One of the most common myths about Florida sales tax is that labor is never subject to sales tax. It is so commonly believed and trusted in that it is one of the most searched topics about Florida sales tax on the internet. Customers are surprised and distrusting when their receipts show sales tax on both parts and labor charges. Worse yet, business owners that do not truly understand when labor is subject to Florida sales tax are completely blindsided when they find themselves audited and assessed tens of thousands of dollars on transactions that should have been taxed. So yes – it is another myth that labor is never subject to Florida sales tax. Businesses do not only need to worry about sales tax on their sales; they must also be ready to defend an audit of their purchases.
If this myth about Florida sales tax only applying only to items of tangible personal property is completely false, why is it so commonly believed? The answer, like in many myths, is a combination of fact, fiction, and history. The story goes as follows: Back in ancient times, 1987, Florida decided to impose sales tax on a broad range of personal and professional services. It was the very first state to do so, and the public did not look on the new law kindly. Perhaps most controversial was the imposition of sales tax on advertising services. Media companies aggressively protested the new tax, and the wave of dissent following the media hype ultimately resulted in the law being withdrawn less than a year after its enactment. It is rare for there to be such great drama in the sales and use tax realm, but Florida’s 1987 tax on services was one such memorable time. Since then, it seems the rumor has stuck that Florida no longer taxes services. And while it’s true that Florida no longer aggressively taxes a broad range of services, it seems somewhere along the line this fact morphed into the false belief that no services are taxable.
So, if services can be subject to Florida sales and use tax, how is a taxpayer to know which services are and which are not taxable? Unfortunately, it’s just something you’ll have to memorize as there seems to be no rhyme or reason why some services are taxable while others are not. The simplest way to break taxable services down is to look at them in three categories: (1) specifically taxed services; (2) services plus the sale of tangible personal property; and (3) fabrication services.
Specifically Taxed Services
Although most services became taxable and then nontaxable again back in the 1987 disaster tax on services, certain taxes on services remain. If Florida’s list of taxable services seems arbitrary, well, that’s because it is. Perhaps we can thank the power of lobbying for what has remained. Regardless, the list of taxable services in Florida includes:
- Nonresidential Cleaning Services
- Commercial Pest Control Services
- Commercial/Residential Burglary and Security Services
- Detective Services
Nonresidential cleaning services is something we often find assessed on Florida sales tax audits. Though often we rely on the businesses from which we make purchases to properly charge tax when applicable, that is not always the case. Frequently, small or out-of-state-based cleaning companies may not realize that while their home cleaning services are not subject to tax, the cleaning services provided in nonresidential places is subject to tax. The Department can absolutely audit cleaning service businesses and assess tax. However, many taxpayers are surprised to find out that the Department can assess them for these purchases too! Picking up purchases of bi-weekly cleaning services over the course of a year three audit period is easy enough for auditors and adds up quickly for taxpayers.
Commercial pest control services also tend to have the same sorts of issues as nonresidential cleaning: taxpayers are unprepared to be assessed for these payments and pest control businesses may not realize they should be charging tax on commercial services. It is also important for taxpayers, both in the industry and making purchases of services from those in the industry, to understand what pest control services are covered by the statute and what aren’t. Spouse removal, for example, does not seem to be taxable when performed in a commercial setting, so those married couples working together can save on this expense. J
For burglary and security services, there are two important things to note. First, tax on these services is imposed on both commercial and residential charged. While cleaning and pest control are only taxable if performed in a commercial or nonresidential setting, security and burglary services are taxable everywhere. Second, the types of available “security services” have evolved over the years and the taxing statute has failed to keep up, resulting in lack of clarification in many businesses. For example, many logistics companies also monitor and track goods. Are these logistics services and their new technologies taxable security services? As of today, there is no clear answer to that question. As cameras and associated technology increasingly make their way into our daily lives, the Department is finding new ways to increase revenue through Florida’s tax on burglary and security services.
Lastly, the issue of detective services highlights one of the most frustrating aspects of Florida’s tax on services – there are many exceptions and technicalities. For example, if you hire a police officer through the sheriff’s office to assist as part of a detail, such charge is not taxable whether it is a detective who is being hired for consultation purposes or a road cop who is hired for security. The lesson is this: if you believe you are engaging the sale or purchase of any of these taxable services, make sure to check the exemptions!
Mixed Transactions
When a sale includes both a service plus tangible personal property, this is considered a taxable mixed transaction. Sometimes taxpayers will not even realize they are engaging in a mixed transaction when purchasing a service. In addition, sellers of mixed transactions may not realize at the time of sale that they will require tangible personal property to complete the job until they are already halfway through the job. This is especially true in repair services, where the repairman may not know exactly what the job entails until he’s already doing it. Resultingly, it is very possible for a person to engage in a transaction without knowing at the start whether the transaction is taxable.
For example, imagine your clock is broken and you bring it to a repairman to evaluate. The repairman discovers you need a new part inside the clock, and so he repairs the clock with the new part and charges you a lump sum for the repair and part. Even if the part is worth $.01 and the service is worth $49.99, the inclusion of this small piece of tangible personal property “taints” the entire transaction! In the alternative, say you bring your clock in to be evaluated by a repairman and the repairman realizes that a screw inside is simply loose. Taking his screwdriver, he tightens the screw that is already inside and then closes the clock back up. Viola! The clock is fixed. He charges you $50 for his service. In this case, as there was no transfer of tangible personal property and it was instead a pure service transaction, the sale is not subject to sales tax.
