SUMMARY. January 7, 2005

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1 SUMMARY QUESTION: Does the standard apportionment factor, which would include the sale of Florida business assets, fairly represent the extent of the taxpayer's tax base attributable to Florida? ANSWER - Based on Facts Below: The inclusion of the proceeds from the sale of assets that were used in the taxpayer's business is found not to materially distort the apportionment factor or tax extraterritorial values. Therefore, the taxpayer's request for alternative apportionment was not granted. January 7, 2005 Re: Technical Assistance Advisement 05C1-001 Corporate Income Tax - Apportionment - Other Methods Section , F.S. XXX, hereinafter referred to as "Taxpayer" Dear : Your letter dated XX, requests a Technical Assistance Advisement concerning whether the Taxpayer may use an alternative apportionment factor. This response to your request constitutes a Technical Assistance Advisement under Chapter 12-11, Florida Administrative Code, and is issued to you under the authority of s , Florida Statutes. FACTS The Taxpayer is a XXX that is commercially domiciled in XX. The Taxpayer has XXX in Florida and XXX. The Taxpayer files corporate income tax returns on a separate basis in Florida and on a consolidated basis with XXX affiliated entities in XXX. The Taxpayer's XXX affiliated entities do not file corporate income tax returns in Florida. During its XX tax year, the Taxpayer sold XXX that were located in Florida. The sale of these business assets located in Florida generated XX of gross proceeds and resulted in a net gain to the Taxpayer of XX.(FN 1) The standard Florida apportionment factor requires the Taxpayer to include the gross proceeds from the sale of the business assets in the sales factor. Since the business assets that were sold were located in Florida, most, if not all of the gross proceeds from the sale of the business assets are included in the numerator of the Florida sales factor under this standard Florida apportionment methodology. This increase in the numerator of the Florida sales factor (Florida sales) increases the Florida sales factor and consequently increases the overall Florida apportionment factor. The Taxpayer believes that the standard Florida apportionment factor does not fairly tax the income that it earned during its XX tax year and has requested the use of an alternative apportionment factor. The Taxpayer's proposed

2 alternative apportionment factor would exclude from the apportionment factor (FN 2) the gross proceeds from the sale of the business assets. In its XX tax year, the Taxpayer's weighted sales factor was and its total apportionment factor was (FN 3) The standard Florida apportionment factor, which includes the sale of the Florida business assets, produces a XX weighted sales factor of and a total apportionment factor of If the Taxpayer's alternative apportionment methodology were used for the XX tax year, the Taxpayer's weighted sales factor would be and its total apportionment factor would be (fn 4) The Taxpayer's federal taxable income, after Florida additions and subtractions, for the XX tax year is a loss of (XX) and its federal taxable income, after Florida additions and subtractions, for the XX tax year is XX. The substantial increase in federal taxable income is from the Taxpayer's sale of the Florida business assets. In addition, it should be noted that the Taxpayer's XX apportioned Florida loss of (XX) should be used to offset Florida income in XX. QUESTION Does the standard apportionment factor, which would include the sale of the Florida business assets (XX), fairly represent the extent of a taxpayer's tax base attributable to Florida? If the answer is no, which of the Taxpayer's alternative apportionment methodologies is appropriate in this situation? LAW Section , F.S., states in part: (1) It is the intent of the Legislature in enacting this code to impose a tax upon all corporations, organizations, associations, and other artificial entities which derive from this state or from any other jurisdiction permanent and inherent attributes not inherent in or available to natural persons, such as perpetual life, transferable ownership represented by shares or certificates, and limited liability for all owners... It is the intent of the Legislature to subject such corporations and other entities to taxation hereunder for the privilege of conducting business, deriving income, or existing within this state. This code is not intended to tax, and shall not be construed so as to tax, any natural person who engages in a trade, business, or profession in this state under his or her own or any fictitious name, whether individually as a proprietorship or in partnership with others, or as a member or a manager of a limited liability company classified as a partnership for federal income tax purposes; any estate of a decedent or incompetent; or any testamentary trust. However, a corporation or other taxable entity which is or which becomes partners with one or more natural persons shall not, merely by reason of being a partner, exclude from its net income subject to tax its respective share of partnership net income. This statement of intent shall be given preeminent consideration in any construction or interpretation of this code in order to avoid any conflict between this code and the mandate in s. 5, Art. VII of the State Constitution that no income tax be levied upon natural persons who are residents and citizens of this state.... (3) It is the intent of the Legislature that the income tax imposed by this code utilize, to the greatest extent possible, concepts of law which have been developed in connection with the income tax laws of the United States, in order to:

