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Florida: Location of customer, not the majority of taxpayer’s activities, determines the source of sale

The Florida Department of Revenue (Department) recently released Technical Assistance Advisement 13C1-011 (the Advisement). In the Advisement, the Department analyzes whether certain analytic services provided by a taxpayer through subscriptions to an online database should be included in the sales apportionment factor as Florida sales.


While the facts were heavily redacted, a summary of the factual scenario is as follows. The taxpayer is in the information business (an online database and analytics service) and enters into contracts with its customers to provide certain information through its “Buy” or “Watch” businesses. Each of the Buy and Watch segments provide certain data, information and analytics to the customers. Each segment collects data from unrelated third-party individuals located around the country. Through the information the taxpayer collects, it is able to provide analytical data and aggregated data to its customers.

The raw data and information collected by the taxpayer is transmitted and stored at the taxpayer’s data centers across the country. Customers throughout the U.S. can access this information anytime and from any location. Depending on the requirements of a customer contract, the income-producing activity may be in any state. The majority of the taxpayer’s expenditures in connection with providing such services occurs outside of Florida.


The issue is whether sales revenue generated from the Buy and Watch segments constitutes Florida gross receipts to calculate the sales factor for apportionment purposes.

Summary of relevant law

Under Florida Statutes § 220.15(5), the sales factor is the total Florida sales of the taxpayer over the total sales of the taxpayer everywhere during the taxable year. “Sales” means gross receipts with certain exceptions. Sales of services include the performance of research and development contracts.

Under Rule 12C-1.0155(2)(l) of the Florida Administrative Code, sales are attributed to Florida “if the income producing activity which gave rise to the receipts is performed wholly within [Florida].” “Income producing activity” means “the transactions and activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits.” In addition, for interactive networks, where there are charges to Florida customers for direct access to a database, those charges are considered Florida sales. If the income-producing activity is not wholly performed in Florida, then it is necessary to conduct a cost of performance analysis.

Department analysis and conclusion

Two cases which the Department analyzed in the Advisement were Heller Western v. Arizona Department of Revenue, 161 Ariz. 49 (Ariz. Sup. Ct. 1989), and Ameritech Publishing, Inc. v. Wisconsin Department of Revenue, 788 N.W.2d 383 (Wis. Ct. App. 2010).

The court in Heller Western held that regardless of the source of the money to make loans and the fact that a majority of the expenses incurred in connection with the income-producing activity occurs out of state, it is the situs of the consumer who is the debtor that is to be considered for purposes of allocating the lender’s sales. Thus, loans to Arizona consumers are to be sourced to Arizona.

The court in Ameritech similarly held that a seller of telephone directory advertising should be sourced to Wisconsin because the crux of the income-producing activity was access to a Wisconsin audience. This was even after considering that a majority of Ameritech’s costs and activities occurred outside of Wisconsin, and that even the salespeople involved may not have consummated sales of advertising inside the state.

The Department reasoned that in the cases of Heller Western and Ameritech, the majority of the taxpayer’s costs of performance occurred outside the state where its customers resided and where the income-producing activity actually occurred. Nonetheless, the two cases held that the income-producing activities were sales of services to customers as opposed to the costs of providing those services.

Ultimately, the Department held that the taxpayer’s income-producing activity occurs wholly within Florida if the taxpayer’s customer is located in Florida. Further, the Department held that the collection of data is not income-producing activity because no transaction is involved. Hence, the Department reasoned, the transaction occurs where the taxpayer sells the final service to its customer and received compensation for that service in return. Therefore, the taxpayer must source sales from Florida customers to Florida for purposes of calculating its Florida gross receipts for purposes of the sales factor for corporate income tax purposes.

New York: Technical guidance on state Business Incubator and Innovation Hot Spot Support Act

The New York Department of Taxation and Finance has issued a Technical Memorandum summarizing the New York State Business Incubator and Innovation Hot Spot Support Act (Act), which was signed into law as part of the 2013-2014 New York State budget.

The Act is designed to support businesses in the formative stages of development by providing operating grants, technical assistance, direct mentorship, entrepreneurial education, business development services, and tax benefits. The Act is administered by Empire State Development (ESD), which is New York State’s chief economic development agency.

Incubators and innovation hot spots

The Act grants the ESD the power to designate entities as New York State incubators, which generally are business incubation programs that provide physical or virtual space to eligible businesses. The ESD may designate five incubators as New York State innovation hot spots in each of the state's fiscal years 2013-2014 and 2014-2015. An innovation hot spot must

  • Be affiliated with and have the support of at least one college, university or independent research institution, and
  • Must have programs and purposes that are consistent with regional economic development strategies.

