How did Florida treat a retail parent company's investment interest and intercompany dividends in its corporate sales-factor apportionment?

Subject

Sales Apportionment

Plain-English summary

The Department treated the parent's investment interest and intercompany dividends differently in the Florida sales factor. The parent used dividend income for cash management and invested operating cash in commercial paper, money-market accounts, and money-market funds for future expansion.

The general sales-factor statute excluded interest and dividends for taxpayers other than financial organizations. But Florida also allowed an alternative method when the standard formula did not fairly represent the state's share of the tax base.

The small interest amount did not justify adjustment because excluding less than 1% of gross receipts caused no apparent distortion. The dividends were different: at approximately 7%, they were material intercompany receipts connected to identifiable investments in the subsidiaries, so the Department included and sourced them under the intangible-income rule.

What this means for you

Business-income classification did not automatically mean a receipt entered the sales factor. The ruling first classified the income, then separately tested the statutory sales-factor exclusions and potential distortion.

Materiality and a fair measure of business activity drove the alternative treatment of the intercompany dividends on these facts.

Common questions

Q: Was the investment interest nonbusiness income? No. The Department found it arose in the ordinary course of the taxpayer's business and was business income.

Q: Why was business interest excluded from the sales factor? The taxpayer was not a financial organization, and section 220.15 generally excluded interest; the small amount created no distortion requiring an alternative method.

Q: Why were dividends included despite the general exclusion? They were material intercompany receipts, and excluding them would inaccurately represent the taxpayer's Florida activity.

Q: Where were the dividends sourced? To the subsidiaries' location because the income-producing activity was the identifiable investment in those subsidiaries.

Citations and references

• Fla. Stat. § 220.03(1)(r) — business and nonbusiness income
• Fla. Stat. § 220.15(5) and (5)(a) — sales-factor fraction and excluded receipts
• Fla. Stat. § 220.152(4) — alternative method for equitable apportionment
• Fla. Admin. Code R. 12C-1.0155(1)(f)1.-2. and (1)(j) — identifiable intangible-income activity and intercompany sales
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97C1-001

Original ruling text

Feb 27, 1997

Re: TAA 97(C)1-001
Corporate Income Tax - Sales Apportionment
XXX, hereinafter referred to as "A and Subsidiaries"

Dear :

Your letter of XX, requested a Technical Assistance Advisement
on the proper calculation of the sales apportionment factor for
Florida corporate income tax purposes. 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 of XX, states that "A," the parent corporation of an
affiliated group of corporations is incorporated in XX, is
domiciled in Florida, and files consolidated Florida corporate
income tax returns. With one exception, the subsidiaries of the
parent company are incorporated in XX and are domiciled in XX.
The main operating subsidiary has sales, property, and payroll,
both within and without Florida. None of the other subsidiaries
have Florida nexus. These corporations sell XX through retail
stores.

"A" receives dividends from holding stock in several of its XX
domiciled subsidiaries, which your letter states qualify for the
federal dividends received deduction. According to your letter,
this dividend income is used for cash management purposes, and
represents approximately 7% of "A's" gross receipts.
Additionally, "A" invests excess cash generated from business
operations in commercial paper, money market accounts, and money
market funds. Your letter states that these investments are held
for future business expansion, and the income derived from them
represents less than 1% of "A's" gross receipts.

QUESTIONS

1. Should the interest income received from these investments
be characterized as business income or nonbusiness income
for Florida corporate income tax purposes?

2. Is interest and dividend income received by "A" properly
   includable in the sales factor for Florida corporate income
   tax purposes?
3. If the dividend income received by the parent company from
   the subsidiaries domiciled in XX is properly includable in
   the sales factor for Florida corporate income tax purposes,
   where should it be sourced?

