Know the Rules of the Florida Commercial Rent Sales Tax
Originally published on March 1, 2017
Updated on October 31st, 2023
Florida businesses often hold real property and their business operations in separate entities for liability purposes. These types of structures need to be especially mindful of the sales tax rules because, even though the two businesses have the same owner, sales tax is still due on any rental payments (or payments construed as rent) made from the business to the real estate holding company. These rules can apply even if one of the entities is disregarded for federal income tax purposes.
What constitutes rental payments?
The most obvious answer is “the amount stated in the lease agreement for the right to use or occupy the commercial property.” However, most lease agreements are not that simple. If a tenant is required to make payments of any kind on behalf of the landlord (such as include mortgage, real estate taxes, insurance, CAM expenses or any other payments required under the lease agreement), these payments can still can be characterized as rent and be subject to sales tax. Any payment or agreement between a tenant and lessor should be evaluated for sales tax implications.
Leasehold improvements that are required under the lease agreement can also constitute rent if paid for by the tenant, depending on the language and intent of the lease agreement. Factors to consider include the improvements required, whether the improvements revert to the landlord at the end of lease, whether they were in lieu of rent, and whether credit was given against rent. If such situations pertain to you, we recommend consulting your tax advisor or legal counsel due to the variances of each lease agreement or situation.
What if I don’t charge rent?
If the real estate company doesn’t charge rent to the business, there can still be sales tax implications. Any payments made by the business (tenant) on behalf of the real estate entity are deemed rent by the Department of Revenue (DOR). For example, if an entity occupies the property and pays the mortgage, real estate taxes or insurance on behalf of the owners, the payments would be subject to Florida sales tax.
Distributions from a business to the owners can also be characterized as rent. For example, if distributions coincide with the amount and timing of mortgage payments or due date of real estate taxes, the DOR could consider the amounts consideration for the use of property. This could include distributions between two related parties or two single member LLCs (which are disregarded for federal income tax purposes).
Fortunately, with some strategic tax planning, the sales tax on intercompany rent can be minimized as much as possible.
Are there any exemptions?
Certain tenants and organizations are exempt from commercial sales tax. These include the rental of commercial property assessed as agriculture, rentals to non-profit organizations (must obtain Certificate of Exemption DR-14) and rental to federal, state, county or city government.
My landlord never charged or collected sales tax on my rent. Do I still owe taxes?
The lease agreement should clearly identify the party responsible for making payments. In most circumstances, the owner of the property or property manager (whoever receives the rental payments) registers with the DOR to remit the sales tax collected. If the lease is silent on this detail, tenants are responsible for paying the sales tax to the landlord, who is then responsible for collecting and remitting to the state. Make sure to keep adequate records to prove that the necessary taxes have been paid and remitted. The sales tax should be separately stated from the rent amount.
The lease agreement is the most important tool to minimize or avoid unnecessary sales tax on other payments/charges. Carefully drafting and reviewing lease agreements can also eliminate confusion on who is responsible for payments.
Contact us for more information regarding sales tax on commercial rent and how to reduce your payment or avoid paying this tax altogether.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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