        DISTRICT COURT OF APPEAL OF THE STATE OF FLORIDA
                              FOURTH DISTRICT
                               July Term 2014

                   AMERICAN BUSINESS USA CORP.,
                            Appellant,

                                      v.

                      DEPARTMENT OF REVENUE,
                             Appellee.

                              No. 4D13-1472

                            [November 12, 2014]

  Appeal from the State of Florida, Department of Revenue; L.T. Case No.
2013-005FOF.

   Michael D. Sloan, David B. Esau, and Dean A. Morande of Carlton
Fields, P.A., West Palm Beach, for appellant.

   Pamela Jo Bondi, Attorney General, Jeffrey M. Dikman, Senior
Assistant Attorney General, and Angela L. Huston, Assistant Attorney
General, Tallahassee, for appellee.

LEVINE, J.

    The issue presented for our review is whether the State of Florida’s tax
on the internet sale of flowers, which are ordered by out-of-state customers
for out-of-state delivery, violates the commerce clause of the United States
Constitution. We find that Florida impermissibly burdened interstate
commerce when it taxed out-of-state customers for out-of-state deliveries
of out-of-state tangible goods. Because the flowers sold by the Florida-
registered internet business were never stored in or brought into Florida,
the imposition of taxes did not meet the “substantial nexus” test and thus
violated the dormant commerce clause. As such, we reverse the order of
the Florida Department of Revenue imposing a tax assessment on the sale
of flowers to out-of-state customers for out-of-state delivery. As to the part
of the order regarding the imposition of a tax assessment on the sales of
prepaid calling arrangements, we affirm.

   The Florida Department of Revenue (“the department”) issued a
proposed assessment on American Business USA Corp. (“the taxpayer’) for
taxes and interest on the taxpayer’s sales transactions between April 1,
2008, and March 31, 2011. The taxpayer filed a timely protest and a final
hearing was set in front of a Division of Administrative Hearings judge.

   For the final hearing, the parties stipulated to the following facts: The
taxpayer is a Florida corporation doing business as “1Vende.com,” in
Wellington, Florida. All of the company’s sales were initiated online. The
taxpayer specialized in the sale of flowers, gift baskets, and other items of
tangible personal property, as well as “prepaid calling arrangements.” The
taxpayer “did not maintain any inventory of flowers, gift baskets and other
items of tangible personal property.”

   The taxpayer would use “local florists to fill the orders it received for
flowers, gift baskets and other items of tangible personal property.” The
taxpayer “charged its customers sales tax on sales of flowers, gift baskets
and other items of tangible personal property delivered in Florida.”
However, the taxpayer “did not charge its customers sales tax on sales of
flowers, gift baskets and other items on tangible personal property
delivered outside of Florida.” Finally, the taxpayer “did not charge its
customers sales tax on the prepaid calling arrangements it sold.”

   The co-owners of the taxpayer, a husband and wife, both testified at
the hearing. The department offered no witnesses but offered several
exhibits into evidence. The department filed a proposed order which stated
that the taxpayer was responsible for the sales tax when the business
“receives an order pursuant to which [it] gives telegraphic instructions to
a second florist located outside Florida for delivery of flowers to a point
outside Florida,” under Florida Administrative Code Rule 12A-1.047(2)(b).
The department conceded that the business sold primarily to customers
in Latin American markets. The department tax auditor noted that “[t]he
taxpayer’s customers are throughout the world primarily to [sic] Spanish
speaking countries.”

    The administrative law judge issued its recommended order to uphold
the department’s proposed assessment and made the following findings of
fact. There were two principal aspects of the taxpayer’s business: (1) the
sale of flowers, gift baskets, and tangible personal property, and (2) the
sale of prepaid calling arrangements. All of the taxpayer’s sales were
initiated online. The taxpayer sold to customers throughout Latin
America, Spain, and the United States, including Florida. The taxpayer
charged its customers sales tax on the sale of flowers, gift baskets, and
other items of tangible personal property when the items were delivered
within Florida. The taxpayer did not charge its customers sales tax on the
sales of flowers, gift baskets, and other items of tangible personal property

                                     2
delivered outside of Florida. Finally, the taxpayer did not charge sales tax
on any of the prepaid calling arrangements it sold.

