Did estimated, unbilled employee-leasing revenue recorded at year-end count as a January 1 taxable receivable?

Subject

Receivables

Plain-English summary

The employee-leasing company's estimated year-end reimbursement revenue was not a taxable receivable on January 1 because the services were incomplete and the amounts were not yet billable. The company estimated payroll, tax, insurance, and fee reimbursements for employee work performed through December 31 and entered them as receivables, but customers did not yet owe those amounts under the contracts.

The company first needed customers to report employee hours and then had to calculate and process payroll, issue checks, pay related taxes, and generate invoices. Its right to payment arose when the customer received an invoice. Until the company had substantially completed those obligations and the revenue became billable, there was no existing obligation for payment and therefore no intangible asset under the cited Florida statute.

The Department emphasized that “billable” did not mean “already billed.” A taxpayer could not avoid intangible tax simply by postponing an invoice until after January 1 when the service was complete and the revenue was otherwise recognizable.

What this means for you

For this historical tax, a ledger label did not control. The decisive questions were whether the earnings process was substantially complete, the amount could be determined, and the customer had an enforceable payment obligation as of the measurement date.

Common questions

Q: Did recording an estimate as accounts receivable create a taxable asset? No. The ruling said the entries were premature because the related services and billing conditions were incomplete.

Q: Did the customer have to receive an invoice before a receivable could exist? Not necessarily for every situation. The ruling focused on when the amount became billable, while this particular contract made the right to receive payment arise on invoice receipt.

Q: Could a company avoid tax by waiting until after January 1 to send an invoice? No. Delayed billing did not change revenue that was already earned and billable.

Citations and references

• Fla. Stat. § 199.023 (1997) — intangible personal property includes existing obligations for payment of money
• Fla. Stat. §§ 199.032, 199.052(1), 199.175 (1997) — January 1 ownership, control, management, and taxable situs
• Treas. Reg. § 1.451-1(a) — accrual-method income recognition
• Decision, Inc. v. Commissioner, 47 T.C. 58 (1966)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C2-009

Original ruling text

Aug 18, 1998

Re: Technical Assistance Advisement 98(C)2-009 Intangible Tax - Receivables Section 199.023, F.S.

Dear :

The letter dated XX, requesting a Technical Assistance Advisement has been received by this office. The request deals with the taxable status of unbilled revenues relative to employee leasing contracts between XXX, et al., (hereinafter "Taxpayer") and its clients.

ISSUE

Based upon the facts presented, technical advice is requested on the following issue:

Are the amounts that were designated for bookkeeping purposes as accounts receivable on January 1 of a given year properly classified as receivables for purposes of Florida's intangible personal property tax even though these were not yet due and owing to the taxpayer on that date?

STATEMENT OF FACTS

The facts that you have provided to the Department are as follows:

Taxpayer is a Florida corporation. These facts generally apply to all the entities named in this advisement.

Taxpayer is in the business of providing employee leasing services to other businesses. Under the agreements between Taxpayer and its business customers, employees working at the business customers' facilities are hired and employed by Taxpayer. These employees are then "leased" by Taxpayer to the business customers. For its services, Taxpayer charges a fee to

its business customers. In addition, the business customers are required to reimburse wages and other amounts paid by Taxpayer to (or on account of) the employees performing services for that business customer.

In order to determine the amount of compensation to be paid to an employee for each pay period, Taxpayer requires its business customers to provide, via telephone or other similar means of communication, the information detailing the number of hours worked by each Taxpayer employee located at a worksite. After accepting the information provided by the business customers, Taxpayer issues payroll checks to the employees based on the information reported for the pay period. In addition, Taxpayer makes payment of employment taxes, withholding taxes, insurance contributions, and similar items, as required by law. Upon processing the payroll checks for the employees, Taxpayer generates an invoice for the client requiring reimbursement for the payroll, employment taxes and the related administrative fee.

Pay periods for Taxpayer employees vary depending on the requirements and practices of the business customer. As a result, reimbursement dates for business customers vary. Accordingly, at any given time, some employees are likely to have performed work for which they have not yet been compensated. Similarly, reimbursement payments from the business customers for those employees for the same period may not yet be due.

For bookkeeping purposes, at the end of each month, Taxpayer records on its books as payables and receivables all actual and anticipated expenses (such as payroll and payroll taxes) and reimbursements attributable to employee hours worked during that month. In some cases, the reimbursement amounts booked as receivables are genuine accounts receivable, with checks for that period having been issued to employees and corresponding reimbursement payments for that period being due and owing by the business customers.

Other amounts treated as "receivables" by Taxpayer for bookkeeping purposes are merely estimates of reimbursement

amounts which Taxpayer subsequently expects to collect from its business customers for work performed during a given month.

An illustration of the year-end fact pattern described above, as it relates to the Florida intangible tax for calendar year 1997 follows. December 31, 1997, was a Wednesday. Many of Taxpayer's employees are paid on a weekly basis with paychecks issued during the week the employee has worked. For the week ending Saturday, January 3, 1998, business customers with a weekly pay period begin to report the hours worked by employees to Taxpayer on Monday, January 6, 1998. Taxpayer issued payroll checks after the hours had been reported and accepted. In addition, an invoice was issued to the customer after the hours were accepted, and an enforceable obligation arose to reimburse Taxpayer for the amount paid to the employee, the associated employment taxes and related administrative fee. As of December 31, 1997, Taxpayer calculated a total amount expected to be due to all employees for the days worked in 1997 for the week that ended January 3, 1998, (i.e., the period Sunday, December 28, 1997, through Wednesday, December 31, 1997) and recorded this sum as an expense and a payable. Such amount was not calculated by employee or customer but was determined in the aggregate based on business projections and other related information. Despite this bookkeeping practice, the amounts recorded as receivables were not actually due from the business customers on either December 31, 1997, or January 1, 1998. These amounts did not become existing receivables until after January 3, 1998, when the salaries were reported by business customers and services were completed by Taxpayer (i.e., hours accepted, payroll calculated, payroll processed, checks delivered, taxes paid, etc.).

