Under Florida's 1996 intangible tax, were receivables contributed before January 1 to a Delaware subsidiary taxable?

Plain-English summary

Florida did not tax receivables contributed before January 1 to a Delaware subsidiary with no Florida business situs.

The subsidiary held the receivables on January 1 and could return them about one week later as dividends or in exchange for its stock. That later transfer did not change ownership, management, or control on the assessment date.

The parent's recordkeeping, payment accounting, reporting, and routine customer communications were ministerial and processing activities whether performed inside or outside Florida. The subsidiary stock received for the contribution was excluded when parent and subsidiary met the affiliated-group tests and filed together.

What this means for you

• January 1 ownership controlled despite a planned short holding period.
• Ministerial servicing did not create management or control.
• Stock exclusion depended on affiliated-group status and consolidated filing.

Common questions

Q: Were the Delaware subsidiary's receivables taxable? A: No.

Q: Did returning them a week later change the result? A: No.

Q: Was the subsidiary stock taxable? A: No, when parent and subsidiary qualified and filed together.

Citations and references

• Fla. Stat. § 199.023(8) — affiliated group ownership tests
• Fla. Stat. § 199.032 — annual intangible tax
• Fla. Stat. § 199.052(1), (10) — ministerial functions and consolidated returns
• Fla. Stat. § 199.175(2)(a) — business transacted in Florida
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-007

Original ruling text

Feb 06, 1996

Re: Technical Assistance Advisement No. 96(C)2-007 Intangible Tax - Taxable Situs Sections 199.052 and 199.175, F.S. XXX (Parent, Inc.)

Dear

Your letter requesting a Technical Assistance Advisement dated has been received by this office. The request deals with the taxation of intangible property transferred to a non-Florida entity.

STATEMENT OF FACTS

Parent, a subsidiary of C-Corp, is incorporated in Delaware and is domiciled in Florida. Parent generates sales within and without Florida and has accounts receivables that are generated in and out of Florida.

Parent will form a wholly owned subsidiary (Newco) under the laws of the state of Delaware. Newco will be commercially domiciled and maintain its principle office outside of Florida. Newco will have no sales, property or business situs in Florida and will not have any agents, employees, or representatives of any kind in Florida. Parent will perform ministerial activities (described below) at the discretion of Newco.

Prior to January 1, 1996, Parent is contemplating the transfer of all its accounts receivable to Newco #1 and Newco #2. The receivables will be transferred from Parent as a contribution to capital of Newco in exchange for Newco stock. Approximately one week after January 1, Newco may distribute the receivables to Parent as dividends or in exchange for Parent's Newco stock.

Parent and Newco will enter into a service agreement whereby Parent will provide the following services:

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maintain the books and records necessary for the collection of the receivables;

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report activities, outstanding balances, and aging of receivables to Newco #1 and Newco #2 on a periodic basis (typically monthly);

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account for the payment of the receivables which will be sent to the bank account of Corporation A, a wholly owned subsidiary of Parent. The bank is located outside of Florida. The funds will be remitted to Newco #1 and Newco

2 shortly thereafter.

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perform routine communications with the customer regarding late payments and credit problems, and,

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notify Newco of uncollected accounts by monthly transmittal of status report.

The agreement will be based on arm's length terms and conditions and Parent will be paid a fee for providing these services. Parent, Newco will be included in the filing of a consolidated Florida intangible personal property tax return.

ADVISEMENTS REQUESTED / CONCLUSIONS OF LAW

Based upon the scenario above, you have requested technical assistance on the following issues:

Question 1:

Are the receivables which are contributed by Parent to Newco and owned by Newco on January 1 subject to the intangible tax levied pursuant to section 199.032, F.S.?

Response:

The taxable status of this issue is governed by the "taxable situs" provisions of sections 199.052 and 199.175, F.S., which generally provide that the tax shall be paid on any intangible personal property that falls within the following two categories:

i) Any and all non-exempt intangible property that is owned, managed, or controlled by any person domiciled in

this state as of January 1 of the tax year. For purposes of this provision of law, "manage" or "control" is defined under section 199.052(1), F.S., as to not include any ministerial function or processing activity.

ii) Any and all non-exempt intangible property that is derived from, arises out of, or is issued in connection with business transacted in this state and which is owned, managed, or controlled by any person, regardless of domicile, that transacts business in this state. For purposes of this provision of law "business transacted in this state" is defined under subparagraph 199.175(2)(a), F.S., to be the regular conduct of business with customers in this state from a business location or through agents, employees, or representative of any kind within this state.

