FL Taxation of Florists Case Denied Cert by US Sp Ct
I remember when one could understand the limits of a state’s ability to subject transactions to sales tax. But that understanding has been dwindling into a murky lake of uncertainty over the last 25 years. Today, the waters just got a LOT more dangerous to the point I’d say businesses should consider the realm of sales tax compliance to be more akin to shark infested waters. The days of the bright line test of Quill have become a distant memory. We have gone from the plausible constitutional reasonableness of click-thru-nexus to the out-right-boldness of South Dakota creating a statute that simply says a company has nexus for sales into the state, forcing the issue straight to court without ever even getting an audit or assessment notice. However, those efforts pale in comparison to what happened today when the US Supreme Court Denied Cert in the American Business USA Corp v. Florida Department of Revenue case.
As a very brief synopsis of the case, Florida has a statute that purports to subject to sales tax all Florists sales in Florida except when the order is placed by another Florist. This particular taxpayer had an online business that took flower orders and relayed the orders to Florists around the world. The taxpayer only collected sales tax for sales tax Florida customers. Florida assessed sales tax on all sales, no matter the destination. Section 212.05(1)(l), F.S., provides:
Florists located in this state are liable for sales tax on sales to retail customers regardless of where or by whom the items sold are to be delivered. Florists located in this state are not liable for sales tax on payments received from other Florists for items delivered to customers in this state.
So, if a California resident goes online to order a bouquet of Flowers from a website owned by a company based in Florida for the flowers to be prepared and delivered by a florist in Tennessee to a customer in Tennessee, then Florida’s statute claims that Florida has the right to subject the transaction to sales tax. Tennessee also has the right to subject the Tennessee florist on the transaction with no mechanism in place to allow the Tennessee florist to take a credit for the sales tax imposed by Florida on the transaction. So the California resident purchasers in this case has the real and distinct risk of having the same transaction subject to sales tax by two different states with no hope of having the tax apportioned between the two states. If you know your dormant commerce clause jurisprudence, then you would likely recognize that the risk of multiple taxation, unfair apportionment of the tax, and substantial nexus over the transaction concepts in the Complete Auto Transit case have been violated in this real fact pattern. [You can read up more on the history of the sales tax laws on Florists in an Amicus Curiae Brief filed with the Florida Supreme Court HERE there are several links to other articles about this case at the end of this article.]
However, the monumental problem with this case is that it opens up Pandora’s Box on what we thought was a limit to a state’s power to subject any particular transaction to sales tax. For any reader that owns a business or that practices in state tax law – answer me this. If your company or your client’s company in State A sells a good (other than a flower) and ships the item directly to a customer in State B, then is the sale of that good subject to sales tax in State A? The answer should be “no.” Now ask yourself why the answer is no. Is it because State A feels kind and forgiving to the customer in State B so they created a magical exemption that allows the transaction to completely escape sales tax in State A – thereby graciously giving all the use tax to State B? If you answer yes to this question, then you work for a state taxation agency and shouldn’t be using your working hours reading state tax blogs! The real answer as to why State A does not tax a good shipped out of state is that every state believes the US Constitution cuts off State A’s ability to subject to sales tax a good shipped out of the state. In other words, under all laws in every state with a sales tax – when you ship a good directly to a customer out of State A, then it is not considered a sale subject to sales tax in State A. It is considered a sale in State B, the destination state, at least for sales and use tax purposes. Only State B has the jurisdiction to subject to sales/use tax that “transaction.” Sure, State A has jurisdiction over the seller in State A. So State A could subject the seller to an income tax, a gross receipts tax, a business activity tax, or a host of other tax. But in the realm of sales tax, the transaction itself falls outside State A’s ability to subject to sales tax the transaction because the act of shipping the product across state lines to State B make it a sale in State B. This is such well settled law in the US sales tax jurisprudence that it has not even been questioned in decades. Every state simply wrote this limitation into its own laws believing the limitation to be constitutional law.
So why would the Florida Supreme Court ignore such a well settled principle of sales and use tax law? To start with, the taxpayer didn’t argue multiple taxation or lack of apportionment. The taxpayer only argued that Florida did not have nexus over the transaction. This is a good argument in and of itself, but you have to keep the court focused squarely on sales and use tax jurisprudence to win this argument. Unfortunately, while the Court was smelling the flowers, the state pulled the wool over the court’s eyes. The counsel for the Florida Department of Revenue convinced the Court that Florida’s statute was really a gross receipts tax, not a sales tax. In doing so, the Court was convinced that the state only needed nexus over the company to subject all transactions to Florida tax. Such would be the case for a gross receipts tax. However, the tax imposed in this case was a sales tax, which is required by statute to be passed on to the customer. So each and every transaction is subject to constitutional limitations on a state’s ability to subject to sales tax the transaction. At least that is what the law was before this case.
