INTERIOR DESIGNERS: FL SALES TAX PLANNING
The sales tax rules in Florida are, in whole, founded on a fairly simple notion—tax is imposed at a rate of 6% on the sale of tangible personal property (plus the local sur tax). Services are generally not taxable, unless they fall into one of the few unlucky services that Florida does tax (e.g. commercial cleaning services). However, outside of this oversimplified version of the world, tax in the state of Florida is like any area of law in that there are nuances and complications that are exposed through feats of human involvement. The particular example to which I am referring is a Technical Assistance Advisement, or TAA, number 15A-004 published by the Department on May 4, 2015. In this TAA, the question was posed inquiring when service contracts and sales contract overlap, what is taxable? Like the answer to all interesting or provocative legal questions, the answer to this question was: It depends.
The TAA in question raises an example of a company enlisting the services of an interior designer. The design contract provides for services, such as designing layout, suggesting paint color and brands, shopping for materials, and supervising the redesign. In and of themselves, these are not taxable events. A contract for the sale of these services would not be taxable. However, the contract muddies the waters a bit, as there is a clause identifying the designer is paid in the form of markup on materials. Designers often procure items for a redesign at discount from the vendors. These items are resold to the designer's clients at retail. This is the taxable sale of tangible personal property. This contract specified that the designer was to be paid a $10,000 fee, which is applied to the purchases once the minimum purchase requirement was met.
Section 212.02(16) Florida Statutes, ("F.S.") provides ""Sales price" means the total amount paid for tangible personal property, including any services that are a part of the sale. . ." Perhaps more clearly stated: Design services are outside the scope of sales tax UNLESS items of tangible personal property are provided as part of the design, in which case both the property and design services become subject to sales tax. To drive this idea home, Rule 12A-1.001(2)(a)1, Florida Administrative Code, (F.A.C.), identifies that an interior decorator's fee is taxable and cannot be exempted as a professional or personal service charge when the transaction involves the sale of tangible personal property.
Looking back at this specific TAA, where the design fee was $10,000, the designer will be required to charge his/her customers $600 in sales tax on the pure service part of the transaction or the designer will become liable for the tax, plus related penalties and interest. When multiplied over a series of transactions, over the standard 36 month audit period, this could add up to a large, and completely unexpected liability for a designer who does not understand these rules. So what is a designer to do to protect themselves from being assessed Florida sales tax on a service transaction? There are several options to minimize the sales tax on interior design services:
- Collect sales tax to make sure the designer does not become liable for taxes that should have been passed on to the customer. However, this put the designer at a competitive disadvantage to designers who do not provide tangible person property and do not have to charge sales tax.
- Set up a separate company to provide the tangible personal property. The customer would have to sign two contracts and pay each company separately – one for the design SERVICES and the other for the materials. This would avoid the sales tax on the services portion of the project, but the material company would have to keep up with the sales tax compliance burdens.
- A final suggestion might be to alter the deal with the material providers. Instead of the vendor of the materials offering a trade discount to the designer and then the designer selling the good to the customer at retail, why not alter the deal to minimize the sales tax AND paperwork on the designer. Instead of getting a reduced price from the material provider, why not ask the material provider to simply sell the materials at retail directly to the customer and provide an incentive check to the designer equal to the discount that would have been offered. Now the retailer is collecting sales tax on the materials from the customer and the design services are not taxable. It would also reduce the paperwork on the designer because the materials are no longer flowing through the designer's company.
In summary, if the interior designer is providing any tangible personal property to the client, then the whole transaction is taxable. However, with a little knowledge and proper planning, many companies can not only lower both the overall sales tax due in their business, but also do so in a way that saves time and makes the company more competitive in their industry. At the Law Office of the Law Offices of Moffa, Sutton, & Donnini, P.A., our primary practice area is Florida taxes. We represent taxpayers and business owners from the entire state of Florida, from Department of Revenue to County Property Appraisers and Tax Collectors. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
About the author: Amanda Levine is an associate attorney with the Law Offices of Moffa, Sutton, & Donnini, P.A. Her primary practice area is Florida tax controversy, with focus on real property issues. Ms. Levine received a B.S. in Accounting from University of Central Florida. She spent several years working in public accounting before attending Nova Southeastern University Law School. She received her Juris Doctorate in 2014. During her time at Nova Law, Ms. Levine was the Executive Justice of Academics for the Moot Court Honor Society, as well as the Finance Chair. She was awarded by the National Order of the Barrister, a national honor society which recognizes oral advocacy and brief writing skills.
AUTHORITY
212.02, F.S. – Sales and Use Tax Definitions
212.05, F.S. – Sales, storage and use tax
Rule 12A-1.001 F.A.C. – Specific Exemptions to Florida Sales and Use Tax
TAA 15A-004 – TAA on Interior Design published May 4, 2015
ADDITIONAL RESOURCES
FL SALES TAX - TAA 14A-020 - NAICS CODES VERSUS NONRESIDENTIAL CLEANING SERVICES – published by James H. Sutton, CPA, Esq. October 8, 2014
WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA?, published May 1, 2012, by James Sutton, CPA, Esq.
FL COUNTER-TOP COMPANIES: FLORIDA SALES TAX PROBLEMS, October 13, 2013, by James Sutton, CPA, Esq. and Gerald Donnini, Esq.