Sales and Use Tax TAA 16A-018 Title Transfer
QUESTION 1: WHAT IS THE TAXABILITY OF A MOTOR VEHICLE TITLE TRANSFER WHEN A BUSINESS
NAME HAS CHANGED FROM “INC.” TO “LLC”?
ANSWER 1: GIVEN THE NATURE OF THE CONVERSIONS SET FORTH IN THE FACTS OF THIS TAA,
THE TRANSFERS OF THE MOTOR VEHICLE TITLES WOULD BE EXEMPT FROM TAX PROVIDED
THAT A SALES TAX EXEMPTION AFFIDAVIT (DR-40) WITH THE LANGUAGE “CONVERSION
OF A CORPORATION TO AN LLC THAT QUALIFIES AS A REORGANIZATION SOLELY IN
EXCHANGE FOR STOCK UNDER I.R.C. S. 368(A)(1)(F),” SIGNED UNDER PENALTY
OF PERJURY, ACCOMPANIED THE APPLICATIONS FOR TITLE TRANSFER.
QUESTION 2: WHAT DOCUMENT(S) WOULD BE REQUIRED TO OVERCOME THE PRESUMPTION OF TAXABILITY
WHEN TRANSFERRING MOTOR VEHICLE TITLES IN THIS TYPE OF SITUATION?
ANSWER 2: XXX MUST FIRST DETERMINE IN EVERY CASE WHETHER THE REORGANIZATION QUALIFIES
AS A REORGANIZATION UNDER I.R.C. S. 368(A)(1)(F). IF XXX IS SATISFIED
THAT THE REORGANIZATION QUALIFIES, A SALES TAX EXEMPTION AFFIDAVIT (DR-40)
WITH THE LANGUAGE “CONVERSION OF A CORPORATION TO AN LLC THAT QUALIFIES
AS A REORGANIZATION SOLELY IN EXCHANGE FOR STOCK UNDER I.R.C. S. 368(A)(1)(F)”
IS REQUIRED.
December 2, 2016
Re: Technical Assistance Advisement 16A-018
Sales and Use Tax – Transfer of Motor Vehicle Titles
Chapters 607 and 617 and sections 212.05, 212.06(10), 220.03(1)(e), and 605.1046, Florida Statutes (“F.S.”)
Rule 12A-1.007(25)(a), Florida Administrative Code (“F.A.C.”)
Sections 368(a)(1), and 381(c), Internal Revenue Code (“I.R.C.”)
I.R.C. Regs. ss. 1.368-2 and 301.7701-3
Dear XXXXX:
This letter is a response to your petition dated September 9, 2016, for
the Florida Department of Revenue’s (the “Department”)
issuance of a Technical Assistance Advisement ("TAA") concerning
the taxability of motor vehicle title transfers when a business name has
changed from “Inc.” to “LLC” and the documents
required to overcome the presumption of taxability when transferring motor
vehicle titles in this situation.
Your petition has been carefully examined and the Department finds it to
be in compliance with the requisite criteria set forth in Chapter 12-11,
Florida Administrative Code. This response to your request constitutes
a TAA and is issued to you under the authority of s. 213.22, F.S.
Requested Advisement
Advice is requested regarding: 1) what the taxability of a motor vehicle
title transfer would be when a business name has changed from “Inc.”
to “LLC;” and 2) what document(s) would be required to overcome
the presumption of taxability when transferring motor vehicle titles in
this type of situation.
Brief Answer
Given the nature of the conversions set forth in the facts of this TAA,
the transfers of the motor vehicle titles would be exempt from sales tax
provided that a Sales Tax Exemption Affidavit (DR-40) with the language
“Conversion of a corporation to an LLC that qualifies as a reorganization
solely in exchange for stock under I.R.C. s. 368(a)(1)(F)” signed
under penalty of perjury accompanied the applications for title transfer.
Facts As Provided
A representative of XXXX is seeking the above advice as a result of an
inquiry from an attorney, XXXX (Attorney”). Attorney regularly converts
existing corporations to limited liability companies (“LLC’s”)
with the Florida Department of State Division of Corporations (“Division
of Corporations”). The LLC’s continue to use the same EIN’s
that the corporations did and continue to file corporate income tax returns.
