IN THE CIRCUIT COURT OF THE SECOND JUDICIAL CIRCUIT

IN AND FORLEONCOUNTY, FLORIDA

HUNTER DOUGLAS, INC. & SUBSIDIARIES,

Plaintiff,

V.

Case No. 05-CA-2440

STATE OF FLORIDA,

DEPARTMENT OF REVENUE,

Defendant.

ORDER GRANTING PARTIAL SUMMARY JUDGMENT

This matter is before the Court on the Defendant, Florida Department of Revenue's (DOR) motion for partial summary judgment and the Plaintiffs, Hunter Douglas, Inc. & Subsidiaries' (Hunter) cross motion for summary judgment. The Court has considered the motions, counsels' argument and, being otherwise fully advised in the premises, finds as follows:

1. OVERVIEW

Hunter brought this action pursuant to section 72.011 (1), Florida Statutes, to appeal DOR's assessment of corporate income tax which Hunter had challenged through the informal protest process, in accordance with section 213.21 (1), Florida Statutes, and chapter 12-6, part II of the Florida Administrative Code. The Court finds that Hunter has exhausted its administrative remedies, and timely filed its complaint. The Court has jurisdiction.

Hunter's Complaint is composed of one count. Although it would appear that the pivotal legal issue is the application of Public Law 86-272 to Hunter's Florida consolidated tax return, and that resolution of that issue should resolve the case, both parties agree that if that issue isresolved against Hunter, then another issue remains. The parties therefore agree that if the Court determines that Public Law 86-272, and the United States Constitution, do not preclude DOR's request for additional tax, the issue of whether all of Hunter's intercompany sales, including the sales of non-nexus members of the affiliated group, should be included in the numerator and denominator of the sales factor remains.

There are no facts in dispute, and the relevant facts underlying the legal issues here are not complex. Hunter is a Delaware corporation, and its principal place of business is in New Jersey. The company manufactures window treatments, and does business throughout the United States, including Florida. DOR audited Hunter to determine Hunter's compliance with chapter 220, Florida Statutes, which is the Florida Corporate Income Tax Code, for the period December 31, 1999 through December 31, 2001 (the audit period). During each of the years in the audit period, Hunter and its subsidiaries qualified as an affiliated group of corporations(FN 1) under 26 U.S.C. section 1504(a) of the Internal Revenue Code [IRC], and filed federal and Florida consolidated income tax returns. Hunter's affiliated group included subsidiary corporations located outside Florida, leading Hunter to conclude that it should exclude from the numerator and denominator of its sales factor all intercompany sales and the sales of the members of the group that had no tax nexus with Florida (the Florida non-nexus corporations). Hunter's apportionment sales fraction was comprised of sales to persons outside the affiliated group. DOR's audit found Hunter's calculation deficient, and determined that Hunter should not haveexcluded its intercompany sales from its sales factor. DOR then recalculated Hunter's sales factor and assessed additional tax against Hunter.

The issue to be resolved here is whether a taxpayer filing a Florida consolidated income tax return waives the protection of Public Law 86-272, which prohibits a state from taxing the income of a person whose nexus with the state is limited to the solicitation of orders of tangible personal property. DOR's position is that the act of consolidation, which is voluntarily elected, merges the tax attributes of the constituent members of the affiliated group, despite the fact that some of those members have no nexus with the State of Florida. Hunter claims that the protections afforded by Public Law 86-272 are based in "the context of the Due Process (FN 2)and Commerce Clauses of the U.S. Constitution," and that Florida cannot impose corporate income tax on non-nexus corporations even where they voluntarily decide to file a consolidated return. Following a careful review of the statutes, constitutional provisions, and case law related to this issue, the Court must conclude that the taxpayer waives the protection of Public Law 86-272(FN 3) when it voluntarily elects to file a Florida consolidated income tax return. Furthermore, since the decision to file a consolidated is completely voluntary, the attendant consequences of that decision do not offend either the Due Process or the Commerce Clauses of the United States Constitution.

