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Stickman burdened by tax

Whether your client is obsessive about taxes, remits every penny of tax collected, or doesn’t even sell tangible personal property – I guarantee you that your client missed something that should have resulted in more Florida sales tax being remitted to the state. The questions you should be asking are (1) on what does my client owe tax, (2) how much tax, (3) is there a statute of limitations running on this issue, and (4) would my client blame me if the state spotted this issue before I did. Several times a week I get a phone call from an enrolled agent, accountant, or CPA that was caught completely off guard by something a sales tax auditor uncovered, but the tax professional had no idea was their client’s responsibility to account for. Worse yet – I get far too many calls from people who are upset at their tax professional for not knowing about the issue to begin with. I end up doing damage control for a tax professional I’ve never met - asking their client whether they every asked their tax professional to review their sales tax issues. The answer is usually no, which diffuses the situation. With this article, I hope to reach as many tax professionals as possible to help you watch for things your client is not paying attention to. You get to be the hero spotting the issue instead of taking the blame when the issue comes up on audit. At the end of this article are links to more detailed articles about the issues discussed below.

Statute of Limitations?

Before we get into specific issues to look for in your client’s business, let’s talk about the scariest part of the conversation. Is there a statute of limitations associated with the transactions that are not being handled properly? I can’t begin to count the number of times a taxpayer came to me about something they didn’t know was taxable – and the issue had been there for 10+ years. The alarm goes off in my head to confirm whether the taxpayer currently has any protection from the statute of limitations or is there a way for us to otherwise limit the lookback period. I’ve run into situations in which there were no statute of limitations on 30 years of transactions for the company with a cumulative tax liability of more than $20 million. Even if the issue is not huge in any one year, it’s hard for a tax assessment not to become devastating to a company if the tax, interest, and penalties are combined over a 30-year period.

So when you identify a sales tax issue, the first question to ask is whether the company has been filing sales tax returns during the period this issue has been ongoing. If the company has been filling sales tax returns, then the Department of Revenue would most likely only be able to go back 3 years to assess tax for mistakes. If the taxes were collected but not remitted, then (even if sales tax returns were being filed) there is a way for the Department of Revenue to go back 5 years by filing criminal charges against the responsible party/parties. [see links at the end of this article about the criminal side of sales tax] So, if sales tax returns have been filed, then you can take a deep sigh of relief that you are only looking at 3 to 5 years of potential tax liability. Note – that does not mean you should rush out to file amended returns, as many tax professionals tend to do. There is a much better solution, discussed below.

If your client (or your company) has not been filing sales tax returns, then there is nothing to start the statute of limitations running. This means that the Department of Revenue could assess tax back to the beginning of when the company started having this issue (imagine James Earl Jones saying “We are now going back to the beginning of time”). This is the kind of thing that could ruin a company, destroying many, many years of hard work in practically the blink of an eye. If there is no statute of limitations for a company, then you need to ask whether the Department Revenue has contacted the taxpayer about the issue. This is a rather urgent question because, if the answer is no (and the company is not under a sales tax audit), then we can really help out in this situation – IF WE ACT FAST. If the Department contacts your client about this issue first or your client gets an audit notice, then your options become much, much more limited. However, if your client hasn’t been contacted or is not under audit, then the Florida Department of Revenue has an amazing tool to use, known as the Voluntary Disclosure Program. This is by far my favorite part of the whole Department of Revenue. It is truly magical. We contact the Voluntary Disclosure Program to let them know we have a client that has made a mistake and we’d like to come clean.