3 (a) Minimize the expenses of the Department of Revenue and difficulties in administering this code; (b) Minimize the costs and difficulties of taxpayer compliance; and (c) Maximize, for both revenue and statistical purposes, the sharing of information between the state and the Federal Government. (4) It is the intent of the Legislature that the tax imposed by this code be prospective in effect only. Consistent with this intention and the intent expressed in subsection (3), it is hereby declared to be the intent of the Legislature that: (a) "Income," for purposes of this code, including gains from the sale, exchange, or other disposition of property, be deemed to be created for Florida income tax purposes at such time as such income is realized for federal income tax purposes; (b) No accretion of value, no accrual of gain, and no acquisition of a right to receive or accrue income which has occurred or been generated prior to November 2, 1971, be deemed to be "property," or an interest in property, (c) All income realized for federal income tax purposes after November 2, 1971, be subject to taxation in full by this state and be taxed in the manner and to the extent provided in this code.... Section , F.S., states in part: (1) A tax measured by net income is hereby imposed on every taxpayer for each taxable year commencing on or after January 1, 1972, and for each taxable year which begins before and ends after January 1, 1972, for the privilege of conducting business, earning or receiving income in this state, or being a resident or citizen of this state. Such tax shall be in addition to all other occupation, excise, privilege, and property taxes imposed by this state or by any political subdivision thereof, including any municipality or other district, jurisdiction, or authority of this state.... Section , F.S., states in part: (1) Except as provided in ss and , adjusted federal income as defined in s shall be apportioned to this state by taxpayers doing business within and without this state by multiplying it by an apportionment fraction composed of a sales factor representing 50 percent of the fraction, a property factor representing 25 percent of the fraction, and a payroll factor representing 25 percent of the fraction. If any factor described in subsection (2), subsection (4), or subsection (5) has a denominator that is zero or is determined by the department to be insignificant, the relative weights of the other factors in the denominator of the apportionment fraction shall be as follows:... (5) The sales factor is a fraction the numerator of which is the total sales of the taxpayer in this state during the taxable year or period and the denominator of which is the total sales of the taxpayer everywhere during the taxable

4 year or period. (a) As used in this subsection, the term "sales" means all gross receipts of the taxpayer except interest, dividends, rents, royalties, and gross receipts from the sale, exchange, maturity, redemption, or other disposition of securities. However:... Section , F.S., states: If the apportionment methods of ss and do not fairly represent the extent of a taxpayer's tax base attributable to this state, the taxpayer may petition for, or the department may require, in respect to all or any part of the taxpayer's tax base, if reasonable: (1) Separate accounting; (2) The exclusion of any one or more factors; (3) The inclusion of one or more additional factors which will fairly represent the taxpayer's tax base attributable to this state; or (4) The employment of any other method which will produce an equitable apportionment. Rule 12C , F.A.C., states in part: (1)(a) A departure from the applicable method of apportionment required under the provisions of ss or , F.S., shall be permitted only where the method does not accurately and fairly reflect business activity in Florida. An alternative method may not be invoked, either by the Department of Revenue or by the taxpayer, merely because it reaches a different apportionment percentage than the regularly applicable formula. However, if the applicable formula will lead to a grossly distorted result in a particular case, a fair and accurate alternative method is appropriate (see Norfolk and Western Railway Co. v. Missouri State Tax Commission, 390 U.S. 317, 88 S. Ct. 995, 19 L. Ed. 2d 1201 (1968), which is incorporated by reference in Rule 12C , F.A.C.). (b) A taxpayer seeking to utilize an alternative apportionment method must show by clear and cogent evidence that the regularly applicable formula would result in taxation of extraterritorial values (see Butler Bros. v. McColgan, 315 U.S. 501, 62 S. Ct. 701, 86 L. Ed. 991 (1942), which is incorporated by reference in Rule 12C , F.A.C.). This can be shown only if the regularly applicable formula is demonstrated to operate unreasonably and arbitrarily in apportioning to Florida a percentage of income which is out of all proportion to the business transacted in Florida and does not accurately and fairly reflect business activity in Florida (see Hans Rees Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123, 51 S. Ct. 385, 75 L. Ed. 879 (1931), which is incorporated by reference in Rule 12C , F.A.C.). (Emphasis Supplied)

