FLORIDA SALES TAX: INTERIOR DESIGN SERVICES

The Florida sales tax rules for interior decorators and design/build contractors are overly complicated and far too many people in this industry find themselves in trouble when the Florida Department of Revenue comes knocking on their door for a sales tax audit. It’s been 10 years since we published a good article on this industry and after a long call with a big interior design contractor this morning, I thought it was a good time to publish one again. Imagine if all the income from your business that wasn’t taxed really should have been taxed over the last 3 years – it is a big number and you really want to make sure you are doing it right. The purpose of this article is to try to make it easy to understand how and when Florida sales tax applies to interior decorators and design build contractors. Then, if you are doing it wrong, then we can talk about the most effective ways to clean it up with the least amount of pain. Buckle up because there is a lot of information here…

The easiest way to learn about how Florida sales tax applies to the interior decorator and design/build contractor industry is to break the information down into categories as follows:

Design services ONLY (no tangible personal property or real property improvement)
Design plus tangible personal property Contracts
Design plus real property improvement Contracts
Design plus Mixed Contracts (tangible personal property and real property improvement)

Regardless of the type of category a project falls under, you have to determine whether:

Tax is collected from the customer and remitted by the designer/contractor,
Tax is paid by the designer/contractor on the cost of materials purchased, or
Tax is paid by a subcontractor

THE THEORY OF SALES TAX

When reading all the different categories of design services and the different taxability of each, it might help to keep in mind the overall theory of sales tax. In theory, sales tax is designed to tax the final consumer of tangible personal property. That means, at least in theory, the last person to own something before it is consumed (or it becomes real property) should be the person that pays sales tax. I’ve taught state and local tax to CPA’s, attorneys, enrolled agents, business owners, and to law school students for almost three decades and I’ve found that keeping this theory in mind is one of the easiest ways to remember what is taxed, who owes the tax, and what amount is the tax calculated on.

DESIGN SERVICES ONLY

If your company is ONLY doing design services and your contract with your customer does not provide any furniture, paint, cabinets, flooring, window treatments, landscaping, or anything else tangible or real property improvement, then you should be free and clear of having to worry about registering for Florida sales and use tax. Just pay tax on any items you use in providing your services and do not charge tax to your customers. If this is all your company does, then take a big sigh of relief. However, I suggest you still read the rest of the article because there will come a day when a customer asks you to do more. Also, please note that I did not say all design services avoid Florida sales tax. The rule here is that if a project for a client doesn’t do anything but design services, then the project isn’t subject to Florida sales tax. That being said, design services COMBINED WITH other things, such as tangible person property (e.g. a couch), can make the design services taxable. More on this below.

Following our theory of sales tax, since there is no tangible personal property being transferred or consumed, there is no sales tax due.

DESIGN SERVICES WITH TANGIBLE PERSONAL PROPERTY

If your company does interior design services and also provides some of the interior furniture and fixtures for the client, then your company will need to register for and collect Florida sales tax on at least some of your projects. For any contract that includes tangible personal property, the entire fee charged to the client is most likely subject to Florida sales tax. This is where we see the most problems on sales tax audits for this industry. Far too many people in the industry know to tax tangible personal property, but do not realize that selling the customer that one couch along with the design services makes the entire fee charged to the customer taxable. If the designer doesn’t charge tax to the customer, then the designer will be eating the tax when you get audited. Because audits cover a 3 year period, this kind of mistake can end up being extremely expensive during an audit. Putting the couch on a separate invoice doesn’t magically change the taxability of the design services. The original contract with the customer that provides for design services AND tangible personal property is what controls the taxability. Also, the designer can’t just pay tax on the purchase of the couch (with or without a markup) and resell it to the customer without making the whole fee paid by the customer taxable. The only time you would NOT charge tax on a design contractor with tangible personal property is when the customer has valid tax exempt paperwork (such a church or public school) and the payment for the services comes directly from the tax exempt organizations. You want to keep proof of both the tax exemption certificates and that the payment came directly from the tax exempt organization.