On the Division of Corporations’ website, a listing for a converted
LLC will have the same deemed effective date as the date the original
corporation was formed. The Division of Corporations issues a new document
number for the LLC, however. When Attorney converts a corporation to an
LLC, the owners of the LLC will own membership interests rather than stock.
The shareholders surrender shares of stock in the existing corporation
for membership interests in the LLC. The owners and ownership percentages
of the “transferring” and “resulting” entities
are identical. The process involved in the conversion is that the Articles
of Conversion are filed simultaneously with the Articles of Organization
of the resulting LLC. The moment the Division of Corporations processes
the conversion, all of the assets, debts, etc., of the transferring corporation
are deemed to immediately be the assets, debts, etc., of the resulting
LLC. The corporation no longer owns assets after the conversion, and the
resulting LLC does not hold any assets or tax attributes immediately prior
to the conversion.
All that is needed to show a conversion, as far as the Internal Revenue
Service (IRS) is concerned, is for the LLC to file a copy of the conversion
documents with its return. With regards to federal tax treatment, an LLC
can choose its tax classification. If Attorney forms a new LLC and elects
for it to be taxed as an S Corporation, the resulting LLC will be an S
Corporation for income tax purposes even though it is a Florida LLC whose
ownership interests are issued as membership interests. Attorney has converted
numerous Florida corporations into Florida LLC’s, and every conversion
has been accepted by the IRS as a tax-free “F” reorganization
pursuant to I.R.C. s. 368(a)(1)(F).
When Attorney converts a corporation to an LLC and the corporation owns
real property, the property of the corporation continues to be vested
in the LLC without transfer. He is not required to prepare new deeds to
reflect the name change. Rather, he records certified copies of the Articles
of Conversion in each county where the corporation owns real property.
The LLC’s can convey legal title to the real property based on the
recorded Articles of Conversion.
Many of his corporate clients have fleets of company vehicles. When one
corporation tried to renew its vehicle registrations in the name of the
converted LLC, XXXX said that the LLC would need to get new plates and
registration for each vehicle, as the LLC was a separate new entity from
the corporation. This prompted Attorney to ask XXXX if there was a less
expensive option available to corporate clients when they renew their
vehicle registrations after a state law conversion. XXXX then reached
out to the Department of Revenue for advice as to the taxability of a
motor vehicle transfer when a business had changed its form and identity
from “Inc.” to “LLC.” XXXX also asks if such transfer
is not taxable, then what documents would be needed to substantiate this
change in identity.
Applicable Law and Response
Section 212.05, F.S., states that it is “the legislative intent that
every person is exercising a taxable privilege who engages in the business
of selling tangible personal property at retail in this state . . . .”
Included in the definition of a sale would be “[a]ny transfer of
title or possession, or both, exchange, barter, license, lease, or rental,
conditional or otherwise, in any manner or by any means whatsoever, of
tangible personal property for a consideration.” See s. 212.02(15)(a),
F.S. Section 212.06(10), F.S., further provides that all transfers of
title to motor vehicles are taxable transactions, unless expressly exempt
under Chapter 212, F.S.
In certain instances, the transfer of ownership of motor vehicles in a
conversion from a corporation to an LLC, is exempt from sales tax. Rule
12A-1.007(25)(a), F.A.C., provides, in relevant part, that transfers of
ownership of motor vehicles are exempt from sales tax when the following
conditions are met:1
1) the transfer of title into the name of the surviving corporation is
by reason of a corporate consolidation or merger in accordance with Chapter
607 or 617, F.S., or is a reorganization as defined in s. 368(a)(1) of
the Internal Revenue Code solely in exchange for stock.
2) a certificate setting forth the facts and signed under penalty of perjury
accompanies the application for title transfer, or if no title certificate
is required by law, the application for transfer of license or registration.
See Rule 12A-1.007(25)(a), F.A.C., and subparagraph 4., quoted in footnote 4, below.
