Florida Sales and Use Tax Exemptions and Exclusions Florida Taxation and Budget Reform Commission Finance and Taxation Committee August 17, 2007
General Principles of Sales and Use Tax General Principles • The taxable event must take place in Florida. • The taxable event must involve the ultimate consumer (i.e., be a retail transaction). • Pyramiding of tax on the same property or event is to be avoided. • The economic burden may fall on the consumer, but the collection responsibility falls on the Florida seller. DOR can collect from either one. • A compensating use tax is imposed directly on the consumer for goods purchased out of state and used in Florida, subject to credit for like tax paid to another state. A use tax may also be imposed on the consumer for goods purchased in Florida where tax was not collected.
What is Taxable under Florida’s Sales and Use Tax Statutes? • Retail sales and leases of tangible personal property (s. 212.05(1), F.S.) • Includes fabrication of tangible personal property from customer-provided materials (s. 212.02(15), F.S.) • Includes repairs of tangible personal property if any materials are furnished by the repairer (s. 212.02(16), F.S.) • Includes services that are part of the sale (s. 212.02(16), F.S.) • Use of tangible personal property (s. 212.05(1)(b), F.S.) • Transient rentals, motor vehicle parking, boat dockage, aircraft tie-down space (s. 212.03, F.S.) • Real property rentals (non-residential) (s. 212.031, F.S.) • Admissions (s. 212.04, F.S.) • Security services, commercial cleaning and pest control (s. 212.05, F.S.) • Service warranty contracts (s. 212.0506, F.S.) • Retail sales of electricity (non-residential) (s. 212.05(1)(e)1.c., F.S.) • Coin operated amusement machines (s. 212.05(1)(j), F.S.)
What is an Exclusion from Tax? Generally speaking, Florida Sales and Use tax is imposed under Chapter 212, Florida Statutes and these statutes define those transactions subject to tax. The general rule is that tax statutes must be strictly construed against the taxing authority and in favor of the taxpayer. The Florida Supreme Court has said that “this salutary principle is found in the reason that the duty to pay taxes, while necessary to the business of the sovereign, is still a duty of pure statutory creation and taxes may be collected only within the clear definite boundaries recited by statute.” Therefore, exclusions from tax are those transactions that simply fall outside of the taxing statute. A few examples of things “excluded” from sales and use tax law are: • Most “pure service” transactions • Sales of real property • Sales of intangible personal property
What is an Exemption? Section 212.21(2), F.S., provides in pertinent part that: It is hereby declared to be the specific legislative intent to tax each and every sale, admission, use, storage, consumption, or rental levied and set forth in this chapter, except as to such sale, admission, use, storage, consumption, or rental as shall be specifically exempted therefrom by this chapter subject to the conditions appertaining to such exemption. • Exemptions (or exceptions) differ from exclusions because they relate to items or transactions that would otherwise be taxable under Chapter 212, F.S., if not for the Legislature having specifically carved out or removed or exempted the transaction from tax. • Florida Courts have described exemptions as follows: • “Exemptions to taxing statutes are special favors granted by the Legislature and are to be strictly construed against the taxpayer.” • “It is well settled that he who would shelter himself under an exemption clause in a tax statute must show clearly that he is entitled under the law to exemption; and the law is to be strictly construed as against the person claiming the exemption and in favor of the taxing power.” • “At common law, there was no right to a refund of taxes from the sovereign. Thus, statutes authorizing tax refunds or exemptions are in derogation of common law; statutes in derogation of the common law must be strictly construed.”