Worthy of note – if the designer is selling the customer uninstalled cabinets, for example, and the customer is hiring their own installers, then would still be design services with tangible personal property and the whole fee charged the customer would be taxable.

Looking at the theory of sales tax – the customer is the final consumer of all the tangible personal property for these types of contracts and the designer is supposed to charge the customer sales tax for the full priced charged the customer (including design services).

DESIGN SERVICES WITH REAL PROPERTY IMPROVEMENT

For design/build contractors, the ones who are doing real property improvements as part of the design contract with a customer, the Florida sales tax consequences change dramatically. No longer is the designer having to collect Florida sales tax from customers. When the designer’s contract provides for installed cabinets, countertops, paint, new windows or doors, new light fixtures, etc, the contract with the customer now falls outside the scope of Florida sales tax completely because the contract is considered a real property improvement contract.

On the flip side of the coin, the designer now has to pay attention to make sure sales tax is paid on any tangible personal property the designer buys that is consumed when improving the customer’s real property. So, if the designer is buying custom cabinets from Italy and hiring someone in Florida to install those cabinets in a customer’s home, then the designer owes sales/use tax on the designer’s cost of the cabinets.

Alternatively, if the designer outsources the cabinet work to a subcontractor that provides installed cabinets, then the cabinet subcontractor will owe sales tax on the subcontractor’s manufactured cost of the cabinets and the designer does NOT have to deal with sales tax at all on the cabinets. So, there is always a layer of complication that a real property improvement design build contractor must pay attention to whether the designer takes title to the tangible personal property before the installation (before it becomes real property) because that would make the designer liable for paying/remitting the tax.

Falling back to our theory of sales tax, if the design build contractor buys the materials before they are installed, then the tangible personal property is converted into real property while the contractor owns the materials and, therefore, the contractor owes the tax on their cost. If the subcontractor buys the tangible property and converts it to real property as part of the contract with the designer, then the subcontractor is the final consumer and owes sales tax on their cost.

MIXED CONTRACTS – REAL AND TANGIBLE PERSONAL PROPERTY

A mixed contract is one that provides both tangible personal property and real property improvements. The law provides that we must follow the “Predominant Nature of the Contract Rule” for these types of contracts. Under the predominant nature of the contract rule, we must look at whether there is more real property improvement or tangible personal property provided to the customer. If there is more real property improvement, then the whole contract is treated as a real property improvement contract (see rules above). If, on the other hand, there is more tangible personal property provided under the contract, then the designer is to tax the whole contract as if it were a tangible personal property contract (see rules above). So, that one really expense piece of art, more expensive than all the cabinets and counter top work, can make the whole project taxable to the customer and make the designer responsible for collecting and remitting that tax. The hard part here is that the designer is responsible for knowing what the predominant nature of the contract will be and will owe the difference in tax due if the designer gets it wrong.

SEPARATE INVOICING OR SEPARATE CONTRACTS

Since I always get questions on this topic, it is worth mentioning it here. Simply separately invoicing the design services from the other work will NOT change the taxability of the design contract. Far too many designers have fallen victim to the concept of separate invoices and it can have very expensive consequences.

Once possible way to make design services not taxable for projects with tangible personal property is to use separate contracts for the design services versus everything else. I want to really caution the designers out there who what to rely on separate agreements to avoid sales tax on design fees. Auditors love to try to tax these. If both contracts are signed at the same time, then you will have a long uphill battle trying to fight the taxability of the design services. Now, if the design services contract is signed in May (and does not have any provisions for providing tangible personal property) and then after the design services are down, say in October, and the customer wants to hire the designer to find and provide some furniture, paintings, etc, then there is a viable argument that the design services are a completely separate agreement and not taxable.

