Like all states, Florida is constantly promoting that it is technologically friendly and encourages the emerging business paradigms. But considering the complexity of governmental regulation, the rhetoric may not match the reality. So, ride-share programs, like Uber, hit local municipal snags. Vacation and short-term Internet rentals, like Air BnB, become entangled with residential zoning codes. Internet shopping, through Amazon and others, must, of course, come to terms with the arcane sales tax system for Florida.
And we must add to that list co-working arrangements. Florida is the only state to collect sales tax on rents. I know everyone thinks about sales tax being applicable to “hard goods,” but that is not the case in the State of Florida. The state statute has evolved over the years and is filled with “exemptions,” but commercial rent is not exempted, though there is a provision decreasing the actual tax rate. The reduction is almost inconsequential in amount so the taxation system is still a big factor in planning commercial leases in Florida. And to many people’s surprise, that includes sales tax on subleases. Co-working is basically a sublease since it is only in the rare instance where the owner of the building is engaging in the co-working business. WeWork, with all your difficulties with your public offering, be prepared for an additional surprise in the state of Florida!
Florida State Statute Section 212.031 addresses sales tax on leases. Florida’s Department of Revenue (DOR) interprets the state statute through Administrative Code Rules. The underlying concept is that any payment required to be paid as a condition of occupancy under a commercial lease to be taxable. These include charges paid by a tenant labeled as pass-through expenses or common area maintenance expenses, commonly referred to as “CAM.”
Co-working comes in a number of different varieties, but all varieties have in common that a certain “space” will be rented to a person or entity. There may be all types of ancillary services or amenities, but those services or amenities will be tied to an occupancy, for which rent is paid, for pace. The space may not be exclusive, but nonetheless, this will be characterized as “rent” under Florida’s broad statutory scheme. A good operator could try to save the 5.7% in tax (and in some counties of Florida, 6.7%) to delineating in an agreement those items for which compensation is paid but which are not rent, and further, for which there is an exception from State Statute Section 217.031. However, since the concept is relatively new, there is no precedent on which there can be sound reliance on. Thus, so you will be guessing, not knowing as to exemptions.
When subletting premises, a tenant is generally required to collect and remit sales tax on the amount of rental consideration paid by a subtenant. However, there is are Florida Administrative Code Rules that allow a credit as to the sales tax paid in respect of the original lease.
When a tenant sublets its interest to a portion of the leased premises, a tenant receives a credit for any sales tax paid by a subtenant for the sublease. Basically, the tax is computed on the increased rent attributable to that particular sublease, assuming the original tenant paid the correct amount of sales tax.
Some people may not fully comprehend the seriousness of the failure to remit sales tax to the state. Landlords who collect sales tax from tenants, but who knowingly fail to remit such sales tax to the DOR, may be held criminally liable for committing up to a first degree felony.