GILLETTE COMPANY v. FRANCHISE TAX BOARD

Respondent’s Request for Judicial Notice

Cal.September 20, 2013

Au the Supreme Court of the State of Caltfornta THE GILLETTE COMPANY & SUBSIDIARIES, Plaintiffs and Appellants, Vv. CALIFORNIA FRANCHISE TAX BOARD, AN AGENCYOF THE STATE OF CALIFORNIA, Defendant and Respondent. SUPREME COURT Case No. 8206587 F | L E D SEP 2.0 2013 Frank A. McGuire Clerk Deputy First Appellate District Division Four, Case No. A130803 San Francisco County Superior Court, Case No. CGC-10-495911 The Honorable Richard A. Kramer, Judge RESPONDENT’S SUPPLEMENTAL REQUEST FOR JUDICIAL NOTICE MOTION, MEMORANDUM AND SUPPORTING PAPERS KAMALA D, HARRIS Attorney General of California SUSAN DUNCAN LEE Acting Solicitor General KATHLEEN A. KENEALY . Chief Assistant Attorney General PAUL D. GIFFORD Senior Assistant Attorney General W. DEAN FREEMAN Supervising Deputy Attorney General Lucy F. WANG Deputy Attorney General State Bar No. 199772 455 Golden Gate Avenue, Suite 11000 San Francisco, CA 94102-7004 Telephone: (415) 703-5202 Fax: (415) 703-5480 Email: Lucy.Wang@doj.ca.gov Attorneysfor Defendant and Respondent Franchise Tax Board MOTION Pursuant to Evidence Code sections 452 and 459, and California Rules of Court, rule 8.252, Respondent Franchise Tax Board (the “Board”) movesthis court to take judicial notice of the below-listed documentin support of its Reply Brief on Merits: E. A. England, Florida Corporate Income Taxation: Background, Scope and Analysis, An Introduction to Florida Corporate Income Taxation 4,14 (1972), a true and correct copy of the relevant pages are attached hereto as Exhibit E. This documentis attached to this motion as required by California Rules of Court, rule 8.252(a)(3). The motion is based on the attached memorandum ofpoints and authorities, and supporting declaration, filed herewith. Dated: September 20, 2013 Respectfully submitted, KAMALA D. HARRIS Attorney General of California W. DEAN FREEMAN Supervising Deputy Attorney General Bay Lucy F. WAN Deputy Attorney General Attorneysfor Defendant and Respondent Franchise Tax Board MEMORANDUM Pursuant to Evidence Codesection 459, “[a] reviewing court may take judicial notice of any matter specified in Section 452.” The attached article regarding corporate incometaxation in Florida consist of “[fJacts and propositionsthat are not reasonably subjectto dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy” under Evidence Codesection 452, subdivision (h). The document described above and attached hereto falls into these categories and judicial notice is proper as to this document. A. Whythe Matter to be Noticed Is Relevant to the Appeal The history of the Multistate Tax Compact supports the Compact memberstates’ longstanding and consistent construction of the Compact that permits memberstates to eliminate or modify the election and income apportionmentprovisions contained in Articles III and IV of the Compact. Florida’s legislative action in repealing the election and apportionment provisions contained in Articles III and IV of the Compact supports the memberstates’ construction becausethe legislation did not affect Florida’s continued good standing as a Compact memberstate. In addition, Gillette contends Florida actually “maintained the three- factor, equal-weighted Compact formula,” therefore Compact member states knew they could not eliminate the election provision. (Answer Brief at p. 37.) This representation is wrong. While Florida did maintain a “three factor formula,” it did not maintain the equal-weighted formula. Florida used a double-weighted sales factor formula, just as California did in Revenue and Taxation Code section 25128. The appendedarticle discussing Florida’s tax laws and statutes supports the fact that Florida | adopted a “destination” test for determining the source ofsales in 1971, which involved weighting the three-factor formula by assigningfifty percent of the apportionment formula to sales, and twenty-five percent each. to payroll and to property. Thus, Florida’s “three factor” formula is not the equal-weighted Compact formula. B. Whether the Matters to Be Noticed Were Presented to the Trial Court This document wasnotpresentedto the trial court as the appealin this matter was taken after the Board successfully demurred to plaintiffs’ complaints in thetrial court. C. Whether the Mattersto Be Noticed Relate to Proceedings Occurring After Judgment This documentis not related to any proceedings occurring after the order or judgmentthat is the subject of this action. For each of the foregoing reasons, the Board respectfully requests that the Court take judicial notice of the article in Florida Corporate Income Taxation: Background, Scope and Analysis, An Introduction to Florida Corporate Income Taxation. Dated: September 20, 2013 Respectfully submitted, KAMALAD. HARRIS Attorney General of California W. DEAN FREEMAN Supervising Deputy Attorney General cay Wang LucyF. WAN Deputy Attorney General Attorneysfor Defendant and Respondent Franchise Tax Board SF2010900595 AN INTRODUCTION TO YO. po,ty : Peohivea Reicbin O'D.Askew. ..7 ‘Corporate. Liicome. Taxationan “Florida: Background, Scope,anid Analysis... 6 coo 6. bow ArthurJ..England, fris.4YS os , :le i Code: AGonsideration. i ’- SubstantiveAspects so... cca cge sa gov es sia oun ’. Finan. 25 his: Florida Corporate Income Taxsttion; .Ye Assessment, liniforeemnent, ‘and Refund oT,, ' Procedures oo. waa ceues teweesecdes Shepard Ring. 38 ‘ The-lirip the Florida:Code.:F9 Butea wees a: TAXATIONIN FLORIDA: : BACKGROUND,-SCOPE, AruvurJ. England, Jr a | . On November 2, vert ‘the voters ofFlo . constitutional, ammendtrient aui potived th : inconie tax on. corpora APTI! 1 Shortly alter this: Tek feriduth,,©the Governor of ‘Florida Se. “hniey”artificial ‘eniities whieh: wre: NOL, strictly incorporated eniefprises,. imple tingBeconstitutional ‘autho tax “other ‘than natural ie : York‘Barwr Asotitens . ‘ILS. Res, 7-8,Jane-Spee Sess,’ (Fla 19 jing. the proposed amendment to Fla, Const, art. VI, § 5 (1988), The. text of this ent appeare:an page Bilafra. » 220 C1 Titercinafier referred: to as ‘the Flo Guaep. 