1 of 11 DOCUMENTS. LexisNexis Practice Insights. Copyright 2006, Matthew Bender & Company, Inc., a member of the LexisNexis Group

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1 Page 1 1 of 11 DOCUMENTS Signal unavailable As of: Dec 13, 2006 LexisNexis Practice Insights Copyright 2006, Matthew Bender & Company, Inc., a member of the LexisNexis Group Lexis FL Tax P.I. 936 CHARGES FOR THE INSTALLATION OF TANGIBLE PERSONAL PROPERTY ARE GENERALLY SUBJECT TO SALES TAX Fla. Admin. Code Ann. 12A By Michael J. Wilson, CPA, Esq. -- Williams, Parker, Harrison, Dietz & Getzen General Editor, Mark E. Holcomb, Esq. -- Holland & Knight LLP INSIGHT The taxation of installation charges is often misunderstood because such charges are mistakenly perceived to be for nontaxable services. However, installation charges are subject to tax when they are sold with tangible personal property, even if the installation charges are separately stated from the cost of the tangible personal property. Charges for installation services that are part of the sale of tangible personal property are not subject to tax if such tangible personal property becomes a part of real property. ANALYSIS The taxable sales price of tangible personal property generally includes charges for the installation of tangible personal property, even if such charges are separately stated on the invoice, purchase order or sales contract. Under Fla. Admin. Code Ann. Rule 12A-1.016(2) the term "sales price" is defined as "the total amount paid for tangible personal property, including any services that are part of the sale." Charges for services that are part of the sale, and therefore are taxable, include charges for labor or materials to install, "alter, remodel, maintain, adjust or repair tangible personal property."1 Installation charges include setup charges, such as charges for the setup of audio/visual equipment. Florida Department of Revenue, Technical Assistance Advisement (Florida Department of Revenue Technical Assistance Advisement ("TAA") 04A-051 (Aug. 25, 2004), 2004 Fla. Tax LEXIS 72. Charges for these services are subject to sales tax even if such charges are separately stated from the cost of the tangible personal property, as provided by Rule 12A-1.016(3). Charges for these services are also taxable even if the purchaser has the option of receiving and paying for such services. TAA 04A-051. Rule 12A-1.016(2) states trade-ins or discounts to the sales price that are allowed and taken into account at the time of sale are not included within the definition of the term "sales price." In other words, such trade-ins and discounts reduce the taxable "sales price." Charges for the installation of tangible personal property are not subject to sales tax if the tangible personal property becomes a part of real property. Charges made by contractors and manufacturers that furnish and install tangible personal property that becomes a part

2 Page 2 of real property are not subject to sales tax because the contractors, rather than their customers, are deemed to be the ultimate users of the tangible personal property because the contractors use the tangible personal property in providing real property improvement services to their customers. Rule 12A-1.016(3)(b); see also Fla. Admin. Code Ann. Rule 12A (regarding the taxation of sales of tangible personal property to or by contractors that improve or construct real property). On the other hand, charges made by contractors and manufacturers that furnish and install tangible personal property that does not become a part of real property are subject to sales tax under Rule 12A-1.016(3)(b).2 Rule 12A-1.016(3)(b) provides that charges for the purchase and installation of the following items are subject to sales tax: 1. Carpets, except those that become real property; 2. Drapes, slipcovers, bedspreads, curtains, blinds, shades, and other window treatments; 3. Garbage can receptacles; 4. Household appliances; 5. Lawn markers; 6. Mail boxes; 7. Mirrors, except those that become real property; 8. Portable ice machines; 9. Precast clothesline poles; 10. Radio and television antennas; 11. Rugs; 12. Stepping stones; 13. Window air conditioning units; and 14. Equipment used to provide communication services.

3 Page 3 NOTES (1) Transportation charges are dealt with in Florida Administrative Code Ann. 12A (2) The discussion of when tangible personal property becomes a part of real property is beyond the scope of this Article. For a detailed discussion and explanation of this topic, see Florida Administrative Code Ann. 12A These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws.

