FL Sales Tax – Cash or Accrual Basis?
While the age old question of what comes first – the chicken or the egg – gets much more press, the question of whether Florida sales tax should be accounted for on the cash or accrual basis is probably more important to most Florida business owners. Unfortunately, the question is often not raised by anyone until the Florida sales tax auditor comes a knocking. This purpose of this article is to answer the cash or accrual basis question once and for all. Unfortunately, as with most things sales tax related, the answer is not a simple yes or no answer. The answer depends on the type of transaction.
If you have ever bought furniture from Rooms to Go, then you probably remember that while the company runs great advertising campaigns offering "no payments and no interest for 36 months," the fine print requires you to pay two things when you sign the contract for your furniture to be delivered. One – you have to pay for the delivery. Two – you have to pay the sales tax. This simple, real life example teaches us the general rule that Florida sales tax should be accounted for on the accrual basis.
The General Rule: So when the contract is signed, sales tax is usually due right then and there – i.e. Accrual Basis. However, unlike Rooms to Go, not all businesses require their customers to pay sales tax when the contract is sign. So even if your customers do not pay for 30, 60, or even 90 days, the selling vendor must account for and remit the sales tax for the month when the contract was entered into. Industries with extended payments terms can be dramatically affected by this rule. The construction industry is a prime example.
A lumber yard sells $30,000 of lumber to a general contractor on June 15th, with 45 day payment terms. The customer does not pay the $30,000 or the $1,800 of sales tax (presuming 6% sales tax rate) until July 30th. However, the vendor must file and remit the sales tax related to this sale no later than July 20th (19th if the business files electronically) even though the lumber yard has not even collected the tax at that point. This can be a huge financial burden on some industries, but it is the law and the penalties can get very expensive for not remitting the sales tax timely.
But what if the customer never pays you? You have been forced to pay sales tax that you never collected? This is a very good question. If you remit tax for a customer that never pays you – or does not pay the full amount due, then you can take a bad debt credit on your sales tax return. The down side is that you must take this bad debt credit within 12 months of writing off the debt. So if you have been remitting sales tax for years on transactions that you never received full payment, you only get to go back 12 months from the date you wrote off the bad debt. Industries that can be heavily affected by this rule are ones that tend to reposes often. The first industry that usually comes to mind on repossesses is car dealers. The Buy Here, Pay Here car industry is booming, but it has many sales tax complications. Worthy of note, while you are entitled to take a repossession credit for sales tax not collected, the FL DOR heavily scrutinizes any credits taken on sales tax returns.
The Exception: With every general rule, there is an exception. In this case, the exception in Florida is rent.
Sales tax on rent is computed on the cash basis. If the tenant does not pay rent, then you do not have to remit sales tax. This exception will even catch sales tax auditors off guard occasionally. So if you collect rents in Florida, then make sure your business properly accounts for sales tax on the cash basis, but only for rent. Everything else subject to sales tax in Florida should be accounted for on the accrual basis.
About the author: Mr. Sutton is a Florida licensed CPA and Attorney and a shareholder in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Sutton's primary practice is Florida tax controversy, with an almost exclusive focus on Florida sales and use tax. Mr. Sutton worked for in the State and Local Tax department of one of the Big Five accounting firms for a number of years and has been an adjunct professor of law at Stetson University College of Law since 2002 teaching State and Local Tax and at Boston University College of Law since 2014 teaching Sales and Use Tax. Mr. Sutton is a frequent speaker on Florida sales and use taxes for the FICPA, Lorman Education, NBI, and the Florida Society of Accountants. Mr. Sutton is also the State and Local Tax Chairman for the American Association of Attorney – Certified Public Accountants. You can read more about Mr. Sutton in his firm BIO HERE.
AUTHORITY
Rule 12A-1.056 Tax Due at Time of Sales; Tax Returns and Regulations
ADDITIONAL RESOURCES
IS RENT SUBJECT TO FLORIDA SALES TAX?, published January 26, 2015, by Jerry Donnini, Esq.
MELBOURNE USED CAR DEALER ARRESTED FOR SALES TAX FRAUD, published January 25, 2015, by James Sutton, CPA, Esq.
WHEN A CLOSED BUSINESS ISN'T CLOSED TO FL DOR, published September 26, 2014, by Matthew Parker, Esq.
2015 FL DISCRETIONARY SALES SURTAX RATES, published January 5, 2015, by James Sutton, CPA, Esq.
WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA, published May 1, 2012, by James Sutton, CPA, Esq.