Ins and Outs: The Taxation of Imports and Exports in Florida
You have a prospective client that manufactures and sells computers. The client sells his or her items primarily in Illinois, but has recently won a contract to provide computers to several customers in South America. In order to be effectively used in South America, the computers have to be specially modified. The client has found a specialist in Miami that can make the modifications and then deliver the computers to the port for shipping. The client has contacted you for advice about the contract with the Miami specialist, the shipping issues through the port, and for related Florida matters.
Welcome to the world of imports, exports, and state taxes. Although sometimes an afterthought, state taxes in the scenario described above can be substantial. This article is intended to explain the sales and use tax treatment of imports and exports and the documentation requirements involved.1
General Sales and Use Tax Principles
Some general concepts about Florida’s sales tax will be useful. Florida imposes sales tax on “retailsales”2 of “tangible personal property” within Florida.3 “Tangible personal property” is just about any tangible thing that is not realty,4 and a “sale” is any transfer of title or possession for consideration.5 These concepts result in almost anything you pay for and leave a Florida store with being subject to Florida sales tax.6 Taxing sales, however, is not the whole picture; most states also have a “use” tax. This tax applies when you “use” an item within a state and have not paid sales tax on it.7
For the majority of items consumed within Florida, the use tax is not a problem. Most consumers pay sales tax when the item is purchased from a local store, and as long as enough tax is paid, use tax does not apply. But, if property comes into Florida without tax being paid — for instance, when our computer manufacturer imports the computers into Florida — use tax may apply.8
The use tax is a “complement” to the sales tax.9 It is intended as a disincentive to purchase taxable items from a state with a lower sales tax.10 For instance, Floridians living near the Florida-Georgia border might choose to purchase items from stores within Georgia because the Georgia sales tax is less than the Florida sales tax.11 The growth of the Internet has amplified another popular example — in which Floridians purchase items from a retailer that ships the items to Florida without collecting any tax. In both of these examples, the purchasers would generally owe Florida use tax on the items as soon as the purchasers possess the items within Florida.12 The Floridian that paid the four percent Georgia sales tax would owe an additional two percent because Florida has a six percent tax,13 while the Floridian that made the Internet purchase would owe the full six percent because no tax has been paid.14
Our Illinois computer manufacturer has to purchase items to manufacture its computers, but does not pay sales tax at that time because Illinois, like most states, allows the manufacturer to purchase the raw materials tax free, and then will impose tax when the manufacturer sells the computers in Illinois. But, instead of selling the computers in Illinois, the manufacturer delivers the computers to a local shipping company, which puts the computers on a truck and transports them from Illinois through several states, and to the Miami specialist that will modify the computers for use in South America. When the computers arrive in Miami, the computers have traveled through several states without the owner having paid any sales and use tax. What prevents each of these other states from imposing a tax on the computers as they pass through?
The Import-Export Clause and the Commerce Clause of the U.S. Constitution prohibit individual states from taxing imports and exports to and from the states and from imposing taxes on interstate commerce.15
The scope of the Import-Export Clause and Commerce Clause has been primarily defined through interpretation by the U.S. Supreme Court.16 The Court has held that items are shielded from taxation while “in the stream of commerce” or “the stream of exportation,” and has generally viewed the question whether property has entered the “stream of exportation” under the Import-Export Clause and the question whether property has entered the “stream of commerce” under the Commerce Clause as identical.17 As a result, the majority of the jurisprudence on state taxation of imports and exports revolves around when the export process begins and ends and whether the export process was “continuous and unbroken.”18 Kosydar v. National Cash Register Co., 417 U.S. 62 (1974), and Carson Petroleum Co. v. Vial, 279 U.S. 95 (1929), illustrate these issues.
National Cash Register involved an Ohio manufacturer of cash registers. Pursuant to orders for cash registers to be delivered and used in a foreign country, the Ohio manufacturer had begun manufacturing a bulk of cash registers. Once finished, the registers were stored in an Ohio warehouse, and sometimes remained there for years before being shipped abroad. Ohio attempted to impose a tax on the cash registers, and the manufacturer claimed protection under the Import-Export Clause. The Court interpreted the Import-Export Clause to require a physical commitment to the export process before its protections applied. Since the registers had not physically started the journey out of the country, the Import-Export Clause did not shield them from taxation by Ohio.
