Florida Real Estate Agent Sues Target and Walmart for Collecting Sales Tax on Stars and Stripes

Date October 25, 2023
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*UPDATE* The plaintiff voluntarily dropped the case against Target and Walmart in an order entered on October 30, 2023.

Sales tax and administrative burdens go together like the Fourth of July and apple pie. A recent lawsuit highlights the burden and the risk to retailers when they improperly charge sales tax. The plaintiff in the case, a Boca Raton real estate agent, Pamela Knopman, filed a class action against Target and Walmart in US District Court on October 16, 2023, charging that the companies unlawfully collected sales tax on the sale of US flags. Ms. Koopman is seeking damages, compensatory damages, statutory damages, and punitive damages, plus litigation costs. While Ms. Koopman originally paid $0.89 and $1.12 in sales tax to Target and Walmart, respectively, on the purchase of two American flags her suit will cost the retailers much more than a refund of $2.01.

The issue in the case stems from Florida’s exemption on the sale of US flags. Florida is one of approximately fifteen states with a sales tax exemption on US Flags. According to the suit, Target and Walmart charged Ms. Koopman sales tax on her purchase of US Flags, one of which was the always stylish car mount. Ms. Koopman also claims the retailers did not remit the tax collected from her to the Florida Department of Revenue because they sought to “maximize profits”, resulting in unjust enrichment.

The case highlights the challenges associated with addressing all aspects of sales tax compliance. While most retailers are focused on the filing and remittance of sales tax, errors in assigning taxability to products and services can be costly. While most errors will not result in litigation, they are the responsibility of the seller and can result in assessments when tax is undercharged or bad publicity when overcharged. The case is evidence that even the largest retailers, with their vast resources, have issues with sales tax compliance.

Businesses that sell taxable goods and services are subject to sales tax collection in more states than ever due to the economic nexus laws that grew out of Wayfair. Taxpayers face many obstacles with multistate sales tax compliance – sales tax rules vary by state and by product or service. It is challenging for any seller, especially one with limited resources, to audit taxability across all states. There are solutions to mitigate risk such as taxability reviews, sales tax software, and self-audits, but perfection is unlikely.

It will be interesting to see how this case proceeds. Many sales tax class action claims are eventually dismissed since other remedies, such as filing a refund claim, exist. The case is Knopman v. Target Corporation et al filed in the United States District Court Southern District of Florida.

If you have questions on sales tax compliance or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

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Florida Sales Tax Overview for Contractors

Date October 11, 2023
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Sales and use tax rules in Florida can be challenging and require interpretation for the construction industry. How your activity is classified – real property improvement or sale of tangible personal property (TPP) – will determine your sales (and use) tax obligations. The first step in evaluating a transaction is to determine whether it is a real property improvement or the sale of tangible personal property.

The state’s sales tax rule on sales by contractors, Rule 12A-1.051, which includes the relevant definitions related to real property contracts, is a good starting point for determining your tax implications. Generally, activities to real property such as building, constructing, repairing, and maintaining are considered improvements to real property. Real property contracts include any agreement to:

  • 12A-1.051(2)(h)a. Erect, construct, alter, repair, or maintain any building, other structure, road, project, development, or other real property improvement;
  • 12A-1.051(2)(h)b. Excavate, grade, or perform site preparation for a building, other structure, road, project, development, or other real property improvement; or
  • 12A-1.051(2)(h)c. Furnish and install tangible personal property that becomes a part of or is directly wired or plumbed into the central heating system, central air conditioning system, electrical system, plumbing system, or other structural system that requires installation of wires, ducts, conduits, pipes, vents, or similar components that are embedded in or securely affixed to the land or a structure thereon.
  • The last section warrants attention as the method in which property is affixed is often critical for determining how the sale or contract is classified for Florida sales tax purposes.

    Real property contracts do not include situations where the seller does not (also) install the property, even when the tangible personal property will be permanently affixed to the realty. For example, if you sell countertops but do not install them that is not a real property contract even though the countertops will eventually be permanently installed into a home. Sales of machinery and equipment are also not real property contracts.

    Types of Contracts

    There are five contract price structures addressed in Florida’s rule on contractors. The first four: lump sum contracts; cost plus or fixed fee contracts; upset or guaranteed price contracts; and time and material contracts all follow the same rules in terms of the sales tax considerations. The contractor is considered the consumer and pays sales tax to the vendor (or accrues use tax) on the materials. In these scenarios, the contractor does not charge the customer sales tax on the contract price or any of its elements. The contract price (or bid) should include sales tax paid by the contractor on materials.

