The Lawletter Vol 40 No 2
A very recent decision by a Florida appellate court illustrates constitutional issues that arise when a state or locality seeks to impose a tax upon sales of goods to out-of-state customers via the Internet. In American Business USA Corp. v. Department of Revenue, 151 So. 3d 67 (Fla. 4th DCA 2014), the court addressed the question of whether Internet sales of flowers, gift baskets, other items of tangible personal property, and prepaid telephone calling arrangements by a corporation that was registered to do business in Florida to out-of-state consumers were subject to the Florida sales tax. The taxpayer in the American Business case objected to taxation of its Internet sales to out-of-state customers on the ground that such taxation violated the Commerce and/or Due Process Clauses of the U.S. Constitution. The American Business court upheld the State of Florida's taxation of Internet sales of prepaid telephone call cards but rejected the State's taxation of Internet sales of flowers and other tangible goods.
The American Business court began its discussion of the constitutional issues by pointing out that the Commerce and Due Process Clauses of the federal Constitution "impose distinct but parallel limitations on a State's power to tax out-of-state activities." Id. at 71 (quoting MeadWestvaco Corp. ex rel. Mead Corp. v. Ill. Dep't of Revenue, 553 U.S. 16, 24 (2008)). The American Business court explained that when evaluating the validity of a tax under the Commerce Clause of the Constitution, the tax in question will survive "[if] the tax is applied to an  activity with a substantial nexus with the taxing State,  is fairly apportioned,  does not discriminate against interstate commerce, and  is fairly related to the services provided by the State." Id. (alterations in original) (quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)). According to the American Business court, "if the taxing state is able to show only three of the four prongs under Complete Auto, the tax will not be sustained under a commerce clause challenge." Id. The genesis of the prohibition against collecting a sales tax on purchases made outside the state, such as those made through mail orders, can be traced in large measure to the Commerce Clause, which precludes the application of a state statute to commerce that takes place wholly outside of the state's borders, whether or not the commerce has effects within the state. Id. at 72 (citing Edgar v. MITE Corp., 457 U.S. 624, 642-43 (1982); Geoffrey E. Weyl, Quibbling with Quill: Are States Powerless in Enforcing Sales and Use Tax-Related Obligations on Out-of-State Retailers?, 117 Penn St. L. Rev. 253, 257 (2012)).
With respect to the Due Process Clause challenge by the taxpayer in the American Business case, the court explained that "[t]he standard for due process analysis under the Fourteenth Amendment, as adopted by the United States Supreme Court, is the same standard as announced in International Shoe, i.e., whether maintenance of the suit would offend 'traditional notions of fair play and substantial justice.'" Id. at 73 (quoting Quill Corp. v. North Dakota, 504 U.S. 298, 307 (1992) (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945))).
Ultimately, the American Business court ruled that although the State of Florida's imposition of taxes on sales of prepaid calling arrangements to out-of-state customers via the Internet did not violate the Due Process Clause of the Fourteenth Amendment of the federal Constitution, the assessment of sales tax on Internet sales of flowers, gift baskets, and tangible personal property outside of Florida to out-of-state customers for out-of-state delivery violated the Commerce Clause of the Constitution:
As we determine "by a case-by-case evaluation of the actual burdens imposed by particular regulations or taxes," we conclude that the taxes imposed here are an undue burden on interstate commerce, as there is not a "substantial nexus" between the activity of the taxpayer and the taxing state. Quill, 504 U.S. at 315, 112 S.Ct. 1904. Cf. Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 184, 115 S.Ct. 1331, 131 L.Ed.2d 261 (1995) (finding Oklahoma's tax on a bus ticket for travel from Oklahoma to another state satisfied the first prong of the Complete Auto because "Oklahoma is where the ticket is purchased, and the service originates there. These facts are enough for concluding that '[t]here is "nexus" aplenty here.'"). Merely registering in a state does not give the taxing state the right to assess sales taxes on transactions without any other facts to constitute "substantial nexus." Further, the Court in Bellas Hess characterized mail order transactions as "exclusively interstate in character." 386 U.S. at 759, 87 S.Ct. 1389. It follows then that the internet transactions at issue here are even more "exclusively interstate in character."
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Unlike the sale of flowers ordered by out-of-state customers with delivery at an out-of-state location, the prepaid calling arrangements have the required "substantial nexus" to the taxing state. See Complete Auto, 430 U.S. at 279, 97 S.Ct. 1076. Taxes on prepaid calling arrangements are governed by section 212.05(1)(e), Florida Statutes (2012). In contrast with tangible personal property, prepaid calling arrangements are sold and delivered by the taxpayer through the internet. Delivery is effectuated by the taxpayer sending an authorization code directly to the customer via the internet. This makes the sale of prepaid calling arrangements unlike the sale of tangible personal property, such as flowers and gift baskets.