FL TAXABLE RENTAL VS NONTAXABLE SERVICE
We have been getting an usually high number of calls from companies that are being audited and assessed Florida sales tax when using equipment to provide a service. Many of these companies involve industries that provide lighting, video, or sound services to concerts promoters, weddings, or speaking events. This increased focused by the Florida Department of Revenue has left many people in the industry completely baffled and often very upset. We would be upset too if our trusted government experts in sales tax tried to collect $50,000 to $100,000 of tax on transactions that were not only not taxed to our customers, but also should have never been taxed in the first place. Thus, we thought that an article on the topic might help people in these industries understand what SHOULD and SHOULD NOT be subject to sales tax, so they know when it is time to fight back. Perhaps a few Florida sales tax auditors will read this article and start to push back against the misinformation coming from their superiors as well. Before we begin, however, please note this article will not discuss the few services in Florida that are subject to sales tax by law. For a discussion on this topic, please see the link at the bottom of this article titled “What Services Are Subject To Florida Sales Tax.”
So let’s explore the difference between the taxable renting of equipment and non-taxable services that use equipment when providing a service under Florida sales tax law. Is it simply because the invoice states the transaction is a service or a rental? Or is it perhaps taxable or not taxable because everyone in the industry treats it one way or the other? This article will discuss the subtleties between the taxable rental of tangible personal property and nontaxable services that happen to use equipment while performing the service. Let’s start out with two very obvious examples at either extreme.
Simple Examples of Taxable Rentals vs NonTaxable Services
Our second “sales tax for dummies” example is a rental of a trailer to pull behind your car. You have that latest item to tackle on your honey-do-list, which is to go pick up that used freezer from your brother-in-law. So you go to Home Depot, Lowes, or some other trailer rental place to pick up a trailer to haul the freezer back to your home. You’ve never pulled a trailer before, so the salesman walks you through hooking up the lights, how to raise and lower the back gate, and the salesman even helps you hook the trailer up to your car. Everything the salesman is doing is a service, but it would be a far stretch to say that the trailer rental is only a non-taxable service that happens to use a trailer while providing the service. This would be a taxable rental of a trailer by anyone’s reasonable definition.
So, if everyone can easily tell the difference between a non-taxable pool cleaning service and a taxable rental of a trailer, then what is the difference that makes one taxable and one not taxable?
It is not because one involved real property (a pool) versus a tangible trailer. It is not because I referred to the pool cleaning as a service and the trailer as a rental either (although that can create rebuttable presumptions). The difference is whether the tangible personal property (pole or trailer) is controlled by the service provider or the customer. In the pool cleaning service, the tangible personal property (the long pole) is controlled and used by the pool cleaner. In the trailer rental, you drive away with the trailer and completely control the trailer through the vast majority of the rental. In both cases, you expect the tangible person property to be used and, in both cases, you benefit from the use of the tangible personal property, but in the taxable situation, you are the one in possession and control of the tangible person property (the trailer). So, using these extreme examples, you now should have a much better idea of when something is a non-taxable service that uses tangible personal property and, alternatively, when something is the taxable rental of tangible personal property. It all turns on control over the tangible personal property.
Applying this new logic to a pair of related examples, what would the tax consequences be when you hire someone to mow your lawn versus you rent a lawn mower to mow the lawn yourself? Both involve the use of a lawn mower, right? But are both taxable? When you hire someone to mow the lawn, then the lawn mowing company has possession and control of the lawn mower the whole time. So it is not subject to sales tax as the rental of personal property, right? However, when you rent a lawn mower and control the lawn mower yourself, then it is taxable as the rental of tangible personal property, right?
In Depth Discussion of the Law of Service vs Rental
Now that we have covered this topic from a high level, let’s delve into more of the more specifics of Florida sales tax law. [Spoiler Alert: The article is about to get technical for a short time.] Anyone engaging in the business of selling or leasing tangible personal property in Florida is exercising a taxable privilege. See s. 212.05, Florida Statutes (“F.S.”). In order to lease tangible personal property in Florida, a State tax rate of six percent (6%) plus any local discretional surtax (0% to 1.5%) is charged on the transaction. See ss. 212.05(1)(a)1.a., 212.054, and 212.055, F.S. This discretionary sales surtax, however, is limited to the first $5,000 of each lease payment of the tangible personal property. See Rule 12A-15.004(2)(b), Florida Administrative Code (“F.A.C.”). “Tangible personal property” is defined as anything that “may be seen, weighed, measured, or touched or is in any manner perceptible to the senses….” See s. 212.02(19), F.S. Therefore, the lease of tangible personal property in Florida is subject to a State tax rate of 6%, plus any county discretionary sales surtax, unless some other exemption applies. However, Florida law provides that if the “owner of equipment furnishes the operator and all … supplies, … contracts for their use to perform certain work under his direction …, and the customer does not take possession or have any direction or control over the physical operation, the contract constitutes a service transaction and not the rental of tangible personal property, and no tax is due….” See Rule 12A-1.071(9)(d), F.A.C. (emphasis added.)
