The Florida Department of Revenue (the “Department”) recently published Technical Assistance Advisement No. 17C1-004 (decided Apr. 17, 2017, published Aug. 25, 2017) (the “TAA”), which addresses how receipts from “other sales” are sourced under Florida’s apportionment regulation (i.e., Florida Administrative Code Regulation (“Regulation”) 12C-1.0155(2)(l)). Despite the cost-of-performance (“COP”) language explicitly stated in Florida’s Regulation 12C-1.0155(2)(l), the Department applied a market-based sourcing approach, concluding that the receipts from certain services should be sourced to Florida when the taxpayer’s customers are physically located in the state. While Technical Assistance Advisements have no precedential value, the TAA showcases Florida’s propensity to use market-based sourcing for receipts from “other sales,” which appears to be in contrast to the COP directive under Florida Regulation 12C-1.0155(2)(l).
Summary of the TAA
The taxpayer requested the TAA for insight on how to source its multiple services to its customers, who are primarily located outside of Florida. The taxpayer’s services include providing telephone and online customer support services. To provide its customer support services, the taxpayer maintains Florida call centers and contracts with third-party call centers outside the United States. In addition to customer support services, the taxpayer also offers general support services by providing a support staff directly to its customers. The support staff performs certain financial services (e.g., accounting, reconciliation, etc.) and marketing services for its customers.
Receipts from “other sales” (e.g., certain services) are sourced under Regulation 12C-1.0155(2)(l), which provides a COP sourcing regime, stating: “[g]ross receipts from other sales shall be attributed to Florida if the income producing activity which gave rise to the receipts is performed wholly within Florida. Also, gross receipts shall to attributed to Florida if the income producing activity is performed within and without Florida, based on [COP].”] Furthermore, under Regulation 12C-1.0155(2)(l), “income producing activity” is defined as “the transactions and activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits.”
Despite the COP language in Regulation 12C-1.0155(2)(l), the Department concluded that the “income producing activity” occurs entirely within Florida (and thus, sourced to Florida for purposes of the sales factor computation) when the taxpayer’s customer is physically located in the state. The Department’s analysis started with a detailed review of the definition of “income producing activity.” The Department stated that “income producing activity is not analyzed holistically as one major activity, but each individual transaction is considered a separate transaction and consequently a separate income producing activity.” In this regard, the Department found that the taxpayer’s income producing activity was the telephone/online discussion or otherwise the interaction/contact with the customer and, as such, the income producing activity occurs in Florida if the customer is physically located in the state. While the Department did not provide further substantive analysis, the Department supported its conclusion by broadly stating that “Florida is generally referred to as a market state, and the sales factor is generally based upon where the customer is located.” Despite the COP sourcing rule provided in Regulation 12C-1.0155(2)(l), the Department’s analysis did not address the location of the taxpayer’s activities or costs associated with providing the taxpayer’s services, which is typically the focus of a COP analysis. In other words, the Department seemed to wholly ignore the COP language in Regulation 12C-1.0155(2)(l).
While Florida’s position in this TAA initially may seem surprising, we have seen other states effectively utilize market-based sourcing, although their statutes and regulations indicate otherwise (e.g., Indiana and South Carolina). Generally, states that ignore their COP statutes and regulations in favor of market-based sourcing often do so to create a monetary benefit to the state. However, we note that many states shift from COP to market-based sourcing to create an incentive for taxpayers to move into the state (i.e., COP sourcing tends to create a higher tax burden for in-state service providers compared to out-of-state service providers). This TAA is interesting because it appears to provide a benefit to the taxpayer as most of the taxpayer’s customers were located outside of the state and the taxpayer had call centers (i.e., its COP) in Florida. Although this does not eliminate the possibility that Florida’s motive in interpreting its COP Regulation as market-based sourcing is for monetary reasons (e.g., Florida may want to appear consistent in its tax analysis), it does raise the question as to whether Florida is looking to be more taxpayer friendly to its service providers located in the state.
We note that other Florida administrative guidance supports the application of market-based sourcing principles to the sourcing of receipts from certain services, despite Florida’s Regulation providing a COP approach. See, e.g., TAA 11C1-008 (decided Sept. 15, 2011); TAA No. 13C1-004 (decided May 21, 2013); TAA No. 13C1-011 (decided Nov. 21, 2013). Service providers with an income tax filing obligation in Florida should take note of this TAA and the apparent disconnect between Florida regulatory guidance (i.e., COP applies to source service receipts) and Department practice (i.e., market-based sourcing applies to source service receipts), as well as consider both the potential opportunities and pitfalls it presents. This Florida administrative guidance raises an interesting issue for taxpayers who would otherwise benefit from a COP approach in Florida, particularly as such guidance is non-binding.