With regards to the first condition above, since the conversions of corporations
to LLC’s in this case would not be considered consolidations or
mergers, we shall look to see whether the conversion of a corporation
to an LLC, as limited to the facts in the instant case, would meet the
second alternative of condition 1 above.
In other words, we need to determine whether the conversions specific to
this case would qualify as “reorganization[s] as defined in s. 368(a)(1)
of the Internal Revenue Code solely in exchange for stock.” See
Rule 12A-1.007(25)(a)4., F.A.C.
I.R.C. s. 368(a)(1)(F) provides that “a mere change in identity,
form, or place of organization of one corporation, however effected,”
would be considered a reorganization for purposes of I.R.C. s. 368(a)(1).
So, now, it must be determined whether what is occurring in the conversions
of the corporations to LLC’s in the instant case would be considered
mere changes in identity or form under I.R.C. s. 368(a)(1)(F).
I.R.C. Reg. s. 1.368-2(m) provides, in relevant part, that in order:
[t]o qualify as a reorganization under s. 368(a)(1)(F), a transaction must
result in a mere change in identity, form, or place of organization of
one corporation, however effected. A mere change can consist of a transaction
that involves an actual or deemed transfer of property from one corporation
to one other corporation. Such a transaction is a mere change and qualifies
as a reorganization under s. 368(a)(1)(F) only if all the requirements
set forth in paragraphs (m)(1)(i) through (vi) are satisfied.
I.R.C. Reg. s. 1.368-2(m)(1) provides requirements (i) through (vi): (i)
Resulting corporation stock distributed in exchange for transferor corporation
stock. Immediately after the potential F reorganization, all the stock
of the resulting corporation, including any stock of the resulting corporation
issued before the potential F reorganization, must have been distributed
(or deemed distributed) in exchange for stock of the transferor corporation
in the potential F reorganization. . . .
(ii) Identity of stock ownership. The same person or persons must own all
of the stock of the transferor corporation, determined immediately before
the potential F reorganization, and of the resulting corporation, determined
immediately after the potential F reorganization, in identical proportions. . . .
(iii) Prior assets or attributes of resulting corporation. The resulting
corporation may not hold any property or have any tax attributes (including
those specified in section 381(c)) immediately before the potential F
reorganization. . . .
(iv) Liquidation of transferor corporation. The transferor corporation
must completely liquidate, for federal income tax purposes, in the potential
F reorganization. . . .
(v) Resulting corporation is the only acquiring corporation. Immediately
after the potential F reorganization, no corporation other than the resulting
corporation may hold property that was held by the transferor corporation
immediately before the potential F reorganization, if such other corporation
would, as a result, succeed to and take into account the items of the
transferor corporation described in section 381(c).
(vi) Transferor corporation is the only acquired corporation. Immediately
after the potential F reorganization, the resulting corporation may not
hold property acquired from a corporation other than the transferor corporation
if the resulting corporation would, as a result, succeed to and take into
account the items of such other corporation described in section 381(c).
Let us look at the conversions described in the facts of this TAA to see
if they would meet these requirements.
(i) Resulting corporation stock distributed in exchange for transferor
corporation stock. Immediately after the potential F reorganization, all
the stock of the resulting corporation, including any stock of the resulting
corporation issued before the potential F reorganization, must have been
distributed (or deemed distributed) in exchange for stock of the transferor
corporation in the potential F reorganization. . . . In the conversions
described in the facts of this TAA, the moment the Division of Corporations
processes a conversion from a corporation to an LLC, all of the stock
from the corporation is deemed to have been distributed in terms of membership
interests in the LLC. The ownership percentages of the stock and the membership
interests are identical. The corporation no longer owns stock after the
conversion.
What is occurring is, in fact, the nature of a conversion. Section 605.1046,
F.S., provides:
(1) When a conversion in which the converted entity is a domestic limited
liability company becomes effective: (a) The converted entity is: …
2. The same entity, without interruption, as the converting entity; (b)
All property of the converting entity continues to be vested in the converted
entity without transfer, reversion, or impairment . . . .
The term “stock” in requirement (i) above does not have to
be taken literally in the requirement that all of the “stock”
of the resulting corporation must be distributed in exchange for the “stock”
of the transferor corporation, as LLC’s have membership interests
rather than stock. This will be discussed further below.
