Disputing the constitutionality of its corporate income tax audit assessment of over $600,000, JetBlue Airways Corporation & Subsidiaries (JetBlue) filed a complaint against the Florida Department of Revenue (Department) claiming that a Florida statute unconstitutionally expands Florida’s territorial boundaries to include areas outside of the state for tax purposes.
“If every state determined the portion of federal taxable income attributed to it by adopting a revenue miles methodology that exceeded the state’s geographical borders, a taxpayer would be subject to state income tax on more than 100% of its income.”
revenue miles
JetBlue, a commercial airline that serves over 100 global destinations, has several flights that either originate or terminate at a Florida-based airport.
Generally consistent with other states, Florida requires that a taxpayer apportion its income to the state based on the extent of its income earned in Florida. For an airline, that calculation typically involves miles flown within the state’s borders. Accordingly, for purposes of determining its Florida’s apportioned income tax, JetBlue calculated its revenue miles which is every mile where at least one passenger is transported in exchange for consideration. Using revenue miles, Florida law then requires taxpayers to apportion its Florida based income applying the factor of Florida revenue miles divided by everywhere revenue miles.
Notably, for Florida income tax purposes, revenue miles are those within the geographical area set forth in Florida statute and include areas beyond the borders of Florida and the United States. Interestingly, the extent beyond the US border included is 280 miles outside of Indian Shores Beach near St. Petersburg, Florida, into the Gulf of Mexico and some areas within Alabama and Georgia. Florida defines this geographical area as “The Box.”
assessment
When calculating its Florida tax liability, JetBlue included only revenue miles within the geographical boundaries of Florida. JetBlue did not include revenue miles that were outside the state of Florida, but within Florida’s income tax geographical box.
Jetblue was audited and the Department issued a Notice of Proposed Assessment (NOPA) challenging JetBlue’s tax calculations and proposed an assessment exceeding $400,000 in corporate income tax due as well as almost $150,000 in interest.
challenges
After receiving the NOPA, JetBlue filed suit challenging Florida’s revenue mile calculation statute on several grounds. First, JetBlue alleges that the Florida statute violates its own state constitution, as the Florida Constitution defines the boundaries of Florida and its Box to include geographical areas outside of the territorial jurisdiction set forth in its constitution.
Additionally, JetBlue claims the Florida statute violates the Federal Supremacy Clause, which prevents Florida from extending its territorial jurisdiction outside of the United States as well as the Commerce Clause on several grounds. The Commerce Clause requires a substantial nexus between a state tax which affects interstate commerce and the taxing state. JetBlue argues that any commercial flights which fly outside of the geographic boundaries of Florida do not have the requisite substantial nexus with the state. Additionally, JetBlue believes that the Florida statute is not externally consistent as required by the Commerce Clause because it seeks to tax revenue earned outside of Florida. JetBlue highlights the potential for double-taxation when revenue earned outside of the state’s geographical boundaries is taxed by that state.
Conclusion
The court’s decision in this case will impact how airlines calculate income earned in Florida and beyond. If the court rules that the Florida statute is unconstitutional, the geographical boundaries for calculating revenue miles in Florida would likely result in airlines reviewing their apportionment calculations for current tax due, as well as revisiting all open periods for purposes of requesting a refund.
Calculating tax liability for any company involves working through complex issues, statutes, and as with this case, state constitutions. Trust the Torch to guide your company through tax complexities.