Carson involved an oil company that purchased petroleum in certain interior states, and then transported the petroleum across state lines via railway to New Orleans. In New Orleans, the oil was accumulated in storage tanks owned by the purchaser. The company intended that the oil be exported, but the oil was stored in New Orleans until enough petroleum was accumulated to justify the costs of shipment overseas. Louisiana argued that the oil became subject to taxation because the export process was broken and the petroleum had come to rest in Louisiana. However, the Court held that the Import-Export Clause shielded the oil from state taxation because a good faith and temporary interruption of the passage in furtherance of the intended transport does not break the continuity of journey that the Import-Export Clause requires.19
Florida law accounts for the requirements under the Import-Export and Commerce clauses. First, Florida provides an exemption from sales and use tax for tangible personal property imported, produced, or manufactured in Florida for export.20 Moreover, Florida does not impose tax on anything in violation of federal law;21 if tangible personal property is shielded from taxation by the Import-Export or Commerce clauses, Florida avoids a conflict with federal law by simply not imposing tax on it.
In summary of the federal protections for imports and exports within Florida, two questions need to be answered in determining whether tangible personal property is shielded from tax as an export:
1) Is the property committed to the exportation process (at the time of sale or importation)?
2) Is the exportation process continuous and unbroken until the property leaves Florida?22
The challenge for Florida sellers, importers, and exporters is to be able to answer these questions in the affirmativethrough proper documentation of the transaction(s).23
Safe Harbor for Florida Dealers
Out-of-state businesses and in-state businesses view the import and export issues from different perspectives. The out-of-state business is primarily concerned with ensuring that the item does not get “taxed to death” while it travels through or out of the country. The federal provisions discussed above will shield the majority of those scenarios.
However, Florida dealers view the import and export issue primarily as one of proving export. In this instance, the federal protections for imports and exports are of little help. The federal provisions will not generally prohibit the state from taxing the item while it is in the Florida dealer’s possession. Florida does provide some exemptions from tax for these exports, but the dealer will have to prove that the exemptions apply.
To help Florida dealers manage this issue, the Florida Legislature has provided a “safe harbor” for selling dealers to prove that an item was exported outside Florida.24 The Florida dealer is not requiredto collect and remit tax if, pursuant to the sale, the dealer delivers the item:
• To a licensed exporter for exporting;
• To a carrier25for shipment outside Florida;
• To the U.S. mail for mailing to a destination outside Florida; or
• Using its own mode of transportation26 to a destination outside Florida.27
Florida courts have interpreted this provision to establish a presumption that property is not intended for export unless one of the criteria is met.28 If the statutory safe harbor is not utilized, the property is presumed for use within Florida, and the taxpayer must rebut the resulting presumption of taxability.29
“Uses” Under Florida Law
So what is a “use” of property for tax purposes, and is there any “use” that is allowed before use tax applies? “Use” is defined broadly in Florida to include the exercise of any right or power over tangible personal property — generally, no minimum degree or duration of use is required.30 For instance, if a hammer is purchased tax free and shipped to a purchaser in Florida, the hammer likely becomes taxable as soon as it comes into Florida; it does not have to be used to drive a nail first.
The Florida Supreme Court recently addressed the scope of Florida’s use tax inFlorida Department of Revenue v. New Sea Escape Cruises, Ltd., 894 So. 2d 954 (Fla. 2005). The taxpayer offered gambling cruises from Ft. Lauderdale. The vessel would cruise out of port to three miles off the coast of Florida, conduct gambling activities, and then return to Ft. Lauderdale. The taxpayer had imported its gambling equipment without paying any sales or use tax, and the Department of Revenue assessed the taxpayer use tax for using the equipment in Florida.31
The taxpayer argued that no use tax was due on the gambling equipment because the equipment was only used for gambling activities when the vessel was outside Florida waters.32 The Florida Supreme Court rejected this argument, citing the broad nature of the statutory definition of the term “use,” relying on Klosters Rederi A/S v. State Department of Revenue, 348 So. 2d 656 (Fla. 3d DCA 1977), in which the Third District Court of Appeal determined that the removal from storage and placement of such items as facial tissue, toilet paper, and party supplies on a cruise ship departing from the Port of Miami constituted the taxable “use” of property within Florida.33 The Florida Supreme Court clearly recognizes, therefore, that any exercise of dominion or control over tangible personal property — even when such exercise is brief and in aid of transporting the property outside Florida — constitutes a taxable “use” of the property.
