Do you rent commercial real property? It does not matter whether you are the landlord or lessee, the Florida Department of Revenue could pursue either (and sometimes both!) parties until a payment is made. That begs the question or what is and is not subject to Florida sales or use tax as a commercial real property rental.
Believe it or not, Florida sales or use tax is due on any real property rental unless the real property fits within certain categories. The most popular category of an exclusion from Florida sales and use tax would be places used exclusively as a dwelling unit (i.e., a residence). Another category is agricultural property that is assessed under section 193.461, Florida Statutes, which is known as the “Ag. Exemption.” The next category is parking, docking, or storage spaces are not taxable as commercial real property if subject to tax under a different statute. This difference is very important as parking, docking, and storage have a different tax rate than commercial real property rentals. Next, property used at an airport exclusively for aircraft landing or taxiing as well as property used by airlines to load or unload passengers or property onto or from an aircraft plus property used to fuel aircraft. There are a few other categories that are not as commonly used but are out there.
If the real property does not fit within one of the above noted exclusions, then the commercial real property is likely subject to Florida sales or use tax. Effective December 1, 2023, the state sales and use tax rate is four and one-half percent (4.5%). If there is a county discretionary sales surtax, then the country discretionary sales surtax will be in addition to the state sales and use tax rate. Unlike sales of tangible personal property, there is no “cap” on the country discretionary sales surtax. In other words, the full rental payment for each rental payment is subject to Florida sales or use tax.
Now that we have a very general idea of what transactions are or are not subject to Florida sales or use tax, we need to know what components of the otherwise taxable transactions are subject to Florida sales or use tax. One, and perhaps the most obvious, aspect of what is subject to Florida sales and use tax would be the amount of rent paid from the tenant to the landlord. Another, perhaps less intuitive transaction, would be a “percentage rent.” In this scenario, a “percentage rent” happens where an individual has the right to use or occupy a portion of commercial real property but pays the landlord a percentage of the revenues garnered. A popular setup for such a transaction involves vacuums at a gas station or car wash. A lot of times the gas station or cash wash does not own the vacuum but allows the vacuum company to place the vacuum on the premises, and they agree to split the receipts as a form of rent. Amusement machines placed on another’s property and the parties split whatever income is received by the machine is another example. The “tenant” has to be careful that not only is Florida sales or use tax being paid on the rent (concededly, the landlord must be weary of this as well), but in some instances the tenant’s activities via the placed item, such as an amusement machine, could be subject to Florida sales tax as well. If the Florida Department of Revenue does not tax in one manner, they will get you in another.
Another, perhaps less intuitive, form of rent is what is called “constructive rent.” The Florida Department of Revenue says that if the tenant pays certain bills on behalf of the landlord, then those payments are considered to be rent subject to Florida sales or use tax. A prime example of this is ad valorem taxes. The Florida Department of Revenue considers payments of ad valorem taxes by a tenant automatically to be subject to Florida sales or use tax. No questions asked. Even if there is no lease, the Florida Department of Revenue assumes one person or entity occupying a property of another person or entity is a lease. In these situations, the Florida Department of Revenue looks to the local Tax Collector’s records for payments made by the occupant in order to assess Florida sales or use tax. Again, the Florida Department of Revenue does not care whether there is a written lease. In their mind, the payment is taxable until you can prove otherwise. A similar analysis is true for insurance payments. If the occupier of the real property pays an insurance premium and the policy is for the benefit of the landlord in some way, then the Florida Department of Revenue generally will assess Florida sales or use tax on those payments. Even if that was not bad enough, the Florida Department of Revenue has assessed Florida sales or use tax on mortgage payments! Yes, that is correct. If the occupier pays the mortgage of the real property owner, the Florida Department of Revenue assumes that is rent subject to Florida sales or use tax. Again, these are not intuitive and are usually wrongful by the Florida Department of Revenue. These latter scenarios can and do mainly catch related parties off guard, as they are typically the ones to setup (usually for liability purposes) an entity that owns the real property and another entity that occupies the real property without there being a lease. For cash flow purposes, the occupier will pay these expenses of the property owner without either party considering the amounts to be rent.
With all of the above said and done, there are certain instances where a commercial real property rental transaction might be exempt from Florida sales and use tax. One such example would be a sale for resale. The property owner will rent the commercial real property to a lessee. However, the lessee will not occupy the property but will sublease the property. If the prime lessee presents to the landlord a Florida Annual Resale Certificate that is valid and unexpired, then the prime lease should not be subject to Florida sales or use tax. The landlord usually is off the hook. In those instances, the Florida Department of Revenue normally looks to the prime lessee for any Florida sales or use tax owed. Another example of a transaction that should be exempt from Florida sales or use tax would be if the landlord was renting to a tenant and received a Florida Sales and Use Tax Direct Pay Permit. If the permit is valid and unexpired, then the landlord does not have to collect any Florida sales tax. The tenant would then remit the amount of Florida use tax owed on the transaction. Finally, the organization to which the commercial lease is made may be exempt from Florida sales or use tax. As a prime example, this would include a church. If the church presents a valid and unexpired Consumer’s Certificate of Exemption and the landlord has proof of payment with the exempt entity’s funds, then the landlord should be able to exempt the transaction from Florida sales and use tax.
In conclusion, Florida sales and use tax of commercial real property has hidden traps for the uninitiated. One must be careful to ensure the proper amount of Florida sales or use tax is either collected or paid. If not, then proper exemption documentation should be obtained. Otherwise, the landlord and tenant could individually be liable for the same amount of Florida sales and use tax…sometimes even at the same time.
About the author: David Brennan is partner 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 212.031, F.S. – Tax on rental or license fee for use of real property.
Rule 12A-1.038, F.A.C. - Consumer's Certificate of Exemption; Exemption Certificates.
Rule 12A-1.039, F.A.C. - Sales for Resale.
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.
FLORIDA SALES TAX AUDITS PROCESS AND TRAPS, published March 4, 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 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.