Under Florida's 1996 intangible tax, were receivables sold before January 1 to an out-of-state subsidiary taxable?

Plain-English summary

Florida did not tax receivables owned on January 1 by an out-of-state subsidiary with no Florida business situs.

The seller planned to transfer receivables before January 1 at face value or a discount for a market-rate note. It continued recordkeeping, collection, remittance, reporting, and customer communications under a service agreement. The Department treated those functions as ministerial, so neither company reported the receivables for that year.

A transfer back after January 1, including under delinquent-account recourse provisions, did not change the assessment-date result. But if the seller still held the receivables on the following January 1, the ruling said they would likely become taxable to the seller.

The intercompany note qualified for elimination on the consolidated return. A nominal discount did not change the answers, while a substantial discount unsupported by market factors could change all of them.

What this means for you

• January 1 ownership and situs controlled the current year's result.
• Routine servicing did not amount to management or control.
• Recourse after January 1 did not retroactively change the assessment date.
• Pricing needed market support; a substantial unsupported discount was a stated risk.

Common questions

Q: Were the subsidiary-owned receivables taxable on January 1? A: No.

Q: Did a later transfer back change that year's result? A: No.

Q: What if the seller still owned them the next January 1? A: The ruling said they would likely be taxable to the seller.

Q: Did the discount matter?
A: A nominal discount did not, but an unsupported substantial discount could change the ruling's answers.

Citations and references

• Fla. Stat. § 199.032 — annual intangible tax
• Fla. Stat. § 199.052(1) — ministerial functions
• Fla. Stat. § 199.052(10) — consolidated returns and intercompany accounts
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-018

Original ruling text

Feb 23, 1996

Re: TAA 96(C)2-018
Corporate Intangible Personal Property Tax - Sale of Accounts Receivable XXX, hereinafter referred to as "A"; XXX, hereinafter referred to as "B"

Dear :

Your letter of XXX, requested a Technical Assistance Advisement on the effect of sales of accounts receivable on the intangible personal property tax liabilities of the seller and purchaser. 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

Your letter states that "A" does business both within and without Florida, and has accounts receivable generated in Florida and other states, as well as intercompany receivables. "A" intends to file its first consolidated Florida intangible tax return in 1996.

"A" has a subsidiary, "B," which is organized under the laws of, is commercially domiciled in, and maintains its principal office in XXX. "B" has no business situs in Florida, nor does it have agents, employees, or representatives of any kind in Florida other than "A," which may be directed by "B" to perform ministerial activities with regard to the accounts receivable purchased from "A."

Prior to January 1, "A" intends to sell all or part of its accounts receivable to "B" at face value, or at a discount, in exchange for a promissory note bearing a market rate of interest. This transaction is expected to reflect arm's length terms and conditions. Delinquent accounts will be subject to

transfer from "B" to "A," pursuant to recourse provisions set forth in the contract governing this transaction.

Under the service agreement entered into by "A" and "B" pursuant to this transaction, "A" is to provide the following services:

*

Identifying all receivables governed by this agreement in its accounting records.

*

Ensuring these receivables are in compliance with "B's" credit and collection policies, and are not in default prior to transfer or purchase.

*

Maintaining any records necessary for the collection of the receivables which were sold.

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Reporting activities, outstanding balances, and aging of receivables to "B" on a regular periodic basis.

*

Collecting and accounting for the receivables.

*

Remitting proceeds to "B."

*

Communicating with customers regarding late payments.

*

Communicating with customers regarding credit problems.

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Notifying "B" of uncollected accounts.

*

Sending standard form notices to customers to remind them of late payments.

In exchange for providing these services, "B" will pay "A" a fee, which is to be based on arm's length terms and conditions. "A" expects to file a consolidated Florida intangible personal property tax return which will include "B."

On or after January 2, "B" expects to transfer some or all of the receivables purchased from "A," back to "A," in satisfaction of the promissory note tendered in the original purchase.

QUESTIONS

1. Are the receivables sold by "A" to "B," and owned by "B" on
   January 1, subject to the Florida intangible tax imposed by s. 199.032, F.S.?
2. Will the transfer of the receivables back to "A" after
   January 1, affect their tax treatment on January 1?
3. If some or all of the receivables are transferred back to
   "A" after January 1, will the tax treatment be affected?
4. Do the activities of "A" set forth above constitute

ministerial functions as that term is used in s. 199.052, F.S.? If not, which activities do not meet the criteria of ministerial functions?

