Were receivables sold before January 1 by Florida subsidiaries to their Canadian parent taxable when the subsidiaries continued collection services?

Plain-English summary

The Florida Department of Revenue concluded that receivables sold before January 1 by two Florida subsidiaries to their Canadian parent were not subject to Florida intangible tax. On January 1, the parent owned and controlled the assets, conducted no Florida business, and had no Florida employees, agents, representatives, or assets.

The subsidiaries continued bookkeeping, reporting, collecting payments, remitting proceeds, sending routine late-payment communications, and notifying the parent about uncollected accounts. The Department classified every listed service as ministerial rather than management or control of the receivables.

The subsidiaries received interest-bearing intercompany notes for the transferred receivables. Those notes were excluded from tax if the parent and subsidiaries were properly included on the same timely filed consolidated Florida intangible-tax return. Filing the consolidated return did not itself give the parent's intangible property a Florida business situs.

What this means for you

Corporate groups transferring receivables

For this 1996 ruling, ownership, management, and control on January 1 drove the result. The Canadian parent independently managed the receivables, while the Florida subsidiaries' service agreements limited them to routine collection and processing work.

Credit and collections teams

The Department treated the specific servicing list as ministerial: maintaining records, periodic reporting, receiving and accounting for payments, remitting proceeds, and sending routine late-payment or status notices. Discretionary credit or management decisions were not part of the approved facts.

Corporate tax departments

Two limitations mattered. The parent had to remain free of Florida business activity and Florida personnel, and the intercompany-note exclusion required proper inclusion of all parties on a timely consolidated return.

Common questions

Q: Did the Florida subsidiaries owe tax on the sold receivables? A: No. They did not own, manage, or control the assets on January 1, and their continuing duties were ministerial.

Q: Did the Canadian parent owe Florida intangible tax? A: No on the stated facts. It conducted no Florida business and had no Florida employees, agents, representatives, or assets.

Q: What if some receivables originally arose from Florida transactions? A: The ruling still concluded that the parent's assets were not taxable where the parent transacted no Florida business and had no Florida personnel or representatives.

Q: Did selling the assets back after January 1 change the result? A: The ruling said the tax was based on taxable assets owned on January 1. The planned transfer back on or after January 2 did not alter who owned the assets on the measurement date.

Q: Were the intercompany promissory notes taxable? A: They were excluded to the extent the parent and subsidiaries were properly included on the same timely consolidated return.

Q: Can another corporate group rely on this TAA? A: Not automatically. The advisement states that it binds the Department only under the facts and circumstances described in the request, and later legal changes or court interpretations may produce a different result.

Citations and references

• Fla. Stat. § 199.032 (annual intangible personal property tax)
• Fla. Stat. § 199.052(1) (ministerial functions and processing are not management or control)
• Fla. Stat. § 199.052(10) and § 199.023(8) (consolidated returns and affiliated groups)
• Fla. Stat. § 199.175 (Florida taxable situs and business situs)
• Fla. Stat. § 213.22 (technical assistance advisements)
• Fla. Stat. ch. 119 (public records)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-134

Original ruling text

Dec 13, 1996

Re: Technical Assistance Advisement No. 96(C)2-134 Intangible Tax - Taxable Situs Sections 199.052 and 199.175, F.S. XXX (Parent) YYY (Subsidiary A) ZZZ (Subsidiary B)

Dear :

Your letters requesting a Technical Assistance Advisement dated October 9, 1996, and December 10, 1996, have been received by this office. The request deals with the taxation of intangible property transferred to a non-Florida entity.

STATEMENT OF FACTS

Parent is organized under the laws of Canada and is commercially domiciled and maintains its principal office in Canada. Parent conducts no business in Florida. Parent has no employees, agents, representatives or assets of any kind located in the state. Parent is the common parent of two subsidiaries, Subsidiary A and Subsidiary B. Subsidiary A, a wholly owned subsidiary of Parent, is organized under the laws of the state of Florida and commercially domiciled in Florida. Subsidiary A's intangible tax return includes all corporations in its affiliated group as defined by subsection 199.023(8), F.S.

Subsidiary B, a wholly owned subsidiary of Subsidiary A, is incorporated in Florida and commercially domiciled in Florida. Subsidiary B is included in the consolidated intangible tax return filed by Subsidiary A as provided for under subsections 199.052(10) and 199.023(8), F.S.

As described below, Subsidiary A and Subsidiary B will perform ministerial activities on behalf of Parent with respect to the receivables and other intangibles which Subsidiary A and Subsidiary B will transfer to Parent. Parent has its own

officers and directors who perform their duties independently of Subsidiary A and Subsidiary B.

Prior to January 1, 1997, Subsidiary A and Subsidiary B (hereinafter also referred to as "the Subsidiaries") anticipate the sale of the following assets to Parent:

1. Notes receivable from installment sales. Subsidiary B
   generates notes receivables from installment contracts in the normal course of its business.
2. Trade accounts receivables. Trade accounts receivable
   include receivables generated by Subsidiary A in the normal course of business. Some of these receivables arise from transactions occurring in Florida while others have a taxable situs in Florida only by virtue of being owned by one of the Subsidiaries who has its commercial domicile in Florida.

