In the first part of this three-part article on sales tax on commercial rent in Florida, sometimes referred to as “Commercial Rent Tax,” the question “What is rent?” was answered in detail and explanations were provided which showed some of the common misunderstandings when it comes to what types of payments can fall under the definition of taxable rent in Florida. It is important for taxpayers to remember that any payments between two entities or people when one entity or person has a license to use real property owned by the other entity or person could potentially be identified as taxable rent by the Florida Department of Revenue. However, understanding what is, what could be, and what the Department thinks qualifies as “rent” is only the first step.
This article will address how the Florida Department of Revenue taxes commercial rental transactions, as well as who is responsible for paying, collecting, and remitting, sales tax on commercial rent. Even in instances where all parties are in agreement that a rental relationship exists and what, precisely, that rental price is, there is still a question of what the tax amount will be and who, precisely, is required to pay the tax.
How are commercial rentals taxed in Florida?
Section 212.05, Fla. Stat., imposes sales and use tax on items of tangible personal property sold at retail in this state at a rate of six percent. This statute is the tax which most Floridians encounter on a daily basis and how they understand the tax to operate. Every time a taxable purchase is made, the state will charge 6% and taxpayers are generally ready to see that on their bill, in addition to any potential local surtaxes which could increase the sales tax marginally. However, Florida’s sales tax on commercial rent is not in the same statute, and is not at the same rate.
Section 212.031, Fla. Stat., imposes sales tax on the rental of real property in a variety of different ways. While the prior article in this series addresses only a few of the strange ways sales tax can find its way into “rental” transactions, it did not address how the rental rate can and has changed. Even taxpayers who are aware of sales tax on commercial rent in Florida often assume that the sales tax is imposed in the same manner, and at the same rate, as sales tax on tangible personal property. It does not matter if you are buying a small Iphone or a large vehicle, the rate remains at six percent here in Florida. However, the tax rate on commercial rent is completely different, changes, and does so by rate.
For many years, Florida imposed its sales tax on commercial rent at the same rate as its sales tax on tangible personal property so that both types of sales were subject to the same six percent. However, Florida’s sales tax on commercial rent is notoriously unpopular. Having a unique and steep tax on a generally untaxed transaction in other states has conflicted with Florida’s pro-business image while simultaneously disadvantaging some of the Florida’s smallest businesses. After all, small business owners often wear many hats, including bookkeeper, and cannot possibly keep up with every state tax law, as they change, all at once while managing every other aspect of their business.
As a result, in the years leading up to the unexpected, worldwide, covid-19 pandemic, the state of Florida began slowly reducing the sales tax rate on these transactions. However, as the pandemic began and spread within the state of Florida, there was a halt on this reduction as no one knew what the toll, and cost, this unique situation would have on the state and the state’s finances. As the world shut down and people ran to collect unemployment benefits during mass layoffs, they relied heavily on the state of Florida’s Unemployment Compensation Trust Fund.
Fortunately, as the pandemic came to an end, Florida was able to recover better and faster than most of the country and the state could continue its reduction of Florida’s sales tax rate on commercial rent. Governor DeSantis signed House Bill 7063, effective December 1, 2023, which reduces sales tax on commercial rent from 5.5% to 4.5%. That’s not all though. In addition to this one percent reduction in the sales tax rate on commercial rent, prior legislation made a promise that the sales tax rate on commercial rent will be reduced again all the way down to two percent on the first day after the second month after the Unemployment Compensation Trust Fund reaches its pre-pandemic balance. You may think that after how awful the pandemic was, and how many people affected, that this may not be for years and years. However, it is currently projected that by 2024 the sales tax rate on commercial rent will be down to that two percent!
Who is responsible for paying sales tax on commercial rent?
