STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

COULTER ELECTRONICS, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 77-472

)

DEPARTMENT OF REVENUE OF )

THE STATE OF FLORIDA, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings by its duly designated Hearing Officer, James E. Bradwell, held a hearing in this case on October 21st, 1977, in Miami, Florida. Following the close of the hearing, the parties submitted briefs which have been considered by me in preparation of this recommended order.

APPEARANCES

For Petitioner: James R. McCachren, Jr., Esquire

Ervin, Varn, Jacobs & Odom, Law Offices

305 South Gadsden Street Tallahassee, Florida 32304

For Respondent: E. Wilson Crump, II

Assistant Attorney General Department of Legal Affairs Fletcher Building Tallahassee, Florida 32304

Coulter Electronics, Inc., (Petitioner herein), filed a petition with the Department of Revenue (sometimes called the Respondent or the Department) for reasons stated in detail hereinafter, challenging the Department's determination of its corporate income tax liability due pursuant to Chapter 220, Florida Statutes.

The issues posed herein are whether the Petitioner's inter-company sales constitute sales within the meaning of Florida Statutes, Section 214.71(3) and Section 220.15(1) and as such are required to be included in its sales factor or apportionment formula during fiscal years 1973 and 1974.

Based on the arguments of counsel and the entire record compiled herein, I make the following:

FINDINGS OF FACT

1. Coulter Electronics, Inc., Petitioner, is a manufacturer of machinery and instruments used primarily by medical and related professions. During

   fiscal years 1973 and 1974 the Department included in Coulter's apportionment formula certain inter-company sales of two of its subsidiary corporations, Coulter Diagnostics, Inc., (C.D.I.), and Blood Services, Inc., (B.S.I.). C.D.I. produces products which are used with the machinery and instruments to perform certain tests and B.S.I. produces certain materials which are used by C.D.I. to manufacture its products. Coulter is the parent corporation with C.D.I. being a

   100 percent wholly-owned subsidiary and B.S.I. being an approximately 92 percent owned subsidiary. The central management group of Coulter selects and appoints management of both C.D.I. and B.S.I. with some overlap between the top management of the three corporations.

   
   

2. During Petitioner's corporate fiscal years ending March 31, 1973, and March 31, 1974, Coulter, as the parent of an affiliated group of corporations, filed consolidated income tax returns for federal income tax purposes. Petitioner's subsidiaries also filed consolidated corporate income tax returns with the State for the fiscal years in question. As reflected on Petitioner's books, sales made to it in this State by its subsidiaries for the 1973 fiscal year total $13,875,153 and for the fiscal year ending 1974, the company sales total $13,961,516 (see Exhibit B to Petitioner's Complaint P.7). These inter- company sales were not included in either the denumerator or denominator of the Petitioner's apportionment formula in the original returns which are filed with the State of Florida. The department, pursuant to an audit by its corporate income tax bureau, included these, resulting in deficiencies of $39,436.00 for the 1973 tax year and $324.00 for the 1974 tax year.

   
   

3. The Petitioner takes the position that the transactions in question do not constitute sales which are to be included in the sales factor of the apportionment formula, Section 214.71(3), F.S., because ownership, possession, control and right to direct the products in question at all times rested with the parent corporation and the operations of the subsidiary corporations were at all times totally under the direction and control of the parent corporation.

4. Florida Statutes, Section 214.71(3), generally provides that: "The sales factor is a fraction, the

   numerator of which is the total sales of the taxpayer in this state during the taxable year period and the denom- inator of which is the total sales of the taxpayer everywhere during the taxable year or period."

   
   

   The Petitioner urges that its inter-company transactions do not constitute "sales" because they do not include elements traditionally associated with the legal concept of a sale such as passage of title from the vendor to the vendee in payment of a direct consideration from the vendee to the vendor. However, the statutorily defined concept of a sale is very broad in Section 220.15(1), Florida Statutes. That section provides in pertinent part that:

   
   

   "The term 'sales' in paragraph 214.71(3)(a) shall mean all gross receipts of the tax- payer except interest, dividends, rents, royalties, and gross receipts from the sale, exchange, maturity, redemption, or other disposition of securities; except that: (a) Rental income shall be in- cluded in the term 'sales' whenever a

   significant portion of the taxpayer's business consists of leasing or renting real or tangible personal property;

