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