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]
Because the Florida Constitution prohibits a tax "upon the income of natural persons,"8 the state has long been heavily dependent on the sales tax as its principal source of state tax revenue.9 Since the enactment of the sales tax in 1949, the state has been under steady pressure to raise the rates or expand the base of the tax to meet the increasing fiscal demands created by the state's rapid growth. During the quarter century following enactment of Florida's sales tax, the rate was increased from three to five percent and the base was broadened to include, among other things, specified services. But, with a few exceptions, the tax remained essentially what it had been from the outset—a levy on sales of tangible personal property, admissions, and transient accommodations. Services were generally excluded from the sales tax base.
During the 1980s, the pressure on Florida to expand its sales tax base became more intense. As stated in the report prepared by the State Comprehensive Plan Committee (popularly known as the “Zwick Commission”), which was charged with recommending the means of financing the legislature's State Comprehensive Plan:
The growth of Florida is relentless. Since 1980, we have averaged 893 new residents every day.
. . . 6,268 every week.
. . . 27,163 every month.
. . . 325,960 every year.
. . .
What they don't bring are the roads, the bridges, the schools, and all the vast and varied human services needed to realize [their] dreams.
. . .
. . . our low tax rates and our undue reliance on a narrow-based sales tax keep us from having the stable and reliable flow of governmental revenues that is needed to attract and accommodate quality growth.10
In response to these pressures, the Florida legislature first expressed its intent to impose a broad-based tax on services in June 1986. Chapter 86-166 of the Laws of Florida, enacted in the closing hours of the 1986 legislative session, extended Florida's preexisting sales tax to services by imposing a tax "[a]t the rate of 5 percent of the consideration for performing or providing any service."11 At the same time as it affirmatively expanded the scope of the sales tax to include services, the legislature repealed numerous exemptions from the sales tax, including the exemption for "professional, insurance or personal service transactions which involve sales as inconsequential elements for which no separate charges are made."12 The legislature postponed the effective date of the sales tax on services and the repeal of most of the exemptions addressed by Chapter 86-166 until July 1,1987.
The legislature's decision to postpone for a full year the effective date of the sales tax on services and the repeal of exemptions reflected its recognition that its action had significant policy, revenue, legal, and administrative implications that warranted further consideration and, perhaps, further legislative attention during its 1987 legislative session. To this end, the legislature directed that two studies be undertaken. The first was a study of the revenue effects of Chapter 86-166 and of the legal and administrative issues it raised. The legislature assigned this task to the Department of Revenue in consultation with the Revenue Estimating Conference.13 The second was a study of "the public policy and fiscal impact of the exemptions from the sales tax" which was to include recommendations as to the exemptions' retention, modification, or repeal.14 To carry out this study, the legislature created a 21-member Sales Tax Exemption Study Commission appointed by leaders of both houses of the legislature and by the Governor. Both studies were to be completed prior to the legislature's 1987 session.
The Department of Revenue's study was completed in early March 1987.15 The Department's study, in addition to considering the revenue impact of Chapter 86-166, contained an extensive legal analysis of Chapter 86-116.16 Beyond identifying a number of problems raised by Chapter 86-116,17 the legal analysis contained a model annotated revision of Florida's preexisting sales tax designed to provide the legislature with a workable alternative to Chapter 86-166. The revision was concerned largely with technical and structural issues, such as integrating the preexisting provisions of Florida's sales tax with the sales tax on services, and not with issues of tax equity (e.g., exemptions). Indeed, it explicitly disavowed anyintent to make substantive changes in Chapter 86-116 or in the preexisting sales tax, other than a few changes that had been specifically identified.18 The model annotated revision was thus offered as "the first cut at a working draft of legislation that will no doubt be modified or, perhaps, rejected altogether in the months to come as those entrusted with the respon-sibility of enacting legislation confront the issues . . . tentatively addressed in the Revision."19
