JetBlue Survives Motion to Dismiss in Corporate Income Tax Airline Apportionment Case

JetBlue has survived the Department of Revenue’s Motion to Dismiss its Complaint challenging Florida’s special apportionment formula for airlines. Known as the “Florida Box,” the formula identifies revenue miles attributable to Florida based on their presence in a box-like shape that encompasses not only all of Florida, but also a large part of the Gulf of Mexico (America?), areas in Alabama, and certain coastal waters of Georgia. While states have leeway to choose apportionment formulas, Florida’s apportionment formula capturing miles flown outside the states is truly unique.

Previously, our articles discussed the initial complaint and motion for summary judgment, the latter of which was deemed premature and has since been refiled with a hearing set in April 2025. This article will discuss the pleadings, hearing transcript, and order for the Department’s Motion to Dismiss. In addition, it will also provide the latest development: The Department’s Answer and Counterclaim.

Motion to Dismiss

Florida Department of Revenue’s Motion to Dismiss

On August 27, 2024, the Department of Revenue filed a Motion to Dismiss JetBlue Airways Corporation’s lawsuit challenging Florida’s income apportionment formula for airlines, citing fundamental deficiencies in the complaint. Two of the key arguments advanced by the Department related to alleged substantive flaws in JetBlue’s claims and procedural missteps.

DOR’s Claim of Substantive Deficiencies in JetBlue’s Claims

The Department contends that JetBlue’s complaint suffers from a lack of specificity and relies on conclusory allegations, particularly in its constitutional claims. Further, the Department’s Motion to Dismiss makes the following claims by topic:

1. Fair Apportionment

JetBlue alleges that the formula is unfairly apportioned and lacks proportionality. However, the Department asserts that JetBlue fails to provide “clear and cogent evidence” of gross distortion—a requirement for challenging apportionment methods under the U.S. Supreme Court’s precedents, such as Container Corp. of America v. Franchise Tax Board. The Department emphasizes that JetBlue has not demonstrated that its Florida tax burden is disproportionate to its business activities within the state.

2. Nexus and Fair Relation

The complaint also argues that the formula violates the dormant Commerce Clause by taxing revenue without a substantial nexus to Florida. However, the Department notes that JetBlue’s own allegations confirm a nexus, as the numerator of the apportionment formula includes only revenue miles from flights originating or terminating in Florida. Moreover, JetBlue’s extensive operations in Florida—including flights at several commercial airports—demonstrate a clear connection to the state.

3. Foreign Commerce Clause

JetBlue’s claim that the formula interferes with the federal government’s ability to “speak with one voice” in foreign commerce is speculative, according to the Department. The Department of Revenue points out that JetBlue fails to identify specific foreign policy issues or federal directives that the formula purportedly contravenes. Finally, the Department argues that the Plaintiff’s assertion that the formula improperly taxes international flights is unsupported by facts or legal precedent.

4. Facial Constitutional Challenge

JetBlue’s facial challenge to the statute faces an especially high bar, the Department of Revenue argues, requiring it to show that no set of circumstances exists under which the statute would be valid. The Department highlights a hypothetical involving an airline operating exclusively within Florida, where the formula would clearly apply without constitutional issue. This hypothetical alone, the Department claims, is enough to defeat JetBlue’s facial challenge.

5. Procedural Noncompliance: Florida Rule of Civil Procedure 1.071

In addition to substantive deficiencies, the Department identifies an alleged procedural flaw in JetBlue’s complaint: the failure to comply with Florida Rule of Civil Procedure 1.071. This rule requires any party challenging the constitutionality of a state statute to file a notice of constitutional question and serve it on the Florida Attorney General or the appropriate state attorney. The Department argues that JetBlue’s failure to adhere to this requirement is fatal to its constitutional claims.

JetBlue’s Response to Motion to Dismiss

JetBlue Airways Corporation filed a detailed response to the Department of Revenue’s motion to dismiss its challenge to the state’s income apportionment formula for airlines on October 16, 2024. JetBlue’s response highlights both procedural and substantive arguments to counter the Department’s claims. Here’s a summary of JetBlue’s position:

1. Standing to Sue

JetBlue argues that it has standing because:

• Injury-in-Fact: The airline asserts it suffered a direct injury from the Department’s assessment based on what it claims is an unconstitutional statute.
• Causal Connection: The injury stems directly from the apportionment formula in Section 220.151(2)(c), which includes revenue miles outside Florida’s geographic boundaries in the numerator of its tax formula.
• Redressability: The requested relief—overturning the assessment—would address the injury.

The Department’s claim that JetBlue lacks standing because it did not allege flights over other states (e.g., Alabama or Georgia) misconstrues JetBlue’s position. JetBlue clarifies that its primary constitutional argument centers on Florida’s inclusion of revenue miles outside the state, irrespective of specific overlaps with other states’ boundaries.

