FLORIDA'S SALES TAX ON SERVICES - ntanet.orgntanet.org/NTJ/41/1/ntj-v41n01p1-18-florida-sales-tax-services.pdf · FLORIDA'S SALES TAX ON SERVICES WALTER HELLERSTEIN* ABSTRACT

FLORIDA'S SALES TAX ON SERVICES**

WALTER HELLERSTEIN*

ABSTRACT other aspects of the tax, the levy trig-

During its 1987 session, the Florida leg-gered an enormous storm of protest, with

islature enacted a sales and use tax on aopponents attacking it as unfair, unwise,

broad range of services consumed in theand unconstitutional. In December 1987,

state. Because the tax systematically soughtless than six months after the tax took ef-

to tax services that were performed outsidefect, the Florida legislature responded to

the state but used in Florida (includingthe widespread opposition to the tax by

national advertising), the levy triggered Ianrepealing it effective January 1, 1988.

enormous storm of protest with opponentsThis article traces the development of

attacking it as unfair, unwise, and uncon-Florida's sales tax on services, examines

stitutional. This article traces the histori-its design and operation, explores the pol-

cal develo ment of Florida's sales tax onicy questions that the tax has posed, con-

@p siders the legal challenges to the levy'sservices, examines its design and opera-

validity, and describes the events that ledtion, explores the policy questions that the

to its repeal. Although I cannot claim totax raised, considers the legal challenges

be a disinterested observer of rise and fallto the levy's validity, and describes the

of Florida's sales tax on services,7 I haveevents that led to its ultimate repeal.

attempted to present the issues raised bythe tax in an evenhanded manner.

1. Introduction

GENERAL retail sales taxes, today's 11. Historical Backgroundmost significant source of state tax

revenue,' have been confined largely to Because the Florida Constitution pro-

sales of tangible personal property.' Al- hibits a tax "upon the income of natural3though most-states tax some services , the persons,"' the state has long been heavily

states (with a handful of exceptions') do dependent on the sales tax as its principal

not tax services generally. The expl'ana- source of state tax revenue.' Since the en-

tion for the limited scope of the sales tax actment of the sales tax in 1949, the state

base lies partly in history and partly in has been under steady pressure to raise

politics. It does not lie in the dictates of the rates or expand the base of the tax to

sound fiscal policy which in the eyes of meet the increasing fiscal demands cre-

most observers would justify the exten- ated by the state's rapid growth. During

sion of the sales tax to many services.5 the quarter century following enactment

During its regular 1987 session, the of Florida's sales tax, the rate was in-

Florida legislature enacted a sales and use creased from three to five percent and the

tax on a broad range of services con- base was broadened to include, among

sumed in the state. Although state tax other things, specified services. But, with

legislation does not usually make the front a few exceptions, the tax remained essen-

page of The New York Times, Florida's tially what it had been from the outset-

action was an exception.6 Two features of a levy on sales of tangible personal prop-

the tax attracted particular attention: first, erty, admissions, and transient accom-

the tax systematically sought to tax ser- modations. Services were generally ex-

vices that were performed outside the state cluded from the sales tax base.

but used in Florida; second, the tax sought During the 1980s, the pressure on Flor-

to tax advertising-including national ida to expand its sales tax base became

advertising- if the advertising service was more intense. As stated in the report pre-

used in the state. As a result of these and pared by the State Comprehensive PlanCommittee (popularly known as the

*University of Georgia. "Zwick Commission"), which was charged

1

2 NATIONAL TAX JOURNAL [Vol. XLI

with recommending the means of financ- to the Department of Revenue in consul-ing the legislature's State Comprehensive tation with the Revenue Estimating Con-Plan: ference.'3 The second was a study of "the

public policy and fiscal impact of the ex-The growth of Florida is relentless. Since 1980, we emptions from the sales tax" which was

have averaged 893 new residents every day. to include recommendations as to the ex-. . . 6,268 every week.

27,163 every month, emptions' retention, modification, or re-325,960 every year. peal."' To carry out this study, the legis-

... lature created a 21-member Sales TaxWhat they don't bring are the roads, the bridgea,

.the Exemption Study Conimission appointed

schools, and all the vast and varied hximan servicesneeded to realize [their] dreams. by leaders of both houses of the legisla-... ture and by the Governor. Both studies

' * 'our low tax rates and our undue reliance ona were to be completed prior to the legis-

narrow-based sales tax keep us from having the sta- lature's 1987 session.ble and reliable flow of governmental revenues thatis needed to attract and accommodate quality growth.'o The Department of Revenue's study was

completed in early March 1987. 15 The De-In response to these pressures, the partment's study, in addition to consid-

Florida legislature first expressed its in- ering the revenue impact of Chapter 86-tent to impose a broad-based tax on ser- 166, contained an extensive legal analy-vices in June 1986. Chapter 86-166 of the sis of Chapter 86-116." Beyond identi-Laws of Florida, enacted in the closing fying a number of problems raised byhours of the 1986 legislative session, ex- Chapter 86-1 16,17 the legal analysis con-tended Florida's preexisting sales tax to tained a model annotated revision ofservices by imposing a tax "[alt the rate Florida's preexisting sales tax designed toof 5 percent of the consideration for per- provide the legislature with a workableforming or providing any service."" At the alternative to Chapter 86-166. The revi-same time as it affirmatively expanded sion was concerned largely with technicalthe scope of the sales tax to include ser- and structural issues, such as integratingvices, the legislature repealed numerous the preexisting provisions of Florida's salesexemptions from the sales tax, including tax with the sales tax on services, and notthe exemption for "professional, insur- with issues of tax equity (eg., exemp-ance or personal service transactions which tions). Indeed, it explicitly disavowed anyinvolve sales as inconsequential elements intent to make substantive changes infor which no separate charges are Made.,,12 Chapter 86 116 or in the preexisting salesThe legislature postponed the effective tax, other than a few changes that haddate of the sales tax on services and the been specifically identified. The modelrepeal of most of the exemptions ad- annotated revision was thus offered as "thedressed by Chapter 86-166 until July 1, first cut at a working draft of legislation1987. that will no doubt be modified or, per-

The legislature's decision to postpone for haps, rejected altogether in the months toa full year the effective date of the sales come as those entrusted with the respon-tax on services and the repeal of exemp- sibility of enacting legislation confront thetions reflected its recognition that its ac- issues . . . tentatively addressed in thetion had significant policy, revenue, le- Revision.""gal, and administrative implications that The Sales Tax Exemption Study Com-warranted further consideration and, per- mission's report was completed in earlyhaps, further legislative attention during April 1987, after months of informationits 1987 legislative session. To this end, gathering, public hearings, and privatethe legislature directed that two studies deliberation." The Commission's reportbe undertaken. The first was a study of recommended the enactment of a broad-the revenue effects of Chapter 86-166 and based sales tax on services and generallyof the legal and administrative issues it endorsed the "technical recommenda-raised. The legislature assigned this task tions" of the model annotated revision in

No. 11 FLORIDA'S SALES TAX ON SERVICES 3

the Department of Revenue report that on services (Chapter 87-6 as amended byCtserve to integrate the taxation of ser- Chapter 87 101) went into effect.vices with the provisions of the currenttax law.""

