belaboring the point, we find that unlike the situation in Coulter,
the indicia of a sale are present in this case. The cans were "invoiced" as "sold
to" Anheuser-Busch. Delivery of the cans to Anheuser-Busch by MCC is
uncontroverted. Finally, we find that Anheuser-Busch's cash advances to MCC
and payment of MCC's third party obligations constitute sufficient evidence of
payment. We note, significantly, that the transactions involved meet the sales
destination test set forth in section 214.71(3)(a)1.3
Anheuser-Busch reviewed all of the indicia previously described in Coulter Electronics v.
Department of Revenue4 and noted that the treatment of the transactions for federal tax
purposes in its consolidated returns is “particularly significant” in that it adds confirmation that
such delivery of goods for a stated price constitutes true gross receipts and “sales” for federal
tax purposes and accordingly for Florida apportionment purposes.5 Consequently, the
transactions are accounted for Florida tax purposes if such transactions are realized and treated
as intercompany sales for federal tax purposes.
Anheuser-Busch addressed the failure of the taxpayer to report the so-called intercompany
transactions as “gross receipts” on the taxpayer’s federal consolidated federal corporate
income tax return. Anheuser-Busch stated:
Although they [intercompany transactions] were called “sales” on their books,
this court found that these transactions did not have the indicia of sale; transfer
of title, delivery, and payment. More importantly, for purposes of comparison
with the can transactions in this case, the intercompany sales in Coulter were
“disregarded for the purpose of federal income tax.” 365 So.2d at 808.
Accordingly, the court held that these transactions did not constitute sales
within the meaning of sections 214.71(3) and 220.15(1), and thus were not
required to be included in Coulter’s sales factor for purposes of the corporate
income tax apportionment formula.6
Anheuser-Busch continued in its analysis of the federal reporting of “gross receipts” of MCC,
the intercompany seller, as used in the computation of separate taxable income as part of the
federal consolidated return, and stated the following:
In determining the best evidence of the gross receipts of these two taxpayers,
Anheuser-Busch’s treatment of the sale of these beer cans in its corporate
income tax return (Form 1120) is particularly significant.

3

Id. at 880.
365 So.2d 806, (Fla. 1st DCA 1978)
5
Id. at 881.
6
Id. at 879.
4

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In the consolidated federal income tax return filed each year on behalf of
Anheuser-Busch’s affiliated group, on Form 1120, line 1, captioned “1(a) Gross
receipts or sales” the gross receipts of all included corporations were
aggregated. In an attached taxpayer schedule, which was required to be filed,
entitled “Consolidated Profit and Loss Summary,” the amount of “gross receipts”
was reported separately for each included corporation and the sum of the “gross
receipts” indicated for each corporation was reconciled to the total amount on
line 1(a) of Form 1120. In each year, the amount of “gross receipts” federally
reported as being those of MCC represented the annual aggregation of the “total
amounts reported by Anheuser-Busch in its federal income tax returns for the
years in question and were not eliminated in any manner from the consolidated
“gross receipts or sales” reflected therein.
However, in Anheuser-Busch’s consolidated Florida corporate tax returns for
each of these tax years, in the computation of the Florida sales factor used for
the Florida apportionment purposes, these gross receipts attributable to MCC in
the federal income tax returns were omitted from the sales factor. In computing
its proposed assessments, DOR restored these gross receipts to the sales factor
denominator as representing gross receipts from all sales of beer cans by MCC to
Anheuser-Busch.7
Accordingly, Anheuser-Busch held that the “best evidence” of the gross receipts of each entity
is derived from the federal consolidated corporate income tax return and related schedules to
such return. This information is “particularly significant” in determining the intercompany gross
receipts and intercompany income included in the intercompany seller’s separate taxable
income. Where MCC, the intercompany seller in the Anheuser-Busch case included these
intercompany receipts in its separate taxable income, it was held by the appellate court such
gross receipts should be included in the sales factor.
The reason for including intercompany sales under certain circumstances is to equitably
apportion a taxpayer’s business activities. The purpose of apportionment is to fairly divide a
taxpayer’s income amongst the states. Apportionment looks to the business activities of a
taxpayer in making this measurement. The states usually measure the business activities of a
taxpayer by the use of a three-factor apportionment formula – a combination of a taxpayer’s
payroll, property, and gross receipts (sales). Apportionment is merely a method to fairly divide
a multi-state entity’s income among the States in which it conducts business. Apportionment is
not an exact science, but it has been widely accepted by both state and federal courts as a
reasonable approximation for this purpose.

7

Id. at 881.

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May 21, 2018
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In this case, the Department has found there to exist in substance the transfer of title to goods,
the payment of consideration for goods delivered, actual delivery of goods to denote the
establishment of “sales destination” of product. In addition, it is also concluded that the “gross
profit” which is derived from the intercompany transaction is established in the separate profit
and loss accounts for the affiliated entities in Taxpayer’s federal consolidated return. For these
reasons, the Department concludes that the intercompany transactions are sales for sales
factor purposes of the apportionment formula.
CONCLUSION
Given the specific circumstances involved in this case, and based on the representations of the
Taxpayer, the gross receipts Taxpayer receives from intercompany product sales to XXXXX
should be included in the sales factor. However, Taxpayer is reminded that should the facts
provided in its request of XXXXX, be determined to be incorrect or changed, the response will
be substantially different from what has been agreed upon in this TAA.
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 213.22, F.S. Our response is based on those facts and
specific situation summarized above. You are advised that subsequent statutory or
administrative rule 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 backup documents are
public records under Chapter 119, F.S., 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 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,
Susan R. Coxwell
Susan R. Coxwell
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 717-6478

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May 21, 2018
Florida Department of Revenue
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Record ID 7000013772
CC: XXXXX