Did you know that Florida is the only state in the nation to charge sales tax on commercial leases? The practice has been in place since 1969, but recent pushback from local real estate boards and associations is paving the way for change.
In the last three years, the sales tax rate on commercial leases has been rolled back a fraction of a percent three times, with the newest legislation–enacted in January–landing at 5.5%.
“One of the most menacing facts about doing business in Florida is that the sales tax is charged on top of property taxes,” says Edward Redlich, Managing Member of ComReal Doral. “This is double taxation. This is simply not fair.”
Redlich and other members of the Florida Real Estate community have been leading the fight against the tax for years, arguing that it hurts the state by disincentivizing businesses from expanding or relocating to the area.
“We’ve been cutting away it for years because it’s kind of a regressive tax,” says Darcie Lunsford, president of the South Florida chapter of the Commercial Real Estate Association known as NAIOP, in an interview with Bisnow. NAIOP helped lobby for the change and is working toward eventual eradication of the business rent tax entirely. “It does sap money that could otherwise be used for investment.”
The tax is imposed not only on base rent, but also on any additional rent, or any consideration required to be paid by tenants as a condition of occupancy, explains law firm Greenberg Traurig. This means tenants are also paying taxes on their share of “common-area maintenance charges, real property taxes, and most other charges required under the lease.”
While eliminating this tax may be a boon for tenants’ rights, it also brings with it a set of challenges for the state, which currently benefits from the tax to the tune of $1B annually. An analysis prepared for the Florida Senate says that the new bill will cut $73M from the state’s yearly budget, but realtors and other business trade groups are standing firm. In his letter to the State Legislator, Redlich estimates that 185,000 new employment opportunities would occur along with an estimated $20,000,000,000 positive economic impact if and when the entire sales tax is repealed.
“If we reduce the overall occupancy costs then businesses may hire more employees; invest in training and education of employees; offer more healthcare and retirement benefits; open additional locations; and more,” Redlich says.
The ComReal team will continue to monitor the status of this tax and its implications for developers, tenants, and the South Florida industry. Keep your eye on this space for more news to come.
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