4 Page 4 2 of 11 DOCUMENTS Signal unavailable As of: Dec 13, 2006 LexisNexis Practice Insights Copyright 2006, Matthew Bender & Company, Inc., a member of the LexisNexis Group Lexis FL Tax P.I. 937 CHARGES FOR MOST TYPES OF REPAIRS ARE SUBJECT TO SALES TAX Fla. Admin. Code Ann. 12A By Michael J. Wilson, CPA, Esq. -- Williams, Parker, Harrison, Dietz & Getzen General Editor, Mark E. Holcomb, Esq. -- Holland & Knight LLP INSIGHT Under Florida law, most any type of charge for the repair of tangible personal property is subject to sales tax. Clients are often dismayed at the taxability of repair charges because they think of repairs as non-taxable services. Consequently, practitioners should educate their clients of the sales tax consequences of providing and receiving repair services. ANALYSIS The full amount of charges for repairing, adjusting, applying, installing, maintaining, or remodeling tangible personal property are generally subject to sales tax when parts or materials are incorporated into the repaired tangible personal property. Where materials or parts are furnished by the repairer of tangible personal property, the entire charge to repair, adjust, apply, alter, install, maintain or remodel (collectively referred to herein as "repair") the tangible personal property is subject to sales tax pursuant to Fla. Admin. Code Ann. Rule 12A-1.006(1)(a). Materials or parts that are actually incorporated into and become part of repaired tangible personal property are not taxable when purchased by the repairer, but are taxable when furnished by the repairer to its customer as set forth in Fla. Admin. Code Ann. Rule 12A-1.006(1)(c). Fla. Admin. Code Ann. Rule 12A-1.006(4) expressly states it is irrelevant if the cost of the furnished materials is insignificant when compared to the cost of the labor involved in the repair. Fla. Admin. Code Ann. Rule 12A-1.006(1)(c) provides examples of items taxable to the customer when provided with repair services: welding rods, solder, body solder, or other surfacing materials, paint, thinner, bolts, and nuts. Fla. Admin. Code Ann. Rule 12A-1.006(2) and (7)(d) provide that charges for cleaning or regulating tangible personal property are taxable when lubrication occurs, such as with lube jobs and oil changes. Examples of other taxable repairs are provided in Fla. Admin. Code Ann. Rule 12A-1.006(7)(a), (b), (c), (e), (10), (11), (13), (16)(b), and (18), and they include:

5 Page 5 1. Altering, repairing or remodeling clothing; 2. Refinishing, restoring or upholstering furniture; 3. Repairing flat tires; 4. Renovating mattresses; 5. Silver plating or chrome plating tangible personal property; 6. Taxidermy; 7. Creosoting railroad cross-ties; 8. Refilling a fire extinguisher; 9. Washing an automobile or other tangible personal property where wax, silicones, or any other substance is used that forms a protective film or coating; 10. Repairing, altering or improving a mobile home that is not classified as real property; and 11. Interior decorating in conjunction with sales of tangible personal property, even if separately stated. Fla. Admin. Code Ann. Rule 12A-1.006(1)(c) expressly states materials, supplies, and tools used by the repairer in making the repairs that do not become part of the tangible personal property repaired are taxable to the repairer as overhead items. Examples of these overhead items include tools, sandpaper, steel wool, flux, and detergents. Clients often mistakenly believe that repairs constitute non-taxable services for sales tax purposes. Practitioners should educate their clients that repair services become taxable whenever the repairer furnishes tangible personal property, no matter how insignificant, that is incorporated into the repaired tangible personal property. Charges for repairs that require only labor or services (i.e., no tangible personal property is furnished) are deemed to be taxable unless there is evidence in the repairer's records to establish that the repairs required only labor or services. Fla. Admin. Code Ann. Rule 12A-1.006(4) expressly states charges for repairs of tangible personal property which require only labor or services are, nonetheless, deemed to be subject to sales tax unless the repairer can establish through the repairer's records that no tangible personal property was incorporated into the repaired tangible personal property. Consequently, practitioners should advise their repair-clients to thoroughly document in their records, including their invoices to their customers, any repairs that require only labor or services. Examples of repairs that generally require only labor or services may be found in Fla. Admin. Code Ann. Rule 12A-1.006(7)(f), (g), (h), (12),

6 Page 6 (16)(a), and (17), and they include: 1. Wheel balancing or tire mounting on an automobile when no parts are furnished; 2. Sharpening drill bits, chain saw chains, saws, knives and mower blades; 3. Sandblasting tangible personal property when no protective coating or covering of any substance is applied to the property; 4. Washing an automobile or other tangible personal property when only detergent or water softener is added to the water; 5. Interior decorating services when no materials or supplies are provided; and 6. Wrecker or towing services if the charges for such services are separately stated on the customer's invoice. Fla. Admin. Code Ann. Rule 12A-1.006(1)(c) expressly states materials, supplies, and tools used by the repairer in providing the repair labor or services are taxable to the repairer. Labor charges for the repair and maintenance of certain aircraft are exempt from sales tax. Fla. Admin. Code Ann. Rule 12A-1.006(1)(b), (2) and (15) provides labor charges for the repair and maintenance of aircraft with a maximum certified take-off weight of more than 20,000 pounds are exempt from sales tax, provided that such charges are stated separately from parts and equipment furnished in connection with such labor charges. If such labor charges are not separately stated, then the charges are deemed to be taxable unless the repairer can establish based on the repairer's records that no parts or equipment were actually incorporated into the aircraft. When read literally, Fla. Admin. Code Ann. Rule 12A-1.006(1)(b) requires the repairer to separately state labor charges even when no parts or equipment are provided. Accordingly, best practice dictates that clients separately state all labor charges and furnished parts and equipment, and if no parts and equipment are furnished then to separately indicate on the invoice that no parts or equipment were furnished. In addition, the client should be advised to otherwise maintain records sufficient to document those transactions where no parts or equipment are furnished with the repair labor. These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws. Practice Insights Legend: Timing concern Drafting tips Split in authority

