Florida’s commercial real property sales tax: A trap for the unwary
The landscape of state and local taxes can be complex, and Florida’s sales and use tax on commercial real properties is no exception. For businesses and/or individuals engaging in the leasing or rental of commercial real estate in Florida, understanding what is subject to this tax, the general exemptions, and what is included in rental consideration is crucial to compliance, particularly as Florida continues to attract businesses to the state.
Pursuant to Florida law, the rental, lease, or license to use commercial real property is subject to a state sales tax. This measure of this tax generally includes any consideration paid for the right to occupy or use real estate, including base rent, additional rental consideration, and other required payments under the lease term. It is important to note that real estate taxes and most utilities paid by a tenant to the landlord or directly to the payee are considered taxable consideration for sales tax purposes. There are certain exemptions to the tax for government entities, nonprofit organizations, and some specific lease agreements, which require careful review and understanding to see if the lease qualifies.
Registration with the Florida Department of Revenue is mandatory before conducting business and entering into a commercial lease. Each rental property location is considered a separate business and requires its own tax registration. While landlords or their agents are typically responsible for registering, collecting, and remitting the tax, tenants could bear the tax liability if the landlord does not fulfill these collection obligations (referred to as use tax), particularly if the tenant undergoes a sales tax audit. It is critical for lessors and lessees of business rentals to review lease terms for clauses regarding sales taxes, including the measure of the tax base and the tax rate on the rental.
For those who engage in subleasing, the sublessor is required to collect sales tax and surtax on the rental payments received, but a tax credit may be available on a pro-rated basis for the tax paid to the main lessor/landlord. If a business is subleasing a business rental property, transferring a lease interest, or holding onto only an insignificant part of the property, the sublessor may be able to avail itself of a tax benefit by use of a resale certificate.
Even owner-occupied (related party) rentals are not exempt from this tax in Florida. For example, “the lease of commercial real property by a parent corporation to one of its subsidiaries, or by a shareholder to a corporation, or by an individual property owner to a related single-member LLC, is subject to sales tax and surtax,” the state writes. Such leases are taxed just like third-party commercial lease agreements.
Keeping up with recent changes in the tax landscape, a significant amendment has been made to Florida’s tax legislation. H.B. 7063, enacted on May 25, 2023, included notable adjustments to the sales and use tax rate on commercial leases. As of December 2023, this rate will be lowered from 5.5% to 4.5%. Looking further ahead, a reduction to 2% – approved during the 2021 legislative session – is scheduled to take effect by late 2024. These changes represent a marked shift in Florida’s taxation of commercial rentals.
Florida is among the few jurisdictions in the United States, along with certain localities in Arizona and New York City, that impose a tax on commercial rent. We recommend that companies considering relocating to Florida take this unique tax landscape into account. Furthermore, lessors of commercial real estate need to be aware of the 1% reduction in the state sales tax rate on business real estate rentals as of December 2023, with the potential of a permanent 2% tax rate on such commercial rentals in late 2024.
To the extent that companies are not in compliance with sales tax on commercial rentals, a mitigation strategy may be available. That is, the Florida Department of Revenue has a no-name voluntary disclosure program for eligible companies. Potentially noncompliant businesses should assess exposure and eligibility to see if the program is cost-advantageous.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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