4 © e y proved 4. th on of ar. "Florida ation, On a Income 172. This ‘brocesses te which taxation: sndmént,. industry. 1% statute vies as the imposes ‘a ‘speaking, ‘ization to {Florida's iS. 1965, sylvania; rand New proposed A of ‘this * v¢ Florida: © «tyweo-carlierdrafts had bi ‘Corporate ing fn splanatory. report? chat feed been1 preparedby th ridy Homsé of Representa ives. ‘This diale stay listributedthroughort the state. for analysis ahd ¢eommentaty during the eight-month ‘period, preecding the November:referendum. Thethird staff draft had dlso been ‘analyzed for technical accuracy by select. tax committees ofThe Florida Bar and the HMdfida, Institute of Certified Public Aveouritatits The Teport, anda supplemental report? issued or : ithe“policy considerations’anvolvedint adoption of a corporate incometax. Togethet these reports:served16 identity the major ‘isguds to bé sonsidered §in: committee, hearigs: and floor debates. The formalleislative process began, an November 17, when «amembeérs of the SenateWays and ‘Means’ C mittee and ‘the. House Finance .and Taxation.Gommittee convened dn ii { sgssion. to’ conduct’ public hearings on. eorpé income taxation, At this he ‘ing, the Governor‘of. Florida. 2sscd the jolt committees on. mijot aspects of corporate pcome wxation, and. staff and industry: began presentatisns of technical materi fs.On NovenibistL8: and athe* Henai in the proposed “iegiélation.Eachaerate sdopied1for veeti Purposes|ithe. -complete draft statute tut bad been tesola » for further deliberationoncl diieute seeinwhich 1the committees had ‘oopeltierea.‘if — tieeine 2A, England, Report to uve ‘Yrouse on PropadtaComporate lncomte.Fax Legislation (Nov. 3, 1971). Copies ‘of this-report: and its supplements are ‘in thy.Florida, State Library,‘the: library cofthie Supreme Goart of aries. of FloriSty University, Stetson rida, and theSieae of Mismi.. PA. Singland, iReport to-theteat Preposed Corporate hicone’“Tax Lepitlarios , ante e e e e e e e 6 | FLORIDA CORPORATEINGOME TAXATION. allowance of a premiums taxeredit for insuraned rempanic (2)‘the allowanceofagross rcecipts tax-credit “the ‘Scope ofan athe4 apportionmentfor seat for thiesales factor:ofthe’‘apportionment formula, On Noveniber.29:theEFlorida: legislature formally convened in overnor’s. call. By this time, the :news mediajjn Florida‘had:focused publicattention on limited number of controversial issues; Becausé. the third. staff draft statute hadalready been adopted by both the House and’ Senate committees, however, many mote significant but: 1g ‘aspects ofcorporate1income taxation, sucht as$ filing "Under: Fla. Stas: ‘eh. 624, Ansari é ‘are, subject to taxon their ‘gross’ premitine. Florida Laws: 984, §. 3, enacted in conjunction with: the income tax statute, riow grants-a credit against this premiumtax Jiability for the income tax. payments of an insurance company, When, this tax credit was-granted ‘the logislature also the’ tax position of yior-Florida companies having a:Florida:regional,home office ‘to increast ‘the overall tax burden’ of these companies in Florida, Fla,ote 624.514 1971). ; he. Florida Statutes.‘imposes:“a gross receipts tax:on tricity, gas, : | the enate # enti themade, toi his“apparent. discelmination: by devising some:“Way: 9 tax cwn, public:“utilities, H. R. jour,‘85 declined to: allow any Torm:Of:‘credit againsth ral SAL a time whea an equally weighted. tireefactor portion formula. was being. deliberated, by ‘the House co consideration. x this . optional natural tesources such as citrus praducts and phosphates.. When ‘the legislature finally adopted an apportionment formula for allIheaxpayerswhith was:Ssomewhat tion: and origin c o e ti nt ed panies: : Florida rent fer ‘@ pure d origin. , Jonedini uis:time, on on a | urd staff ‘use.and mt but: ‘6, tax oft actedfn unst.this aasurance Hodified: ‘ialhome Florida, ¢ tax on ‘vices dn tiliti¢s'a +5, some s'would owned stomerg income nade to ‘to. tax © Sess, Corts’to but the: viivately AX, onument sosxl ‘to , based rounder lity. of swurces finallye newhat woubac BACKGROUND), SCOPE, ANALYSES a; chetes, 1éeining porfogsandaceconunting Hielliods, badbeeen unigontroversial. The* Flotida legislature: re special -session fren November 29: through December-9 ‘On November30 the House of Representatives tookup, considered,und passed aFlorida IncomeTax Code,” The: House bill ~ committee stibstitute for House Bill 16-D — was, considered‘and. amended.bythe Senate Ways and Means Committce on December1!® and bythe full Senate on December2-and3.'! The:amended bill wastaken’ up | bythe House on December 6, at which ‘time all Senate appointed by bbothbode tha hearings beyan,‘On.n December8 the:Iepislature.! >a, Scope ofTaxation For Torty-seven years ‘prior to the Novemb section: 6of article Vil of the Flotida constituti predecessor provisions of the 1885 constit peneral prohibi eitizens of the state’* except to: the extent of credits. or deductions: allowed by the federal governtnch 1 in his inucnnral < anuary 4, 1971, cwlyelected‘Governor Reubin Askey UF his inwition a eourt: determina on whether corporations were immune>Trown:icone taxation tne:the cor titutiorl‘ban ” r referendum, , 1 (1968). and tion,contained. a ion. against taxing “the income. ofresidétits. or "TR.four, Now:Syiet.Sess. 12018.(Fla, 971). 