In the past year, the Florida Department of Revenue (“DOR”) increased the number of sales and use tax audits conducted on businesses, with a particular focus on unpaid sales and use taxes relating to commercial lease agreements entered into by restaurant and retail businesses.

Unless specifically exempted by Florida law, Florida sales or use tax is due on “the total rent” paid in exchange for a commercial lease, rental, or license.  Fla. Stat. §212.031(1)(c)(2011).  The “total rent” includes “payments for the granting of a privilege to use or occupy real property for any purposes and shall include base rent, percentage rents, or similar charges.”  Fla. Stat. §212.031(1)(c)(2011).    In addition to amounts paid as base rent, “total rent” can also include the following charges where the tenant must make the payment as a condition of occupying the property: common area maintenance; building security; parking; liability and casualty insurance; utility charges; ad valorem property taxes; deposit payments and lease cancellation charges applied towards rent; and, cleaning services.  See Florida Department of Revenue, Commercial Rental Standard Industry Guide, 9-10 and 18-23 (Internet Version 10/4/10), http://dor.myflorida.com/dor/taxes/sigs/commercial_rental_external.pdf.

For example, if a tenant pays the county ad valorem tax as part of tenant’s lease obligations, such payment by tenant is subject to sales tax, regardless of whether the amount is paid to the landlord or directly to the county.

Also impacted are landlords with tenants who lease vacant land as the tenants are typically required to fund the costs of building on the land and/or improving the “shell” building.  Any amounts incurred by tenant in improving the land constitute part of the “total rent” that is subject to sales tax.

While most lease agreements include provisions relating to the payment of sales tax on monthly rent payments, many tenants fail to pay sales tax on the additional items that can qualify as “total rent” under the terms of the lease.  Two of the easiest industries to audit are restaurants and retail businesses due to the likelihood that the rental agreement includes provisions requiring the tenants to make improvements to the commercial space.

In the event that the Department of Revenue cannot collect an outstanding sales tax liability from the tenant, the landlord becomes liable for a use tax resulting from improvements made by the tenant and which remain the property of the landlord under the terms of the lease.  The use tax is the counterpart to the sales tax – for each taxable transaction in which Florida’s sales tax remains unpaid (e.g., online purchases from vendors such as Amazon who do not collect a state sales tax), the consumer who purchases and benefits from the use of the item must file a return for and pay the Florida use tax.  The Florida sales tax and use tax are both levied at a rate of 6% and apply to the same taxable transactions.  However, unlike the sales tax, which is paid from the tenant’s funds, the use tax is owed by the landlord from the landlord’s funds.

Example: Tenant leased an unimproved vacant space and was required to remodel the unit in order to operate a restaurant. The Tenant did not pay, and the Landlord did not collect, the required sales tax on the improvements.  In addition, for the duration of the lease, Tenant paid the common area management fees, utilities, and ad valorem property taxes directly to Landlord.  Landlord only filed returns for and paid sales tax for the base rent paid by Tenant. Several years later, Tenant goes out of business, and the Landlord, pursuant to the terms of the lease, keeps all the fixtures installed by Tenant pursuant to the terms of the Lease.

The following year, the Florida Department of Revenue audits the Landlord and discovers that Tenant did not pay the required sales tax on the improvements, fees, utilities, and taxes paid by Tenants during the course of the lease.  If the Department of Revenue is unable to collect the outstanding sales tax from Tenant, e.g., Tenant is insolvent or cannot be located, the Landlord is responsible for paying the use tax on the amounts paid by Tenant and on the value of the improvements.

Thank you.

[author] [author_image timthumb=’on’]http://www.bretjonespa.com/main/wp-content/uploads/2012/06/BJones-90-86-square.jpg[/author_image] [author_info]An intensely critical thinker, Attorney Cazobon focuses on the facts and the application of the law to the acts, rather than through social needs or media. Attorney Cazobon is one of the significant reasons that Bret Jones, P.A. rarely does “basic” estate plans but rather customized and creative means to accomplish a client’s personal goals whether those be short-term, long-term, tax-related, or part of an overall business or life plan.[/author_info] [/author]