How should a bank-related service corporation source fees for Florida's corporate-income-tax sales factor?

Plain-English summary

The corporation was not a financial organization, but Florida approved customer-location sourcing of its net fees as an alternative apportionment method.

Performing services commonly provided by a financial organization did not place the corporation within the statutory definition, especially because it was not regulated by the Florida Department of Banking and Finance. To fairly represent Florida activity, net fees from Florida customers entered the sales-factor numerator and all net fees entered the denominator.

What this means for you

The Department rejected a gross-receipts method because a future contractual change in fee division could distort the factor.

Common questions

Q: Was the corporation treated as a financial organization? A: No.

Q: What entered the Florida numerator? A: Net fees received from customers located in Florida.

Q: What entered the denominator?
A: All net fees received by the corporation.

Citations and references

• Fla. Stat. §§ 220.15(6) and 220.62 — financial organization and bank definitions
• Fla. Stat. § 220.152 — alternative apportionment
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95C1-002

Original ruling text

Feb 14, 1995

Re: Technical Assistance Advisement 95(C)1-002 Corporate Income Tax - Apportionment of Income XXX (Hereinafter referred to as Corporation)

Dear :

XXX letter of XX, requested a Technical Assistance Advisement on the proper classification of services provided by your client's subsidiary with regard to the Florida sales factor for corporate income tax. This response to the 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

According to XX letter, Corporation was incorporated in XX in XX. In XXX (hereinafter referred to as Parent) acquired Corporation. Corporation and XXX (hereinafter referred to as Bank), XXX, provide services for XXX with respect to XXX transactions. The services are provided primarily for XXX.

From XXX until XXX, Corporation's principal was with a XXX owned by Parent. When Parent sold its XXX, Corporation Bank to be the principal XXX.

The customers of Corporation and Bank are generally XXX and XXX. These customers need XXX at the time of the transaction, and XXX of the transaction through the appropriate XXX or with the XXX.

The decision of whether to XXX is a joint one made by Corporation and Bank, who evaluate XXX. The XXX between Corporation and Bank allocates XXX economic risks and attributes of the business conducted by Corporation and Bank. In the event of XXX, it is Corporation's responsibility to provide funds necessary. Corporation is also responsible for XXX (unless due to negligence or willful misconduct). In exchange for assuming

these risks, Corporation is entitled to receive all fees, XXX paid by XXX for the jointly rendered services.

For these transactions, Bank receives a fee. Additionally, Corporation receives a fee for providing services to XXX assist Bank. From this fee, Corporation pays XXX imposed on transaction volume, on a monthly or quarterly basis. Bank pays to Corporation all of the XXX remaining after the XXX is netted out of the XXX. Bank retains none of the XXX. For transactions involving XXX other than XXX, Corporation receives a fee from XXX for the services provided.

Corporation has two subsidiaries, without which Corporation could not conduct business as is presently done. Bank, XXX Corporation to act as its agent to perform most of the services.

QUESTION

Should Corporation apportion its income in accordance with the Florida rules for financial organizations, and source its revenues to the states in which its customers are located?

If not, permission is requested to source sales to the states in which the customers are located.

DISCUSSION AND ANALYSIS OF LAW

Section 220.15(6), F.S., states:

"The term `financial organization,' as used in this section, includes any bank, trust company, savings bank, industrial bank, land bank, safe deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company, sales finance company, or investment company."

Although Corporation is closely allied with Bank, Corporation does not appear, from the facts presented, to fit either the definition of a "financial organization" provided in s. 220.15(6), F.S., or the definition of "bank" provided by s. 220.62, F.S. Although XXX presents an argument for an expansive

application of the definition of "financial organization" based on the word "includes," all of the entities listed in the definition are regulated by the Florida Department of Banking and Finance. In the first of our meetings regarding this subject, XXX stated that Corporation is not regulated by that Department, which would appear to further exclude Corporation from the definition. Providing services which are normally provided by a financial organization does not necessarily make the providing entity a financial organization as defined in s. 220.15(6), F.S.

Based on XXX letter of XX, information provided at the meeting of XXX, and your letter of XX, you argue that requiring Corporation's income to be apportioned as a service provider would distort the reporting of income attributable to Florida. Although Corporation does not appear to fit the definition of a "financial organization," s. 220.152, F.S., provides authority for use of other methods of apportionment, when use of the method normally prescribed would unfairly represent the taxpayer's income attributable to this state. Therefore, we believe the best representation of Florida sales for purposes of the Florida sales factor, is to place net fees received by Corporation (XXX in the example provided at the meeting) from XXX located in Florida in the numerator, and all net fees received by Corporation (all XXX fees) in the denominator. Although using gross receipts to calculate the Florida sales factor in the same manner would at this time yield the same number, we are reluctant to authorize a gross receipts method because a contractual change in the way the fees are divided could result in a change in the relationship between the fees received by the XXX and XXX, causing a corresponding change in the Florida sales factor. Therefore, the most equitable method of calculating the Florida sales factor is to include the net fees received by Corporation from XXX located in Florida, in the numerator, and all net fees received by Corporation in the denominator.

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.

Sincerely,

Suzanne C. Paul
Statutory Compliance Section

SCP/kk
Control No. 17743