The Florida Legislature reduced the state commercial rentals tax rate from 6% to 5.8% for rental periods beginning on or after January 1, 2018. This article guides commercial landlords and property managers in complying with that rate change. While the reduced tax rate applies to commercial rental consideration, it does not apply to other charges that landlords and property managers commonly impose, e.g., for parking, sales and rentals of tangible property, and janitorial, security and pest control services. The commercial rentals tax rate reduction also does not apply to charges for transient (i.e., residential and lodging) accommodations. Since these common charges will no longer be subject to the same state tax rate, accurate recordkeeping will be the key to proper tax compliance.
The reduced state commercial rentals tax rate applies to rentals periods beginning January 1, 2018, regardless of when the rental consideration is paid. If the rental consideration is paid in advance for January 2018, for example, the lower rate applies; however, rent paid on or after January 1, 2018 for prior periods is subject to the higher tax rate. Pass-through charges that are deemed to be additional taxable rental consideration are also subject to the lower tax rate, as discussed further below. The utility pass-through exemption should not be affected by the rate change, but care must be taken to apply the correct rate for the period in question.
The local option surtax rate applies based on the county in which the property is located. Since several local option surtax rates will change effective January 1, 2018, landlords and property managers should consult the current Discretionary Sales Surtax chart (Form DR-15DSS) available on the Florida Department of Revenue’s website, http://floridarevenue.com. Commercial rents are not subject to the $5,000 local option surtax limitation.
Taxable rental consideration will continue to be reported on line C of Form DR-15, Sales and Use Tax Return. The Department expects the revised form, reflecting the lower state commercial rentals tax rate, to be available online in early January 2018. If only commercial rent is reported (i.e., no parking charges or other taxable transactions), Form DR-15EZ may be filed.
Parking (and docking) charges are subject to tax under a different statute than commercial rentals. Thus, parking charges will continue to be taxed at the 6% state rate (plus applicable local option tax) and are not eligible for the reduced commercial rentals tax rate. Landlords and property managers collecting parking charges should report these amounts on line D of the DR-15. Since taxable amounts other than commercial rent are being reported, Form DR-15EZ cannot be used. Parking charges are not subject to the $5,000 local option surtax limitation.
Sales and Rentals of Tangible Property
Charges for sales or rentals of tangible property will continue to be taxed at the 6% state rate (plus applicable local option tax). These amounts should be reported on line A of the DR-15. Since taxable amounts other than commercial rent are being reported, Form DR-15EZ cannot be used. Charges for sales or rentals of tangible property are subject to the $5,000 local option surtax limitation (with important caveats that are beyond the scope of this article).
Janitorial, Security and Pest Control Services
Charges for janitorial, security and pest control services that are provided by or resold by landlords and property managers to commercial tenants will continue to be taxed at the 6% state rate (plus applicable local option tax). These amounts should be reported on line A of the DR-15. Since taxable amounts other than commercial rent are being reported, Form DR-15EZ cannot be used. Charges for janitorial, security and pest control services are not subject to the $5,000 local option surtax limitation.
In circumstances where the landlord or property manager incurs charges for janitorial, security or pest control services and passes those costs through to tenants as additional rental consideration, however, the lower 5.8% commercial rentals tax rate will apply to those pass-through charges as additional rent.
Because this new rate change applies only to commercial rental consideration, the charges commonly imposed by commercial landlords and property managers will no longer be subject to the same tax rate. Perhaps for the first time, it will be important for landlords and property managers to properly categorize and segregate these charges for purposes of calculating and reporting the appropriate tax due. Please let our Real Estate Team or State and Local Tax Team know if we can assist you in developing your Florida tax compliance program.
About the Authors:
Mark Holcomb has more than 32 years of experience practicing in state and local taxation. He represents clients before the Florida Department of Revenue and local taxing authorities, and in litigation at the trial and appellate levels. Mr. Holcomb advises clients on a broad range of state and local taxes, including corporate income and franchise tax, sales and use tax, documentary stamp tax, communication services tax, insurance premium tax, ad valorem tax and motor fuels tax, in tax controversy work and in planning opportunities. He may be reached at firstname.lastname@example.org.
Vicki Berman has practiced in Dean Mead’s Real Estate and Leasing department for 33 years. During that time, she has represented buyers and sellers, landlords and tenants, borrowers and lenders, investors, brokers, developers and consultants in a wide variety of commercial and residential real estate transactions. Ms. Berman has significant expertise in all aspects of leasing transactions, including office, retail and industrial. She also leads the team which represents the firm’s largest client, a major Florida landowner, and has handled several significant transactions for the purchase and sale of real estate, including several 1031 transactions. She may be reached at email@example.com.