Florida Department Of Revenue Rules On Sales Factor Treatment Of Online Tuition And Hedging Receipts

The Florida Department of Revenue recently released two technical assistance advisements that address the sales factor apportionment treatment of certain receipts. On May 17, the Department held that receipts from the provision of online courses are properly sourced to the students' states of residence, either under a cost of performance approach or as receipts from an "interactive network."1 On May 25, the Department ruled that gross receipts from hedging commodity prices are not true sales, whereas net receipts from "output hedges" (but not "input hedges") are includable in the sales factor of the apportionment formula.2

Online Tuition Receipts

The first ruling addressed the sales factor apportionment treatment of receipts generated by a taxpayer that offered courses through its physical classroom locations as well as through the Internet. With respect to the online courses, students located across the United States typically made their own tuition payments from their state of residency if the expense was not paid by financial aid. These online courses were generally accessed from the students' homes, and the taxpayer had home addresses on file (billing and shipping information) to determine the state of residency for each student.

The taxpayer inquired as to the extent to which its online tuition receipts were required to be sourced to Florida. In the ruling request, the taxpayer requested a ruling that since each student receives value from attending the course and accessing the course materials, and the location where these activities are occurring is the state of each student's residence, such location should control for purposes of sourcing revenues from this activity.

After explaining the general rules for calculating the Florida sales factor and the general definition of sales,3 the Department analyzed how to classify the taxpayer's sales for purposes of apportionment. By looking at its regulation addressing the sourcing of items other than tangible personal property, the Department enumerated three potentially applicable rules relating to the sourcing of sales from personal services, computer-related sales from interactive networks and "other sales."4

The Department ultimately agreed that basing the sourcing on the location of each student's residence was the proper approach, as advocated by the taxpayer. However, in doing so, the Department did not clearly confirm which sourcing rule directly produced this result.

Classification as "Other Sales"

The Department first considered the taxpayer's gross receipts to be the provision of a service to a student, classified as "other sales." Under the "other sales" sourcing rule, sales are...