FL Sales Tax - Taxable Commercial Storage or Bailment

Though not well known outside this state, Florida is the only state to separately charge sales tax on commercial real estate rent. This means businesses that have commercial property leases will be subject to Florida sales tax. But, if you can escape the "lease" classification, then you might be able to avoid sales tax liability. One possibility is through a "bailment" as opposed to a commercial lease because bailments are outside the scope of Florida sales and use tax. As the Florida Department of Revenue (FDOR) has been auditing a number storage facilities recently, this issue is becoming more important. This article addresses the issue as particularly applied to the storage rental industry.

Section 212.031, Florida Statutes (F.S.), imposes tax on the privilege of engaging in the business of renting, leasing, letting or granting a license for the use of any real property. This tax can apply to offices, warehouses, and other parcels of real property for other uses. This widely applicable area of Florida tax has a few certain exceptions. Included in the list of exceptions in rule 12A-1.070, Florida Administrative Code (F.A.C.), in subsection (22)(a) is the express exclusion for a contract of bailment as follows:

(a) When tangible personal property is left upon another's premises under a contract of bailment, the bailee is not exercising a privilege taxable under the provisions of Section 212.031, F.S., relating to leases, licenses, or rentals of real property.

Paragraph (b) goes on to provide:

(b) bailment is a contractual agreement, oral or written, whereby a person (the bailor) delivers tangible personal property to another (the bailee) and the bailor for the duration of the relationship relinquishes his exclusive possession, control, and dominion over the property, so that the bailee can exclude, within the limits of the agreement, the possession of the property to all others. If there is no such delivery and relinquishment of exclusive possession, and the owner's control and dominion over the property is not dependent upon the cooperation of the person on whose premises the property is left, and his access thereto is in no wise subject to the latter's control, it will generally be held that such person is a tenant, lessee, or licensee of the space upon the premises where the property is left.

The rule then provides examples. Per the rule, a safe deposit box is a bailment (because the bank has one key and the customer another and both are necessary for access to the box) but an airport locker is not a bailment (because the renter has the key and sole access to the stored property). A "person who merely grants storage space without assuming, expressly or implied, any duty or responsibility with respect to the care and control of the property stored is a landlord of a person granted a right to occupy or use such real property and is not a bailee" and is thus exercising a taxable privilege under section 212.031, F.S. Leases, licenses, and bailments are indicative of contractual relationships and provides that "consideration will be given to the manifested intention of the parties so as to which relationship has been created." However, "[i]n the absence of an express contract, the creation of a bailment requires that possession and control pass from the bailor to the bailee; there must be full transfer, actual or constructive, so as to exclude the property from the possession of the owner and all other persons and give the bailee sole custody and control for the time being."

It becomes clear that most storage rental businesses will not qualify as a bailment (assuming they even wanted to). For those instances where a customer has an access code and the lone key to the storage space used, there clearly doesn't appear to be the required transfer of possession or level of custody required for a bailment. Often the contractual language involved will not try to hide the fact that a bailment is not intended as the business might not want to risk the potential liability associated with custody and control of a customer's property. In such a case, one would be hard pressed to argue that the arrangement was a non-taxable bailment.

But other instances are not as clear such as when there are limited hours of access to storage which arguably require the business owner's presence and/or assent for the customer to access his property. This uncertainty of the proper tax treatment can also become an issue if the storage space is not real property but is instead a movable container which holds customer property and involves customer notice before the customer can get access to the property. In this case, Rule 12A-1.071, F.A.C., applies as it addresses rentals, leases, or licenses to use tangible personal property. Again, as noted above, the business can address the issue in the contract with the customer to specifically disclaim a bailment. For all intentions with the FDOR, the State seems perfectly willing to accept that the transaction is subject to sales tax to receive their associated revenue in those cases where there isn't a bailment.

So, the issue of bailment essentially comes down to a choice by the business owner of what degree of custody and control do they want to accept. The sales tax classification will then follow. But that isn't the end of the issue for state tax purposes. Separately stated nontaxable services can be excluded from sales tax. But, this is not the case if the billing includes the otherwise nontaxable services into a lump sum. In that case, the full amount is subject to sales tax.