7 Page 7 Possible financial impact Warning Expedite filing or proceeding

8 Page 8 3 of 11 DOCUMENTS Signal unavailable As of: Dec 13, 2006 LexisNexis Practice Insights Copyright 2006, Matthew Bender & Company, Inc., a member of the LexisNexis Group Lexis FL Tax P.I. 1,040 CAREFUL DRAFTING AND DOCUMENTATION CAN MINIMIZE SALES TAX Fla. Admin. Code Ann. 12A By Michael J. Wilson, CPA, Esq. -- Williams, Parker, Harrison, Dietz & Getzen General Editor, Mark E. Holcomb, Esq. -- Holland & Knight LLP INSIGHT Unlike many other states, Florida imposes sales tax on rental payments for the lease of real property to a related entity. However, carefully drafting a lease agreement for real property can help to minimize sales tax, especially with respect to utility charges and lease cancellation or termination payments. ANALYSIS In general, the rental or lease of any real property, even between related persons, is subject to sales tax. The rental or lease of real property is generally subject to sales tax, even when the real property is leased to a related entity. Fla. Admin. Code Ann. Rule 12A-1.070(1)(a) and (19).1 For example, sales tax is due on the rental payments when real property is leased by a partnership to a partner (or vice versa), a corporation to its sole shareholder (or vice versa), a limited liability company to its sole member (or vice versa), or from one type of business entity (such as a partnership, limited liability company or corporation) to another business entity when both entities have identical ownership. See Technical Assistance Advisement ("TAA") No. 04A-034 (May 26, 2004), 2004 Fla. Tax LEXIS 50; TAA 04A-032 (May 18, 2004), 2004 Fla. Tax LEXIS 48; TAA No. 03A-039 (July 22, 2003), 2003 Fla. Tax LEXIS 56; TAA No. 95A-009 (March 15, 1995), 1995 Fla. Tax LEXIS 114. It can sometimes be difficult to convince clients that they have to pay sales tax on the rental of real property to entities that they control, especially if they engage in related party rental activities in other states which provide a related party rental sales tax exception. The amount subject to sales tax generally includes ad valorem taxes, common area maintenance charges, utility charges, and insurance premiums paid by the tenant on behalf of the landlord. Sales tax on the rental, lease or license of real property is generally imposed on "all considerations due and payable" by the tenant to the landlord. Rule 12A-1.070(4)(b). Taxable consideration includes ad valorem taxes on the leased real

9 Page 9 property and common area maintenance charges paid by the tenant. Rule 12A-1.070(4)(c) and (d). Utility charges paid by the tenant to the landlord for the right to occupy or use the real property are also taxable consideration unless the landlord pays the utility charges and separately bills the tenant for the utility charges at the same or lower price as that billed by the utility company. Rule 12A-1.070(4)(e). Insurance premiums paid by the tenant for its own protection are not subject to sales tax. Rule 12A-1.070(12). However, insurance premiums paid by the tenant that protects the landlord are subject to sales tax, even if such premiums are separately stated. Rule 12A-1.070(12). Lease agreements should specify which party is responsible for ad valorem taxes, common area maintenance charges and insurance premiums. If the tenant is responsible for these charges, Practitioners should make sure that the lease agreement specifies that these amounts are subject to sales tax and advise their landlord-clients to collect and remit sales tax on these items. If utility accounts will be maintained in the landlord's name, the lease agreement should provide for separate billing and reimbursement in order to minimize sales tax. However, because this separate billing and reimbursement can be burdensome, and to minimize sales tax, many lease agreements provide that the tenant will maintain the utility accounts in its own name and will pay the utility charges directly to the utility companies. Lease termination or cancellation payments are subject to sales tax depending upon how such payments are recorded in the landlord's and tenant's books and records, and whether the lease agreement specifically designates such payments as a lease termination or cancellation payment. Sales tax generally applies to lease termination or cancellation payments if the landlord records such payments as rental income in its books and records or if the tenant records such payments as rental expense in its books and records. Rule 12A-1.070(4)(g)(1) and (2). However, even if lease termination or cancellation payments are recorded as rental income by the landlord or as rental expense by the tenant, such payments will not be taxable if the lease agreement or other documentation establishes that such payments were for the termination or cancellation of the lease, rather than for the use of real property. Rule 12A-1.070(4)(g)(3). Similarly, if lease termination or cancellation payments are not recorded as rental income by the landlord or as rental expense by the tenant, such payments will be taxable if the lease agreement or other documentation establishes that such payments represent additional payment for the use of real property. Rule 12A-1.070(4)(g)(4). Practitioners should advise their clients that reporting lease termination or cancellation payments as rental income or rental expense, as applicable, may result in such payments being subject to sales tax. Also, the lease agreement should be drafted so that payments for lease termination or cancellation are clearly labeled and described. Furthermore, counsel may wish to consider adding a provision to the lease agreement prohibiting the lessor and lessee from recording lease termination or cancellation payments as rental income and rental expense, respectively, in their books and records. Tenants that sublet or assign real property must collect and remit sales tax on the rental payments they receive less the amount of sales tax they pay to their landlord. When a tenant sublets or assigns real property, the tenant is generally required to collect and remit sales tax on the rent collected by the tenant, and the tenant must register as a dealer with the Florida Department of Revenue (the "Department"). Rule 12A-1.070(7)(a). However, the tenant is entitled to a credit for any sales tax paid by the tenant to its landlord for the subleased or assigned real property. Rule 12A-1.070(8). If only a portion of the real property is subleased or assigned, then the amount of the credit is determined based upon square footage or some other basis acceptable by the Department. Rule 12A-1.070(8). Rule 12A-1.070(8) provides the following example: Tenant leases 200 square feet of floor space for $400 and pays Landlord $24 rental tax. Tenant subleases 100 square feet, or one half, of the space to Subtenant for $300 and collects $18 tax which he remits to the [Department], less a credit of $12 for tax that [the tenant] paid to his landlord on the space that he subleased to Subtenant. (One half of $400 is $200 and six percent of this amount is $12.) If the tenant sublets or assigns all of the real property, or retains only an incidental portion of the real property, the tenant may elect to not pay any sales tax to its landlord, provided that the tenant (i) registers as a dealer with the

