Florida Applies “Income Producing Activity” Rule to Source Service Revenue to Customer Location

The cost of performance rule for sourcing service revenue when calculating the sales factor of the apportionment formula generally assigns service revenue to the state(s) where the services are performed, but a number of states are narrowly interpreting those rules to create a market-based sourcing result.

By Kristen Davis, SALT Associate

For purposes of calculating the income tax apportionment factors, each state applies various sourcing rules (i.e., whether or not the factor – property, payroll, and/or sales – belongs in the numerator of the factor).  For example, when calculating the sales factor, sales of tangible personal property are generally sourced to the state where the property is delivered to the customer.  However, when it comes to sourcing receipts from services, states typically apply one of the following two rules: (i) income producing activity (i.e., costs of performance) or (ii) market-based.  Historically, states applied the income producing activity rule, but now about two-thirds apply the market-based rule.

The income producing activity rule is, theoretically, designed to capture the location where the service is performed, versus the market-based approach, which typically will source receipts to the location of the customer.  Nonetheless, states have issued guidance applying the income producing activity rule to determine that the proper sourcing is to the location of the customer.  On January 13, 2020, the Florida Department of Revenue (“DOR”) issued a Technical Assistance Advisement to a taxpayer regarding the proper sourcing of its revenues from providing access to its platform and certain services.[1]

The taxpayer is an out-of-state technology corporation that provides a platform for developers to create and sell apps.  The taxpayer charges users two types of fees.  The first is a fee for access to the platform that is charged when the user creates an account.  The second is a service fee that is charged when one of the user’s customers makes a purchase using the taxpayer’s platform.  In exchange for the fee, the taxpayer provides the user with the following services:

  • acting as an intermediary in transactions between Consumers and Users;
  • collecting payments from Consumers for sales made by Users;
  • calculating, collecting, and remitting sales and use taxes and withholding taxes to the

relevant taxing authorities for sales made via the Taxpayer’s platform;

  • calculating and maintaining a refund reserve on behalf of Users to cover potential

refund amounts including refunds, rebates, and chargebacks; and

  • transferring remaining balances from the refund reserve to Users on a monthly basis.


The taxpayer asked the Florida Department of Revenue a simple question: “How should the taxpayer revenues be sourced under the Florida sales factor?”

The DOR applied Rule 12C-1.0155(2)(l), which states:

Gross receipts from other sales shall be attributed to Florida if the income producing activity which gave rise to the receipts is performed wholly within Florida. Also, gross receipts shall be attributed 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. The term “income producing activity” applies to each separate item of income and means the transactions and activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits.

In a somewhat confusing analysis, the DOR looked at the term “income producing activity” and noted that both transactions and activities must exist in order for any activity to be considered the income producing activity.  This led the DOR to conclude that the sourcing rule should be interpreted that “when the activity producing the sales revenue occurs entirely or predominately in Florida, the receipts from the Florida activity are deemed to be a Florida sale.”

Applying that interpretation to the facts, the DOR ruled that with regard to the user fees received upon setting up the account, the income producing activity is the creation of the user account.  Therefore, if the account is created in Florida, the user fees constitute a Florida sale, as determined by the user’s billing address.  This presumption may be rebutted if it can be proven that the user created the account outside of Florida.

For fees charged to a user for services provided when user’s customer makes a purchase using the taxpayer’s platform (e.g., to access user’s app or purchase goods/services using the user’s app), the DOR ruled that the income producing activity is the performance of services for users when user’s customers make a purchase.  Therefore, the fees from these services should be sourced to Florida if the billing address of user’s customer is in Florida. This presumption is also rebuttable if it can be proven that the customer use or purchase occurred outside Florida.

It is worth noting that this is not the first time that Florida has applied its rule to essentially source services based on the customer’s location (i.e., market-based).[2]  What’s troubling about Florida’s application is that it so narrowly define the income producing activity to include only those activities that directly result in the sale (e.g., the creation of the account in Florida).

Aprio’s SALT team is experienced with addressing these difficult sourcing questions, and we work with businesses on their sourcing determinations in order to identify opportunities to minimize state income tax liability.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.   

Contact Kristen Davis at kisten.davis@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at [email protected] for more information.

This article was featured in the March 2020 SALT Newsletter.

[1] Florida Technical Assistance Advisement 20C1-001, January 13, 2020.

[2] See, e.g., Florida Technical Assistance Advisement 18C1-011, September 27, 2018.  In addition, Florida is not the only state to have taken this narrow view of income-producing activity to achieve a market-based result.  See our newsletter article regarding a similar application in South Carolina.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.