We've discussed all the ways in which you might not have a bailment. So, you are probably asking when do we have a non-taxable bailment? Here is the most common example: Dry Dock Boat Storage. If you live anywhere near the water in Florida, then you have probably seen the boat storage facilities that place boat in storage off the ground, often stack up several boats high. You pull the boat up to the storage facility and a special type of forklift picks up the boat and transports it into a dry dock storage bin. The customer is not allowed anywhere near the boat during the storage period. When the customer wants access to the boat, the storage company uses the forklift to haul the boat back to the water. Even if the customer were allowed temporary access to the boat, it would only with the consent and oversight of the storage company. Like the safety deposit box example above, this is a clear case of bailment because the boat storage facility assumes complete possession and control of the boat at all times.

Additionally, if you are renting movable storage units, you need to be aware of the applicable surtax. Sales tax (including surtax) will be due at the time of the transaction. But, if the storage unit is moved to another county for any number of reasons, then the corresponding surtax will need to be properly reported for allocation purposes to the applicable county. The movement to a different storage county can be related to the customer's need or the business owner's need but the surtax will be applicable based on the location of the real property involved.

The more prevalent issue will be related to the statutory provision that "only one tax on the rental or license fee payable from any rental or license fee is subject to taxation under section 212.031, F.S., shall be collected and the tax shall not be pyramided by a progression of transactions; however, the amount of tax due the State of Florida shall not be decreased by any such progression or transactions." This will be particularly applicable for a storage business that rents its location and cannot properly provide a resale certificate to the landlord. This would mean that the business must remit tax to the landlord and then take a credit for tax paid when reporting tax collected from its customers. This applies to the movable storage units noted above as they typically will charge a separately for storing the unit on their property rather than at the customer's location. Use tax can be due from the business owner who is moving the units unless the unit was used in the original delivery county for more than six months. But, as noted above, the lack of use tax being due does not change the fact that each rental payment is its own sales transaction so that surtax will be due based on where the unit is located at the time of payment. If there is a payment between the two locations for the transfer (often called a "reimbursement fee" and possibly between franchisees or related entities) is subject to tax with the surtax being based on the location of the real property. If a moving charge was involved, then rule 12A-1.045, F.A.C., would apply to make it taxable if it wasn't separately stated or wasn't avoidable by the customer's decision.

As indicated above, a particular storage business that is notified of a sales and use tax audit might not have any questions about how it has treated the actual storage charges. But, the auditor is going to look for every possible issue that might involve unreported tax. And, in many instances, the auditor is authorized to get the tax from either the business or the customer if it wasn't paid. This means a business could be paying an amount to the state that it never collected. Add in the fact that the State has been more likely in recent audits to included exhibits for as little as $50 and less likely to waive penalties, this means it is more important than ever to know your sales tax rights to protest your business and not be overcharged by an overzealous or inexperienced auditor who comes knocking.

We have former Florida sales tax auditors in our firm. Having dealt with new and experienced auditors from all over the state, we can tell you that the issue of bailments is not even taught to auditors. So you have to either be informed enough to know about bailments yourself or hire someone to represent you who is. This is just one of the many strange quirks in Florida sales and use tax law and we can assist you with any questions you might have. If you never ask about what rights you have, you'll never know when an auditor is trying tax you unjurstly. Our free initial consultation can help you address those issues so you can at least feel comfortable in knowing the rights you do have when the audit starts.

FLORIDA SALES TAX ATTORNEY; FLORIDA SALES TAX AUDIT; FLORIDA SALES TAX AUDIT HELP; FLORIDA SALES TAX HELPAbout the author: Mr. Parker is a sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., based in the firm's Tampa office. Mr. Parker's practice includes state tax audits and controversies involving sales and use tax and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Parker received his law degree and L.L.M. in Taxation from the University of Florida. To learn more about Mr. Parker, please visit his firm bio.


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