Could a mixed transportation and non-transportation consolidated group use its proposed alternative Florida apportionment method?

Subject

Alternative Apportionment for a Mixed Transportation Group

Plain-English summary

Florida denied the consolidated group's proposed alternative apportionment method. The group included ten linehaul transportation subsidiaries, five non-transportation subsidiaries, and a parent holding company. It argued that the statutory method overstated income attributable to Florida.

The Department required the transportation subsidiaries to apportion transportation income using Florida revenue miles divided by revenue miles everywhere. The parent holding company and all remaining adjusted federal income had to use the regular property, payroll, and sales formula.

The taxpayer's Option 2 would have separately apportioned each category and applied a blended gross-receipts factor to the parent. But the taxpayer did not show that the statutory method produced gross distortion, taxed extraterritorial value, or attributed income to Florida out of all proportion to its Florida business.

What this means for you

Section 220.152 allowed alternative methods, but the TAA described a strong presumption in favor of the statutory formula. A taxpayer needed evidence of an arbitrary or unreasonable result approaching a constitutional problem, not merely a lower number under its preferred method.

The Department compared the taxpayer's variances with much larger distortions in the cases it discussed. It found the taxpayer's differences relatively small and insufficient to justify relief.

Common questions

Q: Could the whole consolidated group use one revenue-mile factor? No. Non-transportation members prevented use of the transportation formula for all group income.

Q: Which income used the revenue-mile method? Transportation income of the transportation subsidiaries under section 220.151(2).

Q: Which income used the three-factor formula? The parent holding company's income and all other remaining adjusted federal income.

Q: Why was Option 2 rejected? The taxpayer did not prove the statutory method was grossly distorted, arbitrary, unreasonable, or out of proportion to Florida activity.

Q: Did the TAA decide the audited 1985-1994 years? No. Its stated scope was prospective tax years beginning after December 31, 1994.

Citations and references

• Fla. Stat. § 220.131(5) — factor treatment for consolidated groups with transportation and non-transportation members
• Fla. Stat. § 220.15(1) — property, payroll, and sales apportionment formula
• Fla. Stat. § 220.151(2) — transportation revenue-mile formula
• Fla. Stat. § 220.152 — alternative apportionment relief
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C1-003

Original ruling text

Apr 07, 1998

Re: Technical Assistant Advisement 98(C)1-003
XXX ("Taxpayer")
Alternative Apportionment--Transportation Company
Consolidated Return Group
s. 220.131(5); s. 220.151(2); s. 220.152, F.S.

Dear :

This is in response to your letter of October 22, 1996, as
amended by letter dated November 1, 1996, in which you requested
a Technical Assistant Advisement regarding the allowance of an
alternative apportionment method for a transportation
consolidated group pursuant to Section 220.152, F.S.

FACTS

The taxpayer is a Florida corporation which has elected for
federal and Florida corporate tax purposes to file consolidated
returns. The affiliated group has filed Florida consolidated
returns since at least 1985 and has included both transportation
and non-transportation corporations in its Florida consolidated
filing. The taxpayer is a privately held holding company for a
number of wholly-owned subsidiary corporations, some of which
are linehaul trucking corporations and others of which perform
non-linehaul functions. Pursuant to this request there are 15
subsidiaries, ten (10) of which are linehaul transportation
entities and five (5) of which are non-transportation entities.

The taxpayer's Florida Corporate Income/Emergency Excise Tax
returns for the years ended December 31, 1985, through December
31, 1994, were examined by the Florida Department of Revenue.
In the examining agent's report, adjustments were made to
Florida taxable income as a result of changes made to the method
of apportioning taxable income to the State of Florida in the
originally filed returns. The scope of this advisement is to
address the method of apportioning income on a prospective
basis, that is for tax years beginning after December 31, 1994.

The taxpayer asserts that the prescribed method of apportioning
income to Florida does not fairly represent (i.e., overstates)
the extent of its tax base attributable to Florida. The
taxpayer and its subsidiaries filed Florida consolidated returns
pursuant to Section 220.131, F.S., using a single apportionment
factor consisting of Florida revenue miles divided by revenue
miles everywhere. The Florida auditor determined that the
taxpayer and its subsidiaries were not entitled to use the
single factor transportation method, which determines revenue
miles within Florida and revenue miles everywhere, because some
of the subsidiaries did not furnish transportation services.

