If you operate a tow truck company in Florida, then chances are you received a notice from the Florida Department of Revenue (“Department”) wanting to do a Florida sales and use tax audit of your company. We have heard that the Department received an “anonymous tip” that some towing companies are not charging sales tax when they should be. In the middle of a global pandemic, this is the last thing your business needs. Unfortunately, if you have not already received an audit notice, you should expect one soon as the Department ramps up a new campaign against tow truck companies. To minimize the sales and use tax exposure, you must know some of the ways to argue you owe little to no sales or use tax. This article will cover what tow truck companies must know to have the best chance at surviving a sales and use tax audit from the Department.
The initial good news is that tow and wrecker charges are not be subject to sales tax, presuming they are separately stated on the invoice (see Rule 12A-1.006(17)). However, that means that if items subject to sales tax are included on the customer’s invoice, then the towing or wrecker charges would become subject to tax if the charge is not separately stated. In other words, always itemize your invoice (with prices for each line item) or the Department will take the position the entire invoice is subject to Florida sales tax. In these cases, the Department of Revenue will want the money from your towing company even though you never received the Florida sales tax from the customer.
This begs the question what might a tow truck company normally do that is taxable? For example, in my time working for the Department of Revenue, I was told to take the position that if any type of cleaning is done (e.g., cleaning up glass at an accident), this “commercial cleaning service” subject to sales tax. However, by law only services provided as “commercial cleaning services” as defined under NAICS code 561720 would be subject to sales tax. Now that I work for a law firm representing taxpayers, I would point out that you have a strong argument that a tow truck company cleaning glass off the road at the scene of an accident would more appropriately fall under the non-taxable another NAICS code (e.g., 488410 motor vehicle towing and incidental services). This is one of many instances when the Department of Revenue auditors will push things towards being subject to tax when there is a strong argument that what the taxpayer is doing is not subject to tax. It is not fair, and it is not easy for a tow truck company owner or any other type of business owner to fight back if you really don’t know how. That is what we are here for… to defend business owners against the Florida Department of Revenue.
Another instance is that tow truck companies will make roadside repairs for customers. These repairs could be anything from fixing a flat tire, to changing a flat tire, or to providing a jump. Generally, the smallest bit of tangible personal property involved in a transaction can make the entire transaction taxable. So, if a tire is plugged or patched, arguably this charge should be subject to sales tax (See Rule 12A-1.006(7)(e)). The service of changing a customer’s tire with the customer’s own spare tire should not be subject to sales tax because no tangible personal property is given to the customer when providing this service. Something as simple as jumping a car would seem like an easy, non-taxable service, but have you ever looked at your electric bill? Electricity is subject to sales tax. The question becomes whether repair and jumping services are simply part of NAICS Code 488410 non-taxable towing services or can they be separately taxed as vehicle repairs and the sale of electricity. The answer is that if the Department of Revenue wanted to subject the repairs and jumping to sales tax, they very likely could as they clearly fall under items subject to Florida sales tax. However, the good news is that the Department rarely takes this position during a sales and use tax audit. That doesn’t mean it can’t happen. With this in mind, if I owned a towing company, then I would separately state repairs and jumping services and subject those line items to sales tax just to protect myself.
Now we get to one of the most misunderstood taxable items in the towing industry - storage fees. Storage is considered a taxable rental of the property where the item is being stored. When a tow company makes charges for storing a motor vehicle, these charges usually are subject to sales tax according to the Florida Department of Revenue. However, far too many towing companies have not been charging sales tax on any storage fees. This might be because there is a very big exemption to the taxation of storage fees when the charges for the storage are for arising from a lawful impoundment by a local, state, or federal law enforcement agency. In other words, when the tow and storage arose from a local, state, or federal law enforcement agency, the storage charges are specifically not subject to sales tax by law. It is the towing company’s responsibility to get the documentation necessary to prove that the towing arose from a governmental agency and failure to do so will result in the Department of Revenue taking the position that the storage fee is taxable. Therefore, you really want your invoices to clearly indicate that the towing service was provided at the direction of a government agency and name the agency. Proving this after the fact will be difficult and you will be very frustrated when the auditor leaves all your government initiated storage fees on the audit assessment as taxable storage fees.
