Florida Sales Tax Case Presents Opportunity for Supreme Court to Revisit the Quill Nexus Standard

In a petition filed with the Supreme Court of the United States on October 24, 2016, American Business USA Corporation (American Business) seeks a writ of certiori to review the judgment of the Supreme Court of Florida.  [American Business USA Corp. v. Florida Department of Revenue, U.S. Supreme Court, Dkt. 16-567, petition for certiorari filed October 24, 2016]  In its petition, American Business asks whether a state can “collect sales tax on out-of-state property ordered over the internet for out-of-state delivery by relying on this (Supreme) Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and the state’s connection to the corporation that accepts the order and arranges the sale, or does such a tax violate the Due Process Clause and the dormant Commerce Clause of the United States Constitution by imposing a sales tax on the out-of-state transfer of tangible personal property?”  The granting a writ of certiorari by the Supreme Court means that at least four of the justices have determined that the circumstances described in the petition are sufficient to warrant review by the Court.

the Florida Supreme Court agreed with the Department that “the sales tax assessment was constitutional because American Business had a physical presence in Florida and did business in Florida.

Pursuant to Florida Statute Section 212.05(1)(l), “Florists located in this state are liable for sales tax on sales to retail customers regardless of where or by whom the items 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.”   Under Florida Administrative Code Rule 12A–1.047(1), “[f]lorists 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.” The Department asserted that statute and rule require that Florida companies that sell flowers collect sales tax when the flowers are delivered from an out-of-state location to another out0of-state location, as long as the company is located in Florida.  Florida's sales tax on out-of-state sales of flowers was held unconstitutional by the Florida Fourth District Court of Appeal [Am. Bus. USA Corp. v. Dept. of Revenue, 151 So. 3d 67 (Fla. 4th Dist. App. 2014)], as a violation of the dormant Commerce Clause, and was then reversed by the Florida Supreme Court [Florida Dept. of Revenue v. Am. Bus. USA Corp., 191 So. 3d 906 (Fla. 2016)].  

Specifically, the Florida Supreme Court agreed with the Department that “the sales tax assessment was constitutional because American Business had a physical presence in Florida and did business in Florida. Id at 914, 917. The Florida Supreme Court also ruled that the tax assessment was not a due process violation, and that the tax met the remaining elements of the four-part dormant Commerce Clause test set forth by this Court in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). Id. at 913-17.”  In doing so, the Florida Supreme Court reversed the Fourth District Court of Appeals, which recognized that "[b]ecause the flowers sold by the Florida-registered internet business were never stored in or brought into Florida, the imposition of taxes did not meet the 'substantial nexus' test and thus violated the dormant commerce clause." [Am. Bus. USA Corp. v. Dept. of Revenue, 151 So. 3d 67, 68 (Fla. 4th Dist. App. 2014)]. The Fourth District explained that "[m]erely registering in a state does not give the trucing state the right to assess sales taxes on transactions without any other facts to constitute 'substantial nexus."' Id at 73. Importantly, the Fourth District noted that the flowers being taxed "were not grown in, stored in, or delivered from Florida, and do not have any type of connection to Florida." Id.

While it is stipulated that American Business has physical presence nexus in Florida, the case involving American Business involves a question about the taxing state’s nexus with the transaction itself: out-of-state delivery of out-of-state property.  

As the petition points out, “the Florida Supreme Court’s decision thereby allows Florida to tax the sale of property that never actually enters Florida” based solely on “American Business’s physical presence and receipt of payment within Florida”, a conclusion that “confuses this Court’s decision in Quill.”  [Quill Corp. v. North Dakota, 504 U.S. 298 (1992)]  The petition provides the opportunity to “reexamine Quill” which Justice Kennedy requested in his concurring opinion in Direct Marketing Association v. Brohl, 135 S.Ct. 1124, 1135 (2105).  Recall that in Quill, the Supreme Court ruled unconstitutional as violative of the dormant Commerce Clause a use tax requirement on an out-of-state business that lacked physical presence in the taxing state.  In Quill, the taxing state had transactional nexus to impose tax on the sale of the tangible personal property, but lacked physical presence nexus over the out-of-state taxpayer, Quill Office Supply.  While it is stipulated that American Business has physical presence nexus in Florida, the case involving American Business involves a question about the taxing state’s nexus with the transaction itself: out-of-state delivery of out-of-state property.  As such, the petition stresses, “because this case presents the inverse circumstances from those presented in Quill, this case offers an opportunity for the Court to define the contours of Quill's application to domestic corporations. The pending petitions in Brohl-Nos. 16-267 and 16-458-would offer a complementary companion case to the present case, whereby the Court could further define the contours of these context-specific issues.”

“If Florida can impose a sales tax on a transaction based solely on the identity of the corporation that receives the order, ... The State of Washington could require Amazon.com to collect a Washington sales tax on every item sold over its website anywhere in the world.”

To highlight the points asserted in its petition, counsel for American Business notes that:

• The Florida Supreme Court held that such an extraterritorial sales transaction was nonetheless subject to a Florida sales tax because American Business engages in business within Florida (advertising, accepting orders, receiving payment, and transmitting orders to third-party florists), and thus the sales transaction "occurs in Florida[.]" Id. at 915.
• This case “is important because the Florida Supreme Court's newly announced power has no limiting principle. If a State may tax flower sales based only on the State's connection to the internet retailer who accepts the order, then nothing will constrain the spread of this power to all e-commerce transactions. As a category, flowers are indistinguishable from other types of tangible personal property. The Florida Supreme Court's interpretation of Quill is, in fact, an invitation for State Legislatures to craft sales taxes on other out-of-state deliveries of out-of-state property.”