ANALYSIS

Section 220.131, F.S., is an elective method of reporting the
Florida corporate income tax for an affiliated group of
corporations, and the transportation apportionment method is
available to taxpayers furnishing transportation service
exclusively in interstate commerce. Where an affiliated group
that has elected to file consolidated returns contains members
that are not furnishing transportation services, Subsection
220.131(5), F.S., requires the transportation members to convert
their mileage factors to property, payroll, and sales factors.
Section 220.152, F.S., permits taxpayers, even those filing
consolidated returns, to petition the Department for the use of
an alternative apportionment method. This request for a
Technical Assistance Advisement is the taxpayer's request for
alternative apportionment under Section 220.152, F.S.

Section 220.15(1), F.S., provides that "[e]xcept as provided in
ss. 220.151 and 220.152, adjusted federal income as defined in
s. 220.13 shall be apportioned to this state by multiplying it
by an apportionment fraction...." This section then goes on to
articulate the "three-factor" (sales, payroll and property)
apportionment methodology. Transportation companies apportion
their income to Florida using a "single-factor" ("revenue
miles") methodology specified in Section 220.151(2), F.S., which
provides in part that:

(2) The tax base for a taxpayer furnishing transportation

services, for the purpose of computing a tax on those
activities, shall be apportioned to this state by
multiplying such base by a fraction the numerator of which
is the revenue miles of the taxpayer in this state and the
denominator of which is the revenue miles of the taxpayer
everywhere.

(a) For transportation other than by pipeline, a revenue
mile is the transportation of one passenger or 1 net ton of
freight the distance of 1 mile for a consideration.

When a taxpayer is engaged in the transportation of both
passengers and freight, the fraction shall be determined by
means of an average of the passenger revenue mile fraction
and the freight revenue mile fraction, weighted to reflect
the taxpayer's relative railway operating income from total
passenger and total freight service as reported to the
Interstate Commerce Commission, in the case of
transportation by railroad, or weighted to reflect the
taxpayer's relative gross receipts from passenger and
freight transportation, in case of transportation other
than by railroad.

Section 220.152, Florida Statutes, states that:

If the apportionment methods of ss. 220.15 and 220.151 do
not fairly represent the extent of a taxpayer's 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:

(1) Separate accounting;
(2) The exclusion of any one or more factors;
(3) The inclusion of one or more additional factors
which will fairly represent the taxpayer's tax
base attributable to this state; or
(4) The employment of any other method which will
produce an equitable apportionment.

The taxpayer asserts that it is being subjected to tax on income
that is out of all proportion to the amount of business being

conducted in Florida and, therefore, seeks to use an alternate
method of apportionment. The taxpayer's proposed Option 2
apportionment methodology involves separating Florida's adjusted
federal income into three parts. Under the taxpayer's proposed
Option 2, as illustrated in taxpayer's Attachment "Analysis of
Option 2--Period 12/31/85-12/31/89" of its Technical Assistance
Advisement request, the apportionment methodology is to
apportion separately the adjusted federal income of the linehaul
corporations using the single-factor, revenue miles method; the
adjusted federal incomes of the non-linehaul corporations would
be apportioned separately based on the three factor (property,
payroll, and sales factors) apportionment formula; and to
apportion separately the adjusted federal income of the
taxpayer, the parent corporation, which is also a holding
company, by comparing the total of the Florida gross receipts of
the linehaul companies and the gross receipts assigned to
Florida customers of the non-linehaul corporations to the total
gross receipts of both the line-haul and non-linehaul companies.
The composite Florida based gross receipts are then compared to
total gross receipts, with the resulting percentage applied to
the taxpayer's (the parent corporation's) adjusted federal
income.

Under the taxpayer's proposed Option 2, the taxpayer's 1986,
1987, 1988, and 1989 Florida apportionment factors would have
been 79.718%, 63.454%, 38.980%, and 29.616%, respectively,
versus the Department's figures (using the statutory
apportionment methodology) of 74.444%, 62.915%, 53.209%, and
52.042%, respectively. For these four years, the percentage
amount differences between the statutory apportionment factor
computed in accordance with Section 220.151, F.S., and the
taxpayer's proposed Option 2 apportionment factor is (-5.274%)
[74.444% minus 79.718%], (-.539%) [62.915% minus 63.454%],
14.229% [53.209% minus 38.980%], 22.426% [52.042% minus
29.616%], respectively. Alternatively, this variance can be
expressed in the following manner: the Department's method over
the four year period, on the average, is 7.711% (60.653% vs.
52.942%) greater than the Taxpayer's proposed Option 2.

