Sales Tax on Commercial Leases of Real Property: A Refresher on the Issues Involving Florida Sales Tax and Commercial Leases

In Florida, sales tax must be paid on certain charges in commercial lease transactions. This includes base rent, additional rent, and common area maintenance charges. The state imposes a six percent sales tax on the total rent, and counties may add an additional tax on top of that. The Department of Revenue has specific rules on what charges are subject to sales tax. It’s important for tenants and landlords to understand and properly address sales tax in their lease agreements. Section 212.031 of the law says that anyone who rents out real property has to pay a 6% sales tax on the total rent or fee. This includes any extra charges like insurance or property taxes that the tenant has to pay as part of the lease. The Department of Revenue (DOR) has clarified that any charges paid by a tenant for the right to use the leased property, like common area maintenance charges (CAM), are also taxable. So, if a tenant has to pay CAM charges, those are also subject to the sales tax. Common Area Maintenance (CAM) charges include the cost of utilities for shared spaces in a property and are subject to sales tax. This applies to both common areas and leased premises. However, there are some instances where utility charges may be exempt from sales tax. If the landlord pays sales tax on utilities, then the tenant doesn’t have to pay sales tax on those utilities. If the tenant pays for utilities directly to the provider, they also don’t have to pay sales tax. However, if the tenant pays property taxes, they do have to pay sales tax. Insurance paid by the tenant for their own protection is usually not taxed, but if it also protects the landlord, then it is taxed. When a tenant sublets or assigns leased premises, they have to collect and remit sales tax, unless specific rules apply. If a tenant sublets part of their leased space, they can get a credit for any sales tax paid by the subtenant. This means they don’t have to pay as much tax. If the tenant sublets the entire space, they don’t have to pay any sales tax to the landlord as long as they register with the tax department, collect and pay the sales tax on the sublease, and pay any tax for the part of the space they still use. This helps the tenant avoid dealing with complex sales tax calculations. If a tenant wants to end a lease early, they may have to pay the landlord a fee. Whether this fee is subject to sales tax depends on how the landlord and tenant document it. If the fee is recorded as rent, it’s likely taxable. Even if it’s not called rent, it could still be taxable if it’s for using the property. Also, payments for improvements to leased property and rent between related companies are usually subject to sales tax. The lease should say who is responsible for paying the sales tax, but if it doesn’t, there may be a question about who has to pay it. The Florida Supreme Court in Schnurmacher Holding, Inc. v. Noriega ruled that tenants are responsible for paying sales tax on a lease if the lease doesn’t say otherwise. Landlords have to collect and send the tax to the state. Not doing so can result in serious criminal charges. When writing leases, it’s best to clearly state who is responsible for paying sales tax to avoid any issues. For utilities, tenants should have their own account and pay the bills directly, or have separate billing and reimbursement in the lease to minimize sales tax. This article explains how to minimize sales tax on lease termination payments for commercial properties in Florida. To do this, attorneys should advise their clients to clearly label and describe the payments and prohibit the landlord and tenant from reporting them as rental income and expense. Following these rules can help reduce the amount of sales tax owed on these payments. Landlords can pass on the cost of sales tax for utilities to their tenants, but they have to provide proof that they paid the tax. They also have to show that they didn’t mark up the price of the utilities to make a profit. If they did mark up the price, they have to pay sales tax on the extra amount. The most accurate way to show insurance costs is through premium statements from the insurance company. If a lease agreement names the landlord and the tenant as co-insureds for insurance, and the insurance provides different types of coverage, some of which only protect the landlord, the portion of the insurance premium that protects only the landlord will be treated as taxable rent. The tenant may need to register as a dealer if they sublet or collect rent on a taxable portion of the leased property. They may also be required to pay sales tax on the rent unless they provide a resale certificate to the landlord. There are specific rules and regulations that govern these tax requirements in Florida. The Department of Revenue in Florida is discussing the taxability of payments made in connection with an improvement allowance in a lease. They are looking at different factors in the lease to determine if the payments should be considered as part of the rent. The article also mentions specific laws and court cases related to this issue.

An attorney named Jordan S. Wigdor, who works in real estate law, wrote this article for the Tax Section. The article is meant to help people understand the tax laws related to real estate in Florida.

Source: https://www.floridabar.org/the-florida-bar-journal/sales-tax-on-commercial-leases-of-real-property-a-refresher-on-the-issues-involving-florida-sales-tax-and-commercial-leases/