Are you a hotel owner/operator facing a Florida sales tax audit? Did you try to handle the audit yourself thinking nothing was wrong? Or have you heard enough horror stories about sales tax audits that you are considering getting tax professional to manage the audit for you? Or have you worried you might be audited because you could be handling your sales tax wrong? Whatever the reason you are reading this article, I will hopefully put your mind at ease and help you sleep tonight. This article will discuss the ins and outs of Florida sales tax as it relates to the hotel and transient rental industry in Florida. If I haven’t answered your questions by the end of the article, then please don’t hesitate reaching out for a free initial consultation. This article is just as applicable if the audit is by a county for tourist development taxes!
First, it is important to know that while you may have collected and remitted a lot of sales tax (and local bed tax) for the state of Florida, the state is not coming into this thinking you have been doing them a favor. The opposite is usually true in that the auditor comes into the audit looking for mistakes, ways to assess tax against your company. They may walk in the door with smiling, friendly faces saying that they are only here to help. Don’t get me wrong, there are a few good auditors out there, but they are trained to be aggressive and the majority simply behave as they are trained. So be on your guard for what is likely a wolf with a sheep’s smile.
Second, most people go into their first sales tax audit feeling like they have collected sales tax on everything properly and have nothing to hide. The hard lesson to be learned is that the question is not whether they handled sales tax properly. The auditor is looking to see whether you can prove you did everything right with a dizzying array of required paperwork and technicalities that can make your head spin. If you can’t prove you collected the right amount of sales tax, then Florida law allows the auditor to make your company liable for taxes you might have already collected and remitted or for taxes on exempt sales that you simply can’t prove were exempt. We get the phone calls from far too many business owners who are shocked when the first estimates are in the tens of thousands of dollars or more. One simply mistake in paperwork can add up when you have thousands of guests staying in your hotel over the three-year audit period.
Third, remember sales tax audits are not just about whether you can prove you collected the right amount of sales tax, but also whether you can prove that you paid the right amount of sales on all your purchases. So not only do you have to worry about sales, but also all your expenses. Far too many companies do a good job with sales tax on sales, but if you don’t have the paperwork to prove you paid sales tax properly on all your purchases, then you will owe sales tax again. This shocks many business owners. You can actually owe sales tax a second time even if you paid it all correctly the first time simply because you didn’t keep the evidence to prove you were doing it correctly. There may be ways to evidence you did everything correctly after the fact, such as getting statements of account from your vendor. However, it is better to plan for this during the audit than to get blindsided at the end of the audit.
Fourth, you should know that your most dangerous activity as a hotel business is going to be your exempt sales. The auditor really doesn’t care much about the sales you collected and remitted tax on properly. The sales tax auditor is looking for things to tax and hunting for tax on exempt sales can be a gold mine of taxes. Think about how you handle your exempt sales. When a several people from a 501(c)(3) stay at your hotel, such as directors of a church, how do you hand the paperwork? Do you collect their exemption certificate? Do you save the exemption certificate? If you don’t have a copy of the exemption certificate on file for the auditor to see, and one that is current for the period of the stay, then you are going to owe sales tax for that guest’s stay. Also, how did the guest pay? Yes, this is relevant too. You must have proof that the bill was paid directly by funds from the tax exempt entity. That means the guest can’t pay with their personal credit card and have the stay be exempt. It also means that even if you have an exemption certificate, if you don’t have proof the payment came directly from the tax exempt entity – then you are going to owe the sales tax.
Federal employees have slightly less stringent requirements. The state of Florida, or any state, are not allowed to tax the federal government. So you only need to get a copy of the government ID and a signed statement from the governmental employee saying that stay is for governmental exempt purposes. The rules for governmental employees can be found in Rule 12A-1.038(4), FAC, with suggested language for the sworn statement. You can find a link to this rule at the end of this article.
