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Rick Scott


According an article in the Florida Current, Florida Governor Rick Scott announced that he will ask lawmakers for a cut in the sales tax on commercial rents. The announcement made on January 27, 2014, included a prepared statement by the Governor:

"This reduction will make it more affordable for businesses to lease space, so they can keep more of the money they earn and create more jobs. Florida is the only state that imposes this tax, and we must keep working to make Florida the best place in the world to start and grow a business,"

While Florida's sales and use tax is projected to bring in more than $22 billion into Florida's coffers during the 2013 – 2014 fiscal year, it is anticipated almost $2 billion will be derived from Florida sales tax on rents. As hinted in Governor Scott's statement above, while there are a few localities in the country that do impose such a tax, Florida is the only state in the country to impose a sales tax on commercial rent. This puts Florida at a strategic disadvantage when trying to get businesses to local in Florida versus any other state that does not impose a sales tax on rent.

Our law firm sees an additional impact of the sales tax on commercial rent – specifically that many, many businesses do not even know there is a sales tax on commercial rent. Many unsuspecting business owners only learn about the sales tax on rent when they get an audit notice from our comrades in Tallahassee, the Florida Department of Revenue. Considering that the land/building owner has never filed a sales tax return, the state has the authority to extort sales tax, penalties, and interest on the rent back to the beginning of the business because the statute of limitations only begins to run when a company files sales tax returns. That means a 20 year old successful business with employees and a great reputation in the community can be put out of business by the Florida Department of Revenue solely due to the sales tax on rent, plus penalties and interest, for the whole 20 years of the business's operations.

Here is the typical scenario. A small business owner begins operations on land and in a building that (s)he owns. To protect the business from potential legal liabilities (e.g. a law suit from Morgan & Morgan), the new business owner is advised to put the business operations into a legal entity separate from the land and building, such as a limited liability company ("LLC"), corporation, or partnership. This way, if the operating business is involved in some type of law suit, then the owner's land and building will be protected. This is a very typical business step up that is done regularly across the country. Some people will set up formal rent payments between the operating entity and the land entity, but most small business will not even go that far. What usually happens for the small business owner is that the operating entity will have all the cash, so the operating entity pays the mortgage on the building and the property taxes. The problem with this is, under Rule 12A-1.070(4), Florida Administrative Code ("FAC"), when the operating (occupying) entity pays the mortgage and property taxes for the land owner it is considered "CONSTRUCTIVE RENT" and sales tax is due on these payments.

Our Draconian Comrades in Tallahassee have a dedicated team of people hunting down these unsuspecting small business owners. These DOR agents search through businesses listed with the secretary of state that have the same business address, then they go to the country property appraiser's web site to see which entity owns the property. Then they send a friendly (extortion) letter to the land owner demanding proof the property is not being rented or they will start estimating rent and the resulting sales tax, penalties, and interest that will be allegedly due. A typical assessment over a 3 year period for a small business owner in this situation can easily run $20,000 of tax, penalties, and interest. If you are a small business owner, then you know how bad things have been over the last few years and how precious every penny you make is to the viability of your business. Even worse, some of these audits go back many more than three years, which can cripple just about any business. Every type of business you can imagine gets hit with sales tax on commercial rent, from law equipment repair shops to dentist offices. No small business is safe from these tax fishing expeditions.

Even sophisticated businesses get caught off guard when it comes to Florida's unique sales tax on commercial rent. Because no other state in the country imposes the tax, the tax manages to catch off guard businesses migrating into Florida, especially chain restaurants and retail stores. The worst instance I've seen over the last few years is a chain of stores that migrated into Florida with more than a dozen locations. The initial assessment was almost seven figures – just for the sales tax on rent.

Below are links to several articles that talk in more detail about the issues surrounding Florida's sales tax on commercial rent and how to minimize the sales tax impact. For example, it surprises many people to find out that there is no requirement under Florida sales tax law for rent to be at fair market value. This means that a one hundred million dollar piece of property theoretically could be rented for a mere $1,000 a year and the sales tax would only be due on the $1,000 rent payment. Furthermore, if the operating entity is jointly and severally liable for the mortgage, then there might be sales tax due if the operating entity pays the mortgage. You can read more in the articles below.

Bringing the topic back to Governor Scott's proposal to lower the sales tax on commercial rent, the projected legislative goal will be to lower the overall revenue from commercial rents by $100 million dollars during the next fiscal year. So the concept of commercial rent sales tax will not go away, nor will the "gotcha" nature of the Florida Department of Revenue focusing resources on hunting down and extorting money from unsuspecting small business owners that are simply not aware of the "constructive rent" concept. However, I do see a glimmer of hope on the commercial rent sales tax front. The FAQ statement issued by the Governor's office on January 28th referred to the proposed reduction in sales tax on commercial rents as the "[b]eginning the phase-out of the sales tax on business rents." This means that there is finally serious talk in Tallahassee about eventually repealing the most troublesome tax for small businesses in Florida. We can only hope this legislative agenda has legs, but you can be rest assured that we will keep you informed on this issue.

james sutton attorney; florida sales tax audit; florida sales tax audit help; florida sales tax attorney; sales tax on rent

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 of the firm and his primary practice area is Florida sales and use tax controversy. Mr. Sutton worked in the State and Local Tax department of a "big five" accounting firm for a number of years and has been an adjunct professor at Stetson University College of Law since 2002 teaching State and Local Taxation, Accounting for Lawyers, and Federal Income Tax I. You can read more about Mr. Sutton in his firm BIO.


Rule 12A-1.070, F.A.C.


FL TAA ALERT – SALES TAX ON RENT – INVERSE PYRAMIDING?, posted on December 15, 2012, by James Sutton, CPA, Esq.

FL TAX – VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, posted on October 5, 2012, by Jerry Donnini, Esq.

FL 1st DCA – Ruehl Case Decided – Tenant Improvements NOT Subject to Sales Tax, posted on December 30, 2011, by James Sutton, CPA, Esq.

The "It's Your Money Tax Cut Budget" FAQ issued by the Governor's office on January 29, 2014.