FLORIDA GAS STATION INDUSTRY
SALES AND USE TAX ISSUES AND SAVINGS OPPORTUNITIES
PART I - DISTRIBUTORS AND MAIN COMPONENTS
Ranging from multinational corporations to small mom and pop stores, the gas station and distribution industry is one of the largest industries both in the world and here in Florida. Growing up in a family business that owns, operates, and distributes petroleum in South Florida for more than over 30 years, it has been a privilege and has given me the insight to see firsthand how a the gas station industry works. Unfortunately, I have also seen firsthand how the Florida Department of Revenue aggressively pursues the industry at all levels, severely hindering business owners at all levels of the petroleum industry. Such focused scrutiny has even put some gas station owners and operators out of business. This article is written to provide gas station owners, operators, and distributors some insights into how to fight back and plan against the Florida Department of Revenue. In other words, this article serves as a guide to help protect an industry that is dear to me and my family from the scrutiny of a Florida sales tax audit.
While running a gas station may seem straightforward, any owner, operator, or distributor of fuel will tell you that a "simplistic" gas station is really a combination of several complex businesses located on one property. Likewise, while Florida sales and use tax laws may also seem relatively simple, there are many unique factual scenarios that make the law much more complex than most people can ever imagine. Each distinct income source will be analyzed and discussed with regards to the various sales tax ramifications and opportunities within each aspect of a gas station business.
Many companies in the gas and petroleum industry do business primarily as a distributor. A fuel distributor has two main components of income. The first component is fuel sales in which it buys fuel from a producer and re-sells to a dealer, presumably at a profit. The second main component relates to the rental of commercial real property.
The most prevalent savings opportunities for gas station owners, operators, and distributors occurs when the same owner or ownership group owns the property and rents it to a related entity or individual. A thorough analysis of related party rent was done in a December 2011 article by our partner, James Sutton, which can be found here FLORIDA COMERICIAL PROPERTY OWNERS GET BLINDSIDED BY SALES TAX.
Florida and Arizona are unique in the context of sales tax around the country because they make commercial rent subject to sales tax, in Florida under section 212.031, F.S. The imposition of sales tax on commercial rents catch many multistate gas station owners and operators off-guard because most states do not tax such transactions. Many distributors purchase or lease the real property and then re-rent or re-lease the gas station to an operator. Distributors or property owners often do not realize that they should be charging sales tax on rent and gas station owners or operators often do not know that they should be paying the sales tax. This can leave the issue wide open on audit of either entity, bring large assessments (potentially on both landlord and tenant) plus penalties and interest. There are prospective and postspecctive savings opportunities available in this area and at Moffa Gainor & Sutton, we have done countless planning and audit defense work for commercial real property rental scenarios. It is essential to have a Florida sales tax attorney to help plan these types of transactions in any industry and the gas station industry is no different.
The first and most obvious income source of a gas station is its fuel sales. Gas sales are not reported on the DR-15, Sales and Use Tax Return, but are reported on a completely separate, DR-309632, Fuel Tax Return. As such, gas sales should be outside the scope of a sales tax audit. However, gas sales are reported as a portion of a company's gross sales on its federal tax return. It is good practice for a company in any industry to check the amount of gross sales being reported on its federal tax return compared to the gross sales reported on the company's sales and fuel tax returns and its DR-15, Sales and Use Tax Returns, to make sure the numbers are in accordance. In other words, when you add up your revenues from your fuel sales tax returns and your sales reported on your regular tax returns, this theoretically should add up to the income reported on your federal income tax return (presuming there are no other sources of income). Comparing these amounts will be one of the first things a Florida tax auditor will do, so it is better to be prepared to explain (and potentially correct) any discrepancies before the auditor brings the matter to your attention.
Along the same lines of gas sales, many owners or operators of gas stations also engage in the lease or purchase of equipment such as fuel pumps. For all intents and purposes, section 212.02, Florida Statutes (F.S.) and Rule 12A-1.071, Florida Administrative Code, (F.A.C.), treat a lease the same as a sale of tangible personal property and impose a tax of 6% on the sale/rental of such personal property.
In the gas station context, and many other businesses, it is often grey whether something is considered the (taxable) sale of tangible personal property or the (non-taxable) sale of real property / fixtures. For example, is a fuel pump on a gas station property that is attached to the real property treated? Is it tangible personal property or non-taxable real property fixture? In the Florida Department of Revenue's standard industry guide, you will find the Department takes the position that fuel pumps at gas stations are tangible personal property subject to sales tax (as they always seem to do).
