As Congress holds off on extending Internet sales taxes, state courts continue to deal with how to apply local tax laws to online sales. Recently a Florida appeals court rebuffed the state’s effort to collect sales tax from an Internet-based small business that sells flowers, gift baskets and prepaid calling cards to customers in Latin America. The court held such non-Florida business activities were beyond the reach of state tax collectors.
Florida’s Department of Revenue initially assessed three years of unpaid sales taxes against American Business USA Corp., a Florida-based corporation that operates a Spanish-language website targeting customers in Florida, Spain and Latin America. The company merely served as an online sales portal; it did not maintain any inventory. So, for example, if a customer in Latin America purchased flowers through the website, the company arranged for a local florist to fulfill the order.
American Business paid Florida’s sales tax on sales to customers within the state but it did not pay tax on orders to customers outside of Florida. The Department of Revenue said this violated state law. Specifically, Florida imposes tax on all sales of “flowers, wreaths, bouquets, [and] potted plants.” This extends to sales where a Florida-based florist “gives telegraphic instructions to a second florist located outside Florida for delivery of flowers to a point outside Florida.”
On appeal from the department’s assessment, American Business argued the state’s policy was preempted by the United States Constitution. A three-judge panel of Florida District Court of Appeal agreed. In a decision issued on Nov. 12, the court said requiring collection of sales tax on out-of-state deliveries violated the Commerce Clause of the Constitution. This clause gives Congress exclusive authority to regulate interstate and international commerce. Since the 19th century, courts have also read this clause to prohibit “certain state actions that interfere with interstate commerce.”
Here, the court said Florida’s tax interfered with interstate commerce because there was no “substantial nexus” to commercial activity within the state. In other words, aside from the fact American Business incorporated in Florida and operated a website from the state, there was nothing to connect the out-of-state flower deliveries with the state. American Business had no Florida inventory and shipped nothing itself. The orders were carried out by companies with no connection to Florida whatsoever. Accordingly, without more of a “substantial nexus,” Florida could not collect sales taxes on these “exclusively interstate” transactions.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.
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