During March and April of 1987, the III. The Design and Operation of theGovernor, the Senate, and the House Taxturned their attention to Florida's reve-nue needs and to the sales tax on ser- A. Overuiewvices. The studies by the Department ofRevenue and the Sales Tax Exemption Under Florida's sales tax on services, aStudy Commission, as well as the model broad range of services -including ad-annotated revision contained in the De- vertising, legal, accounting, and construc-partment of Revenue Report and subse- tion services-were brought into the salesquently endorsed by the Commission, tax base for the first time. Not all poten-provided the starting point for legislative tially taxable services were embraced inconsideration. They were, however, sub- the expanded base, however. Medical andjected to intense scrutiny by the Gover- health services, educational and socialnor, by the Senate and House Finance and services, services that employees provideTax Committees and their expert staffs, for their employers, and other specifiedand by other interested parties who ex- services were exempted from the tax.pressed their views formally at public In its essential structure, Florida's saleshearings and informally through com- and use tax on services followed the tra-munications with representatives of the ditional pattern of sales and use taxes onexecutive and legislative branches. In the tangible personal property that has longcourse of these deliberations, the model been established in Florida and in otherannotated revision was substantially re- states. The sale of a service was taxablefined and modified to accommodate con- if it was sold within the state; the use ofcerns expressed over such matters as the a service was taxable if it was sold out-treatment of particular industries (eg., side the state but used within the stateadvertising, construction, and transpor- and if the sale or use of the service hadtation), exemption of particular services not been subjected to taxation in another(e.g., health, social, and agricultural), and state.the administration of the tax. The legis- In several respects, however, Florida'slative package that emerged as Florida's sales and use tax on services was moresales tax on services was the culmination narrowly circumscribed than the typicalof this process. On April 23, 1987, the sales and use tax on tangible personalGovernor signed Chapter 87-6 which im- property. Consistent with its purpose toposed a broad-based sales and use tax on tax only the sale or use of services whose

22services effective July 1, 1987. benefit was enjoyed in Florida, the salesDuring the balance of the 1987 legis- and use tax on services provided an ex-

lative session, the legislature considered emption for the sale of services purchasedproposed changes to Chapter 87 6, many within the state for use outside the state.of which were designed to correct per- The sale of tangible personal propertyceived technical errors in the tax as orig- under comparable circumstances wouldinally enacted, such as the definition of generally be taxable. Moreover, the salevarious taxable and exempt services. The or use of services whose benefit was en-bill designed to correct these errors -a bill joyed in part in Florida and in part out-that was modified on a frequent basis as side the state often was subject to appor-the session progressed-was popularly tionment. Apportiorunent generally wouldknown as the "glitch bill." The "glitch bill" not be provided for the tax on the sale orwas enacted in June 1987 during the fi use of tangible personal property enjoyednal hours of the regular legislative ses- in part in other states. In addition, the taxsion." On July 1, 1987, Florida's sales tax contained provisions that relieved the


purchaser of the service tax burden if he plicable to the sales tax and to the use tax.could demonstrate to the satisfaction of The central principle governing the ap-the Florida Department of Revenue that plication of both the sales tax and the usethe benefit of the service was enjoyed out- tax was that services were used or con-side Florida. No comparable "relief" pro- sumed "where the benefit of the servicevisions would be available for the pur- is enjoyed.""chaser of tangible personal property. If the purchaser was an individual and

the purchased service directly related to

B. The Operation of the Statute real property, the benefit of the servicewas presumed to be enjoyed where the real

1. Imposition. A tax was imposed on the property was located. If the purchasedretail sale of any service in the state." service did not directly relate to realThe sale of the service was in the state if property, the benefit of the service was(1) the service was performed wholly in presumed to be enjoyed where the pur-the state or (2) the service was performed chaser received tangible personal prop-partly within and partly outside the state, erty representing the service. A will pre-but the greater portion of the service was pared by a lawyer, a tax return preparedperformed within the state based on costs by an accountant, blueprints prepared byof performance. an architect, or a report prepared by a

If the sale of the service was outside the consultant would fall within this descrip-state (because the greater proportion of tion. If neither of the two preceding rulesthe service was performed outside the state were applicable, an individual purchaserbased on costs of performance) and the was presumed to enjoy the benefit of theservice was used in the state, a tax was service where the greater proportion of theimposed on the use of the service in the service was performed based on costs ofstate. The use tax applied only if a sales performance.or use tax on the sale or use of the service The rules regarding the place of enjoy-had not been lawfully paid to another ment of services purchased by businessstate. were more detailed than the comparable

The taxes on the sale or use of services rules for individuals. As in the case ofin the state applied only to services that purchases by individuals, if the businesswere consumed in the state. Even though purchased a service directly related to reala sale of a service was in the state, the property, the benefit of the service wassale would not be subject to the tax if the presumed to be enjoyed where the realservice was sold for use outside the state. property was located. If the business pur-The use tax by definition applied only to chased a service directly related to tan-"the use of any service in this state."" gible personal property, the benefit of theFlorida's sales tax on services thus im- service was presumed to be enjoyed whereposed no tax on the sale or use of services the property had acquired a business si-that were used or consumed outside the tus, if the property had acquired such astate regardless of where those services situs. If neither of the two property-re-were sold. lated rules applied, and the business pur-

2. Rules for Determining Where the chased a service directly involving salesBenefit of a Service Was Enjoyed. The to a service purchaser's local market, thesales tax on services established a series benefit of the service was presumed to beof rules for determining whether (and, in enjoyed where the purchaser's market ex-some cases, the extent to which) a service isted. For example, if an out-of-state com-was used or consumed in Florida and, pany used the services of an independentconsequently, whether (and, in some cases, representative in Florida to solicit busi-the extent to which) it was taxable there. ness from retailers in the Orlando area,One set of rules was applicable to indi- the service would relate to the activitiesvidual, nonbusiness purchasers; the other of the service purchaser's local market inset of rules was applicable to business Florida. On the other hand, if the com-purchasers. These rules were equally ap- pany hired a market research firm to con-


duct market research in Florida to test benefit of the services within the statemarket a product for a new line of goods rather than upon sellers of services whoto be sold nationally, the service would not performed the services outside the state.relate to the service purchaser's local It also avoided the problem of attemptingmarket. to enforce payment of the tax by the out-

If none of the three preceding rules for of-state vendor.business purchasers were applicable, and As a practical matter, then, the prin-if the business purchaser were doing cipal administrative distinction betweenbusiness within and without the state, the the sales tax and the use tax on servicesservice was presumed to be enjoyed in imposed by Florida concerned which partyFlorida to the extent that the purchaser bore the primary responsibility for col-was doing business in the state. For pur- lecting the tax. The tax on the sale of ser-poses of determining the extent of the vices sold and consumed in the state gen-purchaser's business in the state, the cor- erally was collected by the seller of theporate income tax apportiorunent forxnu- services who, by definition, had per-las were to be employed." Broadly speak- formed the greater proportion of the ser-ing, the rule of apportionment of services vices in the state. The tax on the use ofapplied to business purchases of service services sold outside but used within thethat were not situs-specific. For example, state was remitted directly by the pur-purchases of legal services relating to chaser of the services.federal income tax liability or accounting There were two exceptions to the pre-services relating to the preparation of an ceding generalizations regarding collec-annual report generally would fall into this tion of the tax. First, if the sale of a ser-category. The business purchaser would vice was made in Florida to a multistatepay a tax on the service equal to five per- business with which Florida had tax nexus,cent of the charge for the service multi- and if the business sought to avail itselfplied by the enterprise's Florida income of the exemption for sales of services soldtax apportionment percentage. in Florida for use outside the state, the

In the case of both nonbusiness and business had to present an exempt pur-business purchasers, if the purchaser could chase permit to the seller of the service.demonstrate to the satisfaction of the De- Upon the presentation of such a permit topartment of Revenue that the benefit of the seller of the service, the seller was ab-the service was enjoyed outside the state solved of any responsibility for collectingeven though it would have been deemed the sales tax that may have been due onto have been enjoyed within Florida un- the service. The multistate business hadder one of the specific rules, the benefit to "self-accrue" the taxes due and remitof the service was deemed to be enjoyed them to the Department of Revenue. Sec-outside of Florida. ond, if a seller had tax nexus with Flor-

3. Collection of the Tax. When services ida, the seller rather than the purchaserwere sold in Florida and when the benefit had the obligation to remit the use taxof the services was enjoyed in the state, with respect to the sale of a service out-the tax on the sale of the services gen- side the state that directly related to realerally was collected by the seller of the or tangible personal property in Floridaservice who added the tax to the consid- (other than vehicles or vessels used in in-eration paid for the services. When ser- terstate or foreign commerce) or that wasvices were sold outside Florida for use represented by tangible personal propertywithin the state, the tax on the use of the forwarded to a person in Florida.services generally was remitted by thepurchaser of the services, if the purchaser C. Exemptionshad nexus for tax purposes with Florida.This rule assured that the burden of col- 1. The Sale for Resale Exemption. Thelecting taxes on services performed out- tax imposed on the sale or use of servicesside but consumed within the state was in Florida, like the preexisting tax on theplaced upon purchasers who enjoyed the sale or use of tangible personal property


in the state, was limited to transactions sale), the legislature provided a variety ofinvolving retail sales. Retail sales were exemptions on public policy or equitysales for any purpose other than resale. grounds." The legislature exempted,The legislature prescribed specific guide- among other things, occasional and iso-lines for determining when the sale of a lated services by those not engaged inservice was a sale for resale. These guide- business (eg., neighborhood babysitters),lines provided that a sale of a service was agricultural services, educational ser-a sale for resale (and excluded from the vices, governmental services, health ser-scope of the sales and use tax for services) vices, local and suburban passengeronly if all five the following conditions transportation services, sanitary services,were met: (1) the purchaser of the service social services, and religious services.did not consume the service but ratheracted as a broker in procuring the service