The Sales Tax Exemption Study Commission's report was completed in early April 1987, after months of information gathering, public hearings, and private deliberation.20 The Commission's report recommended the enactment of a broad-based sales tax on services and generally endorsed the "technical recommendations" of the model annotated revision in the Department of Revenue report that "serve to integrate the taxation of services with the provisions of the current tax law."21
During March and April of 1987, the Governor, the Senate, and the House turned their attention to Florida's revenue needs and to the sales tax on services. The studies by the Department of Revenue and the Sales Tax Exemption Study Commission, as well as the model annotated revision contained in the Department of Revenue Report and subsequently endorsed by the Commission, provided the starting point for legislative consideration. They were, however, subjected to intense scrutiny by the Governor, by the Senate and House Finance and Tax Committees and their expert staffs, and by other interested parties who expressed their views formally at public hearings and informally through communications with representatives of the executive and legislative branches. In the course of these deliberations, the model annotated revision was substantially refined and modified to accommodate concerns expressed over such matters as the treatment of particular industries (e.g., advertising, construction, and transportation), exemption of particular services (e.g., health, social, and agricultural), and the administration of the tax. The legislative package that emerged as Florida's sales tax on services was the culmination of this process. On April 23, 1987, the Governor signed Chapter 87-6 which im-posed a broad-based sales and use tax on services effective July 1, 1987.22
During the balance of the 1987 legislative session, the legislature considered proposed changes to Chapter 87-6, many of which were designed to correct perceived technical errors in the tax as originally enacted, such as the definition of various taxable and exempt services. The bill designed to correct these errors—a bill that was modified on a frequent basis as the session progressed—was popularly known as the "glitch bill." The "glitch bill" was enacted in June 1987 during the final hours of the regular legislative session.23 On July 1,1987, Florida's sales tax on services (Chapter 87-6 as amended by Chapter 87-101) went into effect.
Items or links in [square] brackets were not part of the original document.
9 In 1986, Florida derived 55.1 percent of its state revenue from the general sales tax. U.S. Bureau of the Census, State Government Tax Collections in 1986 6 (1987).
11 Ch. 86-166, § 3, 1986 Fla. Laws 816, 819. For a detailed consideration of the legislative history of the tax, as well as an exploration of the legal questions it raised, see Robert A. Pierce and Carol D. Peacock, Broadening the Sales Tax Base: Answering One Question Leads to Others, 14 Fla. St. U.L. Rev. 463 (1986). [Access in HeinOnline]
13 Gen. Approp. Act, Ch. 86-167, § 1, line 1588A, 1986 Fla. Laws 1058. The Revenue Estimating Conference, which is composed of representatives of the executive and legislative branches, is required by law to "develop such official information with respect to anticipated state and local government revenues as the conference determines is needed for the state planning and budgeting system." Fla. Stat. Ann. 5 216,136(3) (Supp. 1986).
15 Florida Department of Revenue, Report to the Florida Legislature: Legal, Administrative and Revenue Implications of Chapter 86—166, Laws of Florida: Repeal of Sales Tax Exemptions for Services and Selected Transactions (1987).
16 Walter Hellerstein, Prentiss Willson, Jr, and Morrison & Foerster, Legal Study of Florida's Sales Tax on Services (1987). The legal study was included in the Department of Revenue's Report to the Legislature. See note 15 supra.
17 Among other things, the legal study concluded that Chapter 86-166 raised problems of (1) unconstitutional delegation of legislative power to executive agencies, (2) unconstitutional imposition of a tax upon the income of natural persons, and (3) confusion and uncertainty over the meaning of the phrase "5 per-cent of the consideration for performing or providingany service." Id. For a more sanguine view that Chapter 86-166 would have passed constitutional muster not withstanding Florida's prohibition on income taxes on natural persons, see Joseph W. Jacobs, Florida's New "Income" Tax, 14 Fla. St. U.L, Rev. 491 (1986) [Access in HeinOnline].
18 The agreement between the Department of Revenue and the consultants that were retained to prepare the legal analysis provided that “[n]o substantive changes to Chapter 212 [the preexisting sales tax] outside 86-116 are to be made. The only changes to existing (Chapter 212) language will be those required to interface the Chapter 86-166 annotated revisions into Chapter 212.” Hellerstein, Willson, and Morrison & Foerster, supra note 16, at 59 (emphasis in original).
20 Florida Sales Tax Exemption Study Commission, Report and Recommendations of the Sales Tax Exemption Study Commission (1987).
23 Chapter 87-101, 1987 Fla. Laws 842. The provisions of a more limited "glitch" bill enacted earlier in the session. Chapter 87-72,1987 Fla, Laws 273, were incorporated in Chapter 87-101.