Now… at least according to Florida’s interpretation, a state has jurisdiction to subject to sales tax any sale originating in its state no matter the destination and no matter whether the tangible personal property was ever even in Florida. This is a complete and total change in sales and use tax jurisprudence with very, very wide implications. As argued by the taxpayer, now the state of Washington can subject to sales tax every order taken by Amazon no matter where the goods are order from, no matter where the goods are shipped to, and no matter where the good were shipped from simply because Washington has jurisdiction over the company that took the order. Hold the presses. The same legal reasoning would allow every state with which Amazon now has nexus to tax EVERY sale of Amazon simply because Amazon has nexus with those states too. Where is the limitation on state powers under this new reality of uncertainty? Which state has the right to tax the transaction first? What mechanisms are in place to prevent double/triple/etc taxation? If this isn’t scary enough, consider that a state could decide to impose the tax on Amazon years after the transactions took place as long as the statute of limitations was still open. What is stopping states from doing this if the US Supreme Court continually refuses to hear any sales tax nexus cases? Is our only hope an intervention from the federal government? One could argue that this is the purpose of the commerce clause – to stop the states from overly burdening interstate commerce. One could also argue that this is the job of the US Supreme Court to stop states from regulating/burdening interstate commerce under the commerce clause. Isn’t that why they refer to this area of law as the “dormant comment clause jurisprudence?”
I and my state tax colleagues in Florida have posed the “where does this stop” question to the top powers in the Florida Department of Revenue. They have given us assurance that they have no intention of broadening the America Business USA Corp holding outside the Florist industry. Even if they do not have that intention today, what happens tomorrow? What happens when there is new blood in the FL DOR? What happens when the economy takes another serious downturn and the state needs revenue? They say the path to hell is paved with good intentions. Personally, I’d rather the path simply not be available. Unfortunately, with state legislators willing to push the envelope constantly and the blind eye of justice refusing to turn our way, the retail world is left with extreme uncertainty. For that matter, so is the wholesale industry that heavily relies on the shipment exclusion from tax for out of state shipments.
Perhaps it is finally time for the federal government to step in to create certainty with a federal sales tax nexus statute. But be careful what you ask for. The initial iterations of federal sales tax legislation created even more burdens on interest commerce than the uncertainty we have now. Bills like the Marketplace Fairness Act or the Main Street Fairness Act would have been a crippling blow to any company selling across state lines that wasn’t already in the billion dollar a year range. These proposed federal legislative bills assume sales tax is a simple process for companies and suggested that retailers can easily register in all states, understand the sales tax law of all states, collect and remit sales tax for all states, file sales tax returns for all states, and be subject to audit by all states (averaging up to 8 audits a year). These proposed bills were heavily supported by the companies who are already in most states, like Walmart or Amazon, and the software companies who want to sell tax compliance services. The only proposed bill that has any merit thus far has been the Online Sales Tax Simplification Act (OSSA) proposed by representative Bod Goodlatte, chairman of the House Judiciary Committee. A copy of the original proposed draft is available for download at the end of this article.
The Online Sales Tax Simplification Act would federally change the nexus laws, preventing the states from changing the laws ad hoc. It would also give companies over a certain threshold of out of state sales nexus everywhere. However, unlike all the other proposed bills, this bill would only require a company to understand that sales tax laws of its home state, only collect and remit sales tax based on its home state laws, only file sales tax returns in its home state, only be subject to audit by its home state. The retailer would still need to keep track of where the sales were being shipped because the related sales tax would be submitted to the destination state, but that process would be handled by the states, not the retailers. The result would be certainty of sales tax nexus laws, simplicity for retailers, and destinations states would finally receive the billions in use taxes that they have so desperately wanted. There are other quirks to the law, but this is the 30,000-foot level and it looks extremely promising.
Returning back to the case at hand, the American Business USA Corp case is bad law and creates a much higher level of uncertainty for businesses in the realm of sales and use tax jurisprudence than we have seen since the 1940’s. Proverbial fires in the sales tax arena are forming all over the country from click-thru-nexus laws to a completely fluid concept of what creates nexus for a business. Now, more than ever, we have reached the point that either the US Supreme Court needs to step in to once again create certainty or we need the federal legislation to do so.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We represent clients in audits, protests, litigation, revocation hearings, collections, criminal investigations, and criminal defense before the state attorney’s office. Our partners are both CPAs/accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side.
About the Author: Mr. Sutton is a Florida licensed CPA and Attorney and a shareholder in
the law firm Moffa, Sutton, & Donnini, PA. Mr. Sutton’s primary
practice is Florida tax controversy, with an almost exclusive focus on
Florida sales and use tax. Mr. Sutton worked for in the State and Local
Tax department of one of the Big Five accounting firms for a number of
years and has been an adjunct professor of law at Stetson University College
of Law since 2002 teaching State and Local Tax and at Boston University
College of Law in 2014 teaching Sales and Use Tax. Mr. Sutton is a frequent
speaker on Florida sales and use taxes for the FICPA, Lorman Education,
NBI, AAA-CPA, and the Florida Society of Accountants. Mr. Sutton is also
co-author of CCH's Sales and Use Tax Treatise. Mr. Sutton is the President
of the Florida Association of Attorney – CPAs and the State and
Local Tax Chairman for the American Academy of Attorney – CPAs.
You can learn more about Mr. Sutton in his Bio
HERE.
AUTHORITY
American Business USA Corp v Florida Department of Revenue – (US Sp Ct No. 16-567, Oct. 27, 216)
Petition for Writ of Certiorari
2015 Online Sales Tax Simplification Act (Draft)
ADDITIONAL RESOURCES
FL DOR SMELLING THE WRONG KIND OF FLOWERS, published November 19, 2014, by Jerry Donnini, Esq.
FLORIDA CPA’s – YOUR CLIENTS OWE SALES TAX AND THEY WILL BLAME YOU, published July 18, 2016, by James Sutton, CPA, Esq.
FLORIDA SALES TAX AUDIT DEFENSE, by Moffa, Sutton, & Donnini, PA.
© copyright 2017 - James Sutton – all rights reserved