Florida Bar Journal

When Old Laws Meet New Tech: Florida’s Uncertain Future in State Taxation

The last time Florida decided to be on the cutting edge of state taxes, it did not turn out so well. Facing a revenue shortfall in 1987, the legislature sought new ways to comply with Florida’s constitutionally mandated balanced budget.^[1] Generally, states have three tax sources to pull from: income, sales, and property. However, income tax is not the revenue-generator it is for other states because Florida famously does not have a personal income tax.^[2] Meanwhile, property taxes are administered locally and do not fall under state revenue.^[3] To increase sales tax revenue, the Florida Legislature could either raise the tax rate or expand the tax base. The legislature chose the latter.^[4] In Ch. 87-6, the legislature made clear its intent to eliminate the exemption on services while creating carveouts to protect “essential services.”^[5]

Decades later, this tax is perhaps most remembered because of the pushback from advertising and media companies. Rolling Stone loudly announced a raise of its cover price in Florida.^[6] Networks showed black-out advertisements or replaced advertisements with commercials against the tax.^[7] Even without the pushback, implementation of any sales and use tax on services is difficult in practice and remains difficult today.^[8] It is no wonder that six months later, the tax was repealed and the tax rate increased instead to the 6% state rate we are all familiar with today.^[9]

The circumstances could not be more different today. In fact, Florida considered reducing the state sales tax rate this year from 6% to 5.25%.^[10] Although that rate reduction did not come to pass, the Florida Legislature did eliminate the unpopular commercial rent tax effective October 1, 2025.^[11] With record high “rainy day funds,” Florida voters will get to decide next year whether the Budget Stabilization Fund can be increased from 10% to 25% of revenue collections from the General Revenue Fund.^[12] Florida is substantially better off than the 20 states facing either a conditional or challenging short-term fiscal outlook.^[13] Currently, Gov. Ron DeSantis has initiated audits of local governments in the broader context of determining whether, and how, property tax relief may be feasible in the future.^[14]

Among all this success, there is a side effect. Florida’s taxing statutes remain neglected and, resultingly, outdated compared to states more pressed to raise revenue. On the surface, old laws are great for new businesses. Technology companies and their consumers engage in sales not even imagined at the time our taxing statues were written. As Florida law is clear that taxing statutes are strictly construed with all ambiguities or doubts “resolved in the taxpayer’s favor,”^[15] tech companies remain safe by staying ahead of laws that haven’t evolved to keep up, or, they should be.

However, on audit, many tech companies have recently found themselves in a “safe haven turned trap” as old laws are being stretched into the future and applied in unpredictable ways. It is clear the tech industry has been taken by surprise as the number of tax cases in litigation rises. The Florida Department of Revenue’s latest attempts to capture income and transactions from outside the taxing statutes are surprising in a time of such fiscal prosperity for the state. Moreover, states that have been aggressive in expanding the tax base, especially in the area of tech, typically maintain a state tax court.^[16] Florida does not.^[17] Without a state tax court or any incentive for the legislature to expand the tax base, the future of state taxation of tech in Florida may be determined over the next several years by a handful of cases across the state. Accordingly, the future of Florida state tax in this area has never been so nebulous.

Tax on Recent, New, and Emerging Technology

At the forefront of state taxation on emerging tech is Maryland, which enacted its own tax on advertising.^[18] Unlike the 1987 Florida tax, Maryland’s tax is on digital advertising such as those seen on social media and other tech platforms. However, like the 1987 Florida Tax on advertising, it has not gone smoothly with challenges ranging from the First Amendment to the Internet Tax Freedom Act.^[19] It is important to note that Maryland identified a revenue source and enacted new legislation to tax it rather than incorporating it into a preexisting tax, such as sales and use tax. In a tax code numbered 1-13, Maryland chose 7.5 rather than 14 for its “Digital Advertising Gross Revenues Tax.”^[20] There can be no ambiguity as to the nature of the tax, even while current litigation leaves unclear whether it is constitutional.

Comparatively, Florida enacted a new tax in 2001 called Communications Services Tax (CST).^[21] Although Ch. 202 is titled, the “Communications Services Tax Simplification Law,” it has proven to be anything but simple. Most recently updated in 2014, F.S. §202.11(1) defines communications services as follows:

“Communications services” means the transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including video services, to a point, or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for such transmission or conveyance. The term includes such transmission, conveyance, or routing in which computer processing applications are used to act on the form, code, or protocol of the content for purposes of transmission, conveyance, or routing without regard to whether such service is referred to as voice-over-Internet-protocol services or is classified by the Federal Communications Commission as enhanced or value-added.