Exemptions v. Exclusions • Exclusions from tax are strictly construed against the taxing authority and in favor of the taxpayer while exemptions are strictly construed against the taxpayer. • Burden of proof
Different Types of Exemptions • Property Itself is Exempt (Product Exemption) • A Party to the Transaction is Exempt (Entity Exemption) • How the Property is Used is Exempt (Use Exemption)
Different Reasons for Exemptions • Inherent in a sales tax • Those intended to stimulate economic activity • Relief from taxes considered in some way overly burdensome for specific businesses or types of businesses • Socially desirable goals • Necessities of life • Administrative concerns
Inherent in Basic Sales and Use Tax Principles Sales taxes are generally applied to the final/retail sale occurring within Florida. The taxation of intermediate or wholesale sales would lead to “double taxation” or “pyramiding of tax.” • Resale • Incorporation into a taxable product
Tax Incentives to Stimulate Economic Activity in Florida • Items fabricated for use in research and development (s. 212.052, F.S.) • The sale or use of satellites or other space vehicles (s. 212.08(16), F.S.) • Purchases of machinery and equipment by new or expanding businesses (s. 212.08(5)(b), F.S.) • Newspapers, newsletters and magazines delivered by mail (s. 212.08(7)(w), F.S.)
Tax Relief • Airport property used for landing, taxiing, or loading (s. 212.031(1)(a)7., F.S.) • Electricity or boiler fuels used in manufacturing (ss. 212.08(7)ff, F.S., 212.08(7)(b), F.S.) • Purchase of agricultural items (pesticides, seeds, fertilizers, etc.) (s. 212.08(5)(a), F.S.) • Sales and leases to organizations sponsoring PGA or LPGA golf tournaments (s. 212.08(7)(gg), F.S.) • Charter fishing boats (s. 212.08(7)(y), F.S.)
Socially Desirable Goals • Dues, fees and admissions charged by non-profit entities (s. 212.04(2)(a)2.a., F.S.) • Purchases by 501(c)(3) organizations (s. 212.08(7)(p), F.S.) • K-12 schoolbooks and lunches (s. 212.08(7)(r), F.S.) • Toll road charges (s. 212.031(1)(a)6., F.S.) • Religious items (s. 212.06(9), F.S.)
Necessities of Life • Groceries for human consumption (s. 212.08(1), F.S.) • Prescription and non-prescription drugs (s. 212.08(2)(a), F.S.) • Purchases of Power & Heating Fuels by Residential Households(s. 212.08(7)(j), F.S.) • Water (both metered and bottled) (s. 212.08(4)(a)1., F.S.) • Rent on low income housing (s. 212.02, F.S.) • Rent charges paid by permanent residents (s. 212.031(1)(a)2., F.S.)
Administrative Concerns Some exemptions are dictated by concerns regarding efficient administration of the law. In many instances, collection costs might be greater than the potential revenue. A good example of this is the exemption for occasional or isolated sales. (s. 212.02(2), F.S.)
Inherent in Basic Sales and Use Tax Principles • Items Purchased for Subsequent Resale $36,285.8 M • Credit for Tax Paid to Other States $70.2 M
Tax Incentives to Stimulate Economic Activity in Florida • Sale or Use of Satellites or Other Space Vehicles $124.6 M • Electricity Used in Manufacturing $71.3 M • Purchases of machinery and equipment by new or expanding businesses $60.0 M • Purchases of Boiler Fuels for Use in Industrial Manufacturing $55.3 M • Machinery and Equipment Used for R&D $26.3 M • Newspapers, newsletters and magazines delivered by mail $15.2 M
Tax Relief • Electricity Used in Manufacturing $71.3 M • Purchase of Agricultural Items (Pesticides, Seeds, Fertilizers, Etc.) $71.0 M • Toll Road Charges $64.7 M • Newspaper and Magazine Inserts $41.3 M • Streets Used by a Utility for Utility Purposes $40.5 M • Farm Equipment $33.8 M • Electricity Consumed or Dissipated in the Transmission of Electricity $33.5 M • Master Tapes, Records, Films of Video Tapes $32.7 M • Feed for Poultry and Livestock, Including Racehorses and Ostriches $27.9 M • Airport Property Used for Landing, Taxiing of Loading $26.4 M