By coming clean, the Department will wave all penalties (except a 5% penalty if the taxes were collected but not remitted) and the Department will limit the lookback period to 3 years. So if your client has an issue going back 10+ years, a voluntary disclosure could literally save your client’s company from bankruptcy. If your client’s sales tax concern could possibly fall into the criminal side of sales tax (i.e. it was intentional), then filing a voluntary disclosure creates a presumption that your client had no criminal intent to defraud the state – by statute. See what I mean by magical? Decades of tax liabilities simply disappear as well as just about any chance of the matter being criminally prosecuted. [see link at the end of this article on Voluntary Disclosures] Worthy of note – some clients will want to just close down the company to avoid the liability. The Department of Revenue has powerful tools to come after the business owner personally for sale tax liabilities that makes this a questionable strategy. [see link at the end of this article on Closing Down A Business To Avoid Sales Tax Liabilities]

Possible Issues Where Sales Tax Could Be Owed

There are a lot of possible ways your client could owe sales tax and not know it. By far the most common way it comes up is when a company is running out of a building owed by the owners of the business or a related entity. Tax professionals seem to get so caught up in the idea that the IRS will allow you to disregard entities that they never even stop to think whether other types of taxes will give the same type of flexibly. I spend 15 to 20 speaking engagements a year trying to beat a specific concept into my tax professional audiences, specifically that:

Florida sales tax law does not care that companies are wholly owned, related, or even disregarded for federal tax purposes. Transactions between related parties ARE subject to sales tax in Florida.

Let that sink in a moment. I have spent far too many phone calls with tax professionals having to repeat this concept several times before the tax professional even begins to understand just how much this concept affects their clients. I hear time and time again “no, you don’t understand, this is a disregarded LLC” or “this building is owned by the owner of the company, there can’t be tax.” Florida law simply does not care that the IRS allows a company to be disregarded for federal income tax purposes. If you have a legal entity doing business with another legal entity or an individual, then you have Florida sales tax consequences. Even if your clients are not “doing business” between related parties, your client could still end up owing sales tax. Sales tax liabilities can arise simply by paying the debts of a related party…

The most common situation that creeps up to blindside taxpayers (and their tax professionals) is when your client is operating a business out of a building owned by a related party.

We see it all the time. Company A is the operating company. Company A is owned by Bob and Bob owns the building where the company operates. Because Company A has the cash, Company A will make the mortgage payments and pay the property taxes on the building, thereby paying Bob’s debts on the building. Even though there is no money flowing directly to Bob in this transaction, this is considered rent subject to Florida sales tax. The Department of Revenue has been extremely successful in assessing tax in these “constructive rent” situations. Stop to think whether you have clients that fall into this situation and whether your client expects you to let them know that sales tax is due.

Other companies will pay themselves “rent” but will not even think about it being subject to sales tax because the “tenant” and “landlord” report on the same federal income tax return (one of the entities is disregarded). This related party rent is subject to Florida sales tax as well – and it is something the Department finds all the time. Perhaps your client does not talk to you about sales tax, but when you do their federal income taxes, you can see whether them business is paying a mortgage on property the business does not own. You should be able to spot these situations if you know what to look for. Let’s face it, your client is expecting you help keep them out of sales tax trouble whether they ask you to or not.

Another situation that almost every company is guilty of these days is purchasing goods over the internet from an out of state vendor that does not charge sales tax. Somehow people get the impression that it is the seller’s responsibility to charge sales tax and if the vendor doesn’t charge sales tax, then Florida sales tax is not due. This is a misunderstanding of sales tax law. A company in Florida is required to collect Florida sales tax on taxable goods or services that they sell. But an out of state company with no connection (“nexus”) to Florida is not subject to Florida’s jurisdiction and can’t be required to collect sales tax on behalf of the state of Florida. That does not mean the transaction is free from Florida tax. It only means that the customer must account for and remit the tax, which is known as a use tax. Generally speaking, if you acquire a good without paying Florida sales tax that would have been taxable if purchased from a Florida retailer, then it is subject to “use tax,” which is the same rate as sales tax. You are required to file a return that reflects your purchases and remit the tax. Both individuals and businesses have this requirement.

Many taxpayers have sales/use tax problems on non-internet purchases too. Real property contractors are a good example. If your client’s business is improving real property (framing, roofing, cabinets, under-ground pipes, low voltage, counter tops, interior designers, etc, etc), then your client is supposed to be paying sales tax on every material they purchase for real property contracts in Florida. If that material is purchased from an out of state vendor, then it is possible that sales tax wasn’t charged. If your client doesn’t have procedures in place to track whether sales tax was paid and remit use tax when it is not, then the tax liabilities can add up considerably. This is another one of those situations in which the statute of limitations can be a problem because real property contracts quite often do not file sales tax returns. (Think – Voluntary Disclosure).

