United States: Florida District Court Of Appeal Finds Internet Sales Of Flowers To Out-Of-State Customers Not Subject To Sales Tax

A Florida District Court of Appeal has ruled that sales of flowers by a Florida-based business via the Internet to customers located outside Florida violated the Commerce Clause of the U.S. Constitution and were not subject to the Florida sales tax.¹ Conversely, the Court determined that Internet sales made by the same business of prepaid calling arrangements to customers located both within and outside Florida were properly subject to sales tax.

Background

The Florida-based taxpayer specialized in the online sale of flowers, gift baskets, and other items of tangible personal property, as well as prepaid calling arrangements, to customers located throughout Latin America, Spain, and the United States, including Florida. All of the company's sales were generated via the Internet and the taxpayer maintained no inventory. Orders received by the taxpayer for tangible personal property, including flowers, were filled by "local" florists.² However, the goods were not grown in, stored in, or delivered from Florida. The taxpayer did not charge its customers sales tax on sales of flowers, gift baskets, or other items of tangible personal property delivered outside Florida. Also, the taxpayer did not charge its customers Florida sales tax on any sales of the prepaid calling arrangements.

The Florida Department of Revenue issued a proposed assessment against the taxpayer including both taxes and interest on all of the taxpayer's sales of prepaid calling arrangements occurring between April 1, 2008 and March 31, 2011, as well as all sales of flowers and gift items to non-Florida customers during the same period. Also at issue was whether the taxpayer's books and records were inadequate and whether the taxpayer retained statutorily mandated records of transactions. Due to the limited records produced by the taxpayer, the Department relied upon estimated sales amounts to determine the amount of assessment.

The taxpayer filed a timely protest, resulting in a hearing by an administrative law judge, who recommended that the assessment be validated. The Department accepted the recommendation and entered a final order, which was appealed by the taxpayer, resulting in the current dispute.

Sales of Flowers and Gifts

Florida law specifies that florists located in the state are liable for sales tax on sales to retail customers regardless of where or by whom the items sold are to be delivered.³ Related regulations further state that "florists are engaged in the business of selling tangible personal property at retail and their sales of flowers, wreaths, bouquets, potted plants and other such items of tangible personal property are taxable."⁴ The Department relied solely upon these standards to impose sales tax on sales of tangible personal property by the taxpayer to customers located outside Florida.

The taxpayer argued that the imposition of sales tax on the sales of tangible personal property via the Internet to out-of-state customers violated both the Due Process Clause⁵ and the dormant Commerce Clause⁶ of the U.S. Constitution. In considering this claim, the Court examined the origins of the Commerce Clause, which was explicitly created to prevent interstate barriers to commerce.⁷ The Court also referenced language from a previous decision clarifying that the Commerce Clause and Due Process Clause impose distinct but parallel limitations on the states' power to tax out-of-state activities.⁸

Ultimately, the Court relied upon the four-prong test established by the U.S. Supreme Court in Complete Auto Transit⁹ to determine whether the sales tax at issue violated the Commerce Clause. Generally, courts have sustained a tax against a Commerce Clause challenge when the tax: (i) is applied to an activity with a substantial nexus with the taxing state; (ii) is fairly apportioned; (iii) does not discriminate against interstate commerce; and (iv) is fairly related to the services provided by the state.

Relying in part upon the logic applied in National Bellas Hess¹⁰ where the U.S. Supreme Court found mail order transactions to be "exclusively interstate in character," the Florida District Court of Appeal similarly characterized the transactions at issue. Specifically, the imposition of Florida sales tax on out-of-state customers for out-of-state flower deliveries violated the dormant Commerce Clause as the activity at issue did not have substantial nexus with Florida. The Court focused on the transactional contacts with the state of Florida, which were the taxpayer's registration as a corporation in Florida, and the operation of a Web site by the Florida corporation. The customer had no other contacts with the state but for its interaction with the Florida-registered corporation on its Web site. According to the Court, merely registering in a state did not give the taxing state the right to assess sales tax without any other facts to support substantial nexus.

Because the imposition of sales tax violated the Commerce Clause, the Court did not consider whether the Due Process Clause was also offended.

Sales of Prepaid Calling Arrangements

In assessing tax on sales by the taxpayer of prepaid calling arrangements via the Internet, the Department relied upon a Florida statute which specifically imposes sales tax collection responsibility on the selling dealer of prepaid calling arrangements at the time of sale, treating it as a sale of tangible personal property.¹¹ The taxpayer contested the imposition of taxes on the prepaid calling arrangements based on the Due Process and dormant Commerce Clauses, parallel to its argument against imposition of sales tax on sales of gift items delivered outside Florida.

