2008 Florida Legislative Update  
The 2008 Regular Session was marked more by the tax legislation that did not pass than the tax legislation that did. The Legislature considered numerous tax bills addressing a wide variety of taxes and issues, but reached consensus on and passed only a few. Left on the cutting room floor were measures such as the Department of Revenue’s tax administration bill, the politically popular back-to-school and hurricane preparedness sales tax holidays, documentary stamp tax measures designed to legislatively overturn Crescent Miami Center, and the forced combination corporate income tax bill. Florida’s severe election-year state budget deficit, coupled with exhausting political wrangling over property tax reform that consumed the Legislature throughout 2007, is the most likely culprit for this paucity of tax legislation, leaving the Legislature with little appetite for tax matters during the recently concluded 2008 Regular Session.

The following will summarize the highlights of the five tax bills that did pass. As of this date, only one of these bills had been presented to and approved by the Governor; however, all are expected to become law. For more information on these bills, including the bill text and legislative staff reports, please visit the House and Senate websites accessible through the State’s website: www.myflorida.com.

1. HB 5065: Corporate Income Tax Piggyback/Decoupling

Florida’s corporate income tax code generally “piggybacks” the Internal Revenue Code and requires the Legislature to annually update the state’s reliance on the Internal Revenue Code in effect as of January 1st of each calendar year. This is widely viewed as the only “must-pass” Florida tax legislation.

In HB 5065, the Legislature updated the adoption of the Internal Revenue Code as amended and in effect on January 1, 2008, with two important exceptions that “decouple” from the IRC. First, the temporary increases in the limitations of expensing specified depreciable business assets under IRC §179(b) for tax years beginning after December 31, 2007, as provided under the Economic Recovery Tax Act of 2007, P.L. 110-185, §102, may not be used in computing adjusted federal income for purposes of determining Florida corporate income tax liability. Second, the bonus depreciation provided for property acquired after December 31, 2007 and before January 1, 2009, as provided in §103 of P.L. 110-185, likewise may not be used in computing adjusted federal income for purposes of determining Florida corporate income tax liability. Depreciation and recovery must otherwise be computed in the same manner as under the IRC.

HB 5065 also mandates two new additions to adjusted federal income for purposes of determining Florida taxable income, which further limit the state effects of ERTA 2007 and future federal bonus depreciation enactments. First, a taxpayer must add to adjusted federal income amounts in excess of $25,000 allowable as a deduction under IRC §179 for the taxable year. Second, a taxpayer must add to adjusted federal income any amounts allowable as bonus depreciation under IRC §168(k). The Department of Revenue is authorized to adopt regulations to administer these provisions.

Finally, HB 5065 revises the time for filing declarations of, and making payments of, estimated corporate income tax. Effective January 1, 2009, the declarations must be filed and payments made before the first day of the months currently specified by law. Except for the changes to the due dates for estimated tax declarations and payments, HB 5065 takes effect upon becoming law and applies retroactively to January 1, 2008.

2. CS/SB 1588: Property Tax Administration

CS/SB 1588 enacts numerous changes related to property tax administration, including provisions for implementing Amendment 1 related to homestead property tax relief. Among the more significant changes are the following:

• Mandates information that must be included in the real property and tangible personal property tax assessment rolls, and authorizes the Executive Director of the Department of Revenue to require additional data be submitted in the tax rolls;

• Makes numerous changes to the assessment of homestead property, including the process for portability of the homestead property assessment limitation, the portability application process, Value Adjustment Board proceedings on portability, and the ordering of exemptions related to homestead property;

• Clarifies the $25,000 tangible personal property tax exemption, including allocation of the exemption for property located in multiple local taxing jurisdictions and defining the “site where the owner of tangible personal property transacts business” for purposes of the exemption;

• Requires local tax collectors to report annually to the Department of Revenue certain non-ad valorem assessment roll data;

• Provides for calculation of the maximum millage rate that local governments may levy at the rolled-back rate in light of the changes effected by Amendment 1;

• Grants emergency rulemaking authority to the Department of Revenue for purposes of implementing this legislation;

• Requires the Department of Revenue to report to the Legislature on the effect of “recent” (i.e., 2007-08) changes in Florida law on information being provided to property owners in the TRIM notices of proposed property taxes, including an examination of the effect of these changes on taxable value and millage levy limitations; and

• Requires the Legislature to appropriate and distribute to fiscally constrained counties moneys to offset the reductions in ad valorem tax revenues caused by Amendment 1.

CS/SB 1588 takes effect upon becoming law and applies to the 2008 and subsequent tax rolls.

