Could a Florida patent-licensing corporation apportion royalty income outside Florida when it had not shown that another state actually taxed it or had jurisdiction to do so?

Plain-English summary

The corporation could not apportion its patent-royalty income outside Florida because it had not established that it was taxable in another state.

The Florida corporation earned almost all of its income by exclusively licensing a patent to an out-of-state company. It filed no income-tax return outside Florida. The other state had not formally ruled that the license created nexus, and the requester supplied no evidence showing that the state had jurisdiction to impose a qualifying tax.

Florida's rule allowed apportionment when a corporation was taxable both inside and outside Florida, including when another state had jurisdiction even if it did not actually impose tax. But a possibility assessed case by case was not enough. Without proof, all adjusted federal income was subject to Florida corporate income tax.

What this means for you

A taxpayer seeking multistate apportionment needed evidence of actual taxation or another state's jurisdiction to tax. The location of a licensee and royalty stream did not establish that element by assertion alone.

Common questions

Q: Did the company actually file or pay income tax in another state?
A: No.

Q: Could jurisdiction to tax be enough even without actual tax?
A: Yes under the quoted rule, but the corporation did not prove that jurisdiction.

Q: Did the out-of-state patent license automatically permit apportionment?
A: No.

Q: What was the result without apportionment?
A: All adjusted federal income was subject to Florida corporate income tax.

Citations and references

• Fla. Stat. § 220.15 — apportionment
• Fla. Admin. Code r. 12C-1.015(1), (2) — doing business within and without Florida
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95C1-008

Original ruling text

Aug 30, 1995

Re: TAA 95(C)1-008
Technical Assistance Advisement (TAA)
Apportionment
XXX (Company)

Dear :

Your letter of June 5, 1995, requested a Technical Assistance
Advisement on the application of corporate income tax to the
above referenced matter.

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.

Discussion Of Facts

Company is a Florida Corporation having more than 150
shareholders, including some corporate entities. Company owns a
patent which it exclusively licenses to a company based in
another state. With the exception of interest income, Company's
income is from the license of the patent. Royalty income last
year was approximately $4 million on the patent, which expires
in 1998.

Company does not incur rent or salary expenses and reports all
income to Florida. No income tax returns are filed in any state
but Florida.

The state in which Company is licensing the intangible has not
issued a formal position on whether the license of an intangible
within the state would create income tax nexus. Rather, that
state assesses these situations on a case-by-case basis, looking
at the facts and circumstances of each taxpayer's activities.
In some instances, a company which is merely licensing an
intangible within that state may be subject to the state's

income tax and the state has, under these circumstances,
determined that a company does have sufficient nexus with the
state for income tax purposes.

You stated that Florida asserts its jurisdiction to tax a
company which licenses an intangible within this state. The
Company may be subject to the other state's income tax, since
the due process clause and the commerce clause do not prohibit
the state from imposing an income tax on Company. Accordingly,
you believe that Company, a Florida corporation, which is
licensing an intangible in another state, would be "subject to
tax in that state" and could therefore apportion its sales
outside Florida.

Statutory Authority

Section 220.15, F.S., provides that "adjusted federal income as
defined in s. 220.13 shall be apportioned to this state by
taxpayers doing business within and without this state..."

Rule 12C-1.015(1), F.A.C., provides in part:

"Apportionment of Adjusted Federal Income.

"(1) For taxable years beginning on or after January 1,
1991, corporations will apportion their adjusted federal income
in accordance with s. 220.15, F.S., only if they are doing
business within and without Florida. A taxpayer will be
considered doing business within and without this state if it
has income from business activity which is taxable both within
and without Florida.
"(a) In determining whether or not a taxpayer is doing
business within and without Florida, a taxpayer will be
considered doing business without this state if the corporation
is taxable in another state, provided:
"1. That state subjects the business to a net income tax, a
franchise tax measured by net income, a franchise tax for the
privilege of doing business, or a corporate stock tax, or,
"2. That state has jurisdiction to subject the taxpayer to
a net income tax regardless of whether, in fact, the state does
or does not..."

Rule 12C-1.015(1)(b)5. and 6., F.A.C. provides:

"5. If no other state may tax a Florida corporation because
of jurisdictional limitations due to the due process or commerce
clauses, P.L. 86-272 (which is incorporated by reference in Rule
12C-1.0511, F.A.C.), or de minimis exceptions, the corporation
will not be considered to be doing business within and without
Florida.
"6. If another state specifically rules that a Florida
corporation is subject to a net income tax, a franchise tax
measured by net income, a franchise tax for the privilege of
doing business, or a corporate stock tax within that state, such
ruling will be prima facie evidence that the state does have
jurisdiction to tax."

Rule 12C-1.015(2), F.A.C., provides:

"If a taxpayer is not considered to be doing business
within and without Florida under subsection (1), all of its
adjusted federal income will be subject to Florida corporate
income/franchise tax."

Discussion and Analysis Of Law

The facts provided show that Company is not subject to an income
tax of any other state, and no evidence has been provided that
would show that any state other than Florida has jurisdiction to
subject it to a net income tax. Therefore, Company has not met
either of the criteria which would allow it to apportion its
income for Florida corporate income tax purposes.

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,

Val Poliuto
Statutory Compliance Section

Control #21765
VJP/kk