D. Particularized Treatment of Specialfor his customer or client; (2) the pur-Industrieschaser of the service bought the service

pursuant to a written contract which In imposing a tax on the sale and useidentified the client or customer for whom of a broad range of services, the legisla-the purchaser was buying the service; (3) ture recognized that certain service in-the purchaser of the service separately dustries required specialized treatment.stated the value of the service in his charge Advertising services furnished by the me-for the service on its resale; (4) the ser- dia were a case in point. Proceeding un-vice would be taxed on its resale, unless der the same general principle that un-exempt as a service sold in the state for derlay the taxation of the sale or use ofuse outside the state; and (5) the service other services-that the sale or use ofwas purchased pursuant to a resale per- services should be taxed where the ben-mit by a dealer primarily engaged in the efit of the service was enjoyed-the leg-business of selling services. islature determined that the most appro-

For example, automobile body work priate measure of enjoyment of the benefitbilled to an automobile mechanic by the of advertising services furnished by thebody shop which repaired the owner's car media was the market coverage of thewould not be taxable to the mechanic if media. The legislature therefore providedthe mechanic resold the body work to the that the sales price of the sale of adver-customer by separately stating such tising services or the cost price of the usecharges on his invoice. In this case, the of advertising services furnished by themechanic acted as a broker and did not media should be apportioned to the stateconsiime the service rendered by the pro- based on the proportion of the Floridavider of the body work. On the other hand, market coverage to the total market cov-if a lawyer prepared a memorandum which erage of the service provider.he sent by courier to his client, the sale For example, if a business paid a na-for resale exemption would not apply to tionally-circulated magazine with tenthe charge for courier services, whether percent of its circulation in Floridaor not the lawyer separately billed his $100,000 to run its advertisement in theclient for such services. In this case, the magazine, the business would be obli-lawyer paid the tax because he consumed gated to remit a tax of $500 to Floridathe courier services as part of his service ([$100,000 service tax base] x [10% Flor-to his client-the timely provision of le- ida apportionment percentage] x [5% taxgal services. rate]). As in the case of other services that

2. Other Exemptions. Beyond the ex- were sold to business purchasers outsideemptions or exclusions from the sales and the state (based on cost of performance)use tax on services that were a function and used within the state, it was the pur-of its underlying structure (such as the chaser of the service, not the seller, whoexemption for services consumed outside was obligated to remit the tax to the state.the state and the exclusion of sales for re- And as in the case of other services, no


obligation to remit the use tax was im- confined to commodities; the tendency to do so . . .

posed if the purchaser of the service (the is more the product of historical accident than logic.The objective of sales tax is to distribute the costs of

advertiser) lacked nexus with Florida for Fovernmentalservicesin relation to consumer spend-tax purposes. Thus if a New York restau- ing, with the usual and reasonable assumption thatrant sporadically advertised in the na- the taxes are shifted forward by the firms from which

tional edition of The New York Times, the the tax is collected to the consumers of the products.Acquisition of service by households constitutes con-

restaurant would have had no obligation sumption expenditure in the same fashion as the pur-to remit the Florida service tax. Nor would chase of commodities; there is no basic difference be-

The New York Times have had any obli- tween the two that warrants different tax treatment.Consumers gain satisfaction fi-om services just as theygation to collect the tax because the saledo from commodities .29

of advertising, based on The New YorkTimes' costs of performance, presumably Moreover, as Due and others have rec-would be deemed to have occurred outside ognized, there are a number of affirma-the state. If the advertising was sold in tive reasons for including services withinthe state (i.e., if the greater proportion of the sales tax base." Greater revenue canthe advertising service was performed in be raised at a given tax rate; tax admin-the state based on costs of performance), istration is facilitated by relieving tax-the sales tax on the advertising service was payers and tax administrators of the bur-collected and remitted by the advertising den of distinguishing between taxablemedia provider. sales of tangible personal property and

The legislature also provided special- nontaxable sales of services; tax neutral-ized treatment for the transportation in- ity is increased by ending the discrimi-dustry and the construction industry. With nation against purchasers of goods vis-a-regard to the transportation industry, the vis purchasers of services; the responsive-sales or cost price of interstate or inter- ness (income elasticity) of the tax tonational transportation services appor- changing economic conditions will be en-tioned to the state was one-half the sales hanced; and the tax is less regressive be-or cost price if the point of origin was in cause expenditures on services rise as in-Florida and one-half the sales or cost price come rises -although this assumption hasif the point of termination was in Florida. been questioned."The specialized provisions relating the What, then, are the objections as a mat-construction industry were too complex to ter of principle to extending the sales taxsummarize here. In very general terms, generally to services? The primary objec-however, the tax was imposed on 50 per- tion is that broad-based taxation of ser-cent of the contract or cost price of new vices sweeps into the tax base purchasesconstruction and on the contract price, less of business inputs, which is undesirablethe amount paid by the prime contractor for a number of reasons. First, it is in-for buildings materials incorporated into consistent with the premise that a retailthe realty, for other than new construc- sales tax is a single-stage levy on the fi-tion. nal sales of goods or services to the con-

sumer. Insofar as business inputs are in-

IV. Tax Policy Considerationscluded in the tax base, it will causepyramiding of the tax burden on the finalconsumer purchase of goods or services

A. The Case for and Against Extending whose price embodies services that werethe Sales Tax to Services taxed at a previous stage of the economic

As a matter of theory, there is no eco-process. For example, on the reasonable

nomic distinction between goods and ser-assumption that business costs are gen-

vices that would justify imposition of aerally passed forward to the ultimate con-

sales tax on goods but not on services. ssumer, the cost of advertising or legal

John Due has observed,services purchased by Procter & Gamblewill constitute part of the price of the tube

there is no basic reason why sales taxes should be of Prell or box of Tide purchased by the


ultimate consumer. Under a broad-based on services on the ground that it taxesservice tax that reaches business inputs, business inputs is equally applicable to asuch advertising or legal services will be very large component of the existing salestaxed twice, once when purchased by Pro- tax on goods, and it would require a sub-ter & Gamble and again when the ulti- stantial restructuring of existing sales taxmate consumer purchases the Prell or the bases if taken to its logical conclusion.Tide whose price reflects the cost of those Other objections to taxing businessservices. purchases of services may not be equally

The difficulty with this argument, how- applicable to business purchases of goods.ever, is that it proves too much, at least The taxation of services purchased byif the present pattern of sales taxation of business-such as legal, accounting, andtangible personal property and selected information processing- might induce theservices is taken as the standard of com- business to provide those services in-houseparison. Despite the theoretical premise to avoid the burden of the tax. This wouldthat retail sales taxes are single-stage distort resource allocation and create alevies on consumer expenditures, busi- competitive advantage for businesses thatness purchases in fact make up a healthy provided their own services over those whoportion of most states' sales tax bases. purchased them from third partieS.36 TheThus it has been estimated that 58 per- problem is more acute in the context ofcent of Texas' sales tax is generated by services than goods because it is gener-business purchaseS32 and that in Illinois ally easier for businesses to provide forand Ohio 24 and 14 percent of their re- themselves the services that they pur-spective sales tax revenues come from chase from others than to produce fortaxes imposed on producers' goods .31 In themselves the goods they purchase fromFlorida, before the imposition of the broad- others. There may also be a more seriousbased sales tax on services, more than 25 problem with regard to the taxation of in-percent of sales tax revenue was derived terstate transactions involving business