3. CS/HB 909: Property Tax Valuations and Appeals

CS/HB 909 enacts various changes to the property tax valuation and appeals process. These changes include:

• Amends the “highest and best use” factor of the 8 criteria for deriving just valuation in §193.011, Fla. Stat., to expressly require consideration of the “legally permissible use of the property,” including any zoning changes, concurrency requirements and permits necessary to achieve the property’s highest and best use;

• Specifies that availability of the agricultural exemption shall not be predicated on any minimum acreage requirement;

• Requires the Department of Revenue to develop uniform policies and procedures for use by value adjustment boards, special magistrates and taxpayers in VAB proceedings;

• Reconstitutes the composition of value adjustment boards to reduce the number of local taxing authority members and add two independent citizen members, one of whom owns homestead property in the county and one of whom owns a business occupying commercial property in the county;

• Prohibits the county attorney from acting as counsel to the value adjustment board, and requires the independence of private counsel to the VAB;

• Requires the value adjustment board to verify the qualifications of any special magistrate, and requires the special magistrate to be independent of the property appraiser;

• Requires the special magistrate in any VAB proceeding to accurately and completely preserve all testimony, and include proposed findings of fact, conclusions of law and reasons for upholding or overturning the property appraiser’s determination;

• Requires the Department of Revenue to conduct annual training for special magistrates on the Department’s standard measures of value and real property and tangible personal property guidelines;

• Expands the tax impact information required to be published as the result of value adjustment board proceedings, to include the number of parcels for which VAB petitions were filed but not considered by the board because the petitions were withdrawn or settled prior to consideration;

• Expresses the Legislature’s intent that a taxpayer shall never have the burden of proving that the property appraiser’s assessment is not supported by any reasonable hypothesis of a legal assessment, and rejects cases decided since 1997 to the extent that they impose a contrary burden of proof as an interpretation of legislative intent; and

• Expands the property tax data to be collected and reported by the Department of Revenue, including annual increases in nonvoted ad valorem taxes, and the distribution of ad valorem tax levies among various classifications of property.

CS/HB 909 takes effect September 1, 2008. 4. CS/HB 1373: Space Flight Business Tax Refund Program

CS/HB 1373 amends §288.1045, Fla. Stat., and expands the qualified defense contractor tax refund program to include space flight businesses and space flight contracts. The bill defines “space flight business” and “space flight contract” and provides application requirements for purposes of the program. The amount of potential tax refunds per job created is increased, both for qualified defense contractors and space flight businesses. CS/HB 1373 was approved by the Governor on May 28, 2008 and will become effective July 1, 2008. Ch. 2008-89, Laws of Fla.

5. HB 5061: Costs of Property Tax Administration

The Department of Revenue is charged with responsibility for overseeing the administration of Florida’s ad valorem tax system by local property tax appraisers and tax collectors. HB 5061 authorizes the Department to incur employee expenses in developing and conducting training schools for local property tax appraisers and tax collectors to upgrade their assessment and collection skills. The bill also authorizes the Department to procure and absorb the cost of providing aerial maps and photographs to small county property appraisers, and to charge fees for such materials provided to large county property appraisers, for their use in the appraisal process. HB 5061 takes effect July 1, 2008.

Posted: 6/10/08

Florida Waters Edge Combined Reporting Bills Fail to Pass in 2008  
Legislation that would have required water's edge combined reporting for Florida corporate income tax purposes failed to pass during the 2008 regular legislative session. Detals of this legislation, which will probably re-surface in 2009, are reported below under "Other Matters of Interest."

Posted: 6/4/08

Urgent! Tax Swap Measure Threatens Fiscal Crisis & New taxes  
On April 24, 2008, Florida’s Taxation & Budget Reform Commission (TBRC), a constitutional body which convenes every 20 years and has the power to place constitutional amendments directly on the ballot, narrowly approved a measure which would create a substantial risk of new state taxes. CS/CP0002 offers instant relief from local property taxes (approximately 27% on average statewide), in return for uncertainty and confusion over what will be done to replace the lost revenue and the resulting impact on Florida’s economy. The business community, individual residents of the State, and local governments all face significant risk if the voters approve this proposal in the November 2008 general election.

Despite the implementation of substantial property tax relief as a result of other changes to the Florida Constitution during the same period in which the TBRC was holding meetings, the Commission approved this measure to replace a portion of local school property taxes with State general revenue. The problem is in the numbers. The amount that would be replaced is approximately $10 Billion, which is roughly a third of general revenue and half the revenue generated by the sales tax. The proposal is vague about how these replacement revenues would be raised, and a fiscal crisis could easily result if this becomes effective as intended in fiscal 2010-2011.

