United States: Florida Supreme Court: Origin Sourcing for Sales Tax is Constitutional

The Florida Supreme Court upheld the imposition of a sales tax obligation on an in-state florist for all of its worldwide sales regardless of delivery destination. This "origin sourcing" method of determining transactions subject to sales tax creates constitutional concerns beyond those addressed in this case.

Today, May 26, in Florida Department of Revenue v. American Business USA, the Florida Supreme Court reversed the decision of the lower court and held that a florist's sales can constitutionally be subject to sales tax in the state where the florist is located, regardless of where the flowers are delivered.1

Background American Business USA ("American Business") is located in Wellington, Florida, and operates an online website for sales of flowers, gift baskets, and other similar items. All of its sales were initiated through its online website. American Business did not maintain any inventory of the items sold through its website, and it did not deliver the purchased items to customers. Instead, it used local florists and delivery services located throughout the country to fulfill and deliver the orders. American Business collected sales tax depending on the location of the delivery. If the delivery occurred in Florida, American Business collected Florida sales tax on that sale. However, if the delivery occurred outside of Florida, it did not collect Florida sales tax. Take, for example, the following transaction:

An individual in Texas purchases flowers for delivery to his mother in Texas. The purchase is made using American Business's website. The flowers are arranged by a florist in Texas and delivered by a delivery service in Texas. American Business would not collect and remit Florida sales tax on that sale.

Florida, like many other states, has specific guidance on the sales tax responsibilities of florists. Florida has a specific statutory provision:

Florists located in [Florida] 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 [Florida] are not liable for sales tax on payments received from other florists for items delivered to customers in this state.2

Under this statute, the Florida Department of Revenue issued a proposed assessment on American Business' internet sales between April 1, 2008 and March 31, 2011 that were delivered to customers located outside Florida (like the Texas customer in the example above). American Business filed a protest, which was upheld by the administrative law judge. American Business then appealed to the Fourth District Court of Appeal, arguing that imposing tax on sales delivered outside Florida violated the Commerce Clause of the U.S. Constitution. The District Court agreed with American Business.

Fourth District Court of Appeal Decision In a unanimous decision, the Fourth District Court of Appeal concluded that even though American Business was located in Florida, Florida lacked a substantial nexus with American Business' sales delivered outside Florida. In doing so, the court held that imposing tax on sales to out-of-state customers for out-of-state delivery violated the Commerce Clause. According to the court, the mere presence of American Business in the state was insufficient to permit the state to tax all of its sales.

Florida Supreme Court Decision The Florida Supreme Court reversed the District Court's decision, and held that Florida's imposition of tax in this case was constitutional. The court examined the imposition of tax using all four prongs of Complete Auto Transit. First, the court concluded that since the taxpayer had substantial nexus with Florida, all of its sales could be subjected to Florida sales tax.3 That nexus existed, the court held, because American Business was domiciled in Florida, received orders from its location in Florida, and had been doing business in Florida since 2001. Second, the court found that the statute was internally consistent because "no florist would be taxed twice" if every state adopted Florida's statute,4 and that the statute was externally consistent because the transaction occurred in Florida when the customer placed an order with a Florida business.5 Third, the court held that the tax did not discriminate against interstate commerce since it "contains no provision that affords preferential treatment or any commercial advantage to a Florida business over an out-of-state business."6 Fourth, the court decided that the tax was fairly related to the services that the taxpayer received at its physical location in Florida.7

Notably, the Supreme Court did not address the District Court's transactional nexus conclusion that there was no substantial nexus between Florida and the sales to out-of-state customers for out-of-state delivery. Nor did the Supreme Court address the unique nature of floral sales, which often occur electronically. Instead, the Supreme Court's decision broadly declared that a state can subject all of a taxpayer's sales to sales tax if the taxpayer has physical presence only in that state. American Business will now need to determine whether to appeal this decision to the U.S. Supreme Court.

Takeaways The Florida Supreme Court's reasoning in this case was not restricted to the unique nature of floral sales, so this decision could embolden Florida (and other states) to adopt origin-sourcing for other transactions. (Indeed, origin-sourcing was recently proposed by House Judiciary Chairman Goodlatte as a solution to use tax collection by remote sellers.8) Allowing sales to be taxed based on where the seller (rather than the buyer) is located conflicts with transactional tax historical norms and raises concerns about which state must yield in a dispute.

Also, while this decision addressed the four prongs of Complete Auto Transit, it did not address the additional tests imposed when a tax implicates the Foreign Commerce Clause. In particular, a state tax is unconstitutional if it "creates a substantial risk of international multiple taxation." Origin-sourcing for sales tax creates a substantial risk of international multiple taxation since the other country is not obligated to use origin-sourcing, or to provide a credit for taxes paid.

In fact, American Business may have been able to show actual international multiple taxation—not just the risk of multiple taxation—as a result of its substantial amount of floral deliveries to Latin America. If any of those Latin American destination countries imposed a destination-based transaction tax on the sale (e.g., a value-added tax), these transactions would be subject to international multiple taxation (sales tax in Florida and VAT in the foreign country).

Now that origin-sourcing has a win under its belt, stay tuned to see how this impacts other types of transactions, as well as other state taxing agencies' practices.

  1. Florida Department of Revenue v. American Business USA Corp., No. SC14-2404 (May 26, 2016).
  2. Fla. Stat. § 212.05 (emphasis added).
  3. Florida Department of Revenue v. American Business USA Corp., No. SC14-2404 (May 26, 2016) at 15.
  4. Id. at 16.
  5. Id. at 18.
  6. Id. at 19.
  7. Id. at 21.
  8. See Discussion Draft, Online Sales Simplification Act of 2015.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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