(ii) Identity of stock ownership. The same person or persons must own all
of the stock of the transferor corporation, determined immediately before
the potential F reorganization, and of the resulting corporation, determined
immediately after the potential F reorganization, in identical proportions. . . .
In the conversions described in the facts of this TAA, the same owners
of the stock in the corporations own the membership interests in the LLC’s,
and the percentages of ownership of the stock in the corporation are identical
to the percentages of ownership of the membership interests in the LLC.
(iii) Prior assets or attributes of resulting corporation. The resulting
corporation may not hold any property or have any tax attributes (including
those specified in section 381(c)) immediately before the potential F
reorganization. . . .
In state law conversions, the Articles of Conversion have to be filed simultaneously
with the Articles of Organization of the resulting LLC. In the conversion
filing forms, the two sets of articles are in one document. The moment
the Division of Corporations processes the conversion, the corporation
no longer exists, and all of the assets, debts, etc. of the transferring
corporation are deemed to immediately be the assets, debts, etc. of the
resulting LLC. Since the LLC is formed simultaneously in the conversion
process, the LLC could not have owned any assets or tax attributes prior
to the corporation.
(iv) Liquidation of transferor corporation. The transferor corporation
must completely liquidate, for federal income tax purposes, in the potential
F reorganization. . . .
The transferor corporation liquidates at the time of the conversion in
that it ceases to own assets.
(v) Resulting corporation is the only acquiring corporation. Immediately
after the potential F reorganization, no corporation other than the resulting
corporation may hold property that was held by the transferor corporation
immediately before the potential F reorganization, if such other corporation
would, as a result, succeed to and take into account the items of the
transferor corporation described in section 381(c).
According to the facts of this TAA, immediately after the conversion of
the corporation to the LLC, the LLC is the only entity holding property
that was held by the transferor corporation.
(vi) Transferor corporation is the only acquired corporation. Immediately
after the potential F reorganization, the resulting corporation may not
hold property acquired from a corporation other than the transferor corporation
if the resulting corporation would, as a result, succeed to and take into
account the items of such other corporation described in section 381(c).
According to the facts of this TAA, the conversion is of one corporation
into one LLC. The only property acquired by the LLC at the time of the
conversion is the property of the transferor corporation.
Also within subsection (m), I.R.C. Reg. s. 1.368-2(m)(4) provides a scenario
in which a conversion would qualify as “a mere change in identity,
form, or place of organization of one corporation, however effected”
under I.R.C. s. 368(a)(1)(F):
EXAMPLE 8. SERIES OF RELATED TRANSACTIONS - MERE CHANGE. P owns all of
the stock of S, a State A corporation. The management of P determines
that it would be in the best interest of S to change its form from a State
A corporation to a State A limited partnership but to continue to be treated
as a corporation for federal tax purposes. Accordingly, P contributes
1% of the S stock to newly formed LLC, a limited liability company, in
exchange for all of the membership interests in LLC. P is the sole member
of LLC. Under § 301.7701-3 of this chapter, LLC is disregarded as
an entity separate from its owner, P. Then, under a State A statute, S
converts to a State A limited partnership. In the conversion, P's interest
as a 99% shareholder of S is converted into a 99% limited partner interest,
and LLC's interest as a 1% shareholder of S is converted into a 1% general
partner interest. S also elects, under § 301.7701-3(c) of this chapter,
to be classified as a corporation for federal income tax purposes, effective
on the same day as the conversion. Under paragraph (m)(3)(i) of this section,
the conversion of S from a State A corporation to a State A limited partnership,
together with the election to treat S as a corporation for federal tax
purposes, results in a mere change of S and qualifies as a reorganization
under section 368(a)(1)(F).
While the facts in Example 8 above are slightly different than those in
this TAA, this example is illustrative of the point that a conversion
from a corporation to an LLC and an election of a limited partnership
to be treated as a corporation for federal tax purposes qualify as a “mere
change” under I.R.C. s. 368(a)(1)(F). It also shows that, though
Rule 12A-1.007(25)(a), F.A.C., above, states that the transfer of ownership
of motor vehicles is only exempt from sales tax when the conversion classifies
as a reorganization as defined in I.R.C. s. 368(a)(1) “solely in
exchange for stock,” there is no problem if the corporation’s
stock is, in fact, exchanged for membership interests.
