Is Labor Subject to Sales Tax in Florida?

Florida taxpayers are often surprised to discover that labor is subject to sales and use tax. However, it is not all labor that is subject to tax. Instead, it is only certain types of labor. To make matters worse, the same labor might be taxable in one scenario and nontaxable in another scenario. Taxpayers concerned whether they should be charging, collecting, and remitting sales and use tax on labor should first identify the type of labor at issue. Then, they should determine the context of the labor. Finally, taxpayers must know who is liable for the tax

What is the Type of Labor?

It is a general principle of Florida sales tax law that retail sales of tangible personal property are subject to tax. In addition to that, certain services are subject to sales tax as well. While some states broadly tax services, Florida narrowly taxes only very specific services. Because there are only a few of them, they are easy to forget or miss altogether. Over a three year audit period, an error like that will be costly!

Included in Florida’s taxable services are (1) nonresidential cleaning services; (2) commercial pest control services; (3) commercial/residential burglary and security services; and (4) detective services.

Regarding cleaning and pest control services, it is often the case that businesses will treat their residential customers and commercial customers the same by charging tax on all sales or not charging tax on any sales. In the first scenario, these businesses may be due a refund for overpaid taxes. Meanwhile, in the second, more common scenario, these businesses may be facing an assessment with interest and penalties on top!

Meanwhile, over the last decade, what constitutes a “security service” is more unclear than ever. With modern technologies unanticipated by the statutes falling into a grey area, many taxpayers are forced to defend the nature of their services when faced with an audit. Many such audits hinge on the purpose of GPS. Is GPS used for security or logistics? In many cases, it is used for both. Without clear direction from the Florida Department of Revenue, taxpayers are left to guess whether their new technology services are taxable security services or nontaxable logistics services.

What Is the Context of the Labor?

The four services mentioned above are not the only types of labor that are subject to Florida sales tax. In fact, Florida famously has the “one drop of oil” rule which can essentially make ANY labor taxable under the right circumstances.

The “one drop of oil” rule uses the example of an oil change. If you bring your car to a mechanic and he examines your car, checks the engine, and checks the oil levels, he’s performed a pure labor service and no sales tax would be due. However, the second he adds ANY tangible personal property, even one single drop of oil, the ENTIRE transaction, including both oil and labor, becomes taxable.

Transactions in which a service and tangible personal property are sold together are known as “mixed transactions.” Such mixed transactions are at the core of many Florida sales and use tax audits. It is not uncommon for up to 90% or more of a sales price to be for services provided and only a small amount of the transaction for tangible personal property. Regardless, the Florida Department of Revenue will assess on the FULL amount of the invoice.

Ultimately, with the one drop of oil rule, ANY labor could be taxable is sold as part of the same transaction with tangible personal property. Clever invoicing often does taxpayers no good in an audit, as Florida has been known to take aggressive positions on what a “transaction” includes. Therefore, it is vital for taxpayers to know not only the nature of the labor provided but also the context of it to determine whether sales tax is due.

Who Owes the Tax on Labor?

Taxpayers often forget to consider who is actually liable for the sales tax owed on labor. In the first example of taxable services, such as nonresidential cleaning services, the service provider is required to collect and remit sales tax from their customer and then remit that sales tax to the state. However, there are cases where the business itself is liable for paying what seems to be sales tax on labor.

Specifically, businesses are required to pay use tax on labor they “use” in the course of their business. This only occurs in certain situations, and most commonly it occurs in fabrication. When a business fabricates cabinets, for example, these cabinets are ultimately installed into a home and become part of the real property. Such real property improvements are not subject to sales tax. However, the business owner is required to pay sales tax when they purchase materials and are also required to calculate and remit use tax to the state themselves on their fabrication labor.

Fabrication labor is one of the trickiest areas of Florida sales tax law, but it serves as a great example of the unusual stance Florida takes on the taxability of labor. Taxpayers must know whether they should paying tax on labor or if their customers are supposed to pay tax on labor. Sometimes, the same employee will perform labor that is both taxable to the business and taxable to the customer! Don’t expect the Florida Department of Revenue to cut you a break when these confusing laws are not properly implemented by your business. Not only can the Department go back years in assessing tax, but they will also add interest and penalties as well!

Many taxpayers overlook Florida’s imposition of sales and use tax on labor. However, the cost of not being familiar with these laws could result in a devastating sales tax assessment down the line. Business owners should be educated on the nature of their services, the context in which their labor is provided, and who is responsible for paying sales and use tax to the state.

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.

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.

AUTHORITY

Rule 12A-1.006, Florida Administrative Code ("F.A.C.") Install, Maintain, Repair Tangible Personal Property.
Rule 12A-1.009, F.A.C. Pest Control Services
Rule 12A-1.0091, F.A.C. Cleaning Services
Rule 12A-1.0092, F.A.C. Detective, Burglar Protection, and Other Protection Services
Rule 12A-1.051, F.A.C. Contractors Who Repair, Alter, Improve, and Construct Real Property

ADDITIONAL RESOURCES

WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA?, Published May 1, 2012, by James Sutton, CPA, Esq.

FL CABINET COMPANIES WITH SALES TAX PROBLEMS, Published October 5, 2013, by James Sutton, CPA, Esq. & Gerald Donnini, Esq.