Joe: “We are now waiting for our court date with the state of Florida”
Me: “The state of Florida is suing us?”
Joe: “No. YOU are suing Florida.”
Note as of 2021: Florida House Bill 7061 was finally passed in response to my lawsuit: https://www.myfloridahouse.gov/Sections/Documents/loaddoc.aspx?FileName=_h7061er.docx&DocumentType=Bill&BillNumber=7061&Session=2021
How did I get here?
I had just been acquired by a multinational logistics corporation. My board had just told me we are entering a big lawsuit with the state of Florida and while it will take many years to resolve, they believed the evidence of Sales Tax corruption with our competitors was too obvious.
Our company was shipping American goods into South Easter Asia. One of my first acts after getting acquired was to figure out how to reduce the expenses of our products. When we started the company we shipped out of my New York apartment in an act of desperation. New York has one of the highest Sales Tax’s in the country at 8.875%. The most obvious solution was reducing the Sales Tax.
If you do a cursory google on Sales Tax you will learn 5 states have none. Alaska, Delaware, Montana, New Hampshire and Oregon. The issue is these states are far away from people and severely limit the number of warehouses or “3PL”s we would be able to set up at our volume. Additionally, our new overlords had specific low cost shipping routes only in Los Angelos and Miami so however the math worked out they would likely have to be trucked to either of those cities.
Alaska was immediately out of the question from its location.
I called every 3PL I could for weeks in the other states. Nobody in Delaware and Montana was willing to deal with a startup of our size even with our bigger holding company. Oregon and New Hampshire had some potential options but the cost of trucking it added a lot as well as a shipping delay that would annoy our customers. Buying it in Los Angelos even with a 4.45% Sales Tax was still cheaper and faster than any other option.
I decided to delve deeper. Sales Tax is ultimately determined by Zip Code, not the overall state. Maybe I could find a random zip code with a lower sales in one of these states.
And boy did I find out a lot.
I contacted everyone and anyone.
The Department of Revenue of numerous states. Publications on Tax Law. Marketplaces for Walmart and Amazon and Shopify and how they correctly charge Sales Tax for online goods. The head of Fortune 500 tax calculator companies. Eventually, I just started going through every zip code in these calculators for weird quirks.
And forget trying to estimate ales tax on your own as a company. If you are caught overcharging for Sales Tax, you will get hit with a class action “Qui Tam” lawsuit as many retailers have in the past.
Reseller Exemption
I already knew about this method but since we were buying items and reselling them outside the USA to other customers, technically we should have a way to avoid Sales Tax completely. The issue was you needed the supplier to sign off on it and not charge you. Unfortunately, the suppliers didn’t like that we were reselling their products abroad. Those distribution channels are very valuable to them (or they at least assume they are). I suspect they were also worried about fraud or doing customer support in some remote island country which is what we specialized in.
If we could get it to work magically though, there’s a reseller exemption certificate needed in whatever state we were operating out of – in this case, California. If we did some complicated questionable umbrella of corporations in which the buyer was a nonprofit, about half the states would remove our Sales Tax too. If we were an agricultural or biomedical company we could also get some exemptions.
Pirate Joe’s
You may wonder how we could legally buy items against a supplier’s wishes and resell it for whatever price we wanted. We have Pirate Joe’s (https://en.wikipedia.org/wiki/Pirate_Joe%27s) to thank for that. Trader Joe’s refused to open up a shop in Canada citing the same reasons we heard from all these suppliers. So an enterprising guy named Michael Hallatt would just buy all of Trader Joe’s items and drive it across the border and opened his own store he called Trader Joe’s. The entire suit was dismissed but the margins were so thin already Pirate Joe’s didn’t last so long.
I was surprised how “flexible” Sales Tax could be.
In North Carolina, movie studios successfully lobbied to remove Sales Tax on any equipment.
In Tennessee, the county level sets the Sales Tax at 0%, but each city can change it instead.
In Illinois, there is no sales for hygiene like toilet paper.
U.S. territories have their complicated laws but generally no Sales Tax.
Oil rigs have 0% Sales Tax. We could move our operations to an oil rig…
Cruises have a Sales Tax while docked in the USA but at a certain point outside a boundary on the border, it becomes 0%. That means if you start buying drinks too soon in the trip there’s a tax.
Some cities can even have a rare Extra Territorial Tax, meaning you can get the Sales Tax of a nearby city you are not even in or off the borders of states depending on your industry.
One thing kept popping up though, these laws always came into being around election cycles. And none was more mysterious than Florida.
Florida
In Florida, normally with a Sales Tax of 6% I found something no other state seemed to have. A bunch of random zip codes with 0% sales tax.
- 34249
- 33106
- 33126
- 33178
- 33192
- 33195
- 33206
- 33166
A couple were just a few blocks from our Miami warehouse. Ok easy enough I think, we will just rent a space in these zip codes and drive it over to our warehouse and call it a day. But all of these zip codes were of single buildings that weren’t renting out their space.
In fact, these zip codes were owned by competitors of ours.
Several calls with the Florida Department of Revenue yielded no results. They had no records of when and why these came existence. I called back the executives at these tax calculator companies. One quietly told me he suspected this was some election cycle deal with a donor. He used to see this type of thing all the time when he worked in politics.
Finally hitting a wall, I just sent all this info to our board and found myself in a lawsuit.
One Tax lawyer in Florida coincidentally wrote this around the time I emailed my board:
“This policy of establishing unique, tax free zip codes is, interestingly, nowhere in the Florida statutes or Florida administrative code. Questions regarding the Department’s authority to establish such a policy remain unanswered. Furthermore, the procedures for qualifying for this program are unclear. For example, what standards must a freight forwarder meet to obtain a unique, tax free zip code? What is to stop a person within Florida from obtaining an address within these unique zip codes and simply picking up their tax-free goods from the freight forwarder?”
As of 2021, the State of Florida issued Florida House Bill 7061 which lets any freight forwarder get a tax exemption certificate. Unfortunately, this is exactly the same as the reseller certificate, most suppliers won’t agree to this even if technically they don’t need to pay it.
Nothing changed, but hey I got a bill made.