It is also a well-settled principle of Florida law that taxing statutes are construed against the State. See Harbor Ventures, Inc. v. Hutches, 366 So. 2d 1173, 1174 (Fla. 1979). If there is any doubt as to whether a transaction is subject to tax, Florida Courts will find the transaction to not be subject to tax. Because the Department has the legal burden of establishing the relationship is a taxable transaction and if the Department is unable to do so, the identified transaction must be considered nontaxable. Therefore, if there are any ambiguities whether the transaction is subject to sales tax, then the law is supposed to fall on the side of taxpayer holding the transaction is not taxable.
Should I Pay Sales Tax on the Purchase of Equipment?
If you own a company that uses equipment to provide a non-taxable service, then you should be aware that your purchase/use of the equipment is subject to sales tax. So when you buy the long pole to provide pool cleaning services or the lawn mower to provide lawn care services, then your company is supposed to be paying sales tax on that equipment at the time of purchase (or first use if you acquired the equipment without paying sales tax). If, on the other hand, your company rental equipment and charges sales tax, then your company does not have to pay sales tax on the original purchase of the equipment because it would be exempt as a sale for resale (or re-rental in your case). This distinction catches a lot of companies off guard and it can be painful in a sales tax audit.
Am I Handling Services vs Rentals Correctly?
So if your company uses equipment to provide a service and the Florida Department of Revenue sends you one of those friendly love letters known as a Form DR-840 Notice to Audit Books & Records, then you can now be better prepared. Even before the audit notice arrives, you may want to review your company’s procedures to make sure that you are handling these types of transactions correctly. Do you really keep possession and control of the equipment while providing the service? If not, then you really should examine whether you have been taxing the transactions properly. Even if you are taxing the transaction properly, be prepared for a Florida Department of Revenue auditor to come in claiming that you owe tax either way. We’ve seen it far too often to be surprised.
How Far Back Will Florida Department of Revenue Go?
The normal audit period for a sales tax audit is 36 months. However, if your company has NOT been registered for sales tax and you get a notice for a sales tax audit, then the Department of Revenue can audit your company back to the beginning of your company. This is because statute of limitations that normally stops the Department of Revenue from going back more than 36 months only works if you are filing sales tax returns. So if your company has been providing non-taxable services that use equipment, then you have more potential exposure than you realize. If this is the case, then you might consider contacting one of the authors to at least review your sales tax exposure. There are also ways to minimize your exposure back in time if you act BEFORE you get an audit notice.
About the Authors:
Mr. Sutton is a Florida licensed CPA and Attorney and a shareholder in
the law firm Moffa, Sutton, & Donnini, PA. 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 in 2014 teaching Sales and Use Tax. Mr. Sutton is a frequent
speaker on Florida sales and use taxes for the FICPA, Lorman Education,
NBI, AAA-CPA, and the Florida Society of Accountants. Mr. Sutton is also
co-author of CCH's Sales and Use Tax Treatise. Mr. Sutton is the President
of the Florida Association of Attorney – CPAs and the State and
Local Tax Chairman for the American Academy of Attorney – CPAs.
You can learn more about Mr. Sutton in his Bio HERE.
David Brennan is an associate attorney with Moffa, Sutton, & Donnini,
P.A. His primary practice area is Florida tax controversy. David received
a B.S. in Accounting and Finance, with a minor in Computer Science, from
Florida State University. He worked as an accountant for a CPA firm before
attending law school at Regent University. He received his Juris Doctor
in 2013 and was licensed to practice law in Florida in the same year.
In 2015, David earned his Masters of Laws in Taxation from Boston University.
David worked for the Florida Department of Revenue as a Senior Attorney
before entering private practice. You learn more about David in his Bio HERE.
AUTHORITY
Rule 12A-15.004, F.A.C.
Harbor Ventures, Inc. v. Hutches, 366 So. 2d 1173, 1174 (Fla. 1979)
ADDITIONAL RESOURCES
WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA?, published May 1, 2012, by James H Sutton, Jr., CPA, Esq.
ARE CLEANING SERVICES TAXABLE IN FLORIDA?, published November 30, 2016, by James H Sutton, Jr., CPA, Esq.
FL TAX – VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, published October, 5, 2012, by Jerry Donnini, Esq.
GOING TO JAIL FOR NOT PAYING SALES TAX?, published November, 3, 2013, by James Sutton, CPA, Esq.
CLOSE A BUSINESS TO AVOID LARGE FL SALES TAX ASSESSMENTS?, published July 24, 2013, by James H Sutton, Jr, CPA, Esq.
FLORIDA SALES TAX AUDIT HELP, published July 14, 2013, by James Sutton, CPA, Esq.