In the world of state corporate income tax, companies constantly are at odds with states in determining where the income is properly attributable to.  States often take contradictory positions using cost of performance or market based sourcing to attempt to attribute income to their own state.  Such was the issue in a recent case filed in Florida called ADP LLC v. Florida Department of Revenue. 

Florida has a typical corporate income tax regime. For purposes of determining attributable income, section 220.15(5), F.S., requires that the sales factor of the apportionment formula be calculated using the sales made within Florida.  By administrative rule 12C-1.0155(1)(h), Florida has determined that a sale occurs in Florida if the majority of the revenue generating activity occurs in Florida. In other words, Florida applies a typical “cost of performance” test to determine whether the income is attributable to Florida. 

In ADP, the taxpayer allegedly is a New Jersey based company that does business in many states.  ADP provided, among other things, data processing services and licensed prewritten software to its customers.  The revenue generated was a result of activities done in a Georgia facility and ADP does not have such a facility in Florida.  For Florida corporate income tax purposes, the taxpayer excluded the receipts from its services because the cost of performing the revenue generating activities was in Georgia, not Florida. 

On audit, as states tend to do, Florida determined that the revenue was Florida revenue because the customers were in Florida.  Rather than using the “cost of performance” test as outline in the administrative code, Florida used market-based sourcing to attempt to collect tax on the revenue.  By using “the Florida sales information provided by the Taxpayer,” the Florida Department of Revenue assessed just under $3,000,000 dollars before reducing the tax due to about $250,000. 

As explained in a prior blog, Florida relied on its often-cited Heller Western v. Arizona Dep’t of Revenue, 775 P. 2d 1113 (Ariz. Sup. Ct. 1999) and Ameritech Publishing Inc. v. Wisconsin Dep’t of Revenue, 788 N.W. 2d 383 (Wis. Ct. App. 2010) for the proposition that the income producing activity occurred where the customer is located, not where the company incurred costs to deliver the services.  The Florida Department of Revenue’s decision to always take the position that results in the most tax for the state is clearly ripe for challenge.   It will be interesting to follow to see if a court corrects the Department’s aggressive thinking. 

Gerald “Jerry” Donnini II is a shareholder of the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Donnini concentrates in the area of state and Federal tax matters, with a heavy emphasis on the tobacco, alcohol, motor fuel and related industries. He also handles a myriad of multi-state state and local tax issues. Mr. Donnini is a co-author for CCH’s Expert Treatise Library: State Sales and Use Tax and writes extensively on multi-state tax issues for  For more information please call us at 888-966-8216.