II.ANALYSIS

Article 1, Section 8 of the United States Constitution empowers Congress to regulatecommerce "among, the several states(FN 4) . A number of commerce clause tax cases have dealt with “nexus," a legal concept that defines whether a person was sufficiently present in the taxing state to make the person responsible for paying tax to that state. See, for example, Container Corporation ofAmerica v. Franchise Tax Board, 463 U.S. 159, 165-166, 103 S.Ct. 2933, 2940 (1983).

Public Law 86272 was enacted "to allay the apprehension of businessmen that ‘mere solicitation' would subject them to state taxation;" the law "was designed to define clearly a lower limit for the exercise of the states' power to tax." Heublein, Inc. v. South Carolina Tax Commission, 409 U.S. 275, 279 and 280, 93 S.Ct. 483, 487 (1973). Public Law 86-272 prohibits the states from taxing the income of a person whose only business activities in the state are the solicitation of orders of tangible personal property.(FN 5) Thus, Public Law 86-272 establishes the minimum standards for determining whether a person is sufficiently present in the state to subject the person to the state's taxing authority. See International Shoe Company v. Cochreham, 164 So.2d 314, 321 (La. 1964).

In this context, Hunter argues that Public Law 86-272 protects the sales of the Florida nonnexus corporations from being included in the Florida sales factor. DOR disagrees, asserting that the mechanics of consolidation remove the Florida nonnexus corporations from the ambit of Public Law 86-272, and that Florida can therefore require the inclusion of these corporations'sales in the affiliated group's Floridasales factor. The Court agrees with DOR's position.

A corporation that does business in Florida pays state income tax. See sections 220.02(l) and 220. 11 (1), Fla. Stat. A corporation that does business in Floridaeither files a separate income tax return in its own right, or files as part of an affiliated group. s.220.13 1 (1), Fla. Stat. The concept of an "affiliated group" is actually derived from federal tax law. s. 220.03(l)(b), Fla. Stat. Section 220.13 1 (1), Florida Statutes, imposes three requirements on the filing of a Florida consolidated income tax return:

1. The affiliated group for Florida purposes is identical to the affiliated group for federal purposes [section 220.13 1 (1)(c)];

2. The affiliated group filing a Florida consolidated return files a federal consolidated return [section 220.13 1 (1)(b)]; and

3. Each member of the group consents to the filing of a consolidated return by specific authorization at the time the consolidated return is filed. [s. 220.13 1 (1)(a), Fla. Stat.] In addition, the affiliated group filing a Florida consolidated return can include "component members not subject to tax under this code." See section 220.131(3), Fla. Stat.

The consent by members not necessarily subject to Florida tax is an essential aspect of this issue. Hunter was not required to file a consolidated return; only the Florida nexuscorporations were required to file returns which, in the absence of a consolidated return, would be separate returns. The Florida non-nexus corporations, absent a consolidated return, simply would not exist for Florida tax purposes. However, by consenting to being part of a consolidated return, they agreed to fully participate in the return. That participation includes the attendant costs as well as the attendant benefits; to find otherwise would be to allow corporations to reap the benefits of a consolidated return, but not suffer any tax consequences.

In Section 220.03(l)(aa), the term "taxpayer" "includes all corporations for which a consolidated return is filed under s.220.13 L" The court in American Standard, Inc. v. United States, 602 F.2d 256, 261 (Ct. Cl. 1979)(FN 6) observed:

The basic purpose behind allowing corporations to file consolidated returns is to permit affiliated corporations, which may be separately incorporated for various business reasons, to be treated as a single entity for income purposes as if they were, in fact, one corporation. Therefore, [in accordance with federal regulation] the tax is computed solely on the basis of consolidated taxable income.

Here, the single taxpayer is an affiliated group of corporations that filed consolidated income tax returns. Hunter, however, offers Anheuser-Busch, 527 So.2d 877 to refute the notion that the affiliated group is a single taxpayer:

[E] ach of two or more corporations joining in a consolidated return is none the less a taxpayer. (Citations omitted.) The election to file a consolidated return does not destroy the existence of separate corporate entities existing within the group. (Citation omitted.) Thus, Anheuser-Busch and MCC constitute two taxpayers for apportionment purposes.