   The administrative law judge upheld the department’s assessment,
finding that “[t]he taxpayer’s sale of flowers, wreaths, bouquets, potted
plants, and other such items of tangible personal property were subject to
sales tax pursuant to section 212.05(1)(l) and rule 12A-1.047(1).” The
administrative law judge recommended to validate the department’s
proposed assessment. The department accepted the recommendation by
entering a final order. An appeal of this final order ensues.

    “Whether a lower tribunal had subject matter jurisdiction is a question
of law which we review de novo.” Dep’t of Revenue ex rel. Smith v. Selles,
47 So. 3d 916, 918 (Fla. 1st DCA 2010). “Lack of subject matter
jurisdiction may be raised for the first time on appeal.” Id. (citation
omitted). Further, “judicial interpretation of statutes and determinations
concerning the constitutionality of statutes are pure questions of law
subject to the de novo standard of review.” Abram v. Dep’t of Health, Bd.
of Med., 13 So. 3d 85, 88 (Fla. 4th DCA 2009) (citation omitted). Since this
case involves an administrative agency, issues of the constitutionality of
the tax statute may be raised for the first time on appeal. See S. Alliance
for Clean Energy v. Graham, 113 So. 3d 742, 748 (Fla. 2013).

   In upholding the assessment of the sales tax, the department relied on
section 212.05(1)(l), Florida Statutes (2012), and Florida Administrative
Code Rule 12A-1.047(1). Section 212.05(1)(l) states:

      Florists located in this state are liable for sales tax on sales to
      retail customers regardless of where or by whom the items
      sold are to be delivered. Florists located in this state are not
      liable for sales tax on payments received from other florists for
      items delivered to customers in this state.

Rule 12A-1.047(1), the administrative regulation that implements the
florist tax, states that “[f]lorists are engaged in the business of selling
tangible personal property at retail and their sales of flowers, wreaths,
bouquets, potted plants and other such items of tangible personal property
are taxable.”

   The taxpayer contests the imposition of taxes on out-of-state sales of
flowers, gift baskets, and other tangible personal property. The taxpayer
claims that the imposition of taxes violates the due process clause of the
Fourteenth Amendment and the dormant commerce clause emanating
from Article 1, Section 8 of the United States Constitution. For the same

                                      3
reasons, the taxpayer also contests the imposition of taxes on the prepaid
calling arrangements and disputes the department’s determination that
the taxpayer’s books and records were inadequate and that the taxpayer
did not retain statutorily mandated records of transactions.

   We affirm that part of the department’s order that assessed taxes for
the calling arrangements, and we determine that the failure to maintain
adequate records was sufficient grounds to affirm. We also find that the
imposition of taxes did not violate the due process clause of the Fourteenth
Amendment. We do find, however, that the imposition of taxes on out-of-
state customers for out-of-state flower deliveries violates the dormant
commerce clause, and we reverse that part of the tax assessment which
emanates from the sale and delivery of flowers entirely outside Florida. We
further find that the tax is unconstitutional as applied to the taxpayer’s
sales to out-of-state customers for out-of-state delivery.

   At the beginning of the Republic, the Framers were acutely concerned
with impermissibly burdening the commerce between the states. Hamilton
famously wrote in Federalist No. 22 that

      [t]he interfering and unneighborly regulations of some States,
      contrary to the true spirit of the Union, have, in different
      instances, given just cause of umbrage and complaint to
      others, and it is to be feared that examples of this nature, if
      not restrained by a national control, would be multiplied and
      extended till they became not less serious sources of
      animosity and discord than injurious impediments to the
      intercourse between the different parts of the Confederacy.

The Federalist No. 22, at 140 (Alexander Hamilton) (Clinton Rossiter ed.,
1999). Prior to the adoption of the Constitution, “[u]nder the Articles of
Confederation, state taxes and duties hindered and suppressed interstate
commerce; the Framers intended the Commerce Clause as a cure for these
structural ills.” Quill Corp. v. N. Dakota, 504 U.S. 298, 312 (1992).

    Hamilton, in referring to the Articles of Confederation, was highlighting
one of the glaring weaknesses of the governing structure during the times
before the passage of the Constitution. Hamilton warned about interstate
barriers on interstate commerce: “Though the genius of the people of this
country might never permit this description to be strictly applicable to us,
yet we may reasonably expect from the gradual conflicts of State
regulations that the citizens of each would at length come to be considered
and treated by the others in no better light than that of foreigners and
aliens.” The Federalist No. 22, at 140-41.

