Could a Florida marketing subsidiary apportion income from foreign product sales and management services?

Subject

Apportionment of Income

Plain-English summary

For the post-May 31, 1994 facts, the Florida subsidiary could not apportion its income because it did not establish that it was taxed by a foreign country or that a foreign country had jurisdiction to tax it. The Department also viewed the described sales activities as protected solicitation under Public Law 86-272.

Because the company was not eligible to apportion, the Department did not separately source its management-fee income. For years before June 1, 1994, the Department declined to rule without a field examination of the filed returns.

What this means for you

Foreign customers, overseas travel, title passage abroad, and employees outside Florida did not by themselves establish apportionment eligibility in this ruling. The company needed evidence satisfying the rule's foreign-tax or foreign-jurisdiction test.

Common questions

Did the Department decide the years before June 1, 1994? No. Those years required a field examination.

Could the company apportion for later years? No, on the evidence presented.

Were management fees separately sourced? No. Once apportionment was denied, the ruling did not perform that sourcing calculation.

Citations and references

• Fla. Admin. Code r. 12C-1.015(1)(b)8
• Public Law 86-272
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co. (U.S. June 19, 1992), as cited in the ruling
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94C1-009

Original ruling text

Oct 25, 1994

Re: TAA 94(C)1-009
Apportionment of Income

Dear :

Your request for a technical assistance advisement has been
referred to me for a response.

FACTS PRESENTED BY TAXPAYER

XXX ("Parent"), a New Zealand company, sells dairy products to
customers in Latin America and the Caribbean. XXX ("Sub 1"), a
Bermuda corporation, is a wholly-owned subsidiary of Parent. XXX
("N"), a Florida corporation, is a wholly-owned subsidiary of Sub

1. N has its primary office in the state of Florida and through
   May 31, 1993, it had field offices in Venezuela, Guatemala, Chile
   and Colombia. With the exception of Colombia, these offices have
   been incorporated as subsidiaries for years beginning after 5-3193. Sub 1 also has other wholly-owned foreign subsidiaries (the
   Subs) located in various countries where Sub 1 has no operating
   subsidiary. Parent, Sub 1, the Subs and the Agents operate
   outside of the U.S. and are not subject to U.S. Federal income
   tax.

N's primary purpose is to promote the products of Parent in Latin
America and to assist Parent in making sales to clients in these
areas. N does not take title to the goods sold to Latin America
or the Caribbean. N does take title to the goods sold to cruise
ships in U.S. ports. These goods are shipped to a Florida port
and are kept in a bonded warehouse in the free trade zone until
they are sold and then they are delivered from the bonded
warehouse directly on to the cruise ship.

For the year ended 5-31-93, N had five sales employees in field
offices in Latin America and five sales people based in Florida.
They also had one sales support staff in one of the field offices
and two sales support staff in Florida. N also employed

approximately three other people in Florida who performed
management services and approximately nine employees who
performed accounting, secretarial and administrative functions.

The sales employees assist in making sales to customers in Latin
America and the Caribbean. An N employee would assist with all
of Parent's sales by Agents in jurisdictions where a Sub is not
present and with sales to the larger clients in jurisdictions
where the Subs are present. Approximately 75% of N's sales are
through assistance to an Agent or a Sub and 25% are through field
offices.

N receives a marketing allowance based on a fixed percentage of
all of the sales of particular products which are made in the
Latin American and Caribbean countries. Approximately ninety-two
percent of N's annual gross revenue is attributable to the
marketing allowance. N records the total commission received as
gross receipts. Commissions paid to Subs and Agents are recorded
as an operating expense.

Commissions to the Subs and the Agents are 100% attributable to
outside Florida. The sales employees' salaries are incurred both
in and out of Florida. The employees in Latin America spend 100%
of their time outside of Florida and the company estimates that
the U.S. employees' spend most of their time in Florida.

N employees based in the U.S. travel to the various countries to
meet with potential new and repeat customers of Parent. The
purpose of their assistance is to describe the products available
for sale and ultimately generate an interest in purchasing these
products. All prices are subject to approval by Parent. They
also perform other activities including market research,
planning, budgeting, forecasting, pricing, product education and
lobbying while outside of Florida.

Upon their return to the Florida office, the N employees will
assist in the finalizing of the negotiations and other aspects of
the agreement.

Currently, the sales process is being modified. Beginning 6-194, Parent will make sales directly to the Subs as well as to N

who in turn will sell to the ultimate customer. N will take
title to the inventory after it has been shipped from New Zealand
with title passing in international waters. The goods are
delivered directly from the ship to customers in Latin America.
No inventory, except that in bonded warehouses for sales to
cruise ships, will be stored in Florida, and the goods will never
enter the state.

N receives a management fee for overseeing all of the Latin
American operations. The management fee is for monitoring the
Subs' performance as compared with the budget; planning and
monitoring of strategic planning; enforcement of Parent policies
and procedures; new investment and development of a region;
coordination and consolidation of reporting; and internal
auditing. These services are performed by separate employees not
involved in marketing. Approximately 69% of these services are
performed by the employees while they are in Florida and 32% are
performed outside of the United States.

ISSUES:

1. Is N eligible to apportion its income for the tax years
   prior to June 1, 1994, and, if so, where is the marketing
   allowance sourced, for Florida apportionment purposes?
2. Is N eligible to apportion its income for the tax years
   after May 31, 1994, and, if so, where are the sales sourced,
   for Florida apportionment purposes?
3. If N is eligible to apportion income, where are the
   management fees sourced for Florida apportionment purposes?

DISCUSSION:

ISSUE #1:
The request for a determination for years prior to June 1, 1994,
is such that it can not be addressed without the benefit of a
field examination of the returns filed.

ISSUE #2:
To determine if a corporation is doing business within and
without Florida, a corporation must meet one of two criteria as
stated in Rule 12C-1.015(1)(b)8., F.A.C. First, it must be

subject to a tax imposed by a foreign country, or secondly, the
foreign country must have the jurisdiction to tax the
corporation.

N has not indicated that any of the income earned is foreign
income. N has not presented any evidence that tax returns were
filed or will be required to be filed, and there is no indication
that tax was paid or would be required to be paid in any foreign
country.

In Wisconsin Department of Revenue v. William Wrigley, Jr., Co.
(June 19, 1992), the U. S. Supreme Court concluded that the
solicitation of orders covers more than what is strictly
essential to making requests for purchases and also recognized
that a de minimis exception to P.L. 86-272 does exist if the
nonimmune activities constitute a trivial additional connection
with the state. The activities of N's sales staff appear to
serve no independent business function apart from their
connection to the solicitation of orders. The stated activities
of the employees in this specific situation fall within the
purview of P.L. 86-272.

Therefore, neither of the two criteria used for determining
whether income can be apportioned have been met. Accordingly, N
is not eligible to apportion its income.

ISSUE #3:
N's income is not subject to apportionment as explained in issue

2 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 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 and your request 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 by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response. Please note that we already have in
file some documents evincing some desired deletions.

Sincerely,

Val Poliuto
Technical Assistant
Statutory Compliance Section

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