16 The _eR"fours« Novi? Spee.Sess. 5 "fa wt'95-9958.,Jour, Nov.6 14 lacConst. art. VAL, § 5 (9 ‘No ax UpOR estates oriiiheritancé or ipori tie income:ofFésidents Ort is of Che state shall tiedevied! by. the: stute, or ander its wullidrily, a excess OF the MRTERLE“of amounts, whiels muy be wtlowed tobecredited uponcer‘deducted Tron any: similar xlevied by (he UnitedStates or-anystate. Senate committee chose:ta:amend the: Ttouse bill, ratherthon:‘bo. cla halal nV EOLApale el ARRBt o e 8 MORIACORPO! INCOME TENA TION jOn Januaty 21, 1971, the Justices of the: | count rendered ‘an advisory } pinion ‘ta the Governorinwhielt ‘they consthucd thé ‘tei“residents. orcitizens”to. includecorporations and otherartificial entities. !s OnJanuary 27‘the Governor convened a special session.of the Florida legislature to ainend tlie constitution -to: allow taxation of corporations-and other artificial entities, On February3 the ‘legisla ture-adopted a _jomt resélution. amending article VII, section § of theFlorida constitution, and it was this: resolution which the voters. approved itt theNovemberréferendiim,!© Theconstitution wasamended‘to read: Natural Persons. No tax upon.¢statesor:inheritariegshe income of natural perseis who are residents ‘Gr.citizens of the state shall be levied by the state its authority,in excess of the agercgate of-amo’may beallowed to’be:credited upon ordéducted from ansimilar taxlevied by the ‘United: i ‘Others. No fax uponthe 4 gitizens: other than natural persons State, or under its income, as defined ‘by: lity = authorized.bya three-fifths (3/5) of each. c-of the legislature state the tmaxinium amount. whi redited against: incame taxes levi SU; { otier states, There. shall’ be: exer mn luxufign HotJess ‘than-five thousand doltiys (35 f. the: excess ofnet income subject: to tax over the maximum - amount:allowed! lo be credited aginst income taxes. levied by. the:United States and other states, Thescopeof intended taxation isa significant ¢natter underthe, amended: Florida constitutionbecause income taxability. isauthorized only with: respect to “other than: natural persons;”* while totaltax immunity 1s €éntinucd for “hataral :The establishmentof thesetwo mutually: exeld persons was thetechnical inethod of, achievi objective of Iégislatorsand. voters in Florida‘to ifichbme taxation cornparablé to. ‘tha imposed by: the federalfoverninent, while continuingthe goristitutional ban’ againstpersonal income faxation. Although the Constitution makesno ¥ ‘of the menibership — provide. for thy es ng. the general allow:corporate Styne Advisory‘Opinion to:the Goverher, 243'So. 2573 (Fla. 1974),LSxi J. Res, TB, supracdale-t, - i ‘ ‘loride stipreme 1 e e e C e Bataandk e r e e OTIC which. chide | 7 they weto s and ucda orida oters 1 was res mo OF a4 Jev ch ny nd he ct is ip he be Cs ot of oe nt re. inder dy Is mis,” ge es of. neral sate ileral angst: @ 17 i), authorizedemnership‘orust should 3f “questions are: avoided astothe “ertity’? suitus-of pirtnersihips uider ba, StatcSS 62d01620.08 1(3),-o7 620.40 (197.1), ROUND, SCOPE,ANALYSIS: — g oo attempt to detine “naturalpersons. the delineation, | taxable and non-Lixdble pitsuns is achieved in at Jeast. three: other ways. / First, a ‘preamble. to the: joint. resdl intcnt-of thie amendment was to. limit 17‘states that the income. tax immunity:‘to ‘natural ‘persons, as 6}artificial persons orentities: cteatéd by or pursuant to law sugh as. business. corporations, professional ‘gorporations, _ banking associatlt vings candloanassociations and Other -eritities:brought. inte. being.by:compliance with.State ‘or federal statutes... : 7 This declaration is iistru tive-to some. degree asto the:types af- ‘petsons wmeant to be taxable. The incotic tax statute: itself contains ftirtherrefinements:of this declared intent:!® _ Secondly, the legislature expressly exclided from the ‘tax partnerships; slates; and trusts, which ire the principal tax subjects ut or near'thelegal borderline ‘between “natural” and “artificial! Early in 1971 GovernorAskew had asked. the TaxSection of TheFlorida Barto appoint a select: contmittee of -tax experts to advise. him whether the proposed constitutional amendment would authorize th eislatuire ‘to impose a “personal”incume tax in Floxida, On._June 7, 1971, that, committce advised the Governor that‘such a. tak. would continue to be prohibitedin Flotida. In its written opinionthe commitice observed, without teaching: any. cénclusten, tha Federal income tax history .ef “natural person” ‘taxation. evidenced a “gray. area whereinit is difficult. to determine on ‘which. side ‘of the. life a particular entity, suchas-a-statutorlly: éxeltision ‘of these“leu ‘ofpens lst the lawto: the federal conduit ‘tre: fl of these tax subj cts. hy . "Pils Stat, § 220,02(1) (1971), “ Pla, Stan 88 220:02(1), 220,08(1)(b) (1971), hy expressly excluding all ‘partnerships fram thic provisions of the Plorida “Gode, wetter (ram AlanBindsay lo-Gevernor Reubin Askow,,pur % rar 10 LLORADAGORPORATEINCOME TAXATION Thirdly, the Florida Code enumerates: a number ‘of artificial entitics thataredeclared: to: be subject, 1o Income‘taxation or that are requiredto. file income taxreturns,?+ ‘thereby further illuminating the. intended scope oftaxation. Thelist of taxable entities: excludes those ‘that are not solely statutory and therefore-not whollyartificial inmature. . Federal rT‘ak’‘Parallels: Early in their considenw ion of“income tax legislation, the ‘Seniite’ and House ‘committees. bo’ concluded. that Florida should lookta federalcorporate taxable incdimeor one ofits numerous equivalents: for special industties** as the basis for - taxing net incoric in Flotida, Whe-the House and Senate _ committees: of the legislature adopted the third ‘staff draft statute as thélr wotking model, they thereby adopted for Florida the federal methods and periods of accounting, the. federal concepts of realization. and’ tecognitiony a sect of: procedures. for returns: and declarations compatable to and Ant ‘grated_with. federal counterpart provisions, and an. ral. sadjustinents:?3 Bsy far the most sianapet ofthis ‘federal ee for theprovis ‘orn-fer:‘e6tiitinh! in ates, Flotida:returns :are dive - each: year fifteen day afterfederal returns. 