As if such a long definition is not already confusing, the statutory definition of “communications services” excludes the following: 1) Information services; 2) installation or maintenance of wiring or equipment on a customer’s premises; 3) the sale or rental of tangible personal property; 4) the sale of advertising, including, but not limited to, directory advertising; 5) bad check charges; 6) late payment charges; 7) billing and collection services; 8) internet access service, electronic mail service, electronic bulletin board service, or similar online computer services.^[22]

There is no question why advertising was excluded from the statutory definition of communications services after the 1987 incident. However, one frequent problem in applying this tax is determining whether new tech is a taxable “communications service” or nontaxable “information service,” which remains unclear even as the consequences are so high for businesses caught in the crosshairs. Consider whether AI is a communication service or an information service to understand the dilemma of every Florida SALT attorney.

Historically, the boundaries of CST were limited to the telecommunications industry. Agency guidance from 2002 asked whether charges for answering services with live operators that include, as part of the charge, automated voicemail and an auto attendant feature, and separately stated charges for the usage of a 1-800 line, the transmission of messages by fax or pager, the sale or lease of a pager, and pager protection were subject to the tax.^[23]

Netflix, founded in 1997 so that users could rent DVDs by mail, did not begin offering streaming services until a decade later, and six years after CST was enacted.^[24] Though the law has been updated since its inception, the core nature of CST remains rooted in a time when the internet was just starting to take off and the tech that is taken for granted today did not exist.

It is unclear how, then, the current landscape of CST has broadened so widely. The Department of Revenue has issued agency guidance in the last several years determining that CST covers transactions including personalized videos from celebrities,^[25] online educational videos,^[26] and even bar prep courses.^[27] However, if this agency guidance is outside the plain meaning of the tax statute, as it could be, it is invalid under Florida’s Administrative Procedures Act (APA).^[28]

The Department of Revenue does not have the right to create laws, a power expressly reserved to the legislature.^[29] Therefore, rather than agency guidance from the department, the bounds of Florida’s CST in the next several years may be determined, in part, by the ongoing case, T-Mobile South LLC v. Dep’t of Rev., 2024 CA 2137 (Fla. 2d Cir.). In T-Mobile, the Florida Department of Revenue assessed CST on Netflix subscriptions offered through T-Mobile’s “Netflix On Us” promotion. Under this program, T-Mobile provided customers with free Netflix service when purchasing a qualifying wireless plan. The department took the position that T-Mobile owed CST on the Netflix subscriptions included in the promotion. T-Mobile has argued that CST is imposed on the seller of communications services based on the sales price of communications services sold at retail. Therefore, because the tax base is limited to the amount actually charged for such services, no tax is due because the service is provided for free to customers.

Significantly, T-Mobile has also argued that Netflix is not a “communication service,” and that sales of CST between two dealers for use in providing CST services are exempt under Technical Assistance Advisement 23A19-001. The resolution to both these issues will have far-reaching implications for the tech businesses operating in Florida.

Rather than follow a state like Maryland and create a new tax specifically to capture emerging tech, the Florida Legislature has made no move to tax this industry. Instead, the Florida Department of Revenue made the move to include them in the CST. In both instances, tech companies have shown they are willing to fight expansions of the tax base. However, Florida remains unique in its approach.

Incorporations of Technology in the Sales and Use Tax Base

Like most states, Florida’s sales tax base is generally divided by tangible personal property and services.^[30] Specifically, Florida sales tax is on retail sales of tangible personal property, unless exempt, and select services.^[31] Because Florida has not enacted new legislation imposing tax squarely on recent, new, and emerging tech, we remain operating under sales and use tax laws written to tax CDs and DVDs, but not Spotify or Netflix subscriptions.

Comparatively, many states are on their second or third iteration of tax on digital goods and services. The Indiana Department of Revenue recently issued guidance on the taxability of AI chatbox services^[32] citing various statutory provisions, such as: 1) the definition of prewritten software in the definition of a retail transaction;^[33] 2) the exclusion of Software-as-a-Service (SaaS) from the tax base;^[34] and 3) the definition of specified digital products.^[35] As with any agency guidance, the department’s position may be within or outside the statute and rules. However, at least in Indiana, there is a statute that can be pointed to with clear definitions of terms.

In Florida, any agency guidance imposing sales tax on new and recent tech, such as digital goods or SaaS, is potentially invalid because it is inherently outside the scope of our outdated taxing statutes. However, that has not always stopped the Florida Department of Revenue from taking positions in litigation that sales tax is due on software services.

Most recently, the Florida Department of Revenue took the position that the taxability of software updates is dependent on the nature of the original software product for which the upgrades and support agreement were purchased, and whether upgrades are considered to be renewals of the initial transaction.^[36] The department lost on that argument in the Division of Administrative Hearings but prevailed on other grounds on appeal, leaving open the question of whether that issue may be raised again.^[37]

The question in the early 2010s was whether it was fair for Florida businesses selling tangible personal property in brick-and-mortar stores to be responsible for sales and use tax while remote, online retailers were not. That playing field was leveled in 2018 by the U.S. Supreme Court in South Dakota v. Wayfair, 585 U.S. 278 (2018). The question today may be whether it is fair for sellers of tangible personal property to be subject to sales and use tax while sellers of digital goods and services are not, particularly in instances where the same good may be sold either through a tangible or intangible medium. For now, the answer does not matter in Florida. The sales tax statutes do not tax digital goods and services.