    The fifth contract type, retail sale plus installation contract, does not apply to many contractors due to the requirements involved in qualifying. First, a retail sale plus installation contract must itemize and price all materials being incorporated into the real property. This is not common amongst or practical for contractors. Second, the purchaser is required to assume title and risk of loss on the materials as they are delivered. Typically, title does not pass until the contractor’s work is complete which makes retail sales plus installation contracts unappealing to customers. Under a retail sale plus installation contract, the contractor purchases the materials exempt from sales tax as a sale for resale, but bills sales tax to the customer for the tangible personal property sold but not for the installation charges.

    Anyone, including contractors, that sells and installs tangible personal property (that remains tangible personal property) must collect sales tax on the charge for the property and the installation, unless the contract is a retail sale plus installation contract previously discussed. The fact that a seller separately itemizes the installation charges does not impact the taxability – the installation is taxable. Florida Rule 12A-1.016 addresses several activities that are considered the sale and installation of tangible personal property. Common examples applicable to contractors may include the following: carpets, drapes, blinds, shades; household appliances; mirrors; and window air conditioning units. There are exceptions to the examples listed if the items become real property, for example, carpets that are permanently attached as contrasted to throw rugs or carpets set in place.

    Mixed Contracts

    The most demanding area of taxation for contractors is mixed contracts. Mixed contracts include real property improvements along with the sale of tangible personal property. The default treatment of mixed contracts is based on the predominant nature of the contract. If most of the contract is for real property, then the contract follows the real property sales tax rules. The classification of the contract predominance will control the sales tax rules on purchases related to the contract. Contractors have the option of allocating contract price within a mixed contract between real property and tangible personal property and following the applicable tax rules for each type of contract.

    The examples provided in Florida’s rule involve a home builder that also includes free standing appliances in its contract to construct a home. If the contract separately states the price for the sale and installation on the appliances, that sale is treated under the rules for the sale of tangible personal property, meaning the contractor buys the appliances exempt as a sale for resale, but charges sales tax to the homeowner on the sale and installation. If the same contractor provides free standing appliances as part of the cost to construct a new home, the contractor is treated as the consumer, under real property contract rules, of the appliances and pays sales tax on the appliances. The homeowner is not billed sales tax separately.

    Specific Activities

    Florida’s rule on contractors specifies activities and whether they are generally considered real property contracts or not. The complete listing can be viewed in section 17 of the rule (Rule 12A-1.051). Common activities for homebuilders that are classified as real property contracts include: block, brick, and stone masonry; burglar and fire alarm system installation; cabinetry; carpeting with tacks or glue; door and window installation; electrical system installation and repair; foundations; HVAC systems; plumbing work; roofing work; solar systems; and water, sewer, and drainage systems.

    Activities not classified as real property contracts include the sale, installation, maintenance, or repair of the following: area rugs and carpets; freestanding cabinets or shelving; drapes, curtains, blinds, shades; entertainment systems; furniture; appliances (unless built in and directly wired); equipment used to provide communication services; and window air conditioning units.

    Fabrication

    Contractors that manufacture, produce, or fabricate items for use in real property contracts owe use tax on the fabricated cost of these items. This issue is common for many contractors that produce all or part of the materials used in their contracting activities (for example, cabinetry or countertops). The use tax is based on the cost of the property produced including materials, labor, services, and transportation. Labor provided at the job site and transportation costs from the plant to the job site may be excluded from the fabrication costs. If fabrication costs are an issue for your contracting business, review Rule 12A-1.043 for a complete explanation of the calculation for use tax purposes. The rule contains a detailed explanation of items included by category with examples.

    Discretionary Sales Surtax

    Florida’s discretionary sales surtax applies to purchases and sales made in Florida. From a contractor’s perspective, the vendor should charge sales tax on materials based on where the materials are delivered. Contractors that purchase taxable materials from an out of state seller or through the internet do not owe surtax if they are not required to be registered as a dealer in Florida.

    There is a limit on the discretionary sales surtax to the first $5,000 on sales of tangible personal property. The exemption applies to a single sale, which generally includes items sold as a set (dining room set), multiple quantities of a single item, or the items that are component parts of no use until assembled as part of a working unit. The $5,000 limit does not apply to services, sales of service warranties, or leases of real property. A full explanation of the discretionary sales tax surtax is included in Florida guideline GT-800019.

