June 3, 2010

Planning Opportunity Regarding Florida Sales Factor

Planning Opportunity Regarding Florida Sales Factor

Florida deviates from the prevailing treatment in its sister states regarding how intercompany sales are reflected in the apportionment factors and thereby creates a planning opportunity for affiliated groups electing to file on a consolidated basis.

In most states, when a consolidated return is filed, intercompany sales are removed from both the taxable base and apportionment factors. For example, in New York, the receipts factor on a combined report is computed as though corporations were one corporation; and, intercorporate receipts must be eliminated. Alabama has the same rule: “All intercompany transactions between and among members of an Alabama affiliated group will be eliminated in computing taxable income or loss and in determining the Alabama apportionment factor.” In Nebraska, “. . . factors shall not include any amount that was eliminated as an intercompany transaction. . . .” Indeed, the concept is prevalent.

Florida rules provides that “gross receipts” for sales factor purposes are any sales possessing the proper indicia of sale, even sales among separate corporate entities within the federal consolidated group.

Florida holds that “sales” mean all gross receipts received by the taxpayer from transactions and activities in the regular course of its trade or business. For these purposes, intercompany sales may be included in the sales factor. Hence, included in the sales factor are:

  • Amounts called sales on the books;
  • Amounts invoiced as sold to a related party;
  • Actual payments from a related party; or
  • Amounts included in the consolidated federal income tax return as “gross receipts or sales”.

Anheuser-Busch Case
The Florida rules were promulgated in 1993 as a result of the Anheuser-Busch v. Department of Revenue case (1988). In this case, Anheuser-Busch (hereinafter “AB”), the court held that transfers of beer cans between a parent corporation and its wholly-owned subsidiary constituted sales includable in the apportionment formula. In AB, the subsidiary’s transfers of beer cans to the parent corporation constituted sales because the cans were invoiced as “sold to” the corporation. Moreover, the corporation’s payment was evidenced by its cash advances to the subsidiary and its payment of the subsidiary’s third party obligations. The corporations filing of a consolidated return did not prohibit the inclusion of intercompany transactions in the apportionment formula because the corporation and subsidiary constituted two taxpayers for apportionment purposes. Therefore, the subsidiary’s total gross receipts and Florida gross receipts were properly includable in the sales factor denominator and numerator, respectively, for Florida apportionment purposes.

The court in AB distinguished the earlier decision in Coulter Electronics, Inc. v. Department of Revenue, stating there were significant differences between the controlling facts in the two cases. Of particular mention was the fact that no payments were ever made by Coulter to its subsidiary; and, there was no delivery of product between Coulter and its subsidiary. Hence the Coulter transactions did not have the indicia of a sale: transfer of title, delivery and payment, etc. The AB court stated that, “. . . without unduly belaboring the point, we find that unlike the situation in Coulter, the indicia of a sale are present in this case. The cans were ‘invoiced’ as ‘sold to’ Anheuser-Busch. Delivery of the cans to Anheuser-Busch by (its subsidiary) is uncontroverted. . . .”

The AB court explained its reasoning as follows:
The real issue in this case is Anheuser-Busch’s contention that it should be entitled to eliminate the effect of its intercompany transactions in the apportionment formula because it has filed a consolidated return in which intercompany transactions are eliminated in the computation of taxable income. However, to accept Anheuser-Busch’s argument would confuse apportionment with taxability.

Today the proper treatment of intercompany sales in Florida is to eliminate these from the taxable base, but reflect them in the apportionment factors (if indicia of sale exist).

A planning opportunity arises when affiliated entities elect to file a Florida consolidated income tax return and intercompany sales are reportable in the denominator, but not in the numerator. In cases where the intercompany sales are to non-Florida locations, the Florida apportionment factor can be favorably impacted. This anomaly does not apply in most jurisdictions, but it does apply in Florida. As a result, by properly documenting that intercompany sales have indicia of sale, affiliates filing a Florida consolidated return could reduce the sales factor and thereby the income ultimately apportioned to Florida.

In Florida’s zeal to capture more tax on intercompany sales, they have created an interesting planning opportunity for corporate income tax purposes.