Why would a group of prominent citizens appointed to the TBRC propose such a measure? Many of them undoubtedly were motivated in part by a desire to provide additional property tax relief. Although we believe the TBRC was created to examine structural features of Florida’s system rather than the magnitude of a particular tax, some Commissioners felt obligated to respond to citizen concerns about their property tax burdens. However, property tax relief was not the only factor at work. It is also clear that competing factions on the Commission came together to advance a different goal: to create a budget shortfall that will require dramatic action by the legislature to resolve. The first faction, led by the sponsor of CS/CP0002, has openly acknowledged the goal of forcing the legislature to enact a sales tax on services, as well as eliminate existing exemptions for business inputs. The second faction, comprised of members who believe State government is bloated, aspire to the opposite result. They hope the legislature would resolve the resulting budget gap by dramatically reducing State spending for other programs. Neither faction can be assured of what the legislature will do, but both seek to create conditions in which the legislature will be forced to choose.

The doubt about what choices will be made is accompanied by structural problems with the proposal, most notably the fact that the local school districts would be “held harmless” from reductions in State funding for only one year. Thus, it is possible that after the first year (2010-2011) the budget problem will be resolved in whole or in part at the expense of the schools. On the other hand, if new taxes are enacted for the first year, they may become permanent for all practical purposes.

With this measure now approved for the November ballot, there are only two options for those opposed to it. The first is judicial. If a court finds the ballot summary misleading, the measure will be stricken from the ballot (as occurred with the last TBRC tax proposal in 1992). Because of the limited time available before the election, a judicial remedy must be invoked very soon if it is to be effective. The second option is a public campaign against the measure to dissuade Floridians from voting for it. Because neither option is foolproof, the most effective strategy for opposing it is to employ both of them.

Posted: 5/2/08

Penalty rules  
A few years back, the Florida Legislature took the Department of Revenue to task for alleged inconsistencies in the treatment of taxpayers and added a provision to the Taxpayer Bill of Rights assuring taxpayers "the right to fair and consistent application of the tax laws of this state by the Department of Revenue." F.S. s. 213.015(21). While the Department has been concerned with treating similarly situated taxpayers consistently for many years, it decided that one area in need of improvement was the administration of penalties. With the objective of making the imposition and compromise of penalties more objective and uniform, the Department undertook the rewriting of penalty compromise standards in a way that assigns points, either positive or negative, on the basis of various facts, with the resulting point value dictating the penalties to be imposed. The effort has been the subject of several rule development workshops. If the rule proposals were adopted in their current form, the likely upshot would be the levy of penalties on most large taxpayers that are regularly audited. By way of illustration, the first part of these rule proposals deals with the question whether the taxpayer’s actions reflect “willful neglect or willful negligence.” As presently crafted, the rule would say that the failure to remit tax on any two occasions after written notice constitutes willful negligence—with the result that penalties equal to 50% of any unpaid tax would be due and not subject to compromise. That would mean that if, for example, a taxpayer were audited and found to owe $1,200 in use tax, say on fixed assets, in Audit 1 in 2002, and $450 in use tax on something else in Audit 2 in 2005, then 50% penalties would be imposed on all deficiencies identified in Audit 3. For large taxpayers that are repeatedly audited, the rule proposals imply very substantial, nondeductible costs. Even if the taxpayer escapes the first 25% penalty obstacle (i.e., no willful neglect or negligence), the matrix is heavily weighted toward the assignment of points, as distinct from the assignment of credits, with the result that penalties in the 5% to 25% range are probable in most audits. The Department has held several workshops since April 2005, most recently in February 2008, but has not yet commenced the formal rulemaking process. This firm has submitted comments on four occasions.

Posted: 4/11/08

Ad Valorem Taxation-_embedded software  
By statute, computer software, other than “embedded software,” constitutes tangible personal property for property tax purposes “only to the extent of the value of the...medium on which the...program...is stored or transmitted...” Fla. Stat. §192.001(19) (2005). For this purpose, “software” is that which is “intended for use...to cause one or more computers or pieces of computer-related peripheral equipment, or any combination thereof, to perform a task or set of tasks.” Id. [Emphasis added.] Two trial court decisions addressed whether the removable software used in wireless telecommunications switching equipment meets the statutory definition of “software” and thus has little or no value for property tax purposes. In Primeco Personal Communications, L.P., d/b/a Verizon Wireless v. Markham, Case No. 00-0133317(12) and consolidated case numbers (Fla., 17th Circuit, Partial Final Judgment, January 11, 2006), the parties stipulated that the software “embedded” in the switching equipment, that is, residing in ROM rather than in RAM, would be taxable as part of the value of the equipment. The Court held that the programs that load into RAM when the equipment runs meet the definition of “software” and therefore have no value for property tax purposes beyond the value of the medium on which they are stored. The Court analyzed the issue primarily in terms of the distinction between “software” and “embedded software,” and did not analyze extensively whether the switching equipment consisted of “computers.” The same result was reached in Verizon Wireless Personal Communications L.P. v. Nikolits, Case No. 2005 CA 011462 XXXX MB AE (Fla. 15th Circuit March 5, 2008).

