Florida court reaffirms the state’s cost-of-performance sourcing for the sale of services

A circuit court in Florida has reaffirmed the state’s cost-of-performance standard for sourcing the sale of services in Target Enterprise, Inc. vs. Florida Department of Revenue, Fla. Cir. Ct (2nd), No. 2021-CA-002158, 11/28/22. In this case, Target Enterprise, Inc. (TEI) was providing services to its parent company, Target Corporation (Target). TEI provided Target with merchandising, marketing and strategy, and management consulting services.

In sourcing their services, TEI based their sales in Florida on the portion of income- producing activity that took place in the state. Fla. Admin. Code Ann. r. 12C-1.0155(2)(l) requires that taxpayers source services to Florida when a greater proportion of the income- producing activity that generated the sales revenue is performed by the taxpayer in the state. 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,” according to the Florida Department of Revenue (DOR).

The DOR stated in the case that, under audit, TEI failed to provide proper documentation of their position for using cost-of-performance and so the DOR took the position that sales should have been sourced based on the square footage of Target stores in Florida compared to Target stores everywhere.

The court found that TEI had provided proper documentation to the DOR, including referencing the DOR’s own regulation that requires the use of cost-of-performance sourcing. The court went on to state that even if TEI had not provided this documentation, the DOR’s method of comparing the footprint of Target’s stores was not appropriate as it conflated Target’s business activity in the state with TEI’s business activity.

In several places throughout the decision, the court found that the most reliable indication of where the costs of performance are located is where the taxpayer’s payroll is based. For example, TEI’s Florida payroll for the tax years under litigation was only 0.07% while their Minnesota payroll was approximately 94.9%.

This court’s decision in the proper application of sourcing service revenues is in direct contradiction to the DOR’s recent interpretations of this regulation. For some years, the DOR has been issuing Technical Assistance Advisement rulings (TAAs) that attempt to shift Florida away from the regulation’s cost-of-performance sourcing towards a market-based methodology. For example, the DOR issued Florida Technical Assistance Advisement 21C1-005 (July 2, 2021) in which it concluded that revenue should be sourced to the location of the customer. In this TAA, the DOR states that sales of services should be sourced to Florida to the extent that, “deliverables from those services are forwarded, sent, delivered or provided, to a location in Florida for the customer.” This TAA also states that Florida is “frequently referred to as a ‘market state’ because its sales apportionment is based on where the sales transaction takes place rather than where contracts are approved, where payment is made, or where the customer’s headquarters is located”.

In Technical Assistance Advisement No. 21C1-010 (Mar. 5, 2021), the DOR provides that income from services should be sourced to “the location to which the services are provided, on a market basis.”   

These TAAs are just two of a series of other rulings in which the DOR attempted to reinterpret its own regulation towards a market-based methodology in contradiction to applying the stated cost-of-performance requirement in sourcing service revenues for income tax apportionment purposes.

The ruling not only brings into question the DOR’s ability to use its special apportionment power but also brings the focus of apportioning services back to the cost-of-performance standard detailed in the regulation.

What does CohnReznick think?

The court’s ruling in Target Enterprises, Inc. disallows the DOR’s attempted use of an alternative apportionment factor, as the taxpayer was able provide clear documentation regarding where its cost in providing its services occurred. Additionally, the court found that, as applied to this taxpayer, the best primary evidence of where the costs incurred to perform taxpayer’s service were located was the taxpayer’s payroll apportionment workpapers.

This case gives taxpayers a firmer footing when apportioning sales of services to Florida as well as exploring potential refund opportunities for taxpayers that had followed the DOR’s market-sourcing methodologies pending whether the DOR will be appealing the court’s ruling.  The clear deviation from the regulation in the DOR’s recent TAA rulings created uncertainty for taxpayers as to which methodology is appropriate in sourcing revenue to Florida.


John Iannotti, CPA, Partner, State and Local Tax (SALT) 

James Gaul, Manager, National Tax, State and Local Tax (SALT)

Subject matter expertise

  • Contact John John+Iannotti John.Iannotti@cohnreznick.com
    John Iannotti

    CPA, Partner

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