Florida's largest industry is tourism, with hotels, restaurants, and car rentals being a constant source of revenue for both Florida's tourism industry as well as the state of Florida from the sales taxes (and other taxes) imposed on this industry.Residents of Florida should welcome these taxes as a very effective way of passing on the cost of our state and local government system on to tourists and we are talking about hundreds of millions of tax dollars each year.However, as any hotel owner will tell you, there are a significant number of "tourists" that are able to stay in Florida hotels without paying sales tax, discretionary surtaxes, or even the tourist development taxes normally imposed on hotel room sales.If a hotel guest works for tax exempt entity and proper procedures are followed, then the hotel does not have to charge state or local taxes on the room charges.
The hotel is charging the same room rate and making the same profit regardless of whether the state collects taxes on the hotel stay.Therefore, one would think that the hotel would not care about tax exempt guests one way or the other.However, any hotel owner that has been through a Florida sales tax audit will tell you that tax exempt sales can be an administrative nightmare with dire consequences for not following the administrative rules imposed by our comrades in Tallahassee, the Florida Department of Revenue.At the heart of this article are two law suits filed against the Florida Department of Revenue and referred to the Division of Administrative Hearings (DOAH) on January 4th 2013, which are perfect examples of what can happen if the administrative rules surrounding tax exempt hotel guests are not following to the letter.Before we discuss the cases, let’s make sure we are clear on the relevant law.
Section 212.03, Florida Statutes (F.S.), imposes a 6% sales tax on the privilege of engaging in the rental of sleeping accommodations.The tax is imposed on the "total rental charge," which only includes amounts required to be paid by the guest as a condition of the use or possession of the accommodation. See, Rule 12A-1.061, Florida Administrative Code (F.A.C.).Therefore, a hotel located in Florida must charge Florida sales tax (and other local taxes that can exceed the state sales tax) unless an exemption applies.Section 212.08, F.S., provides a general exemption from sales tax for charities, schools, and other federal income tax exempt entities.Section 212.08(7), F.S., however, provides the sales tax exemption allowed to tax exempt entities is only available if the tax exempt entity pays for the otherwise taxable transaction directly (employee reimbursement is not allowed).Rule 12A-1.061(14)(b)1, F.A.C., goes on to limit the exemption allowed to tax exempt entities when (1) the rental charges are billed directly to and paid directly by the exempt entity, (2) the entity's representative does not use the accommodations for personal use, and (3) the entity's representative provides the retailer with the sales tax exemption certificate.Finally, under Florida's draconian sales tax 'guilty until proven innocent' rules, the retailer must prove to the Department of Revenue that all three of these requirements have been met by retaining not only the tax exempt entity's exemption certificate, but also (according to the DOR in this case) proof that the tax exempt entity paid for the good or service directly.The proof requirement is at the heart of the cases being discussed in this article.
Patrick Rishe, Esq. with Hill, Ward, and Henderson, P.A. represents the taxpayers in these cases.Patrick is one of the state's top property tax attorneys, but ventures into other state tax matters as well.The taxpayers are sister companies, McKibbon Hotel Group of Gainesville Florida 2, LP and McKibbon Hotel Group Gainesville 3, LLC, both owned by McKibbon Hotel Group, LLC.For those readers familiar with Gainesville, the number 2 entity owns the Homewood Suites and number 3 entity owns the a Hilton Garden Inn, both in Gainesville.The McKibbon Hotel Group, based in Tampa, Florida, is a family owned co 
mpany with a long standing history of hotel development, ownership, and management in Florida, starting out as Holiday Inn franchise owners back in the day when Holiday Inns swept the country (and most of western Europe) with a new standard of hotel stay.Now with 26 high end hotels in Florida as well as more hotels in other states, the McKibbon Hotel Group is a force to be reckoned with in the industry ( www.McKibbon.com).Anyone familiar with the requirements imposed by international hotel franchise chains like Holiday Inn, Hilton, and Marriott knows that sloppy management is simply not an option if you want to keep your franchise.Therefore, it takes little effort to imagine just how good this company is at managing hotels and the paperwork administrative functions that surround the industry.However, Florida's requirements for tax exempt sales are beyond the normal administrative function of the hotel industry.