The Continuous and Unbroken Journey
The out-of-state business that has property moving through a state sees the law of exports in a simple way — ensure that the export journey is continuous and unbroken; once the property commingles with the general mass of property in Florida, the federal protections will no longer apply,34 and at least in Florida, a use tax applies upon simple ownership of the property in state.35
In our example, where the manufacturer is shipping the computers through several states to the specialist within Florida, the federal protections are easiest to apply with regard to the states that the computers are merely passing through. Where the shipper’s truck enters the state on an interstate and exits that state on the same interstate a few hours later without even having opened the cargo container, the Import-Export Clause and Commerce Clause clearly protect the computers from taxation by the state.
However, the border-states generally face an additional issue, and it is involved in our client’s affairs. Any last minute marshalling of assets for ease of transport and any last minute modifications are likely to occur within the state where the port is located. If someone other than the shipper takes possession of the item while in Florida, tax could easily attach.
Marshalling and modification generally require possession of the property by the owner or the owner’s agent, and, as discussed above, such possession will generally signify a use. This is not to say that tax attaches as soon as the owner or agent touches the item within Florida, but it does set up a difficult presumption to overcome.
Two Florida cases demonstrate the importance of properly documenting that property is committed to the exportation process and that the process is continuous and unbroken. These cases also demonstrate that the fact that goods are actually exported is not enough to secure immunity from tax.
Fred McGilvray, Inc. v. Askew,340 So. 2d 475 (Fla. 1976), involved a subcontractor involved in a construction project in the Bahamas. The subcontractor purchased materials from sources inside and outside Florida and received the materials at its Florida location. Eventually, the materials were loaded onto contractor-chartered barges and delivered to the Bahamas. However, the subcontractor was not able to present any evidence of the property’s commitment to the export process. The subcontractor did not have bills of lading or export declarations, and because the barges were chartered by the contractor, the subcontractor was not able to present proof of the use of a common carrier.36 The Court held that there was too little evidence of commitment to the export process to find the goods immunized from tax.
Three years after the Florida Supreme Court’s decision in Fred McGilvray Inc., the First District Court of Appeal was presented with another foreign installation contract case.Great Lakes Dredge & Dock Co. v. Department of Revenue, 381 So. 2d 1078 (Fla. 1st DCA 1979), rev. den., 381 So. 2d 765 (Fla. 1980),involved a situation wherein a joint venture was created for the purpose of modernizing the Port of Dammam, the primary port of Saudi Arabia.
Pursuant to the joint venture’s contract with the Saudi Arabian government, the joint venture was required to provide certain materials and equipment for use on the construction project in Saudi Arabia. In order to effectively package and ship the materials and equipment, the joint venture had the property delivered to Dade County, where the joint venture took possession of the property in order to prepare it for shipping and deliver it to a transporter for ocean transport to Saudi Arabia. The property was prepared for shipment, delivered to the transporter, and shipped by the transporter to the foreign port. The Florida Department of Revenue assessed use tax on the property, claiming that the property came to rest within Florida and that the continuity of journey requirement was not satisfied.37
The First District Court of Appeal held that even while the taxpayer was marshalling the property in Dade County, the property was still under the protection of the Import-Export Clause. Relying on the analysis provided by the federal case law and the Florida Supreme Court, the First District Court of Appeal weighed the factors involved in order to determine whether the continuity of journey requirement had been satisfied.
The court found that 1) the purchaser was contractually bound to deliver the goods to Saudi Arabia; 2) the purchaser had bills of lading; 3) export declarations were processed; 4) the purchaser maintained inventories which documented the packaging of the property; 5) many of the purchase invoices were marked “for export”; and 6) many of the purchase invoices even required delivery by a certain date for purposes of meeting overseas shipping dates. Thus, the court held that the goods were committed to the export process from the time they were purchased from the original vendor, and the steps involved in the export process were steps in furtherance of transport and did not subject the property to state taxation.38
If the documentation maintained by the dealer is insufficient, the imposition of tax will be upheld. Beware of the documentation requirements — it is not enough to merely show that the item was actually exported.
In order to enjoy immunity from tax as an export, documentation must establish that property was committed to the export process at the time of sale or import, and that the process remained continuous and unbroken until the property leaves Florida. Records must be maintained that:
a) Identify the property sold;
b) Identify the delivery destination of the property;
c) Establish that the property was not commingled with the mass of property in Florida;
d) Document that the property was committed to the exportation process at the time of sale; and,
e) Document that the exportation process is continuous and unbroken until the property is exported from Florida.39
If the documentation maintained by the dealer is insufficient, the imposition of tax will be upheld.40
Where does this leave our potential client? If you have not guessed it yet, the biggest problem for our client is the modifications by the specialty business in Miami. In our case, the Miami business is arguably an agent of the Illinois manufacturer when it takes possession of the computers within Florida and makes the modifications. Our client, however, could potentially avoid tax by registering as a Florida dealer and retaining detailed documentation that shows export of the items outside Florida. If the manufacturer takes possession before it registers as a dealer within Florida, use tax is likely due on the computers.