Specifically, paragraph 12 of Taxpayer's contract states:

Client will pay Taxpayer the amount(s) specified in the Proposal, which will be invoiced on a periodic basis. Taxpayer's right to receive the invoiced amount shall arise upon Client's receipt of any such invoice, and the amount invoiced shall be due upon receipt.

DISCUSSION OF LAW

The underlying problem here is primarily one of financial accounting rather than the application of Florida tax law. In particular, from the facts presented, it appears that certain receivables were booked prematurely, and thus the tax was paid on supposed intangible assets, which in fact would not meet the required statutory definition of an intangible asset.

For financial accounting purposes a receivable cannot be recognized until the associated revenue is recognized. In the instant situation, a receivable was booked for financial and tax accounting purposes, although the associated revenue could not be recognized.

Typically when goods are sold or services are performed for which funds have not yet been received, the basic accounting entries (although there could be others such as cost-of-goods sold) for recording this event would be:

(Debit) Accounts Receivable
(Credit) Sales

$$$

$$$

Based upon the language contained in Concepts Statement No. 5, revenue is recognized when (1) it is realized or realizable and (2) it is earned.(FN 1)

According to Intermediate Accounting, KIESO and Weygandt, 5th Edition:

Revenues are realized when goods and services are exchanged for cash or claims to cash (receivables). Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. And, revenues are earned when the entity has substantially accomplished what it must do to be entitled to benefits represented by the revenues, that is, when the earnings process is complete or virtually complete. In accordance with this principle: ... (b) revenue from services rendered is recognized when services have been performed and are billable.... (Emphasis added.)

Federal tax law uses a similar principal for recognizing revenue as was purported for financial accounting. Section 1.451-1(a) of the Income Tax Regulations provides in pertinent part:

Under an accrual method of accounting, income is includable in gross income when all of the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. * * *

This position was upheld in Decision, Inc. v. Commissioner of Internal Revenue, 47 T.C. 58, 63 (1966), acq. 1967-2 C.B. 2. In that case, the court held that "For tax purposes, income does not accrue, even to an accrual basis taxpayer, until such time as it becomes due and payable to the taxpayer".

Section 199.023, Florida Statutes (1997), requires, in the case of an account receivable, that there actually be an "obligation for the payment of money", not just the potential.

Section 199.023, F.S. (1997), provides in part:

(1) "Intangible personal property" means all personal property which is not in itself intrinsically valuable, but which derives its chief value from that which it represents, including, but not limited to, the following: (a) . . . (b) All notes, bonds, and other obligations for the payment of money....

Further, pursuant to ss. 199.032, 199.052(1), and 199.175, F.S. (1997), tax is imposed on every person who on January 1 "owns, controls, or manages" intangible personal property which has a taxable situs in this state. In this matter, the taxpayer could not under generally accepted accounting principals or under federal tax law recognize revenue for the period December 28 through December 31, with its associated receivable, for services that had only been partially performed as of January 1, and were not, as yet, billable. Thus, as of January 1 Taxpayer did not own, control, or manage an intangible asset relative to

its partial performance of its contract with its clients.

CONCLUSION

Relative to Taxpayer"s activities for the period discussed above, Taxpayer could only record the revenue for that period, and its corresponding cash or receivable, if the services were performed and such amounts were "billable". It is important to note that the amounts need not actually be "billed", rather they need only be "billable".

As noted earlier, Taxpayer's business practice is that "Upon processing the payroll checks for the employees, Taxpayer generates an invoice for the client requiring reimbursement...." Thus, upon generating the payroll checks for the employees, Taxpayer has at that time "substantially accomplished" its contract obligations and its revenues are then billable.

Using the example presented above as of December 31, 1997, Taxpayer had not "substantially accomplished" its contracted obligations (payroll calculated, payroll processed, taxes paid, checks delivered)(FN 2) for the period December 28, 1997, through December 31, 1997. Indeed, the only portion of Taxpayer's contract that would have been fulfilled at year-end was that its employees would have worked for a portion of a given pay period.

Therefore, if Taxpayer could not record revenue and its resultant receivable for the period described above, it clearly could not have generated an intangible asset. The Department thus agrees with Taxpayer that an intangible tax would not be due on the partial completion of this particular contract, which at that time could not be billed in accordance with its normal business practices or agreement. Important to note here is that Florida's intangible tax cannot be avoided simply by postponing the billing of otherwise recognizable revenue, and the related receivable, until some date after January 1 of a given tax year.

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 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 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,

Paul J. Munyon
Tax Law Specialist
Technical Assistance &
Dispute
Resolution

PJM/kh
Control: #33863

FOOTNOTE 1 "Recognition and Measurement in Financial Statements of Business Enterprises," Statement of Financial Accounting Concepts No.5 (Stamford, CN: FASB, 1984), par.83.

FOOTNOTE 2 See "Taxpayer" Contract, par.7.