34from purchases of producer's goods. purchases of services than comparableHence the objection to extending the sales transactions involving business pur-tax to service on the ground that it would chases of goods. The taxation of businesstax business inputs applies with equal purchases of services by a state may sim-force to existing sales tax bases that in- ply induce business to make those pur-clude substantial taxation of business in- chases in other states to the detriment ofputs." Indeed, no state has ever at- the local economy. Although a use tax ontempted to structure its sales tax to be a services, such as that provided by Florida,true uniform tax on consumer expendi- responds to this problem in the same waytures. To do so would require a signifi- that a use tax on tangible personal prop-cant narrowing of the sales tax base to erty deals with the analogous problempurchases for personal consumption and a raised by the out-of-state purchase ofcorresponding increase in the rate-per- goods, the difficulty of locating serviceshaps to politically unacceptable levels- in time and space may make enforcementto generate the same amount of revenue. of the use tax on services more difficult

This is not to suggest that the objection and result in substantial loss of revenueto taxing business purchases of services is and economic activity.ill-founded or that economists like Due,in making the case for extending the sales B. Use Tax on Servicestax to services, were focusing on anythingother than the purchases of services by The theory underlying a use tax on ser-households. Nor does it deny that existing vices is identical to the theory underlyingsales taxes on goods often provide specific the use tax on the sale of tangible per-exemptions for business purchases that sonal property. It is designed to counter-have no analogue in some proposed sales act the potential loss of business and rev-taxes on services, including Florida's. The enue the state might incur if in-statepoint is simply that the objection to a tax consumers of services sought to avoid the


tax by purchasing services from out-of- were general federal income tax advice andstate service providers. By imposing a use national advertising. Florida's provisiontax equal in amount to the sales tax that for apportionment of these non situs-spe-would have been imposed on the sale of cific services raises the question whetherthe services if the sale had occurred within such apportionment is necessary and, ifthe state's taxing jurisdiction, the state in not, whether it is wise.principle removes the incentive for local The argument that Florida was consti-consumers of services to purchase ser- tutionally compelled to provide for appor-vices outside the state. As two commen- tionment of its sales and use tax on ser-tators noted during the deliberations over vices is rooted in language in manythe structure of Florida's sales tax on ser- Supreme Court cases declaring that thevices: Due Process and Commerce Clauses of the

If all services provided in Florida become subject toConstitution require that taxes be "fairlyapportioned" to the taxpayer's activitiesthe sales tax, there should, for enforcement and sym 18

metry, be a complementary use tax on aU services in the taxing state. Despite such lan-provided to a Florida consumer. Without the tax also guage, the Supreme Court has never re-falling on in-state consumers of services rendered by quired apportionment of retail sales andout-of-state providen, tax avoidance would increase use taxes -at least in the sense of re-and in-state providers would be placed at a comi3eti-tive disadvantage. 37 quiring that the measure of the tax be di-

vided among different jurisdictions. RatherThe use tax provisions of Florida's tax the Court has intimated, although it has

on services were designed to implement never held, that states may be required tothis underlying theory. The use tax was give a credit for sales or use taxes im-complementary and ftmctionally equiva- posed by other states to solve the problemlent to the sales tax. It applied at the same of multiple taxation that would arise ifrate and with the same measure to ser- both the state of sale and the state of usevices that would have been taxable under imposed a tax with respect to the same

39the sales tax if they had been sold in the transaction. Since Florida effectivelystate. The legal predicate for imposing a provided a credit against its service taxuse tax on services is the same as the le- liability for sales or use taxes on servicesgal predicate for imposing a use tax on paid to other states, and thereby "avoid[ed]tangible personal property; just as the state the possibility"" of multiple taxation, ithas ample authority to impose a tax on would apparently have been on solid con-the use or consumption of tangible per- stitutional ground if it had chosen not tosonal personal property in a state so it has provide for apportionment of its sales taxthe power to impose a tax on the use or on services.consumption of services in a state. Al- A recent Minnesota case lends addi-though the notion of taxing the use of tional support to this conclusion. The tax-services purchased in other states may payer had purchased equipment in Northseem strange to the casual observer, it is Dakota on which he had paid a two per-no stranger in theory than the notion of cent sales tax, for use on a farm thattaxing the use of tangible personal prop- straddled North Dakota and Minnesota.erty purchased in other states. Sixty-eight percent of the land lay in

Minnesota. The taxpayer took the posi-

C. Apportionment of the Sales and Use tion that Minnesota's four percent use tax

Tax on Services should apply only to 68 percent of the costof the property with a credit for the North

One unusual feature of Florida's sales Dakota sales tax paid on that portion ofand use tax on services was that it pro- the property. The court held that thevided for an apportionment of the tax base Minnesota tax was applicable to the fullin connection with purchases by multi- purchase price of the equipment (reducedstate businesses of services whose benefit by the credit for the North Dakota saleswas not enjoyed within the confines of a tax paid on the full value of the property).single state. Examples of such services This was consistent with the Commerce

m m -

10 NATIONAL TAX JOURNAL [VOI. XLI

Clause because it avoided any multiple troversy. The media claimed that a tax onburden on interstate commerce and merely advertising services violated the First"[elqualized the positions of in-state and Amendment; the organized bar claimedout-of-state purchasers."" A taxpayer that a tax on legal services violated itspurchasing property in Minnesota and clients' constitutional right to assistanceusing it partially in North Dakota would of counsel; out-of-state purchasers of ser-pay the full Minnesota sales tax. vices claimed that the tax violated the Due

Despite the apparent absence of any Process and Commerce Clauses; and scoresconstitutional compulsion, Florida nev- of other objections were raised to the taxerthless provided for apportionment of its on federal and state constitutionalsales and use tax on services in certain grounds. In light of the repeal of Florida'scases, and the question remains whether sales tax on services, some of the lawsuitsit was wise to do so. As a matter of prin- challenging its validity have been settled,ciple, it is difficult to quarrel with the at- and others that were pending as this ar-tempt to limit the sales tax base to that ticle went to press are likely to be settledportion of a service that may reasonably soon. In many cases, the legal fees re-be considered as used or consumed in the quired to litigate these issues would ex-state. While national advertisers may have ceed the six months' of tax liability atyelled foul at the prospect of paying a tax stake, and, in any event, one must dis-to Florida based on the portion of adver- count the value of the potential judgmenttising expenditures corresponding to their by the probability of succeeding on theFlorida market coverage, imagine the hue merits. Examination of the principal le-and cry that would have arisen if Florida gal challenges that were directed againsthad sought to tax 100 percent of those ex- Florida's sales tax on services is nonethe-penditures if the advertising was used in less warranted. The issues raised are im-Florida, subject, of course, to a credit for portant in their own right, and they couldsales or use taxes levied on such adver- well emerge in other contexts in the fu-tising services by other states. ture.

If apportionment of generalized ser-vices purchased by multistate businesses A. Taxation of Advertising Services andmay therefore be regarded as a political The First Amendment(if not a constitutional) necessity for a statelike Florida that seeks to tax such ser- Of all the legal attacks on Florida's salesvices by reference to where they are con- tax on services, the claim that it violatedsumed rather than where they are pur- the First Amendment surely received thechased or performed, there is still the task most public attention. Whether this pub-of designing apportionment provisions that licity reflected the claim's power over theare administratively workable. Unless public imagination or the media's powersuch provisions can be designed and im- to determine what gets publicized is openplemented, the tax on services will fail as to question. In any event, it is a claim thata practical matter no matter how elegant merits-and, indeed, has been given-the theory of apportioning the service tax careful judicial scrutiny.base by reference to in-state consump- Although the First Amendment does nottion. Efforts to deal with some of the thor- immediately come to mind when one isr,Lier apportionment issues preoccupied the thinking about constitutional provisionsDepartment of Revenue in the months restraining state taxation, the amend-following enactment of the tax," and the ment does prohibit state taxes that dis-jury was still out on whether Florida had criminate against, or otherwise threaten,succeeded in designing and implementing first amendment interests. In Grosjean v.a workable apportionment scheme when American Press Co.," the Court struckthe legislature repealed the tax. down a Louisiana license tax of two per-

cent of the gross receipts from the sale ofV. Legal Controversies advertising by newspapers with a weekly

From its inception, Florida's sales tax circulation above 20,000. Out of 124on services was embroiled in legal con- newspapers in the state, only 13 were


subject to the tax, and all but one of those namely that it singled out a small groupwere political adversaries of Senator Huey within the press for adverse treatment.Long who dominated the state legisla- The Court went on to note that the dis-ture. In holding that the tax constituted crimination in Arkansas Writer's Projectan abridgement of the freedom of the press involved an even "more disturbing use ofin violation of the First Amendment, the selective taxation than Minneapolis Sta?148

