Under Florida's 1996 intangible tax, did receivables sold to an out-of-state subsidiary retain Florida taxable situs when the seller performed only ministerial servicing?

Plain-English summary

Florida found that the receivables sold to the non-Florida subsidiary did not have Florida taxable situs on January 1, 1996.

The Florida manufacturer sold substantially all receivables with Florida situs to its out-of-state subsidiary before year-end for a price approximating fair market value, receiving a market-rate promissory note. After the sale, the manufacturer maintained records, processed and deposited payments, sent routine notices, and answered routine inquiries. It could not compromise debts, refer them for collection, or take other unauthorized action.

The Department treated those retained services as ministerial functions, which did not amount to managing or controlling the receivables under section 199.052(1). The subsidiary's discretionary functions occurred outside Florida. The subsidiary's right to require a fair-market-value repurchase after January 1, and its later exercise of that right, did not change who owned or controlled the receivables on the January 1 assessment date.

The Department also found no Florida taxable situs for the promissory note given for the receivables because it resulted from business transacted outside Florida and was issued by a non-Florida entity.

What this means for you

• The January 1 ownership, control, and management facts drove the result.
• Routine recordkeeping, payment processing, notices, and customer responses were ministerial on these facts.
• Settlement, collection-referral, and other discretionary authority remained outside the Florida seller's role.
• A later repurchase right did not retroactively change the January 1 tax result.

Common questions

Q: Were receivables from out-of-state customers taxable if the Florida manufacturer still held them?
A: No. The Department said those receivables did not arise from Florida business with Florida customers.

Q: Did the seller's continued servicing create Florida situs?
A: No, as long as its activities remained the ministerial functions described in the agreement.

Q: Did the subsidiary's repurchase right change the January 1 result?
A: No, whether or not the right was later exercised.

Q: Was the promissory note received by the seller taxable in Florida?
A: No, because the ruling found that the note arose from an out-of-state transaction and lacked Florida situs.

Citations and references

• Fla. Stat. § 199.032 — annual intangible tax
• Fla. Stat. § 199.052(1) — January 1 ownership, control, and management test
• Fla. Stat. § 199.175 — Florida business situs
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-051

Original ruling text

Apr 17, 1996

Re: TAA 96(C)2-051
Intangible Personal Property Tax - Taxable Situs - Sale of
Accounts Receivable
XXX, hereinafter referred to as "A";

XXX, hereinafter referred to as "B"

Dear:

Your letter of XX, requested a Technical Assistance Advisement
on the effect of sales of accounts receivable from Florida
customers 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 "A" was incorporated in XXX is commercially
domiciled in XXX, and conducts business within and without
Florida. "A" has a manufacturing plant in Florida from which it
makes sales to both Florida and non-Florida customers. Accounts
receivable arising from the Florida plant's sales to "A's"
customers are serviced by "A's" employees in XXX. "A" files a

separate Florida intangible personal property tax return.

"B" was incorporated in XXX, is commercially domiciled in XXX,
conducts no business in Florida, and is a wholly-owned
subsidiary of "A." "B" does not presently, and will not during

the term of the proposed transaction, have any agents,
employees, or representatives in Florida other than "A," who may

perform certain activities at "B's" direction.

Prior to December 31, 1995, "A" intends to sell "substantially
all" of its receivables with Florida situs to "B" at a price
approximating fair market value, in exchange for a promissory

note bearing a market rate of interest, in accordance with a

contractual agreement. This transaction is expected to reflect

arm's length terms and conditions.

Under the service agreement entered into by "A" and "B" pursuant
to this transaction, "A" will service the receivables sold to

"B" for a fee following the sale. The services to be provided

by "A" in accordance with the contractual agreement are as

follows:

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

• Maintaining records relating to the receivables which were
  sold sufficiently to allow "B" to determine the status of
  each receivable

• Receive, collect and process all payments made relative to
  the receivables which were sold

• Deposit all collections related to the receivables which
  were sold, into accounts designated by "B" within two
  business days following receipt

• Sending routine notices to receivables obligors to remind
  them of delinquent payments, as directed by "B"

• Responding to routine inquiries of receivables obligors

concerning their receivables.

Additionally, "A" would have no authority to:

• Compromise or settle receivables

• Refer receivables to outside collection agencies,
  attorneys, or any other party for collection

• Take any other action not specified by the agreement, in

the servicing of the receivables.

