DO YOU NEED TO CHARGE SALES TAX DURING THE MONTHS A LANDLORD OFFERS FREE RENT IN FLORIDA?
Florida is the only state in the country that has a general tax on the rental of real property. As such, taxpayers and practitioners alike find themselves walking in unfamiliar territory when it comes to finding easy answers to questions regarding gray areas in the Florida real property rental realm. Furthermore, as one of the only true 'form over substance' taxes in this county, a well seasoned federal tax professional can often be caught off guard when attempting to apply decades of federal tax experience to provide educated guesses to sales tax situations. So, when authority comes out that helps provide one of those gray areas with a little clarity, we want to help share the knowledge. In this case, the clarity comes in the form of a Technical Assistance Advisement ("TAA") given to a taxpayer that rents out (commercial) real property, but offers several months of free rent to entice new renters. (TAA downloadable at the end of this article)
Per section 212.031(1)(a), Florida Statutes (F.S.), "[E]very person is exercising a taxable privilege who engages in the business of renting, leasing, letting, or granting a license for the use of any real property…" Surprising to many people even living in Florida, this means that ALL real estate rentals are subject to sales tax, unless an exemption applies. For example, there is an exemption to residential rent being subject to sales tax when the residential rental period is for more than six months, however, no such exemption exists in the commercial rental realm.
Even before our Florida economy plummeted down at levels not seen since the Great Depression, Landlords, in recognition of consumers' heightened interest in a good deal, frequently offer a period of rent-free living to entice potential tenants. So you would expect that the question of whether a landlord must charge sales tax during rent free months would have been answered years ago. There numerous answers out there on this topic for both Generally Accepted Accounting Principles ("GAAP") as well as under the Internal Revenue Code ("IRC"), both of which generally require recognition of income over the period of the lease, not when received. However, what is good for the goose is not necessarily good for the gander, and taxpayers who follow either GAAP or the IRC usually end up screaming foul when subjected to a sales tax audit (double pun intended).
Our taxpayer in this case could not find comfort in the Florida statutes or administrative rules, but had the good sense not to call the Florida Department of Revenue's tax hot line for a questionable answer (which is more costly to taxpayers than a 900 number, in my humble opinion). Instead, the taxpayer requested a TAA to get an answer directly from the Tax Assistance and Dispute Resolution division ("TADR") of the Florida Department of Revenue ("FL DOR"), which not only binds this particular taxpayer to the answer, but also the state. As is often the case, a business would be glad to charge sales tax or not. The business simply wants to know whether the transaction is subject to sales tax and a TAA request is the perfect solution in these cases.
Naturally, after a rent-free period, tenants are subject to rent. "Rent" is the consideration that the tenant periodically pays under the lease agreement in order to occupy or use the rental property. Though rent is traditionally envisioned as money, it need not be. See § 212.03(1)(d), Fla. Stat. As the benefit conferred by the renter to the landlord for use of the premises, rent may be services, wares, food, or anything else that benefits the landlord (such as the payment of property taxes on behalf of the landlord).
The point in time when rental payments are taxed is where our issue is raised. To reiterate the question posed, are Landlords required to collect and remit sales taxes from tenants during the rent-free period of a real property lease? At least for this taxpayer following the fact scenario depicted in the TAA issued on October 3, 2012, the answer is no. The taxpayer is accountable for taxes collected on any consideration, but not until such consideration is actually collected. So, even that a Landlord that allows the first three months of occupancy completely free of rent may spread the total rental payments our evenly over the rental period for GAAP or IRC purposes, under Florida sales tax law, it appears that sales tax is only due on rental payments during the months the rental payments are actually received.
If you have any questions about how Florida sales and use tax applies to real property rentals, then please do not hesitate contacting one of our attorneys to answer your questions with a free consultation. If you have other questions about Florida sales tax and would like to bind the FL DOR to an answer, then we would be glad to help discuss your options with filing a Technical Assistance Advisement.
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 IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM AND HIS PRIMARY PRACTICE IS FLORIDA SALES AND USE 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
§ 212.031(1)(a), F.S. (Real property rentals are subject to sales tax)
§ 212.03(1)(d), F.S. (Other types of consideration paid to or on behalf of landlord)
TAA 12A-023 (Oct. 3, 2012) (Rent free periods of real property rental agreements not subject to sales tax)
ADDITIONAL RESOURCES
FLORIDA COMMERICAL PROPERTY OWNERS GET BLINDSIDED BY SALES TAX, Dec. 31, 2011, by James Sutton, CPA, Esq.
© 2012 All rights reserved - James H Sutton Jr