Posted: 4/2/08

Florida Court Invalidates DOR SRLY Rule  
An affiliated group of corporations filed combined federal income tax returns for several years in which members of the group that operated in Florida filed separate Florida returns. In those years, some of the Florida-nexus members reported losses for Florida income tax purposes. For later years, the group elected to file consolidated Florida returns, pursuant to Section 220.131, Florida Statutes, and for those years the group eventually filed amended Florida returns on which it deducted the previous losses of the Florida-nexus subsidiaries, pursuant to the statutory provision authorizing such deductions, Section 220.13(1)(b)1, Florida Statutes. The Florida Department of Revenue disallowed the losses on the basis of Rule 12C-1.013(14)(j), Florida Administrative Code, the Separate Return Loss Limitation (“SRLY) Rule.” The SRLY rule purported to allow an operating loss carryforward only for previous years in which consolidated Florida returns were filed by the affiliated group. Florida’s First District Court of Appeal invalidated the SRLY Rule as an “invalid exercise of delegated legislative authority” as defined in Florida’s Administrative Procedure Act. After noting that the general, express intent of the Florida Income Tax Code is to “piggyback” the Internal Revenue Code, the Court relied on specific provisions of the Florida Code that directly and expressly permitted deduction of the loss carryforward on the facts of the case. Section 220.13(b)(1) provides that in computing Florida taxable income, “There shall be deducted from such [federal taxable] income...[t]he net operating loss deduction allowable for federal income tax purposes under s. 172 of the Internal Revenue Code,” and “...all deductions attributable to such losses shall be deemed net operating loss carryovers...and treated in the same manner, and to the same extent, and for the same time periods as are prescribed for such carryovers in ss. 172...of the Internal Revenue Code.” Because the Department’s SRLY Rule would disallow deductions expressly allowed under the Internal Revenue Code, the Court held that it “does enlarge, modify or contravene the statutes it purports to implement.” On this basis, the Court invalidated the Rule and ordered refunds to the taxpayer. A procedural aspect of the case, although not discussed in the appellate opinion, is noteworthy. Florida law permits taxpayers to challenge assessments or refund denials by electing one of two routes: a hearing before an administrative law judge pursuant to the Administrative Procedure Act, or a lawsuit in Florida’s court of general jurisdiction, the Circuit Court. Once the taxpayer chooses the judicial forum, as occurred in this case, the administrative forum is expressly foreclosed by law. Section 72.011, Florida Statutes. In such cases, the Department of Revenue sometimes argues that the taxpayer cannot challenge its administrative rules because the sole avenue to challenge rules under the Administrative Procedure Act is a proceeding before an administrative law judge. This case is another occasion when the courts have proceeded directly to address the validity of Department rules, tacitly recognizing that complete relief must be available to the taxpayer who chooses the judicial forum. See Dept. of Revenue v. Vanjaria Enterprises, 675 So.2d 252 (Fla. 5th DCA 1996).

Posted: 4/2/08

Admission or License to Use Real Property  
The Department has issued a ruling, TAA 07A-010, holding that charges for use of a facility that includes a gun range, obstacle course, 4-acre driving pad, 80-foot rappel tower, classrooms and other facilities, are subject to tax under F.S. s. 212.031. That statute taxes leases and licenses to use real property. The taxpayer inquired whether the charges were "admissions" taxable under F.S. s. 212.04 and the Department concluded that they were not, but without any real analysis. The result appears to hinge entirely upon the fact that the taxpayer has users sign a "License and Hold Harmless Agreement" that includes "license to use" language. The tax consequences of classifying a transaction as an admission, on the one hand, or as a license to use real property, on the other, can be very different. In other contexts, the Department has interpreted the term "admissions" very broadly and this ruling is likely no retreat from some of the aggressive stances it has taken. Its decision not to extend the definition of "admissions" to the transactions in question is probably a function of the fact that tax would be due under either characterization and the taxpayer's own documents pointed the way. In this regard, one obvious lesson for taxpayers is to be mindful of the titles and descriptions of charges, activities and transactions in commercial agreements. They can and often are used to justify the imposition of tax. If the agreements do not accurately reflect the underlying transactions, they should be reviewed with sales, income and other tax consequences in mind.

