Taxation of Services in Taxation of Services in FloridaFlorida

Florida Taxation and Budget Reform Florida Taxation and Budget Reform CommissionCommission

Finance and Taxation CommitteeFinance and Taxation Committee

September 13, 2007September 13, 2007

SERVICES THAT ARE PART OF A TANGIBLE PERSONAL

PROPERTY TRANSACTION

• Non-optional delivery and transportation charges• Engineering services “inextricably intertwined”

with the sale of telecommunications equipment

“PURE” SERVICES SPECIFICALLY TAXED

• Non residential cleaning• Non residential pest control• Security services, detective, burglar protection

services• Communication services

ALTERATION, REMODELING, MATINENANCE, ADJUSTMENT AND REPAIR OF TANGIBLE PERSONAL PROPERTY

• Business Equipment Repair• Tire repair • Jewelry Repair/soldering• Shoe repair• Clothing alterations/repair• Furniture Restoration• Paint/chrome applications• Vehicle repair• Fabrication of TPP

“PURE” SERVICES

• Laundry• Lawn care• Domestic services• Fitness trainer• Music lessons

PROFESSIONAL AND PERSONAL SERVICES

Professional• Attorney Documents • Banking

Services• Architectural Blueprints • Credit

Reporting• Accounting Services • Funeral

Services

Insurance• Insurance Policies • Claims

Documents

Personal• Pedicure • Manicure• Beauty Salon/Barber Shop • Massage

Taxable

NON-TAXABLE SERVICES

Florida’s Experience with Broad Florida’s Experience with Broad Sales and Use Tax on Services Sales and Use Tax on Services

in 1987in 1987

Defining Services/Sales Price Situsing Services Use Tax Provisions Resale Exemptions Specific Industries Administrative Issues

Defining ServicesDefining Services

1987 Services Tax applied generally 1987 Services Tax applied generally to “all services”to “all services”

The Legislature used the Standard The Legislature used the Standard Industrial Classification (SIC Code)Industrial Classification (SIC Code) Imperfect and often overlappingImperfect and often overlapping Typically defines establishments not Typically defines establishments not

activitiesactivities OutdatedOutdated

Sales PriceSales Price

““the total amount paid for tangible the total amount paid for tangible personal property or services … personal property or services … without deduction therefrom on without deduction therefrom on account of the cost of the property account of the cost of the property sold, the cost of materials used, labor sold, the cost of materials used, labor or service cost, interest charged, or service cost, interest charged, losses or any other expense losses or any other expense whatsoever.”whatsoever.”

SitusingSitusingWHERE WAS A SERVICE SOLDWHERE WAS A SERVICE SOLD

Occurs in Florida if more than Occurs in Florida if more than 50% of the costs of 50% of the costs of performing the service are performing the service are incurred in the stateincurred in the state

WHERE WAS A SERVICE USEDWHERE WAS A SERVICE USED

IndividualsIndividuals BusinessesBusinesses where real property where real property related to service is related to service is locatedlocated

where real property where real property related to service is related to service is locatedlocated

where the purchaser where the purchaser receives tangible receives tangible personal property personal property representing servicerepresenting service

where the business where the business situs of tangible situs of tangible personal property personal property related to service is related to service is locatedlocated

where the greater where the greater proportion of services proportion of services are performedare performed

where the where the purchaser’s local purchaser’s local market related market related

to the service existsto the service exists

multistate business multistate business – where it is doing – where it is doing business – business – apportionedapportioned single state business single state business – where it does – where it does businessbusiness

UNIQUE SITUSING RULESUNIQUE SITUSING RULES

Advertising – Benefit in FloridaAdvertising – Benefit in Florida to the extent advertising is disseminated in the to the extent advertising is disseminated in the

statestate Transportation – Benefit in FloridaTransportation – Benefit in Florida

on an allocated basis with 50% at point of on an allocated basis with 50% at point of origin and 50% at point of terminationorigin and 50% at point of termination

Services provided to the estate of a Services provided to the estate of a decedent – decedent –

BenefitBenefit where decedent last established residencywhere decedent last established residency