DISCUSSION AND ANALYSIS OF LAW

Section 220.03(1)(r), F.S., states:

(r) "Nonbusiness income" means rents and royalties from
real or tangible personal property, capital gains,
interest, dividends, and patent and copyright royalties, to
the extent that they do not arise from transactions and
activities in the regular course of the taxpayer's trade or
business. The term "nonbusiness income" does not include
income from tangible and intangible property if the
acquisition, management, and disposition of the property
constitute integral parts of the taxpayer's regular trade
or business operations, or any amounts which could be
included in apportionable income without violating the due
process clause of the United States Constitution. For
purposes of this definition, "income" means gross receipts
less all expenses directly or indirectly attributable
thereto. Functionally related dividends are presumed to be
business income.

Section 220.15, F.S., states in part:

(5) The sales factor is a fraction the numerator of which
is the total sales of the taxpayer in this state during the
taxable year or period and the denominator of which is the
total sales of the taxpayer everywhere during the taxable
year or period.

(a) As used in this subsection, the term "sales" means all
gross receipts of the taxpayer except interest, dividends,
rents, royalties, and gross receipts from the sale,
exchange, maturity, redemption, or other disposition of
securities....

Section 220.152, F.S., states in part:

If the apportionment methods of ss. 220.15 and 220.151 do
not fairly represent the extent of a taxpayer's tax base
attributable to this state, the taxpayer may petition for,
or the department may require, in respect to all or any
part of the taxpayer's tax base, if reasonable:

(4) The employment of any other method which will produce
an equitable apportionment.

Paragraph 220.03(1)(r), F.S., defines "nonbusiness income" as
certain types of income which arise from transactions and
activities which are not in the regular course of the taxpayer's
trade or business operations. Items of income from activities
which constitute integral parts of the taxpayer's regular trade
or business operations, or the inclusion of which in
apportionable income would not violate the due process clause of
the U.S. Constitution, are business income.

Except in the case of financial organizations, income from
interest and dividends is generally excluded from the
calculation of the Florida sales factor for corporate income tax
purposes, as provided by s. 220.15(5), F.S. However, s.
220.152, F.S., allows other methods of apportionment when the
customary formula provides an inequitable representation of the
tax base reported to Florida.

Intercompany transactions are normally included in the Florida
apportionment factor because the apportionment factor is
intended to provide a measure of business activity which
generates federal taxable income and, ultimately, Florida net
income which is taxed. This is consistent with the concept of
Rule 12C-1.0155(1)(j), F.A.C., which provides for the inclusion
of intercompany sales in the Florida sales factor.

In your analysis concerning the inclusion or exclusion of the
intercompany dividends in the sales factor, you reference Rule
12C-1.0155(1)(f)2., F.A.C., which discusses income which cannot
be attributed to a particular income producing activity of the
taxpayer. However, the source of these dividends is "A's"
investment in its subsidiaries, and the income is directly
attributable to those investments. Therefore, Rule 12C1.0155(1)(f)1., F.A.C., would apply in this instance because the
income producing activity can be readily identified as the
investment in the subsidiaries.

Accordingly, the answers to your specific questions follow:

1. Based on the facts presented in your letter, the interest
   income received from investments is derived from
   transactions in the ordinary course of the taxpayer's
   business, and should be characterized as business income
   subject to formulary apportionment.
2. The taxpayer does not appear to meet the definition of a
   financial organization; therefore, pursuant to
   220.15(5)(a), F.S., the interest income received from
   investments should not be included in the calculation of
   the sales factor for Florida corporate income tax purposes.
   Based on the facts presented in your letter, s. 220.152,
   F.S., would not apply, because the interest received from
   investments represents less than 1% of the taxpayer's gross
   receipts, and excluding that income from the Florida sales
   factor should cause no distortion of income reported to
   Florida.

The intercompany dividends should be included in the
Florida sales factor, because the apportionment factor is
intended to be a measure of activity, and to exclude them
would provide an inaccurate representation of the
taxpayer's activity in Florida. The dividends should also
be included, because they represent approximately 7% of the
taxpayer's gross receipts, which appears to be a relatively
material amount.

3. As stated in Rule 12C-1.0155(1)(f)1., F.A.C., where the
   income producing activity which gives rise to income from

intangible personal property can be readily identified, the
income is sourced to that location. Therefore, the
dividend income paid by the subsidiaries to "A" should be
sourced to the location of the subsidiaries, which in this
case is XX.

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.: 27691