07-002667 Motion Computing vs. Department Of Revenue Status: Closed Recommended Order on Monday, December 24, 2007.

Summary: Petitioner established that sale transactions between Texas and Massachutes had no substantial nexus with Florida, and therefore, it is not subject to Florida sales and use tax.

Case No. 07-2667

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

MOTION COMPUTING, ) ) ) ) ) ) ) ) ) )

Petitioners, RECOMMENDED ORDER

vs.

DEPARTMENT OF REVENUE,

Respondent.

This cause came on for formal proceeding and hearing, as

noticed, before P. Michael Ruff, a duly-designated

Administrative Law Judge of the Division of Administrative

Hearings. The hearing was conducted in Tallahassee, Florida, on

September 7, 2007. The appearances were as follows:

APPEARANCES

For Petitioner: Jeffrey O'Connor

Qualified Representative

8601 RR 2222 Building II

Austin, Texas 78730

For Respondent: Warren J. Bird, Esquire

Office of the Attorney General

The Capitol, Plaza Level 01

Revenue Litigation Bureau

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

The issues to be resolved in this proceeding concern

whether the Petitioner, a Delaware Corporation with its

principal place of business and domicile in Texas, has an

obligation to collect and remit Florida sales taxes on sales it

made to a Massachusetts-domiciled corporation, in view of the

facts found below.

PRELIMINARY STATEMENT

This cause arose when the Respondent, the Department of

Revenue, (Department), conducted an audit of the books and

records of the Petitioner for the audit period April 1, 2003 to

March 31, 2006. The audit was conducted by Xena Francis, an

experienced auditor of the Department, who testified on behalf

of the Department in this proceeding. The audit purportedly

revealed that the Petitioner was not collecting sales tax on

transactions where computer products were sold to entities who

did not produce a certificate of exemption from collection of

sales tax by Florida on the transaction, and when the product

involved was shipped by the Petitioner into Florida by common

carrier.

The Respondent, through the audit process, determined a

deficiency based upon such transactions, and assessed the

Petitioner for $72,447.29, including tax and interest through

March 12, 2007. The tax was in the amount of $61,538.90, and

interest thereon was in the amount of $10,908.39. The

Department had adjusted its initial assessment downward based

upon the Petitioner demonstrating that certain of the purported

transactions for which taxes had not been paid were revealed by

the Petitioner to actually be exempt. The Petitioner paid the

Respondent the sum of $39,064.24 on June 11, 2007. This

represented payment of $37,941.94 of the tax assessment, as well

as $1,122.30 for interest related to that amount of the tax

assessment.

The Petitioner in essence contested the portion of the

assessment related to its sales to Advantec Computer System,

Inc., a Massachusetts limited liability company, with its

principal place of business in Marlboro, Massachusetts. The

Petitioner timely exercised its right to a proceeding pursuant

to Section 120.569 and 120.57(1), Florida Statutes (2006), and

its Petition was forwarded to the Division of Administrative

Hearings and the undersigned Administrative Law Judge.

The cause came on for hearing as noticed. The Petitioner

presented seven exhibits at the hearing six which were admitted

into evidence. Exhibits two, three, and four were admitted on a

limited basis. The Petitioner also testified on its own behalf

through the testimony of Jeff O'Connor, C.P.A. The Respondent

presented, as its witness, Xena Francis, the auditor who

performed the audit at issue and presented Exhibit "A," the

audit which was admitted into evidence.

Upon conclusion of the proceedings a transcript thereof was

ordered and the parties availed themselves of their right to

submit proposed recommended orders. After granting one

requested extension, the Proposed Recommended Orders were timely

submitted and have been considered in the rendition of this

Recommended Order. The Motion to Strike the Petitioner's

Proposed Recommended Order is denied.

FINDINGS OF FACT

1. The Petitioner is a Delaware Corporation whose

principal place of business is in Austin, Texas. The Petitioner

designs, develops, and markets portable computer equipment,

chiefly portable "tablet" personal computers with related

"peripherals," which it sells and delivers in multiple states,

including Florida. It sells these products to "re-sellers" and

distributors, as well as to "end users." The Petitioner, by the

Department's admission in Exhibit "A" (audit) does not maintain

a physical presence in the State of Florida. It does employ one

sales person for business in Florida, but maintains no warehouse

or other facilities, vehicles nor other indicia of physical

locations or operation in the state of Florida. The Petitioner

is registered as a "dealer" with the State of Florida,

Department of Revenue under the Florida Sales and Use Tax Law.