Fifth, you should understand the rules concerning when a guest stays in your hotel long enough to be exempt simply because of the length of stay. Under Florida law, a written rental agreement for LONGER than six months is exempt from sales tax and the local tourist development tax. This just happens to be the magical amount of time it takes to become a resident of Florida, at which time the state exempts the rental agreement from sales tax. For the extended stay industry or hotels near airports or cruise ports, long term rental agreements are fairly common. The same rule that exempts a 1-year residential apartment lease from sales tax also exempts a long term hotel room rental from sales tax. These types of exempt sales fall into two categories. One is when the guest books the room for more than six months. Under this circumstance, the room is exempt from sales tax and the local tourist development tax from day one. The second type is the person who books are room and ends up staying in the room more than six months. Under the later scenario, the room becomes exempt from sales tax and the local tourist development tax after six months.
There is also the circumstance in which a business, such as an airline or cruise ship company books a block of rooms on a long term basis for airline pilots, stewardesses, or cruise ship employees. The question arises whether a room booked for more than six months but used by different employees qualifies for the exemption. The answer is YES, but only if the same room is booked continuously. If the hotel is switches which room the guest can use, then the exemption does not apply. Furthermore, the agreement must be for more than six months at the outset to be exempt from day one of the room rental. Otherwise, the exemption applies after the same room is booked continuously for more than six months.
Sixth, cleaning fees charged to guests are taxable. You may hear a lot of guests complaining about this, but a cleaning fee charged to a guest of your hotel is simply additional taxable rent under Florida sales tax law. If you aren’t charging sales tax on these cleaning fees to your guests, then you are going to owe the tax yourself. On the other hand, cleaning fees you pay to an outside company to clean hotel rooms are NOT subject to sales tax. This is because cleaning services for residential accommodations are not a taxable service in Florida. This polar opposite result is purely a function of how Florida law understands that anything a hotel charges a guest for the occupancy of the room is for all practicable purposes part of the rent charged for the room. So the guest cleaning fee is taxable rent no matter what you call it. The expense of a hotel to clean a hotel rental accommodation, on the other hand, can’t be construed as rent. So this cleaning expense incurred by the hotel is analyzed under normal sales tax law and very, very few services are subject to sales tax. While commercial cleaning services are subject to sales tax, cleaning expenses for sleeping accommodations are not taxable. Our firm recently fought this issue for business in Sarasota against the Sarasota local taxing authority and a link to an article about this case is at the end of this article.
There is one exception to the rule that cleaning services charged to guests are taxable. When the cleaning service and fee is optional to the guest, then it is not considered part of the required fee for occupying the room. Therefore, this optional cleaning fee is not considered rent and is not taxable to the guest. Most auditors are not aware of this exception to the rule, but it is explicated provided for in Rule 12A-1.061(4)(c) (link to this rule at the end of the article.)
Seventh, as a hotel owner, you are always looking to up the average revenue per key. Hosting a conference can be a great way to not only fill the hotel, but get additional fees for catered food, rental for audio and visual equipment, as well as rental of the conference room itself. Remember, all of these charges are subject to sales tax. These fees are all subject to sales tax unless the guest is tax exempt and you have the proper documentation to prove it.
Eighth, registration fees are not subject to sales tax unless the fee is used to offset the room rate.
Ninth, parking fees are another huge source of additional revenue for the hotel industry. I recently experienced a hotel in South Florida charging a $75 per night valet parking fee. As a guest, this was outrageous. But from a hotel owner’s perspective, this parking fee was higher than some hotels get for a room and any hotel would be ecstatic to get the revenue. However, this is one of the area hotels can get in trouble on. Parking fees are generally considered a rental of the parking space and the rental of real property in Florida is subject to sales tax. Hiring someone to park your car, on the other hand, is a service and is generally not taxable. Unfortunately, a fee charged to a guest for both a parking space and valet service is subject to sales tax UNLESS the two are itemized on the invoice and a sign is placed that explains the difference in pricing. In such a case, the hotel would be required to charge sales tax just on the parking fee, but not the separately itemized valet fee. Most hotels don’t bother with the complexity of itemizing the valet fee. The tax is being paid by the guest, after all.