   (b) Royalty income shall be included in the term 'sales' whenever a significant portion of the taxpayer's business con-

   sists of dealing in or with the production, exploration, or development of minerals." (Emphasis supplied)

   
   

   Therein the legislature extended the term "sales" to much more than is traditionally associated with the legal concept of sales for purpose of defining the sales factor or corporate income tax apportionment formula. It thus appears that the presence or absence of title and the method of payment, necessary elements of the traditional concept of the "sale", would not necessarily prevent these inter-company transactions as reflected on the Petitioner's books, from being considered "sales" within the contemplation of the sales factor in the apportionment formula when consideration is given to the above section.

   Petitioner's Comptroller specifically testified that the inter-company sales formed a part of its gross receipts. None of the transactions involved here fall within any of the statutory exceptions. Evidence also reveals that the inter-company transactions reflected a percentage of profits for the various subsidiaries. Case law in this state has previously recognized that book transactions between members of an affiliated group could be considered as transactions for Florida's tax purposes even where there was no actual transfer of funds. See for example Zero Food Storage Division of American Consumer Industries, Inc. v. Department of Revenue, 337 2d 765(1st DCA Florida 1976).

   Other state courts have also construed the "sales" factor in their apportionment formula broadly so as to include receipts by the taxpayer that clearly fall without the traditional concept of a sale. See Twentieth Century Fox Film Corporation v. Phillips, 47 S.E. 2d 183 (1948).

   
   

5. The Petitioner raises, for the first time, in its brief that the inclusion of inter-company sales in the sales factor of the apportionment formula as originally enacted related only to financial organizations. Petitioner based this argument on its contention that the original legislative enactment of the tax administration act as embodied in Chapter 71-359, Law of Florida, contained the language relating to inter-company sales as part of a subsection pertaining only to financial organization. It argues further that when the State Laws were codified in the Florida Statutes from 1971, and all succeeding years, it was placed as a separate subsection applicable to all corporations. This codification was made by the Division of Statutory Revision. That division receives its authority from Florida Statutes, Section 11.242. My consideration of the various paragraphs of Section 11.242(5), F.S., persuades me to conclude that the change which was made clearly fell within the power of the division and that the legislature has met continuously, at least on an annual basis, since 1971 when the above referenced arrangement was enacted in Section 214.71(3), F.S., by the Division of Statutory Revision, and it is that branch which should have addressed any alleged erroneous placement by the Division of Statutory Revision so as to conform to legislative intent. In any event, argument in this regard should be addressed to this legislature.

   
   

6. For these reasons, I conclude that the inter-company sales as evidenced by the testimony constituting a part of Petitioner's gross receipts are therefore a proper item for inclusion in the sales factor of the apportionment formula, as provided in Chapter 214.71(3), Florida Statutes. As such, to the

   extent that the Florida sales here in question include a profit element, they are includable in the denominator and in the numerator.

   
   

   CONCLUSIONS OF LAW

   
   

7. The Division of Administrative Hearings has jurisdiction over the subject matter and the parties to this action.

   
   

8. The parties were duly noticed pursuant to the notice provisions of chapter 120, Florida Statutes.

   
   

9. The authority of the department is derived from Chapters 214 and 220, Florida Statutes.

   
   

10. The inter-company transactions in question herein constitute sales which are includable in the sales factor of the Petitioner's apportionment formula, pursuant to Section 214.71(3), Florida Statutes.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, I hereby recommend:

That the Petitioner's challenge of the Department's determination of corporation tax due pursuant to Chapter 220, Florida Statutes, be denied, and that the Respondent's proposed corporate income tax deficiencies for Petitioner's corporate fiscal years ending March 31, 1973 and 1974 be sustained.

DONE and ENTERED this 27th day of December, 1977, in Tallahassee, Florida.

JAMES E. BRADWELL

Hearing Officer

Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304

COPIES FURNISHED:

James R. McCachren, Jr., Esquire

Ervin, Varn, Jacobs & Odom, Law Offices

305 South Gadsden Street Tallahassee, Florida

E. Wilson Crump, II Assistant Attorney General Department of Legal Affairs Fletcher Building Tallahassee, Florida 32304

Docket for Case No: 77-000472

Orders for Case No: 77-000472