On the flip side, even if your client does pay sales tax on every purchase they make, your client is required to keep proof that sales tax was paid. If your client doesn’t keep proof that sales tax was paid, then your client will owe the sales tax again. In other words, an auditor will not only be reviewing everything your client sold to confirm sales tax was properly collected and remitted, but will also be looking at all your client’s expenses to confirm sales tax was properly paid. Far too often I have taxpayers tell me that they “never used their resale certificate to make purchases,” claiming they don’t owe any sales tax. Then they get hit with a sizable use tax assessment on audit because they did not keep any records of their purchases. Oh, and it is worth nothing that your client’s credit card bill does not contain any proof of sales tax paid. You need actual receipts showing sales tax. Alternatively, an annual statement from the vendor showing purchases with sales tax will work as well. I often suggest setting up a corporate account for things like office supplies just to get that annual statement, at least for clients that have trouble keeping up with daily records. This will frustrate your client to no end and it is worth it to tell your client’s upfront about this issue.

Every industry out there has its own quirks that cause sales tax problems. [see links to articles below discussing each of these industries]

  • Low voltage contractors quite often don’t realize they are real property contractors and run into real problems with tax exempt clients.
  • Car dealers far too often don’t understand the complicated rules for charging only partial sales tax when someone comes from out of state to buy a car from their Florida dealership.
  • Companies that ship or have shipped large volumes of merchandise don’t understand when shipping and handling is subject to sales tax and when it is not.
  • Industries, such as convenience stores, seem to think underreporting sales tax collections is a normal part of doing business and they find out too late that the Department of Revenue has very good ways of catching them.
  • Does your client offer biometric fingerprinting services? Guess what, fingerprinting services are considered a taxable investigation service!
  • Do you have clients that provide cleaning services? Are they aware that non-residential cleaning services are subject to sales tax?
  • Do you have a client with a car wash? Do they understand that some car washes are taxable and some are not?
  • Do you have a client that provides Investigation Services? This industry has a complex web of what is and what is not taxable, thanks to extensive lobbying efforts by various industries.
  • Retailers or Alcohol and Tobacco should be squeaky clean because the Department of Revenue is using the wholesale purchase information from the Department of Business and Professional Regulation to estimate whether this industry is properly reporting sales tax collections.
  • Do you have clients that are buying or selling a business or just the assets of a business? Did you know sales tax liabilities can be transferred to the purchaser by operation of law?
  • Any retailer selling to tax exempt organizations must not only keep the tax exemption certificate on file, but also proof that the payment actually came from the tax exempt organization (not the employee’s personal credit card). Any company that has a large volume of exempt sales is like candy to a sales tax auditor simply because the taxpayer has to prove the sales were exempt. Any missing paperwork of slight misunderstanding of the law and the taxpayer owes sales tax that was never collected from the customer.

Then there are the clients that are having financial troubles. We all have them and I probably have more than my fair share as well. Your client collects sales tax all month, puts the funds into their business banking account, then the company pays for rent, payroll, electricity, and all the other expenses of a typical business. If the company is profitable, then the sales tax is likely still going to be in the account when the 20th of the next month rolls around and the sales tax return is due. However, if the company is operating at a loss and expenses are being paid out of that bank account, then it is likely all the sales tax deposited will not be there when the 20th of the month comes. It is not like the client can see in their cash account that part of the cash in the account is really sales tax. Sure, you trained your client to record the sales tax liability on their books, but did you get them to open a separate bank account for sales tax? Did you suggest that they at least create a separate account on their books that says “Cash – Sales Tax?” No one even thinks about these kind of protections because they are not required by law. However, if the company doesn’t have the sales tax in the bank account when the tax returns are due, then the owners can either borrow money or they file the return with a partial or no payment. The business owner tells themselves that they will make it up in a few weeks when the business is doing better. But businesses do not always do better and the same thing happens next month and the next. Your client is using sales tax receipts in an effort to keep the business afloat, digging themselves into a very dangerous hole. Not timely remitting sale tax a business collects is a crime and it only takes $301 to become a 3rd degree felony, punishable by five years in jail. It happens all the time and often the tax professional doesn’t know about it until it is too late. Make sure YOUR clients know that sales tax is one bill that you always pay because it is not dischargeable in bankruptcy and it can land them in jail.

