Is sales tax due when personal property is separately broken out on a real estate contract?
by Grant W. Kehres* | Posted 03/25/2014
From time to time we see some real estate purchasers, and an occasional real estate seller, manipulate the real estate contract and artificially allocate a portion of the sales/purchase price to furniture or other personal property. In the shadows of this contract manipulation lurks the government and criminal liability for the seller, purchaser and real estate broker.
The purchasers believe the county real estate property appraiser will rely on the lowered real estate price allocation and award the purchaser a lower valuation for county ad valorem taxes. The occasional real estate seller that does so is usually either a foreign seller on the cusp of a $300,000.00 sales price trying to qualify for the “$300,000.00 and under FIRPTA exemption” or trying to fool the Florida Department of Revenue into accepting lower-than-otherwise documentary stamps on the transaction.
As a practical matter, the actions of the purchasers and sellers in these situations are either unsuccessful, criminal, or both; and in some cases sales tax is due on the amount allocated to the furniture or other personal property. If the real estate broker fails to collect and remit the sales tax, the real estate broker faces fines and imprisonment!
Say what you will about Florida’s county property appraisers, they are anything but naive or without resources to determine the true value of real estate. The amount of the documentary stamps attached to the deed is only one of many factors the property appraiser uses in reaching the annual valuation for tax purposes. The manipulation may have a small effect on the valuation the first year after the sale. But in future years, the property’s “purchase price” becomes less relevant in determining the annual valuation. In short, the purchaser gets away with very little, while becoming exposed to the risk of criminal prosecution (along with the seller) for conspiracy to defraud the county government of county tax revenue and the state government of state documentary tax revenue, not to mention the Internal Revenue Service when Federal tax issues are involved.
Sadly, most buyers don’t realize they can get the same temporary favorable property valuation treatment without manipulating the purchase price because the county property appraisers send to purchasers, shortly after the purchase closes, a questionnaire asking if any extraordinary personal property was involved in the transaction. A “yes” and the buyer’s estimate of value must be taken into consideration by the property appraiser. In those situations where the property appraiser fails to ask, the taxpayer has the right to bring the fact to the attention of the property appraiser, and the property appraiser must take the value of personal property into consideration.
The foreign FIRPTA manipulator is similarly foolish. The exemption from withholding under FIRPTA is not an exemption as to the payment of any tax due the United States, nor is it an exemption from the obligation to file a tax return with the Internal Revenue Service. Granted, shortly after the closing the foreign seller might be safe from the long arms of the IRS behind the borders of their home nation; but what about the US purchaser that conspired with the foreigner? It is the buyer that has the obligation to withhold under FIRPTA, and the IRS knows where you are.
In summary, there’s more gristle than gravy for Sellers and Buyers to artificially adjust the sales price of real estate by allocating part of the transaction’s price to personal property. But how about the real estate broker? Should the broker care?
Turns out, the real estate broker is liable for collecting sales tax on the value of the personal property separately allocated on the real estate contract or bill of sale! This rule is equally applicable to the legitimately and illegitimately allocated personal property sales price allocation.
“Business” is statutorily defined as any activity engaged in by any person with the object of gain. Excluded from the definition of “business” is the occasional or isolated sale or transaction involving tangible personal property who does not hold himself or herself out as engaged in business, the so called “yard sale” or “casual sale” exemption.
The Florida Administrative Code specifically provides that the isolated sales exemption does not apply to the sale of tangible personal property by or though an auctioneer, agent, broker or any other person required to be registered as a dealer to collect and remit tax on such sales. The term “dealer” is broadly defined and includes real estate brokers.
Bottom line: When personal property is separately broken out on a real estate contract on a transaction wherein a real estate broker is involved, the real estate broker is required to collect and remit sales tax on the amount allocated to the personal property. The failure to collect and remit sales tax carries with it interest, civil penalties and criminal liability. Florida law states that, depending upon the amount involved, any person who, with intent to unlawfully deprive or defraud the state of its moneys can be convicted of various criminal offenses ranging from a misdemeanor to a felony in the first degree. First degree felony convictions carry imprisonment of up to 30 years, and a fine of up to $10,000.00 or twice the amount of the tax, whichever is greater. Obviously, the State is serious about sales tax on the sale or furniture and other personal property. Maybe you should be, too!
FIRPTA is the Foreign Investment in Real Property Tax Act of 1980, 26 USC Section 1445, which generally requires a purchaser to withhold from a foreign seller of a US real property interest, 10% of the purchase price, and remit those funds to the US Treasury as security for the payment by the foreign person of any tax due as a consequence of the sale. The government determined, as a matter of tax administration policy, that cost of administering small non-commercial transactions was not worth the tax benefit and exempted purchasers from compliance provided the transaction was $300,000.00 or less and the purchaser has definite plans to use the property for its own use more than half the time the property is intended to be used over the next two (2) years.
Florida Statutes Section 201.02(1)(a) (2013) imposes a tax on deeds at the rate of 70 cents per $100.00 or fraction thereof of the consideration paid or agreed to be paid.
For an excellent discussion of the factors considered by Florida county property appraisers in valuing real estate for the ad valorem tax, see The Florida Real Property Appraisal Guidelines, a 58 page pamphlet published November 26, 2002 by the Florida Department of Revenue under its Tax Administration Program.
See Article VII, Section 4, Florida Constitution. See also Bystron v. Witman, 488 So2d 520 (Fla. 1986).
F.S. 212.05(1)(a) (2013)
F.S. 212.05(1)(a)1.a. (2013)
F.S. 212.02(2) (2013)
Rule 12A-1.037(2)(a)5, F.A.C. and Rule 12A-1.037(5), F.A.C.
F.S. 212.06 (2) (2013)
The definition of a “dealer” under F.S. 212.06(2) (2013) is so broad that it could be easily argued the Seller who happens to be a real estate broker is not entitled to the casual sale exemption, even when there is no other real estate broker involved in the transaction.
F.S. 212.15 (2013)
F.S. 775.082(3)(b) (2013)
F.S. 775.083(1)(b) (2013)
F.S. 775.083(1)(f) (2013)
*Grant Kehres is Board Certified by the Florida Bar Board of Legal Specialization as a Real Estate Law Specialist. He holds a doctorate in jurisprudence from Vanderbilt University, an MBA (finance) from Babson College and a dual undergraduate degree in Investments and Economics from Babson College. Admitted to The Florida Bar in 1978, he has handled more than 10,000 closings for more than 8,000 clients. For more information on our services and what distinguishes our office from other law firms and title companies, call (561) 392-5200 or e-mail us at firstname.lastname@example.org.