10 Page 10 Department for sales tax purposes, (ii) collects and remits to the Department sales tax due on the tenant's sublease of the real property and (iii) pays directly to the Department any sales tax due on the real property retained (i.e, real property that is not subleased or assigned) by the tenant. Rule 12A-1.070(9). If the tenant makes this election to not pay any sales tax to the landlord, the tenant should provide the landlord with a resale certificate. Rule 12A-1.070(9). Making this election is oftentimes advantageous because the tenant doesn't have to calculate the amount of sales tax paid to the landlord for purposes of determining the amount of sales tax credit. Of course, in order to minimize sales tax, practitioners should make certain to always advise their clients to make this election in situations where the rent paid by the sublessee to the tenant is less than the rent paid by the tenant to the landlord. NOTES (1) The taxation of rentals or leases of transient accommodations, such as residential dwelling units, are addressed in Florida Administrative Code Rule 12A These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws. Practice Insights Legend: Timing concern Drafting tips Split in authority Possible financial impact Warning Expedite filing or proceeding

11 Page 11 4 of 11 DOCUMENTS Signal unavailable As of: Dec 13, 2006 LexisNexis Practice Insights Copyright 2006, Matthew Bender & Company, Inc., a member of the LexisNexis Group Lexis FL Tax P.I. 1,041 FAILURE TO CONSIDER SALES TAX IMPLICATIONS WHEN DRAFTING OR REVIEWING LEASE AGREEMENTS CAN BE DANGEROUS Fla. Admin. Code Ann. 12A By Michael J. Wilson, CPA, Esq. -- Williams, Parker, Harrison, Dietz & Getzen General Editor, Mark E. Holcomb, Esq. -- Holland & Knight LLP INSIGHT Counsel is well-advised to consider sales tax implications when drafting or reviewing lease agreements for tangible personal property. Seemingly minor details in lease agreements can have a dramatic affect on a client's sales tax liability. By carefully drafting lease agreements in light of Fla. Admin. Code Ann. Rule 12A-1.071, practitioners can minimize their client's sales tax liability with respect to the lease of tangible personal property. ANALYSIS Interest charges are subject to sales tax if the lease agreement fails to clearly provide that such interest charges are for late payment or other defaults. Any interest charges for late payment or other defaults under a lease agreement for tangible personal property are generally subject to sales tax, even if such charges are separately stated. Rule 12A-1.071(1)(c)(2)(a). There is an exception, however, if the lease agreement provides that the interest charges are being imposed upon the lessee for late payment or other defaults under the lease agreement, rather than for the use of tangible personal property. Rule 12A-1.071(1)(c)(2)(a). In order to avoid sales tax on interest charges, the lease agreement should clearly provide the interest percentage, how it is calculated, and that the interest charge is only imposed for late payment of rent or another payment, or for another type of default under the lease agreement. Charges for retaining tangible personal property beyond the stipulated lease term may be taxable depending upon how such charges are recorded in the lessor's and lessee's books and records, and whether such charges are designated and itemized in the lease agreement as a penalty or late fee. Sales tax generally applies to any charges by the lessor to the lessee for retaining tangible personal property beyond

