Broadly speaking, according to the Florida Department of Revenue, each Florida sale, amusement park admission, storage unit and rental is taxable (unless it falls under an exemption, such as nonprofits). More specifically, sales tax is imposed on the rental of real property. As stated explicitly in the Florida Statutes, any business or person that rents, leases or grants a license for commercial real property must register with the Florida Department of Revenue. Any failure to collect, report and pay any tax due (whether sales tax, surtax or both) can result in criminal and civil penalties.
Sales tax applies to the total rent paid by a tenant for its right to lease premises. Effective December 1, 2023, the State of Florida’s sales tax on the total rent under a lease for commercial real estate was reduced from 5.5% to 4.5%.[1] Let’s break down what this means for Florda commercial tenants.
What Type of Commercial Real Estate is Subject to This Reduction
A majority of commercial real estate, but not all, is subject to sales tax on rent. There are four categories of “commercial” real estate subject to sales tax on rent and they are: commercial offices, retail spaces, warehouse and self-storage spaces.[2] Property that is specifically excluded from having sales tax due on rent includes land assessed as agricultural land, dwelling units, property that is subject to a separate tax on parking, docking or recreational property, or the common elements of a condominium. With respect to common elements in a condominium, this tax only applies when the common elements are subject to a lease between the developer or owner thereof and the condominium association in its own right or as agent for the owners of individual condominium units or the owners of individual condominium units. Only the lease payments on such property shall be exempt from the tax, and any other use made by the owner or the condominium association shall be fully taxable.[3]
How to Define ‘Total Rent’
The “total rent” used to determine the amount of sales tax due includes all consideration due and payable by the commercial tenant, meaning both base rent and any additional rent due. Examples of customary expenses within the definition of additional rent in commercial leases include operating expenses, insurance, utilities, common area maintenance costs (“CAM”) and real estate taxes.
Who is Responsible for Paying the Sales Tax on Rent
Although every landlord is the party responsible to collect and remit sales tax to the Florida Department of Revenue, the tenant in Florida is the presumed party responsible to pay it. Many landlords choose to include property taxes in rent payments under a single net lease to ensure taxes are paid on time and correctly. In this scenario, the sales tax is charged by the commercial landlord receiving the rental payment and is due and payable at the time of receipt of such rent, whether monthly or annually. It is then the landlord’s responsibility to remit the tax to the Florida Department of Revenue at the time and in the manner required under the statute. If there is an arrangement for a landlord to be responsible for paying sales tax, the lease must explicitly state the same, otherwise the lease is considered “silent”, and the burden is on the tenant.
A charge due to a landlord to terminate a lease will be presumed taxable if the commercial landlord records such charges as rental income in its books and records. However, this presumption can be overcome by sufficient documentation in the lease showing such charges were not for rent.[4]
Florida by County – Optional Discretionary Sales Surtax
In Florida, there is also an optional discretionary sales surtax imposed based upon the county where the real property is located. Unfortunately, the reduction on Florida’s sales tax rate on rent has no effect on any individual county’s optional sales surtax.[5]
The new combined sales tax and discretionary sales surtax rate for certain Florida counties for 2024 are listed below[6]:
Brevard County: 5.5%
Broward County: 5.5%
Collier County: 4.5% (no discretionary sales surtax)
Duval County: 6.0%
Miami-Dade County: 5.5%
Orange County: 5.0%
Palm Beach County: 5.5%
Pinellas County: 5.5%
Seminole County: 5.5%
Things to Consider When Negotiating a Commercial Lease in Florida
When leasing commercial property in Florida, a tenant should thoroughly understand the economic ramifications of sales tax due on its rent (and the optional discretionary sales surtax, if applicable) as the sales tax is due in addition to the total amount of rent due. If tenants do not pay the applicable sales tax and surtax to its landlord, they remain liable to the Department of Revenue for any unpaid sales tax and surtax, plus any interest and penalty due.[7]
There are also economic implications to consider when a tenant is deciding what type of lease structure makes the most financial sense for its business. Since any payment required to be made by a tenant to a landlord could be characterized as rent and subject to sales tax, all lease agreements should be evaluated for its sales tax implications. In a “single net lease,” tenants typically owe a higher monthly base rent but overall have a smaller financial obligation because the landlord continues paying for all other operating expenses. A triple net lease on the other hand, requires tenants to pay monthly base rent plus all property expenses including property taxes, insurance and maintenance and repair costs, and these costs are all considered rent. The sales tax due on rent would be higher under a triple net lease given the higher financial burden on the tenant, but that may be worth it for a tenant who is looking for more flexibility and less landlord oversight.
Ramifications of Florida Sales Tax Reduction
Commercial tenants in Florida should analyze leases with tax planning in mind, as 2024 is the first full calendar year for this reduction. The clear intent of the Florida State Legislature when rolling out the reduction on sales tax due on rent was to encourage economic relief for current and (hopefully) future business owners in the Sunshine State.
[1] https://floridarevenue.com/taxes/tips/Documents/TIP_23A01-20.pdf
[2] https://floridarevenue.com/taxes/tips/Documents/TIP_23A01-20.pdf
[3]http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0200-0299/0212/Sections/0212.031.html
[4] http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0200-0299/0212/Sections/0212.031.html
[5] https://floridarevenue.com/taxes/tips/Documents/TIP_23A01-20.pdf
[6] https://floridarevenue.com/Forms_library/current/dr15dss.pdf
[7] https://floridarevenue.com/forms_library/current/gt800016.pdf
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