State Income Tax Sourcing and Technology Companies

One of the most difficult areas of state tax is sourcing income. Perhaps the well-cited comment from Container Corporation of America v. Franchise Tax Board, 463 U.S. 159, 192 (1983), says it best:

Allocating income among various taxing jurisdictions bears some resemblance, as we have emphasized throughout this opinion, to slicing a shadow. In the absence of a central coordinating authority, absolute consistency, even among taxing authorities whose basic approach to the task is quite similar, may just be too much to ask.^[38]

If slicing a shadow was difficult in 1983, when Container Corporation of America was decided, it is chaos in 2025. Consider the following example: U.S. Software, Co., sells U.S. Business 2,000 licenses for remote-access software to be used by employees in all 50 states. Those employees work remotely, and many of them travel frequently both within and outside of the U.S. Around 200 of the licenses remain unused. All of U.S. Software, Co.’s transactions are like this. How is U.S. Software, Co.’s income allocated?

The recent trend for sourcing revenue from services began with “cost-of-performance” sourcing and then moved to “market-based” sourcing.^[39] As the name implies, the cost-of-performance methodology looks to where the costs of performing the service are incurred. Cost-of-performance sourcing generally allocates income to the state where the business is located because that is where the costs in performing the service occur. Meanwhile, market-based sourcing looks to the location of the customer or consumer. Therefore, market-based sourcing allocates income more broadly across the customer base. More than two-thirds of states now use market-based sourcing. However, states take different approaches in applying these methodologies.^[40]

The transition from cost-of-performance to market-based sourcing has not always been smooth. In 2023, the Pennsylvania Supreme Court addressed a sourcing dispute over whether cost-of-performance or market-based sourcing was the right method under Pennsylvania law.^[41] Ambiguity over the proper sourcing method came from a Pennsylvania law derived from UDITPA §17.^[42] Synthes USA HQ, Inc., a Pennsylvania-based company, argued that its receipts should be sourced to the location of its customers. In a highly unusual situation, the Pennsylvania Department of Revenue advocated for market-based sourcing, while the Pennsylvania Office of the Attorney General defended the cost-of-performance methodology. The Pennsylvania Supreme Court ultimately sided with the Department of Revenue, holding that service receipts should be sourced to the customer’s location, making Pennsylvania one of the few jurisdictions to adopt a market-based interpretation of cost-of-performance for the years at issue.

The dangers of old law in a modern world are apparent in Synthes USA HQ, Inc. v. Commonwealth, 289 A.3d 846, 855 (Pa. 2023). When the overwhelming majority of states have moved on to market-based sourcing, the failure to evolve creates friction for the few states that buck the trend. Unsurprisingly, Florida is one of these few states left with cost-of-performance sourcing of services.^[43] Perhaps also unsurprising is that Florida’s cost-of-performance sourcing is not in Florida’s corporate income tax statutes at all.^[44] Rather, it was created by rule in the Florida Administrative Code.^[45]

It is not difficult to understand that Florida receives very little income tax from tech companies under the cost-of-performance sourcing method. Many of the largest tech companies, including Apple, Amazon, Google, and Meta, are all located on the West Coast of the U.S. If service income is sourced based on cost-of-performance, then most income from the largest tech companies in the country is being sourced to California and Washington.

Perhaps sensing a disparity, the Florida Department of Revenue began issuing agency guidance against its own cost-of-performance rule in 2021.^[46] Because cost-of-performance sourcing is by rule and not statute, the Florida Department of Revenue could have simply amended the rule. However, it instead made the switch from cost-of-performance to market-based sourcing by agency guidance and with surprise assessments of various tech companies.^[47] Litigation regarding Florida’s sourcing of services remains ongoing.

So far, none of the tech companies have brought administrative challenges against the Department of Revenue’s policy that cost-of-performance sourcing for services will now be market-based sourcing. However, the issue appears ripe for a challenge under Florida’s APA, and, in particular, its prohibition on unadopted rules.^[48]

Conclusion

Florida is no longer in the poor fiscal situation it was in 1987, when it last decided to be at the forefront of state tax on services. In the decades since, the service industry has only grown with emerging technologies like digital goods, SaaS, data processing, AI, and more. Florida’s taxing statutes are old, stale, and arguably too brittle to incorporate technology to the extent needed to keep up with other states. The Florida Department of Revenue has taken the position that the current laws and regulations of the state can capture sales and income from tech companies, but the result has come as a surprise to the industry. The legislature’s silence on the matter may be because Florida does not need to keep up with other states. After all, an important lesson from 1987 is that aggressive tax policy is not always the best in practice.

This column is submitted on behalf of the Tax Section, J.J. Wehle, chair, and Charlotte A. Erdmann, editor.