October 2011 A proposed sales tax on improvements to leased property would have a major negative impact on Florida business and discourage many from leasing office, industrial and retail space in the State, according to Bob Zegota, Chairman of Government Affairs, Florida Gulf Commercial Association of Realtors (FGCAR).
Zegota characterized the proposal as “double taxation” since there’s already a sales tax on leases.
“Double taxing commercial real estate is a new picture of an old practice that has been occurring in Florida for years with common area maintenance fees,” Zegota said. “Now the Department of Revenue wants to impose a sales tax on the tenant while the tenant is already paying tax on the improvements through a lease. That is double taxation.”
Thousands of commercial real estate brokers statewide are being mobilized to stand against the tax, which could cripple an already weak office, industrial and retail space market during an economic downturn the State has not seen the likes of in recent history.
The furor being raised is regarding tenant improvements being taxed from three angles by the Florida Department of Revenue, not including local taxes imposed on a business by cities and counties or Federal taxes imposed.
The three sources of state taxation are as follows:
1. Sales tax is charged on all materials used to provide tenant improvements. Labor is exempted because it is taxed by other means;
2. Once tenant improvements are finished the property appraiser re-assesses the property to include the tenant improvements costs and the owner of the property is taxed accordingly. This property tax on improvements runs about 2.5% per year;
3. Sales tax is charged on all commercial leases, 6% for Florida and 1-2% for local municipalities. In the majority of cases the owner of the property does the tenant improvements and then amortizes that cost over the life of the lease. This means the cost of the tenant improvements is paid ultimately by the tenant at the rate quoted above.
The State’s argument is that the Landlord is paying the property tax and the sales tax on the material. The tax on the lease is something different and is for the tenant.
“This tax is for the tenant’s improvements and should be paid directly from the tenant, says the Department of Revenue. Zegota responded, “Who, in their right mind, would believe the tenant is not already paying? How does one figure what to charge for rent? It includes any and all expenses and a profit. That is what the tenant already pays”
Real estate is a backbone of the economy and has been devastated by the economic conditions that prevail today. No building is occurring because there are few new tenants and money sources are scarce. There is minor movement in the commercial real estate market.
“Yet, with these torrid conditions, Florida State Government has chosen to find another way to tax an already limping economic engine,” Zegota said. “The question that arises is “will this be the proverbial straw that breaks the camel’s back?”
“Florida law prohibits double taxation. Yet it has already occurred in commercial real estate. Businesses create jobs. When seven percent is added to business costs that amount is lost elsewhere. Normally, jobs are lost since this fee creates no revenue like jobs do. Since fewer jobs are provided, everything else shrinks. It’s a downward spiraling effect that will prolong our recession.”
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