A Florida appellate court has struck down Florida’s attempt to tax interstate sales of flowers by Florida-based online vendors whose only activity within Florida is the presence of an online store.
In American Business USA Corp. v. Department of Revenue (November 12, 2014), the Fourth District Court of Appeal held that a Florida-based vendor could not be required to collect sales tax from its out-of-state customers with respect to sales of any flowers, gift baskets or other items when none of the flowers, gift baskets or items were made in Florida, stored in Florida, or delivered in Florida. The court’s rationale was that the tax burdened Interstate Commerce and thus violated the U.S. Constitution’s “dormant” Commerce Clause under Article 1, Section 8 of the United States Constitution, because Florida lacked a substantial nexus to the transaction. It concluded that the mere incorporation and presence of the vendor here failed to create that nexus. However, the court found that the sales tax was appropriate on prepaid calling arrangements sold by the same vendor, because “delivery was effectuated by the taxpayer sending an authorization code directly to the customer via the internet.” It thus treated the delivery of that information via the internet as the equivalent of tangible personal property, even though communications via the internet are really a series of codes and impulses. The case likely will be appealed to the Florida Supreme Court and could end up at the US Supreme Court for a final resolution of the constitutional issues.
Questions regarding the obligations of online vendors and consumers regarding state sales and use taxes have perplexed states for well over a decade. The nexus issue is not completely new, as similar arguments applied with regard to mail order sales. However, with the exponential growth of online commerce, states have foregone significant tax revenue, and brick-and-mortar retailers also have felt a competitive disadvantage. While states have the power to impose a use tax on consumers on their purchases from out of state, it’s been an uphill battle getting consumers to comply. The problem lies in the inability of the states to compel out-of-state vendors who don’t have a substantial nexus to the state (either through physical presence or otherwise) to collect the taxes on the state’s behalf. In the absence of federal legislation, a number of states, like New York, have adopted so-called “Amazon laws”, deeming any local online vendors “affiliates” of Amazon for tax purposes. Recently, Amazon and the State of Florida resolved the nexus issue by virtue of Amazon’s decision to establish a local distribution center within the state. The evolution of Amazon’s business model into a decentralized distributor of books and more will mute some of the efforts to create a nexus in those states where Amazon decides to establish itself. But it will persist with regard to other retailers who do not create that nexus.
The district court's decision currently is the only decision of its kind in Florida. Other courts of appeal are not bound to follow it, but it binds the lower courts until it's overturned or another appellate court decides the other way. If the state appeals, the court's decision will be automatically stayed pending appeal. For Florida-based retailers whose business consists solely or primarily of facilitating the purchase and sale of goods between residents of states other than their own where those goods have no connection to Florida, the Florida court’s decision is a welcomed liberation from the burden of calculating, collecting and remitting sales taxes with respect to those out-of-state transactions. However, before deciding to stop collecting sales tax, check with the Department of Revenue. The prudent approach is to continue the collections and remittances until the Department announces a change.
Once the law is settled, it will be important that retailers keep careful records of such sales, including the locations of the sellers and buyers, so that they can demonstrate to the Department of Revenue that none of those sales involved Florida. There inevitably will be sales that do have a nexus to Florida, and sales tax will be due.