Court declared that the tax "is bad be- because Arkansas differentiated amongcause, in light of its history and of its magazines based on their content. To de-present setting, it is seen to be a delib- termine whether particular publicationserate and calculated device in the guise were exempt from sales tax, eg., if theyof a tax to limit the circulation of infor- were devoted to sports or religion, Arkan-mation. ,44 sas officials would have to review them

In two more recent decisions, the Court for their content. "Such official scrutinyhas elaborated on the First Amendment of the content of publications as the basisrestraints on state taxation. In Minne- for imposing a tax is entirely incompati-apolis Star & Tribune Co. v. Minnesota ble with the First Amendment's guaran-

)749Commissioner of Revenue," Minnesota tee of freedom of the press.exempted periodic publications from its Relying on these authorities, media andgeneral four percent retail sales tax but media advertisers attacked Florida's salesimposed a four percent use tax on the cost tax, which indisputably applied to adver-of paper and ink consumed in the pro- tising services, as violating the Firstduction of publications. The Court held Amendment. Defenders of the tax re-that the tax violated the First Amend- sponded that the very same authoritiesment by discriminating against publica- that have invalidated taxes discriminat-tions in two respects. First, it singled out ing against the press made it clear thatthe press for differential tax treatment; the press was not immune from nondis-second, it targeted only a small group of criminatory state taxes. Thus in Gros-newspapers for taxation by exempting the jean, the Court observed that newspaperspurchase of the first $100,000 of paper and are not inunune "from any of the ordi-ink from the tax. "Whatever the motive nary forms of taxation for the support ofof the legislature in this case, we think the government."50 In Minneapolis Star,that recognizing a power in the State not the Court declared that "[ilt is beyondonly to single out the press but also to tai- dispute that the states and the Federallor the tax so that it singles out a few Government can subject newspapers tomembers of the press presents such a po- generally applicable economic regula-tential for abuse that no interest sug- tions without creating constitutionalgested by Minnesota can justify the problems ,5' and that "our cases have con-scheme.""' sistently recognized that nondiscrimina-

In 1987, the Court revisited the ques- tory taxes on the receipts or income oftion of state taxation of the press in Ar- newspapers would be permissible."" Andkansas Writers'Project, Inc. v. Ragland. 17 in Arkansas Writers' Project, the CourtArkansas imposed its retail sales tax on reiterated that the press "can legiti-general interest magazines but exempted mately be subject . . . to generally appli-newspapers and religious, professional, cable economic regulations.""trade, and sports journals. The publisher The essential First Amendment contro-of a general interest magazine challenged versy over the application of Florida's taxthe tax on the ground that the levy dis- to advertising services thus boiled downcriminated against the press because, as to the question whether the tax discrim-a result of the exemptions, it was the only inated against the press. The taxpayersArkansas publication that paid sales tax. alleged that it did, citing the fact thatRelying on its decision in Minneapolis many services were exempt from taxationStar, the Court declared that the Arkan- and that advertising was therefore beingsas scheme was discriminatory in the same singled out for invidious treatment. Theway that the $100,000 exemption in the state responded that it did not, citing theMinnesota tax was discriminatory- fact that over 70 percent of potentially


taxable services were included in Flori- Bel for per-sons accused of crimes." Law-da's service tax base and that advertising yers representing criminal defendantsmade up only 4.7 percent of the revenues claimed that Florida!s sales tax on ser-derived from the sales tax on services and vices, which generally applied to all feesa mere 1.4 percent of the overall esti- for legal services,'o unconstitutionallymated 1987-88 sales tax base .14 burdened the right to counsel. In its ad-

Although the dispute may never be de- visory opinion to the Governor, the Flor-finitively resolved in light of the repeal ida Supreme Court had little difficultyof Florida's tax, the Florida Supreme Court disposing of these contentions. It notedindicated in an advisory opinion to the that the right to counsel is violated onlyGovernor that it was unpersuaded by the when access to an attorney is impeded ortaxpayers) argument." Relying on per- when the attorney's ability to consult with,centage figures cited in the preceding advise, or defend his client is hindered. 61

paragraph, the court found that the tax Because Florida@s tax did not apply to ser-had not singled out either advertisers or vices provided for free or by counsel ap-the press for discriminatory treatment. Nor pointed for indigents, and thus only ap-did the tax run counter to the three Su- plied to those who could afford to retainpreme Court opinions discussed above: counsel and pay the tax, the court con-

Unlikethe statute consideredin Grosjeanand Min- cluded that the tax did not have the pro-neapolis Star, [the Florida tax) does not impact only hibited effect.a select few advertisers or publications. Moreover, not Lawyers' groups also alleged that Flor-only does it apply to the overall industries, it is part ida!s sales tax on services unconstitution-of the same general sales tax provision that will ap- ally discriminated among the provision ofply to all other nonexempt businesses involved in thesale or use of services in Florida. Thus, the instant various legal services in violation of fed-tax is wholly dissimilar to the use tax on ink and pa- eral and state equal protection guaran-per considered in Minneapolis Star. Indeed, the in- tees." The Florida Supreme Court foundstant tax does exactly what the Supreme Court ap- that the lines drawn by the Florida leg-proved and criticized Minnesota for failinq to do, i.e.,extend the general sales tax to the press. 6 islature among various legal services did

not violate equal protection strictures.Moreover, unlike the tax struck down in Legal services were taxed under the gen-Arkansas Writers'Project, Florida's tax did eral taxing provisions of the statute andnot discriminate among publications on were not singled out for separate treat-the basis of content. The institutions ex- ment. Nor did the individual exemptionsempt from taxation on the advertise- provided for particular types of legal ser-ments they purchased and disseminated vices alter the act's nondiscriminatorywere exempt from taxation on all their character in light of the broad power en-sales and purchases that would otherwise joyed by the states in making classifica-be taxable under a sales and use tax on tions for tax purposes, so long as the clas-goods and services. Hence, in contrast to sification is "rationally related to athe tax at issue in Arkansas Writers' legitimate state purpose."' The lines theProject, Florida's tax "does not require an legislature drew-exempting legal ser-evaluation of a publication's content in vices provided to indigents, government,order to determine its status for taxation nonprofit entities, and employers-werepurposes."" Although the case law re- "necessary for consistency with the over-garding taxation of the press is not vo- all act . . . [and] to satisfy other consti-luminous, recent decisions of other state tutional requirements or social policycourts tend to support the Florida Su- considerations.,,64 Hence the taxationpreme Court's conclusion.5' scheme as applied to legal services was

rationally related to a legitimate state

B. Taxation of Legal Services, the Right purpose and therefore passed constitu-

to Counsel, and Equal Protection tional muster.Despite the views of the Florida Su-

The United States and Florida Consti- preme Court expressed in its advisorytutions both guarantee the right to coun- opinion to the Governor, a Florida county


judge held that the sales tax on services ucts to retailers in Florida, where theywas unconstitutional as applied to legal were sold to the ultimate consumer. As-services .65 The judge found no reasonable sume also that the out-of-state manufac-basis for the distinctions drawn by the turer systematically advertised its prod-legislature between various services, and ucts over national television and throughdemanded rhetorically: nationally-circulated magazines, five per-

cent of whose market coverage was inCan it be said that a person with a toothache needs Florida. The advertising was not "sold" in

• dentist any more or less than a person charged with• crime needs an attorne3O Can it be said that at, in- Florida because, presumably, the adver-dividual who sustains a serious permanent personal tising service was performed elsewhere.iajury in a motor vehicle accident needs a physician However, the advertising was "used" into treat his injuries any more or less than he needs the state insofar as the cost of advertisingan attorney to represent him in his claim for damagesagainst the tortfeasor arising from the same idju- Was apportioned to the state under theries'@"' market coverage formula. Since the out-

The judge also found that the state couldof-state advertiser was required to remitthe tax on advertising sold outside but

not impose a tax on legal fees charged for used within the state, the question thencriminal defense work because "the State became whether Florida had a sufficientmay not through taxation exact a price for nexus with the taxpayer to require it tothe exercise of that constitutionally pro- remit the tax due on the advertising ser-tected right."" The judge's decision has vices that it used in Florida.been appealed to the Florida Court of Ap- The taxpayers claimed that nexus forpeal. Due Process and Commerce Clause pur-

poses required the physical presence of the

C. Due Process and Commerce Clause taxpayer in the state and that any view

Issues of nexus dispensing with the physicalpresence requirement would result in an

