Is Mastercard avoiding Florida taxes?
Mastercard has more than 1.8 billion credit and debit cards in circulation. One in every two Americans between ages 18 and 64 — more than 100 million people — has one.
Each time a consumer uses one of those cards, the purchase generates a web of secondary transactions in which money is wired from the consumer’s bank to the merchant’s bank — with a variety of fees flowing to Mastercard in the process.
Those fees add up. Processing billions of transactions from a 500,000sq. ft. technology and operations center in a suburb of St. Louis, Mastercard generated nearly $15 billion in revenue last year, up from $12.5 billion in 2017.
The millions of American Mastercard holders include plenty of consumers in Florida who buy goods and services every day from businesses here. But when it comes time to pay its Florida income taxes, Mastercard argues that none of its sales are made in the state.
The claim stems from a gray area in Florida’s tax rules and how Mastercard chooses to answer a deceptively simple question embedded within them: What generates a company’s revenue? In Mastercard’s case, is it when a consumer actually uses the card? Or is it all the data processing and money transfers that follow the purchase?
Mastercard argues that it’s the follow-up activity, which happens predominantly in Missouri, because that interpretation leads to a lower tax bill in Florida.
But state tax auditors say it’s the initial purchase. The amount of money at stake is substantial: The Florida Department of Revenue, which audited Mastercard’s 2009-14 tax returns, says the Purchase, N.Y.-based company owes $24 million in back taxes, interest and penalties. If the auditors prevail, it could cost the company $5 million or more a year in state income taxes going forward.
Tax laws leave “a lot of room for manipulation. And there’s a lot of room for good-faith disputes,” says Michael Mazerov, a senior fellow and state tax expert at the Center on Budget and Policy Priorities, a think tank in Washington, D.C.
Half a century ago, when most states began to tax corporate profits, it was much easier to figure out who sold what to whom — and where. Most companies built and sold physical products, and the businesses that sold services were usually in the same state as their customers.
States developed standards to determine how much of a company’s business activity occurred within its borders — standards that have remained largely in place since. Typically, states assess how much of a company’s property, workforce and sales are located there. In calculating the precise amount of tax, a state might give each of those factors different weights; Florida puts more weight on sales, for example.
But figuring out where a company makes its money has become more challenging over the years, as multistate and multinational companies proliferated and more of their products shifted from tangible goods to services. To determine how much of a business’s service sales should be allocated to Florida, tax authorities here (and in many other states) long ago adopted what’s called the “cost of performance rule.”
Part of the rule examines whether “income-producing activities” are performed in Florida. But the rule also says that if those income-producing activities are performed in more than one state, then the sales should be attributed to the state where the company incurred the largest share of its costs.
The cost of performance rule is an all-or-nothing proposition. If a company incurs the largest share of its costs in Florida, then all of its sales are assigned to Florida for tax purposes. If it earns the largest share in another state, then none of its sales are attributed to Florida.
That’s the basis for Mastercard’s argument that none of its sales happen in Florida.
Mastercard says it gets most of its revenue from “transaction switching” — processing a sale to determine how much of the proceeds goes to the consumer’s bank and how much to the merchant’s bank.
The company acknowledges that it provides “a very small percentage of its services” at a Florida office where it handles calls from Mastercard customers in Latin America. But it says the vast majority of the transaction-switching services happen at its operations center in suburban St. Louis. And since Missouri is where it incurs most of its costs for transaction switching, Mastercard says all of its sales should be attributed to Missouri, according to lawyers for Mastercard in a formal protest submitted to the state.
A spokesperson for Mastercard, Seth Eisen, says, “we believe the statutory language is very clear and that our tax returns were filed consistent with the law. The overwhelming majority of our activities take place outside of Florida and, consistent with the state’s tax laws, where our activities occur should control how our corporate tax liability is computed. We have, and will continue to, work with the state to clarify any differences of interpretation and bring the matter to a close.”
The Florida Department of Revenue thinks Mastercard is distorting the meaning of income-producing activity. “The income-producing activity isn’t processing the transactions,” a department auditor wrote in a letter to Mastercard, “but rather the actual use of the card. The swipe is what generates the income; therefore, it is the income-producing activity.”
Mastercard has protested the decision and threatened a lawsuit, though it has yet to file one. The company’s lawyers say Mastercard’s business will be “substantially affected” if Florida compels it to pay higher taxes. Paying $5 million or more each year would amount to a nearly 10% increase in the $65 million Mastercard paid last year in state and local income taxes last year, according to regulatory filings.