12 Page 12 the term stipulated in the lease agreement if such charges are recorded as rental income in the lessor's books and records. Rule 12A-1.071(14)(a). However, sales tax will not apply to such charges if they are specifically designated and itemized in the lease agreement as a penalty or late fee. Rule 12A-1.071(14)(a). Consequently, the amount of penalties or late fees for the retention of tangible personal property beyond the stipulated term should be clearly designated and itemized in the lease agreement. Best practice dictates that practitioners advise their clients that recording such penalties or fees as rental income or rental expense, as applicable, may result in such penalties or fees being subject to sales tax. Counsel may also wish to consider adding a provision to the lease agreement prohibiting the lessor and lessee from treating penalties or late fees for retaining tangible personal property beyond the stipulated term as rental income and rental expense, respectively, in their books and records. Lease termination or cancellation payments are subject to sales tax depending upon how such payments are recorded in the lessor's and lessee's books and records, and whether the lease agreement specifically designates such payments as a lease termination or cancellation payment. As with charges for retaining tangible personal property beyond the stipulated lease term, sales tax generally applies to lease termination or cancellation payments if the lessor records such payments as rental income in its books and records or if the lessee records such payments as rental expense in its books and records. Rule 12A-1.071(14)(b)(1) and (2). However, even if lease termination or cancellation payments are recorded as rental income by the lessor or as rental expense by the lessee, such payments will not be taxable if the lease agreement or other documentation establishes that such payments were for the termination or cancellation of the lease, rather than for the use of tangible personal property. Rule 12A-1.071(14)(b)(3) and (4). Practitioners should advise their clients that reporting lease termination or cancellation payments as rental income or rental expense, as applicable, may result in such payments being subject to sales tax. Also, the lease agreement should be drafted so that payments for lease termination or cancellation are clearly labeled and described. Furthermore, counsel may wish to consider adding a provision to the lease agreement prohibiting the lessor and lessee from recording lease termination or cancellation payments as rental income and rental expense, respectively, in their books and records. Insurance premium payments made by a lessee to a lessor are subject to sales tax even if the payments are separately stated or itemized in the lease agreement. When a lessor maintains insurance on leased tangible personal property and the lessor is the named beneficiary under the insurance policy, payments by the lessee to reimburse the lessor for such premiums are taxable even if the payments are separately stated or itemized in the lease agreement. Rule 12A-1.071(1)(c)(2)(c). In other words, payments made by a lessee to a lessor that are reimbursement for insurance premiums on the leased tangible personal property are treated as payments for the use of tangible personal property, even if such payments are separately stated and itemized, and therefore are subject to sales tax. Repair parts purchased for leased tangible personal property may be subject to sales tax depending upon which party pays for the parts. Repair parts purchased by a lessor for use in maintaining tangible personal property that is used exclusively for leasing purposes are exempt from sales tax. Rule 12A-1.071(8). On the other hand, the purchase of repair parts by a lessee for use in maintaining leased tangible personal property is subject to sales tax. Rule 12A-1.071(8). Practitioners should keep this subtle sales tax distinction in mind when negotiating lease agreements and whether the lessor or lessee is responsible for purchasing repair parts for the leased tangible personal property. These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws. Practice Insights Legend:

13 Page 13 Timing concern Drafting tips Split in authority Possible financial impact Warning Expedite filing or proceeding

14 Page 14 5 of 11 DOCUMENTS Signal unavailable As of: Dec 13, 2006 LexisNexis Practice Insights Copyright 2006, Matthew Bender & Company, Inc., a member of the LexisNexis Group Lexis FL Tax P.I. 1,042 SALES TAX ISSUES MUST BE CONSIDERED WHEN ASSIGNING OR RECEIVING AN ASSIGNMENT OF A LEASE AGREEMENT OR A RIGHT TO RECEIVE RENTAL PAYMENTS Fla. Admin. Code Ann. 12A-1.071(47) By Michael J. Wilson, CPA, Esq. -- Williams, Parker, Harrison, Dietz & Getzen General Editor, Mark E. Holcomb, Esq. -- Holland & Knight LLP INSIGHT Assignors and assignees of lease agreements for tangible personal property and of the right to receive rental payments under such leases may be surprised to learn who has the obligation to collect and remit sales tax. Failure to consider Fla. Admin. Code Ann. Rule 12A-1.071(47) may result in unhappy clients with an unexpected sales tax obligation. Consequently, practitioners should carefully consider the sales tax ramifications when advising clients that are assigning or receiving an assignment of a lease agreement for tangible personal property or of a right to receive rental payments under such a lease agreement. ANALYSIS Assignors of the right to receive rental payments under a lease agreement for tangible personal property are still liable for collecting and remitting sales tax on such rental payments. Lessors that assign the right to receive rental payments under a lease of tangible personal property remain subject to the obligation to collect and remit sales tax on such rental payments. Rule 12A-1.071(47)(b). Lessors often incorrectly assume that because they have assigned the right to receive rental payments they have also assigned the obligation to collect and remit sales tax on such rental payments. Lessors have this sales tax obligation even if the lessor does not receive the rental payments from the lessee, but instead such payments are paid by the lessee directly to the assignee. Rule 12A-1.071(47)(b). The assignee is, however, required to remit sales tax paid by the lessee to the assignee. Rule 12A-1.071(47)(b). In the event that the right of the assignee to receive the lease payments is secured by the leased property and the assignee enforces the security agreement and obtains title to the property, the assignee steps into the shoes of the lessor and becomes responsible for collecting and remitting sales tax on the rental payments. Practitioners

