COUNTER-TOP COMPANIES WITH FL SALES TAX PROBLEMS
We have recently seen an alarming increase of Florida sales and use tax audits dealing with fabricating and real property installation companies. Of continuing interest to the Florida Department of Revenue's ("FL DOR") focus are counter-top companies. From a Florida sales and use tax attorney's perspective there are many issues that will even surprise people that have been in the counter-top industry for many years. We have also learned that many businesses are unaware of the potential tax problems when that dreaded, DR-840, Florida sales and use audit notice arrives. Perhaps you have wondered whether you were handling your sales and use taxes correctly. Many of our clients received "tax advice" from people in their industry rather than speaking with a tax professional. By reading this article, you should get a good idea of whether your counter-top company is handling Florida sales and use taxes correctly and how to correct any problems you discover.
While the sales and use tax rules may seem simple at first, the Florida sales and use tax laws can be complicated in practice for any fabrication / installation company. For starters, as a general rule Florida sales tax should be charged on any sale of tangible personal property within the confines of Florida. However, the sale of installed counter-tops is not the sale of tangible personal property, but rather are real property improvement contract. Because real property improvements are outside the scope of Florida sales tax, it would be a very rare situation when a counter-top contractor would charge sales tax to the customer for installed counter-tops. Contrary to popular belief, that also means that a customer cannot avoid the tax by presenting a resale or exemption certificate (there some planning techniques that can be done if your company sells to tax exempt entities). The real catch is that Florida use tax should be paid or accrued on the purchase of all materials and shop fabrication labor for real property improvement projects, including counter-top installation jobs.
For many real property improvement contractors, these rules only become clear after going through a very painful Florida sales and use tax audit. Until an audit, many Florida counter-top installers are not aware that any in shop fabrication labor is subject to Florida use tax. That's correct, if a company pays an employee to fabricate real property materials, then use tax should be remitted on the shop fabrication labor costs of that employee. The overwhelming majority of our new real property improvement clients were unaware of this rule and it often comes as a surprise when they owe tens or even hundreds of thousands of dollars on fabrication labor as a result of a sales tax audit.
Most of the fabrication/installation companies that we come across that are not handling their sales and use tax compliance correctly fall into two categories.
Group One: Charge sales tax to customers on the retail price of materials.
Group Two: Always pay sales tax on materials purchased, but accrue no use tax on shop fabrication labor. We will discuss the issues with each of these groups below:
Sales Tax on Retail Price of Materials
The first group charges sales tax to their customers on the retail price of the materials. If the price of the counter-tops includes the cost of materials, shop fabrication labor, and a mark-up for profit, then this method tends to have the right about of tax going to the state if not a little more. However, the problem is that the counter-top contractor should not be charging sales tax to the customer and all Florida sales tax auditors are trained to tell the contractor that they have been illegally collecting sales tax from the customer, and even worse, the contractor still owes use tax on the cost price of the materials (materials plus shop labor). In this situation, state actually wants to collect the tax from the contractor again. This is the type of news that auditors usually refrain from delivering in person, as many business owners would reasonably have an excuse to be a little upset. This is something we can usually negotiate with the state on and help the counter-top contractor correct the methodology going forward. Unfortunately, this type of negotiation usually cannot be done at the audit level, requiring an administrative protest or even the initiation of controversy to get the FL DOR to see reason.
However, the real problem that occurs when the counter-top installation contractor charges sales tax to customers comes to light when the counter-top company does work for tax exempt clients. Because the counter-top company has been under the wrong impression that sales tax is due from customers, the counter-top company doesn't charge or accrue any tax to tax exempt clients. As you probably understand now, the counter-top company owes use tax on the "cost price" (materials + shop fabrication labor) of the materials used in tax exempt jobs. So, when audited, the counter-top company gets hit with the use tax plus interest and penalties on all tax exempt projects. For companies that do a lot of tax exempt work, this small misunderstanding of Florida's sales and use tax law can be financially devastating.