Therefore, it is the department's determination based on the facts before us, that the receivables which are contributed by Parent to Newco and owned by Newco on January 1 would not be subject to the 1996 Florida intangible tax since, as of January 1 of that year, they were not owned, managed, or controlled by a person domiciled in this state, or by any person transacting business in this state.

Question 2:

If Parent receives capital stock from Newco from the transfer of the receivables, will the stock be eliminated from Parent's taxable intangibles through the filing of a consolidated intangible personal property tax return?

Response:

The taxable status of this issue is governed by the provisions of subsection 199.052(10), F.S., which generally provides that an "affiliated group of corporations" may elect to file a consolidated return and exclude from taxation any capital stock, other than the parent's, which is owned by another corporation included on the return. For purposes of this provision of law an "affiliated group of corporations" is generally defined as a chain of corporations that satisfies both of the 80% stock

ownership tests as provided for under subsection 199.023(8), F.S.

Thus, since Parent and Newco do in fact constitute an affiliated group for purposes of section 199.023(8), F.S., we therefore conclude that the capital stock which Parent received from Newco would not be subject to the 1996 annual tax to the extent that Parent and Newco are included on the same consolidated return.

Question 3:

What is a definition of "ministerial functions", and do the above outlined activities of Parent constitute ministerial functions or processing activities under section 199.052, F.S.?

Response:

Insofar as there is no statutory definition for the term "ministerial" under Chapter 199, F.S., the department must therefore turn to the fundamentals of statutory construction to ascertain the meaning of this particular term as it applies to section 199.052, F.S. In this regard, the court in the matter of Simmons v. Schimmel, 476 So.2d 1342, 1344 (Fla. 1985), stated it to be an axiom of statutory construction that when a statute does not specifically define words of common usage, such words are to be construed in accordance with their plain and ordinary meaning. Consequently, the department has turned to Black's Law Dictionary (6th Edition) in order to ascertain the ordinary and plain meaning of the term "ministerial" which it defines as "that which involves obedience to instructions, but demands no special discretion, judgment, or skill" and an act "which a person or board performs under a given state of facts in a prescribed manner in obedience to the mandate of legal authority without regard to or the exercise of his or their own judgment upon the propriety of the act being done." Thus, based on this particular definition of the term "ministerial", we therefore conclude that the described activities of Parent would in fact constitute ministerial functions for purposes of section 199.052, F.S.

Regarding the question as to whether the described activities of Parent would constitute a "processing activity" for purposes of section 199.052, F.S., and in the absence of both a statutory and plain and ordinary meaning for this term, the department therefore is required to rely on the doctrine of statutory construction known as ejusdem generis as announced in the matter of Hannah v. Sunrise, 94 So.2d 597 (Fla. 1957). This doctrine of statutory construction provides that where the enumeration of specific things is followed by a more general word or phrase, then in such cases the general word or phrase is construed to refer to a thing of the same kind or species as is included within the preceding limiting or confining terms. Thus, based on this particular doctrine of statutory construction, it is our opinion that the terms "any ministerial function" and "and any processing activities" should be construed to be synonymous, and we therefore conclude that the described activities of Parent would also constitute "processing activities" for purposes of section 199.052, F.S.

Question 4:

Does it make a difference whether Parent performs these ministerial functions within or outside of Florida?

Response:

No, the taxable status of the receivables owned by Newco #1 and Newco #2 on January 1, 1996, would not be affected by whether the described ministerial functions of Parent are conducted within or outside Florida inasmuch as these activities do not constitute the management or control of an intangible asset for purposes of section 199.052, F.S.

Question 5:

Will a distribution of the receivables to Parent from Newco as dividends back to Parent for Newco stock one week after January 1 cause the receivables to be subject to the intangible tax pursuant to section 199.032, F.S.?

Response:

No, a post January 1 distribution of the receivables to Parent from Newco as dividends back to Parent for the stock of Newco would not cause the receivables to be subject to the 1996 annual tax since this transaction would not alter the fact that the receivables were not owned, managed, or controlled by a person domiciled in this state, or by a person transacting business in this state as of January 1 of that year.

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 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,

George D. Turner
Senior Tax Specialist
Tax Policy & Dispute Resolution

GDT