Taxpayers challenged the validity of unconstitutional application of the tax. ForFlorida's sales and use tax on services un- this proposition, they relied principally onder the Due Process and Commerce the Supreme Court's 1967 decision in Na-Clauses. Their principal contentions were tional Bellas Hess, Inc. v. Department ofthat the levy attempted to impose an ex- Revenue," which held that a state had noaction on taxpayers or transactions lack- jurisdiction to impose a use tax collectioning nexus with the state and that the tax obligation on an out-of-state mail-orderwas not fairly apportioned to the taxpay- seller without physical presence in theers' activity in the state. The Florida Su- state.preme Court did not address these issues The state responded that the require-in its advisory opinion to the Governor ment of the physical presence of the tax-because they were "wholly fact specific"" payer in the jurisdiction before he can beand, in some instances, because they raised subjected to the coercive power of the statequestions exclusively of federal law. was outmoded. It pointed out that the re-

1. Nexus. The critical nexus questions quirement of physical presence as a pre-spawned by Florida's services tax arose in requisite to the state's assertion of per-connection with the use tax on services. sonal jurisdiction over an out-of-stateThe use tax was imposed whenever ser- defendant had been repudiated. As thevices that were not sold in the state were Court declared in its 1985 decision innevertheless used (i.e., consumed or en- Burger King v. Rudzewicz:"joyed) in the state. The fundamental issue

[Ilt is an inescapable fact of modem commercial lifewas most clearly illustrated by the case that a substantial amount of business is transactedof national advertising. Assume that an solely by mail and wire communications across stateout-of-state manufacturer, with no phys- lilies, thus obviating the need for physical presence

ical presence in Florida, wholesaled its " thin a State in which business is conducted. So longm a commercial actor's efforts are "purposefully di-

products to independent distributors out- rec,.ed" toward residents of another state, we haveside of Florida who in turn sold the prod_ consistently rejected the notion that an absence of


P"Y"ical contacts can defeat personal jurisdiefian vertising space by a publisher of a mag-th@@-@.'l azine distributed in various states. In soApplying this reasoning to the out-of-state holding, the Court observed that there wasadvertiser, the state argued that where no violation of the multiple taxation doc-an advertiser has sought systematically trine because the activities associated withand extensively to exploit the Florida the publisher's sale of advertising space,market, thereby "purposefully directing upon which the tax was imposed, could notits efforts toward residents of another be taxed by other states because all of

,,12state, the taxpayer could be subjected those activities occurred in New Mexico.to a Florida use tax related to its exploi- Since Florida was seeking to tax thosetation of the market-just as that tax- same receipts insofar as they reflectedpayer could be subjected to the jurisdic- advertising services used in Florida, thetion of the Florida courts for any claim multistate business was allegedly sub-arising out of its purposeful exploitation jected to a risk of multiple taxation in vi-

73of the market. It remains to be seen olation of the Commerce Clause.whether the Court is ready to abandon the The state's response was that the Court'sphysical presence requirement of Na- holding that only New Mexico could taxtional Bellas Hess and to incorporate into the publishe7-s sale of advertising ser-its state tax jurisprudence the more lib- vices in New Mexico did not precludeeral standards that it had embraced in Florida from taxing the advertiser's use ofdelineating the constitutional restraints those services in Florida. In the state'son state court jurisdiction. view, Florida@s provision of a credit for

2. Fair Apportionment. The Due Pro- sales or use taxes imposed by other statescess and Commerce Clauses both require on services performed there eliminated thethat a tax be fairly apportioned to the possibility of multiple taxation. It therebytaxpayer's activities in the taxing state. solved the multiple taxation problem withAs noted above, Florida provided rules in which Western Live Stock was con-a number of situations for apportioning cerned."the service tax base to the state. It is un-likely that these rules would be found un- VI. The Repeal of Florida's Salesconstitutional on their face. Indeed, while Tax on Servicesthe Supreme Court has declared that anapportionment

7formula may be inher- The storm of controversy surrounding

ently arbitrary, ' not once in its history Florida's sales tax on services did not sub-has it declared that a state apportion- side with its enactment and implemen-ment formula is unconstitutional on its tation. Indeed, it intensified. Spear-face." Whether Florida's rules in appli- headed by national advertisers andcation have resulted in unfair apportion- advertising media, taxpayers launched ament in particular cases, as taxpayers al- vigorous and well-financed campaign toleged, are questions that in all probability repeal the tax. Some of the nation's larg-will remain unanswered-at least by the est advertisers -including Coca-Cola,courts-in view of the repeal of the tax. General Foods, Kraft, Lever Brothers, and

There was, however, one issue related Procter & Gamble-canceled or reducedto fair apportiorunent whose resolution did their advertising in Florida to protest thenot depend on a particularized factual in- tax. Media trade associations, includingquiry. Taxpayers claimed that Florida's the Magazine Publishers Association andtax on services performed elsewhere but the Television Bureau of Advertising, wereused in the state subjected them to an un- among the business groups that ex-constitutional risk of multiple taxation. pressed their displeasure with Florida!s taxIn particular, they pointed out that West- by canceling at least 60 conventions theyern Live Stock v. Bureau of RevenUe,7' had booked in the state. Advertisers andwhich articulated the multiple tax bur- the media were joined by lawyers, real-den doctrine, held that New Mexico could tors, and homebuilders in assailing the tax.tax amounts received from the sale of ad- United under the acronym STOP (Sales

No. 1] FLORIDA'S SALES TAX ON SERVICES 15

Taxes Opressing People), tax protesters FOOTNOTES

poured Lipton's Instant Tea into Florida'sharbors to rekindle memories of a tax **In the interest of full disclosure, it should be noted

protest some two centuries earlier. that I played a significant role in drafting Florida'ssales tax on services and that I served as counsel toOnce the tax became effective July 1, the Florida Department of Revenue in connection with

1987, confusion over the scope of the tax its legal defense of the statute. The views expressed

and difficulties encountered by taxpayers in this article are my own, however, and do not riec-

who sought to comply with it added to the essarily reflect the views of the Florida Departmentof Revenue. In preparing this article, I have drawnswell of public indignation. Some thought freely from Walther HeBerstein, Extending the Sales

the tax covered medical services, which Tax to Services: Notes From Florida, Tax Notes, Feb.

created understandable consternation 23, 1987, P. 823, and Walter Hellerstein, A Primer on

among Florida's elderly population Oth- Florida's Sales Tax on Services, Tax Notes, June 22,1987, p. 1219. 1 would like to acknowledge the helpftil

ers were uncertain whether the tax ap- comments of two anonymous reviewers of an earlierplied to their services and were unclear draft of this article.over their collection responsibilities. Mul- 'In 1986, general sales taxes accounted for 32.8 per-

tistate businesses claimed that it wascent of the tax revenue collected by all the states. U.S.Bureau of the Census, State Government Tax Collec-

simply impossible to comply with the rules tions in 1986 1 (1987). Individual income taxes, whichfor apportioning the sales tax base, par- accounted for 29.6 percent of state tax revenue, ranked

ticularly when a purchase was made by second. Id.

one member of an affiliated group of cor-ohn F. Due and John L. Mikesell, Sales Taxation

83(1983).porations. 3Mariy states tax public utility services, hotel and

Responding to the public outcry against motel services, and admissions. Id. at 83 98. See also

the tax (and, perhaps, to a dramatic drop Timothy E. Marx, Sales Taxation in the Servi(-e and

in his public approval rating), Governor Information Economy, 7 Hamline L. Rev. 19, 21 23(1984).

