FL: Sales Of Services Sourced Based on the Customer’s Location

In a recent Technical Assistance Advisement (TAA), the Florida Department of Revenue addressed how a service provider should source its receipts to Florida.  The taxpayer was not providing personal services. An administrative rule provides that sales, other than sales of tangible personal property, are attributed to the state if the “income producing activity” is performed entirely in Florida, or the greater proportion of the income producing activity is performed in Florida based on costs of performance.  “Income producing activity” is defined as “the transactions and activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits.”  In addressing how these provisions are interpreted, the Department cited to two cases from other states. In both of these cases, the taxpayers argued that all of their service receipts should be sourced to the state in which the majority of their costs of performance occurred, rather than the state in which their customers were located. However, the courts in both cases concluded that the income producing activities at issue were the actual sale of services to the taxpayers’ customers, as opposed to the costs of performing those services. The courts in both cases sourced the taxpayers’ gross receipts from the sale of services to the market state, the state in which the customer resided, reasoning that the direct sale to the customer at the customer's domicile was where the income producing activity occurred. The Department further observed in the TAA that “in analyzing the income producing activity, the most important factor to determine is where the customer is located.” As such, the Department concluded that the taxpayer’s receipts from services provided to customers located in Florida should be included in both the numerator and denominator of the Florida sales factor. Please contact Jeremy Dukes at 954-847-3971 with questions on TAA 18C1-011.