Posted on September 11, 2018, by Richard S. Rubin
When buying commercial property on which to operate your business, most attorneys in the United States will tell you to segregate the business operations for the business into a legal entity separate from the entity owning the real estate. Using one company for ownership of an operating business and a separate company that owns real property is an effective tool to protect the real estate from liabilities of the operating business. However, in Florida, this is often a trap that leads to unwanted tax consequences due to Florida sales tax on commercial rent.
Florida is the only state in the U.S. that imposes a sales tax on commercial rentals. Florida Statute § 212.031 imposes a 5.8% sales tax on every person (or entity) that engages in the business of renting, leasing, letting, or granting a license for the use of any real property.
The Florida Department of Revenue has aggressively implemented sales tax on commercial property with Rule 12A-1.070 and applies this tax to related-party transactions. This can add significant tax consequences when structuring common asset protection plans using related entities.
These types of asset protection plans typically employ a triple net lease, where the affiliated tenant pays the insurance, real estate taxes, utilities and other maintenance costs of the property. Unfortunately, with the Florida sales tax on commercial rent, this can mean that the tenant owes the Florida Department of Revenue thousands of dollars of sales tax on these affiliated company costs.
Proper planning can avoid some of the pitfalls associated with the Florida sales tax on commercial rent. By using attorneys who are knowledgeable about both the protections afforded by related party business structures and the rulings of Florida courts and the Florida Department of Revenue, businesses can create a corporate structure and the inter-company lease agreement to reduce the amount of sales tax due to the Florida Department of Revenue while ensuring the protection of the company owning the real estate from business liabilities.
Avoid liability for substantial sales tax, fines, and interest by contacting Massey Law Group to have our attorneys help you set up ownership of your real estate holdings from the outset.
The above is intended to inform firm clients and friends about recent developments in the law, including analysis of statutes and new case decisions. This update should not be construed as legal advice or a legal opinion, and readers should not act upon the information contained herein without seeking the advice of legal counsel.
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