5 Rule 12C (1)(b), F.A.C., states: Sales of business assets. If a taxpayer derives receipts from the sale of equipment used in its business, such receipts constitute a "sale." For example, a truck express company owns a fleet of trucks and sells its trucks under a regular replacement program. The gross receipts from the sales of the trucks are included in the sales factor. If amounts of gross receipts arising from an incidental or occasional sale of a fixed asset used in the regular course of the taxpayer's trade or business would materially distort the sales factor, the taxpayer may petition the Department, or the Department is authorized to require, pursuant to s , F.S., and Rule 12C , F.A.C., an adjustment to the sales factor. (Emphasis Supplied) Rule 12C (1)(f), F.A.C., states: Income from intangible personal property. 1. Where the income producing activity in respect to business income from intangible personal property can be readily identified, such income is included in the denominator of the sales factor and, if the income producing activity occurs in this state, in the numerator of the sales factor as well. For example, usually the income producing activity can be readily identified in respect to interest income received on deferred payments on sales of tangible personal property and income from the sale, licensing, or other use of intangible personal property. The sale or licensing of the use of a trade name, trademark, or patent will be attributable to the state in which the trade name, trademark, or patent is used. 2. Where business income from intangible property cannot readily be attributed to any particular income producing activity of the taxpayer, such income cannot be assigned to the numerator of the sales factor for any state and shall be excluded from the denominator of the sales factor. For example, where business income in the form of dividends received on stock, royalties received on patents or copyrights, or interest received on bonds, debentures or government securities results from the mere holding of the intangible personal property by the taxpayer, such dividends and interest shall be excluded from the denominator of the sales factor. 3. In the case of a taxpayer engaged in the sale, assignment, or licensing of intangible personal property such as patents and copyrights, "sales" includes the gross receipts therefrom. Rule 12C (2)(a), F.A.C., states: Sales of Tangible Personal Property in Florida. Gross receipts from sales of tangible personal property are in this state if the property is delivered or shipped to a purchaser within this state regardless of the F.O.B. point, other conditions of the sales, or the ultimate destination of the property. Tangible personal property shipped by common or contract carriers will use a destination test to determine whether the sale is a Florida sale or a sale without this state. 1.a. Property shall be deemed to be delivered or shipped to a purchaser within this state if the recipient is located in this state, even though the property is ordered from outside this state.

6 b. Example: The taxpayer, with inventory in State A, sold $100,000 of its products to a purchaser having branch stores in several states including this state. The order for the purchase was placed by the purchaser's central purchasing department located in State B. $25,000 of the purchaser's order was shipped directly to purchaser's branch store in this state. The branch store in this state is the "purchaser within this state" with respect to $25,000 of the taxpayer's sales. 2.a. Property is delivered or shipped to a purchaser within this state if the shipment terminates in this state, even though the property is subsequently transferred by the purchaser to another state. b. Example: The taxpayer makes a sale to a purchaser who maintains a central warehouse in this state at which all merchandise purchases are received. The purchaser reships the goods to its branch stores in other states for sale. All of the taxpayer's products shipped to the purchaser's warehouse in this state are property "delivered or shipped to a purchaser within this state." 3.a. With respect to sales made to a citrus cooperative by a grower-member, the grower-member's sales factor shall be the same as the sales factor for the most recent taxable year of the citrus cooperative-processor. With respect to sales made to a Florida processor by a grower-participant, the grower participant's sales factor shall be the same as the sales factor for the most recent taxable year of the Florida processor. A copy of the processor's sales factor as furnished to the grower-member or grower-participant shall be attached to the grower-member's or growerparticipant's corporate income tax return, Form F-1120, which is incorporated by reference in Rule 12C-1.051, F.A.C. b. If there is delivery of citrus fruit in Florida, other than citrus fruit delivered by a cooperative for a grower-member, citrus fruit delivered by a grower-member to a cooperative, or citrus fruit delivered by a grower-participant to a Florida processor, the sale will be a Florida sale. For example, if a citrus grower delivers fruit to a processor or middle-man for cash, the sale is considered to be a Florida sale, regardless of any subsequent shipment of the fruit outside the state. 