It is a generally settled principle that items purchased for lease to a business’s customers allows the business to purchase those items tax free. Slightly less well known is the provision in section 212.05(1)(b), Florida Statutes, (F.S.), that designates “use” tax on items of tangible personal property (“TPP”) which are not sold but is “used, consumed, distributed, or stored for use or consumption in this state.” What many businesses and professionals might have missed in this legislation is the subsequent statutory language addressing leased property.
The statutory language I am referencing in section 212.05(1)(b), F.S., states:
for tangible property originally purchased exempt from tax for use exclusively for lease and which is converted to the owner’s own use, tax may be paid on the fair market value of the property at the time of conversion. If the fair market value of the property cannot be determined, use tax at the time of conversion shall be based on the owner’s acquisition cost.
For businesses that exclusively lease property, this is a very important provision to be aware of – particularly if property is converted to the owner’s use. And, for determining applicability, you should note that the Department VERY BROADLY interprets “use” for tax assessment purposes.
This is especially important because the conversion to the owner’s use may occur many years after the initial purchase and exclusive rental/lease to customers. The subsequent conversion creates the “date of importance” for audit purposes. So, despite an audit occurring more than three years after the tax free purchase of the asset(s), there still could be current sales and/or use tax implications based on the conversion and applicable date.
With the occurrence of the conversion establishing taxability, the next important issue is determining the tax that is due. In almost every instance I have seen, the Department of Revenue auditor has assessed tax on the cost of the item of TPP – regardless of how long ago it was purchased. While the Department broadly interprets “use” for tax purposes, it generally uses a narrow interpretation for fair market value (“FMV”).
Book or depreciated value for income tax purposes may not be enough to establish FMV for tax purposes at the date of conversion. This means you can provide guidance to your client or protect your own business from overstated used tax by getting the FMV of the asset(s) at the time of conversion. This valuation will need to be documented and kept with your records. With the tax you self-report on your monthly return, you should keep an extra copy with that calculation for subsequent audit purposes. It would be of additionally probative if the evaluation was performed by an outside party, ideally who is trained in valuation or an “industry expert” who is knowledgeable on the item of TPP and FMV determination.
One additional condition in section 212.05(1)(b), F.S., is stated in the last part of the statute:
Under no circumstances may the aggregate amount of sales tax from leasing the property and use tax due at the time of conversion be less than the total sales tax that would have been due on the original acquisition cost paid by the owner.
This provision is important to note if the owner previously purchased the item for limited rental purposes (or changed its business model or position regarding asset leasing) before conversion. If the owner tried to utilized rapid, immediate depreciation to decrease the tax base of the item of TPP, that will not work to reduce the tax burden. Again, my experience with the Department’s audit process has set a very high burden to prove a reduction in tax. This means that auditors have asked for specific, identifiable ways to calculate the tax from prior rental activities relative to a specific item of TPP. As the Department loves to “argue in the hypothetical,” auditors have, and likely will, take the position that one of other similar (or identical) items of TPP might not specifically have tax attributed to rental for calculation purposes. The Department auditor likely will try to take the position that it cannot be determined that a converted item of TPP was specifically ever rented (or to what degree).
Tax professionals and business owners need to be aware of these provisions to avoid excessive tax obligations that aren’t due. As identified above, the Department of Revenue will take any chance it can get to maximize the amount subject to use tax – and I have seen this done with items of TPP that have been significantly re-rented for amounts that greatly exceed the cost price of the asset. Yet, the Department still tried to assess use tax, years later, on the initial cost price. While you might want to argue “double taxation” the Department is going to respond that there is separate taxing authority to justify the tax assessment. Knowing what the requirements are will allow you to properly document you or your client’s assets and the associated tax calculation as of the conversion date. We can help with any questions you or your client might have about the valuation and/or documentation to help properly report a conversion now so it isn’t a bigger cost – and headache – later.
About the author: Mr. Parker is a sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., based in the firm's Tampa office. Mr. Parker's practice includes state tax audits and controversies involving sales and use tax and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Parker received his accounting degree, law degree, and L.L.M. in Taxation from the University of Florida. If you have any questions please do not hesitate to contact him via 813-775-2132 or MatthewParker@FloridaSalesTax.com or 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 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-1.071 Rentals, Leases, or License to Use Tangible Personal Property
TAA 13A-017 Lease of Tangible Personal Property
ADDITIONAL RESOURCES
FL Sales tax on Equipment Sharing Agreements, published August 16, 2014, by James Sutton, CPA, Esq.