The Petitioner does engage in some sales to Florida "end

customers" or to re-sale purchasers in Florida. These

transactions, however, are not at issue in this case. The

dispute solely relates to transactions between the Petitioner

and Advantec Computer System, Inc., of Marlboro, Massachusetts.

2. The Respondent is an agency of the State of Florida

charged with the regulation, control, administration, and

enforcement of the sales and use tax laws of the State of

Florida embodied in Chapter 212, Florida Statutes, and as

implemented by Florida Administrative Code Chapter 12A-1. The

Respondent conducted an audit of the books and records of the

Petitioner, resulting in this proceeding, for the audit period

April 1, 2003 to March 31, 2006. That audit was conducted by

Xena Francis, and revealed, according to the Department's

position, a purported sales tax payment deficiency on the part

of the Petitioner in the above-referenced amounts. The

Department, upon completion of the audit, issued a Notice of

Intent to Make Audit Changes, thus advising the Petitioner of

the amount of the tax penalty and interest it was assessing as a

result of the audit.

3. The transactions which the Department maintained were

questionable, in terms of taxes not being paid with regard

thereto, were those where the Petitioner sold computer products

to entities who did not produce to the Petitioner a certificate

of exemption from collection of sales tax by Florida on that

transaction, and where the product was shipped by the Petitioner

into Florida by common carrier. The Department essentially

takes the position that, since the Petitioner has a state sales

and use tax "dealer certificate," that it is responsible to

prove any transactions as being exempt from the relevant taxing

provisions of Chapter 212, Florida Statutes, and the above rule

chapter. The Department apparently presumes as a part of this

position that the fact that the product in question was shipped

to ultimate users in Florida by common carrier from the

Petitioner's place of business outside the state that such were

Florida sales tax transactions. It thus contends that the

burden is on the Petitioner to prove that they are exempt from

such tax and collection.

4. After it was advised of the audit findings and the

basis for the assessment, the Petitioner provided to the

Department certain exemption certificates for a number of the

entities and transactions for which shipment had not been made

into Florida. The Department accepted these and the assessment

was adjusted downward to reflect the exempt status of those

transactions, pursuant to the further information provided the

Department by the Petitioner.

5. The other disputed transactions for which no exemption

certificate was provided by the Petitioner, were deemed by the

auditor to be taxable. In essence, the auditor took the

position, as does the Department, that every person making sales

into the State of Florida is subject to sales and use tax unless

specifically exempt and that it is incumbent upon the selling

dealer (which it maintains is the Petitioner) to establish the

exempt status of the transaction, at the time of sale, with a

supporting re-sale certificate or some documentation to support

the transactions, exempt status. 1/

6. The sales which are the subject of this dispute are

exclusively those between the Petitioner and Advantec Computer

Systems, Inc. Advantec is a Massachusetts Incorporated and

domiciled corporation. It apparently does not possess a Florida

"re-sale certificate" or "dealer certificate." The Petitioner

sold various computers and related products, as shown by the

invoices in evidence, to Advantec. The invoices and the

testimony adduced by the Petitioner established that those sales

were between the Petitioner and Advantec, the Massachusetts

corporation. Advantec, in turn, sold the products or some of

them to Florida customers. Those customers did not pay the

Petitioner for the sales, but paid Advantec. Advantec directed

that delivery from the Petitioner be made not to Advantec

itself, but to its Florida-end customer via common carrier from

the Petitioner's out-of-state location or from its overseas

supplier. In any event, delivery was made from outside Florida

to the Florida Advantec customers by common carrier.

7. The Petitioner billed no Florida customer and had no

relationship with any Florida customer of Advantec. Instead it

invoiced and billed Advantec for the price of the products

involved on a "net 30-day" basis. Advantec would then pay the

Petitioner for the amount invoiced by the Petitioner to

Advantec. As to the Advantec sales at issue, there was no

nexus, substantial or otherwise, between the Petitioner and

Advantec's customers in Florida, except that the product was

"drop shipped" from the Petitioner's relevant location out of

the State of Florida to the Florida customer by common carrier,

not by any vehicle owned, leased, or operated by any person or

entity affiliated with the Petitioner. In fact, the deliveries

in question were made by Federal Express as a drop shipment.

8. Advantec's principal business activity is the re-sale

and distribution of computers and related products. It has no

presence in Florida and is not a registered dealer in Florida.