15 Page 15 should be careful to advise their lessor-clients that they can be liable for sales tax if they assign the right to receive the rental payments and sales tax is not collected and remitted on such rental payments by the assignee. The agreement assigning the right to receive the rental payments should contain a provision addressing how sales tax will be collected from the lessee and remitted to the Florida Department of Revenue. Practitioners representing the lessor may even consider requiring the lessee to pay the sales tax portion of the rental payment to the assignor and to pay the balance of the rental payment to the assignee, so that the assignor can be sure that sales tax is properly collected and remitted. Assignees of a lease agreement, as opposed to assignees of a right to receive rental payments, are responsible for collecting and remitting sales tax on the rental payments. When assignors assign the lease agreement, the assignee assumes the position of the lessor for sales tax purposes. As a result, the assignee is required to register with the Florida Department of Revenue as a dealer for sales tax purposes and is obligated to collect and remit sales tax on the rental payments from the assigned lease agreement. After the assignment of the lease agreement, the assignor is no longer obligated to collect and remit sales tax on the rental payments. See Fla. Admin. Code Ann. Rule 12A-1.071(47)(c). Assignees of a lease agreement and the leased property are responsible for collecting and remitting sales tax on the rental payments. As with assignees that merely receive an assignment of the lease agreement, assignees that receive an assignment of the lease agreement and receive fee simple title to the leased property also assume the position of the lessor for sales tax purposes. As a result, the assignee is required to register with the Florida Department of Revenue as a dealer for sales tax purposes and is obligated to collect and remit sales tax on the rental payments attributable to the assigned lease agreement. After the assignment of the lease agreement, the assignor is no longer obligated to collect and remit sales tax on the rental payments, and the assignor should obtain a resale certificate from the assignee in lieu of collecting and remitting sales tax on the sale of the leased tangible personal property. See Rule 12A-1.071(47)(d). These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws. Practice Insights Legend: Timing concern Drafting tips Split in authority Possible financial impact Warning Expedite filing or proceeding

16 Page 16 6 of 11 DOCUMENTS Signal unavailable As of: Dec 13, 2006 LexisNexis Practice Insights Copyright 2006, Matthew Bender & Company, Inc., a member of the LexisNexis Group Lexis FL Tax P.I. 1,402 USE TAX: THE MISUNDERSTOOD TAX Fla. Admin. Code Ann. 12A By Michael J. Wilson, CPA, Esq. -- Williams, Parker, Harrison, Dietz & Getzen General Editor, Mark E. Holcomb, Esq. -- Holland & Knight LLP INSIGHT The use tax is the complement to the sales tax, and they together create a uniform system of consumption taxation on the retail sale or use of tangible personal property in Florida. Clients frequently misunderstand the interaction of the Florida use tax with the Florida sales tax and how Florida's use tax interacts with the sales and use tax laws of other states. ANALYSIS The Florida Sales and Use Tax Act creates a uniform system of consumption taxation. Use tax is imposed on the "use, consumption, distribution, and storage for use or consumption" in Florida of tangible personal property that was purchased in a manner that sales tax was not applicable at the time of purchase. Fla. Admin. Code Ann. Rule 12A-1.091(1). For example, if a taxpayer purchases tangible personal property for resale, the purchase of such property is exempt from sales tax as a sale for resale. However, if the taxpayer later decides to use the tangible personal property in its business, the taxpayer is liable for use tax on the property. Florida use tax and sales tax are both subject to the same rate of tax, six percent, which may be increased by the discretionary sales surtax. Use tax does not apply to any tangible personal property the retail sale of which is exempt from sales tax. Fla. Admin. Code Ann. Rule 12A-1.091(4). Accordingly, the sales tax and the use tax are complements to each other, and taken together provide a uniform tax on either the retail sale of tangible personal property or the use of tangible personal property irrespective of where it may have been purchased. Use tax is commonly imposed on tangible personal property that is purchased outside of Florida and then brought into Florida. A credit is available against Florida sales and use tax imposed on tangible personal property for the amount of sales or use tax (or similar tax) of another jurisdiction that is imposed and paid with respect to such property. Florida use tax is not imposed on the use, consumption, distribution, or storage for use or consumption of tangible personal property in this state if such tangible personal property was subject to a sales and use tax (or similar tax) in

17 Page 17 another state or territory of the United States or the District of Colombia; provided, however, that the amount of tax imposed and paid in the other jurisdiction is equal to or greater than the amount of sales or use tax that would be due in Florida. Fla. Admin. Code Ann. Rule 12A-1.091(3). In other words, there is a credit against Florida sales and use tax for the sales or use tax (or similar tax) that is paid in another state or territory of the United States or the District of Columbia. No credit is permitted for sales or use tax (or similar tax) paid in another country. If the amount of tax lawfully imposed and paid in the other state or territory of the United States or the District of Columbia is less than the amount of sales and use tax that would be imposed in Florida, then the taxpayer is liable for an amount of Florida use tax equal to the difference between the tax imposed in such other jurisdiction and the full amount of tax that would be due in Florida. Fla. Admin. Code Ann. Rule 12A-1.091(3). For example, if a Florida taxpayer purchases property in another state and tax is lawfully imposed and paid in such state equal to five percent of the purchase price, and such property is used in a county in Florida where the applicable use tax rate is seven percent, the taxpayer would be liable for Florida use tax equal to two percent. There is a presumption against the imposition of Florida use tax if tangible personal property is used outside of Florida for six months or longer before it is imported into Florida. Fla. Admin. Code Ann. Rule 12A-1.091(2)(a) creates a presumption that tangible personal property was not purchased for use in Florida, and therefore is not subject to Florida use tax, if the tangible personal property was used for six months or longer in another state or territory of the United States, or the District of Columbia before being imported into Florida. In order to obtain the benefit of the presumption, the tangible personal property must be used in the other state or territory of the United States, or the District of Columbia under conditions which would lawfully give rise to the authority of such other jurisdiction to imposed sales or use tax on such tangible personal property, regardless of whether any such tax was actually imposed or paid. Fla. Admin. Code Ann. Rule 12A-1.091(2)(a). This presumption is not available if the tangible personal property is used in another country for six months or more before being imported into Florida. This presumption creates an excellent planning opportunity for taxpayers, especially with respect to big ticket items that can be stored or otherwise used in another state with a lower sales tax rate or even no sales tax at all. Taxpayers are liable for use tax if their vendors do not properly collect sales tax. If a taxpayer purchases tangible personal property at retail in Florida, uses tangible personal property in Florida, or leases tangible personal property or real property in Florida, and cannot prove that Florida sales or use tax was paid to such taxpayer's vendor or lessor, the taxpayer shall be liable for use tax and any applicable interest and penalties due on any such taxable transaction. Fla. Admin. Code Ann. Rule 12A-1.091(13). These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws.