Posted: 5/30/07

De Minimis Nexus Exception  
The Florida Department of Revenue has for some time refrained from issuing any nexus determinations, but broke the silence recently when it issued a no-nexus finding. In TAA 05A-045, the Department concluded that a taxpayer had not established nexus for sales tax purposes because it had no property or employees, representatives or agents in the State. The taxpayer did have employees who “occasionally” visited customers in Florida. The Department carefully phrased its ruling: “if the only physical contact with the State of Florida is a once a year visit to one customer, where no sales orders are taken, this would be considered inconsequential, and thus not create nexus.” The Department tends to refrain from citing cases it has lost, but the result is apparently premised on the more liberal ruling in Department of Revenue v. Share International, 676 So.2d 1362 (Fla. 1996), cited by the taxpayer. Interestingly, the Department also effectively advises the taxpayer that it can have inventory stored temporarily in Florida without creating nexus (buying from a Florida vendor for shipment to a customer outside Florida), but then suggests that in such cases the taxpayer should be charged use tax under the drop shipment rule, Rule 12A-1.091(7), unless it voluntarily registers for Florida sales tax purposes and extends a resale certificate to that Florida vendor.

Posted: 12/6/05

 

Other Matters Of Interest

Proposed Water's Edge CIT Legislation - Combined Reporting   Posted: 4/2/08

Possible Bill of Rights Proposal - Possible Taxpayer Bill of Rights Legislation   Posted: 9/1/06

Off-Calendar Reporting and Payment - Off-Calendar Reporting and Payment   Posted: 9/1/06

Proposed Penalty Guidelines - New Penalty Matrix Proposed   Posted: 9/1/06

More Non-Taxable Advertising Material - Non-Taxable   Posted: 12/6/05

Taxation of Hotel Rewards Points - Hotel Rewards Points--Upcoming Department Workshop   Posted: 12/5/05

Corporate income tax--deconsolidation - Corporate income tax--deconsolidation   Posted: 11/3/05

Service/TPP Transactions - Bundled Services/TPP Transactions   Posted: 10/4/05

Securing Disputed Assessments - Circuit Court Jurisdiction of Assessment Challenges   Posted: 3/17/05

Permission to Discontinue Filing Consolidated Returns - Deconsolidation   Posted: 3/10/05

New Sea Escape--Apportioned Tax - New Sea Escape   Posted: 3/10/05

The Missouri Boat Ride - The Missouri Boat Ride   Posted: 3/8/05

Statute of Limitations--DOR Interpretation - Statute of Limitations--DOR Interpretation   Posted: 10/29/04

Discounted Hotel Rooms-Internet Sales - Hotel rooms--Internet sales   Posted: 10/29/04

New CIT Rule - CIT Adjustments   Posted: 10/13/04

New Transient Rentals Tax Issues - Transient Rentals Tax   Posted: 4/2/04

2004 SSTP Bill - 2004 SSTP Bill   Posted: 2/13/04

Florida CIT Changes Possible in 2004 - Florida CIT Changes Possible in 2004   Posted: 11/24/03

New Florida Tax Amnesty Program - Florida Tax Amnesty   Posted: 6/4/03

Florida Rethinks Internet Access - Taxability of bundled DSL charges   Posted: 12/5/02

Venue in Action Challenging Sales Tax Warrant - Warrant Venue   Posted: 12/3/02

County Lease of Real Property for Tennis Tournament Taxable - Tennis Tournament Lease Taxable   Posted: 12/3/02

Recent Judicial Decisions - Judicial Decisions   Posted: 11/15/00

DOR 2001 Legislative Concepts - DOR 2001 Legislative Concepts   Posted: 11/13/00

Major Florida tax legislation passed in 2000 - 2000 tax legislation   Posted: 8/9/00

Taxpayer reliance on prior audit results - analysis - Reliance on prior audits   Posted: 8/8/00

Document tax on related party transfers stricken - Related party realty transfers   Posted: 12/30/99

Off balance sheet financing not taxable as a lease - Off balance sheet financing not taxable   Posted: 12/3/99

Annual Resale Certificate Required February 1, 2000 -   Posted: 11/10/99

Court Clarifies Credit for Taxes Paid in Another State -   Posted: 11/10/99