Use Tax ProvisionUse Tax Provision

Eliminate Competitive DisadvantageEliminate Competitive Disadvantage Taxable where the Benefit is Enjoyed Taxable where the Benefit is Enjoyed

or Usedor Used Administrative IssuesAdministrative Issues

ExemptionsExemptions

Services sold in Florida, but used out Services sold in Florida, but used out of stateof state

Employee servicesEmployee services Occasional or isolated salesOccasional or isolated sales Partner’s servicesPartner’s services Intercompany salesIntercompany sales

PYRAMIDINGPYRAMIDING(resale provisions)(resale provisions)

Extremely Contentious IssuesExtremely Contentious Issues 1987 Legislation used Restrictive 1987 Legislation used Restrictive

DefinitionDefinition Brokers or intermediariesBrokers or intermediaries Written contract specifically identifying the Written contract specifically identifying the

ultimate customerultimate customer Separately state value on subsequent resaleSeparately state value on subsequent resale Tangible personal property used by person Tangible personal property used by person

providing service was taxableproviding service was taxable

EXEMPTIONSEXEMPTIONS(necessities of life)(necessities of life)

Health and Medical ServicesHealth and Medical Services Social ServicesSocial Services Educational ServicesEducational Services Services Associated with Agricultural Services Associated with Agricultural

ProductsProducts Residential Sewage and GarbageResidential Sewage and Garbage Bus Transportation/Taxi CabsBus Transportation/Taxi Cabs

EXEMPTIONSEXEMPTIONS(to remove competitive (to remove competitive

disadvantage)disadvantage) Realtors Commissions (Added 5¢ to doc stamp tax)Realtors Commissions (Added 5¢ to doc stamp tax) Motor Freight Transportation (Added 5¢ per gallon to tax on Motor Freight Transportation (Added 5¢ per gallon to tax on

diesel)diesel) Water/Rail TransportationWater/Rail Transportation InsuranceInsurance Financial ServicesFinancial Services Interest/Discount ChargesInterest/Discount Charges Certain Legal ServicesCertain Legal Services

CriminalCriminal Child SupportChild Support BankruptcyBankruptcy Civil RightsCivil Rights

EXEMPTIONSEXEMPTIONS(to stimulate jobs)(to stimulate jobs)

Commissions to Insurance AgentsCommissions to Insurance Agents Forestry ServicesForestry Services Motion Picture ProductionMotion Picture Production Security/Brokerage ServicesSecurity/Brokerage Services Membership Fees to Nonprofit Membership Fees to Nonprofit

GroupsGroups

EXEMPTIONSEXEMPTIONS(for institutions)(for institutions)

Churches (buy and sell)Churches (buy and sell) Governmental EntitiesGovernmental Entities Non-Profit OrganizationsNon-Profit Organizations

ADVERSTISINGADVERSTISING SERVICESSERVICES

Taxed only on charges for medium Taxed only on charges for medium itself and costs of brokering mediumitself and costs of brokering medium

Computed on portion of sales or cost Computed on portion of sales or cost price that reflects market coverage price that reflects market coverage in Florida as a % of total market in Florida as a % of total market coveragecoverage

CONSTRUCTION SERVICESCONSTRUCTION SERVICES

If the cost of the construction service was less If the cost of the construction service was less than $5,000, it was deemed fully taxablethan $5,000, it was deemed fully taxable

If the cost of the construction service was If the cost of the construction service was greater than $5,000, tax was due on 50% of greater than $5,000, tax was due on 50% of the total contract pricethe total contract price

The prime contractor could get credit for The prime contractor could get credit for other services purchased, but had to meet other services purchased, but had to meet the restrictive documentation requirement the restrictive documentation requirement noted previouslynoted previously

OPERATIONAL ISSUESOPERATIONAL ISSUES

Short Implementation TimeShort Implementation Time Large Taxpayer Education EffortLarge Taxpayer Education Effort Increase in Registered Dealers (30%)Increase in Registered Dealers (30%) Compliance Learning Curve Compliance Learning Curve

(Billings and Delinquencies Increased 50%)(Billings and Delinquencies Increased 50%) Cash Basis Reporting/No Estimated Cash Basis Reporting/No Estimated

TaxTax

QUESTIONSQUESTIONS