On March 6, 2026, a Florida circuit court granted a taxpayer’s motion for summary judgment, determining that the taxpayer’s revenue stream was for a service rather than access to a database, and that the greater portion of the “income producing activity” related to this revenue was performed outside of Florida. The circuit court, consistent with the express language in the state’s cost-of-performance (COP) rule, confirmed that an “income producing activity” is determined by the transactions and activities directly engaged in by the taxpayer and not its clients or customers of its clients.
The decision is consistent with recent Florida circuit court cases holding that state law requires the use of the COP method when sourcing the taxpayer’s service revenues for purposes of the sales factor applicable for the Florida corporation income tax.1
Background
The taxpayer, Checkfree Services Corporation (Checkfree), provides financial technology services to banks, credit unions, and other similar financial institutions. Specifically, during the years under audit, Checkfree primarily received revenue from facilitating its clients’ online bill payment services through payment processing networks such as the Automated Clearing House (ACH) network. While Checkfree was not a financial institution, it was approved to act as an agent of its clients and facilitate these types of transactions on their behalf.
This allowed Checkfree’s clients to offer their customers the ability to pay bills online utilizing the customer’s bank account. A typical transaction would begin with the customer initiating a bill pay transaction online through their bank account, which would send an electronic request to Checkfree’s system.
Checkfree would then process the transaction on behalf of the client’s customer by utilizing the Federal Reserve ACH system to transfer cash, a third-party bank to transfer cash, or by producing a physical check to mail to the payee. Checkfree provided these services from locations outside Florida (specifically, data centers located in Omaha, Nebraska and Johns Creek, Ga.) and incurred most of its costs to perform these services outside Florida. Additionally, all of Checkfree’s employees and substantially all of its total property were located outside Florida.
For Florida corporate income tax purposes, Checkfree apportioned its income from the sale of services using the COP method as outlined in the Florida apportionment regulations for sales that are classified as “Other Sales in Florida.”2 By applying this method, Checkfree apportioned revenue to the state where most of its costs for income producing activities were incurred, resulting in no service revenue being sourced to Florida.
The Florida Department of Revenue initiated a corporate income tax audit, and determined that the revenue received by Checkfree from clients located in Florida should have been classified as “Florida sales” under Rule 12C-1.0155(2)(h)5.a because it was in the business of providing direct access to a database to its clients. Furthermore, the Department maintained that this rule applied to both “direct” and “indirect” access to a database.
Both sides confirmed that there were no disagreements about the facts of the case. Checkfree contested the Department's determination regarding the classification of their services and the method for sourcing sales to Florida for apportionment. As a result, Checkfree submitted a motion for summary judgment to a Florida circuit court.
Determining income-producing activities
Under Florida law, corporations are required to apportion their business income to the state using a three-factor formula comprised of a payroll, property, and double-weighted sales factor.3 For purposes of the sales factor, the Florida statute directs taxpayers to include the total sales of the taxpayer “in this state” and Florida regulations provide the methodology required to identify “Florida sales” depending on the category of trade or business that generated the receipts.4
The court began its analysis by impliedly agreeing with Checkfree’s position that its receipts fell outside of the classifications of income explicitly provided in Rule 12C-1.0155(2)(a)–(k), and that the sourcing rule in Rule 12C-1.0155(2)(l) governing the sourcing of revenue classified as “Other Sales in Florida” was appropriate.
Under this rule, if the income producing activity giving rise to the receipts was not conducted solely in Florida, the receipts are attributable to Florida if the greater proportion of the income producing activity was performed in Florida, based on costs of performance. Thus, if the greater proportion of the costs to perform the income producing activity were incurred outside Florida, none of the related receipts is apportioned to Florida.
It should be noted that despite the references to costs of performance, the Department has interpreted this regulation to apply market-based sourcing in many instances over the past several years in its published guidance.5
In determining whether the receipts should be sourced to Florida under the COP rule, the court first needed to define Checkfree’s income producing activity before balancing Checkfree’s in-state to out-of-state costs of performance. Under the COP rule, the term “income producing activity” applies to each separate item of income and means the transactions and activity directly engaged in by the taxpayer for the purpose of obtaining gains or profits.
The Department’s position was that the transactions and activities performed by the customers of Checkfree’s clients constituted the income producing activity. Therefore, each transaction occurring within Florida would be seen as being wholly in Florida and the receipts sourced to the state for apportionment purposes. The Department’s position would, in effect, result in a market-based sourcing approach.
The court disagreed with the Department’s position. Rather, the court relied on the express language provided in the COP rule stating that an income producing activity is determined by the transactions and activity directly engaged by the taxpayer for the purpose of obtaining gains or profits, and not the activity or location of its clients or their clients’ customers. Based on the facts and evidence provided to the court, it was concluded that the Checkfree’s relevant income producing activity was its provision of services to its Florida clients.
After establishing Checkfree’s income producing activity and confirming that it was not conducted wholly within Florida, the court proceeded with the next step of the COP rule by determining the location where the greater proportion of costs associated with performing the activity were incurred. Because Checkfree’s data centers were located outside Florida, along with substantially all of Taxpayer’s employees and property, the greater proportion of costs to perform Checkfree’s income producing activities were incurred outside of Florida and no sales were sourced to the state for apportionment purposes.