Under the taxpayer's proposed Option 2, (See "Analysis of Option
2-Period 12/31/90-12/31/94"), the taxpayer's 1990, 1991, 1992,

1993, and 1994 Florida apportionment factors would have been
46.626%, 47.013%, 47.385%, 59.172%, and 42.280%, respectively,
versus the Taxpayer's figures on its return (the "revenue miles"
for both transportation and non-transportation entities) of
47.282%, 45.335%, 44.163%, 47.860%, and 20.424%, respectively.
For these five years, the percentage amount differences between
the taxpayer's reported apportionment factor ("revenue miles"
for all corporate entities), and the taxpayer's proposed Option
2 apportionment factor is .656%, (1.678%),(3.222%), (11.312%),
and (21.856%), respectively. Alternatively, this variance can
be expressed in the following manner: the Return Filing Method
("revenue miles" for both transportation and non-transportation
entities) over the five year period, on the average, is (7.482%)
[41.013% vs. 48.495%] less than the Taxpayer's proposed Option

2. The statutory apportionment factors are unknown as of the
   date of this Technical Assistance Advisement; however, it is
   expected that the statutory apportionment factors, although most
   probably higher than the Taxpayer's Option 2 apportionment
   factors, would not show a difference significantly more than the
   7.7% computed above for the earlier tax years.

With respect to the taxpayer's request to use an alternative
apportionment method, concerning the using of the combined
apportionment factor derived from "revenue miles" and the threefactor method as applied to the parent, holding company, the
Florida Supreme Court has addressed the language in Section
220.152, F.S. (formerly Section 214.73, F.S.), and stated in
Roger Dean Enterprises, Inc. v. State of Florida, Department of
Revenue, 387 So.2d 358 (1980), the following:

The relief provision quoted above tracks the language
appearing in section 18 of the Uniform Division of Income
for Tax Purposes Act (UDITPA). The Act deals with the
allocation and apportionment of income of multistate
businesses for tax purposes. There is a very strong
presumption in favor of normal three-factor apportionment
and against the applicability of the relief provisions. See
Donald M. Drake Co. v. Department of Revenue, 263 Or. 26,
500 P.2d 1041 (1972). The relief provision should be used
where the statute reaches arbitrary or unreasonable results
so that its application could be attacked successfully on

constitutional grounds. Departures from the basic formula
should be avoided except where reasonableness requires.
Desert Pharmaceutical Co., Inc. v. State Tax Commissioner,
579 P.2d 1322 (Utah 1978); see Pierce, The Uniform Division
of Income for State Tax Purposes, 35 Taxes 747, 782 (1957).
The relief provisions applicable to apportionment should
not be used to remove an out-of-state stock sale made by a
foreign-chartered corporation subject to its income tax
from the tax base. See F.W. Woolworth v. Commissioner of
Taxes, 133 Vt. 93, 328 A.2d 402 (1974); Hoosier Engineering
Co. v. Shea, 124 Vt. 341, 205 A.2d 821 (1964). (emphasis
supplied)

Accordingly, the Florida Supreme Court, in denying alternative
apportionment for Roger Dean, held that there is a strong
presumption in favor of the statutory three-factor apportionment
formula and against the application of the relief provision in
Section 220.152, F.S. Also, the Roger Dean Court stated that,
in any case, the relief measures should be used where the threefactor method produces such arbitrary or unreasonable results
that "its application could be attacked successfully on
constitutional grounds." (emphasis supplied)

The U.S. Supreme Court has reviewed the single-factor
apportionment formulas of Missouri, North Carolina, Iowa, and
other states to determine whether those single-factor methods
resulted in the taxing of extraterritorial income in violation
of the Due Process Clause of the U.S. Constitution. In Norfolk
& W.R. Co. v. Missouri State Tax Com., 390 U.S. 317 (1968)
[hereinafter, Norfolk], the Court found the application of the
apportionment formula unconstitutional where the taxing State
imposed an ad valorem property tax on the railroad rolling
stock, using the familiar single-factor mileage formula
apportionment basis. The taxpayer presented evidence showing
that the actual inventory of rolling stock in Missouri on tax
day was less than half (approximately $7,600,000 versus assessed
value of $19,981,000) the value assessed using Missouri's
apportionment formula. The taxpayers further demonstrated that
their calculation of the tax-day value was representative of the
value of rolling stock located within the state throughout the
year and in the preceding year. The Court in Norfolk (p. 329)

noted that it is not necessary for a state to demonstrate that
its use of the mileage formula yields an exact measure of value.
However, the Norfolk Court further stated that:

[w]hen a taxpayer comes forward with strong evidence
tending to prove that the mileage formula will yield a
grossly distorted result in its particular case, the State
is obliged to counter that evidence or to make the
accommodations necessary to assure that its taxing power is
confined to its constitutional limits. If it fails to do
so and if the record shows that the taxpayer has sustained
the burden of proof to show that the tax is so excessive as
to burden interstate commerce, the taxpayer must prevail.