18 Page 18 7 of 11 DOCUMENTS Signal unavailable As of: Dec 13, 2006 LexisNexis Practice Insights Copyright 2006, Matthew Bender & Company, Inc., a member of the LexisNexis Group Lexis FL Tax P.I. 1,403 SALES OF SERVICE WARRANTIES ARE GENERALLY SUBJECT TO SALES TAX Florida Admin. Code Ann. 12A By Michael J. Wilson, CPA, Esq. -- Williams, Parker, Harrison, Dietz & Getzen General Editor, Mark E. Holcomb, Esq. -- Holland & Knight LLP INSIGHT Clients are often surprised to learn that sales of service warranties covering tangible personal property are subject to sales tax. This is probably because service warranties are not tangible personal property. However, Florida's sales tax rules effectively treat the purchase of a service warranty covering tangible personal property as purchasing taxable repairs for the tangible personal property. ANALYSIS Sales tax is imposed on service warranties that are sold with respect to tangible personal property that, if sold at retail, would be subject to sales tax. Sales tax is imposed on the total consideration received for selling or assigning a service warranty. Fla. Admin. Code Ann. Rule 12A-1.105(1), (2)(a) and (e). The person that receives the consideration for selling a service warranty must collect and remit the sales tax to the Florida Department of Revenue (the "Department"). Fla. Admin. Code Ann. Rule 12A-1.105(2)(b). Persons that solicit, offer, provide, enter into, issue or delivers service warranties must register as a dealer with the Department for sales tax purposes. Fla. Admin. Code Ann. Rule 12A-1.105(1)(a). A "service warranty" is defined for sales tax purposes as "any contract or agreement which indemnifies the holder of the contract or agreement for the cost of maintaining, repairing, or replacing tangible personal property, whether or not the contract provides for the furnishing of parts." Fla. Admin. Code Ann. Rule 12A-1.105(1)(b)(1). Examples of service warranties include motor vehicle warranties and service contracts covering appliances, such as refrigerators or dish washers. Fla. Admin. Code Ann. Rule 12A-1.105(1)(b)(1). A service warranty does not include contracts or agreements to repair, maintain or replace tangible personal property if such property, when sold at retail in Florida, would not be subject to sales tax. Fla. Admin. Code Ann. Rule 12A-1.105(1)(b)(2). Service warranties also do not include contracts or agreements to repair, maintain or replace tangible personal property which becomes a part of real property. Fla. Admin. Code Ann. Rule 12A-1.105(1)(b)(3). For

19 Page 19 example, a service warranty covering a central air conditioning system is not subject to sales tax because a central air conditioning system is considered to be part of real property. Fla. Admin. Code Ann. Rule 12A-1.105(1)(b)(3). Sales tax on service warranties covering leased motor vehicles or other tangible personal property must be collected at the time the service warranty is sold. When a service warranty is sold in conjunction with the lease of a motor vehicle or other tangible personal property, the sales tax on the service warranty is due at the time of sale of the service warranty, regardless of whether the cost of the service warranty is prorated over the lease term. Fla. Admin. Code Ann. Rule 12A-1.105(2)(d). If the cost of the service warranty is prorated over the lease term (rather than charged upfront), the prorated amount of the cost of the service agreement in each lease payment will be exempt from sales tax if the cost is separately stated in the lease agreement. Fla. Admin. Code Ann. Rule 12A-1.105(2)(d). Therefore, practitioners should make sure that the lease agreement separately states any portion of the lease payment that is attributable to the service warranty. Otherwise, sales tax will be needlessly imposed twice on the cost of the service warranty. The payment of a claim under a taxable service warranty to the repairer is exempt from sales tax, while the payment of a claim under a taxable service warranty which is not made to the repairer is subject to sales tax. The payment of any claim under a taxable service warranty by the person issuing the service warranty to a person performing repairs or maintenance on a product or made directly to a lessor of the product is subject to sales tax. Fla. Admin. Code Ann. Rule 12A-1.105(4)(a). On the other hand, the payment of any claim arising under a taxable service warranty which is not made directly to either the person performing the repairs or maintenance on the product or the lessor of the product is subject to sales tax. Fla. Admin. Code Ann. Rule 12A-1.105(5). Such taxable payments include: 1. Any deductible paid by the service warranty holder; 2. Any amount paid by the service warranty holder directly to the person performing the repairs or maintenance on the product for which the warranty holder may be subsequently reimbursed by the issuer of the service warranty; and 3. Payment by the warranty holder for repairs or maintenance which are not covered by the service warranty. Fla. Admin. Code Ann. Rule 12A-1.105(5). Fla. Admin. Code Ann. Rule 12A-1.105(4) and (5) essentially treat the purchase of a service warranty covering tangible personal property as purchasing taxable repairs for tangible personal property. Therefore, when claims are paid-out for repairs under service warranties, these payments are not subject to sales tax (otherwise there would be double taxation on the same repair). However, payments made for repairs on the tangible personal property that are not covered by the service warranty are subject to the general sales tax rules governing payments for repairs of tangible personal property, and such payments are generally subject to sales tax because sales tax on these payments is not covered by the sales tax paid when the service warranty was sold. These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws.