2. Facial Challenge Only, Not As-Applied Challenge

JetBlue emphasizes that its challenge to the constitutionality of Section 220.151(2)(c) is a facial challenge only, contrary to the Department’s mischaracterization of its claims as an as-applied challenge. JetBlue’s arguments are aimed at invalidating the statutory provision itself, based on its explicit inclusion of revenue miles outside Florida’s geographic borders in the apportionment formula.

A facial challenge requires demonstrating that the statute cannot be constitutionally applied under any set of circumstances. JetBlue contends that:

• The statute’s language unambiguously includes revenue miles flown outside Florida in its definition of “revenue miles in this state.”
• This overreach directly violates the Commerce Clause, Due Process Clause, and Foreign Commerce Clause of the U.S. Constitution.

The Department’s argument conflates a facial challenge with an as-applied challenge by focusing on JetBlue’s operations rather than the statutory text itself. JetBlue asserts that the Department fails to grasp that its claims are not about how the statute applies to specific facts but about the inherent constitutional flaws in the statute’s structure and scope.

3. Procedural Compliance with Rule 1.071

Florida Rule of Civil Procedure 1.071 requires notifying the Attorney General of constitutional challenges. The Department claimed JetBlue’s failure to comply as a basis for dismissal, but JetBlue argues:

• Timeliness: It filed the required notice before the Department’s deadline to answer the complaint, ensuring the Attorney General had sufficient opportunity to participate.
• Practicality: Given that the Attorney General’s office is already representing the Department in this case, JetBlue asserts the intent of Rule 1.071 was fulfilled.
  
  

4. Challenges to the Department’s Hypotheticals

The Department cited a hypothetical scenario involving an airline operating exclusively within Florida to argue that the apportionment formula could be constitutional. JetBlue counters this as unrealistic, noting:

• The hypothetical fails to involve interstate commerce, a necessary element for Commerce Clause claims.
• A state taxing only intrastate activities would not be subject to apportionment formulas in the first place.

JetBlue maintains that its challenge focuses on the real-world impact of Florida’s apportionment methodology on multistate businesses like itself.

5. Constitutional Arguments

JetBlue defended its constitutional claims as explained below:

• Commerce Clause: Florida’s formula violates the internal and external consistency tests:
  • Internal Consistency Test: If every state adopted Florida’s apportionment formula, it would result in double, triple, or even quadruple taxation of the same income due to overlapping claims on revenue miles.
  • External Consistency Test: Florida taxes income generated outside its borders, exceeding what is fairly attributable to the airline’s business activity within the state.
• Fair Apportionment: By including revenue miles outside Florida, the formula fails to fairly apportion income based on business activity within the state.
• Due Process: The formula lacks a sufficient nexus between the taxed income and the services Florida provides to airlines.
• Foreign Commerce Clause: Including revenue miles over international waters infringes on federal authority to regulate foreign commerce.
  
  

6. Rejection of the Frontier Airlines Precedent

The Department heavily relied on a prior case, Frontier Airlines v. Department of Revenue, where similar claims were dismissed. JetBlue distinguished its case by pointing to significant differences:

• JetBlue’s arguments include internal and external consistency claims under the Commerce Clause, which were not addressed in Frontier Airlines.
• Trial court decisions like Frontier Airlines are nonbinding and provide little guidance, especially since no detailed reasoning was given in the prior dismissal.
  
  

Hearing on Motion to Dismiss

Hearing: Arguments of JetBlue and the Florida Department of Revenue

In a critical hearing addressing the Department of Revenue’s Motion to Dismiss JetBlue Airways Corporation’s lawsuit, both parties presented compelling arguments. Below is a summary of the transcript of the hearing, including arguments by JetBlue’s counsel and the Department’s counsel as they relate specifically to the Motion to Dismiss.

JetBlue’s Arguments Against the Motion to Dismiss

1. Facial Challenge to the Apportionment Formula

JetBlue argued that its lawsuit is exclusively a facial challenge to the constitutionality of Florida’s income apportionment formula under Section 220.151(2)(c). It emphasized that the Department misconstrued JetBlue’s position by labeling it an as-applied challenge. It clarified that:

• The challenge is directed at the statute itself, not its application to JetBlue’s specific operations.
• The statute’s inclusion of revenue miles flown outside Florida’s geographic boundaries is unconstitutional on its face.
  
