FLORIDA LOW VOLTAGE CONTRACTORS GET BLINDED BY SALES AND USE TAX

Florida low voltage contractors comprise a very large industry in the state of Florida – ranging from small companies that install phone lines in residential households to high tech firms that engineer, install, and maintain high end data networks for big businesses and governments. Low voltage companies handle everything from vacuum cleaners to CAT 5 Ethernet connections as well as wireless routers and security systems. The low voltage industry provides a much needed service helping Florida be one of the most technologically advanced states in the country. The industry also is responsible for a great number of jobs in a state with an economy that has been struggling since 2007. Unfortunately, the Florida Department of Revenue decided to paint a bull's eye on the low voltage industry as a whole – and the scrutiny is going to put a lot of Florida based low voltage contractors out of business. The culprit is Florida Sales and Use Tax. This article is designed to help the low voltage contractor understand how the Florida Department of Revenue is finding and assessing large tax amounts your industry and how to not only improve your business practices to shield against a devastating assessment of taxes, but also to minimize the tax, penalties, and interest due to past mistakes in Florida sales and use tax practices.

Florida's sales and use tax laws seem relatively simple on the surface. A 6% state sales tax rate on the sale of tangible personal property at retail for consideration in the state of Florida. A complimentary 6% state use tax rate on the use of tangible personal property in the state of Florida that was acquired without paying Florida sales tax. There are a few services subject to Florida sales tax, but these taxable services do not affect the low voltage industry (for the most part). So how could Florida Sales and Use Tax get complicated? Unfortunately, Florida low voltage contractors find themselves in one of the most complicated areas of Florida Sales and Use Tax Law – the Real Property Improvement Contract. The question becomes, is a low voltage installation contract the sale of tangible personal property or is it an improvement to real estate? If the low voltage contract is a real property improvement, then does sales tax even apply since real property improvements are not subject to Florida sales tax? If sales tax does not apply, then are any taxes due on low voltage contracts?

The answer to these questions is that Florida low voltage contractors are usually subject to Florida's use tax instead of sales tax. Rule 12A-1.051, Florida Administrative Code ("FAC") is the authoritative rule on "Sales to or by Contractors Who Repair, Alter, Improve, and Construct Real Property." This rule breaks real property contractors into five categories:

(a) Lump Sum Contracts (materials, supplies, and services for one price)

(b) Cost Plus or Fixed Fee Contracts (cost of materials/supplies plus fix price/percentage for services)

(d) Retail Sale Plus Installation Contracts (specifically described and designated materials and supplies at an agreed price plus services at an additional price) (hard to fit into without meticulous documentation)

(e) Time and Materials Contracts (materials at a price/cost plus a fee per amount of time to complete the project).

See, Rule 12A-1.051(3)(d)(a-d). Section 12A-1.051(4) provides that "Contractors are the ultimate consumers of materials and supplies they use to perform real property contracts and must pay tax on their costs of those materials and supplies, unless the contractor has entered a retail sale plus installation contract." Therefore, unless the contractor very specifically fits into the "(3)(d" category of the rule, the low voltage contractor will be deem the final consumer of the materials and supplies and should be remitting use tax on the contractors cost price of the materials and supplies or, better yet, simply pay sales tax when purchasing those materials/supplies.

Unfortunately, from my experience, many low voltage contractors simply charge sales taxes to their customers not realizing that sales tax is usually not due on low voltage contracts. Because a low voltage contract usually involves an improvement to the real property (installation of wires into walls or hardware permanently installed into the building), the low voltage contractor should be accruing a use tax on the cost price of materials used in the low voltage contract instead of charging a sales tax. Most customers don't realize the difference and pay the sales tax without thinking twice. Here's the part that really gets me. The Florida Department of Revenue generally does not even bring up the mistaken sales tax collection practice on audit of low voltage contractors because the sales tax collected on the retail price of the low voltage contract is higher than what the use tax would be on the lower cost price of the materials. Because the state is collecting more tax, the auditors usually do not bring up the discrepancy. This can easily result in the low voltage contractor believing that they are doing everything right and complying with the law. However, this small misperception can have devastating results.