                                     4
   Madison, writing in a letter in 1829, stated that the commerce clause
“grew out of the abuse of the power by the importing States in taxing the
non-importing, and was intended as a negative and preventive provision
against injustice among the states themselves, rather than as a power to
be used for the positive purposes of the General Government, in which
alone, however, the remedial power could be lodged.” Letter from James
Madison to Joseph C. Cabell, (Feb. 13, 1829).

    To be sure, Article 1, Section 8, Clause 3 of the United States
Constitution “says nothing about the protection of interstate commerce in
the absence of any action by Congress. Nevertheless, as Justice Johnson
suggested in his concurring opinion in Gibbons v. Ogden, 9 Wheat. 1, 231-
232, 239, 6 L. Ed. 23 (1824), the Commerce Clause is more than an
affirmative grant of power; it has a negative sweep as well.” Quill, 504 U.S.
at 309. Thus, the dormant commerce clause has come to be understood
as prohibiting “certain state actions that interfere with interstate
commerce.” Id.

   “The Commerce Clause and the Due Process Clause impose distinct but
parallel limitations on a State’s power to tax out-of-state activities.”
MeadWestvaco Corp. ex rel Mead Corp. v. Ill. Dep’t of Revenue, 553 U.S. 16,
24 (2008). When it comes to evaluating a tax regarding its compliance
with the commerce clause, the decisions of the United States Supreme
Court

      have considered not the formal language of the tax statute but
      rather its practical effect, and have sustained a tax against
      Commerce Clause challenge when the tax is applied to an [1]
      activity with a substantial nexus with the taxing State, [2] is
      fairly apportioned, [3] does not discriminate against interstate
      commerce, and [4] is fairly related to the services provided by
      the State.

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). This has
come to be known as the Complete Auto test. If the state tax fails any
prong of the four-part test, then the tax violates the dormant commerce
clause. Thus, 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.

   Among the taxes levied by states are the sales tax and the use tax.
Sales tax is “any tax which includes within its scope all business sales of
tangible personal property at either the retailing, wholesaling, or

                                     5
manufacturing stage, with the exceptions noted in the taxing law.” Jerome
R. Hellerstein & Walter Hellerstein, State Taxation ¶ 12.01 (3d ed. 2014)
(citation omitted). “Compensating use taxes are functionally equivalent to
sales taxes. They are typically levied upon the use, storage, or other
consumption in the state of tangible personal property that has not been
subjected to a sales tax.” Id. at ¶ 16.01[2]. “Because the use tax
complements the sales tax, it generally applies only to the use of goods
and, in some states, to services that have not already been subjected to
sales tax. Consequently, the use tax applies principally to goods and
services purchased outside the state.” Id. (footnotes omitted).

   Thus, “[g]enerally, the power of a state to collect sales taxes is limited
to transactions occurring within that state, and states cannot collect a
sales tax on purchases made outside the state, such as those made
through mail orders.” 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). The genesis of this
prohibition 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. In Southern
      Pacific Co. v. Arizona, 325 U.S. 761, 775, 65 S. Ct. 1515, 1523,
      89 L. Ed. 1915 (1945), the Court struck down on Commerce
      Clause grounds a state law where the “practical effect of such
      regulation is to control [conduct] beyond the boundaries of the
      state . . . .

Edgar v. MITE Corp., 457 U.S. 624, 642-43 (1982) (plurality opinion). See
also Am. Oil Co. v. Neill, 380 U.S. 451, 455 (1965) (“When passing on the
constitutionality of a state taxing scheme it is firmly established that this
Court concerns itself with the practical operation of the tax, that is,
substance rather than form.”).

