April 22, 2024


Is Mastercard avoiding Florida taxes?

Jason Garcia | 1/25/2019

Different standards

As the fight between the state and Mastercard plays out, there are signs that Florida tax authorities are subtly trying to change the standards to leave less gray area in the state’s tax rules.

Companies realized decades ago they could take advantage of the cost of performance rule by claiming that they incur most of their costs at their headquarters — and that none of their sales should be attributed to any other state where they do business.

Beginning in the 1990s and continuing into the 2000s, many multistate companies began recomputing their tax returns and filing for giant refunds using cost of performance arguments. Among the companies that took states to court in cost of performance fights were Comcast, Vodafone, DirectTV, Dish, AT&T, the University of Phoenix, Equifax and Ameritech. “These were the biggest companies in the United States, and they were all playing games with the factors,” says an attorney from a state revenue department outside of Florida. Many cases made it to verdicts — companies won some, states won others.

As companies began more aggressively interpreting cost of performance rules, many states responded by adopting a different standard known as “market sourcing.” In market sourcing, a company’s sales are attributed to whatever state its customers are in. More than half of the nation’s 50 states now use market sourcing rather than cost of performance, a figure that has more than doubled in just the past decade.

Advocates of market sourcing say it makes it easier and fairer to account for sales across state lines. It also eliminates some of the ambiguity that both companies and state revenue agents attempt to exploit when it comes to defining the income-producing activity.

Florida tax law, though, is in something of a no-man’s land. The state’s tax laws and the Department of Revenue generally describe Florida as a “market state” with a corporate tax structure built around the idea that there are more companies selling into Florida than manufacturing here.

But the cost of performance rule remains in place. The discrepancy has led to a potpourri of tax approaches from companies, depending on where they are based, according to a former attorney for the Florida Department of Revenue.

The Florida Legislature hasn’t bothered to clarify the issue — and it almost certainly won’t because a change would mean increasing taxes on some companies, even while simultaneously lowering taxes for others. The Department of Revenue hasn’t attempted to formally withdraw or rewrite the rule, a process that would almost certainly draw opposition from large, out-of-state companies.

But tax attorneys who practice in Florida say the department appears to be attempting to subtly shift to market sourcing. In recent years, the department has issued a series of legal opinions to companies essentially advising the companies to use the market-sourcing standard rather than cost of performance.

The companies that have sought the guidance include an online university, television production studios, a company operating call centers and a cable provider.

More evidence of a subtle shift: Audits, like the one the department conducted of Mastercard. By arguing that the income-producing activity for Mastercard is the consumer’s actual purchase — and that any purchase made in Florida is a Florida sale — the department essentially adopts a market sourcing standard.


In recent years, both Kansas Citybased Cerner, a health care information-technology provider, and Comdata, a payments technology company for the trucking industry based in Brentwood, Tenn., have sued the department, accusing it of attempting to impose a “nonrule, market-based sourcing policy.” Mastercard’s larger credit-card rival, Visa, also took the state to court in another cost of performance dispute involving Visa’s international subsidiary. All three cases — each of which involved hundreds of thousands of dollars a year in Florida income taxes — were settled, the terms confidential.

“It does seem they are more consistently moving away from cost of performance and trying to move toward market-based sourcing,” says Jim Ervin, a partner specializing in taxes at Holland & Knight.

The Department of Revenue, for its part, is circumspect. “Department audit determinations are based on a specific set of facts and circumstances, as each case is unique,” says a spokesperson for the agency.

Amid the patchwork of differing state standards, companies unsurprisingly seem inclined to take advantage of whichever standard prevails in a given state.

Consider Mastercard. In a state like Florida, where it has a relatively small physical presence but where lots of consumers use Mastercards, the company benefits by using a cost of performance approach to source its sales.

But in a state like Missouri — where it has a big physical presence and thus incurs many of its costs — the company can benefit from using market sourcing and attributing its sales to the states where its customers are. And it just so happens that the Missouri Legislature switched from cost of performance to market sourcing a few years ago.

One of the organizations that lobbied for the change was the business group Associated Industries of Missouri. Mastercard is one of the group’s biggest financial supporters.

Read more in our February issue.

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