4.a. The term "purchaser within this state" shall include the ultimate recipient of the property if the taxpayer in this state, at the designation of the purchaser, delivers to or has the property shipped to the ultimate recipient within this state. b. Example: A taxpayer in this state sold merchandise to a purchaser in State A. Taxpayer directed the manufacturer or supplier of the merchandise in State B to ship the merchandise to the purchaser's customer in this state pursuant to purchaser's instructions. The sale by the taxpayer is in this state. 5.a. When property being shipped by a seller from the state of origin to a consignee in another state is diverted while en route to a purchaser in this state, the sales are in this state. b. Example: The taxpayer, a produce grower in State A, begins shipment of perishable produce to the purchaser's place of business in State B. While en route the produce is diverted to the purchaser's place of business in this state in which state the taxpayer is subject to tax. The sale by the taxpayer is attributed to this state. Rule 12C (2)(c), F.A.C., states:

7 Real Property. Gross receipts from the sale, lease, rental, or licensing of real property are in this state if the real property is located in this state. (Emphasis Supplied) Rule 12C (2)(f), F.A.C., states: (f) Intangible personal property in Florida. 1. The rental, leasing, licensing, or other use of a trade name, trademark, or patent to a business entity located in Florida will be considered a Florida sale. The mere holding of intangible personal property is not, of itself, an income producing activity. 2. Franchises. The franchise fees paid to rent, lease, license, or otherwise use a trade name and system of sales are Florida sales if the franchise location is in the state. Section (1), F.S., states: The department may issue informal technical assistance advisements to persons, upon written request, as to the position of the department on the tax consequences of a stated transaction or event, under existing statutes, rules, or policies. After the issuance of an assessment, a technical assistance advisement may not be issued to a taxpayer who requests an advisement relating to the tax or liability for tax in respect to which the assessment has been made, except that a technical assistance advisement may be issued to a taxpayer who requests an advisement relating to the exemptions in s (1) or (2) at any time. Technical assistance advisements shall have no precedential value except to the taxpayer who requests the advisement and then only for the specific transaction addressed in the technical assistance advisement, unless specifically stated otherwise in the advisement. Any modification of an advisement shall be prospective only. A technical assistance advisement is not an order issued pursuant to s or s or a rule or policy of general applicability under s The provisions of s (1) are not applicable to technical assistance advisements. Rule (1), F.A.C., states: A taxpayer may not rely on an advisement issued to another taxpayer, except that an advisement issued to a taxpayer association provides guidance to those taxpayers who are members of the taxpayer association for the particular transaction(s) discussed in the TAA... (Emphasis Supplied) DISCUSSION The Taxpayer is requesting the use of an alternative apportionment factor for Florida because it believes that the standard apportionment factor, which includes the sale of the business assets, taxes extraterritorial values and apportions more income to Florida than Florida is constitutionally allowed to tax.(fn 5) Florida Standard Apportionment Factor Subsection (5), F.S., provides the intent of the Florida Legislature and states that the sales factor is a fraction,

8 the numerator of which is the total sales of the taxpayer in this state during the taxable year or period, and the denominator of which is the total sales of the taxpayer everywhere during the taxable year or period. This subsection further provides that the term "sales" means all gross receipts of the taxpayer except interest, dividends, rents, royalties, and gross receipts from the sale, exchange, maturity, redemption, or other disposition of securities. Since the sale of these business assets (XX) is a gross receipt of the Taxpayer, which is not interest, a dividend, a rent, a royalty, or a receipt from the disposition of securities, the standard Florida apportionment methodology would include in the numerator and denominator of the sales factor the proceeds from the sale of the Florida business assets. See Rule 12C-1.055(1)(b) and (2), F.A.C. Following Florida's standard apportionment law, the Taxpayer's apportionable income of XX is subject to a Florida apportionment factor of The Taxpayer's Florida income tax liability is XX, when offset by the Taxpayer's XX net operating loss. Alternative Apportionment As noted above, the Taxpayer believes that the standard Florida