In June 2018, the United States Supreme Court decided South Dakota v. Wayfair. The Court tossed aside the old requirement a business had to be physically located in a state before the state could require the business to register to collect sales tax. Now, the Court says a state can require a business to register if the business makes a certain dollar of sales or number of transactions into a state. This new standard is called economic nexus. Florida is most likely heading into this new frontier, which means there are things to learn about Florida sales tax and steps you should be taking now to prepare.
As an initial matter and for now, Florida still requires a business to be physically present in Florida before a business has to register to collect sales tax. The Florida Department of Revenue (“DOR”) has not and cannot currently change this position through a rule. Rather, the DOR must wait until a statute is passed by the Florida Legislature, which will not occur until the Legislature is in session from March 2019 to May 2019. Once the Legislature passes an economic nexus statute, then it will only be a matter of time before sellers have to register with the DOR and begin collecting sales tax.
After a business is registered with Florida to collect sales tax, the business will need to realize that even if sales tax is not collected, a monthly return is still due to report $0; otherwise, the business is hit with penalties. If sales tax is collected, then all of the sales tax must be remitted. It takes just $300 of Florida sales tax that has been collected but not remitted to constitute a felony.
One aspect newly-registered businesses do not consider is potential back tax liability. If you have been collecting Florida sales tax and not remitting the tax or you should have been collecting sales tax but did not, you can get this cleaned up. The process is called a Voluntary Disclosure Agreement. Through this, you can have a maximum lookback of three years, penalties waived, and you can sleep well at night knowing you do not have to look over your shoulder. If the back taxes are related to “Wayfair,” then there may be special considerations the DOR may offer to help you and get you out-the-door paying less than you may normally owe.
Another consideration businesses do not immediately address is the potential for audit. The DOR has offices across the county and can audit a business in person or remotely (called a desk audit). DOR will normally go back no more than three years and audit everything from your purchases to your sales. If you did not charge sales tax to your customer when you should have, the DOR will make you pay for the sales tax…out of your pocket.
Now that we have gotten all of this out of the way, Florida usually imposes sales tax at a state rate of 6%. Counties can choose to impose a sales tax anywhere from 0% to 2%, currently. The county sales tax rate is only imposed on the first $5,000 of the sales price of an item. Thus, if you sell a bunch of different office supplies to an individual for $10,500, then the county tax applies to the full amount. There are exceptions to this rule. One exception involves the sale of a single item above $5,000. In this case, suppose a computer is sold for $8,000. The state sales tax rate applies to the entire sales price, but the county rate only applies to the first $5,000.
With the above in mind, businesses then have to know whether their products or services are taxable in Florida. For services, Florida only taxes certain services. Protection/burglary/detective services, nonresidential cleaning services, and nonresidential pest control services are subject to tax if the service fits within NAICS Code 561611, 561612, 561613, 561621, 561710, or 561720. If, however, the service does not fit within one of these NAICS Codes or you can find a more specific NAICS Code applicable to your business, then the service is not subject to tax. Concerning the sale of items (or tangible personal property), these items are generally taxable. Nevertheless, Florida has made certain exceptions (called exemptions) that allow no tax to be charged on the transaction. If a transaction is partially or fully exempt from tax, you will need to ensure you keep all of the exemption documentation for at least a period of three years, although four years is safer. The reason the documentation must be kept is because in Florida the burden is on you to prove why you did not charge tax on something that should have had tax charged. If you do not keep the correct paperwork, then the DOR will say you have to pay the tax from your bottom line.
As if owing a sizable tax bill to the DOR is not enough, some businesses have found out what happens when they charge sales tax on items that should not have been taxed (e.g., taxing delivery charges when the charge is optional to the customer, incidental to the sale, and itemized on the invoice). Papa John’s and Pizza Hut, to name just a couple, were sued by customers for overcharging sales tax on the optional, incidental, and itemized delivery charge for a pizza. While this is not a lot of money for just one sale, the issue became a class action, which could end up costing any business a substantial amount simply to defend, let alone to pay any settlement or judgment.
What you should begin doing now with the above in mind and preparing for Florida to impose an economic nexus standard? You need to first figure out the total amount of sales (in dollars) and the total transactions to customers in Florida. While figuring out this by year is helpful, you may need to determine this by month. You should go back for the past three years. What you will be looking for is whether over a twelve-month period your gross sales to customers in Florida exceed $100,000 or the total number of sales to locations in Florida exceed 200 transactions. If either of these is the case and depending on the law passed by the Florida Legislature, you may have to register with the Florida DOR for sales tax purposes.
Assuming you register with the DOR for sales tax collection and remittance, the business may have to register for other tax types at the same time. For instance, if the business is a “C-Corporation” for federal tax purposes, then the business will most likely need to register for Florida Corporate Income taxes. Knowing precisely the tax types needing to be registered for at the onset can save a bunch of heartache (and money) later.
In conclusion, remote sellers should pay careful attention to whether the Florida Legislature will enact an economic nexus statute. Beginning to prepare now by determining the dollar amount of sales and number of transactions into Florida will allow a business to be prepared to register as soon as economic nexus becomes law in Florida. Otherwise, a business may find it will delay registration just because the business is trying to determine whether it must register in the first place.
About th
e author: David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate 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 Law in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on various sales and use tax issues. You can read about David in his BIO HERE.
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 have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. 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 represent taxpayers and business owners from the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
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AUTHORITY
SouthDakota v. Wayfair, Inc., 585 U.S. ____ (June 21, 2018)
ADDITIONAL RESOURCES
POST-WAYFAIR - CAN YOU AFFORD TO WAIT TO REGISTER, published August 8, 2018 by James Sutton, C.P.A., Esq.
FLORIDA SALES TAX FORGIVENESS POST-WAYFAIR: AMAZON FBA SELLERS, published June 28, 2018 by James Sutton, C.P.A., Esq.
FLORIDA SALES TAX AND DROP SHIPMENTS, published June 3, 2018, by Moffa, Sutton, & Donnini
FLORIDA SALES TAX - VOLUNTARY DISCLOSURE PROGRAM, published April 9, 2018, by Jeanette Moffa, Esq.
FLORIDA USE TAX AUDIT LETTER?, published June 14, 2015, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.
GO TO JAIL FOR NOT PAYING FLORIDA SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.