The innovation hot spots can certify certain clients as qualified entities to be eligible for certain tax benefits. Any entity claiming any of these tax benefits is not eligible for other New York State exemption, deduction, credit, or refund attributable to business operations in, or as part of a virtual incubation program operated by, an innovation hot spot.

Corporation franchise tax benefit

The Act provides for two corporation franchise tax benefits for five years beginning with the first tax year the qualified entity becomes a tenant in, or part of a virtual incubation program operated by, an incubation hot spot. A qualified entity that is located completely within the incubation hot spot is only liable for a fixed dollar minimum franchise tax. A qualified entity that is located both within and without the incubation hot spot, or is a corporate partner in a qualified entity, is allowed a subtraction modification benefit in computing entire net income for the amount of income or gain included in its federal taxable income that is attributable to operations in, or as a part of a virtual incubation program operated by, the innovation hot spot.

Personal income tax benefit

The Act provides for a personal income tax benefit for five years beginning with the first tax year the qualified entity becomes a tenant in, or part of a virtual incubation program operated by, an incubation hot spot. Under this tax benefit, eligible taxpayers are allowed a deduction, in the form of a subtraction modification benefit, for the amount of income or gain included in his or her federal taxable income to the extent that the income is attributable to operations in, or as a part of a virtual incubation program operated by, the innovation hot spot. Eligible taxpayers include the following:

  • Individuals who are sole proprietors;
  • Members of a limited liability company taxed as a partnership;

  • Partners in a partnership; and

  • Shareholders in a New York S corporation.

Sales and use tax benefit

The Act provides that a qualified entity is eligible for a credit or refund of the four percent sales and use tax and the 3/8 percent tax imposed by the Metropolitan Commuter Transportation District on the purchase of tangible personal property, certain utility services, and certain other taxable services. Such tax benefit is available for a period of 60 months beginning with the first full month after the qualified entity becomes a tenant in, or part of a virtual incubation program operated by, an incubation hot spot. However, if such qualified entity makes sales subject to sales and use taxes, that entity is still required to be registered as a sales tax vendor and to collect and remit the applicable state and local sales taxes on its sales.

Maintaining designation

Under the Act, the ESD may audit incubators, innovation hot spots and the clients certified as qualified entities by such innovation hot spots, and may evaluate the operations of incubators and innovation hot spots, including making site visits. If operating grants are received by the incubators or innovation hot spots, then such entities are also subject to independent peer review at least once every three years.

The incubator or incubator hot spot will have an opportunity to remedy any deficiencies noted by the ESD in its audit or evaluation. If such deficiencies are not timely remedied, the incubator or innovation hot spot could lose its designation as such and lose its operating grant.

Wisconsin: If your economic development tax credit is not valuable to you, transfer it

On April 2, 2014, Wisconsin Gov. Scott Walker signed legislation, S.B. 449, which provides added flexibility to the state’s economic development tax credit program by way of permitting transfers of the tax credit.

To obtain the relevant credit, the Wisconsin Economic Development Corporation (Corporation) may certify a person to claim tax credits against the person’s income or franchise tax liability for fees imposed on insurers, if the Corporation determines that the person is conducting or will conduct eligible business activities that will result in economic development in Wisconsin (each such credit, an economic development tax credit). Additionally, a person may qualify for additional economic development tax credits if the eligible activity will benefit particular groups or certain distressed areas.

Under S.B. 449, the Corporation may approve the aggregate transfer of up to $15 million worth of economic development tax credits over three years. The Corporation may approve the transfer if the original person to whom the credit was issued meets at least one of the following conditions:

  1. The person is headquartered in, and employs at least 51 percent of its employees in, Wisconsin.
  2. The person intends to relocate its headquarters to, and employ at least 51 percent of its employees in, Wisconsin.

  3. The person intends to expand its operations in Wisconsin, and that expansion will increase the number of full-time employees employed by the person in Wisconsin by a number that equals at least 10 percent of the person’s full-time employees.

  4. The person intends to expand its operations in Wisconsin, and the person will make a significant capital investment in property in Wisconsin as a result of that expansion.

The transferee must give valuable consideration, other than money, in connection with the eligible business activity for which the tax credits were originally awarded in order to be eligible to receive a transfer of the credit. Any unused portion of these transferred credits may be carried forward for up to 15 years until fully claimed. The Multistate Tax Update covered this bill’s passage in the legislature in a prior article.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.