The Court in Norfolk found that the taxpayer sustained its
burden and that Missouri had in this case exceeded its
constitutional power to tax, as defined by the Due Process and
Commerce Clauses. As noted supra, the three-year average
apportionment percentage used by Florida for taxpayer's tax
years 1986, 1987, 1988, and 1989 is only 7.711% (60.653% vs.
52.942%) greater than Taxpayer's proposed Option 2. In Norfolk
(p. 327), the taxpayer was able to demonstrate that the state's
apportionment formula:

resulted in postulating that N & W's rolling stock in
Missouri constituted 8.2824% of its rolling stock. But
appellants showed that the rolling stock usually employed
in the State comprised only about 2.71% by number of units
(and only 3.16% by cost-less-depreciation value) of the
total N & W fleet.

In Norfolk, the increase of the State's apportionment percentage
(8.2824%) over either of the taxpayer's proposed apportionment
percentages of 2.71% or 3.16% was 205.62% or 162.1%,
respectively. Furthermore, Norfolk is a property tax case using
a single-factor apportionment formula whereby all the rolling
stock of a railroad is apportioned by a formula which has as the
numerator the number of miles of railroad within the state over
the number of miles of railroad controlled by the railroad
everywhere. It was a relatively easy matter for the taxpayer to
conduct a physical inventory of its rolling stock located in the

state and compare it with the value determined using Missouri's
apportionment formula. However, the apportionment of income of a
transportation company is more abstract and, therefore, less
amenable to the type of presentation used by the taxpayer in
Norfolk to overturn Missouri's apportionment method as it was
applied to them in its particular case.

In Hans Rees' Sons, Inc. v. North Carolina Ex Rel. Maxwell, 283
U.S. 123 (1931) [hereinafter, Hans Rees'], the State of North
Carolina attempted to apportion income of a manufacturing
concern using a formula based on the ratio of the value of the
taxpayer's real and tangible personal property located in North
Carolina over the value of its real and tangible real property
located everywhere times its entire income. The taxpayer was
able to demonstrate that such a one-factor (property)
apportionment formula "operated unreasonably and arbitrarily" in
attributing income to the state that was "out of all proportion"
to the taxpayer's activities in the state. The type of
distortion present in Hans Rees' is largely remedied today by
use of a three-factor apportionment formula which provides a
better measure of the activities of a manufacturing or
mercantile business in a state. The three factors now generally
used by states to apportion income of a manufacturing or
mercantile business (like the taxpayer in Hans Rees') to their
state are sales, property, and payroll. The income of
transportation companies, however, is generally apportioned by
use of a one-factor formula that uses "revenue miles" in the
state in the numerator over "revenue miles" everywhere in the
denominator. Indeed, the taxpayer is not arguing that the
one-factor formula is distortive in apportioning transportation
income of its various line-haul (transportation) companies but
rather is seeking to have the "revenue miles" factor be included
in apportioning the holding company income, non-transportation
income, of the parent company.

As demonstrated earlier, the variance between either of the
taxpayer's proposed apportionment methods and the Department's
statutory apportionment method are relatively small when
compared to the variance demonstrated by the taxpayer in
Norfolk. Accordingly, the exclusion of the "revenue miles"
(transportation formula) from Florida's apportionment formula of

the holding company income of the parent company does not result
in inequitable treatment for the taxpayer by overstating the
extent of its tax base attributable to Florida. Therefore, the
statutory apportionment method does fairly apportion the
Taxpayer's income to Florida.

RESPONSE

Based on the foregoing analysis, it is determined that the
taxpayer has not demonstrated that the applicable apportionment
formula, as specified in Section 220.131(5), F.S., leads to a
grossly distorted result, results in extraterritorial values
being taxed, or operates unreasonably and arbitrarily in
attributing to Florida a percentage of income which is out of
all proportion to business transacted in Florida. Accordingly,
the taxpayer must use the transportation company formula of
Section 220.151(2), F.S., in apportioning the transportation
income of its transportation subsidiaries; and it must use the
three-factor apportionment formula of Section 220.15, F.S., in
apportioning all of its remaining adjusted federal income. The
taxpayer is not authorized to use in apportioning its holding
company income either the transportation company formula of
Section 220.151(2), F.S., or the alternative Option 2 method
apportionment of Section 220.152, F.S., proposed in its Petition
for Technical Assistance Advisement.

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,

Harry A. Baucom
Tax Law Specialist
Technical Assistance and Dispute
Resolution

HAB/hb
Control No: 26876