Capital leases are an excellent way to plan for the future as well as take advantage of unique Florida sales and use tax benefits. However, the Florida Department of Revenue sees a capital lease and will plan for ways to tax the periodic lease payments, when the lease payments may not necessarily be subject to sales or use tax in the first place. It is pivotal knowing how to fight back against the Florida Department of Revenue and protect your capital lease and more importantly your bottom line. Read below to understand how the Florida Department of Revenue will see your capital lease, why the lease will be taxed by the Florida Department of Revenue, and how you might protect yourself.
To understand the Florida sales and use tax consequences of a capital lease, one must first understand the Florida sales and use tax consequences of a “regular” monthly lease (i.e., an operating lease). The sale or rental of any tangible personal property is subject to Florida sales tax according to Section 212.05, Florida Statutes (“F.S”). The legislature, understanding some may say individuals do not “rent,” defined the word “sale” to mean any transfer of possession, license, lease, or rental of tangible personal property per Section 212.02(15)(a), F.S. Therefore, the Florida Legislature has made it clear any type of lease or rental of tangible personal property in Florida is unequivocally subject to Florida sales or use tax, unless an exemption applies.
The Florida Department of Revenue has reinforced the above-mentioned concept via a regulation it has under Rule 12A-1.071, Florida Administrative Code (“F.A.C.”). The Florida Department of Revenue calls a regular monthly lease an operating lease in its rule and says each monthly lease payment is subject to Florida sales or use tax. However, the Florida Department of Revenue adds a discussion about what it calls a capital lease and the Florida sales and use tax consequences of this lease.
A capital lease is one where: (1) a contract transfers substantially all of the benefits (including depreciation) and the risks of the ownership of the property to the lessee; and (2)(i) ownership of the property transfers to the lessee at the end of the lease term, or (ii) the contract contains a purchase option for a nominal amount. A nominal amount is any amount not exceeding the lesser of $100 or one percent (1%) of the total contract price.
If your lease meets the above capital lease criteria, then the lease is a capital lease. Different from an operating lease where the monthly payments are subject to Florida sales or use tax, a capital lease will cause the Florida sales or use tax to be due and payable at the beginning of the lease or when the property subsequently comes into Florida. Thus, a capital lease is treated as if it is a sale of the leased item. The seller must remit the full amount of Florida sales tax on the transaction as if the lease were a sale, even if the seller has not received the sales tax from the lessee (i.e., the lessor is financing the sales tax as well). This last point is critical, as some lessors will struggle to pay the Florida sales tax or not understand the Florida sales tax is due upfront.
The Florida Department of Revenue, via its rule, says charges for interest or financing are also taxable unless the rate of interest or the actual amount of interest charged is separately stated on the customer’s contract. To determine whether a lease is a capital lease or an operating lease, the Florida Department of Revenue will look at all of the documents at the time the lease was executed.
Now that the differences between capital leases and operating leases as well as the associated Florida sales and use tax consequences of each has been reviewed, a discussion is warranted as to the Florida Department of Revenue’s treatment of each in practicality.
The Florida Department of Revenue usually takes the position one must prove beyond a doubt qualification for a sales or use tax position taken. For instance, if the Florida Department of Revenue says a lease is an operating lease, the lessor or lessee must prove the lease is a capital lease (if it is). Otherwise, the Florida Department of Revenue will say each lease payment is subject to sales or use tax. This first scenario is all too common, as the Florida Department of Revenue normally defaults to leases being an operating lease with the burden on the lessor or lessee to prove otherwise. If the lease is genuinely an operating lease, then the Florida Department of Revenue may take the position the lease is a capital lease with tax due at the beginning. For a lessor in either instance of an assessment by the Florida Department of Revenue, this means money coming from your bottom line. For a lessee, it means you may be paying tax twice if you are assessed by the Florida Department of Revenue. Either way, paying tax plus interest and potentially penalties can quickly add up. If you cannot prove you are right, the Florida Department of Revenue will uphold their assessment, as the Florida Department of Revenue’s position is you are guilty until proven innocent.
When the Florida Department of Revenue upholds assessments, you should strongly consider fighting. Just because the Florida Department of Revenue says something is subject to sales or use tax and that you must pay the tax, interest, and penalties, it does not mean you owe those amounts. Oftentimes, our firm sees the Florida Department of Revenue take various positions that are simply incorrect. In other cases, the issue could have been handled very easily early on with the right advice. I cannot tell you how many times I have heard “I wish I had hired you sooner” from clients.
While not the main focus of this article, it is worth noting certain leases, whether a traditional monthly lease or capital lease, could be exempt from Florida sales or use tax. There are numerous exemptions from Florida sales and use tax that are available. However, the main issue is the person claiming the exemption must be able to prove qualification for the exemption. If you cannot prove you meet the requirements of the exemption, the Florida Department of Revenue will disallow the exemption, and assess interest and potentially assess penalties of fifty percent (50%)! Needless to say, the Florida Department of Revenue may assess you even if you do not owe the money in the first place.
In conclusion, the Florida sales and use tax consequences of a capital lease and operating lease could not be more different. A capital lease requires Florida sales or use tax to be paid upfront while an operating lease has Florida sales or use tax imposed on each monthly payment. Not having an understanding of the differences could lead to having your lease assessed Florida sales or use tax by the Florida Department of Revenue. It may not be just tax, as the Florida Department of Revenue will likely assess penalties and interest. The best way to mitigate your liability is to plan ahead, as fighting the Florida Department of Revenue can be an uphill and long battle. If you do end up fighting the Florida Department of Revenue, you must ensure you timely meet all deadlines to do so, as not meeting deadlines can add a layer of complexity to the issues.
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 Doctor 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. While working for the Florida Department of Revenue as a Senior Attorney, David focused on various sales and use tax issues. You can read his 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 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. Contact us for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Section 212.02, F.S. - Definitions.
Section 212.05, F.S. - Sales, storage, use tax.
Rule 12A-1.071, F.A.C. - Rentals, Leases, or License to Use Tangible Personal Property.
ADDITIONAL ARTICLES TO READ
FL SUPREME COURT 1% HILLSBOROUGH SURTAX INVALID, published February 27, 2021, by Jeanette Moffa, Esq.
FLORIDA SALES AND USE TAX AUDITS, published September 21, 2020, by Steve Middel.
FL DOR - PROSECUTING CRIMINALLY BASED ON IRS 1099 DATA, published February 6, 2020, by Amanda Levine, Esq.
FLORIDA SALES TAX: LEASED CARS, published May 22, 2019, by David J. Brennan, Jr., Esq.
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.