SEPARATE DESIGN SERVICES COMPANY

Our largest designer clients that really want to be cost competitive with their design services without having to charge sales tax will create a legal entity for their design services completely separate from the build or property procurement side of the business. So, clients sign a design contract with one entity and a separate contract with a related entity for any other tangible personal property or real property improvement. They also invoice separately from each entity. This is the cleanest way to protect the design services from sales tax in Florida.

WHAT IF I HAVE BEEN DOING IT WRONG?

If you finished reading this article and realize that your company (or your client’s company) has been handling sales tax wrong in Florida, then there are ways of cleaning this up. The most problematic way to clean up a sales tax problem is to simply change how you are handling sales tax prospectively. A significant change in how you report sales tax to Florida is a HUGE red flag for an audit. The Florida Department of Revenue invested heavily in computer software to track sales tax reporting anomalies. If you haven’t been handling sales tax correctly, then the last thing you want is to go through a full sales tax audit where they will try to tax everything and the burden is on you to prove them wrong.

What we usually recommend for cleaning up past sales tax problems is the go through a voluntary disclosure. The voluntary disclosure program is statutory in Florida and it allows you to admit you made a mistake, they will cut off the lookback period to 3 years, waive all the penalties, and even allow you to get into a payment plan to pay the taxes back. The likelihood of getting audited if you go through a voluntary disclosure is almost nil because the FL Department of Revenue wants to encourage people to come forward with mistakes. They will even enter the changes into their system like you were doing it right the whole 3 year period. The Voluntary Disclosure is by far the cleanest way to fix sales tax reporting problems. This is something we can help with.

SUMMARY

You can unbuckle now and, hopefully, you have a much better understanding of when an interior designer is supposed to charge sales tax or pay sales tax and whether that tax is based on cost or full price charged to the customer. You should also have a good idea of things not to do and how to protect yourself from a painful sales tax audit. You might even have memorized the theory of sales tax to help you analyze your design agreements going forward for the sales tax consequences. If anything is unclear or you want to discuss the specifics or what you company does, then please feel free to reach out for a free initial consultation.

About the Author: James Sutton is a Florida licensed CPA and attorney as well as a shareholder in Moffa, Sutton, & Donnini, PA. Mr. Sutton is charge of the Tampa office of the firm and practices almost exclusively in the area of Florida Sales & Use Tax Controversy. Mr. Sutton handles audits, protest, litigation, criminal cases, revocations, collections, and consulting engagements all in the area of sales tax. Mr. Sutton is an active member in the FICPA, AICPA, AAA-CPA, and FIADA. Mr Sutton is a very common speaker at the FICPA’s Construction Industry Conference. Mr. Sutton was also the State and Local Tax Chairman for the AAA-CPA and past president of the Florida AAA-CPA. For 2022 to 2024, Mr Sutton was the Chairman for the State Tax Committee for the FICPA. In a prior life, Mr Sutton also was part owner of two construction companies, one residential and one building hotels. You can learn more about Mr. Sutton in his firm bio HERE and you call him directly at 813-775-2131 or JamesSutton@FloridaSalesTax.com

About the Firm: 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 even have former sales tax auditors on staff. 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

Rule 12A-1.051 Sales to or by Contractors Who Repair, Alter, Improve, and Construct Real Property

Florida Technical Assistance Advisement 15A-004 – Interior Decorating

ADDITIONAL RESOURCES

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

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

FLORIDA SALES TAX AUDITS PROCESS AND TRAPS, published March 4, 2023, by David Brennan, Esq.

FLORIDA SALES TAX INFORMAL WRITTEN PROTEST, published November 17, 2018, by James Sutton, CPA, Esq.

FL Sales tax audit – From Audit Notice (DR-840) to NOPA, published September 17, 2023, by Matthew Parker, Esq.

DON’T HIRE AN IRS ATTORNEY FOR SALES TAX PROBLEMS!, published July 17, 2024, by James Sutton, CPA, Esq.

FL SALES TAX AUDITS – AUDITING YOURSELF BEFORE A STATE DOES, published October 23, 2023, by Matthew Parker, Esq.

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