2: 2 will, if filed‘with the DeparinienofR vente andaccompanied by 4 tentative: tax: payment, automaticallyextend the Florida Flingdate for, the:pened &of hei dedetal extension tfthe total 2bPla, Stat. § 22 os{ayt'B) (1971)-- 22s4¢ Fla, Stat:§ 220,19(2) (1971), ; 23:4 ‘complete discussion:‘OF the: federal tax parallels appears.on pages 25-87 infra, 24-6ne important effect of défi hE“Snes ein terms of federal realization concepts ‘Is the ‘avoidarice of” prot ems yelativeto accrued ‘property rights. ‘such as Mlinois sencountered when it commenced, the oq * for Filing, federal:‘eeburns : Karna ema + rictal oor richer cable. » and, snate rate | for , the t of nd (un most Was nd in * due ¥ sind - turns aniéd erida ‘tertadl cther it of” — pages oderal wFacd | 5 a the te See 7 eo - The Florida legislature,:new HIGKGROUND, 8GOVE, ANALYSIS | it estimated tax. returns and payments, which ure. required whenever the taxpayer expects ataxliabilityof $2,500 oFi (equivalent to a fet income of $50,000 or. moresubject to: Floridatax).?7 These. returns andpayments, which eheompass: the same monthly. periods-as federal declarations,”are also duc ‘fifteen-days after-thefederal.duedates, Deviations from Federal.Tax ‘Neithér the adoptionof federal tax concepts: for Floridanor: the statutory effort to: parallel federal tax: procedures Was -able- to.avoid alk devistion. from federal corporate income ‘taxation. ‘the business. of: taxing, income, soon discoveredthatstates tack the ability ‘to tax ‘income on, exacily ‘the. same basis as‘the federal government among the cdérsiderdtions that preclude wholesale ‘a federal taxable income are questions. ofjurisdiction, Jimitations on. tikation underthe federal public debt-statute; constitutional Tonitations: on the delegation of‘state Iegislative functions, and federal. constitutional, dictates of (i¢ commerce Clause. These considerations prompted ‘the Florida legislature {6 adopt Tour deviations from the:federal tax. scheme, Mandatory.Deviations 1, Future FederalAmendments:—Inoneoftheir little-noted detegmingtions, the Senate and’ House"Committees: defeated a 1); 220.33, Because: Floridala exempts $5;‘o0D from: the 211g, §§.220,24( tax levy for ail taxpayers, ani:expected net.income. of $55,000: is actually thebasis for estimation,. 28 int. Rev, Code of 1954, 8 6154(b). 295"R. 25-1), Nov. Spee.Sess, (Fla. 1971). 3°tn, Rev. Code of 1554: hereinafter, referred to. as: the internal Revenue Code]. ' See. Ay Ragland,“$u i note 3,pe4,aea discussion of.the “easibility 12 | FLORIDA CORPORATEINCOME TAXATION eominittee. action, the Internal Revenue Godeas it existedonNovember 2, 1971, becamethe basis of Florida's law.3 2: Incommittee the decisionwaymotivatedby adesire toorequiré t*' Flotida‘legislature. to aluate,: individually, each change “thai_ Congress ntight periodically make ‘in the federal. taxation‘ofcorporateentities. . ” Since the legislature's.failure to conform Florida’s.tax Jawtfederal Jaw at frequent intervals: could produce: sipni7 compliance ‘andaudit problem: ‘the legislative: will periodically a ze all cha 'corporatetax provisionsof theIntetnal.Revenue Code: Inthis process: beganat: the Opening. of the. 1972re when ‘the Executive Diréctor of the Departmendescribed +6. the | leSubsequent "departed ‘from: federal taxation: ‘involves the ‘privilegeof. filiconsolidated retums, for -an affiliated group of ¢6 :‘There was very:little discussion about consolidated reportingthelegislative progéss, in. part becausé. the subjéct: matthighly technical andin.pary because ‘there: was. littleoppositi to: the treatment Jin thedraft statute, In: thismore than in anyother, there-was. strong legislative relian:‘staff expertise,. For: federal income tax purposes,taxpayersrelated through.stock ownership OF atleast eightypercent ofthe voting Gwerof all classes: of stock and. atleast the same. percentage of lidated. return rather “th;rate returns.*4 The priricipal advantae of such |© agroup:of eligible corporations is the: elimination, of:tax ‘on: transactions ‘between. the ‘Hiembers of the affiliatedgroup. Ih théory, the consolidated retum provides abasis ‘for Oe, 7 taxing: the net. income ‘earned by: inémbers ofthe ifrom:souréesoutsiilethe rel the several levels of net j amongthe affiliates, SOrta, Stat. § 220.03(2)(c).(1979). **Letter fromJ.&d: Straughn tothé President.of theSenateanid ‘the:Speakerof:the House;January:20, 1 72, :at, Rev.Codeof1954,§§ 1801-05; BACKGROUND, SCOPE,ANALYSIS The manner of allowing Florida. ‘consolidation changed a ‘numberof times inthe development of the’Florida.Code,butin each phase it was recognized that Florida's tax law couldnot fairly mirror the federal treatment of affiliated groups. The interstate and multijurisdictional problems of state taxation _ ‘seemedto require. the creation.ofaFlorida “affiliatedgroup’ “swhich would>differ. from thefederalgroup...Asfinally adopted, the Florida Code allows: any: Florida parent: of an affiliated, group of corporations tofile a consolidated. Floridareturn with ‘its in-state affiliates.35 As amedns.of accommodatingtaxpayers — : , to: file. in Ploridacon the same basisas:8 they file for . federal‘purposes, hn Ate a sa] { ‘ofits Federal, corporate affiliates 1to elect to:‘file their federal ed rr i chsome tiémbet OE grotip wouldnot:otherwise be subjed to tax ink if Florida.consalidation have not cenresolved specifics ofi orisolidation for tréatnient. ir mulgated. by ‘the Department:ol Revenue, just 2as5 Congresspe “deft virtually all aspects: of federa consolidationto interpre: ° tation‘bythe Treasury:Department. 