When the Petitioner made the sales to Advantec Computer Systems,

as shown by the invoices and testimony in evidence, it billed

Advantec for the sales and did not collect sales tax. While the

Petitioner has in its possession Advantec's Massachusetts-issued

tax-exempt certificate, the Petitioner does not have a Florida

tax-exempt certificate on-file for Advantec, because Advantec is

not registered in Florida, and the sale by the Petitioner to

Advantec is a Massachusetts sale with no Florida nexus.

9. The Petitioner offered three Technical Assistance

Advisements (TAA) into evidence, which it obtained from the

Department in support of the fact that the transactions in

question are not taxable. (See Exhibits 2, 3, 4 in evidence.)

These exhibits were admitted on a limited basis over the

Department's objection as being possibly material to a

determination as to the weight and credibility of the

Department's evidence in this case, but not as being legally

binding or constituting legal precedent, which last quality is

precluded by Section 213.22(1), Florida Statutes (2006).

10. Additionally, the Petitioner offered and had admitted

Petitioner's Exhibit 7, which was an e-mail received from a

representative of the Department, in response to an inquiry by

the Petitioner. This was admitted over hearsay objection as a

party statement offered by the opposing party. 2/ In that

exchange between the Petitioner and the Department, the

Petitioner, as shown by testimony and the exhibit, related the

facts involved in the sales to Advantec. The Department's

response indicated that, if indeed, the buyer and seller were

both located outside the State of Florida and the goods when

purchased were outside the State of Florida, then the sale is

not a Florida sale, between the out-of-state buyer and the out-

of-state seller (the Petitioner). If the goods were then

delivered by common carrier to the out-of-state buyer's ultimate

customers in Florida, from the Petitioner's out-of-state

location, then the transaction between the Petitioner and the

out-of-state buyer is not subject to the Florida sales tax law

and, in essence, is non-jurisdictional, not as a "Florida nexus

sale."

11. In summary, the Petitioner sold the goods in question

to Advantec and invoiced Advantec at its Massachusetts domicile

and address on "net 30-day" term. No Florida customer, person,

or entity was billed for the sales in question, nor was any

payment collected from any individual or business entity located

in the State of Florida. Once the sale was consummated between

the Petitioner and Advantec, the Petitioner merely "dropped

shipped," by common carrier, the goods purchased by Advantec to

Advantec's ultimate customer located in the State of Florida.

CONCLUSIONS OF LAW

12. The Division of Administrative Hearings has

jurisdiction of the subject matter of and the parties to this

proceeding. §§ 120.569 and 120.57(1), Fla. Stat. (2006).

13. Section 212.21(2), Florida Statutes (2006), provides

that it is the specific legislative intent to tax every sale

provided for in that Chapter except such as shall be proven to

be specifically exempted by provisions of Chapter 212.

14. Section 212.02, Florida Statutes (2006), provides as

follows:

Section 212.02 definitions.- The following

terms and phrases when used in this chapter

have the meanings ascribed to them in this

section, except where the context clearly

indicates a different meaning.

* * *

(15) 'Sale' means and includes:

(a) Any transfer of title or possession or

both, exchange, barter, license, lease, or

rental, conditional or otherwise, in any

manner or by any means whatsoever, of

tangible personal property for a

consideration.

15. Pursuant to Section 212.18, Florida Statutes, any

person desiring to engage in or conduct business in Florida as a

dealer, as defined in Chapter 212, Florida Statutes, must obtain

a certificate of registration from the Department, and the

certificate issued by the Department grants dealers the

privilege of conducting business in the state and imposes an

obligation to collect and timely remit sales tax. See also Fla.

Admin. Code R. 12A-1.060.

16. Florida Administrative Code Rule 12A-1.038 provides

that transactions that result in shipment of tangible personal

property into the State of Florida are subject to sales and use

tax unless specifically exempt, and the selling dealer must

establish the exempt status of a transaction at the times of

sale with a supporting re-sale certificate or some documentation

to support the exempt status of the transaction. The Department

thus takes the position that if the seller does not produce

evidence of exemption from the applicable sales tax, then the

sales in question are subject to the tax.

17. The problem with the position of the Department is

that, although a sale clearly took place, the sales which the

Department attempts to tax, transacted between the Petitioner

and Advantec, were not "transactions that result in shipment of

tangible personal property into the state of Florida." It was

the transaction between Advantec and its Florida-end customer

(the re-sale), which actually resulted in the shipment of the

property into the state. The Petitioner's only connection with

the Florida Advamtec customers and the transactions between such

customers and Advantec was its depositing of the goods on a

common carrier for delivery via interstate commerce into Florida

from a non-Florida location.

