On March 1, 2023, a Florida trial court confirmed that costs of performance (COP) sourcing, not market-based sourcing, is Florida’s standard methodology for sourcing service receipts for apportionment purposes. In Billmatrix Corp. v. State of Florida, Department of Revenue, No. 2020-CA-000435 (Fla. 2d Cir. Ct. Mar. 1, 2023), the court strongly rebuked the Florida Department of Revenue for attempting to apply market-based sourcing in contravention of its own COP sourcing regulation.
The taxpayers in Billmatrix were six related companies that provided financial technology services to business customers. Five of the six companies provided their services from locations outside Florida and incurred the majority (and in some instances the vast majority) of their costs of providing said services outside Florida. The sixth company provided its services from locations in and outside Florida and incurred the majority of its costs of providing said services in Florida. For purposes of computing their respective sales factors, all six companies sourced their service receipts according to the Department’s COP regulation, Fla. Admin. Code r. 12C-1.0155(2)(l). This regulation provides that gross receipts from sales of services must be sourced to Florida if the income producing activity is performed within and without Florida but the greater proportion of the income producing activity is performed in Florida, based on costs of performance. Consistent with the regulation, five of the six companies sourced all their service receipts outside Florida, while the sixth company sourced all its service receipts to Florida. On audit, however, the Department asserted that the companies’ income producing activities occurred where their customers were located, effectively applying market-based sourcing.
The court rejected the Department’s position and held that the plain language of the Department’s own regulation requires the use of COP sourcing. In so holding, the court drew a sharp distinction between COP sourcing, which looks to the location where the taxpayer performs its income producing activity, and market-based sourcing, which looks to the location where the customer receives the benefit of the service. The court concluded that the Department’s use of market-based sourcing was contrary to the Department’s COP regulation and, as a result, violated the companies’ right under the Florida Taxpayer Bill of Rights to fair and consistent application of the state’s tax laws by the Department.
The Billmatrix decision marked the second time in a span of roughly three months that the Department was admonished for attempting to avoid applying its COP regulation. In Target Enterprise, Inc. v. State of Florida Department of Revenue, No. 2021-CA-002158 (Fla. 2d Cir. Ct. Nov. 28, 2022), the same judge held that the Department’s refusal to apply its COP regulation was improper and that the alternative sourcing methodology it applied, on the basis of its discretionary authority no less, bore no relationship to the taxpayer’s business activity in Florida.
The case is Billmatrix Corp. v. State of Florida, Department of Revenue, No. 2020 CA 000435 (Fla. 2d Cir. Ct. Mar. 1, 2023), which is available here. The court’s decision in Target Enterprise, Inc. v. State of Fla. Department of Revenue, No. 2021-CA-002158 (Fla. 2d Cir. Ct. Nov. 28, 2022), is available here.