Both of the taxpayers in these cases were audited by the Florida Department of Revenue.During the audit, it was discovered that the taxpayers did not always followed the rules for tax exempt entities, at least in the auditor's opinion.Both taxpayers had a company policy that sales tax must be charged on room charges unless an exemption certificate is provided and the room is billed to and paid by the tax exempt entity.However, the auditor claims to have found that some of the tax exempted rooms were not billed directly to the tax exempt entity.Furthermore, the taxpayer was not able to prove that the tax exempt entity paid for the room directly.As such, without proof that the administrative rules were followed perfectly, the hotel owners become liable for the tax.
The two hotels filed suit against the Florida Department of Revenue on two grounds.First, the taxpayers argue that Rule 12A-1.038, F.A.C., provides certain records that must be maintained by dealers (in this case a hotel) when tax exempt sales/rentals occur.The rule specifically mentions that dealers must maintain a Consumer's Certificate of Exemption (Form DR-14), but the taxpayers argue that nowhere in the administrative code is it required that the dealer maintain proof of how the good or service was paid.Since the taxpayers maintained copies of the exemption certificates for the hotel stays in question and they had policies and procedures in place to ensure sales tax exemptions would only be allowed if payments were made directly by tax exempt entities, the taxpayer maintains that it has meet its obligations under the law. While this argument would never sway an auditor or and likely would not hold water during an administrative protest, it is still a creative argument that may sway an administrative law judge. Perhaps another argument to make on this topic is that Rule 12A-1.038(3)(c), F.A.C., very specifically provides that a dealer who accepts a resale certificate in good faith from a non-governmental 501(c)(3) customer shall not be held liable for the tax. Therefore, as long as the state does not have proof that someone other than the tax exempt entity paid for the room, the dealer (hotelier) has meet the documentation requirements of the Rule by simply keeping the valid certificate of exemption. This is the type of arguement an administrative law judge could sink his/her teeth into.
The second position taken by the taxpayers is that multiple hotels owned by the McKibbon's group have been through Florida sales and use tax audits in the past.These sister hotels follow the same policies and procedures regarding tax exempt sales and records retention.None of the prior audits raised "proof of entity payment" as a concern.Section 213.23(3)(b), F.S., provides that a taxpayer may reasonably rely on a written determination by the Florida Department of Revenue as how to handle a particular type of transaction for sales tax purposes.Furthermore, for purposes of section 213.23, F.S., prior audit reports for the taxpayer can qualify for tax relief. The taxpayers took the position on audit and continue to do so during the suits that the taxpayers reasonably relied on the prior audit finding on related entities.However, as sympathetic as the argument may be, the Department noted in the Notice of Decision (available below) that the relief granted by section 213.23, F.S., is only available if the written determination was given to the same taxpayer under Rule 12-13.005, F.A.C.Unfortunately, it is not likely that an administrative law judge will be swayed by this argument given the specificity of the Rule.That being said, the sympathy factor may come into play in settlement negotiations with the Attorney General's office, who is the opposing counsel in all DOAH cases.
We will have to see if the case proceeds or gets settled out of court.Quite honestly, I’m really surprised that the Florida Department of Revenue was not willing to settle these cases before the suits were filed.We will keep you up to date either way.In the mean time, please note just how serious the paperwork retention policies for your company (or your client’s company) need to be for Florida sales and use tax purposes.A Florida sales and use tax audit can be a very expensive way to learn how to do things right.If you have any questions about the issues in this case, then please do not hesitate to contact one of our attorneys for a free initial consultation.
ABO
UT 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
§ 212.03, F.S.
§ 212.08, F.S.
§ 213.23, F.S.
Rule 12A-1.061, F.A.C.
Rule 12A-1.038, F.A.C.
ADDITIONAL RESOURCES
McKibbon Hotel Group Gainesville 3, LLC
Petition for Chapter120 Administrative Hearing
McKibbon Hotel Group of Gainesville Florida 2, LP
Petition for chapter120 Administrative Hearing
© 2013 All rights reserved - James H Sutton Jr