Rejection of direct access to a database classification
Following the determination that the COP rule was appropriate to source Checkfree’s receipts outside Florida, the court then turned to the Department’s argument that Checkfree’s revenue actually came from providing customers with "direct access to a database." If this classification were accurate, Checkfree’s receipts from Florida customers would have been sourced to Florida via a market-based sourcing approach.
However, the court sided with Checkfree and determined that its services did not provide customers with direct access to ACH (or other) networks utilized by Checkfree to perform its services. Instead, customers compensated Checkfree for providing online bill payment services and did not directly access any database in the process. Additionally, the court summarily determined that the Department’s interpretation that this sourcing rule also applied to “indirect” access to a database was inaccurate as the language expressly stated that it applies to “direct” access only.
Commentary
In this case, the Department maintained that Checkfree was in the business of providing its customers with direct access to a database and effectively stated the use of market-based sourcing be used for apportionment purposes. The use of databases in providing online services is a common requirement for companies to perform the service as well as to store user profiles, transaction history, and other relevant data. Under the Department’s position, many online service companies could be seen as providing customers with access to a database and be required to source receipts on a market-based approach.
The court’s decision in this case, against the Department’s methodology, to categorize Checkfree’s revenue under the “Other Sales in Florida” classification requiring use of the COP method, along with its analysis of what constitutes an income producing activity and how to source the related receipts, may provide additional insight into categorizing receipts and identifying income producing activities.
Taxpayers that are service providers who incur most of their costs to perform their services outside Florida may consider reviewing the income producing activities they undertake within the state, rather than those activities of their customers, to understand how their receipts could be sourced.
Similar to this court’s prior rulings in Billmatrix Corp. v. Department of Revenue, 6 and Target Enterprise, Inc. v. Department of Revenue ,7 the court focused on the express language provided in the related regulation, but did not address any underlying legislative intent when the Florida legislature considered, and then enacted, its corporate income tax apportionment regime.
Originally, the Florida legislature considered apportionment laws that generally were consistent with the model statutory apportionment regime endorsed in the Multistate Tax Compact as in effect at the time, along with complementary regulations interpreting the Compact’s provisions. While the Department adopted these regulations, the Florida legislature ultimately decided not to enact the COP statutory provisions in order to be a “market-based” state.
Thus, an argument may be made that the legislature intentionally rejected a COP sourcing approach that is still reflected in the regulation, and that the Department exceeded its delegated authority by promulgating a COP regulation that is not supported by a COP statute, providing a level of support for the continued application of a market-based sourcing methodology.
Furthermore, the court did not conclusively provide guidance on which specific COP method (transactional or operational) should be applied for sourcing service receipts. The “plain-language” of the regulation and general position that the Department has taken appears to support a transactional approach, in which the income producing activity and costs from each service-based transaction are taken into account. The analysis provided by the court, though, focuses more on the location where the majority of Checkfree’s overall costs are incurred to provide the services, which implies support for an operational approach.
It should be noted that while the court’s recent decisions in this area are consistent, they do not set precedent throughout the entire state. Rather, other courts in the state will view these decisions as persuasive. Until a substantive District Court of Appeals or Florida Supreme Court decision on the subject is released, it would not be surprising for the Department to continue taking its historical approach, especially at the audit level.
Additionally, this decision does not address the potential impact on the numerous historical rulings issued by the Department that applied a market-based sourcing approach. Ultimately, as a response to this litigation, legislation could potentially be enacted to require market-based sourcing and/or expanded definitions of the various revenue categories provided in Rule 12C-1.0155(2).
In any event, practitioners and taxpayers should continue to monitor for future developments. In the meantime, service providers that incur a greater proportion of their costs to perform their services outside Florida, but that have a significant market presence in Florida, may want to consider whether this case provides sufficient support for applying a COP methodology to previous and prospective filings, at least on a protective-claim basis.
1 Checkfree Services Corporation v. State of Florida Department of Revenue, Circuit Court of the 2nd Judicial Circuit, Leon County, Fla., No. 2024-CA-1026, March 6, 2026.
2 FLA. ADMIN. CODE ANN. r. 12C-1.0155(2)(l).
3 FLA. STAT. ANN. § 220.15(1).
4 FLA. STAT. ANN. § 220.15(5); FLA. ADMIN. CODE ANN. r. 12C-1.0155(2).
5 For example, see Technical Assistance Advisement, No. 21C1-010, Florida Department of Revenue, March 5, 2021 (released Feb. 2022); Technical Assistance Advisement, No. 21C1-005, Florida Department of Revenue, July 2, 2021 (released Jan. 2022); and Technical Assistance Advisement, No. 20C1-001, Florida Department of Revenue, Jan. 13, 2020.
6 Circuit Court of the 2nd Judicial Circuit, Leon County, Fla., No. 2020-CA-000435, March 1, 2023.
7 Circuit Court of the 2nd Judicial Circuit, Leon County, Fla., No. 2021-CA-002158, Nov. 28, 2022.
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