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Florida Flunks Sourcing Quiz, Sources Revenue from Online Education to Students' Locations

Florida Department of Revenue (DOR) ruled that tuition receipts from online courses are sourced to the location of the student, as opposed to the location where the costs of performance (COP) are incurred.

Florida Department of Revenue (DOR) ruled that tuition receipts from online courses are sourced to the location of the student, as opposed to the location where the costs of performance (COP) are incurred. Technical Assistance Advisement, 12C1-006 (May 17, 2012). While the ruling acknowledges that Florida applies COP for sourcing service revenue (by virtue of a regulation promulgated by the Department of Revenue (DOR)) and that receipts from services are to be sourced to the location of the income producing activity (IPA) based on COP, the DOR seems to apply a market-based sourcing method.

The taxpayer suggested, and the DOR agreed, that the taxpayer’s IPA is providing access to the online classes. Since most students access those classes from their homes, the DOR concluded that the taxpayer’s receipts ought to be sourced to the students’ state of residence. The DOR did not require any examination of where the actual COP were incurred.

Florida defines “income producing activity’” as “the transaction and activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains and profits.” Rule 12C-1.0155(2)(1), F.A.C. A taxpayer may have more than one IPA (e.g., curriculum development, faculty instruction, etc.) and several non-IPAs (e.g., academic administrative support, etc.). It is difficult to believe that the only IPA of an online education service provider is the provision of access to its online education courses. In fact, many providers of education classes may outsource that function to third parties such as website administrators or similar companies. Before an online class is made accessible to students, it must be developed. This process includes substantial direct costs, including costs related to enrollment, curriculum development, faculty instructions, and others. Florida should have examined each of the taxpayer’s activities to determine which ones constitute IPAs. It should have then ascertained the location of the direct costs associated with the performance of each IPA to determine how to source the taxpayer’s receipts.

The ruling is similar to Technical Assistance Advisement, 11C1-008 (Sept. 15, 2011), where Florida similarly applied a market-based sourcing method to a cable programmer’s receipts attributable to subscription and advertising revenue. In that case, Florida stated that “although activities related to the production of income . . . occur outside of Florida (such as the gathering, . . . and processing of all necessary information to develop and produce the advertisements), those activities cannot rightly be called income producing activities.” Wisconsin similarly applied a very narrow view of what constitutes an IPA in Ameritech Publishing Inc. v. Wisconsin Dep’t of Revenue, 327 Wis. 2d 798, 788 N.W.2d 383 (Wis. Ct. App. 2010), when it focused on the last activity of the taxpayer’s provision of directory advertising services which took place in Wisconsin, rather than examining the taxpayer’s other activities/costs, many of which took place outside of Wisconsin.

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