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Florida Taxpayer Wins Service Income Sourcing Challenge

Tax Development Dec 15, 2022

Florida Taxpayer Wins Service Income Sourcing Challenge

Florida income tax regulations dictate a cost-of-performance methodology for sourcing of service revenue for purposes of corporate income tax.1 In sometimes reckless disregard of the statute, the Department of Revenue (DOR) chooses to abandon this approach in favor of market-based sourcing or other alternative sourcing methods. The Target Enterprise, Inc. v. Department of Revenue2 case, in which the DOR attempted to impose an alternative sourcing methodology rather than a cost-of-performance methodology as correctly used by the taxpayer is a case in point.

Target Enterprise, Inc. (TEI) is a subsidiary of Target Corporation (“Target”) based in Minneapolis, which provided marketing, merchandising, and other services to Target during the years under audit. TEI owned no real or personal property in Florida and had a minimal amount of payroll in the state during those years. Under audit, the DOR assessed almost $8 million in taxes, penalties, and interest by revising the apportionment method used by TEI from cost-of-performance to an alternative method based on the relationship of the square footage of Florida Target stores to the square footage of all Target stores. Using the DOR’s apportionment rules, TEI claimed that sales should be attributed to the state based on the location of the income-producing activity, which is determined on the location of the costs to perform the services provided.

Florida sourcing regulations dictate that sales other than tangible personal property are attributed to the state if the income-producing activity generating sales revenue is performed by the taxpayer in Florida. If that income-producing activity is not performed entirely in Florida, revenue is only attributable to Florida if the greater proportion of the income-producing activity is performed in Florida, based on the costs of performing the activity.

The Second Circuit Court of Florida did not agree with the DOR’s methodology, concluding that most of the services that TEI provided to Target occurred outside of Florida, as 94.9% of TEI’s payroll was attributable to Minnesota, and less than .1% of the payroll was attributable to Florida. It was clear to the court that TEI did not provide services to individual Target retail stores, and the DOR’s sourcing methodology was rejected.

The Florida Department of Revenue notoriously uses alternative apportionment to source revenue to the state based on the market for the services, despite the regulatory rule to source income based on cost of performance. If the state has recharacterized your company’s revenue as Florida revenue based on a market state sourcing position, please contact your Ryan professionals to discuss the impact of this decision on your business.  

1 Fla. Admin. Code Ann. r. 12C-1.0155(2)(e).

2 Florida Circuit Court (2nd), No. 2021-CA-002158, November 28, 2022.


Mark L. Nachbar

Mary Bernard

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