The problem arises when the low voltage contractor starts doing work for clients that are exempt from Florida sales tax – such as a church, county government, school, or university. If the low voltage contractor has a business practice of charging sales tax and the tax exempt customer provides a tax exemption certificate, then the low voltage contractor will often mistakenly believe the entire contract is exempt from Florida sales and use tax. In fact, the low voltage contractor is subject to use tax on all real property improvement contracts, including contracts with clients that are exempt from Florida sales and use tax. The result is that low voltage contractors around the state have a lot exposure for use taxes and the Florida Department of Revenue can assess the tax, plus any applicable penalties and interest, going back three years. The bottom line amount of taxes, penalties, and interest due can be absurdly high for some contractors with tax exempt clients.

The Florida Department of Revenue became aware that this was an industry wide problem and established a task force targeting the low voltage industry. The Florida Department of Revenue is simply identifying every company in Florida with a standard industry classification code related to low voltage work, then reviewing those companies sales tax returns to reveal whether the company is accruing use tax. If there's no use tax, then this is a red flag. Low voltage contractors around the state are receiving Form DR-840 Notice of Intent to Audit Books and Records and most of them believe that they are completely compliant with the law. With this misperception, the low voltage contractor will often handle the Florida sales and use tax audit on their own and never see the problem coming until the end of the audit. When the auditor mentions "use tax" and "3d contractor" in the same sentence, then you know that there is a problem.

If your low voltage company or your client's low voltage company received a Form DR-840 – Notice of Intent to Audit Books and Records, then take the matter very seriously by contacting an attorney that specializes in Florida Sales Tax Audit Defense. The Florida Department of Revenue has its sights on the industry and if the company does even a moderate amount of work for tax exempt clients without remitted Florida sales and use tax, then the dollar amounts of taxes, penalties, and interest due can be staggering. Depending on the work you do, there may be a position to take that some of the contracts are not real property improvement contracts and, therefore, the contract should be tax exempt. This is a very facts and circumstances based argument and it takes someone that really understands Florida's sales and use tax laws as they apply to real property improvement contractors to have a change of winning an argument on this subject. If the position is not clear, then at least the taxpayer could argue to settle the taxes for a lesser amount than the entire amount of taxes proposed by the auditor.

If your company or your client's company has a problem with Florida use tax on low voltage contracts and the Department of Revenue has not made contact, then you should act very fast to participate in Florida's voluntary disclosure program. Through the voluntary disclosure process, you can substantially limit or even eliminate the penalties which might otherwise be 50% or more of the tax due. This can be a substantial savings, but is only available if you file the voluntary disclosure BEFORE the Florida Department of Revenue contacts the taxpayer about a potential audit.

Going forward, every low voltage contractor should learn the difference between the five categories of Rule 12A-1.051(3)(a-e). Make sure that your low voltage company or client's company changes the way Florida Sales and Use Taxes are handled so that either use tax is remitted for real property improvement contracts or the company clearly fits into the category of a "(3)(d)" contractor. Besides protecting your company against potentially devastation use tax assessments, your company will also be able to make lower bids on projects because there will be less overall tax burden on the low voltage real property improvement contracts.

For an article on how to fit into the category of a "3d" contractor under Rule 12A-1.051 specifically for tax exempt customers, read our article FLORIDA CONSTRUCTION ON TAX EXEMPT PROJECTS - MINIMIZING/ELIMINATING SALES AND USE TAXES.

If you have any questions about Florida Sales and Use Taxes on Florida low voltage contracts or other real property improvement contracts, then contact The Law Offices of the Law Offices of Moffa, Sutton, & Donnini, P.A. today. At Moffa Gainor & Sutton PA, we cumulatively have decades of experience focusing almost exclusively on Florida sales and use tax controversy as well as the voluntary disclosure process.

ABOUT THE AUTHOR: JAMES H 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 IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM AND HIS PRIMARY PRACTICE IS FLORIDA TAX CONTROVERSY. MR. SUTTON WORKED FOR THE STATE AND LOCAL TAX DEPARTMENT OF A BIG FIVE ACCOUNTING FIRM 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, ACCOUNTING FOR LAWYERS, AND FEDERAL INCOME TAX I. YOU CAN READ MORE ABOUT MR. SUTTON IN HIS FIRM BIO.

AUTHORITY

RULE 12A-1.051, FLORIDA ADMINISTRATIVE CODE

Technical Assistance Advisement 08A-019 (whether contractor meets requirements of 12A-1.051(d)(3) for a tax exempt customer)

FLORIDA DEPT OF REV TARGETS LOW VOLTAGE INDUSTRY