  

A facial challenge requires demonstrating that the statute cannot be applied constitutionally under any set of circumstances. The attorney stressed that the statute’s clear language violates established constitutional principles, including:

• The Commerce Clause: By including revenue miles flown outside Florida, the statute creates risks of double taxation and exceeds its territorial limits.
• Due Process: The statute taxes income without a sufficient nexus to the state.
• The Foreign Commerce Clause: The formula improperly encroaches on the federal government’s authority to regulate international commerce.
  
  

2. Rejection of Procedural Arguments

JetBlue countered the Department’s procedural objections, particularly regarding compliance with Rule 1.071, which requires notice of constitutional challenges to the Attorney General:

• JetBlue filed the required notice in a timely manner, ensuring the Attorney General’s office had adequate opportunity to participate.
• The fact that the Attorney General already represents the Department fulfills the spirit of the rule.
  
  

3. Challenges to the Department’s Hypotheticals

The attorney dismissed the Department’s reliance on a hypothetical airline operating entirely within Florida to justify the apportionment formula:

• Such a scenario is irrelevant because JetBlue’s challenge is directed at the statute’s application to interstate commerce.
• The Department’s argument ignores the real-world impact of the apportionment formula on multistate businesses like JetBlue.
  
  

4. Standing to Sue

JetBlue defended its standing by outlining:

• Injury-in-Fact: JetBlue faces a direct and concrete injury from the tax assessment.
• Causal Connection: The injury stems directly from the inclusion of revenue miles outside Florida in the apportionment formula.
• Redressability: Overturning the formula would remedy JetBlue’s injury.
  
  

Florida Department of Revenue’s Arguments Supporting the Motion to Dismiss

1. Procedural Noncompliance

The Department of Revenue argued that JetBlue’s constitutional challenge should be dismissed due to procedural deficiencies:

• Rule 1.071: The notice filed by JetBlue failed to identify specific constitutional questions, as required by the rule. DOR cited case law emphasizing strict compliance with this procedural requirement.
• DOR rejected JetBlue’s argument that representation by the Attorney General’s office satisfies the notice requirement, noting that the Attorney General’s role is distinct from that of the Department.
  
  

2. Lack of Specificity in JetBlue’s Claims

DOR contended that JetBlue’s complaint lacked the factual detail required to sustain its constitutional claims:

• The allegations about double taxation and apportionment were too conclusory.
• JetBlue failed to provide clear and cogent evidence of disproportionate taxation or other harms.
  
  

3. Defense of the Apportionment Formula

The Department defended Florida’s apportionment formula, arguing:

• The formula, which has been in place for over 50 years, is consistent with legal precedents allowing states to consider out-of-state activities for apportionment purposes.
• Revenue miles flown within the statutorily defined “box” are used solely to allocate a fair portion of JetBlue’s income to Florida.
• The inclusion of certain areas outside Florida’s borders does not violate constitutional principles because the formula is designed to reflect the value of interstate activities connected to Florida.
  
  

4. Relevance of Precedent

The Department pointed to the Frontier Airlines case, in which similar claims were dismissed. The attorney argued that the court should follow this precedent because the apportionment formula has already been upheld against comparable challenges. While acknowledging that the decision is not binding, DOR emphasized its persuasive value.

5. Nexus and Fair Apportionment

The Department asserted that JetBlue’s claims about nexus and fair apportionment were unfounded on the basis that:

• All flights included in the numerator of the apportionment formula originate or terminate in Florida, satisfying the nexus requirement under the Commerce Clause.
• The formula does not tax income unrelated to Florida but instead fairly attributes a portion of JetBlue’s interstate business activity to the state.
  
  

Conclusion: Hearing

Both JetBlue and the Department of Revenue presented sharply contrasting arguments during the motion to dismiss. JetBlue focused on the constitutional overreach of Florida’s apportionment formula, emphasizing its facial invalidity under multiple constitutional provisions. The Department of Revenue, on the other hand, relied on procedural and substantive defenses, arguing that JetBlue’s claims were procedurally deficient and lacked factual support.

Order on Motion to Dismiss

In its December 18, 2024 order, the court issued mixed rulings, reflecting the complexity of the issues:

1. Dismissals with Prejudice
   • Count I (Florida constitutional violation) and Count II (federal supremacy violation) were dismissed with prejudice. The court concluded that these claims lacked legal merit, noting that constitutional limitations do not prohibit Florida’s apportionment method as designed.
   • Count VII (foreign commerce clause) was also dismissed with prejudice.
2. Dismissals Denied
   • The court allowed Counts III, IV, V, VI, and VIII to proceed, finding that they presented factual disputes requiring further development during discovery. These counts focus on Commerce Clause and Due Process challenges, with significant implications for Florida’s tax policies.
     