Pay Sales Tax To Suppliers, But No Use Tax on Labor
The second group of counter-top fabrication/installation companies that contact us with problems have simply been paying sales tax to material suppliers on all materials purchased. These counter-top companies correctly understand that they are making real property improvements, so they are not charging sales tax to their customers. This means that they do not have the glaring problem with tax exempt customers. However, these counter-top companies have not be accruing use tax on the shop fabrication labor. That means that an auditor will want taxes on all shop fabrication labor for all jobs over the last three years. What is worse, many of this group never even registered for Florida sales and use tax purposes. This means that they have never filed a sales tax return and the state can go back to the beginning of the company to collect tax (filing sales tax returns cuts off the statute of limitations to 3 years). If your counter-top company falls into this precarious position and you have not been contacted by the state, then a Voluntary Disclosure is likely the best solution to limit your liability to 3 years and wipe out the penalties.
Another question that surfaces with some degree of regularity is the company that installs counter-tops and also sells at retail uninstalled counter-tops from its shop. Should the counter-top company pay tax on all materials? The correct way to treat this situation is to pay tax on all materials used on real property (installation) jobs. Conversely for purchases of material that will be sold uninstalled, the taxpayer may present a resale certificate and purchase the item tax-free and then charge Florida sales tax to its customer. If the taxpayer is unsure as to where the material will be used or sold, it can elect to use its resale certificate and make all the material purchase tax-free. From there, if the item is sold as an uninstalled counter-top, the company should charge the retail customer a sales tax. However, if the counter-top is removed from inventory for use in a real property improvement contract, then use tax should be accrued and remitted to the state during the month of use.
Out of State Installation
The last complex issue counter-top companies face in the Florida sales and use tax arena deals with counter-tops fabricated in Florida, but installed into real property outside Florida. There is a long article on this topic linked at the bottom of this article, but we will provide a quick summary here. In a nutshell, our draconian comrades in Tallahassee believe that if you fabricate counter-tops in Florida then install the counter-tops into real property anywhere in the world, then you owe use tax to the state of Florida. The problem is, the state where the counter-tops are installed is most likely entitled to use tax as well. The FL DOR is being actively fought on this issue from multiple angles, but you need to be aware of the issue as it applies to the counter-top industry.
For the majority of the counter-top companies we talk to, an audit notice has been sent and we are hired to minimize the damage and/or negotiate a compromise with the state. However, we also help counter-top companies that realize there is an issue BEFORE the state finds them. If you are reading this article and realize your (or your client's) counter-top company has a Florida sales tax issue, then please do not hesitate to give us a call for a FREE INITIAL CONSULTATION to discuss your situation and potential avenues to minimize the pain.
ABOUT THE AUTHOR: MR. SUTTON IS A FLORIDA LICENSED CPA AND ATTORNEY AND A SHAREHOLDER IN THE LAW FIRM the Law Offices of Moffa, Sutton, & Donnini, P.A. MR. SUTTON IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM AND HIS PRIMARY PRACTICE IS FLORIDA SALES AND USE TAX CONTROVERSY. MR. SUTTON WORKED FOR THE STATE AND LOCAL TAX DEPARTMENT OF A BIG FIVE ACCOUNTING FIRM FOR A NUMBER OF YEARS AND HAS BEEN AN ADJUNCT PROFESSOR OF LAW AT STETSON UNIVERSITY COLLEGE OF LAW SINCE 2002 TEACHING STATE AND LOCAL TAX, ACCOUNTING FOR LAWYERS, AND FEDERAL INCOME TAX I. YOU CAN READ MORE ABOUT MR. SUTTON IN HIS FIRM BIO.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A. , based in Fort Lauderdale, Florida. Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. You can read more about Mr. donnini in his firm bio.
FL TAX - VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, by Jerry Donnini, Esq., Oct. 5, 2012
FL TAX ALERT: USE TAX ON MANUFACTURERS / FABRICATORS INSTALLING TPP OUT OF STATE, by James Suttton, CPA, Esq., April 19, 2012
FLORIDA SALES TAX AUDIT HELP, by James Sutton, CPA, Esq., July 14, 2013
"Draconian" relates to Draco, a 7th-century B.C. Athenian statesman and lawmaker who implemented laws that prescribed extremely harsh punishment for almost every offense, quite often the death for even minor offenses.
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