apportionment factor taxes extraterritorial values and apportions more income to Florida than Florida is constitutionally allowed to tax. As a result of this belief, the Taxpayer is requesting permission to use an alternative apportionment factor. The Taxpayer notes the language in Rule 12C (1)(b), F.A.C., which provides that if amounts of gross receipts arising from an incidental or occasional sale of a fixed asset used in the regular course of the taxpayer's trade or business would materially distort the sales factor, the taxpayer may petition the Department, or the Department is authorized to require, pursuant to s , F.S., and Rule 12C , F.A.C., an adjustment to the sales factor. Alternative apportionment is very rare. The Florida Supreme Court recognized this fact in Roger Dean Enterprises v. State, Department of Revenue, 387 So.2d 358 (Fla. 1980). There is a very strong presumption in favor of normal three-factor apportionment and against the applicability of relief provisions... The relief provision should be used where the statute reaches arbitrary or unreasonable results so that its application could be attacked successfully on constitutional grounds... Departures from the basic formula should be avoided except where reasonableness requires. 387 So.2d at 363. In Moorman Manufacturing Co. v. Bair, Director of Revenue of Iowa, 437 U.S. 267 (1978), the U.S. Supreme Court stated:...[the] claim that the Constitution invalidates an apportionment formula whenever it may result in taxation of some income that did not have its source in the taxing state is incorrect. 437 U.S. at 272. The Department has only allowed alternative apportionment on a few occasions. As noted, Rule 12C (1)(b),

9 F.A.C., permits an adjustment to the sales factor where the inclusion of the proceeds from an incidental or occasional sale of fixed assets could be distortive to the sales factor and may in fact create a situation where the standard apportionment factor provides Florida with more or less income tax than Florida is constitutionally allowed to collect. However, situations where the inclusion of an incidental or occasional sale of fixed assets actually distorts a taxpayer's apportionment factor are very rare. The Taxpayer cites one such instance when the Department allowed an alternative apportionment (TAA 97(C)1-007) and seems to rely on this Technical Assistance Advisement (TAA) even though there are numerous other TAAs that did not allow an alternative apportionment factor as a result of an occasional or isolated sale of business assets. First, the Taxpayer cannot rely on another taxpayer's TAA. See Subsection (1), F.S., and Rule (1), F.A.C. Second, the Taxpayer's situation is substantially different from that of the taxpayer in the cited TAA (TAA 97(C)1-007). Several substantial differences are noted below. 1. The Taxpayer files separately in Florida, while the taxpayer in TAA 97(C)1-007 filed consolidated in Florida. 2. The Taxpayer's transaction is a straight business asset sale, while the taxpayer in TAA 97(C)1-007 sold stock through an I.R.C. section 338(h)(10) transaction, which was treated as a sale of business assets.(fn 6) 3. The Taxpayer's sale of business assets did not contain goodwill, while the taxpayer in TAA 97(C)1-007 had a sale that contained a substantial portion of goodwill. Given that TAA 97(C)1-007 and the numerous other TAAs that address alternative apportionment are neither authoritative nor persuasive, we must look to the actual law. Rule 12C , F.A.C., provides for an adjustment to the apportionment formula if the standard formula leads to a grossly distorted result. This rule requires the Taxpayer to show by clear and cogent evidence that the apportionment formula results in taxation of extraterritorial values. The Taxpayer must demonstrate that the apportionment formula operates unreasonably and arbitrarily in apportioning income to Florida, and that it is out of all proportion to the business transacted in Florida and does not accurately and fairly reflect business activity in Florida. The Taxpayer has shown that the numerator and the denominator of its sales factor, as well as its overall apportionment factor, substantially increase when the Taxpayer's sale of Florida business assets are included in the sales factor on the XX Florida corporate income tax return. Now, we must consider whether the inclusion of the proceeds from the sale of the business assets in the sales factor materially results in the taxation of extraterritorial values. We must examine the two activities that produced income for the Taxpayer in XX. The Taxpayer's regular business operations produced a loss of (XX). When this is multiplied by the Florida apportionment factor that would have existed without the sale of the business assets ( ), the Taxpayer would have had a Florida net operating loss of (XX). In addition to its regular business activities, the Taxpayer also made a sale of some of its Florida business assets that produced income of XX. Since all of the business assets that were sold were located in Florida, one would expect that all of the XX in income would be subject to tax by Florida. When these two income producing activities are combined, the Taxpayer would have XXX in Florida income that would be subject to the Florida corporate income tax.