1 Each dealer is required to secure, maintain, and keep, for as long as required by Fla. Stat. §213.35, a complete record of tangible personal property received or used, along with any other pertinent documentation required for the administration of Ch. 212. Fla. Stat. §212.13(2). The department is authorized to audit such records to correct any overpayment of tax or to assess and collect any deficiency. Fla. Stat. §212.12(5)(a).
2 A “retail sale” is generally defined as a sale to a consumer or to any person for any purpose other than for resale. Fla. Stat. §212.02(14)(a).
3 See Fla. Stat. §212.05(1)(a).
4 See Fla. Stat. §212.02(19).
5 See Fla. Stat. §212.02(15)(a).
6 An exemption from tax may apply. There are three primary bases for exemption: 1) the property itself may be exempt (e.g., prescription medicine); 2) a party to the transaction may be exempt (e.g., a sale to a public school); and 3) the use to which the property is put may be exempt (e.g., overhead materials for certain N.A.S.A. or Department of Defense contracts). See Fla. Stat. §§212.08(2), (6), and (17).
7 See Fla. Stat. §§212.02(20), 212.05(1)(b), 212.06(1)(a); Fla. Admin. Code §12A-1.091.
8 See Fla. Stat. §§212.05(1)(b), 212.06(1)(a) and (4).
9 United States Gypsum Co. v. Green, 110 So. 2d 409, 412 (Fla. 1959); Fla. Admin. Code §12A-1.091(4). Florida imposes and collects the use tax from the ultimate consumer of the property, who enjoys the use in Florida of the imported property. See Fla. Stat. §212.06(2)(b) and (4); Whitehead & Kales Co. v. Green, 113 So. 2d 732, 734 (Fla. 1st D.C.A. 1959).
10 Department of Revenue v. Kuhnlein, 646 So. 2d 717, 722 (Fla. 1994).
11 Georgia taxes sales at the rate of four percent. See Ga. Code Ann. §48-8-30.
12 See Fla. Stat. §§212.05(1)(b) and 212.06(1)(a).
13 Florida provides a credit for any “like tax” lawfully imposed and paid to another state, territory of the United States, or the District of Columbia. If the out-of-state tax was less than the amount imposed by Florida, Florida only collects the difference. See Fla. Stat. §212.06(7).
14 Fla. Stat. §212.06(7).
15 U.S. Const. art. I, §10, cl. 2 (the Import-Export Clause) and art. I, §8, cl. 2 (the Commerce Clause).
16 See, e.g., Coe v. Errol, 116 U.S. 517 (1886); A.G. Spalding & Bros. v. Edwards, 262 U.S. 66 (1923); Carson Petroleum Co. v. Vial, 279 U.S. 95 (1929); Kosydar v. National Cash Register Co., 417 U.S. 62 (1974); Department of Revenue v. Association of Washington Stevedoring Companies, 435 U.S. 734 (1978).
17 Kosydar v. National Cash Register Co., 417 U.S. 62, 66 (1974). Florida likewise views the questions as the same and considers an item an “export” whether immunized by the Import-Export Clause or by the Commerce Clause. See Fla. Stat. §212.05(1)(a); Fla. Admin. Code §12A-1.0015.
18 Carson, 279 U.S. 95 (1929).
19 Id. at 103 (citing Champlain Realty Co. v. Brattleboro, 260 U.S. 366 (1922)).
20 Fla. Stat. §212.06(5)(a)1.
22 Fla. Admin. Code §12A-1.0015(2)(b).
23 A sale for export is an exemption from tax, and the burden is upon the selling dealer to show entitlement to the exemption, and to maintain records demonstrating entitlement to the exemption. State ex rel. Szabo Food Services, Inc. v. Dickenson, 286 So. 2d 529, 531 (Fla. 1973); Green v. Pederson, 99 So. 2d 292, 296 (Fla. 1957); United States Gypsum Co. v. Green, 110 So. 2d 409, 413 (Fla. 1959); Fla. Stat. §212.13(2).
24 Fla. Stat. §212.06(5)(a)1.
25 Common carrier, contract carrier, or forwarding agent. See Fla. Admin. Code §12A-1.0015.
26 It does not matter whether the seller or the purchaser arranges for the transportation of the property. See Linder Industrial Machinery Co. v. Berry, 385 So. 2d 742 (Fla. 2d D.C.A. 1980).