5. If "A's" activities fall outside those deemed to comprise
   ministerial functions, is "A" or "B" required to report the receivables?
6. May the promissory note received by "A" from "B" in
   exchange for the receivables, be eliminated as a consolidating elimination in preparing the consolidated Florida intangible personal property tax return?
7. If the receivables are sold at a discount in exchange for a
   promissory note, would the responses to questions one through six change?

DISCUSSION AND ANALYSIS OF LAW

Section 199.032, F.S., states in part:

An annual tax of 2 mills is hereby imposed on each dollar of the just valuation of all intangible personal property which has a taxable situs in this state,...

Subsection 199.052(1), F.S., states:

An annual intangible tax return must be filed with the department by every corporation authorized to do business in this state or doing business in this state and by every person, regardless of domicile, who on January 1 owns, controls, or manages intangible personal property which has a taxable situs in this state. For purposes of this chapter, "control" or "manage" does not include any ministerial function or any processing activity. The return shall be due on June 30 of each year. It shall list separately the character, description, and just valuation of all such property.

Subsection 199.052(10), F.S., states:

An affiliated group of corporations may elect to make a consolidated return for any year.... Where a consolidated return is made, intercompany accounts, including the

capital stock of an includable corporation, other than the parent, owned by another includable corporation, shall not be subject to annual taxation. However, capital stock and other intercompany accounts of a nonqualified member of the affiliated group shall be subject to annual tax. Each consolidated return shall be accompanied by documentation identifying all intercompany accounts and containing such other information as the department shall require.

The intent of the statutes referenced above is to impose a tax on all intangible personal property having a taxable situs in Florida. An intangible personal property tax return is to be filed by all corporations or persons owning, controlling or managing intangible personal property with a taxable situs in Florida. As stated in subsection 199.052(1), F.S., ministerial functions and processing activities do not meet the criteria of "managing" or "controlling" intangible personal property. Additionally, s. 199.052(10), F.S., authorizes corporations to file consolidated intangible personal property tax returns, and provides for the elimination of intercompany accounts consistent with Generally Accepted Accounting Principles (GAAP).

Accordingly, the answers to your specific questions follow:

1. The receivables sold by "A" to "B," and owned by "B" on
   January 1, are not subject to the tax imposed by s. 199.032, F.S., as a result of not having taxable situs in Florida on the assessment date provided by subsection 199.052(1), F.S.
2. The transfer of the receivables back to "A" after January
   1, will not affect their intangible personal property tax treatment because, as stated in subsection 199.052(1), F.S., the tax is imposed on corporations and persons holding intangible personal property having a taxable situs in Florida on January 1. In this instance "A" did not manage or control the property on January 1, nor under the facts presented, did the property have taxable situs in Florida.
3. If some or all of the receivables are transferred back to
   "A" after January 1, the tax treatment for the current year will not be affected for the same reasons given in the

previous answer. Obviously however, if "A" still retains these receivables on the following January 1, the receivables will likely meet all criteria to establish an intangible personal property tax liability for "A."

4. The activities of "A" following the transfer of the
   receivables to "B," constitute ministerial functions as the term is used in subsection 199.052(1), F.S.
5. "A's" activities do not fall outside those deemed to
   comprise ministerial functions. Therefore, neither "A" nor "B" is required to report the receivables for intangible personal property tax purposes, because "B" owned them on January 1.
6. Subsection 199.052(10), F.S., provides for the filing of
   consolidated intangible personal property tax returns by corporations, and further provides for those consolidating eliminations normally allowed by GAAP. Because intercompany receivables are one category of consolidating elimination allowed by GAAP, the note payable given to "A" by "B" in exchange for "A's" accounts receivable, appears to meet the criteria for elimination in the consolidated return.
7. The answers to questions one through six would remain the
   same if the receivables are sold at a nominal discount. However, if they are sold at a substantial discount which cannot be supported by market factors, the responses to questions one through six may change.

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 on file documents evidencing some desired deletions.

Sincerely,

Suzanne C. Paul
Tax Policy and Dispute
Resolution

SCP/kk
Control No.: 24130