10 This amount of Florida income, when offset by the Taxpayer's XX net operating loss, would produce a Florida income tax liability of XX. Following Florida's standard apportionment law, the combination of the Taxpayer's two income activities produces income of XX, which is subject to a Florida apportionment factor of Apportionable income, when offset by the Taxpayer's XX net operating loss, produces a Florida income tax liability of XX. Under the Taxpayer's proposed alternative methodology, which would exclude the sale of the business assets from the sales factor, the combination of the Taxpayer's two income activities produces income of XXX, which would be subject to an apportionment percentage of Apportionable income, when offset by the Taxpayer's XX net operating loss, would produce a Florida tax of zero and the Taxpayer would still have a Florida loss carryover to XX of (XX). The Taxpayer's argument fails to recognize that a significant portion of the income generated was a result of Florida activity, the sale of business assets (XXX) located in Florida. The income of the Taxpayer substantially increases as a result of the Taxpayer's sale of Florida business assets. What logically follows an increase in income resulting from the sale of business assets located in Florida is an increase in the sales factor in Florida. The corresponding increase in the weighted sales apportionment factor from to and corresponding increase in the apportionment formula from to is commensurate with the fact that the business assets that were sold by the Taxpayer were substantial and were located in Florida. The increase in the Taxpayer's Florida tax liability reflects the fact that Florida may subject to tax a substantial portion of the income generated by the sale of Florida business assets. Although the difference in the apportionment factors between including or excluding the sale of the business assets is substantial, we do not believe that extraterritorial values are being taxed by Florida. The regular apportionment factor, which includes the sale of the business assets that were used in the Taxpayer's XXX business, does not operate unreasonably and arbitrarily in apportioning to Florida a percentage of income that is out of all proportion to the business transacted in Florida. The Taxpayer's mere suggestion that extraterritorial values are being taxed and that an alternative apportionment results in less tax due to the State of Florida is insufficient proof. In Norfolk, supra, the U.S. Supreme Court found the application of the apportionment formula unconstitutional where the taxing state imposed an ad valorem property tax on the railroad rolling stock, using the familiar single-factor mileage formula apportionment basis. The taxpayer presented evidence showing that the actual inventory of rolling stock in Missouri on tax day was less than half (approximately $7,600,000 versus assessed value of $19,981,000) the value assessed using Missouri's apportionment formula. The taxpayer further demonstrated that its calculation of the tax-day value was representative of the value of rolling stock located within the state throughout the year and in the preceding year. The Supreme Court in Norfolk, at page 329, noted that it is not necessary for a state to demonstrate that its use of the mileage formula yields an exact measure of value. However, the Supreme Court further stated that: [w]hen a taxpayer comes forward with strong evidence tending to prove that the mileage formula will yield a grossly distorted result in its particular case, the State is obliged to counter that evidence or to make the accommodations necessary to assure that its taxing power is confined to its constitutional limits. If it fails to do so and if the record shows that the taxpayer has sustained the burden of proof to show that the tax is so excessive as to burden interstate commerce, the taxpayer must prevail.