From a legal perspective tangible personal property are items that can be seen, weighed, measured, or touched. On the other hand, rule 12A-1.051, F.A.C., defines "real property" as land, improvements to land, and fixtures and further confirms that the sale of "real property" is not subject to Florida sales or use tax. Furthermore, an "improvement to real property" includes a building or other structure on real property. A "fixture" which is generally defined as an item or accessory attached to a building or land, which retains its separate identity upon installation but cannot be easily removed without causing damage to the building or land, is also considered real property. Common examples of fixtures include items like bathroom sinks, elevators, central air conditioning units, built in cabinets, counters, and lockers, are all examples of fixtures.
Turning back to my initial inquiry, is an installed fuel pump a tangible personal property or a real property improvement? It seems a strong argument can be made that a fuel pump is real property because it is permanently attached to the realty. While it is true the pump is merely bolted the realty, it is connected to a permanent piping system which makes it more analogous to the central air or sink situation. Further, the pumps are can cause substantial damage to the realty upon its removal, it is intended to remain attached, it requires permits or licensing to install, and is customized to fit a particular space. The manner in which the item is reported for federal tax depreciation will also play a role in this dilemma.
Why does it matter whether a fuel pump is tangible personal property or real property? The distinction between the tangible vs. real nature of a fuel pump can result in significant tax savings for the purchaser and the installer. If the fuel pump is considered tangible personal property, then the gas station owner or operator must pay sales tax on the full, installed sales price of the fuel pump. Conversely, if the pump is real property, then use tax is only due on the cost of the materials (without the installation costs) and, possibly more importantly, the tax is technically owed by the installing contractor as a use tax and NOT owed by the gas station owner. The difference in sales tax savings can be substantial, especially for an owner of multiple gas stations. Did your company or your client's company pay sales tax on the installation of gas pumps? You might be able to request a refund of those sales taxes.
Consider the following example; MGS Gas Station, Inc. buys 4 installed pumps from DOR Pump and Install, Co. for its store at $10,000/each for a total of $40,000. Structured this way, MGS Gas owes $40,000 ($37,736 pump and install plus $2,264 sales tax). If the same contract is real property and DOR Pump and Install, Co. charges a lump sum for the pumps and install work, then MGS Gas owes no sales tax on its purchase. DOR Pump and Install, Co. would have to pay use tax only on its material cost, which is significantly less than the resale price. Assuming the same job (4installed pumps for $40,000) and DOR Pump and Install, Co.. has a material cost equal to $30,000), the use tax due is only $1,800 (a tax savings of $464 or 20%) and no tax is due by MGS Gas. This may provide for an opportunity for the pump installer to undercut its competition by reducing that sales tax on a contract. This is an aggressive position and would likely be challenged by the Department, but it may be worthwhile for large pump installers or large chain gas station owner or operators. Cases and ruling in other states have taken this position (See, e.g., Kum and Go, LC No. 07-30-6-0011 (IOWA DOR 2007)) and it may be a viable avenue for challenge. Furthermore, if the gas station owner paid significant amounts of sales tax on the installation of pumps during the last three years, then there may be an opportunity for the gas station owner to demand a refund of sales taxes paid to the pump installation company.
As a law firm with nothing but Florida sales and use tax attorneys, we have handled numerous cases involving real vs tangible personal property issues and we have several unique ideas as to how to structure transactions similar to the one above to save money for the Florida gas station owner, operator or distributor as well as the companies providing the equipment for the gas station. This can increase the bottom line for all the companies involved as well as provide opportunities for companies to outbid rivals in this extremely competitive industry.
About the author: Mr. Donnini is a Florida Attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA. Mr. Donnini's primary practice is Florida tax controversy. Mr. Donnini worked as an accountant for a public REIT prior going to law school and is currently pursuing his LL.M. in Taxation at NYU. You can read more about Mr. Donnini in his firm bio.
Sec. 212.02, F.S.
Sec. 212.031, F.S.
Rule 12A-1.051, F.A.C.
Rule 12A-1.071, F.A.C.
See also, TAA 90A-052 (1990) Sales Tax on Self Service Car Wash
See aslo, TAA 99A-059 (1999) Sales Tax on Cash Wash