    Services

    Florida taxes a limited number of services including detective and other protection services; fingerprinting services; nonresidential cleaning services; and nonresidential building pest control services. Within the detective and other protection services category, the state taxes burglar and fire alarm monitoring and maintenance which some contactors may provide. More information is available in Florida guideline GT-800018.

    In addition, repairs to tangible personal property are subject to tax if any property is incorporated into the repair. If the repair charge is for labor only then it is not subject to tax, but it is important to emphasize that if any parts or materials are part of the repair the entire charge is subject to tax.

    Assistance

    If you or your company have questions or issues surrounding Florida sales or use tax, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com. We assist clients with state and local tax (SALT) consulting, controversy, and compliance. We are always willing to schedule a no-cost initial call to review your SALT needs.

    Citations and Resources

    Rule 12A-1.006, Charges by Dealers Who Adjust, Apply, Alter, Install, Maintain, Remodel, or Repair Tangible Personal Property

    Rule 12A-1.016, Sales; Installation Charges

    Rule 12A-1.051, Sales to or by Contractors Who Repair, Alter, Improve and Construct Real Property

    Rule 12A-15.004, Specific Limitations, Discretionary Sales Surtax

    Rule 12AER21-16, Construction Contractors Who Repair, Alter, Improve, and Construct Real Property

    GT-800007: Sales and Use Tax on Building Contractors

    GT-800010; Sales and Use Tax Repairs to Tangible Personal Property

    GT-800018; Sales and Use Tax on Detective, Burglar Protection, and other Protective Services

    GT-800019; Discretionary Sales Surtax

    GT-800067; Sales and Use Tax on Construction, Improvements, Installations and Repairs

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    PA DOR Announces Online Application and Renewal for Sales Tax Exemptions

    Date October 11, 2023
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    The Pennsylvania Department of Revenue (PA DOR) has unveiled an online option for non-profits to apply for and renew their sales tax exemptions. Non-profits will be able to use the myPATH online system instead of the paper application (REV-72). This change will be welcomed by non-profits and practitioners alike, as the traditional REV-72 is a cumbersome application that requires significant amounts of supporting documentation. The online system will also allow non-profits to track the status of their application in real-time and should reduce processing and wait times.

    The change in the application process is part of the Commonwealth’s effort (attempt) to improve licensing and permitting procedures for taxpayers. Pennsylvania began its migration from e-TIDES to myPATH last year to improve online tax systems and provide more utility to taxpayers. The myPATH system is based on software used by most states and it provides consistencies to taxpayers and tax practitioners.

    The full press release from the Department can be viewed here. The press release touts improvements in efficiency by the DOR in processing returns and even mentions progress in the form of decreased wait times within the DOR call center. Taxpayers with experience seeking assistance by calling the PA DOR may raise an eyebrow at that last claim.

    If you have questions on Pennsylvania’s press release or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

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    Florida Sales Tax Rate Reduced on Leases of Real Property

    Date October 5, 2023
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    As previously reported here, the Florida state sales tax rate on rentals, leases, or licenses to use real property is scheduled to decrease to 4.5% (from 5.5%) on December 1, 2023. The Florida Department of Revenue has issued Tax Information Publication No.: 23A01-20 to address the rate change. The Publication can be viewed here .

    The tax on rentals, leases, or licenses to use real property generally applies to commercial office space, warehouses, and self-storage units. The rate reduction does not apply to storage of motor vehicles, boats, or aircraft.

    The sales tax rate is based on when the occupant is entitled to occupy the property, not necessarily when the rent is paid.

  • Rental charges paid on or after December 1, 2023 for rental periods prior to December 1, 2023 are subject to 5.5% state sales tax plus any applicable discretionary sales surtax.
  • Rental payments made prior to December 1, 2023 that entitle the tenant to occupy the real property on or after December 1, 2023 are subject to 4.5% state sales tax plus discretionary sales surtax.
  • If you have questions on Florida’s tax rate change or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

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    2023 Florida Tax Relief

    Date June 7, 2023
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    Florida Governor Ron DeSantis signed an omnibus tax bill, on May 25, 2023, that includes several sales tax changes and exemptions. The sales tax relief for consumers is part of a broader tax relief bill touted to provide over $2 billion in tax relief during the fiscal year. We reported previously on many of the exemptions here . The legislation establishes a slew of sales tax holidays in 2023 and 2024 including:

  • School Supplies – July 24, 2023 through August 6, 2023 and January 1, 2024 through January 14, 2024
  • Disaster Preparedness – May 27, 2023 through June 9, 2023 and August 26, 2023 through September 8, 2023
  • Freedom Summer – May 29, 2023 through September 4, 2023
  • Tool Time – September 2, 2023 through September 8, 2023
  • Energy Star – July 1, 2023 through June 30, 2024
  • Gas Stoves and Cooktops – July 1, 2023 through June 30, 2024
  • Detailed information including lists of items that qualify for each tax holiday can be found here.

