This article is the third article in a three part series on Florida’s imposition of sales and use tax on commercial rental transactions. Florida imposes sales and use tax on the rental of all real property subject to particular exemptions, but this article series focuses only on those transactions which are considered commercial rent or a license to use real property which is not an accommodation such as a hotel or apartment.
The first article answered one question which may appear obvious, but is in fact of vital importance for the Florida taxpayer or Florida taxpayer representative. That question is “what is rent?” While it may seem rent is simply a total rental amount on a lease agreement, there are various charges or fees, both expected and unexpected, which can be included in the Florida Department of Revenue’s definition of rent subject to tax in Florida. The second part of this article series answered not one, but two questions regarding sales tax on commercial rent. First, it answers how commercial rentals are taxed in Florida. It is important to know how that tax is imposed because the rates over the years have changed, and it is expected that they will change again in the near and far future. Meanwhile, the second question asked is who is responsible for sales tax on commercial rent. This answer has created much animosity between landlords and tenants over the years, as either party can be assessed sales tax on the entire liability over the course of a three-year period with no recourse against the other party. Finally, this third article in the three-party series will address two more questions: (1) why does the Florida Department of Revenue so heavily audit commercial rental transactions in the state; and (2) how does the Florida Department of Revenue audit these businesses.
Why does the Florida Department of Revenue so heavily audit commercial rental transaction in this state
While only the Florida Department of Revenue can reveal their true intentions with sales and use tax audits, there are some factors which make these types of transactions appealable from an audit perspective. Ultimately, we can only assume motives and intentions based on our experience working directly with Department of Revenue employees, and the many cases we handle each year. A few of them include that these audits are easy, cheap to perform, and effective, as explained in more detail below.
First, there is very high turnover of auditors at the Department, and overall, very poor training. The simpler an audit, the more likely a new auditor can handle it. Sales and use tax audits of commercial rental transactions are first and foremost very easy for auditors to do. They take a short amount of time, are easy to calculate, and can even be estimated by a simple formula, as discussed in more detail below. Therefore, we believe these the Florida Department of Revenue heavily audits commercial rental transactions because assessing them is simply easy!
In addition, audits are not free for the Department of Revenue. They have to employ an auditor and cover certain expenses, like travel time. While auditors are traveling to locations less frequently than prior to the pandemic, it is sometimes necessary for them to do so, particularly in circumstances where taxpayers keep there records primarily in hard copy and therefore cannot provide them by email. Conducting an audit of commercial rent is extremely cheap for the Florida Department of Revenue as compared to other audits. First, there is usually only one document to be reviewed: a lease agreement. This agreement is compared to sales and use tax returns, and if there no proof that tax was paid pursuant to the lease and properly remitted to the state, then they will usually issue an assessment for what they believe to be the difference. Although the Department has, by Florida Statute, a year to conduct a sales and use tax audit, these types of audits can be conducted in only a few minutes.
Finally, we suspect that the Florida Department of Revenue heavily audits lease agreements because they get the most “bang for their buck” in conducting these audits. Unlike a retail sale of tangible personal property, where due to an error tax was not properly charged or collected on a particular transaction, in cases of commercial rent, they are usually automatic payments for large amounts on a monthly basis. If a single error is made on a single lease agreement, and sales tax on rent is not properly calculated or included, then the Department can assess and collect thirty six months of sales tax on a what is mostly likely a very high dollar amount payment. Therefore, it is worth the Department’s time to investigate on each case whether sales tax was properly paid on commercial rent.
While we can only guess at why the Department of Revenue heavily targets some industries more than others, it seems that they do so in cases of commercial rent because it is cost effective for new or untrained auditors to conduct them while they can result in high dollar amount assessments.
How does the Florida Department of Revenue assess sales tax on commercial rent?
The Florida Department of Revenue assesses sales tax on rent through an audit. This can happen typically in one of two ways. First, the Florida Department of Revenue can issue a general audit notice with the intention to audit all aspects of sales and purchases for additional tax due. But some taxpayers are surprised to learn that the Department also can issue limited scope audits and assessments without even consulting with a taxpayer.
How do they do this? The Florida Department of Revenue has invented a policy which you cannot find in a rule or statute because it does not exist. This policy is that the Department looks up a particular property the local county property appraiser’s site to estimate its current value. Then, using a website such as Google Maps, the auditor will check to see if the business operating at the location has the same name and is the same entity as the business which owns the property. If it is not the same, as it usually will not be, they will estimate what the Department believes is fair market value rent, assess that fair market value rent over the course of the last thirty six months, and then mail that assessment to the taxpayer. Essentially the letter will say: pay up or prove this amount wrong.
Diligent taxpayers will respond immediately with their lease agreement and proof that tax was paid. However, it’s quite possible that the taxpayer never even receives this notice. For example, if the assessment is of the landlord, and the notice is mailed to the address of the property at issue, then the operating company is hopefully looking out for mail not addressed to it and properly turning it over the landlord. If this does not occur, and the notice is either lost, tossed, or never received, that assessment becomes final and the taxpayer/landlord will lose their right to even fight it!
This scenario occurs because of vitally important deadlines on notices from the state. If they have issued an assessment in the way just described, then the first notice you will likely receive is a DR-1215 Notice of Intent to Make Audit Changes, in which the assessment is identified and you are supposed to be provided a 30-day period to respond. However, the Florida Department of Revenue commonly ignores this 30-day period to respond and instead will immediately, or shortly after the issue date, move forward with the subsequent notice which is called Notice of Proposed Assessment, or NOPA for short. A Notice of Proposed Assessment must be responded to within 60 days for an informal protest or 120 days for a Petition for Chapter 120 Hearing or circuit court filing. If that deadline is missed, the assessment, no matter how absurdly wrong it may be, is final and there is nothing that can be done to fight the case.
Ultimately, commercial rent is an area of Florida sales and use tax law which taxpayer and tax practitioners must educate themselves on, as the results of a surprise audit can be devastating. Having some background information on why the Florida Department of Revenue so heavily targets commercial rental transactions for additional tax and how they go about imposing this tax through audit on Florida businesses is important.
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.