Florida sales and use tax laws are very confusing, especially in the construction industry. HVAC companies fall into this category of confusion as well, but the issues are a little more clear cut if you know the law. The purpose of this article is to discuss the Florida sales and use tax rules for the HVAC industry. The article is written specifically for HVAC companies, but consumers that have questions whether they are being taxed correctly can get answers in this article as well. The article is written by a CPA and Attorney who practices almost exclusively in Florida sales and use tax controversy.
To understand Florida sales and use tax law on the HVAC industry, we need to start out with the basics. The heart of understanding sales tax on HVAC companies is to understand whether the project is the sale/repair of “tangible personal property” or “real property.”
Sale/Repair of Tangible Personal Property: The seller of tangible personal property is not supposed to pay sales tax when buying inventory, but it supposed to charge sales tax on the full, installed price, including labor, delivery, and any other charges paid by the client.
Sale/Repair of Real Property: The sale or repair of “real property” is not subject to sales tax. The seller is supposed to pay sales tax on all materials purchased and no sales tax is charged to the customer.
For the HVAC contractor, the important factor is to understand what type of contract for HVAC work fits into each category. For this industry, the answers are usually pretty simple. Centralized HVAC systems are usually considered to be part of the real property and any such installations and repairs are considered real property improvements not subject to sales tax to the customer. Window HVAC systems, like the PTAC units found in many hotels, or any other HVAC system that is not permanently installed into the real property are considered to be tangible personal property and subject to sales tax on the full price (labor too) paid by the customer. So, unless the HVAC system is simply put in place and plugged into an electrical outlet, it will most likely be considered a non-taxable real property improvement.
In other words, most HVAC companies should be paying sales tax to their vendors on material purchases and not charging sales tax to their customers. The good news is, there is less overall sales tax due on a real property contract, so the HVAC contractor can make more profit on the project. Also, the HVAC contractor that understands the rules, can likely outbid another company that tries to charge sales tax on the full contract price.
One danger for a HVAC company doing this wrong is you run the risk of a customer asking for the sales tax back. This is a legitimate claim on a real property improvement contract and there are two ways a HVAC contractor can respond. First, the HVAC contractor could refund the sales tax and take the financial hit. Second, the HVAC contractor could assign the right to a refund so the customer could get the refund directly back from the Florida Department of Revenue through a refund claim. The problem with the later is that it is likely to trigger a sales tax audit on the HVAC contractor.
A larger danger for a HVAC company charging sales tax on real property improvement contracts is when the company goes through a sales tax audit. The auditor will assert that the HVAC contractor has illegally been collecting sales tax from customers AND that the company still owes use tax on materials consumed during the audit period. This is no joke as I have seen this happen multiple times and it would be a huge financial hit to any HVAC company. Luckily, we can usually get the state to accept the argument that Florida also collected more sales tax than was legally due and it would be unfair to collect the sales tax a second time. With an agreement to apply the sales tax law correctly going forward, we can usually win these cases. However, this is not the type of argument auditors are used to and the argument is not always accepted at the audit level. But we can usually get the state to be reasonable at some point in the audit challenge process.
I also caution HVAC companies from taking away from this article that your company is due a huge refund of the overpaid sales tax. These taxes were collected from your customers and merely remitted to the state by your company. Your company is not entitled to a refund, your customers are. But this is a dangerous road for your company because it would result in your company having to come out of pocket for the use taxes on your cost of materials.
Far too many HVAC contractors and accountants do not understand this rule. Some people have been doing this wrong for years, over collecting tax from their customers and giving up profit. You can even find people in the Florida Department of Revenue who will tell an HVAC contractor that they must collect sales tax on every project regardless of type. The impetus of this article is the author had a taxpayer call to tell him they got wrong advice from someone in the Florida Department of Revenue Miami Service Center. The company had been doing it wrong for two years before a customer pushed back hard enough to research the issue.