    Permanent sales tax exemptions, effective July 1, 2023, are part of the tax bill and include the following:

  • Baby and toddler products
  • Diapers and incontinence products
  • Oral hygiene products
  • Machinery and equipment to produce renewable natural gas
  • Certain agricultural fencing
  • Firearm safety devices
  • Services provided by small investigative agencies
  • Lastly, the tax bill includes relief on commercial leases or rentals by reducing the applicable state tax rate to 4.5% (from 5.5%) on December 1, 2023.

    If you have questions on Florida’s new tax relief or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

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    Qualified Disaster Relief Payments

    Date November 2, 2022
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    In the aftermath of Hurricane Ian, the cleanup efforts have just begun in much of Florida and the Carolinas. In addition to the IRS granting a tax filing extension to February 15, 2023 for those impacted by the hurricane, the internal revenue code also provides for tax relief through loss deductions and income exclusions for individuals suffering from a qualified disaster. This article addresses the application of the income exclusion for qualified disaster relief payments paid by an employer to an employee. We have previously covered the casualty loss deduction here.

    What is a Qualified Disaster?

    A qualified disaster is defined as a disaster resulting from terroristic or military action, a federally declared disaster, a disaster determined by the IRS to be of catastrophic nature, or a disaster determined by federal, state, or local government or agency. On September 29, 2022, President Biden officially declared a major disaster and opened areas impacted by Hurricane Ian to receive federal disaster assistance and “unlocking” tax relief available under the internal revenue code.

    Income Exclusion for Employer Payments

    During difficult times like these, many employers seek ways to help their impacted employees while also creating a tax burden for their employees through additional compensation. When structured correctly, employers should be able to provide relief payments that are not taxable to their employees. The IRS has previously provided guidance that may allow employers to pay or reimburse employees for reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Employer payments may also be used to repair or rehabilitate a personal residence and its contents. While ordinarily any payments made to employees would be treated as compensation, subject to employment tax, qualified disaster relief payments are exempt from both taxes under Section 139. In addition, the employer is entitled to a full deduction for these payments. To the extent that any payment is later compensated for by insurance proceeds or otherwise reimbursement it will be included in the employees income.

    Record Keeping Requirements

    While Section 139 is silent on requirements for employees to substantiate expenses that an employer reimburses through qualified disaster relief payments, we recommend the employer have a written policy covering the payment of expenses incurred as a result of a qualified disaster. We also recommend that the employer receive an employee acknowledgement letter containing the following:

  • The amount being requested
  • Representation of eligibility to participate in the program
  • A statement that the payments will only be used for qualified expenses
  • The employee should be responsible for maintaining records of the amounts received and used for qualifying expenses as well as any insurance proceeds received as part of their tax records.

    Please reach out to your HBK Tax Advisor if you would like additional information about qualified disaster relief payments.

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    Lee County Evaluating Properties for Hurricane Damage

    Date October 7, 2022
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    Property damaged during Hurricane Ian will be evaluated by the Lee County Property Appraiser’s office. The office is currently closed but is expecting to review all properties in the county to redetermine property values. This review will likely take months for Lee County to complete. The Appraiser’s office website has links available for residents to report property damage and submit documents and photographs.

    For more property tax information or to submit hurricane damage documentation to the Appraiser’s office, visit https://www.leepa.org/.

    If you have questions on SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

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    IRS Delays Tax Deadline for Hurricane Ian Victims in Florida

    Date October 1, 2022
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    The IRS announced yesterday that victims of Hurricane Ian in Florida now have until February 15, 2023, to file various individual and business tax returns and make certain tax payments. Individuals and households affected by Hurricane Ian that reside or have a business anywhere in the state of Florida qualify for tax relief.

    Affected Taxpayers:
    Taxpayers considered “affected taxpayers” eligible for the postponement of time to file returns, pay taxes, and perform other time-sensitive acts include individuals who live in Florida and businesses (including tax-exempt organizations) whose principal place of business is in Florida. Taxpayers not in Florida, but whose records are there and necessary to meet various deadlines for filing and paying taxes are also entitled to relief. The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. However, affected taxpayers who reside or have a business located outside the covered disaster area should call the IRS disaster hotline at 866-562-5227 to request relief.