18. The sales which the Department seeks to tax were sales

to the Massachusetts company, which is not registered as a

dealer in the State of Florida, or with the State of Florida.

These were clearly Massachusetts sales. The Petitioner had no

contact with the State of Florida with regard to these sales

during the course of the transactions since it merely delivered

the goods to the common carrier for delivery to Advantec's

Florida sale customer. The Petitioner did not sell the

merchandise in Florida or directly to any Florida customers.

The title to the goods and the consideration for them were

exchanged between the Petitioner and Advantec. It is Advantec

who made sales into Florida that resulted in tangible personal

property being shipped into the state of Florida. It is thus

Advantec who would potentially be responsible for collecting

sales tax from the Florida customers or, since Advantec is not a

registered "Florida dealer," it might be that the Department

must look to the end customer of Advantec in Florida for

collection of the use tax. See § 212.06(4), Fla. Stat.

19. It has been determined that the taxability of a

transaction made by an out-of-state vendor into Florida

resulting in shipment of the goods which are the subject of the

transaction into Florida, depends on the out-of-state vendor's

"substantial nexus" with the state. Thus, the cases of National

Bellas Hess, Inc., v. Illinois Department of Revenue , 386 U.S.

753 (1967) and Quill Corporation v. North Dakota , 504 U.S. 298

(1992) (which re-affirmed the holding in the National Bellas

Hess opinion) stand for the proposition that if an out-of-state

vendor only has a connection with customers in the taxing state

by common carrier or mail, used in delivering goods to customers

in the state, then the state, where the goods are delivered, may

not compel the out-of-state vendor to collect a sales or use

tax. This is because a vendor whose only contacts with the

taxing state or by mail or common carrier lacks the "substantial

nexus" to the taxing state required by the cases interpreting

the commerce clause of the United States Constitution. See

Complete Auto Transit, Inc., v. Brady , 430 U.S. 274 (1977),

which sets out the test whereby a state-imposed tax could be

sustained against a challenge under the commerce clause, which

test included the requirement of a substantial nexus with the

taxing state.

20. The principle running through these cases was affirmed

and followed in Florida in more recent times in Florida

Department of Revenue v. Share International, Inc. , 667 So. 2d

226 (Fla. App. 1st Dist. 1995). The court, speaking through

Judge Barfield (concurred in by Judges Kahn and Shivers)

followed this "substantial nexus" test, established through the

above decisions. The factual situation in that case involved

the presence of the appellee Share International, Inc. , in

Florida for three days a year at a seminar it conducted. The

seminars were conducted for chiropractors during the winter

months in Florida. Share International sold certain items in

Florida during the seminars, registered with the Department and

collected and remitted the sales tax on those items sold in

Florida during the seminars. It did not, however, collect

Florida Sales taxes on sales or orders made by telephone or mail

from residents in Florida, but delivered by mail or common

carrier, or on orders received during the Florida seminars but

later delivered by mail or common carrier. The court upheld the

trial judge's finding that imposition and collection of the

sales tax on this out-of-state vendor would be unconstitutional

in terms of imposing a burden on interstate commerce in

violation of the federal commerce clause. This was because the

presence in the State for approximately three days per year of

Sharer employees and products, under the circumstances presented

in that case did not establish a substantial nexus with Florida

which would permit the State of Florida to impose on Share the

duty to collect and remit taxes on its mail order sales to

Florida residents. The court, through Judge Barfield's opinion,

after affirming the trial judge, certified the question to the

Florida Supreme Court, as to whether, under the facts of that

case, "substantial nexus," within the meaning set forth in the

Quill Corporation , and National Bellas Hess decisions, existed

which would permit Florida to require Share to collect sales and

use taxes on all goods sold to Florida residents. In due

course, the Florida Supreme Court in Florida Department of

Revenue v. Share International, Inc. , 676 So. 2d 1362 (Fla.

1996), speaking through Justice Anstead, affirmed and adopted

the holding of the First District Court of Appeal. The

Department of Revenue later petitioned for Writ of Certiorari to

the United State Supreme Court. The United States Supreme Court

in Department of Revenue v. Share International , 519 U.S. 1056

(1997), denied certiorari .

21. That case and its facts are closely akin to those in

the instant situation. Here the only nexus that the out-of-

state vendor, the Petitioner, had with the State of Florida as

to the transactions in question, was the drop shipment of the

relevant goods into Florida by common carrier.