Socially Desirable Goals • K-12 schoolbooks and lunches $55.5 M • Purchases by 501(c)(3) organizations $47.8 M • Dues, Fees and Admissions Charged by Non-Profit Entities $29.2 M • Religious Items $3.9 M
Necessities of Life Groceries Purchased for Human Consumption $2,651.5 M Purchases of Power & Heating Fuels by Residential Households $2,178.9 M Rent Charges Paid by Permanent Residents $1,259.2 M Prescription Drugs $896.0 M Charges for Hospital Meals and Rooms $603.2 M Metered Water, Excluding Well Water $300.3 M Non-Retail Pharmacies $234.9 M Non-Prescription Drugs $199.0 M Medical Supplies and Products such as Syringes and Prosthetics $114.8 M Rent on Low Income Housing $63.7 M Eyeglasses and Other Corrective Lenses $44.3 M Bottled (Except Carbonated) Water $42.3 M
Administrative Concerns • Occasional or Isolated Sales $ 25.1 M
Exclusions Untaxed Services $23,414.4 M Intangible Personal Property $19,451.0 M
What is a Credit? • Credits are dollar for dollar reductions in tax liability that are not tied specifically to an amount of tax paid. Credits in excess of tax liability may often be obtained through a refund. • Courts have found that tax credit statutes represent exceptions to the general sales tax law and are likewise strictly construed against the taxpayer.
Examples of Tax Credits • Credit for job creation in enterprise zones (s. 212.096, F.S.) • Urban high-crime area job tax credit (s. 212.097, F.S.) • Rural job tax credit (s. 212.098, F.S.)
Administrative Deductions Value of Trade-Ins or Discounts $577.0 M Credit for Returned Goods, Bad Debts ≈$100.0 M Credit for Tax Paid to Other States $70.2 M Collection Allowance of 2.5% for the First $1,200 of Tax Per Return $64.7 M
Examples of Criteria Used to Review Exemptions • What is the economic impact of the exemption? • Were additional jobs created? • Did businesses move to or expand in Florida? • Would the removal of the exemption cause a loss in jobs or make the business uncompetitive? • Does the exemption support other statutory policy (e.g., environmental or growth management laws?) • Does the exemption avoid “double taxation” or “pyramiding” of taxes? • Does the exemption promote equalization of tax treatment? • Is the exemption the most fiscally effective means of achieving its purpose? • What is the fiscal impact of the exemption? • Does the exemption simplify or complicate tax law and its administration?
Court Cases • Fla. Dep't of Revenue v. New Sea Escape Cruises, Ltd., 894 So. 2d 954, 956 (Fla. 2005) • Partial exemption tax apportionment formula for vessels engaged in interstate or foreign commerce under s. 212.08(8), F.S., applied to “cruises to nowhere.” • Dep't of Revenue v. B & L Concepts, 612 So. 2d 720, 721 (Fla. 5th DCA 1993) • Separately stated, optional delivery charges are not part of the taxable sales price. • Department of Revenue v. Quotron Sys., Inc., 615 So. 2d 774, 775 (Fla. 3rd DCA 1993) • Electronic images appearing on video screens do not constitute “tangible personal property” subject to sales taxes where tangible personal property is defined as “means and includes personal property which may be seen, weighed, measured or touched or is an any manner perceptible to the senses.” • Crescent Miami Ctr., LLC v. Fla. Dep't of Revenue, 903 So. 2d 913, 915 (Fla. 2005) • The transfer of property between a grantor and its wholly owned grantee, absent any exchange of value, is without consideration or a purchaser and thus not subject to the documentary stamp tax • Department of Revenue v. Kemper Investors Life Ins. Co., 660 So. 2d 1124, 1126 (Fla. 1st DCA 1995) • Payments and refunds of corporate income tax are included in the computation of the corporate income tax credit against the insurance premium tax in the year in which those payments or refunds should have been made had the taxpayer filed properly in the first place.