The Subsidiaries will sell the receivables to Parent at less than fair market value, based on a discount equal to the bad debt percentage of the receivables at the time of sale, in exchange for intercompany promissory notes from each company bearing a market rate of interest and reflecting arm's length terms and conditions. The assets, which are carried on the Subsidiaries_ books at their fair market value, will be sold pursuant to contracts for sale between the Subsidiaries and Parent and will be identified by the name of the obligor and the amount owed at the time of transfer. The Subsidiaries will treat all assets sold under this contract as having been sold in its accounting records by making appropriate entries to remove the assets sold and record the note receivable from Parent. In its anticipated that Subsidiary A will file a consolidated return which will include Subsidiary B and Parent and that the notes receivable from Parent to each of the Subsidiaries created by this sale will be eliminated from the taxable base.

The Subsidiaries will enter into service agreements with Parent whereby the Subsidiaries will provide, at the discretion of Parent, the following services:

*

Maintaining the books and records necessary for the

collection of the receivables sold.
*

Reporting activities, outstanding balances, and aging

of receivables to Parent on a periodic basis (typically monthly).
*

Collecting the receivables (receive payments) and

accounting for the payment of the receivables.
*

Remitting proceeds to the purchaser (Parent).

*

Sending routine communications with the customer

regarding late payments and credit problems.
*

Notifying Parent of uncollected accounts by monthly

transmittal of status report.
*

Sending routine form reminder notices to customers for

late payments.

The agreement will be based on arm's length terms and conditions. The Subsidiaries will be paid a fee for providing these services to Parent. The Subsidiaries and Parent will each have the right to cancel these service agreements with ten (10) days notice.

On or after January 2 of the year following sale of the assets, that parent will sell back to the Subsidiaries some or all of the purchased assets, and the promissory notes will be satisfied.

ISSUES

Based on the facts as stated above, rulings have been requested on the following issues:

1. Are the assets which are sold by the Subsidiaries to
   Parent and owned, managed and controlled by Parent on January 1 subject to the Florida intangible tax?
2. If the receivables sold included accounts which
   originally had a Florida business situs, will those receivables be subject to the Florida intangible tax?
3. If the assets were transferred back to the
   Subsidiaries after January 1, does this affect the tax treatment of the assets on January 1?
4. If the Subsidiaries each received a promissory note
   from Parent on the sale of the assets, may the

promissory notes be eliminated from their intangible tax base through the filing of a consolidated intangible personal property tax return?

5. Do the foregoing listed activities, which consist of
   services to be provided by the Subsidiaries for Parent, subject the assets to the Florida intangible tax? If so, which of the activities would be deemed to exceed the ministerial functions or processing activities contemplated in Section 199.052(1), Florida Statutes?

LAW AND DISCUSSION

For purposes of the annual tax imposed under section 199.032, F.S., intangible personal property shall have a taxable situs in this state when it is owned, managed, or controlled by any person domiciled in this state on January 1 of the tax year, as provided in section 199.175, F.S. "Any person domiciled in this state" means: (a) any natural person who is a legal resident of this state; (b) any bank or financial institution, company, corporation, partnership, or other artificial entity organized or created under the laws of this state, except a trust; or (c) any person, including a trust, who has established a commercial domicile in this state. A business or other artificial entity acquires its commercial domicile in this state when it maintains its chief or principal office in this state where executive or management functions are performed or where the course of business operations is determined.

Intangible personal property shall have a taxable situs in this state when it is deemed to have a business situs in this state and it is owned, managed, or controlled by a person transacting business in this state, even though the owner may claim a domicile elsewhere. Intangibles shall be deemed to have a Florida business situs when they receive the benefit and protection of Florida laws and courts and they are derived from, arise out of, or are issued in connection with business transacted in this state with a customer in this state.

Subsection 199.052(10), F.S., provides for the filing of a consolidated intangible tax return, and the elimination of

intercompany accounts of qualifying members of the consolidated group. The filing of a consolidated return will not in itself provide a business situs for intangible personal property held by a corporation.

CONCLUSION

The Subsidiaries will not be subject to the Florida intangible tax on the assets that they sold to Parent, since on January 1, they did not own, manage or control the transferred assets. The service activities listed are ministerial functions and do not constitute management and control of the assets. The Florida intangible tax is based on the taxable assets owned on January 1 of each year. If the Parent transacts no business in Florida, and has no employees, agents, or representatives in Florida, its intangible assets would not be subject to the Florida intangible tax.

Intercompany receivables and investments are eliminated from a timely filed consolidated intangible tax return. Consequently, and to the extent Parent and the Subsidiaries are properly included on the same consolidated return, then the subject promissory notes between those parties would be excluded from taxation since this item constitutes an intercompany account for Florida intangible tax purposes.

This response constitutes a Technical Assistance Advisement under section 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 section 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 section 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
Office of General Counsel
GDT/