11 In the Hans Rees' case, supra, North Carolina attempted to apportion income of a manufacturing concern using a formula based on the ratio of the value of the taxpayer's real and tangible personal property located in North Carolina over the value of its real and tangible property located everywhere times its entire income. The taxpayer was able to demonstrate that such a one-factor (property) apportionment formula "operated unreasonably and arbitrarily" in attributing income to the state that was "out of all proportion" to the taxpayer's activities in the state. The Court concluded that proof that the formula produced a tax on 83% of the taxpayer's income when only 17% of that income actually had its source in the State would suffice to invalidate the assessment under the Due Process Clause. See Moorman Manufacturing. The type of distortion present in Hans Rees' is largely remedied today by use of a threefactor apportionment formula. The three factors now generally used by states to apportion the income of most businesses (like the taxpayer in Hans Rees') to their state, are sales, property, and payroll. Even though both XXX and Florida, the two states in which the Taxpayer claims that it is subject to tax, use a three factor apportionment formula, the Taxpayer asserted in conference that because greater than 100% of its income is being taxed by the two states, Florida's apportionment calculation must be taxing extraterritorial values. Apportionment is merely a method to break out a multi-state entity s income amongst the states in which it conducts business. Apportionment is not an exact science, but it has been widely accepted by both state and federal courts as a reasonable approximation for this purpose. Regarding this overlap taxation issue, the U.S. Supreme Court stated in Moorman Manufacturing, 437 U.S. at 277: Even assuming some overlap, we could not accept appellant s argument that Iowa, rather than Illinois, was necessarily at fault in a constitutional sense. It is, of course, true that if Iowa had used Illinois' three-factor formula, a risk of duplication in the figures computed by the two States might have been avoided. But the same would be true had Illinois used the Iowa formula. Since the record does not reveal the sources of appellant s profits, its Commerce Clause claim cannot rest on the premise that profits earned in Illinois were included in its Iowa taxable income and therefore the Iowa formula was at fault for whatever overlap may have existed... The only conceivable constitutional basis for invalidating the Iowa statute would be that the Commerce Clause prohibits any overlap in the computation of taxable income by the States. If the Constitution were read to mandate such precision in interstate taxation, the consequences would extend far beyond this case. For some risk of duplicative taxation exists whenever the States in which a corporation does business do not follow identical rules for the division of income... The prevention of duplicative taxation, therefore, would require national uniform rules for the division of income. Although the adoption of a uniform code would undeniably advance the policies that underlie the Commerce Clause, it would require a policy decision based on political and economic considerations that vary from State to State. The Constitution, however, is neutral with respect to the content of any uniform rule... It is clear that the legislative power granted to Congress by the Commerce Clause of the Constitution would amply justify the enactment of legislation requiring all States to adhere to uniform rules for the division of income. It is to that body, and not this Court, that the Constitution has committed such policy decisions... Florida and XXX apportionment laws are quite different. XXX uses the three factor apportionment formula, like Florida, but XXX weights all three factors (payroll, property, and sales) evenly at 33 and 1/3%, while Florida weights the sales factor at 50% and the property and payroll factors at 25% each. This difference alone creates a situation where a taxpayer that only operates in Florida and XXX could be subject to income taxes on more than 100% of its income, or

12 less than 100% of its income, depending on how a taxpayer is situated. In this case, the Taxpayer asserts that more than 100% of its income would be subject to tax between the states. If XXX weighted its apportionment factors in the same manner that Florida does, the combination of the Florida and XXX apportionments would result in exactly 100% of the Taxpayer's income being subject to tax between the states. However, as stated by the U.S. Supreme Court in Wisconsin v. J.C. Penny Co., 311 U.S. 435, 444 (1940): A State is free to pursue its own fiscal policies, unencumbered by the Constitution, if by the practical operation of a tax the State has exerted its power in relation to the opportunities which it has given, to protection which it has afforded, to benefits which it has conferred by the fact of being an orderly, civilized society. Another significant difference between Florida and XXX law is in the items that are included in the sales apportionment factor. XXX law apparently does not include the proceeds from the sale of the Florida business assets in its apportionment factor. Florida law requires the proceeds from the sale of the Florida business assets to be included in the Taxpayer's apportionment factor. Because the business assets that were sold are located in Florida, the combination of the Florida and XXX apportionment percentages is greater than 100%. If XXX law included the sale of the Florida business assets in its apportionment factor, like Florida, the amount of income taxed between the states would be much closer to the amount that has been historically taxed between the states. Therefore, it may be XXX, and not Florida, that is subjecting extraterritorial values to taxation because XXX does not recognize the sale of business assets in its apportionment computation and it was the sale of the business assets that were located in Florida that produced all of the Taxpayer's income in XX.