3. Apportionment. — Taxation-of multistate: enterptises in Florida brought about-anotherdeviationfrom.federalcorporate. taxation. In drawing provisions necessary to. tax. onlythe " elated portion ‘of income camed bya multistate business, J slators were exposed to-a facet of state: income taxation which most’ tax practitioners ‘in Florida had never encountered — nanrely, the methods: for determining the. "portion-offederal: taxableincome properly: assignable to:one:of fifty:quri dictions. Prior to thé special-session,some members:‘of, the legislature had gained some ‘familiarity with multistatetax- concepts by attending meetings ofnational. tax gtoups. such.as the ‘Multistate Tax. Commission. For-mostlegislators, however,, ‘income. apportionment was, a new and highly complex s Nevertheless, by the time the Florida Code-was‘finally-adopted, muliistaté income. tax. concepts had ‘been analyzed in considerable depth, and the Legislature:of Floridahad.selected two. no} el'and imaginative concepts.forthestate. 3>Fis,Stat, §220.TTTDY IR,,. metheds: ‘oF:apportioning the: consolidated properties, payrolls, and. sales of mulilstate enterprises have been left to refilition, allhough guidelines for: types of allowable treatment. are, set forthin. Pla, Stat. § 499/131(5) (971). 14 #FLORD GORPORATE INCOME TAXATION First, thelegislature considered whetherFlorida should differ from the majority of states which tax corporate income by requiring for Flevida a full apportionment, of the taxable income reported for federal income tax (purposes. This treatment of multistate taxpayers. differs fromthe more traditional process, of “allocating” ~teAssigning in full — to one jurisdiction some types of passive income, and “appor: tioning" = 46, assigning proportional shares of*iIncome among all the states having jurisdiction over the taxpayer'—only the balarice. In: recent years, some ‘states have departed- ‘omthe allocation-apportionment format: cither by statute?? or by regulatory interpret ion?Recognizing that Floridaig not the “comitiercial domicile”fora. significant nuraber ofmultistate enterptises, and.being aware. thatthe: allocation-apportionment formatis financially advantageous:‘onlyto the few commercial domicile states, the Florida legislature elected to follow the: more tioderiitreridto, full apportionment, Ria to the aduption cof the Florida Code, Floridahad: , slate Tax Compact’ which, inchedcd: elective: | Fons for dllocn ng ahd. apportioning income ‘traditional manierAnder any ‘carport Florida might adopt.39 ‘prevent avoidance of the “full” apporlionmént pre isions, the degislatare: Tepealed sthe con. | fligting bul previously. 4inoperative:Portions-of:the. Geripact +0 Secondly, the legislature adupted various methods for apportioning federal taxable income to Flarida:- For. ‘general ‘arporte businesses, the “standard” three-factor lstmala, which assigns: net’ inéome’ dmong jurisdictions tn terms of proportions of sales,payroll,.atd’}Property, was adopted.*? The teeta howe,took Cognizance ofaorid’s role as a ” test for ih. the Gine, tax ‘law which Jadions adupted.wtthe ‘Mul state *.ptember:Ya Oey. Laws 1974,.ch. 71-940, 41.Pla. Sent, §§ 22059, 204.74 97). orida had ~ V uld..differ ome’ by ¢ taxable ses. {This the more full — to J “appor- ue dinong - only: the from ‘the 17 or ‘by is not'the- multistate fuionment yrimercial - allow. the d elective: e in the iw whieh: * the full the ¢on- mpact.”° shods: for or gencral formula, terms “ol. ed.*) The role: as a ”test for re. vat. ¢hy. £20; ltistate Tax 15,-arts,, Hi ioximen t, 16; pt. 6; .at -an equal one BAGCKGROUN D, SCOPE, ANALYSIS eG determining the source of sales,*? the jegislarure weighted ihe. three-factor formula by wssigning fifty pereent of “the apportionment fraction lo gules and twenty:five’‘percent each to p oll and to property. “Phe effect, of this variation om‘the: conventional multistate tax piattice of:assigning eachfraction: third weight -is twofold, First, foreiph (non Florida) acresa it sell fo: Florida's consurtier population without locating ifieant facilities Fpersonndhiin Fkorida: will ‘be taxed ata slightly higher level than in otherstates.. Secondly, Jocal corporate businesses, “that have a-substantial physical presence iti Florida and havea national market will be subject ‘toasmaller ‘home state tax burden than their counterparts in other jurisdictions. To answer anticipated-criticism.of the novel: Florida apportionment. weighting and toaveid possible federal os constitutional problems, the. legislature. added a prov ision desigted toinsure against any possible overtaxation byFlorida yrporauc 83 “Thesssenceofthat provision |is to. allow a tax refund to the extont.2a, tak application: of Florida's “uh aggregate: levy by-all states on mage© thanmic fundc ‘of Federal taxableincome, assuming that Florida ts entitled to ‘use.a33 1/3 percent.weighted sules factor foriivka. 4. TaxationofInterest Inconie, —. A fourth departure from: federal: taxability was required by the federal public debt 4.statutes”: bonds, Treasury nates, and other obligations of the United States" legislaturewas:presentedwith a. nusiber of choles for faxing ncome: (1)t i Jocal interest“Yes + (2) exemption| xemptioti of federal and: Florida-derived interest that legislators did nothave v‘wasthe f ite not:taxediin the state of de hie 980. . discussion of throw-back gales. sce: A. Rngland, yupra. ace 4, pt 3, at 2-7. The legitrejected the practice used ;in. ‘many: sites of ‘tax ing: i botwhich ein Fiori . Fla.Stal. ° (1 4434 U.5.G. § 742(1970). 