Martinez, whose initial support of the sales 4Hawaii, New Mexico, and South Dakota have =edtax on services was critical to its enact- the sale of a broad range of services for a number ofment, reversed course. In late August years. Iowa also taxes more services than most other

1987, the Governor called for a public ref-states. See Note, State Revenue System: Impact of theTax on Services in Iowa, 54 Iowa L. Rev. 64 (1968).

erendum on the tax while claiming to 'John F. Due, Proposed Application of the Illinoissupport it personally. By mid-September Sales Tax to Services, 44 111.Bus. Rev., No. 3, p. 3

he had taken a position squarely in favor (June 1987); Due and Mike8ell, supra note 2, at 88

of outright repeal. Two monthsof politi_ 89; Jerome R. Hellerstein, Significant Sales and Use

Tax Developments During the Past Half Century, 39cal wrangling followed during which the Vand. L. Rev. 961, 964-65 (1986); Daniel C. Morgan,legislature met in special session on seV- Retail Sales Tax 127 (1964)

eral occasions. In early October, the leg- &'Florida Extends Its 5% Sales Tax Past State Line,"

islature passed a bill that would have New York Times, Apnl 25, 1987, P. 1, col. 5. The ac-tion was widely reported in other national media as

modified the tax in a number of respects well(most significantly by removing advertis- 'See the introductory footnote ["*] to this article.ing services from the tax base), but the 8FIa. Const. aft. VII, § 5 (a).

Governor vetoed the bill. On December 11, 91n 1986, Florida derived 55.1 percent of its staterevenue from the general sales tax. U.S. Bureau of

1987, the Florida legislature enacted leg- the Census, State Government Tax Collections in 1986islation, which was immediately signed 6(1987).by the Governor, raising the sales tax rate lostate Comprehensive Plan Committee, Keys to

from five to six percent and repealing theFlorida's Future: Winning in a Competitive World I-4,6 8 (1987).

sales tax on services effective January 1, "Ch. 86-166, § 3, 1986 Fla. Laws 816, 819. For a181988 .

detailed consideration of the legislative history of theIt is too early to predict whether Flor- tax, as well as an exploration of the legal questions

ida'E; sales tax on services will be remem-it raised, see Robert A. Pierce and Carol D. Peacock,Broadening the Sales Tax Base: Answering One Ques-

bered as a brief and isolated experiment tion Leads to Others, 14 Fla. St. U.L. Rev. 463 (1986).in state fiscal policy or as the harbinger "Ch. 86 166, § 8, 1986 Fla. Laws 816, 825, repealof a movement toward expanding the sales inf, Fla. Stat. § 212.09 (7) (d).

tax to services. In either event, we will be 3Gen. App-p. Act, Ch. 86-167, 11, line 1588A, 19w)Fla. Laws 1058. The Revenue Estimating Conference,

feeling its aftershocks for some time to which is composed of representatives of the executivecome. and legislative branches, is required by law to "de-


velop such official information with respect to antic- state by multiplying the apportionable tax base timesipated state and local government revenues as the a fraction reflecting the taxpayees property, payroll,conference determines is needed for the state plan- and sales in the state divided by the taxpayer's prop-ning and budgeting system." Fla. Stat. Ann. §216.136 erty, payroll, and sales everywhere. Fla. Stat. §§214.71,(3) (Supp. 1986). 220.15 (4) (Supp. 1986). The sales factor is double-

"Ch. 86-166, § 9, 1986 Fla. Laws 816, 826. weighted, so the fraction is composed of a sales factor"Florida Department of Revenue, Report to the representing 50 percent of the fraction and a property

Florida Leg@slature. Legal, Administrative and Rev and payroll factor each representing 25 percent of theenue Implications of Chapter 86-166, Laws of Flor- fraction. Id.ida: Repeal of Sales Tax Exemptions for Services and 'This is not to suggest that each one of the ex-Selected Transactions (1987). emptions granted by the legislature can be logically

"Walter Hellerstein, Prentiss Willson, Jr, and Mor- explained other than by reference to the political powerrison & Foerster, Legal Study of Florida's Sales Tax of the those benefiting from the exemption in queson Services (1987). The legal study was included in tion.the Department of Revenue's Report to the Legisla- 'John F. Due, Proposed Application of the Illinoisture. See note 15 supra. Sales Tax to Services, 44 111. Bus. Rev., No. 3, p. 3

"Among other things, the legal study concluded that (June 1987).Chapter 86-166 raised problems of (1) unconstitu- "See id. at 3-4; Due and Mikesell, supra note 2, attional delegation of legislative power to executive 88-89; Robert N. Schoeplein, Some Perspectives in theagencies, (2) unconstitutional imposition of a tax upon Sales Taxation of Services, Proceedings of the Sixty-the income of natural persons, and (3) confusion and Second Annual Conference of the National Tax As-uncertainty over the meaning of the phrase "5 per- sociation 167, 169 (1970); Morgan, supra note 5, atcent of the consideration for performing or providing 127(1964).any service." Id. For a more sanguine view that "As John Due has recently noted:Chapter 86-166 would have passed constitutional R is also commonly argued that the taxamuster notwithstanding Florida's prohibition on in- tion of services would make the tax less re-come taxes on natural persons, see Joseph W. Jacobs, gressive or more progressive, since the portionFlorida's New '7nconw" Tax, 14 Fla. St. U.L. Rev. 491 of income spent on services rises as income(1986). rises. This argument would be valid if, in fact,

"The agreement between the Department of Rev- all services could be taxed, but some of the mostenue and the consultants that were retained to pre- progressive ones, relative to income, cannot bepare the legal analysis provided that "fnlo substan- reached: foreign travel, expensive educationtive changes to Chapter 212 [the preexisting sales tax] out of state, personal/household services, andoutside 86 116 are to be made. The only changes to the like. Various studies suggest that on theexisting (Chapter 212) language will be those re- whole taxing services does not significantlyquired to interface the Chapter 86-166 annotated re- alter the distributional pattern, and taxationvisions into Chapter 212." Hellerstein, Willson, and of some types will make the tax more regres-Morrison & Foerster, supra note 16, at 59 (emphasis sive.in original). Due, supra note 30, at 4; see also David G. Davies,

'91d. at 106. The Significance of Taxation of Services for the Pat-'Florida Sales Tax Exemption Study Commission, tem of Distribution of Tax Burden by Incorm Class,

Report and Recommendations of the Sales Tax Ex Proceedings of the Sixty-Second Annual Conferencee,npt"wn Study Commission (1987). of the National Tax Association-Tax Institute of

'Id. at 3-4. America 138 (1970); William F. Fox and Matthew22chapter 87-6, 1987 Fla. Laws 9. Murray, Economic Aspects of Taxing Services, which23Chapter 87-101, 1987 Fla. Laws 842. The provi appears elsewhere in this issue of the National Tax

sions of a more limited "glitch" bill enacted earlier in Journal.the session, Chapter 87 72, 1987 Fla. Laws 273, were "Due and Mikesell, supra note 2, at 321 n. 2 (citingincorporated in Chapter 87 101. Office of Planning and Research, Texas Comptroller

'The provisions of Florida's sales tax on services of Public Accounts, Fiscal Notes, May 1, 1979, p. 1).are found in Chapter 87 6, 1987 Fla. Laws 9, as 'Id. (siting Richard F. Fryman, Sales Taxation ofamended by Chapter 87 101, 1987 Fla. Laws 842. Ex- Producers Goods in Illirwis, 22 Natl Tax J. 273 (1969)cept in instances in which particular language of the and an estimate supplied by the Ohio Department ofstatute is being quoted, references to specific statu- Revenue). The Illinois percentage set forth in the texttory provisions will not be given. For ease of refer- may overstate the current percentage of the sales taxence, all statutory citations in the footnotes are to the base attributable to business purchases in light of theprovisions as they were designed to appear in the expansion of industrial sales tax exemptions in theFlorida st@tutes in codified form. Because the stat- state since the study was published.utes were not yet available when this article went to 'Information Package, Exhibit 9, p. 5, prepared bypress, it is possible, though not likely, that some of the Department of Revenue for the December 17, 1986the section numbers designated by the legislature have meeting of the Sales Tax Exemption Study Commis-been changed by the official statutory reviser. sion (see text following note 14 supra); Charles E.

"Fla Stat. § 212.059 (2) (emphasis supplied). Rockwood, Edgar A. Fresen, and James Francis,2'Fla. Stat. § 212.0592 (1) (b) (sales tax) and § 212.059 Broadening the Sales Tax Base to Include Services:

(2) (use tax). The Florida Experience, Paper Presented at the 80th27Under its corporate income tax, Florida generally Annual Meeting of the National Tax Association-Tax

apportions the income of a multistate business to the Institute of America, p. 3 (November 1987).