On or after January 2, 1996, "B" may require "A" to repurchase
some or all of the receivables at fair market value. The
repurchase price may be paid by offsetting the unpaid principal
of the promissory notes originally issued in exchange for the

receivables.

QUESTIONS

1. Would the receivables from customers based outside of

Florida, have taxable situs in Florida on January 1, 1996,
and be subject to intangible personal property tax if "A"
held them on that date, rather than having sold them to

2. Will the receivables from Florida and non-Florida customers
   sold by "A" to "B" prior to January 1, 1996, and owned by
   "B" on January 1, 1996, be subject to intangible personal
   property tax?

3. Will ministerial functions performed by "A" on behalf of
   "B" relative to the receivables sold to "B," cause the
   receivables to be subject to intangible personal property
   tax?

4. Will discretionary functions performed by "B" from outside
   Florida cause the receivables to be subject to intangible
   personal property tax?

5. Will "B's" right to require repurchase by "A" of some or
   all of the receivables at fair market value after January
   1, 1996, affect the imposition of intangible tax on the
   receivables on January 1, 1996?

6. Will the actual exercise of "B's" right, addressed in
   question number five, affect the imposition of intangible
   tax on the receivables on January 1, 1996?

7. Do the activities to be performed by "A" set forth above
   and in the service agreement constitute ministerial
   functions or processing activities pursuant to s. 199.052,
   F.S.?

8. Will the promissory note issued prior to January 1, 1996,
   by "B" to "A" in exchange for the receivables, be subject

to Florida's intangible tax?

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.

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.

Accordingly, the answers to your specific questions follow:

1. Based on the information provided in your letter, some of
   the receivables resulted from sales by the Florida
   manufacturing plant to customers outside of Florida, and
   are serviced by "A's" employees in XXX. Therefore, even if
   "A" still held those receivables on January 1, 1996, rather
   than having sold them to "B," the receivables would not
   have had taxable situs in Florida on January 1, 1996, and
   would not have been subject to intangible personal property
   tax. Section 199.175, F.S., attributes Florida business
   situs to intangible property when it arises from business
   being conducted by individuals or entities in Florida with

customers in Florida.

Accordingly, the receivables arising from sales to
customers outside of Florida fail to meet the requirements
of s. 199.032, F.S., and would not be subject to Florida's

intangible tax.

2. The receivables from Florida and non-Florida customers sold

by "A" to "B" prior to January 1, 1996, and owned by "B" on
January 1, 1996, 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.

As stated in subsection 199.052(1), F.S., the performance
of ministerial functions by an entity will not cause
intangible personal property which would not otherwise be
subject to Florida's intangible tax, to become subject to
the tax. Therefore, as long as the loan servicing

activities of "A" on behalf of "B" do not exceed those
which would be considered ministerial functions, the
receivables sold by "A" to "B" would not have taxable situs
in Florida, nor would intangible tax be imposed on them as

a direct result of such activities.

To the extent "B" performs discretionary functions with
regard to the transferred receivables strictly from outside
the state, and the loans continue not to have taxable situs
in Florida, the loans will not be subject to Florida
intangible tax, as stated in s. 199.032, F.S. If the loans
are found to have taxable situs in Florida, the answer to

this question will change.

"B's" right to require repurchase by "A" of some or all of
the receivables at fair market value after January 1, 1996,
will not affect the imposition of intangible tax on the
receivables on January 1, 1996, 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, 1996, nor under the facts presented, did the
property have taxable situs in Florida.

The actual exercise of "B's" right, addressed in the answer
to question five will, again, not affect the imposition of
intangible tax on the receivables on January 1, 1996, for

the same reasons stated in that answer.

7. The activities of "A" set forth above and in the service
   agreement, following the sale of the receivables to "B,"
   appear to constitute ministerial functions as the term is

used in subsection 199.052(1), F.S.

8. The promissory note issued prior to January 1, 1996, by "B"
   to "A" in exchange for the receivables, will not be subject
   to Florida intangible tax. The note resulted from business
   transacted outside of Florida, was given by a non-Florida
   entity in exchange for the receivables, and accordingly,
   does not have taxable situs in Florida as required by s.
   199.032, F.S.

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
Tax Policy and Dispute

Resolution

SCP/kk

Control No.: 24312