During its 1987 session, the Florida legislature enacted a sales and use tax on a broad range of services consumed in the state. Because the tax systematically sought to tax services that were performed outside the state but used in Florida (including national advertising), the levy triggered an enormous storm of protest with opponents attacking it as unfair, unwise, and unconstitutional. This article traces the historical development of Florida's sales tax on services, examines its design and operation, explores the policy questions that the tax raised, considers the legal challenges to the levy's validity, and describes the events that led to its ultimate repeal.
B. The Operation of the Statute
2. Rules for Determining Where the Benefit of a Service Was Enjoyed
3. Collection of the Tax
1. The Sale for Resale Exemption
2. Other Exemptions
D. Particularized Treatment of Special Industries
A. The Case for and Against Extending the Sales Tax to Services
B. Use Tax on Services
C. Appoirtionment of the Sales and Use Tax on Services
A. Taxation of Advertising Services and The First Amendment
B. Taxation of Legal Services, the Right to Counsel, and Equal Protection
C. Due Process and Commerce Clause Issues
*University of Georgia
This article is used with permission of the author and appeared in 41 Nat'l Tax J. 1 (March 1988). [PDF version]
General retail sales taxes, today's most significant source of state tax revenue,1 have been confined largely to sales of tangible personal property.2 Although most states tax some services,3 the states (with a handful of exceptions4) do not tax services generally. The explanation for the limited scope of the sales tax base lies partly in history and partly in politics. It does not lie in the dictates of sound fiscal policy which in the eyes of most observers would justify the extension of the sales tax to many services.5
During its regular 1987 session, the Florida legislature enacted a sales and use tax on a broad range of services consumed in the state. Although state tax legislation does not usually make the front page of The New York Times, Florida's action was an exception.6 Two features of the tax attracted particular attention: first, the tax systematically sought to tax services that were performed outside the state but used in Florida; second, the tax sought to tax advertising—including national advertising—if the advertising service was used in the state. As a result of these and other aspects of the tax, the levy triggered an enormous storm of protest, with opponents attacking it as unfair, unwise, and unconstitutional. In December 1987, less than six months after the tax took effect, the Florida legislature responded to the widespread opposition to the tax by repealing it effective January 1, 1988.
This article traces the development of Florida's sales tax on services, examines its design and operation, explores the policy questions that the tax has posed, considers the legal challenges to the levy's validity, and describes the events that led to its repeal. Although I cannot claim to be a disinterested observer of rise and fall of Florida's sales tax on services,7 I have attempted to present the issues raised by the tax in an evenhanded manner.
Items or links in [square] brackets were not part of the original document.
**In the interest of full disclosure, it should be noted that I played a significant role in drafting Florida's sales tax on services and that I served as counsel to the Florida Department of Revenue in connection with its legal defense of the statute. The views expressed in this article are my own, however, and do not necessarily reflect the views of the Florida Department of Revenue. In preparing this article, I have drawn freely from Walter Hellerstein, Extending the Sales Tax to Services: Notes From Florida, Tax Notes, Feb. 23, 1987, p. 823, and Walter Hellerstein, A Primer on Florida's Sales Tax on Services, Tax Notes, June 22, 1987, p. 1219. I would like to acknowledge the helpful comments of two anonymous reviewers of an earlier draft of this article.
1 In 1986, general sales taxes accounted for 32.8 per-cent of the tax revenue collected by all the states. U.S. Bureau of the Census, State Government Tax Collections in 1986 1 (1987). Individual income taxes, which accounted for 29.6 percent of state tax revenue, ranked second. Id.
3 Many states tax public utility services, hotel and motel services, and admissions. Id. at 83-98. See also Timothy E. Marx, Sales Taxation in the Service and Information Economy, 7 Hamline L. Rev. 19, 21-23 (1984) [Access in HeinOnline].
4 Hawaii, New Mexico, and South Dakota have taxed the sale of a broad range of services for a number of years. Iowa also taxes more services than most other states. See Note, State Revenue Systems: Impact of the Tax on Services in Iowa, 54 Iowa L. Rev. 64 (1968) [Access in HeinOnline].
5 John F. Due, Proposed Application of the Illinois Sales Tax to Services, 44 Ill. Bus. Rev., No. 3, p. 3 (June 1987); Due and Mikesell, supra note 2, at 88-89; Jerome R. Hellerstein, Significant Sales and Use Tax Developments During the Past Half Century, 39 Vand. L. Rev. 961, 964-65 (1986) [Access in HeinOnline]; Daniel C. Morgan, Retail Sales Tax 127 (1964).
6 "Florida Extends Its 5% Sales Tax Past State Line," New York Times, April 25, 1987, p. 1, col. 5. The action was widely reported in other national media as well.