It used to be that tax advisors would advise their clients to be conservative and charge sales tax if there was even a remote question whether the transaction was taxable. However, these days, charging the “right” amount of tax has become more important than ever as some retailers find themselves facing class action lawsuits over charging the wrong amount of tax. Pizza Hut and Papa Johns have both faced class action suits in Florida for not understanding when delivery fees are subject to sales tax. You can imagine the conversation these companies had with their tax advisor over this issue after the class action law suits were filed. How would your clients react if they were being assessed sales tax or even sued over sales tax and you never advised them to do it differently?

No matter what, almost every company in Florida has sales tax problems they are not aware of. Hopefully this article will give you some ideas of what to look for. Be proactive with your clients even if they don't ask you to review sales tax. You'd rather be the hero that catches the problem rather than the person that gets blamed for it (even if you were not engaged to review sales tax). If you have any questions about your clients, then please don’t hesitate to take advantage of our free initial consultation policy. It’s better to be safe than have your client blame you for never even raising the issues.

Florida Sales Tax Audit; Florida sales tax attorney; Florida sales tax accountant; Florida sales tax CPAAbout the author: Mr. Sutton is a Florida licensed CPA and Attorney and a shareholder in the law firm Moffa, Sutton, & Donnini, PA. Mr. Sutton’s primary practice is Florida tax controversy, with an almost exclusive focus on Florida sales and use tax. Mr. Sutton worked for in the State and Local Tax department of one of the Big Five accounting firms 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 and at Boston University College of Law since 2014 teaching Sales and Use Tax. Mr. Sutton is a frequent speaker on Florida sales and use taxes for the FICPA, Lorman Education, NBI, AAA-CPA, and the Florida Society of Accountants. Mr. Sutton is also co-author of CCH's Sales and Use Tax Treatise. You can contact Mr. Sutton at 813-775-2131 or or his firm bio.


GO TO JAIL FOR NOT PAYING FLORIDA SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.

CLOSE BUSINESS TO AVOID LARGE FL SALES TAX ASSESSMENTS?, published July 7, 2013, by James Sutton, CPA, Esq.

FL TAX ALERT – 200% PENALTY STINGS BUSINESS OWNER, published March 24, 2013, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.


WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA, published May 1, 2012, by James Sutton, CPA, Esq.

FL SALES TAX – RESALE TO OUT OF STATE CAR DEALERS, published September 19, 2014, by James Sutton, CPA, Esq.

SHIPPING CHARGES vs FL SALES TAX, published June 8, 2014, by James Sutton, CPA, Esq.

FL TAX ALERT – ALCOHOL AND TOBACCO RETAILERS BEWARE!, published February 10, 2012, by James Sutton, CPA, Esq.


FL SALES TAX CLASS ACTION ON PIZZA HUT DELIVERY FEE, published December 9, 2015, by Jerry Donnini, Esq.

FL DOR ABUSES THE CONVENIENCE STORE INDUSTRY, published October 4, 2015, by James Sutton, CPA, Esq.

INTERIOR DESIGNERS: FL SALES TAX PLANNING, published July 16, 2015, by Amanda Levine, Esq.

FL USE TAX AUDIT LETTER?, published April 28, 2015, by James Sutton, CPA, Esq.

IS RENT SUBJECT TO FLORIDA SALES TAX, published January 26, 2015, by Jerry Donnini, Esq.

FL COUNTER-TOP COMPANIES: FL SALES TAX PROBLEMS, published October 13, 2013, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.

CABINET COMPANIES WITH SALES TAX PROBLEMS, published October 5, 2013, by James Sutton, CPA, Esq.

FL SALES TAX – TAA 14A-020 – NAICS CODES VERSUS NONRESIDENTIAL CLEANING SERVICES, published October 8, 2014, by James Sutton, CPA, Esq.


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