Unlike the sales of flowers ordered by out-of-state customers with delivery at an out-of-state location, the prepaid calling arrangements were both sold and delivered by the taxpayer through the Internet. Specifically, delivery was completed by the taxpayer sending an authorization code directly to each customer via the Internet. Thus, the Court found the prepaid calling arrangements to have the required substantial nexus to Florida. As a result, the Court rejected the taxpayer's argument that the tax violated the dormant Commerce Clause.

Applying the standard for the due process analysis established by the U.S. Supreme Court in International Shoe,¹² whether maintenance of the tax would offend "traditional notions of fair play and substantial justice," the Court also found no offense present as the taxpayer was both registered in Florida and had a mailing address in Florida. Citing Quill,¹³ the Court did acknowledge the differences between the minimal nexus required to meet the requirements of the Due Process Clause and the "substantial nexus" required to meet the Commerce Clause standard. Finding both present in this instance, the Court upheld the imposition of sales tax on the taxpayer's sales of prepaid calling arrangements.

Commentary

In light of the number of states asserting sales tax collection responsibilities on out-ofstate companies selling tangible personal property via the Internet,¹⁴ this case provides an interesting application of the nexus limits imposed by the Commerce Clause. States have continued their efforts in recent years to adopt affiliate and click-through nexus standards on Internet sales of tangible personal property, in spite of potential constitutional challenges.¹⁵ The Court was willing, at least in this instance, to apply some limits to Florida's ability to impose tax. Though no affiliate or click-through relationship was present, it is interesting that the imposition of sales tax was found to violate the dormant Commerce Clause in this instance.

Federal legislation proposed in the previous Congressional session¹⁶ purportedly aimed at leveling the playing field between small, local retailers currently collecting sales tax and large, online retailers currently eluding sales tax collection on remote sales in jurisdictions in which they lack nexus has not been enacted to date. Without Congressional intervention, it appears that states will continue on their separate paths to address the issue for the time being through state-specific legislation and litigation.

The Department relied on the "florist rule" which basically takes an "origination" basis similar to other states.¹⁷ This "origination" approach is not used in other areas of Florida sales tax law and its statutory authority is somewhat questionable. This decision should be considered by taxpayers in other states that use an "origination" approach to apply sales tax to certain transactions.

Due to an absence of detailed records maintained by the taxpayer, the Department was forced to rely upon its own estimates to compute the assessed tax in this case. This decision once again demonstrates the need for all taxpayers to maintain detailed contemporaneous records of transactions.

Footnotes

1. American Business USA Corp. v. Dept. of Revenue, Florida Fourth District Court of Appeal, No. 4D13- 1472, Nov. 12, 2014.

2. While not made clear in the opinion, presumably these local florists were chosen to fulfill orders based on the location of the customer, so that non-Florida florists fulfilled orders from non-Florida customers.

3. FLA. STAT. ANN. § 212.05(1)(l).

4. FLA. ADMIN. CODE ANN. r. 12A-1.047(1).

5. U.S. CONST. amend. XIV.

6. U.S. CONST. art. I, § 8.

7. Federalist No. 22, Alexander Hamilton, Clinton Rossiter ed., 1999.

8. MeadWestvaco Corp. ex rel. Mead Corp. v. Ill. Dep't. of Revenue, 553 U.S. 16 (2008).

9. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

10. National Bellas Hess, Inc. v. Dep't. of Revenue, 386 U.S. 753 (1967). In this decision, the U.S. Supreme Court found the use tax at issue violated the dormant Commerce Clause. The only contact between the company and the in-state customers in this instance was via the U.S. mail or common carrier. Also cited were Oklahoma Tax Comm'n. v. Jefferson Lines, Inc., 514 U.S. 175 (1995) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

11. FLA. STAT. ANN. § 212.05(1)(e).

12. International Shoe v. Washington, 326 U.S. 310 (1945).

13. Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

14. Michigan is the most recent state to enact click-through nexus and affiliate nexus legislation. Act 553 (S.B. 658), Act 554 (S.B. 659), Laws 2014 (effective Oct. 1, 2015). For a discussion of this legislation, see GT SALT Alert: Michigan Enacts Sales and Use Tax Click-Through Nexus and Affiliate Nexus Provisions.

15. For a further discussion of these efforts, see GT SALT Alert: SALT Top Stories of 2014.

16. Marketplace Fairness Act of 2013, S. 743, as passed by the Senate on May 6, 2013.

17. FLA. ADMIN. CODE ANN. r. 12A-1.047. For example, a California regulation provides "[t]ax applies to amounts charged by florists who receive orders for the delivery of flowers . . . to points outside this state and instruct florists outside this state to make the delivery." CAL. CODE REGS. tit. 18, § 1571(b)(2).

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