A tax break floating around the Florida Legislature could save millions for Verizon
The proposal surfaced in Tallahassee two weeks after the wireless giant sued a state agency that denied Verizon a $20 million tax refund.
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A proposed tax break lurking behind the scenes in the Florida Legislature could save tens of millions of dollars for one of the world’s biggest corporations: Verizon Communications.
Verizon’s name doesn’t appear anywhere in the proposal, which has been drafted in secret in Tallahassee and not yet filed as a formal piece of legislation.
But it would cement in place a tax strategy that the country’s largest wireless carrier just used to try and claim an income tax refund worth more than $20 million, records show.
State auditors have denied Verizon’s refund request. So the company sued the Florida Department of Revenue last month, in hopes of convincing a court to overturn the decision.
The proposed tax break surfaced in the Legislature just two weeks after Verizon filed its lawsuit.
Verizon, which has 146 million wireless customers and turned an $18 billion profit last year, did not respond to requests for comment.
The proposal only became public because House Speaker Danny Perez (R-Miami) asked to have the idea “scored” by state economists to see how much Florida might lose in revenue if legislators decide to pass it. A spokesperson for Perez said House leaders are considering including the measure in a larger package of tax breaks that could be unveiled next week.
“People asked for things to be included in the tax package and they can’t be included until we know how much they cost,” Perez spokesperson Amelia Angleton said. “It doesn’t mean we’re including or not including them.”
The economists tasked with studying the tax break — a panel known as the Impact Conference — ultimately concluded that it would cost the state nearly $20 million a year in lost revenue. That’s the equivalent of roughly 450 public school teachers.
It’s not clear if Verizon would get all of those savings itself. But records show that there are only a few giant corporations that could even conceivably benefit from the tax break.
In fact, when the Impact Conference met to analyze it, the group had to suspend their public hearing so they could discuss the proposal in private because of laws that forbid them from disclosing confidential tax information about individual companies.
The proposed tax break comes from the intersection two important corporate tax rules.
The first deals with the way a corporation calculates its income for tax purposes.
Generally speaking, a company only has to pay Florida income tax on the share of its profit that was earned in Florida. But figuring out how much profit a company makes in one particular state can be tricky when that company is a multinational giant with operations around the world.
To solve this problem, Florida usually requires corporations to calculate their state profit using a formula based on three factors: The number of employees the corporation has in Florida; the amount of property it has in Florida; and the value of the sales it makes in Florida.
But a little over a decade ago — in response to lobbying by some of the state’s biggest businesses — Florida’s Republican-controlled Legislature and then-Gov. Rick Scott agreed to dangle another option in front of corporations.
The alternative formula allows companies that do lots of capital investment in Florida to ignore the location of their employees and property when they do their taxes— and instead calculate their Florida profit based solely on the location of their sales.
It’s known as the “single sales factor.” And it can lead to enormous income tax savings for companies that have a big physical presence in Florida but do lots of their sales in other states and countries.
Only a handful of corporations have ever qualified to use the single sales factor in Florida. The very short list includes mining and fertilizer firm Mosaic; grocery chain Publix Super Markets; and the parent companies of Florida Power & Light and TECO Energy.
And it includes Verizon, which, at No. 31 on the Fortune 500, is the biggest corporation on the list.
Now, Verizon is not an obvious fit for the single sales factor.
The company has lots of property in Florida, where it has spent more than $2 billion building out its wireless infrastructure. And it has many employees in the state, including more than 1,100 who work at a $50 million financial operations center in suburban Orlando.
But Verizon also does a huge volume of sales Florida, where it has an estimated 6.3 million wireless customers.
This is where the second important tax rule comes into play.
Again, generally speaking, when a corporation sells some kind of service across state lines — like Verizon, which sells data and voice services to cell phone customers — the Florida Department of Revenue instructs the company to “source” each sale to whichever state the customer is in.
That approach is called “market sourcing.”
But there’s another methodology that corporations often prefer to use. Instead of sourcing the sale of a service to the state the customer lives in, the company attributes the sale instead to a state from which it provided the service.
That approach is called “cost of performance.”
Using cost of performance instead of market sourcing can lead to a tax windfall for a corporation that has lots of customers in one state, because they can now claim that its sales to those customers are — for tax purposes, at least — actually happening in some other state. And that windfall can be magnified even more if the company also uses a single sales factor.
Which is precisely what Verizon figured out.
The company, records show, filed a refund claim last summer with the Florida Department of Revenue for its 2022 taxes.
On its initial tax return, Verizon had used the traditional three factor formula and market sourcing. But on its amended return, the company switched to the single sales factor and cost of performance.
The combined effect shaved roughly $21 million off its tax bill — for just that one year.
It’s not clear from the court record why the Department of Revenue denied the refund request. But Verizon’s complaint suggests that one reason is that the agency ruled that Verizon could not use cost of performance to decide the location of its sales.
And that’s where the proposed tax break comes in.
The measure would explicitly allow a corporation that has been approved to use the single sales factor to then also use cost of performance when calculating its Florida income taxes.
To say it more simply: The tax break would allow a corporation like Verizon to base its income taxes entirely on the sales it makes inside Florida — while simultaneously claiming that all its sales happen outside Florida.
