Florida Use Tax Audit Letter?
Many people in Florida are not aware that if a business does not charge you sales tax on an item then you owe use tax to the state of Florida. They are many legal reasons why a business might not charge you sales tax, but it does not change your obligation as a purchaser to pay the Florida use tax. Unfortunately, the Florida Department of Revenue has many ways to track your purchases. If you are reading this article, then the FL DOR likely found one or more of your purchases – and sent you a use tax audit letter. This is not something you can ignore. If you don't respond, then the state will estimate the taxes you owe, with a statutory presumption of correctness and assess the tax against you. If you don't want wild overestimates of tax followed by liens and your bank accounts frozen – then you should address this issue head on.
The first question I am often asked by smaller businesses has do with why the selling vendor did not charge tax. Many business owners and residents of Florida do not realize that a business with no physical presence in Florida is simply not required to collect and remit sales tax for the state of Florida. So, some people mistakenly believe that it must be the selling vendor's fault for not collecting tax, not the purchaser. This is simply a misunderstanding of sales and use tax law. If a citizen or business purchases a good or service that is normally subject to Florida sales tax, but the purchaser does not pay sales tax, then the purchaser owes Florida use tax unless some other exemption applies. Just because most people fail to file the FORM DR-15MO to report and pay the use tax does not mean that the tax is not owed.
The second question we are usually asked is: How did the state find me? Below are a few of the ways the Florida Department of Revenue tracks down potential use tax liabilities:
- Review the bills of lading of trucks coming into the state at interstate weigh stations. Many a piece of North Carolina furniture have been caught this way.
- Reviewing county tangible personal property tax returns for businesses. Increases in the amount of tangible personal property reported on this return often triggers a use tax audit.
- Reviewing information provided by insured shipments into the state. That's right – the insurance companies that insured your shipment of a TV, computer, or other items are reporting the items to the Florida Department of Revenue.
- Reviewing customs information. If you had something shipped into the state from outside the country, then items reported at customs can trigger an audit. The same is true if you declare a piece of jewelry or other items of value at customs yourself. Notable politicians in Florida have been caught by this tactic.
- Watching for boats traveling under draw bridges. It surprises many a ship lover to learn that the draw bridge attendant really has two jobs. One is to make sure the bridge is raised to allow you safely by. The other is to look for boats without FL registration numbers. The draw bridge attendants make good money turning in the non-registered boats to the Florida Department of Revenue for a reward. A former head of the Florida Department of Revenue was caught by this method, believe it or not.
- Reviewing FAA records. If you fly into a Florida airport, then your travel log is recorded and potentially reported to the Florida Department of Revenue. If you have not paid tax to another state or you do not have an exempt reason for bringing the plane into the state, then you very well may be hunted down for additional sales tax on your airplane.
- Audit the company you purchased the goods from. This is right. Perhaps the company was legally able to get out of charging you tax at the time of your purchase, but that doesn't mean that the Florida Department of Revenue could not audit the company today and find your purchase records. One glaring instance of this comes to mind - Amazon.com.
The third question I usually get is: How far back can the Florida Department of Revenue go back on me? The answer is a little scary to most people. If you have not been filing sales tax returns in the normal course of your business, then the answer is – as far back as the DOR has information on you. Take a moment to absorb this information. A taxing authority with literally no limit to how many years… or decades they can assess tax on you for goods you ordered online, via magazine, or otherwise without paying sales tax. That is just downright frightening, especially when you consider that interest has been accruing on the use tax liabilities the whole time. So, if you have not been filing sales tax returns, you want to be very, very cautious with what you say to a use tax auditor. The use tax auditors often focus on a three year look back period, but there is nothing to stop them from going back farther if they have additional information.
If, on the other hand, your company has been filling sales tax returns regularly, then the state can only go back 3 years from the date the return was filed. While three years of untaxed purchases can add up considerably, that is much better than an unlimited look back period.
The fourth question is often: What does the state have that they think is taxable? The typical use tax letter asks you to bear your soul (or at least your untaxed purchases) for the last three years. So many a taxpayer have been taken aback and wondered just how detailed does the disclosure need to be. The answer to this question is often guided by what the initial use tax letter says. Quite often the Florida Department of Revenue will hint as to what information they have in the letter. If they found out about potential untaxed purchases via your tangible personal property returns, then they will usually mention this in the letter. If they hunted you down via customs documents or shipments into the state, then the letter will usually hint at one of these sources for their information on you. The Florida Department of Revenue will usually not come right out and say that it was the $4,500 4k High Definition TV you ordered online for your board room – as that just might limit how much you are willing admit too. But, if you stop and think through what your business has done over the last 1 to 3 years, you can likely think of several potential items that might have triggered the notice. This can help guide you in organizing your disclosure to the state.
The fifth question often asked is: What will happen if I don't respond? To sum it up in a dramatic understatement, the Florida Department of Revenue does not take kindly to being ignored. If you don't respond to a use tax audit letter, then the FL DOR will estimate what you owe and assess tax against you plus interest and penalties. If you still don't respond, then FL DOR will issue a tax warrant (lien) against you and start collection efforts, which usually include freezing your bank accounts. Oh, and did I mention that when the DOR estimates a tax liability, they will almost always estimate a liability much, much higher than what is actually due? Another interesting tidbit of information – the tax warrant is valid for 20 years against you. And if you think that this is only a liability of your company, then I encourage you to reconsider this thought process. Sec. 213.29 of the Florida Statutes allows the DOR to impose 200% of tax personal penalties on each and every responsible person in a company. That means if the Florida Department of Revenue thinks your company owes $15,000 in use tax (based on high estimates), then the FL DOR may attempt impose $30,000 penalties personally on each shareholder, officer, and responsible employee in the company. In other words, I don't suggest that you ignore what I fondly refer to as our Draconian Comrades in Tallahassee.
The final question often asked is: What do I do now? At this point, hopefully you have decided to take the bull by the horns and address the use tax letter head on. You need to decide if this is something you are comfortable doing on your own or whether you would like professional help from someone that deals with the Florida Department of Revenue every day. If you know that you only have one thing that the DOR could possibly be interested in, then you might be able to disclose that one purchase invoice, pay the tax, penalties, and interest and be done with it. But if there are several items or you don't know what the DOR could possibly be interested in, then you might consider at least consulting with an experienced state and local tax professional. After the call, you should have a much better feel whether this is something you can handle or not. At the Law Offices of the Law Offices of Moffa, Sutton, & Donnini, P.A., we offer free initial consultations via the phone or in person. We know this can be stressful and we are here to help.
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 co-author of CCH's Sales and Use Tax Treatise. You can contact Mr. Sutton at 813-775-2131 or JamesSutton@FloridaSalesTax.com or his firm bio.
ADDITIONAL RESOURCES
WHEN SALES TAX AUDITORS MAY NOT PICK AND CHOOSE RECORDS TO USE, published April 19, 2015, by Joseph C Moffa, CPA, Esq
SHIPPING CHARGES vs FL SALES TAX, published June 8, 2014, by James Sutton, CPA, Esq.
AMAZON STARTS CHARGING SALES TAX IN FLORIDA – MAY 1 2014, published May 2, 2014, by James Sutton, CPA, Esq.
FLORIDA TAX EXEMPT ENTITIES – SALES AND USE TAX HELP, published April 13, 2014, by Jerry Donnini, Esq.
FL TAX – VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, published October 5, 2012, by Jerry Donnini, Esq.