Id., at 881.

Although the Court acknowledges the Anheuser-Busch court's observation, it is not dispositive here. There are great complexities, and mysteries, involved in the administration and interpretation of federal and state tax laws, and many statutes deal with specific aspects of taxation. In this case, the State of Florida's grant of authority to file consolidated corporate tax returns was not required by federal law; by permitting corporate entities to file such returns, which many corporations choose due to a favorable tax result, they cannot pick the provisions that assist in that objective, and reject those that are not beneficial. Hunter's argument is basedon an assumption that the tax consequences of the choice to file a consolidated return should always be positive. Nothing in the laws, or the United States Constitution, suggests that Hunter's argument is valid.

In Comptroller of the Treasury v. World Book Childcraft International, Inc., 508 A.2d 148, 157 (Md. Ct. Spec. App. 1986), the court held that the taxpayer's activities in Maryland "fell within the protection of the federal statute [Public Law 86-2721, and that, consequently, World Book had no duty to file a return." Here, the same result would follow: standing alone, none of the non-Florida nexus subsidiaries would have been required to file a Florida corporate income tax return since they were protected by Public Law 86-272. Hunter and each of its subsidiaries with nexus to the State of Florida would have filed their own tax return, but the Hunter subsidiaries with no nexus to the State of Florida would not have been required to file a return. Hunter apparently discerned some tax advantage in filing a consolidated return, and to exploit that advantage, it merged its tax profile with the tax profiles of its various subsidiaries. The legal effect of Hunter's choice was addressed by the United States Supreme Court in Commissioner of Internal Revenue v. NationalAlfalfa Dehydrating andMilling Company, 417 U.S. 134,149,94 S. Ct. 2129 (1974). In that decision, the Court noted that

[W]hile a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not [citations omitted], and may not enjoy the benefit of some other route he might have chosen to follow but did not.

Commissioner ofInternal Revenue, at 2137.

See, also, Regal Kitchens, Inc. v. Florida Department of Revenue, 641 So. 2d 158, 163) (Fla. I"DCA 1994).

Hunter also argues that rules, and case law, pertaining to unitary tax states, are relevant to resolution of the consolidated return at issue here. In support of that argument, Hunter cites theCalifornia case of Appeal ofJoyce, Inc., 66-SBE070 (November 23,1966),(FN 7) which is discussed in detail below. It is important, however, to note that Florida's courts have observed that unitary accounting methods are different. According to the Court in Anheuser-Busch:

[I]t is important to point out that this case does not involve the unitary method of accounting which does provide for the elimination of intercompany sales in the computation of the sales factor... Unitary business groups are subject to special rules in regard to apportionment which have not been invoked in this case either by the taxpayer or DOR.

Id., 527 So.2d at 882. Hunter nonetheless relies on the special rules pertaining to apportionment and unitary business groups to support its argument. However, since Florida is not a unitary state(FN 8) these special rules do not apply. These special rules should, however, be discussed, since what makes Hunter's position correct in California makes that position incorrect in Florida.

The California State Board of Equalization(SBE) in Appeal ofHuffy Corporation summarized how a unitary group prepares its California corporate tax return. The combined report is the heart of unitary reporting. The SBE said that the combined report sets forth information from each member of the unitary group, and that information in the combined report allows for the apportionment of the unitary group's income (or losses) to California. Appeal of Huffy, 1999 Cal Tax Lexis 173, p. 2. This concept is also known as interstate apportionment. The SBE went on to observe that

The interstate apportionment of unitary business income for the purpose of taxation is a means of ascertaining the actual income attributable to the portion of the unitary business conducted within California. EdisonCalifornia Stores v. McColgan (1947), 3 0 Cal. 2d 472, 48 1. The portion of the tax attributable to California is then further apportioned between members of the unitary group subject to tax in California, also known as intrastate apportionment. (Citation omitted.) This second apportionment is necessary because California taxes each member of the unitary group in its individual capacity; California does not tax the unitary group as a single entity. (Citations omitted.)