22. The Petitioner does maintain one sales representative

in the State of Florida (it is undisputed that the Petitioner

actually conducted some Florida sales of its own, taxation of

which is not in dispute in this case). The First District Court

of Appeal in the Share , supra , decision noted a number of

decisions by the U.S. Supreme Court concerning out-of-state

sales by an out-of-state vendor into a taxing state and in those

prior decisions the requisite nexus for the taxing state was

shown where, for instance, out-of-state sales were arranged by

local agents of the seller while working in the state. The same

nexus was found where maintenance in the state of local retail

store outlets was provided by the out-of-state mail order

sellers and in the case of an out-of-state company that had 10

salesmen conducting continuous local solicitations. The court

also mentioned the example of the maintenance in a taxing state

of only a single employee, an engineer, whose office was in his

home and whose responsibility was to consult with one of the

out-of-state vendor's customers regarding its anticipated need

of the out-of-state vendor's product. (citation omitted.)

These cases show that it is at least fairly debatable whether a

substantial nexus would be shown with Florida by the fact of the

Petitioner's maintaining only one sales representative in

Florida.

23. The pivotal consideration, however, is that the

subject sales transactions which the Department attempts to tax

involved in this proceeding are one step removed from the

situation in the Share International case and in the cases cited

and discussed therein. This is not a situation where the sales

were made into Florida to Florida customers. Rather, the sales

at issue were made to Advantec, Inc., a Massachusetts purchaser.

The sales were Massachusetts nexus sales, not Florida ones and

were invoiced as such. The only sales which "resulted in" the

shipment of the goods into Florida was the sale between Advantec

and its Florida customers. Those sales are not the subject of

this proceeding and are likely the sales with which the

Department might have a substantial taxing nexus and the

authority to at least collect sales or use tax from the Florida

end-customer.

24. It is thus patently apparent that this is not a

situation where the certificated or registered dealer, the

Petitioner, is under a burden to establish an exemption of the

sales in question from Florida taxation. Rather, the sales are

not even jurisdictional. That is, even if the Petitioner is

determined to have a "substantial nexus" as an out-of-state

vendor with the State of Florida through a single sales

representative and a dealer certificate, that substantial nexus

has no relevant relationship to the sales Florida is here

seeking to tax, that is, the sales between the Petitioner with

another foreign corporation, Advantec, which sales occurred,

therefore, in Massachusetts.

25. If Florida were to tax those transactions based upon

the mere fact that the seller, the Petitioner, in those

transactions, shipped the goods to Advantec's Florida customers

by interstate commerce common carrier, such, under the principal

running through the Share International case and the cases cited

therein going back to the National Bellas Hess opinion, would

constitute an undue burden on interstate commerce in violation

of the Federal Commerce Clause. The Department simply has no

jurisdiction to tax these transactions because they are not

Florida sales. The transactions, for the purposes of the above-

cited rule, did not result in the shipment of the tangible

personal property into the state of Florida. Rather, the re-

sales between Advantec and the Florida customers resulted in the

tangible personal property being shipped into the State of

Florida.

RECOMMENDATION

Having considered the foregoing Findings of Fact,

Conclusions of Law, the evidence of record, the candor and

demeanor of the witnesses, and the pleadings and arguments of

the parties, it is, therefore,

RECOMMENDED that a final order be entered by the Department

of Revenue, vacating and dismissing the assessment of the

subject sales tax and interest to the Petitioner, Motion

Computing, Inc.

DONE AND ENTERED this 24th day of December, 2007, in

Tallahassee, Leon County, Florida.

S

___________________________________

P. MICHAEL RUFF

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

www.doah.state.fl.us

Filed with Clerk of the

Division of Administrative Hearings

this 24th day of December, 2007.

ENDNOTES

1/ Florida Administrative Code Rule 12A-1.038.

2/ § 90.803.18, Fla. Stat. (2006)

COPIES FURNISHED :

Jeffrey O'Connor

Qualified Representative

8601 RR 2222 Building II

Austin, Texas 78730

Warren J. Bird, Esquire

Office of the Attorney General

The Capitol, Plaza Level 01

Revenue Litigation Bureau

Tallahassee, Florida 32399-1050

Marshall Stranburg, General Counsel

Department of Revenue

The Carlton Building, Room 204

501 South Calhoun Street

Post Office Box 6668

Tallahassee, Florida 32314-6668

Lisa Echeverri, Executive Director

Department of Revenue

The Carlton Building, Room 104

501 South Calhoun Street

Tallahassee, Florida 32399-0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.