There is also one other potential way for parking fees charged by a hotel to not be taxable. If there is free parking available at the hotel or immediately adjacent to the hotel, then the fee charged to park your car can be considered purely a service and not subject to sales tax. This is something the state will usually fight and most hotels find it is not worth taking the risk of being liable for the tax.
Tenth, rental paid to a related entity. Florida is the only state in the nation that charges sales tax on commercial rent. For many hotel owners, this can be a nasty surprise when the land and building are in a separate legal entity from the operations of the hotels. Effectively, the operating entity is “renting” the hotel from the land/building entity. Florida sales tax law does not care that the two entities are related. If rent is actually or constructively being paid by the operating entity to the land/building entity, then sales tax will be due on those payments. So if the operating entity records rental payments to the land/building entity in its books or tax returns, then you are going to have a sales tax on rent problem. If the operating entity is paying the mortgage payments and/or property taxes for the land entity, then you have a constructive rent problem and sales tax will be due. Florida makes more than $2 billion a year from the sales tax on commercial rent, so you can guarantee it will be one of the first things the auditor will look for in a hotel audit. The trick is that Florida does not require a tenant to pay fair market value rent. In fact, Florida sales tax law doesn’t require a tenant to pay rent at all. This means that with a little proper planning, the sales tax on inter-company rent can be minimized if not illuminated with proper planning. There is a link to an article below that describes the problems surrounding sales tax on rent and planning ideas to help minimize the impact of sales tax on rent for hotel owners.
Eleventh and final area of concern deals with the rewards programs most hotel chains use. This is not exactly a simple area of the law and it can confuse even auditors. In the most basic terms, the hotel is liable for taxes when the hotel receives more funds or credits from the program than the hotel contributes to the program on a quarterly basis, but different rules apply to the first year of a hotel’s operation. The percentage of over reimbursements versus contributions is applied to the total overage of reimbursements to determine the amount subject to tax. The specific requirements on the taxability of the rewards program is provided for in Rule 12A-1.0615 with detailed examples and a link to the rule is provided below. However, if a guest pays with anything in addition to rewards points, then the additional payment is subject to both Florida sales tax and the local tourist development tax.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We represent clients in audits, protests, litigation, revocation hearings, collections, criminal investigations, and criminal defense before the state attorney’s office. Our partners are both CPAs/accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We also have several former Florida Department of Revenue auditors on staff who work directly with the state’s auditors during the audit process. If your hotel is facing a sales tax audit or you have questions about Florida sales tax, then take advantage of our FREE INITIAL CONSULTATION policy by using the link at the top of this page to contact one of our partners today.
About the Author: 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 Arthur Andersen for a number of years and has been an adjunct professor of law at Stetson University College of Law since 2002 -2013 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. Finally, Mr. Sutton is probably the only tax attorney in Florida that once held the position of CFO and In-house counsel for a company that specialized in building hotels. You can learn more about Mr. Sutton in his Bio HERE.
AUTHORITY
Rule 12A-1.038 (Exemption Certificates)
Rule 12A-1.061 (Rentals, Leases, and Licenses to Use Transient Accommodations)
Rule 12A-1.0615 (Hotel Reward Points Programs)
ADDITIONAL RESOURCES
FL Taxpayer Wins! Reservation & Cleaning Fees Not Taxable!, published July 12, 2016, by James Sutton, CPA, Esq.
GO TO JAIL FOR NOT PAYING FLORIDA SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.
FL TAX – VOLUNTARY DISCLOSURE PROGRAM CAN BE THE PERFECT SOLUTION, published October 5, 2012, by Jerry Donnini, Esq.
FL 2017 DISCRETIONARY SALES SURTAX RATES, published January 11, 2017, by James Sutton, CPA, Esq.
IS RENT SUBJECT TO FLORIDA SALES TAX?, published January 26, 2015, by Jerry Donnini, Esq.
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