One argument I have heard often is a HVAC company claiming their contracts are a “retail sale plus installation contractor” which entitles then to just charge sales tax to their customers on materials and not on labor. There is such a thing under Florida law as a “retail sale plus installation contractor,” which is often referred to as a “3d” contractor because it is discussed in Rule 12A-1.051(3)(d), FAC. Unfortunately, there are two requirements that make it almost impossible for a HVAC contractor to be considered a 3d contractor. First, the initial contract must spell out every single item of tangible personal property sold with line item pricing. The feet of insulated duct work, roles of insulated tape, or even the amount of screws that will be used are rarely known with specificity at the start of HVAC project, much less line itemed with pricing in the contract. The second requirement that makes it almost impossible to have a HVAC contract be a 3d contract is that the risk of loss must pass to the customer as soon as the materials hit the jobsite. Virtually no HVAC contracts are designed this way because customers want the HVAC contractor to be responsible for the materials until the project is finished. In other words, for too many people will believe they are a “3d contractor” because someone told them they were. At the end of the day, almost no HVAC contractor will meet the requirements. Besides, who would want to? The HVAC contractor that pays sales tax on their lower cost of materials is able to either outbid or make more profit than the HVAC contractor who charges sales tax on the higher cost the customer pays.
What should you do if your HVAC company has been doing things wrong? This is a great question. First, I will tell you what not to do. I don’t recommend you simply change the way you handle sales tax. If you do this, then your sales tax returns will go from remitting a whole lot of tax to remitting almost nothing. Does anyone think for a second that this will not get the one-track minded attention of the Florida Department of Revenue? The realty is that such a dramatic change will likely trigger a sales and use tax audit. Remember early in this article the discussion about how auditors are trained to tell companies that they owe sales tax back to their customers, but the company still owes use tax on the material purchases? This is most likely the path you would be driving down if you simply change how you handle sales tax. Sure, we could likely, eventually, convince the state of Florida to give you credit for the over collected sales tax. But you would have to go through a painfully long sales tax audit and likely have to hire someone to fight back. There is an easier, much less costly solution. I would recommend going through a voluntary disclosure with the state to admit you have been doing it wrong, request credit for taxes already paid, and then change your method of handling sales tax during the disclosure. This will most likely avoid the sales tax audit and cause much, much less headaches for your business.
SUMMARY
In summary, HVAC companies need to distinguish between their projects that are taxable tangible personal property sales (like window PTAC units) and non-taxable real property improvements. Window units are taxable on the full price paid by the customer and taxes are paid by the contractor on materials consumed for real property improvement projects. Cleaning up the past for a company that has been doing things wrong is best accomplished by filing a voluntary disclosure rather then simply changing filing methods (to greatly lesson the chance of a sales tax audit).
About the author: James Sutton is a Florida licensed CPA and attorney as well as a partner in Moffa, Sutton, & Donnini, PA. Mr. Sutton is charge of the Tampa office of the firm and practices almost exclusively in the area of Florida Sales & Use Tax Controversy. Mr. Sutton handles audits, protest, litigation, criminal cases, revocations, collections, and consulting engagements all in the area of sales tax. Mr. Sutton is an active member in the FICPA and several conferences including the Construction Industry Conference held in Orlando every year. Mr. Sutton was also CFO an in-house counsel for two construction companies from 2003 to 2011, so he understands more about the construction industry than most tax attorneys. If you are interested in learning more about Florida sales tax from Mr. Sutton, you can find his speaking engagements around the state HERE. Otherwise, you can learn more about Mr. Sutton in his firm bio HERE.
About the firm: 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 been defending 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 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
Rule 12A-1.051 Sales to or by contractors who repair, alter, improve, and construct real property
FL DOR Form GT-800067 – Sales and Use Tax on Construction, Improvements, Installations, and Repairs
ADDITIONAL RESOURCES
FLORIDA SALES TAX – VOLUNTARY DISCLOSURE PROGRAM, published April 09, 2018, by Jeanette Moffa, Esq.
WHAT SERVICES AE SUBJECT TO SALES TAX IN FLORIDA, published May 1, 2012, by James Sutton, CPA, Esq.
FL COUNTER TOP COMPANIES: SALES TAX PROBLEMS, published October 13, 2013, by James Sutton, CPA, Esq.
PROTEST A FL SALES AND USE TAX AUDIT, published August 8, 2019, by Matthew Parker, Esq.
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