27 Documentation should be maintained indicating delivery to the carrier or delivery by the seller that identifies a) the item(s) sold; b) the purchaser; and c) the ultimate destination of the item(s). It should be possible to trace and identify the specific item(s) sold throughout the documentation. Note that the dealer is not required to collect tax, but may do so — the Florida Department of Revenue is without authority to compel the dealer not to collect and remit the tax. The purchaser should be entitled to a refund if the requirements of the “safe harbor” are met.
28 Great Lakes Dredge & Dock Co. v. Department of Revenue, 381 So. 2d 1078, 1080 (Fla. 1st D.C.A. 1979), review denied, 381 So. 2d 765 (Fla. 1980); Fred McGilvray, Inc. v. Askew, 340 So. 2d 475, 479 (Fla. 1976).
29 Great Lakes Dredge & Dock, 381 So. 2d at 1081. The legislature’s stated intention is that every sale, use, storage, or consumption of tangible personal property in Florida is subject to tax, unless it is shown by the taxpayer that an exemption or exclusion applies. Fla. Stat. §212.21(2).
30 The legislature has created some limited exceptions. See Fla. Stat. §212.05(1)(a)2. (the sale of a boat or aircraft to a nonresident); Fla. Stat. §212.0598 (air carriers utilizing mileage apportionment); Fla. Stat. §212.06(1)(e) (vessels used solely for demonstration, promotion, or testing); Fla. Stat. §212.06(11) (exported promotional materials); Fla. Stat. §212.08(8) (vessels and parts used in interstate or foreign commerce); Fla. Stat. §212.08(9) (railroads licensed as common carriers and parts used in interstate or foreign commerce; motor vehicles engaged in interstate commerce as common carriers and parts used in interstate or foreign commerce); Fla. Stat. §212.08(10) (sale of a motor vehicle to a nonresident); Fla. Stat. §212.08(11) (sale of an aircraft to a nonresident).
31 See New Sea Escape Cruises, Ltd. v. Florida Department of Revenue, 823 So. 2d 161 (Fla. 4th D.C.A. 2002).
32 New Sea Escape Cruises, Ltd. v. Florida Department of Revenue, 823 So. 2d 161, 163 (Fla. 4th D.C.A. 2002); Florida Department of Revenue v. New Sea Escape Cruises, Ltd.. 894 So. 2d 954, 958 (Fla. 2005).
33 See New Escape Cruises, Ltd., 823 So. 2d at 958. The court specifically noted that the Third District Court of Appeal in Klosters Rederi cited as authority United Air Lines, Inc. v. Mahin, 410 U.S. 623 (1973), where the U.S. Supreme Court held that imposition of a use tax under a similarly worded Illinois statute to the withdrawal from storage of fuel to be used by an interstate carrier did not offend the Commerce Clause of the U.S. Constitution. New Sea Escape Cruises, Ltd., 823 So. 2d at 958.
34 See Carson Petroleum Co. v. Vial, 279 U.S. 95 (1929).
35 Fla. Stat. §212.06(1)(a) and (6).
36 See Fla. Stat. §212.06(5)(a).
37 Great Lakes Dredge & Dock, 381 So. 2d at 1079.
38 Id. at 1084 -1085.
39 Fla. Admin. Code §12A-1.0015(2)(c). See Great Lakes, 381 So. 2d 1078, citing with approval Gough Industries Inc. v. State Board of Equalization, 336 P.2d 161 (Cal. 1959). It should be possible to trace and identify the specific item(s) sold throughout the documentation.
40 Compare Great Lakes Dredge & Dock Co., 381 So. 2d 1078 (Fla. 1st D.C.A. 1979), with Fred McGilvray, Inc. v. Askew, 340 So. 2d 475 (Fla. 1976).
Robert Babin is the deputy director for corporate income, documentary stamp, insurance premium, and miscellaneous taxes in the Department of Revenue’s Office of Technical Assistance & Dispute Resolution. He received his J.D. and LL.M. in taxation from the University of Florida Levin College of Law.
Thomas Butscher is the senior counsel in the Department of Revenue’s Office of Technical Assistance & Dispute Resolution. He received his J.D. from the University of Florida Levin College of Law and his LL.M. in taxation from the University of Denver.
The views expressed in this article are not the opinion of the Department of Revenue.
This column is submitted on behalf of the Tax Section, Edward E. Sawyer, chair, and Michael D. Miller and Benjamin A. Jablow, editors.