98d. 4Oc00 A. Knighiids,supra. notd tal 210 , That law prevénts state taxation of “all stocks, cept to" the exlent they. wi stitte imposes *‘AOR. sderal, state,and’ e; (8) icome.*® The one choice ra al taxation “adopted. 1G FLORA CORPORATE INGOME LANATION for federal purposes, Under-the Internal Revenue Gade, interest derived from most tedetal obligations. is taxedjn. full, while interest derived from state and local debt obligitions is exempted;*” Since no state can adopt this method of taxing federal, :state, and ‘local. interest income without violating the public debt ‘statute, midst. states. have coristructed special tax. patterns to solve the dilemma andatthesare tinie equitably tax financial _ institutions, ‘the one: type of business most significantly affected: by: the. federal constraint: : The Flori legislature dhose to treat. ‘banks and other financlal“institutionsliké.allétherétitities subjectto the Florida ‘tax. Under the: Florida Code, ‘As, originally cnacted, alk corporate taxpayers .are subject to tax..on. their interest income derived from non-Florida and non-foreignsources*® while ‘they enjoy. imitianity from tax ontheir federal*? and. Florida state, local, and municipal interest income. The conference committee, however, had dis¢overed’ that this method af taxation would ptovide’ financial institutions with ari effective. rate of tax icantlyless thanthatimposed on other Florida taxpayers. f gly, the cunferces :specificallyidentificd: the“possibility of this inequity in, their conference committec:report and they urged recansideration of theinterest income.‘Question, at the earliest opportunity,°° Congress may change the. interest immunity provision of the public debt statuite;®? but the Floxida legislature: shag alieady reconsidered the taxdiion of dntercst income, As of this writing, bills to lax finanedal ‘institutions onall federal, state, and: local i nterest. inediie have been consideredbythe House Finance and Taxation Committes and the-Senate.Ways.andMeans. Gommittee,§? OptionalDeviations le.was previously ‘indicuted that the Flori legislature ! sonscionsly: endeavored to.adoptfederal corporate:Nae; a aRev.Code-ot’1954, §103, Pia. Stat, § 220.1 3(a {ayo Cy oon § 220-13(1)(b)3. 50: _Jouta'Nay. Spec, Sess, 96 (ia 197.1); S.Jout.;.Nov.Spee, Sess, a b971) “The Federal Reseiwe Board has: already. recommended “to: Congress that. this provision be repealed; Report-of theBoard: of Governors-of the Federal ReserveSysteri, State and Local Taxation; of Banks’ 7, 11, 66-67 (t971),. SFB, 8655, S651, and 4923,-and'$.B, 563, Bers Sess.-(Hla. 1979), witerest: |, while: rons. is " taxing ing the cial tax juitably % most ‘4 other Florida. itporate derived y enjoy ey local, - mittee, | 1 would — of 14x «sibility ad they at the: interest — bat the viion of ieanenil me have imuniltee Jishaturc: ibility as + ly erie pecs Sess, Gongregs -rs of the 14, 66-67 972), “-some areas. of‘taxability in whieh des HACKGROUND, SCOP, ANALYSIS — 12 Noo dimete 1 ats , a the basis for Florida corporate taxation. There were, however, policy werespecifically ‘considered and. adopted, °or seriously ‘equsideredbut rejected. . i, Installment Sale Transastions.>? — Prior to thé. Noveniber Special session, a gieat deal of time and study..wasdevotedto. the difficulties of taxing fairly the income received. from installment: sale transactions that were consummated prior to November 2, 197%.5* Dating from the+first draft statute réleased for public: analysis on March8, 1971, this particular subject ‘was discussed in more depth,on. more occasions, and among more people“than any other ubjedt.Ineach’of the three staff drafts publicly circulated prior to the November ' yeférendum,, the'manner oftivatingiftstallient sale wansactions. —, was dilferent.:No’one.approachto:the:subject scemedto resalve: all of-the complaints or problems; aiidthroughout’ Jepis tive: debates taxation-ofinstallment:sales remained the mostdifficult problem.to resolve. ‘ The ccittral :problera . with installment sale transactions stemmed from two sources? Florida’s prior constitutional ban én incéme taxation and Florida’s large landsales industry.That. industry, uniquely, deals in long-term land sales, contracts. on which jinconié is feportible for federal purposes of the installment ‘basis: Consequently, in- their federal returns these land development corporations:williIncludu'in:post]ah federal Recahle income installment sale rece t tern is; cotstrued underthé fnternal Revere:Ged, there:Was the discussion of ‘installment: sales as an epionarather than, :a inandatory’ deviation from. federal. taxation rests: 9 tie treatment: of instaltorent ‘sale.|income, under tl . aviaing.“Foi| 54Se8-Ay gland, supra note3,Ht al‘leplshutivede ’ adopted,“calledforimp mentation: of Ilorida'stax systern: on January 1, 1972, Nevertheless; there. wis ‘no constitutional problem between Noyeinber 2 and: December 3). ‘he: exemption ofany income realized ducing thatperiodiis merely-a matter-of tegblative grace. ESI, State -§220,02(4)(a) (1971), : ons from lederul Lise “se | suit Badal et ut ORCLana 18 ~~FLORIDA GORPE RATE INCOME Ts same question:as to Florida's ability to. Gix} ok Fes justiticactn. for. WaiiLing. to lax, Income. redlived prier (0 1972 bit:Pecognized:inpost-1971 ‘years, . * In order td avoid ‘eonstitutional questions, distortion of‘the: or revenue losses td. “tax bakes-ofsome industry groups, andma the state, the treatment of installment sale 7 come ‘in the ‘third. . Staff draft statute was drawn fo accommodate ‘the realizationjproblem. “That draft statute -previded that; taxpayers cleeting| installinent treatment” for +f eril income tax purposes were { required to report to’ Flétida under the accrual method. ofaccounting: or, at their clection,. in: the Yame manner as they: , “reported for federaliptirposes, If thelatter niethod were elected,| however, the: taxpayer wouldhavehadto include in reportable’ | Incomeall collections from: transactions whithovditted priortoDecember 31, 1971. While the SHMtiilives of r-mandatory ‘accrual methodof accountiig-dy dn.