   In National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753,
754 (1967), the Supreme Court considered the constitutionality of a use
tax imposed on customers within the taxing state, where the only contact
between the company and the in-state customers was “via the United
States mail or common carrier.” The Supreme Court found the use tax
was in violation of the dormant commerce clause. It determined that the
taxing state lacked the required “substantial nexus” to tax an out-of-state
vendor, whose only contact to the taxing state was by U.S. mail or common
carrier. The Supreme Court in Bellas Hess, decades before the advent of
the internet, postulated that “it is difficult to conceive of commercial

                                     6
transactions more exclusively interstate in character than the mail order
transactions here involved.” Id. at 759. Because Bellas Hess failed the
first prong of the Complete Auto four-part test, the tax could not be
sustained. The Supreme Court concluded that if the taxing state in Bellas
Hess “can impose such burdens, so can every other State, and so, indeed,
can every municipality, every school district, and every other political
subdivision throughout the Nation with power to impose sales and use
taxes.” Id.

    Like in Bellas Hess, the sales tax in the present case fails the first prong
of the Complete Auto test. The instant case involves an in-state internet
vendor selling to out-of-state customers for delivery of flowers out-of-state.
The vendor’s only connection to the taxing state is that it is registered as
a corporation in Florida. The only interaction the out-of-state customer
has with the taxing state is by shopping for flowers on a website operated
by a company incorporated in Florida. The taxpayer does not maintain
any inventory of flowers, gift baskets, or items of tangible personal
property within Florida. These goods were not grown in, stored in, or
delivered from Florida, and do not have any type of connection to Florida.

   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. Cf. Oklahoma Tax Comm’n v. Jefferson
Lines, Inc., 514 U.S. 175, 184 (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. It follows then that the internet
transactions at issue here are even more “exclusively interstate in
character.”

    The department argues that other states have taxing schemes similar
to this one. Of course, the many taxes, in their many variations, is one of
the concerns previously expressed by the Supreme Court. “The many
variations in rates of tax, in allowable exemptions, and in administrative
and record-keeping requirements could entangle [the taxpayer’s] interstate
business in a virtual welter of complicated obligations to local
jurisdictions.” Id. at 759-60 (footnotes omitted). We recognize, within our

                                       7
constitutional framework of federalism, that “Congress has the ultimate
power to resolve” and “evaluate the burdens that use taxes impose on
interstate commerce, [and] remains free to disagree with” the conclusions
of the judiciary. Quill, 504 U.S. at 318.

   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. 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.

    We also find that the imposition of taxes did not violate the due process
clause of the Fourteenth Amendment. The 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.” Quill, 504 U.S. at 307 (quoting
Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)). In this case,
traditional notions of fair play and substantial justice were not offended
because the taxpayer’s company was registered in Florida and had a
mailing address in Florida.

   Thus, in Quill, the Supreme Court found that imposing tax on a vendor
may violate the commerce clause but, at the same time, not violate the due
process clause, where the vendor solicits business by catalogs and delivers
merchandise within the taxing state by mail and common carrier. Id. at
305. That is because “the two, the Due Process clause and the Commerce
Clause are analytically distinct.” Id. “[A] corporation may have the
‘minimum contacts’ with a taxing State as required by the Due Process
Clause, and yet lack the ‘substantial nexus’ with that State as required by
the Commerce Clause.” Id. at 313.

   The Supreme Court in Quill further explained:

          Due process centrally concerns the fundamental fairness
      of governmental activity. . . . We have, therefore, often
      identified “notice” or “fair warning” as the analytic touchstone
      of due process nexus analysis. In contrast, the Commerce
      Clause and its nexus requirement are informed not so much

                                      8
      by concerns about fairness for the individual defendant as by
      structural concerns about the effects of state regulation on
      the national economy.

Id. at 312. The Supreme Court concluded that the “continuous and
widespread solicitation of business” within the taxing state was enough to
pass muster under a due process analysis. Id. at 308. At the same time,
the Court found that the taxing state failed to demonstrate a “substantial
nexus and a relationship between the tax and state-provided services” in
order to “limit the reach of state taxing authority so as to ensure that state
taxation does not unduly burden interstate commerce.” Id. at 313.

    In summary, we find that assessment of sales taxes on the sale of
flowers, gift baskets, and tangible personal property outside Florida,
ordered by out-of-state customers for out-of-state delivery, violates the
commerce clause of the United States Constitution. As such, we reverse
and remand for further proceedings consistent with this opinion. We
affirm the other aspects of the assessment as it relates to prepaid calling
arrangements.

   Affirmed in part, reversed in part, and remanded.

GERBER and KLINGENSMITH, JJ., concur.

                            *         *         *

   Not final until disposition of timely filed motion for rehearing.




                                      9
