Car repair shops have many considerations for which they must account. From ensuring a customer’s motor vehicle is timely and correctly repaired to labor issues to parts shortages, repair shops have enough to worry about. However, the Florida Department of Revenue adds a new dimension to the analysis – the sales and use tax audit as well as assessment. These audits can appear to come out of left field. What is even worse is the fact the assessment could put the repair shop out of business. This article will review some of the more common ways the Florida Department of Revenue finds repair shops to audit and what some of the likely areas are that will be assessed.
The Florida Department of Revenue obtains information on businesses from a myriad of sources. One method by which the Florida Department of Revenue obtains information is the company’s 1099-K. The Florida Department of Revenue gets the 1099-K directly from the credit card companies. This information is not something that is necessarily willingly provided by the credit card companies; rather, the Florida Department of Revenue has forced credit card companies, via a statutory change, to be required to provide the 1099-K to the Florida Department of Revenue.
You may be wondering why and how the 1099-K is relevant to the Florida Department of Revenue. The Florida Department of Revenue uses this document to compare the amounts the credit card company received to the amount of sales on the sales tax returns. If the amount on the 1099-K is greater than the amount reported on the sales tax returns, the Florida Department of Revenue assumes there are unreported sales that are subject to tax. In other words, the Florida Department of Revenue presumes you are guilty until you can unequivocally prove your innocence. When you cannot prove something did not happen (yes, this actually does occur), then the Florida Department of Revenue will assert the assessment is owed.
Another means by which the Florida Department of Revenue obtains information on car repair shops is through vendors. More specifically, the Florida Department of Revenue may be auditing a vendor. When auditing the vendor, the Florida Department of Revenue might notice no sales tax being paid by your company to the vendor. Not only will the Florida Department of Revenue likely assess your vendor, but also you can be setup for an audit and possibly assessed for the exact same transactions.
One additional method the Florida Department of Revenue uses is to review your tangible personal property returns filed with your local county. Specifically, the Florida Department of Revenue is looking for new items added to these returns during the audit period. If the Florida Department of Revenue sees a new piece of machinery (such as a car lift) added during the audit period, the Florida Department of Revenue will assume you did not pay tax on the equipment unless and until you can prove otherwise.
Now that we have reviewed some ways the Florida Department of Revenue might find out about your car repair shop, we will discuss the most common areas that are assessed by the Florida Department of Revenue.
One very common issue for car repair shops involves shop supplies. Shop supplies is a “catch all” line item for items used in the repair or service. In some instances, shop supplies consist of items used and incorporated into a car repair. In other instances, shop supplies consist of supplies used and consumed by the car repair shop in effectuating the repair (e.g., shop towels). What the shop supplies consist of will determine the tax consequences of the shop supplies. If the shop supplies are items used and incorporated into the repair, then the shop supplies are subject to sales tax and the purchase of the materials by the repair shop can be tax free. However, if the shop supplies charge is for materials consumed by the car repair shop, then the shop supplies charge should not be subject to sales or use tax. The purchase of the materials by the repair shop should be subject to sales or use tax. This is a highly confusing area for repair shops and auditors. Ensuring you are doing things correctly and have the support to demonstrate as much will be critical in this area.
Sometimes, repair shops will subcontract some of the work for a repair job. The subcontracted repair shop makes all of the repairs. When a repair shop makes repairs, Florida sales tax is usually charged on those repairs. However, and to exempt the transaction from Florida sales tax, the primary repair shop should provide its Florida Resale Certificate to the subcontracted repair shop. When received and as long as the Florida Resale Certificate is valid, the subcontracted repair shop should not charge the primary repair shop Florida sales tax. The Florida Department of Revenue will note the transaction did not have sales tax charged and why. If you cannot provide proof of the sale for resale nature of the transaction, then the Florida Department of Revenue will assess tax on the subcontracted repairs.
Repair shops will make repairs to cars that are paid for by insurance companies. Unless the insurance company provides a resale certificate, the Florida Department of Revenue’s position is the repairs paid for by an insurance company to settle a claim arising from the owner’s liability, collision, or comprehensive policy are fully taxable.
In a similar vein of insurance are service warranty agreements. A service warranty is a contract or agreement indemnifying the contract/agreement holder for the cost of maintaining, repairing, or replacing tangible personal property. The payment of claims is not taxable if arising under a taxable service warranty by the person issuing the service warranty (e.g., the service warranty company) made to the person performing the repairs or maintenance (e.g., the car repair shop) of the item covered under the service warranty. When the claim is paid under these circumstances, the repair facility must note the following: (1) the name of the person issuing the service warranty; (2) the identification number of the service warranty; (3) the date of issuance of the service warranty; (4) the Florida sales tax certificate of registration number of the service warranty issued; and (5) the amount of the claim to be paid by the service warranty issuer. If the payment of all or any part of a claim arising under a taxable service warranty is not paid directly to the person performing the repairs or maintenance, then the payment is subject to sales tax.
Finally, and as detailed above, machinery and equipment are a popular area for the Florida Department of Revenue to assess. The reason being most machinery and equipment in a car repair shop is of high value and easy to ascertain. If the car repair shop cannot prove tax was paid, then they might be staring down the barrel of a sales tax assessment for that machinery or equipment.
In summary, car repair shops have a high exposure to being audited and then subsequently being assessed by the Florida Department of Revenue. Knowing some of the common pitfalls can help to mitigate your exposure when an audit occurs. The key is to act right away and not wait for the Florida Department of Revenue to “help” you get things fixed.
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.
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.
Section 212.0506, F.S. - Taxation of service warranties.
Rule 12A-1.007, F.A.C. – Aircraft, Boats, Mobile Homes, and Motor Vehicles.
Rule 12A-1.105, F.A.C. – Service Warranties.
ADDITIONAL ARTICLES TO READ
FLORIDA DOR's 2022 LEGISLATIVE PACKAGE BAD FOR FLORIDA BUSINESSES, published December 29, 2021, by Staff.
IS LABOR SUBJECT TO SALES TAX IN FLORIDA?, published October 4, 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 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.