(FN 7) In addition, because the Taxpayer files on a consolidated basis in XXX, and on a separate basis in Florida, the Taxpayer does not have a separate apportionment factor in XXX for comparison with the Florida apportionment percentage. The Taxpayer only has a consolidated apportionment factor in XXX, and that in combination with the Florida apportionment factor, could be greater than or less than 100%, depending on how the other entities that are included in the XXX consolidated tax return are situated and whether those entities are subject to and paying Florida corporate income tax. The Taxpayer has not shown by clear and cogent evidence that Florida s normal apportionment calculation results in taxation of extraterritorial values. The Taxpayer receives the benefits and protections of Florida law, and there is no question that Florida may constitutionally tax the sale of the assets located in Florida and used in the Taxpayer's business. Also, the Taxpayer has not demonstrated that the inclusion of the proceeds from the sale of the business assets in the apportionment formula makes the formula operate unreasonably and arbitrarily in apportioning the Taxpayer's income to Florida, or that the apportionment formula is inaccurate and does not fairly reflect the Taxpayer's business activity in Florida in XX. CONCLUSION Florida law requires the Taxpayer to include the proceeds from the Taxpayer's sale of its Florida business assets in its apportionment factor. Based on the discussion above, the inclusion of the proceeds from the sale of assets that were used in the Taxpayer's XXX business is found not to materially distort the apportionment factor or tax extraterritorial values.

13 This response constitutes a Technical Assistance Advisement under s , F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice as specified in s , F.S. Our response is based on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon which this advice is based may subject similar future transactions to a different treatment than expressed in this response. You are further advised that this response, your request and related backup documents are public records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions of s , F.S. Confidential information must be deleted before public disclosure. In an effort to protect confidentiality, we request you provide the undersigned with an edited copy of your request for Technical Assistance Advisement, the backup material and this response, deleting names, addresses and any other details which might lead to identification of the taxpayer. Your response should be received by the Department within 15 days of the date of this letter. Sincerely, Robert DuCasse Technical Assistance and Dispute Resolution RCD/ Control No.: FOOTNOTE 1 While the request submitted on behalf of the Taxpayer makes no mention of this point, we presume from the nature of this request that the Taxpayer acknowledges that the proceeds from this transaction are business income. FOOTNOTE 2. As an apparent compromise, the Taxpayer suggests that instead of the gross proceeds from the sale of the business assets being included in the apportionment factor, only the net gain from the sale of the business assets should be included. FOOTNOTE 3. Apportionment formula numbers and the amount of tax due for tax years XX and XX discussed in this advisement come from returns filed or other facts provided by the Taxpayer. Such information has not been verified through audit or other review by the Department. Use of this information in this advisement is not a recognition or acceptance of the accuracy of these numbers, amounts, or facts. FOOTNOTE 4. Under the Taxpayer's alternative apportionment methodology, the XX weighted sales factor is less than the XX weighted sales factor because Florida real estate was sold in the middle of the tax year, resulting in fewer Florida XXX operations and fewer Florida receipts. In addition, the Taxpayer's Florida property factor is lower in XX because the sale of the Florida business assets reduced the Taxpayer's Florida property factor. FOOTNOTE 5. The Taxpayer, in its request for relief, states: "The substantial increase in the apportionment

14 percentage would cause extraterritorial values to be taxed since the higher apportionment percentage would apply to the income earned in the regular course of [the Taxpayer's] business. The regular apportionment formula therefore operates to unreasonably and arbitrarily attribute income to Florida far out of proportion to the business transacted in Florida." FOOTNOTE 6. The Florida Statutes and Rules exclude the sale of stock (disposition of securities) from the apportionment factor, while they include the sale of business assets in the apportionment factor. The Department treats I.R.C. section 338(h)(10) transactions as a sale of business assets and looks to the individual assets that were sold to determine the extent to which each item of income should be included or excluded in the standard apportionment factor. FOOTNOTE 7. The Taxpayer's XXX operations produced a loss for the XX tax year.