Id., at note 4 (emphasis added).

A combined report secures the information necessary to ascertain that portion of unitary income arising from sources within the state. It does not constitute a "consolidated return upon which a single tax would be based." Appeal ofKroehler Mfg. Co., 1964 Cal. Tax Lexis 6, California S8E (December 18, 1964). In addition, "[t]wo California companies, organized in a parent and subsidiary fashion and operating as a unitary business, would file a combined report, and would also each file individual California corporate tax returns." Appeal of RapidAmerican Corporation, 1997 Cal. Tax Lexis 158, p. 2; 96 SBE-019-A (May 8, 1997). " [E]ach corporation remains a separate taxpayer, even though they are required to file a combined report." Appeal of Dasibi Environmental Corporation, 1986 Cal. Tax Lexis 33, p. 2 (Cal. SBE November 19, 1986). Apportionment automatically captures out-of-state economic activity if that activitycontributes to "the operation of the business as a whole." Mobil Oil Corporation v. Commissioner of Taxes of Vermont, 445 U.S. 425, 438, 100 S.Ct. 1223, 1232(1980). combined report imposes upon one California taxpayer partial responsibility for the tax attributes of all other members of the unitary group.

Section 220.131 (1)specifically contemplates a consolidated return that will include corporations not otherwise subject to Florida tax. Pursuant to section 220.131(3),the affiliated group filing a Florida consolidated return is identical to the affiliated group filing a federal consolidated return. Filing a consolidated return is therefore an all-or-nothing proposition. Filing a consolidated return is also completely a matter of choice.(FN 9) The voluntary nature of a consolidated Florida return and the requirement that the constituent members comprising the affiliating group consent to that filing provides the affiliated group the opportunity to compare the costs and benefits of consolidation. The consolidation of sales is one of the costs. The consolidation of deductions and losses is one of the benefits. After consolidation, the constituent members disappear.

Without belaboring the point, suffice it to say that Hunter's reliance on Appeal ofJoyce, 66-SBE-070 (November 23, 1966) is also misplaced. Joyce was a California corporation headquartered in Ohio; the company manufactured shoes in Ohio and Indiana. Joyce employed two sales representatives in California whose activities were limited to soliciting orders which were approved in Ohio and filled from outside California. Joyce filed separate California income tax returns, apportioning its income to California in accordance with the California formula. Joyce was one of three subsidiary corporations owned by U.S. Shoe Corporation. U.S. Shoe's “sole contact with California was by means of sales representatives who operated in the same manner as [Joyce's] representatives." Id.

The California Franchise Tax Board (FTB) (similar to DOR) determined that U.S. Shoe and its subsidiaries engaged in a unitary business. The FTB determined that Joyce's unitary relationship with U.S. Shoe and the other two subsidiaries precluded Joyce from filing a separate return that reflected only Joyce's California activity. The FTB determined that Joyce was required to file a return that combined its income with that of the other members of the unitary group.

The SBE held that Joyce was part of a unitary group and that Joyce incorrectly utilized separate accounting to calculate its California tax liability. Accordingly, Joyce was required to calculate its California tax liability in combination with U.S. Shoe and the other two subsidiaries. The combination would include the income the two other subsidiaries derived from California but not the income U.S. Shoe derived from California. U.S. Shoe's business in California fell within the protection of Public Law 86-272, since U.S. Shoe's presence in California was limited to solicitation; orders were approved and filled outside California. Public Law 86-272 did not, however, protect Joyce's California sales from tax despite their being earned through solicitors, since Joyce was a California corporation; Public Law 86-272 does not shield a corporation from taxation by the corporation's state of incorporation.(FN 10)

The check that Public Law 86-272 imposes on the automatic nature of apportionment and combined reporting in California is not available in Florida when the taxpayer, not the system,controls how the taxpayer files its income tax returns. Public Law 86-272 protects a single corporation, otherwise not participating in a consolidated return, from exposure to Florida tax. The Florida filing system does not automatically include any corporation otherwise protected by Public Law 86-272.