For some people, it is just their nature to point fingers at others when they’ve made a mistake. We all know someone like this. Unfortunately, that happens often in the legal world and we see it here too. When the Department of Revenue comes looking for sales tax, it is not uncommon for a taxpayer to point to the other party in a transaction and claim that they are instead responsible for the bill. Typically, the way this occurs is that one person receives a Notice of Intent to Audit Books and Records from the Florida Department of Revenue. This audit notice can scare a taxpayer, and they usually wonder why them and why at this particular time. The Notice of Intent to Audit Books and Records may be a general audit, in which the Florida Department of Revenue is seeking to evaluate all the taxpayer’s books and records in order to conduct a comprehensive sales and use tax audit of all sales and purchases through the entire three-year audit period. However, in some cases, the Notice of Intent to Audit Books and Records has been issued for the purpose of identifying potential additional tax due on only one type of transaction, such as with commercial rentals. If the tax has not been paid to the state, the taxpayer may wonder if the other party in a rental transaction is liable. Sometimes, the other party is responsible, but generally, the rule is that either party can be held accountable for taxes unpaid on commercial rental payments.
So who exactly is responsible to pay sales and use tax on commercial rent in the state of Florida? Well, the Florida Department of Revenue’s opinion is that they can obtain these rental payments from either party because both parties are engaged in a taxable transaction. More commonly, it is the business operating in the location, and not the landlord who owns the property, that is assessed tax because the Department is already auditing that business for other reasons.
For example, a disgruntled employee is working at a casual dining restaurant and discovers the owner of the business is keeping a portion of the sale tax collected each month rather than remitting it to the Florida Department of Revenue. The disgruntled employee reports the owner of the business to the Florida Department of Revenue for audit purposes, believing that they may profit from any taxes assessed against the business. The disgruntled employee’s report to the Florida Department of Revenue triggers a sales and use tax audit. While investigating the issue of whether there were taxes collected by the restaurant which were not remitted to the state, the Florida Department of Revenue decides to also audit the company on all their consumables, purchases, and lease agreement. The owner of the casual dining restaurant does not know that commercial rent is subject to sales and use tax in Florida, and so provides the lease agreement which is for $5,000 per month even with no sales tax charged. When assessed tax on each and every single month of the three year audit period, the taxpayer is upset that they were not told this by their landlord, and that their lease agreement did not notify them or include the tax which they would have paid if only they’d been aware it was due at the time. The taxpayer points the finger to their landlord, asking for the Department to audit the landlord instead.
In this example, the Florida Department of Revenue is most likely not going to delete the exhibit from the assessment and instead impose the full tax liability on the landlord, even though the landlord probably should have known that sales and use tax was due on the rental payments he charged and that such tax should have been included clearly in the lease agreement. After all, if you are not charged tax on a purchase from Target, it is extremely unlikely the Florida Department of Revenue will try to assess tax from you. Instead, it is almost always the retailer they will seek it from. Is a landlord not a “retailer” in a rental transaction? Perhaps so, but the tax obligation is on both parties in these types of transactions, and therefore once the Florida Department of Revenue assesses against the taxpayer, they are under no obligation to switch the assessment to one of the landlord instead.
Jeanette Moffa is a partner in the Fort Lauderdale office of Moffa, Sutton, & Donnini, P.A. She focuses her practice in Florida state and local tax, with an emphasis on sales and use tax. Jeanette provides SALT planning and consulting as part of her practice, addressing issues such as nexus and taxability, including exemptions, inclusions, and exclusions of transactions from the tax base. In addition, she handles tax controversy, working with state and local agencies in resolution of assessment and refund cases. You can learn more about Jeanette 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. Call our offices today 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 212.031, F.S. – Tax on rental or license fee for use of real property.
Rule 12A-1.070, F.A.C. - Leases and Licenses of Real Property.
ADDITIONAL RESOURCES
DECEMBER 2023 – FL REDUCES SALES TAX ON COMMERCIAL RENT, published December 1, 2023, by Jackie Mustian, Esq.
2023 FLORIDA SALES TAX UPDATE PART I, published July 5, 2023, by David J. Brennan, Jr., Esq.
2023 FLORIDA SALES TAX UPDATE PART II, published August 14, 2023, by David J. Brennan, Jr., Esq.
PHONE CALL FROM FLORIDA DEPARTMENT OF REVENUE: SALES TAX, published October 15, 2022, by Jeanette Moffa, Esq.
FLORIDA SALES TAX - VOLUNTARY DISCLOSURE PROGRAM, published April 9, 2018, by Jeanette Moffa, Esq.