'r'Fox and Murray, supra note 31, cite additional of the individual justices, offered for the Gov-studies revealing the large portion of the sales tax emor's guidance in the performance of his orbase reflecting purchases of producers' goods. her constitutional duties. The opinions ex-

"Such distortion could be avoided, however, if a tax pressed in these advisory opinions do not con-was imposed on the in-house provision of services as stitute decisions of the Florida Supreme Courtis imposed on the production of tangible personal and, therefore, are not binding in any futureproperty for in-house use in some states. See Fla. Stat. judicial proceedings. Moreover, because by na-

212.06 (1) (b). ture an advisory opinion is rendered without"Pierce & Peacock, supra note 11, at 479. the benefit of a record or a specific factual sce-'See, eg., Moorman Manufacturing Co. v. Bair, 437 nario, when such an opinion discusses the con-

U.S. 267 (1978) (Due Process Clause); Complete Auto stitutionality of a statute, it is necessarilyTransit, Inc. v. Brady, 430 U.S. 274 (1977) (Com- limited to the facial constitutionality of themerce Clause). enactment. Thus, in the case of the instant tax

"See Williams v. Vermont, 472 U.S. 14, 22 (1985); on the sales and use of services, any inter-International Harvester Co. v. Department of Trea- ested parties are free to initiate law suits tosury, 322 U.S. 340, 349-62 (1944) (Rutledge, J., con- challenge the tax and are free to argue thatcurring). this advisory opinion has either been wrongly

4OHenneford v. Silas Mason Co., 300 U.S. 577, 587 decided or that the act is unconstitutional as(1936). applied to their particular situations.

4'Miller v. Commissioner of Revenue, 359 N.W 2d Id. at 302. The court also noted that it was precluded620, 622 (Minn. 1985). Other cases have likewise re by the constitutional limits on the scope of an advi-jected the argument that sales and use taxes must be sory opinion from dealing with federal constitutionalapportioned, and they have indicated that the credit issues, but it observed that with the exception of themechanism is sufl'icient. See Goldberg v. Johnson, 117 Supremacy Clause and the Commerce Clause, Flori-111.2d 493, -N.E. 2d -(1987); Great da's constitution contained clauses similar to the fed-American Airways v. Nevada State Tax Commission, eral constitutional provisions on which the opponents101 Nev. 422, 705 P. 2d 654 (1985), cert. denied, 107 of the tax relied in their challenges to it (includingS. Ct. 74 (1986). the First Amendment). Id. at 302 n. 2.

"Perhaps the most difficult apportionment issue 'Advisory Opinion, 509 So. 2d at 305.raised by Florida's sales tax on services concerned the -71d. at 308.treatment of purchases of apportionable services by a "See Catholic Archdiocese of Denver v. City andmember of an affiliated group of corporations. See Fla. County of Denver, 741 P. 2d 333 (Colo. 1987) (tax onStat. § 212.02 (2) (defuiing "affiliated group"); Fla. Stat. newspapers not unconstitutional "tax on knowl-§ 212.0591 (9) (b) 4 (making the affiliated group the edge"); Times MuTor Co. v. City of Ios Angeles, 192purchaser for purposes of apportioning non situs-spe- Cal. App. 3d 170, 237 Cal. Rptr. 346 (1987), reviewcific services). The Department of Revenue issued denied, (Sept. 3, 1987) (upholding city business tax onregulations in September 1987 addressing, among newspapers); Bullock v. Texas Monthly, Inc., 731 S.other things, questions relating to the election to ex W. 2d 160 (Tex. Civ. App. 1987) (upholding sales taxelude members of the affilated group provided in Fla. on general interest magazine despite exemption of re-Stat. § 212.02 (2); the requisite nexus between Florida ligious periodicals published by religious organizaand members of the ani iated group; the obligation tions); but see Louisiana Life Ltd. v. McNamara, 504to collect and remit taxes by members of the affili So. 2d 900 (La. Ct. App. 1987) (invalidating generalated group; and the determination of the appropriate sales tax imposed on retail sale of magazines but notapportionable tax base of the afriliated group. See DOR of newspapers).Emerg. Rule 12AEIW7-92. "U.S. Const. amend. VI (which has been held to ap-

'3297 U.,9 233 (1936). ply to the states by virtue of the Fourteenth Amend'4Id. at 25() ment, U.S. Cons. amend. XIV); Fla. Const. art. 1, § 16.15460 U.S. 575 (1983). 6OAn exemption from the tax on legal services was461d. at 591 92. provided, however, for legal services guaranteed by17 107 S. Ct. 1722 (1987). either the United States or Florida Consitutions, see"Id. at 1727. note 59 supra, when the criminal charges brought'9Id. at 1728. against the defendant are dismissed or if the defend-'oGros'lean. 297 U.S. at 250. ant is acquitted. Fla. Stat. § 212.0592 (27) (a). The5'Minneapolis Star, 460 U.S. at 581. Florida Supreme Court expressed its "concern" about'2Id. at 587 n. 9. the wisdom of this provision and suggested that the13 Arkansas Writers' Project, 107 S. Ct. at 1727. true test of its validity would come when individual"See Brief of the Florida Senate and the Florida defendants challenged it, but declineed to find this

House of Representatives A-3, A-4, In re Advisory aspect of the tax facially unconstitutional. Advisory

0inion to the Governor, 509 So. 2d 292 (Fla. 1987). O@inwn, 509 So. 2d at 303-04.

@'In re Advisory Opinion to the Governor, 509 So. 'Advisory Opinion, 509 So. 2d at 302 (citing United2d 292 (Fla. 1987). The opinion was issued in re States v. Cronic, 466 U.S. 468 (1984)).sponse to the Governor's request to the Justices of the

62U.S. Const. amend. XIV; Fla. Const. art 1, § 2.Florida Suprerne Court that they providl@ him with OSee, eg., Western & Southern Life Ins. Co. v. Statetheir advice regarding the facial constitutionality of Bd. of Equalization, 451 U.S. 648, 668 (1981).

Florida's sales tax on services. Describing the nature 'Advisory Opinion, 509 So. 2d at 303.

and impact of an advisory opinion, the court stated:65

State v. Wood, No. CTC87-87221PMANC, Pinel-

[Aldvisory opinions are merely legal opinions las County Court, Sixth Judicial Circuit, Sept. 17, 1987.


'6Id. at 2. 380 U.S. 553 (1965), the Court did strike down the"Id at 2-3. District's single-factor sales formula for apportioning'Advisory Opinwn, 509 So. 2d at 305. net income as invalid on its face, but that was based69386 U.S. 753 (1967). on an interpretation of the District's statute. In up-'0471 U.S. 462 (1985). holding Iowa's single-factor sales formula in Moor-"Id. at 476. man Manufacturing Co. v. Bair, 437 U.S. 267 (1978),721d. the Court made it clear that its decision in General7'Scholarly support for this view can be found in Motors was not constitutionally based.

Paul J. 14artman, Collection of Use Tax on Out.Of- 76303 U.S. 546 (1938).State Mail-Order Sales, 39 Vand. L. Rev. 993 (1986) 17 See Tyler Pipe Industries, Inc. v. Washington De-and Sandra B. McCray, Overturning Bellas I-Iess: Due partment of Revenue, 107 S. Ct. 2810, 2819, 2821Process Considerations, 1985 B.Y.U.L. Rev. 265. (1987) (indicating that a credit for taxes paid to other

'Underwood Typewriter Co v. Chamberlain, 254 states eliminates the exposure of the interstate busi-U.S. 113, 121 (1920); flans Rees' Sons, Inc. v. North nei3s to multiple ta-xation)Carolina ex rel. Maxwell, 283 U.S. 123, 133 (1931). "'Ch. 87--, l4s7 Fla. Laws (SB 5-D) (Dec. 11,

'In General Motors Corp v District of Columbia, 1987).

14

Documents

FLORIDA'S SALES TAX ON SERVICES** - ntanet.orgntanet.org/NTJ/41/1/ntj-v41n01p1-18-florida-sales-tax-services.pdf · FLORIDA'S SALES TAX ON SERVICES** WALTER HELLERSTEIN* ABSTRACT

FLORIDA'S SALES TAX ON SERVICES - ntanet.orgntanet.org/NTJ/41/1/ntj-v41n01p1-18-florida-sales-tax-services.pdf · FLORIDA'S SALES TAX ON SERVICES WALTER HELLERSTEIN* ABSTRACT