Target subsidiary sues Florida over $10.2 million in taxes and interest

Target Enterprise, Inc. filed a lawsuit last week in Leon County circuit court challenging the state’s attempt to collect more than $10.2 million in taxes and interest after an audit of the company for fiscal years that ended in January 2017, January 2018 and January 2019.

The subsidiary, referred to in the lawsuit as TEI, is based in Minnesota and provides services to Target and other affiliated companies. Those services include marketing, consulting and brand-building, with TEI receiving revenue for the services, according to the lawsuit.

The dispute involves a law that requires, for tax purposes, companies that operate in Florida and other states to “apportion” adjusted gross income to Florida.

After conducting the audit, the Department of Revenue notified TEI in August that it owed $7.9 million in taxes and $2.3 million in interest, with interest continuing to build, according to a copy of the department assessment included in the lawsuit.

The lawsuit said the Department of Revenue deviated from a formula typically used in determining apportionment of income. State law says such deviation is allowed if the typical methods “do not fairly represent the extent of a taxpayer’s tax base attributable to this state.”

But TEI contends in the lawsuit that there was “nothing unusual or unique about the underlying facts of this case” to justify the deviation.

“TEI entered into the services agreement to provide the services to Target Group (the Target Corp. and affiliates),” the lawsuit said. “The fact that one corporate member of a business enterprise provides services to another affiliated corporate member of the same business enterprise is hardly unique.”

The lawsuit, filed Wednesday and assigned to Circuit Judge Layne Smith, said the department used an alternative apportionment method, known as market sourcing, that involved comparing retail square footage of Target stores in Florida with other states.

TEI contends that using the alternative method was improper and violated the company’s due-process rights and the Commerce Clause of the U.S. Constitution. The due-process argument, for example, said TEI employees outside of Florida were providing services to other parts of Minneapolis-based Target.

“Because application of the department’s ‘market sourcing’ approach results in taxing the value earned by TEI for services performed outside Florida, the department’s methodology violates the Due Process Clause of the United States Constitution,” the lawsuit said. “For this reason, the assessment must be abated in full.”