-¢lectiv ‘mstallment methodwere: considered by dax ‘teehtiicians to. present w legully. validchoice, it was suppestedt that they. posed'a very difficult.choice, One view expressed’ during legislative deliberations was that such a procedure would foree some taxpayers t6. waive“constitutional tax réstrietions.®? Nonetheless, inpreservil parallelismwith federal tax ¥¢ ing and. the simpf compliiinee aid audit ‘techr _t ctical effectof puttingelecting corp are ic income position for Flurida. aseannnd sm hey enjoyed HebeiaS eveses ti Be income tax ‘y x A 2 nstallment ‘provisions of thé thirdstaff draft were adopted. In theSenate,however, these provisions were amended {6 éx¢mpt rom Florida tax all income de ‘ived from ~ those contacts: consummatedprivé to January1, 1972; whicli-had aweduration Atthe fime: of: their cons ation of five years or moré.5® Thisprovision, whith quickly: b, came identified with. the land sales industry, ‘was: unat ¢ to many lomslaters. ‘because it distinguished that ‘industry front others having‘shorter term installment contracts, A search, began for.some othermethod of When the: House first enacted corporate leyislation, the mandator accrual and the ‘elec °"1t was argued that somie taxpayers, Finding’ the acetual methodOption io their Gisadvantage,, wotild choose -the federal method andthereby subject: to: taxation Income “derived Crom transactions that jadtaken place prier-te Wie amendine ofthe Florida constitution,' 588)Jour., Nov. Spec, Sess. 21-89 (Fla A97H,° | CANALION or its fustivien lien. trer%o 1972 but is, distortion GFthe or revenue lasses to income. in the third ‘late. therealization taxpayers electing iax purposes were. trual methad of ie manner as. they ‘thod wereélected, élide in reportablé 1 oceutred pfior-to of a mandatory: istallment method Rt a legally valid y difficult choice. ‘eitions was. that payers: to: waive: we inevine tax «live installment d. In theSenate, 4 extmpt from those contracts nd aduration at or more. *8 “Phis i the landsales wre: beeause it wwshorter term “ther method of neieee ‘accrual: method ‘Tal meédied! arid ustions that ‘had ution, consider a ‘dj BAGKGROUND, SCOPE, ANALYSIS = pg ‘axing, iistallment sles: that worded mitigate: the’ Apparent.harshness ‘of ihe Uéuse approach, but Stull deal with. alltaxpayers Uniformly. The ‘approach. everitually considered mostacteptable to. Senate ant: louse-conferecs was oné conceived byHousestaff to provide relief in direct préportion to the age of installmentsalle contracts, ‘Transactions. consummated: in years:more remotefrom. the statute's.effective date ‘were fo.be taxed|. at a lower effective Tatethan those consummated in: ears moreproximate to. that. date. The proposal drafted by state and_presented. to: the: conference committee onDevember 7 would ceapts:from, have -permitged faxationof 4 nety percent-ofall. rc installment ‘sale. transactions consuminated«in 1971, sevénty-percentofall receipts front 1976: tansactions, fifty pércentofall réceipts from 1969 transactions, thirty peréent ofdll-reeeipts ~from. 1968 tfansactions, and té percent of receipts'ftom F967transactions. Receipts ‘from transactions antedating 1967 wouldhave been Wholly exempt from the. tax. This ‘time-mitigation‘approachto installment sales quickly gainedaceeptaivée, amongthe conferees cand Other lépislative: leaders, ‘The “erecs Of tax immunity, - =Tn its: final. for; the Florida Cude ‘subjects: to: tax Seventypercent ‘of (he xeccipts from installment sale transactionsconsummated in - 197%, fifty ~ pereeni of — slehreecipts fron 1.969 and. 1976 transactions, twenty-five. pereentof sueh receipls fra1967 and 1968 trinsactions, and tenpercent of all receipts from such transactions consummated atally time prior to 1967.5? Expense’ deductions, ineliiding. eviction ‘and servicing’ tosts: on Sales contracts, tire. allowed only-onthat portion-of ome subject to Florida tix&® 2, Operating atid Capital Losses. ‘~ Under the InternalReévenue Code, ver operating losses and net capital losses jive.rise to fee its. Mlorida -was forcedtg: cnt procedure in arderto- con orm ‘to: thestate‘eOnstituGenal mandate for an annually balanecel brrchret,6FAdditisnally, the constitutional ban-on state incdtie taxationPrior Lo November 2, 197 L, (provided ‘a sound reason tobar lic cral tux ‘carryback benef " 79Fla Stat. § 220.18(1Mes (1974), ru, § 220.13(1)(4 "Fla, Gonst, art.VIL, §-1(4), cs, and debute tumed. bales to the appropriate: 20 FLORMA CORPORA e use af earryover: losses from pres 1O72 Gee to offset post--1974 income. To deal with. these problems, thethird,suilf draft statute proscribed any carryover of net operiting losses froma ‘yeurs prior to, 1972,°? and it eliminated loss ¢arrybacks completcly.®3 Both of these Provisions emerged fronthe legisl tive process: intact and.now appear in-theFlorida Gade,*4 although: beththe Senate arid House committees originally hadvoted to allow: cannybackas wel ascarryover losses. ®§ Under the Florida Code; arert federal purposes » after acks are exhausted. Transitional rules-aré provided for, 1971-72 taxable years.6¢ » 3. Capital Transactions, — A number of| choices were. available: to the legisliture with ) éapital gains and losses.® Among those considered dt various times during legislutive dchates were the.f¢ my (a) valuation: of capital “assets a : itinggains and latses 4on pans assets “to thatpartion¢occurring iter December. : ‘SI, E971, (¢) taxation ofall capital gains, including:siveh Yetias.might arise‘fonY other thar ‘eapitala‘asset Hansietions,, al a Tare©lowey x . THe i at thinpercent ¢on capitalgain andforty: ghtpercent 9On:nother income,id (d) taxation of capltal a income. WY carryover losses from pre:1972 s¢ for ihe: purpose of alleviating r + Sours, Nov ‘Spec. Sess. 15.16 @a,ete.