Given that the conversions in the instant case satisfy the six requirements
in I.R.C. Reg. s. 1.368-2(m)(1) that are necessary to qualify as a reorganization
under I.R.C. s. 368(a)(1)(F) and that the conversions are acceptable under
the above example, which is also found in I.R.C. Reg. s. 1.368-2(m), the
conversions described in the facts of this TAA would qualify as a reorganization
under I.R.C. s. 368(a)(1)(F). In that the conversion in the instant case
would qualify as reorganizations under I.R.C. s. 368(a)(1)(F), they would
then satisfy the conditions of Rule 12A-1.007(25)(a)4., F.A.C.,2 and all that would be needed for the transfer of the motor vehicles to
be exempt from sales tax would be that a certificate setting forth the
facts and signed under penalty of perjury accompany the application for
title transfer. However, this is not to say that the mere provision of
such a form would be sufficient for XXXX to grant a tax exemption for
any motor vehicle transfer in which it was alleged that a reorganization
of a corporation pursuant to I.R.C. s. 368(a)(1) had occurred. XXXX will
need to determine in every case whether the reorganization mentioned on
the form qualifies as a reorganization under I.R.C. s. 368(a)(1)(F).
With regards to the form that would be required, it would be the Florida
Department of Revenue’s Sales Tax Exemption Affidavit (DR-40). For
purposes of this TAA only, the language that would be needed on the line
for “Other” would be: “Conversion of a corporation to
an LLC that qualifies as a reorganization solely in exchange for stock
under I.R.C. s. 368(a)(1)(F).”
Conclusion
Given the nature of the conversion set forth in the facts of this TAA,
the transfer of the motor vehicle titles would be exempt from sales tax
provided that a Sales Tax Exemption Affidavit (DR-40) with the language
“Conversion of a corporation to an LLC that qualifies as a reorganization
solely in exchange for stock under I.R.C. s. 368(a)(1)(F)” signed
under penalty of perjury accompanied the applications for title transfer.
This response constitutes a Technical Assistance Advisement under section
213.22, F.S., which is binding on the Department only under the facts
and circumstances described in the request for this advice as specified
in section 213.22, F.S. Our response is predicated on those facts and
the specific situation summarized above. You are advised that subsequent
statutory or administrative rule changes, or judicial interpretations
of the statutes or rules, upon which this advice is based, may subject
similar future transactions to a different treatment than that expressed
in this response. You are further advised that this response, your request
and related backup documents are public records under Chapter 119, F.S.,
and are subject to disclosure to the public under the conditions of section
213.22, F.S. Confidential information must be deleted before public disclosure.
In an effort to protect confidentiality, we request you provide the undersigned
with an edited copy of your request for Technical Assistance Advisement,
the backup material, and this response, deleting names, addresses, and
any other details which might lead to identification of the taxpayer.
Your response should be received by the Department within 15 days of the
date of this letter.
Sincerely,
Katharine Heyward
Tax Law Specialist
Technical Assistance & Dispute Resolution
cc: XXXX
Record ID: 211832
End Notes:
1 Rule 12A-1.007(25)(a), F.A.C., provides other situations in which the transfer of motor vehicles would be exempt from sales tax as well.
2 Rule 12A-1.007(25)(a) 4., F.A.C. provides, in relevant part: (25)(a) The following transfers of ownership of any aircraft, boat, mobile home, motor vehicles, or other vehicles of a class or type required to be registered, licensed, titled, or documented in this state or by the United States Government are exempt from tax, provided that a certificate setting forth the facts and signed under penalty of perjury accompanies the application for title transfer, or if no title certificate is required by law, the application for transfer of license or registration: … 4. The transfer of title into the name of the surviving corporation by reason of a corporate consolidation or merger in accordance with Chapter 607 or 617, F.S., or a reorganization as defined in s. 368(a)(1) of the Internal Revenue Code solely in exchange for stock.