Sales Tax on Commercial Leases
It is common knowledge that we pay sales tax on retail items in stores, but did you know sales tax is also charged on rent in commercial leases? Tenants often begin the lease signing process, only to have the sales tax clause catch them by surprise. Either they have never heard of it or they didn’t think to budget for it.
The Discretionary Sales Surtax.
By law, a Florida Sales Tax of 6% is to be collected by the landlord and paid directly to the state. Furthermore, each county has something called a “Discretionary Sales Surtax” which adds an additional surcharge between 0.25% – 1.5% depending on the county in which the commercial property lies. Of the 67 counties in Florida, only 9 do not charge this Sales Surtax; Palm Beach County and Broward County are among the 9. Miami-Dade County, however, has a Sales Surtax of 1% above the state’s 6%. Just another great reason to have your office based out of Palm Beach or Broward County!
Regarding commercial leases, the most pressing question is “on what part of the rent must a tenant pay sales tax?” Among my professional colleagues this is always a hot debate and tends to produce more than one answer. If a lease is set up as a “gross lease” meaning the tenant is paying a monthly amount that includes everything (base rent, real estate taxes, property insurance, and maintenance), most agree the sales tax is tacked onto the gross amount. Therefore, the tenant would pay the sales tax monthly on top of their rental payment.
Triple Net (NNN) Leasing.
The more controversial version, however, is collecting sales tax on a Triple Net (NNN) lease. This type of lease breaks out a payment of base rent and then operating expenses (also called CAM, pass-through, opex). The tenant pays a set base rent but the operating expense can fluctuate based on increases or decreases in property taxes, insurance, janitorial, property management fee and others expenses.
We reached out to a Boca Raton attorney who specializes in real estate transactions to set the record straight. According to Richard A. Murdoch of Murdoch Weires Neuman, “The Florida Statutes state very clearly that every person is exercising a taxable privilege when they rent real property, with only limited exceptions, and that all payments made for the use and occupancy of real property are subject to the Florida Sales and Use Tax. Further, the Florida Administrative Code [F.A.C. Rule 12A-1.070(4)(d)] expressly provides that common area maintenance charges paid by a tenant to the landlord for the privilege or right to use or occupy real property is taxable.”
Among my professional colleagues, this is often debated as unfair to the tenant and viewed as double taxation. Since the operating expense in a lease is made up of a line item budget of services and fees, most of these items are already requiring a sales tax which the landlord is passing through to the tenant. For example, the janitorial services (often part of a full service Triple Net lease) are charging the landlord sales tax on their service. The landlord is then passing that cost on to the Tenant who is paying another sales tax on his entire rental obligation. Other operating expenses such as landscaping, repairs and maintenance, pest control, security and others fall into this same category.
So is it really double taxation or do you have a different opinion? Let us know what you think! Please visit us on Facebook at www.facebook.com/WhelchelTeam and keep the debate going.