Overview

Apple Inc. has filed a lawsuit against the Florida Department of Revenue (DOR) contesting an assessment of corporate income taxes totaling over $26 million for tax years 2020 through 2022. The core issue revolves around how Apple’s revenue from digital services and licensing is apportioned to Florida for corporate income tax purposes.

Background of the Case

Apple, a California-based corporation, is subject to Florida corporate income tax because it conducts business in the state. Under Florida law, businesses operating in multiple states must apportion their income using a three-factor formula consisting of sales, property, and payroll factors. The dispute in this case centers on the sales factor—specifically, whether revenue from Apple’s digital services and licensing should be sourced to Florida.

The Florida DOR issued a Notice of Proposed Assessment (NOPA) on November 20, 2024, asserting that Apple owed additional corporate income tax, along with interest, for the audit period. Apple did not request an administrative appeal of the assessment, making it final as of January 19, 2025. On March 13, 2025, Apple filed a lawsuit challenging the assessment.

Key Issues in the Case

1. Florida’s Apportionment Formula and Sales Factor Calculation

Florida follows a three-factor apportionment formula, which includes a sales factor representing the portion of a company’s sales attributable to Florida.

Apple argues that its sales of tangible goods delivered to Florida customers were correctly sourced to the state but contends that its digital services and licensing revenue should not be included in Florida’s sales factor numerator. The company asserts that it correctly followed the cost-of-performance (COP) regulation outlined in Fla. Admin. Code Ann. 12C-1.0155(2) to determine where its revenue-generating activities occurred.

2. Revenue at Issue

The dispute involves revenue from Apple’s iTunes, Apps & iBooks, Content Subscriptions, and Licensing Revenue:

• iTunes Sales – Revenue from digital sales and rentals of movies, television shows, and music.

• Apps & iBooks – Revenue generated from third-party app and eBook sales through Apple’s marketplace, where Apple receives commissions from developers and publishers.

• Content Subscriptions – Revenue from streaming and cloud-based subscription services (e.g., Apple TV+, Apple Music, Apple Arcade, iCloud).

• Licensing Revenue – Fees earned from third-party agreements, including revenue-sharing arrangements where Apple receives payments when users access third-party services via Apple devices.

Apple contends that the revenue-generating activities related to these services primarily occur outside Florida, making the Florida DOR’s market-based sourcing approach inappropriate.

3. Florida DOR’s Market-Based Sourcing Approach

The Florida DOR classified Apple’s digital services and licensing revenue as Florida sales, arguing that the relevant income should be sourced based on where customers are located rather than where Apple’s operational costs are incurred. This method, known as market-based sourcing, contrasts with the cost-of-performance approach Apple claims is required by Florida law.

Apple argues that Florida has no explicit statute or administrative rule authorizing market-based sourcing for digital service revenue. Instead, Apple claims that Fla. Admin. Code Ann. 12C-1.0155(1) applies, which requires sourcing based on where the greatest proportion of income-producing activities take place, measured by cost of performance.

Legal Arguments Presented by Apple

1. Florida Law Requires a Cost-of-Performance Approach

   • Apple argues that the correct method for sourcing its digital service and licensing revenue is cost-of-performance, not market-based sourcing.

   • The Florida administrative code provides that sales of services should be attributed to the state where the majority of the income-producing activity occurs.

2. Apple’s Income-Producing Activity Primarily Occurs Outside Florida

   • Apple asserts that its engineering, software development, content acquisition, and platform operations occur outside of Florida.

   • Based on its cost-of-performance analysis, Apple claims that the “greater proportion” of its revenue-generating activities take place outside the state, meaning the revenue should not be sourced to Florida.

3. Florida DOR’s Market Sourcing Approach is Unsupported by Law

   • Apple contends that the DOR incorrectly applied market-based sourcing principles, despite the absence of an explicit statute or regulation authorizing such a method for digital services.

   • The company cites prior court decisions, including Target Enterprises, Inc. v. Florida DOR (2022) and BillMatrix Corporation v. Florida DOR (2023), which upheld cost-of-performance sourcing for service-based income.

Relief Sought by Apple

Apple seeks a ruling that:

1. The Florida DOR improperly applied a market-based sourcing method to its digital service and licensing revenue.

2. Apple correctly applied the cost-of-performance method to determine its Florida corporate income tax liability.

3. The assessment against Apple should be abated in full due to the incorrect apportionment methodology used by the DOR.

Implications of the Case

This case could have significant implications for companies selling digital services and software-based products in Florida. A ruling in Apple’s favor could reinforce the use of cost-of-performance sourcing, while a ruling in favor of the Florida DOR could establish precedent for market-based sourcing, leading to higher tax liabilities for digital service providers operating in the state.

Conclusion

Apple’s challenge to Florida’s tax assessment highlights a broader debate over how digital economy revenues should be apportioned for state tax purposes. The outcome of this case will likely influence future corporate income tax disputes involving digital products, streaming services, and online marketplaces. Businesses operating in multiple states should closely monitor this case to understand the potential impact on state apportionment rules and tax compliance strategies.