GrayRobinson Taxation E-lert: Florida Enacts Economic Nexus Giving an Advantage to Brick and Mortar Businesses in the State

By: Seth Cohen, Of Counsel | May 26, 2021

Florida Governor Ron DeSantis recently signed legislation imposing a sales tax collection responsibility on remote vendors and marketplace providers based upon a theory of economic nexus. By doing so, Florida joins every other state that also imposes a sales tax, with the exception of Missouri.

Economic Nexus
What is economic nexus and what does it mean to me? Importantly, it is not a new tax but rather a mechanism for ensuring that the state collects tax on sales by placing the burden for collection on certain remote vendors and marketplace providers (read: Amazon and its ilk) selling into Florida. The result? Our Florida businesses will be on more even footing with those from out-of-state, the state is expected to gain $1 billion in revenue, and it will be easier for Floridians to remain compliant with our sales tax laws.

Sales/Use Tax
While nearly all adults are familiar with the concept of sales tax, few of us understand the concept of a use tax. Use tax is due on the in-state use or consumption of taxable goods and services when sales tax was not paid at time of purchase. This most often occurs when taxable items were purchased out-of-state and shipped into Florida or, less often, purchased in Florida without sales tax.

People are generally unfamiliar with this concept because in large part, they do not comply with use tax law. Enforcement is challenging for the state because chasing individual purchases with mostly small dollar collections is not efficient. However, larger purchases and groups of purchases may be found from those in business who tend to find out about use tax when the Florida Department of Revenue (FDOR) shows up and performs an audit of their purchases (most frequently as a part of a more general sales tax audit).

At the end of the audit, the FDOR will tally up all taxable items (e.g., appliances, computers, electronics, certain construction materials, etc.) purchased free of sales tax and assess the tax, interest and, frequently, penalties. With the combination of fees to professionals, interest, and penalties on the assessed amount, the results are painful and can be debilitating to any business, especially to those struggling in these trying economic times.

Why the Change?
In 2018, the U.S. Supreme Court decided a case called South Dakota v. Wayfair, Inc (Wayfair). Before Wayfair, in order to force a remote vendor to collect sales tax, there needed to be some physical presence within a state or a connection to the state. Wayfair changed all that. Now, the concept of economic nexus has been given legs and nearly every single state in the Union (except Missouri) that has a sales tax has instituted legislation establishing Wayfair-type nexus rules.

It is a perfect storm for the states. First, this is not a new tax that comes with political cost. Use tax has been the enforceable inverse of sales tax. Second, it enforces the law without the cudgel and stigma of audit, professional fees, interest, and penalties on assessments. Third, and some think most importantly, it helps even the playing field between giant internet vendors and small to large local brick and mortar stores with their local jobs and investments in neighborhoods. With this new law, there will be much less of the approximate 6 percent incentive to buy online (with its savings, but all of its risk of audit assessments). Florida businesses should see an increase in sales.

What exactly is the change?
Vendors who sell enough goods into Florida but who have no real physical connection will be forced to collect and remit sales tax…it’s that simple. For the detail-oriented folks, the law goes into effect on July 21, 2021 and if a vendor sold more than $100,000 into Florida in 2020, then that vendor must register and begin collecting and remitting Florida sales tax. There are several provisions in the law that provide for safe harbors that relieve the vendor of tax, interest, and penalty due on sales prior to July 1, 2021 so long as it has registered by October 1, 2021 and certain conditions are met.

As is generally the case with these types of evolving, complicated tax issues, states can be willing to help those who realize they made a mistake and who voluntarily attempt to correct their mistake by disclosing the same to the state. Florida has a long-standing voluntary disclosure law (authorized by statute) that removes penalties for those who do so. However, speaking to an experienced tax professional prior to attempting a disclosure is highly advisable as this path is fraught with dangers.

Good or Bad?
Florida-based businesses should be delighted as a competitive disadvantage has been stripped away. Florida will be happy because from a political standpoint, there is no new tax, and they are expected to receive an increase in revenue of $1 billion. Florida purchasers will have to pay the use tax, but the paperwork and payment will be conveniently handled by the vendor. Floridians who didn’t realize use tax payments were required by law will not be subject to the risk of a punishing use tax audit with its costs. When looking at the big picture, it certainly seems to be a win for Florida.