“This:provision was removedby the: in: the course of granting full Lax immnnity to: Contacts tealion: of & years: or longer. 8, Jour,Nov.Spee. Sessi BheR(Fla 1971), .* S00 A, Paar,supra wole3, pt|Aart 83-pte 2,al89.3.5, Oa, Stat, § 220,09() (b)la, 8 Seq “hand, supra note 5, al 4: wt ‘ 890.13(1){b) lb (197A), Tee A.KayglanayMUped MOLE 3; pt. 2)at AB ,674.ipecalpics to aliiw. ¢ ‘ON . be alfset “tlicsta lt Hing losses earrypatks five process th both.the ad to: allaw* itida Code,, rtain -other does allow ‘orward for ‘l-purposes ¢: provided: viees. were “tment of ut various: . 19:7, for “h assets to. odsfor all a pains ‘and December -yscuscmright save lower nirpose uf yercent on and all ether: nn prel972 levialing: the Sess,. 15-16 1 course af U5. yeurs or $25,000 or $10, BACKGROUND, 8COPE,A NAD PSTS | 2 In addition to these alternatives, a pret wis: crinividle red to Wile all property as. oF December SL, 1971, forthe purposeof prohibiting taxation van ally all:aceruitls: or accretions of yaltte-ptior hte 1972, Thi proposal was rejected as being ‘unnecessary to the Frlorida scheme oftaxation, unduly difficult “fo administer gitice all types of praperty would have to be valued as’ -of December 31, and uridesirable: From¢a revenue standpoint, ‘Thelegislature: finally. decided, to tax all forms. of iincome, including, capital gain, ata un form’ ‘five percent rate. This decisionrecagniacd that Florida ‘imposed arelatively low tax te in comparison to the federal rate, and, that Capital asset transactions are usually of limited:significance|In .corperate,: as opposed te personal, incometaxation. Thus as finally passed, “the Florida Code contains no ‘special provision relating to capital transactions. Net lonj-term capital gain as. reflected in federal taxable. in¢eme is taxed along with all other incomeat a fivepercentrate. 4, SmallBusinesses, ~ Probably no one.subject captutedthe imagination’ or deminated the rhetori¢ of Florida legislators more‘than thé tax treatmenttobe accorded small businessmen, In ‘the House of Representatives dnsuceesstul attempts.were madeto provideall. corporate taxpaye: if ),000:°8 The House did yote tot ‘business corporations,”as theywre definedin:Subchapter § of ~. the Internal Revenue Code; to thesame liniited extent that they are taxed al. the :curporate level | wfederalttax:* Purposes ~ that elie Lorall anpuyers“by ( 00 af net ingame:to. of$5;000. ‘Because the efforts of sume: House members to obtain a tax exemption in excess of _ #000 had been defeated, tie ona,AR, Jour’, Nove:Spee. Suiss.. EB (NEG LOT). aie generallyA. England, supramote.3,pt, 2,at 26-27, 198, Jour, Nov. Spec. Sess, (7-184 Kia, F971), m1 at 18, 22 FLORIDA CORPORATE INCOKUE =eronee committer carl. weed the taxability of smu] eorporate businesses with yirlances only in the. rate structure. and the. ~ treatmentof Subchapter §. corporations, A uniform five perecnt rate of tax was ultimately adopicd by the conférecs.7? The ‘Subchapter -S question wus thé last issue ‘that the conferees resolved, and their selution is: a model cof conference ‘compromise, As finally enacted, the Florida Code provides that for ‘taxable petiods commencing before July 1, 1978, Subchapter § corporations are to be taxed on the samcbasis as they .are taxedfor federal purposes, as the Hause had voted.‘Unless the Florida Godeis changed, however, Subchapter § “corporations will become’, subject. to taxation fike othey corporations farall. subsequent taxable years, a8the Senate ‘had voted, without; regard to the election made under the Internal. - Revenue Code.?9 This provisional exoneration fromthe tax was designed. Yo insure chit the legistuture would have. ample opportunityta evaluate the federal treatment ofthese: types Gf corporations for Flotida tax purposes. ; 5. Foreign Source Income. ~ Income derived ‘from foreign {fien-United States) the ‘legislature to: be. an appropriatesubject forFloridataxation. The draft statuées circulated before the November teferendupy had. raisedthé possibility of taxing this type: ofj but gof opposition emanated from -areas. in South:Florida,princi jally Coral Gables, wherethereare headquartered export:companics doing a substaritial business j the Canbbean,. arid other ‘western hemi ti Additionally, several national oil companies: urged. the . legislatureto consider the technical difficulties of adjustiFlorida tax “basé to take inte account the foreign tax. credit provisions: -of fedetal law; It was shown that: vast inequitigs among ‘competing corporations with different corporate structures, but -with similar levels: of business activity in Florida, ‘would result unless the Florida: Gude provided something ‘akin ‘to the federal taxcredit fer foreign source inconic, Astate tax creditdid nut seem Feasible,however, : great outpourin Asfirnilly adopted, the Florida Code climinates fromthe tax, - ‘base. all income derived from foreign sources.7* To prevent erosion 6f the tax base where domustic ag wellsforeignsource 2 Fla, Stat, § 0.11(2)-(1971), . 7d. 8 220,03(2)(), . :794d. '§ 226; 18( 1)(b)2. os - 3 Sources. Was ncver' seriously considered by - Latin America,- * gad the # percent 75,7? The: conferees arference vides that. ‘ 1, 1973, ‘ve. basis.as. ad. voted. shapter S ke other: énate had 2 Taternal u the‘tax ve ample — ntypes of ‘n Foreign dered by taxation, ‘erendum ne, but a in- south - suartered America, ‘quitries, ged the isting the 1x’ credit nequiliés ‘Orporate’ 1 Florida, ling akin state tax n thetax prevent in SOUrCC