A sale in Florida subject to sales tax normally requires the seller to collect Florida sales tax from the purchaser. In cases where a customer believes a business has charged too much sales tax, the growing trend is for the customer to sue the business. However, it does not stop there. Customers will attempt to have the suit turn into a class action. This is exactly what happened to Avis Budget Car Rental and Ace American Insurance Company. The scary thing is it could happen to your business if you do not charge your customers the exact correct amount of Florida sales tax.
Stephen Morgan rented a car from Avis at the Jacksonville International Airport. Morgan alleges he obtained insurance coverage on the car from Avis and that such insurance coverage was optional. He also states he was charged sales tax on the insurance coverage. Morgan alleged the Florida sales tax charged was illegal, as sales tax should not be owed on the total sales price of the rental because, and for various reasons insurance charges should never be subject to sales tax.
From a technical standpoint, Morgan might be correct but for the wrong reason. Florida sales tax can be and has been imposed on insurance charges. The reason why is the price subject to Florida sales tax includes the total amount for the charge. This is best illustrated by nontaxable items being paired with a taxable item. Even if the nontaxable items account for 99.9% of the total charge, the taxable portions can taint the rest of the transaction. This is called the drop of oil rule. We see this all the time with the Florida Department of Revenue.
Turning to Morgan’s case, the Department’s Rule 12A-1.007(13)(c)1., F.A.C., specifically states the entire charge for the lease or rental of a motor vehicle for less than 12 months is subject to sales tax when the contract is entered in Florida or the motor vehicle is delivered in Florida at the commencement of the rental contract. Rule 12A-1.007(13)(e)1., F.A.C., speaks to charges for insurance relating to the rental of a motor vehicle. The Department comes right out to say separately itemized charges for required insurance is subject to Florida sales tax. Yet, in instances where the rentee has the option to obtain insurance, separately itemized charges for the optional insurance should not be subject to Florida sales tax.
Most businesses are concerned with ensuring they charge Florida sales tax on transactions that are taxable. Sometimes, a business may be unsure or mistaken as to what components of a transaction are subject to Florida sales tax. The Florida Department of Revenue oftentimes advises businesses that it is better to over charge Florida sales tax on a transaction so the business is not liable when the Florida Department of Revenue conducts an audit. To some extent, that is a true. However, what is uncontemplated by that advice is that if a customer is overcharged Florida sales tax, what will the customer do? The answer is the customer may bring a class action lawsuit against your business!
What about in cases in which the customer says you were unfairly enriched by collecting too much sales tax? This simply is not true, as the business holds the money in trust for the Florida Department of Revenue and should usually remit the full amount of the funds by the 20th of the month following the collection. Why did Morgan not sue the Department of Revenue? Currently, Florida law prevents individuals from brining a class action lawsuit against the State for sales tax purposes. Thus, it is easier for these customers with relatively small amounts of taxes at issue to sue the vendor (your business!) that charged the sales tax.
What should you do to mitigate your exposure? You need to prioritize ensuring you are correctly and fully charging Florida sales tax on your sales. If not, this is something that should be changed right away. You will be decreasing your exposure on several fronts with – (1) the Florida Department of Revenue; (2) your customers; and (3) plaintiff’s lawyers looking to earn extra fees via class action that you would end up having to pay
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.
AUTHORITY
Section 212.02, F.S., Definitions.
Section 212.05, F.S., Sales, storage, use tax.
Rule 12A-1.007, F.A.C., Aircraft, Boats, Mobile Homes, and Motor Vehicles.
ADDITIONAL ARTICLES TO READ
FLORIDA SALES TAX - COUPONS V. DISCOUNTS, published October 30, 2018, by David Brennan, Esq.
FLORIDA SALES TAX - VOLUNTARY DISCLOSURE PROGRAM, published April 9, 2018, by Jeanette Moffa, Esq.
FL SALES TAX CLASS ACTION ON PIZZA HUT DELIVERY FEE, published December 9, 2015, by Jerry Donnini, Esq.
FLORIDA USE TAX AUDIT LETTER?, published June 14, 2015, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.
GOING TO JAIL FOR NOT PAYING FLORIDA SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.