Florida imposes sales tax on commercial rent. But did you know that the Florida Department of Revenue often takes the position that certain management agreements are commercial rentals subject to sales tax? Section 212.03(1)(a), Florida Statutes, imposes sales tax on commercial rent. In a typical rental scenario, a business will engage in a lease agreement with its landlord and pay rent according to the agreement’s terms. These rental payments are subject to sales tax. However, the reality is not so simple.
Businesses will often engagement in management agreements to outsource a particular burden of operations. For example, most hotels have one or more restaurants on its premises. Rather than operate the restaurant(s) entirely on its own, a hotel may look for outside help. Sometimes, a hotel will engage in a clear rental agreement, and offer the available space to a restaurant to take over and operate on its own. Alternatively, a hotel may simply want to hire outside help to manage the restaurant on its behalf. The latter agreements are structured as management agreements. In these scenarios, the hotel engages a separate entity to provide management services of its restaurant.
Effectively, the difference between these agreements is that in a traditional rental agreement, the restaurant is a separate company from the hotel whereas in the management agreement, the restaurant is still the hotel’s. The distinction is significant; however, the Florida Department of Revenue will often blur the lines and assert that a management agreement is a rental agreement subject to Florida sales tax. This is true not just in the hotel example used above, but in a variety of other business models as well.
In fact, many restaurants operate under management agreements. Recently, the Florida Department of Revenue issued a Technical Assistance Advisement addressing a management agreement between a food hall and vendors who operated on its behalf. These cafeteria-type eateries are increasingly popular across the state and are known for providing diverse, specialty food items from chefs that specialize in particular dishes. The food hall at issue in TAA 18A-009 engaged in independent contractor agreements with vendors in which the vendors provided and collected payment for food purchases on behalf of the restaurant.
Specifically, the restaurant collected the total daily cash from each independent contractor, reconciled the cash to sales, and then finally distributed the cash to each independent contractor for their services performed. Neither of the parties at issue considered themselves engaged in a rental relationship. Furthermore, the independent contractor agreement explicitly stated that there was no lease of real property or equipment and that no consideration was received in exchange for space. Ultimately, the agreement provided for payment to the independent contractor, not payment from the independent contractor to the restaurant.
Regardless, even without any payments going from the independent contractor to the food hall, the Florida Department of Revenue found that the independent contractors were operating their business on real property owned by another business. Therefore, the Department reasoned, the agreement was subject to Florida sales tax. The guidance altogether failed to address the fact that cash flowed from the restaurant to the contractors as part of the service agreement.
As evidenced by this recent guidance, the Department is unwilling to narrow its historically broad interpretation of taxable commercial rent. It appears that almost any service agreement or management agreement can, in the right circumstances, be construed to be taxable rent. With the Florida Department of Revenue having the authority to assess tax to the beginning of a business when that business is not registered to collect and remit tax to the state, the potential exposure is substantial.
Fortunately, businesses who realize they have a tax exposure can apply for a voluntary disclosure. A voluntary disclosure can limit past liability exposure while setting a business up to properly collect and remit tax going forward. If your service or management agreement is likely to be construed as a rental agreement by the Florida Department of Revenue, this may be a good option.
Alternatively, you can work with a professional to submit your own agreement for a Technical Assistant Advisement just as the above referenced food hall did earlier this year. If you are unsure about revealing your identity to the Department through a Technical Assistant Advisement, the Department also offers anonymous Letters of Technical Advice.
Regardless of how you approach the potential sales tax exposure lurking behind a management or service agreement, one thing is for certain: the failure to act now could result in an assessment down the road.
Jeanette Moffa is an attorney who concentrates on state and local taxes at Moffa, Sutton, & Donnini, P.A. She is an executive council member of the American Bar Association Tax Section State and Local Tax Committee and the Florida Bar Tax Section. Ms. Moffa is an author of both the CCH’s Expert Treatise Library: Sales and Use Tax as well the ABA’s Sales and Use Tax Deskbook. In addition, her regular columns on state and local tax issues can be found in State Tax Notes and Actionline, a publication from the Florida Bar’s Real Property, Probate, and Trust Law Section. She also serves as assistant editor to the Sales and Use Tax Deskbook and Actionline. Ms. Moffa is a regular speaker at the American Bar Association Tax Section conferences, the Institute of Professionals in Taxation, the Florida Bar Tax Section, the Florida Bar Real Property, Probate, and Trust Law Section, and the FICPA. In her free time, she teaches as an adjunct professor at Broward College. To learn more about Ms. Moffa, visit his firm bio.
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 clients against Florida sales and use taxes for more than 25 years with over 100 years of cumulative experience working for 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 also have former Department of Revenue agents on staff who know how the tax agents think. With offices in Fort Lauderdale, Tampa, & Tallahassee, the law offices of Moffa, Sutton, & Donnini, PA represent taxpayers and business owners throughout 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.
AUTHORITY
ADDITIONAL RESOURCES
Florida FINALLY Reduces the Sales Tax on Commercial Rent, published July 1, 2017, by James Sutton, CPA, Esq.
Is Rent Subject to Florida Sales Tax? published January 26, 2015, by Jerry Donnini, Esq.
FL Gov Scott Calls for Phase Out of Commercial Rent Sales Tax, January 29, 2014, by James Sutton, CPA, Esq.
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