20 Page 20 8 of 11 DOCUMENTS Signal unavailable As of: Dec 13, 2006 LexisNexis Practice Insights Copyright 2006, Matthew Bender & Company, Inc., a member of the LexisNexis Group Lexis FL Tax P.I. 1,259 THE DEFINITION OF BUSINESS INCOME Fla. Admin. Code Ann. 12C By Michael J. Wilson, CPA, Esq. -- Williams, Parker, Harrison, Dietz & Getzen, P.A. General Editor, Mark E. Holcomb, Esq. -- Holland & Knight LLP INSIGHT Business income is extremely broad and includes virtually any type of income that is related, or any asset generating income that is related, in any manner to the taxpayer's trade or business. Business income also includes many types of passive income. This can be a trap for the unwary because clients domiciled outside of Florida will oftentimes wrongfully assume that passive income will be classified as nonbusiness income and allocated outside of Florida, rather than classified as business income and apportioned to Florida. Consequently, clients may significantly underestimate their Florida corporate income tax liability. ANALYSIS "Business Income" has a broad definition that essentially includes all of a taxpayer's income except for "nonbusiness income." For Florida corporate income tax purposes, the term "Business Income" is defined as: [I]ncome arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations. In essence, all income which arises from the conduct of trade or business operations of a taxpayer is business income. Fla. Admin. Code Ann. Rule 12C-1.003(4). The Florida Administrative Code further defines business income to

21 Page 21 include all income of a taxpayer "unless clearly classifiable as nonbusiness income" under Fla. Admin. Code Ann. Rule 12C Fla. Admin. Code Ann. Rule 12C-1.003(4). This definition is circular because Fla. Admin. Code Ann. Rule 12C-1.016(1) defines "nonbusiness income" as "all income other than business income." Therefore, combining the definitions of business income and nonbusiness income, business income is essentially all income of the taxpayer arising from trade or business operations unless such income clearly does not arise from trade or business operations. The Florida Administrative Code further explains that: [T]he critical element in determining whether income is "business income" or "nonbusiness income" is the identification of the transactions and activity which are the elements of a particular trade or business. In general, all transactions and activities of the taxpayer which are dependent upon or contribute to the operations of the taxpayer's economic enterprise as a whole constitute the taxpayer's trade or business and will be transactions and activity arising in the regular course of, and will constitute integral parts of, a trade or business. Fla. Admin. Code Ann. Rule 12C-1.016(1)(a). Even certain types of passive income, such as rental income, interest, dividends, royalties, and gain or loss from the sale of assets will constitute business income if there is virtually any connection between the passive income or the asset generating the passive income and the taxpayer's trade or business. Rental Income. Rental income constitutes business income if the rented property is used in, or is incidental to, the taxpayer's trade or business. In other words, rental income constitutes business income if the rented property is included in the taxpayer's property factor for purposes of apportioning business income under Fla. Stat. Section Fla. Admin. Code Ann. Rule 12C-1.016(1)(b)(1). Examples are below: 1. Car rental income earned by a multistate car rental business is business income. 2. The taxpayer is engaged in the heavy construction business in which it uses equipment, such as cranes, tractors, and earth-moving vehicles. The taxpayer makes short-term leases of such equipment when certain pieces are not needed on any particular project. The rental income is business income because the equipment is used in the taxpayer's heavy construction business. 3. The taxpayer operates a multistate men's clothing store and owns a five-story building. The taxpayer uses three of the five stories as retail and office space, and leases the other two stories to an unrelated party. The rental income from the lease of the two stories is business income because it is incidental to the operation of the taxpayer's trade or business. The same result would occur if the taxpayer moved completely out of the five-story building into a new building and leased the entire five-story building to an unrelated party. Interest. Interest income is business income where the underlying obligation giving rise to the interest arises out of or was created in the regular course of the taxpayer's trade or business operations or where the purpose for acquiring and holding the obligation is related to or incidental to such trade or business operations. Fla. Admin. Code Ann. Rule 12C-1.016(1)(b)(3). Examples are below: 1. The taxpayer operates a multistate chain of department stores and sells for cash and on credit. Service charges, interest, and other charges received by the taxpayer with respect to installment sales and revolving charge accounts are business income.

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