Receipts from products and services delivered or submitted over the Internet to the taxpayer’s online database or interactive network, the conversion of data, the administration of premium plans and the licensing of proprietary intangible assets are sourced based on the location of the customer, according to Technical Assistance Advisement 13C1-007, released by the Florida Department of Revenue on Nov. 25, 2014.
The technical assistance advisement (“TAA”) also concluded that receipts from sales of printed materials shipped to the taxpayer's customers are sourced to the state in which they are delivered or shipped.
At issue in the TAA is whether gross receipts from a number of different activities should be sourced to Florida when calculating the numerator of the sales factor in the taxpayer's apportionment formula. The taxpayer, a private corporation that collects, processes and analyzes information, primarily generates its revenue by providing information, products and services that are available online or, in some instances, in hardcopy format to its customers.
The majority of the receipts addressed in the TAA are derived from activities that involve customers accessing the taxpayer's online data base for various products. Rules, guidelines and information created by the taxpayer for its customers and customer information collected by the taxpayer and provided to others on the customer's behalf are accessed over the Internet through the taxpayer's website. Additionally, the following items provided by the taxpayer are available through the taxpayer's website:
• information worksheets for each employer that are automatically produced and delivered to the customer by e-mailing the customer a link to download the file from the website,
• online versions of all of the taxpayer's publications, and
• information regarding proposed activities.
Under Fla. Admin. Code Ann. r. 12C-1.0155(2)(h)(5), “charges to Florida customers for direct access to a data base … are considered Florida sales.” Such charges include fees to access the network and to retrieve information from the data base. After applying this rule, the department concluded that “the sourcing of Taxpayer's online database depends upon the location the customer. When a customer located in Florida access Taxpayer's online database, the sales will be sourced to Florida.”
However, the department noted that receipts from information worksheets that are e-mailed directly to the customer, rather than being downloaded by the customer, are not sourced under Fla. Admin. Code Ann. r. 12C-1.0155(2)(h)(5). Instead, these receipts are sourced as receipts from the sale of services, the department said
In addition to providing access to its website, the taxpayer also has a number of receipts which the department categorized as receipts from the sale of services and sourced according to Fla. Admin. Code Ann. r. 12C-1.0155(2)(l). This regulation sources receipts to Florida if the transaction and activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits (the “income producing activity) which gave rise to the receipt is performed entirely in Florida.
“The income producing activity generally occurs where the customer is located and not where a taxpayer processes the income producing activity,” the department said. “If the sales are made to and income is derived from a Florida customer, the sales must be sourced to Florida,” it also said.
Receipts sourced by the department under this rule include those received for converting data provided by the customer in a hardcopy format into the taxpayer's standard reporting format through the use of a third party vendor, administering premium plans and delivering products that are otherwise available for download directly to the customer though e-mail.
For each activity, the department identified the transaction and activity directly engaged in by the taxpayer before determining whether its receipts would be sourced to Florida. In all three instances, the department concluded that the receipts should be sourced to Florida when the customer is located in-state.
Although the taxpayer's “predominant business activity consists of earning revenue from providing access to an interactive network, the sale of tangible personal property, and the sales of services,” it also receives royalties earned from licensing agreements with third party customers authorizing those customers to republish products using the taxpayer's propriety and intangible information.
Royalty income is generally excluded from the sales factor by Fla. Stat. § 220.15(5)(a). However, under Fla. Admin. Code Ann. r. 12C-1.0155(1)(f)(1), business income from intangible personal property is included in the sales factor when the income producing activity can be readily identified. If the intangible is licensed or used by an in-state entity, Fla. Admin. Code Ann. r. 12C-1.0155(2)(f)(1) sources receipts from the licensing or use to Florida.
After applying these rules to the royalties fees received by the taxpayer, the department determined that the receipts should be included in the sales factor and sourced based on where the customer is located if the royalty income is significant. If the income is not significant, it “will not be allowed to be included in the Taxpayer's sales factor since it does not clearly reflect the Taxpayer's business activity,” the department said.
By: Lauren Colandreo
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