• “If Florida can impose a sales tax on a transaction based solely on the identity of the corporation that receives the order, ... The State of Washington could require Amazon.com to collect a Washington sales tax on every item sold over its website anywhere in the world.”
• “While noting the standard this Court has set for a State to impose a sales tax-that ‘a sale of tangible goods has a sufficient nexus to the State in which the sale is consummated to be treated as a local transaction’- the Florida Supreme Court did not analyze the standard correctly.”
• “Believing it was bound to do so by Quill, the Florida Supreme Court concluded that the statute was lawful because it ‘taxes the transaction that occurs in Florida by the business engaging in business here, and not on the items sold or the activities occurring out of state[.]’ Id at 915-16.”
• “With the continuing expansion of e-commerce, and with trillions of dollars spent annually over the internet, States are understandably searching for ways to collect tax revenues from the internet-based sale of goods. The Florida Supreme Court has held that Florida can collect sales tax, permissibly under the Due Process Clause and dormant Commerce Clause, when out-of-state customers purchase out-of-state property for out-of-state delivery, as long as the internet-based company from which the order is initially placed is located within Florida.”
• “The Florida Supreme Court relied on this Court's decision in Quill to support its holding that a Florida company can be required to collect sales tax for sales made anywhere in the world.”
• “It reflects an invitation for State Legislatures to craft sales taxes, outside the context of flowers, on other out-of-state transfers of tangible personal property.”
• “[T]his Court's review is necessary to confirm that only the State where property is transferred may collect a sales tax.”
• “In this case, the Florida Supreme Court made no express determination on the incidence of Florida's sales tax on flowers, but held that "the statute taxes the transaction that occurs in Florida by the business engaging in business here, and not on the items sold or the activities occurring out of state[.]" Florida Dept. of Revenue, 191 So. 3d at 915-16;”  Under Florida’s sales tax scheme, the sales tax is imposed on the consumer, and the retailer is obligated to collect the tax for the privilege of doing business in Florida.  Florida’s sales tax on florists cannot escape Constitutional scrutiny by simply asserting that the statute imposes tax on companies engaged in business there, and not on the transactions or activities occurring outside the state.
• "If the legislature of a State should enact that the citizens or property of another State or country should be taxed in the same manner as the persons and property within its own limits and subject to its authority, or in any other manner whatsoever, such a law would be as much a nullity as if in conflict with the most explicit constitutional inhibition." Miller Bros. Co. v. State of Md., 347 U.S. 340, 342 (1954) (quoting City of St. Louis v. Wiggins Ferry Co., 78 U.S. 423, 430 (1870)).”
• “Florida's statute and administrative rule expand Florida's power beyond its borders, and Florida lacks any basis to tax consumers for out-of-state transfers of tangible personal property.”
• “’[A] State may not tax value earned outside its borders.’ ASARCO Inc. v. Idaho State Tax Com'n, 458 U.S. 307, 315 (1982) (citations omitted).”
• “In the context of a sales tax on goods, ‘a necessary condition for imposing the tax [is] the occurrence of 'a local activity, delivery of goods within the State upon their purchase for consumption.’ Jefferson Lines, 514 U.S. at 187 (quoting McGoldrick v.. Berwind- White Coal Mining Co., 309 U.S. 33, 58 (1940)).”
• “Here, Florida has used a connection to one of its internet-based corporations as the bridge to collect sales tax from consumers worldwide for transfers of property that occur anywhere in the world. The State of Florida lacks a sufficient connection to the flowers being transferred to impose a sales tax. As such, other States or Nations are the proper parties to collect sales tax on these transactions.”
• “The focus on American Business’s connection to Florida, for purposes of the State’s nexus inquiry, misses the point.”
• “If Florida cannot demonstrate a nexus with the sales it is taxing, then American Business cannot be forced to collect the tax or pay the tax when uncollected. American Business has no obligation to collect a tax from those who have no obligation to pay it.”
• “[I]n the words of the Fourth District, the sales tax was imposed on ‘out-of-state deliveries of out-of state tangible goods.’ Am. Bus. USA Corp., 151 So. 3d at 68.”
• “[T]his Court's precedents for sales taxes on goods has never been the mere placement of an order for property. It has been the actual transfer of the property being sold. This "transfer" requirement derives from "the very conception of the common sales tax on goods, operating on the transfer of ownership and possession at a particular time and place[.]" Jefferson Lines, 514 U.S. at 187.”
• “Because the Florida Supreme Court expressly relied upon Quill, this case presents the Court with an opportunity to clarify the proper scope and continued viability of its decisions in Quill and Bellas Hess. See Brohl, 135 S. Ct. at 1135 (2015) (Kennedy, J., concurring).”
•  “Under the power announced by the Florida Supreme Court, Florida can collect sales tax on any sale, made anywhere in the world, by any consumer, as long as that sale originates with an order placed on a website operated by a company located within Florida.”
• “At least 36 other States and the District of Columbia have enacted sales taxes on flowers, which are of varying degrees of similarity to Florida's.”
•  “There is no limitation on the ability of State Legislatures to enact similar statutes regarding non-floral items of tangible personal property.”
• “[B]ecause this case presents the inverse circumstances from those presented in Quill, this case offers an opportunity for the Court to define the contours of Quill's application to domestic corporations. The pending petitions in Brohl-Nos. 16-267 and 16-458-would offer a complementary companion case to the present case, whereby the Court could further define the contours of these context-specific issues.”

We will continue to monitor the Supreme Court’s consideration of this and the Brohl case.  Given that states continue to seek aggressive means to expand their jurisdiction to impose sales tax on taxpayers and transactions beyond their borders, these two cases present an opportunity to revisit or refine the Court’s decision in Quill to meet the needs of a borderless, e-commerce world.