Of course, mixed transactions are not limited to the repair industry. Interior designers, for example, are notorious victims of the mixed transaction rule. Often, an interior designer will sell a design to a customer with furniture and other home items. However, they also may occasionally just offer their consulting service with no additional sale. If the customer is required to purchase furniture as part of the design contract, you can bet the Department of Revenue will find this entire transaction taxable!
Fabrication Labor
We’ll start with an example for this one. Business A sells special cabinets it purchases from a manufacturer out-of-state. The price is $200 per cabinet, which is calculated based on their purchase price plus mark-up to cover overhead and profit. However, a competitor, Business B, has more resources and decides to build his own shop so he can manufacture and sell his own cabinets to save on cost and be more competitive. Instead, he purchases materials and hires employees for the fabrication labor. By making the cabinets himself, he saves on the cost because he does not have to pay a manufacturer’s price, which would include its own mark-up for overhead and profit. The price for these cabinets is therefore $175 each. Because the competitor’s price is lower than Business A’s, the tax will also be proportionately lower when these cabinets are sold at retail.
However, most cabinets aren’t sold at retail. Instead, it is more likely these cabinets will be sold as a real property improvement in a kitchen or bathroom and be installed by the business. In Florida, real property improvements are not subject to sales tax, so there will be no tax charged on either retail transaction. Meanwhile, Business A and Business B are required to pay tax on their own purchase of materials that will be used in the real property improvement. Business A, therefore, will have to pay sales tax on its purchase of cabinets from the manufacturer, who in this case sells the cabinets to Business A at $100 per cabinet. Business B, however, only purchases $20 of materials and then builds the cabinets himself. Does this mean Business B only has to pay $20 on materials? The answer is: NO!
If Business A had to pay use tax on its purchase of $100 cabinets which it will use for its real property improvements, and Business B only had to pay use tax on its $20 of materials which it will then use to create the cabinets, then Business B has a large tax advantage in the long run. The Department of revenue evened this out by imposing sales tax on fabrication labor. Therefore, while Business A will only have to pay sales tax on its purchase of $100 cabinets, Business B will have to pay sales tax on its $20 of materials and its $70 in labor. From the Department’s perspective, this is fairer, which is why they’ve created the tax on fabrication labor.
Note – tax on fabrication labor comes up frequently within the construction industry! Pay close attention if you or your clients operate in this field. In many cases, taxpayers engaged in fabrication will only pay tax on materials not realizing that the tax on fabrication is due. When they are eventually audited, tax over the three-year period can add up quickly!
Ultimately, the myth that Florida only imposes tax on the sale of tangible personal property can and has devastated businesses who are blindsided by audits which impose tax on both their sales and purchases. The technical rules associated with these tricky taxes further confuses taxpayers. The truth is – labor can be and often is taxable in Florida. The services this labor provides may be taxed specifically, or the labor may become taxable based on its association with the sale of tangible personal property. Finally, the labor may be taxable as a policy reason to prevent manufacturers from having too much of a tax advantage over pure retailers. Whichever category the labor falls in, the tax rate is the same and the audit period is three years. Service provider and customer beware!
Jeanette Moffa is an attorney in the Fort Lauderdale office of Moffa, Sutton, & Donnini, P.A. She focuses her practice in Florida state and local tax, with an emphasis on sales and use tax. Jeanette provides SALT planning and consulting as part of her practice, addressing issues such as nexus and taxability, including exemptions, inclusions, and exclusions of transactions from the tax base. In addition, she handles tax controversy, working with state and local agencies in resolution of assessment and refund cases. You can learn more about Jeanette 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. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Chapter 202, Florida Statutes (Communication Services Tax)
Rule 12A-1.006, Florida Administrative Code ("F.A.C.") (Install, Maintain, Repair Tangible Personal Property.
Rule 12A-1.009, F.A.C. (Pest Control Services)
Rule 12A-1.0091, F.A.C. (Cleaning Services)
Rule 12A-1.0092, F.A.C. (Detective, Burglar Protection, and Other Protection Services)
Rule 12A-1.051, F.A.C. (Contractors Who Repair, Alter, Improve, and Construct Real Property)
ADDITIONAL RESOURCES
PHOTOGRAPHY IN FLORIDA - BEWARE THE SALES TAX, published June 3, 2014, by James Sutton, CPA, Esq.
FL COUNTER-TOP COMPANIES: FLORIDA SALES TAX PROBLEMS, October 13, 2013, by James Sutton, CPA, Esq. and Gerald Donnini, Esq.
FL CABINET COMPANIES WITH SALES TAX PROBLEMS, October 5, 2013, by by James Sutton, CPA, Esq. and Gerald Donnini, Esq.
TALLAHASSEE SECURITY AGNECY OWNER JAILED FOR SALES TAX, October 15, 2013, by James Sutton, CPA, Esq.
TAA 10A-027 (Cleaning Services – Separately Stated Insurance IS subject to Sales Tax)
TAA 10A-035 (Warranty Contract is NOT a non-taxable professional service)
TAA 11A-007 (Residential Pool Cleaning Service is NOT subject to Sales Tax, but IS subject to Use Tax)