It should be addressed that there is a lot of talk in the towing industry about the wording of the exemption that includes “lawful impoundment” by “authorized towing services.” Your company is a licensed towing company so it logically follows that any time you are hired, then your towing and storage should be a “lawful impoundment” from “authorized towing services,” right? The argument sounds great, but the Department of Revenue takes the position this is a misinterpretation of Rule 12A-1.073(6), which provides
“The parking, docking, tie-down or storage of motor vehicles, boats, or aircraft arising from a lawful impoundment by a local, state, or federal law enforcement agency or an authorized towing service does not constitute a contract for such parking, docking, tie-down or storage, and charges for such parking, docking, tie-down or storage are not taxable.”
The Department of Revenue position is that the storage is exempt only if the storage is initiated by a government agency ceasing control of the vehicle. According to the Department, this doesn’t happen when a business asks for someone to tow a vehicle off their property, for example. If your company wasn’t charging sales tax on storage fees, then this is likely to be the biggest part of your sales tax assessment in the audit. Our firm as been fighting the Florida Department of Revenue for almost 30 years and we’ve represented a lot of towing companies and storage companies over the years. We do have one argument that might prove helpful in this situation – “bailment.” If the customer doesn’t have access to the item being stored, then the service is more like a bailment than storage and bailment is not subject to sales tax in Florida. Be forewarned, you will never get an auditor to drop the assessment based on this argument. However, the argument can have more effectiveness at higher levels of challenge and provide a reasonable basis for settlement of the case. This is just one more reason why it is a good idea to have someone that really knows Florida sales and use tax law on your side when fighting the Florida Department of Revenue.
Speaking of law enforcement, sales to law enforcement or any other Florida sales tax exempt entity (church, public school, etc.) have very specific criteria which must be followed for the otherwise taxable sale to be exempt. Generally, you must obtain the Florida Consumer’s Certificate of Exemption from the purchaser and in most cases proof of payment with the exempt entity’s funds. Payment by an employee or owner’s personal credit card will not work for the exemption. As with most exemptions under Florida sales and use tax law, documenting proof of the exemption is the key to not getting hammered during an audit.
All-in-all, tow truck companies should proceed carefully with the Department. Far too many taxpayers walk into sales tax audits fully cooperating expecting that they have nothing to hide and that the Florida Department of Revenue auditor will be fair only to find the auditor is really a wolf in sheep’s clothing. Protect yourself and do not end up being one of the unlucky companies getting shockingly high sales and use tax assessments!
About the 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 Doctorate in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. As a former senior attorney for the Florida Department of Revenue, he handled informal protest appeals, among other things. You can read his BIO HERE.
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, AICPA, AAA-CPA, and FIADA. Mr. Sutton is also the State and Local Tax Chairman for the AAA-CPA and president of the Florida AA-CPA. 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.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is state and local 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
Section 212.03, F.S. Transient Rentals Tax (see Section 6)
Rule 12A-1.006, F.A.C. Charges by Dealers Who Adjust, Apply, Alter, Install, Maintain, Remodel, or Repair Tangible Personal Property
Rule 12A-1.0091, F.A.C. Cleaning Services
Rule 12A-1.038, F.A.C. Consumer's Certificate of Exemption
Rule 12A-1.073, F.A.C. Motor Vehicle Parking Lots and Garages, Boat Docks and Marinas, and Aircraft Tie-down or Storage
TAA 11A-027 - Florida sales tax on towing company storage fees
ADDITIONAL ARTICLES TO READ
FLORIDA SALES TAX INFORMAL WRITTEN PROTEST, published November 17, 2018, by James Sutton, C.P.A., Esq.
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.
FLORIDA TAX INCENTIVES FOR BUSINESS, published November 10, 2013, by Jerry Donnini, Esq.
GO TO JAIL FOR NOT PAYING FLORIDA SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.
WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA?, published May 1, 2012, by James Sutton, CPA, Esq.