    Tax Relief:
    In general, the IRS gives affected taxpayers until February 15, 2023, to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; annual information returns of tax-exempt organizations; and employment and certain excise tax returns). The relief includes the following filing and payment deadlines falling on or after September 23, 2022, and before February 15, 2023.

    • Individuals who had a valid extension to file their 2021 return due to expire on October 17, 2022, now have until February 15, 2023, to file. However, because tax payments related to these 2021 returns were due on April 18, 2022, those payments are not eligible for relief.

    • Quarterly estimated tax payments normally due on or after September 23, 2022, and before February 15, 2023 (e.g., 4th quarter payments due on January 17, 2023), are now due February 15, 2023.

    • Quarterly payroll and excise tax returns normally due on October 31, 2022, and January 31, 2023, are now due February 15, 2023.

      • Penalties on payroll and excise tax deposits due on or after September 23, 2022, and before October 10, 2022, will be abated as long as the tax deposits are made by October 10, 2022.

    • Businesses with an original or extended due date on or after September 23, 2022, and before February 15, 2023, including calendar year corporations whose 2021 extensions expire on October 17, 2022, now have until February 15, 2023 to file.

    • Trusts and Estates with an original or extended due date on or after September 23, 2022, and before February 15, 2023, including Trusts and calendar year Estates with a valid extension to file their 2021 return due to expire on September 30, 2022, now have until February 15, 2023 to file.

    • Form 5500 series returns that were required to be filed on or after September 15, 2022, and before February 15, 2023, are postponed through February 15, 2023, in the manner described in section 8 of Rev. Proc. 2018-58.

    If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment, or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty.

    Additional information is available in the IRS Announcement.

    We will continue to monitor the situation and provide clarification as needed. Please reach out to a member of the HBK Tax Advisory Group with any questions.

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    Florida Sales Tax Holidays – 2022

    Date May 27, 2022
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    The Florida Department of Revenue has a dedicated webpage addressing each of the nine sales tax holidays and temporary exemptions scheduled to begin in 2022. The list of tax holidays and exemptions, along with the applicable periods includes:

    • Children’s Books – May 14, 2022 through August 14, 2022
    • Disaster Preparedness – May 28, 2022 through June 10, 2022
    • Freedom Week – July 1, 2022 through July 7, 2022
    • Energy STAR Appliances – July 1, 2022 through June 30, 2023
    • Children’s Diapers – July 1, 2022 through June 30, 2023
    • Baby and Toddler Clothing – July 1, 2022 through June 30, 2023
    • Home Hardening – July 1, 2022 through June 30, 2024
    • Back to School – July 25 through August 7, 2022
    • Tool Time – September 3, 2022 through September 9, 2022
    • Motor Fuel – October 1, 2022 through October 31, 2022

    These sales tax holidays and exemption events are a great opportunity for consumers to save money. They allow purchases of defined items exempt from tax so consumers will want to plan their purchases in conjunction with the tax holidays and temporary exemptions.

    The tax holidays and exemptions should drive additional sales for retailers, but retailers need to ensure that their point-of-sale systems are properly setup to administer the exemptions. Many of the exemptions are limited by the cost of the item, for example, during Freedom Week there is an exemption on the first $5 of bait or fishing tackle. The exemptions apply to in-store and online sales so it is imperative that even remote sellers apply the exemptions properly to avoid customer service issues.

    The Department’s website contains details on each of the tax holidays and temporary exemptions, including lists of qualifying items and information specific to consumers and retailers. The Department’s webpage can be accessed here.

    If you have questions any of Florida’s sales tax holidays or temporary exemptions, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

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    Florida New Hire/Independent Contractor Reporting

    Date May 25, 2022
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    HBK would like to remind employers that Florida expanded its new hire and independent contractor reporting requirements. This legislation took effect on October 1, 2021.

    What does it mean for Florida employers?
    First, the legislation removed the prior 250-employee threshold for new hire reporting. Now all businesses are subject to new hire reporting. Second, the statute imposes a requirement to report independent contractors paid more than $600 in the calendar year. The reporting of independent contractors should occur within 20 days of the contract start date or date of first payment.

    Currently, there are no penalties for non-compliance with the reporting requirements. If employers have not yet reported independent contractors, they should report all contractors who have exceeded the $600 threshold in 2022.

    More information on reporting new hires or independent contractors in Florida.

    The Florida Department of Revenue maintains FAQ reporting requirements on its website.

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