     

Department of Revenue’s Answer and Counterclaim

Department of Revenue’s Answer

The DOR’s answer methodically addresses each of JetBlue’s allegations, asserting the following key points:

1. Admitted and Denied Claims:
   • The DOR admits to basic facts about JetBlue’s operations and the tax apportionment formula defined under Florida Statutes Section 220.151. However, it firmly denies JetBlue’s assertion that this formula violates constitutional boundaries or apportionment fairness principles.
2. Apportionment Methodology:
   • A significant contention arises over JetBlue’s interpretation of the state’s revenue-mile apportionment formula, known as the “Box.” The DOR argues that the formula has been in place since 1971, is statutorily sound, and fairly reflects JetBlue’s income attributable to Florida.
3. Territorial Boundaries:
   • While admitting that parts of the “Box” extend beyond Florida’s geopolitical boundaries into international waters, the DOR denies that this extension creates unconstitutional overreach or results in double taxation.
     
     

Affirmative Defenses

The DOR raises several affirmative defenses to bolster its position:

1. Failure to Exhaust Administrative Remedies:
   • The DOR contends that JetBlue failed to petition for an alternative apportionment methodology under Section 220.152 of the Florida Statutes before filing this lawsuit. This procedural oversight, the DOR argues, undermines JetBlue’s legal challenge.
2. Primary Jurisdiction Doctrine:
   • The DOR invokes the doctrine of primary jurisdiction, asserting that the agency’s expertise in tax matters should be given precedence over judicial intervention. This argument seeks to defer resolution to the DOR’s internal processes.
3. Unclean Hands:
   • Accusing JetBlue of using a self-devised apportionment formula without notifying or seeking approval from the DOR, the state claims that JetBlue underreported its tax liability, demonstrating bad faith.
4. Lack of Standing:
   • The DOR challenges JetBlue’s standing to bring certain claims, arguing that JetBlue has failed to demonstrate any injury resulting from the state’s tax formula.
5. Fair Apportionment:
   • Even if JetBlue’s proposed alternative methodologies were applied, the DOR asserts that JetBlue’s tax liability would remain equal to or greater than the assessed amount.
     
     

Counterclaim

The DOR’s counterclaim outlines its case for a higher tax assessment against JetBlue, emphasizing the following:

1. Statutory Compliance:
   • The DOR alleges that JetBlue failed to apportion its income according to the default formula in Section 220.151(2), Florida Statutes. Instead, JetBlue unilaterally adopted a self-devised apportionment method that significantly underreported its taxable income.
2. Unilateral Deviations:
   • JetBlue’s unilateral methodology apportioned only 3% to 3.5% of its income to Florida during the audit period, while the statutory formula would have apportioned 6.2% to 7%.
3. Alternative Apportionment:
   • The DOR contends that neither JetBlue’s method nor the statutory formula accurately reflects the proportion of income attributable to Florida. By invoking Section 220.152, the DOR seeks the court’s authorization to adopt an alternative apportionment methodology, which could result in a significantly higher tax liability for JetBlue.
     
     

Supporting Analysis

The DOR’s counterclaim provides a detailed analysis of JetBlue’s operations to support its position:

1. Revenue Disparities:
   • JetBlue reported only $740,000 in taxes for 2019 using its self-applied methodology. By comparison, the DOR’s application of the statutory formula would have increased the total liability to $1 million, and an alternative apportionment formula could have raised it to $5 million.
2. Operational Footprint:
   • Approximately 22-23% of JetBlue’s total departures during the audit period originated from Florida, a figure that starkly contrasts with the 3% apportionment factor JetBlue used.
3. Fair Representation:
   • The DOR argues that JetBlue’s income-generating activities in Florida are vastly understated in its self-reported tax returns, warranting a reassessment to fairly reflect its tax base.
     
     

Relief Sought by the DOR

The DOR requests that the court:

• Authorize an alternative apportionment method under Section 220.152.
• Increase JetBlue’s assessed tax liability for the audit period.
• Award interest and other equitable relief to ensure compliance with Florida’s tax laws.
  
  

Conclusion

JetBlue’s strongest arguments rightfully survived the Motion to Dismiss. After the Florida Department of Revenue filed its Answer and Counterclaim, there is a question as to how that will impact the Motion for Summary Judgement. A hearing on the Motion for Summary Judgement is scheduled for April, so the state and local tax community will not have to wait long to find out the answer.

The Department of Revenue’s counterclaim asking to increase the assessment may seem surprising to those in other jurisdictions who are not used to their own taxing authorities taking such aggressive positions. However, in recent years, there have been substantial changes in the Florida Department of Revenue’s litigation approach. This is not the first time the Department of Revenue has sought to increase an assessment mid-litigation. While in this case, the Department has done so through a counterclaim, there are also instances where the Department of Revenue has “amended” an assessment mid-litigation as well.