On November 28, 2022, the Circuit Court of Florida’s Second Judicial Circuit issued its final judgment in Target Enterprise, Inc. v. Fla. Dept. of Rev.,1 concluding that Target Enterprise, Inc. (“TEI”) correctly applied Florida’s costs-of-performance regulation to its receipts from services and correctly sourced those receipts outside Florida.
The Florida Department of Revenue (the “Department”) issued an income tax assessment to TEI, a Minnesota-based subsidiary of Target Corporation (“Target”), for the 2016 through 2018 tax years. This assessment resulted from the Department sourcing certain receipts that TEI received from Target for the provision of merchandising, marketing, and management services to Florida. TEI did not own any property in Florida, and had less than 1% of its payroll in Florida.
Under Florida's sales-factor regulation, the rule for sourcing “other sales” is often used for sourcing receipts from services.2 Under that rule, a receipt is sourced to Florida if (1) the income-producing activity is performed wholly within Florida, or (2) the income-producing activity is performed inside and outside Florida but a greater proportion is performed in Florida, based on costs of performance.3 In many instances, the Department has taken the position that this rule results in some variation of a market-based sourcing.4
The Department tried to follow a similar approach in Target Enterprise. At trial, the Department argued that TEI failed to provide sufficient documentation to support the use of the costs-of-performance apportionment under the regulations. Therefore, according to the Department, it should be entitled to use its equitable authority to construct a new methodology for TEI's sales factor. The Department argued that TEI should be required to attribute its service receipts to Florida based on the footprint of Target’s retail stores (i.e., using a fraction of retail square footage of stores in Florida over retail square footage of stores across the country).
The Court ruled in favor of TEI and rejected the Department’s arguments. The Court concluded that TEI provided sufficient documentation to support its costs-of-performance analysis. According to the Court, the “best evidence of the costs to perform these services would be TEI’s payroll apportionment workpapers”—and that evidence was provided to the Department during the audit. Because the overwhelming portion of TEI’s payroll costs were incurred outside of Florida, the Court concluded that none of the receipts from the sale of TEI’s services should be considered Florida sales.
The Court also criticized the Department’s alternative apportionment methodology based on the square footage of Target retail stores. The Court noted that “[e]ven if it were reasonable for DOR to rely on [its equitable authority], this Court finds that DOR’s proposed apportionment methodology bears no relevant relationship to TEI’s business activity in the State of Florida.” The Court added that the “DOR’s proposed formula conflates Target’s business activity in Florida with TEI’s business activity. TEI is a distinct legal entity separate and apart from Target.”
This Court’s application of the sales-factor sourcing rules for services in this case—focusing on the location of TEI’s own activities and costs, instead of focusing on the location of its customer’s activities—could have implications for many other taxpayers.
The Department may appeal the Court’s final judgment in Target Enterprise. However, as this case shows, this continues to be an issue in flux in Florida. Taxpayers should review their sourcing methodology to determine whether there are opportunities to reduce their apportionment and resulting tax.
- Target Enterprise, Inc. v. State of Florida Department of Revenue, Case No. 2021-CA-002158, Leon County, Florida, Circuit Court of the Second Judicial Circuit (decision issued Nov. 28, 2022).
- See, e.g., Florida Technical Assistance Advisement No. 20C1-003 (Mar. 3, 2020) (applying “other sales” rule to sourcing receipts from services); Florida Technical Assistance Advisement No. 13C1-011 (Nov. 21, 2013) (noting that “[t]he only rule applicable to the sale of services is” the rule for “other sales”).
- Fla. Admin. Code Rule 12C-1.0155(2)(l).
- See, e.g., Florida Technical Assistance Advisement No. 20C1-003 (Mar. 3, 2020) (taking the position that the “income producing activity occurs in Florida when Taxpayer’s client is located in Florida”); Florida Technical Assistance Advisement No. 13C1-011 (Nov. 21, 2013) (“In Florida, the sourcing of gross receipts depends on the location of the customer.”); Florida Technical Assistance Advisement No. 20C1-001 (Jan. 13, 2020) (stating that “[w]hen analyzing each portion of the receipts, a determination must be made as to the final destination of the product or service being sold.”).
Client Alert 2022-394