Limited Scope Audits of Florida Use Tax

The Florida Department of Revenue (DOR) has increasingly employed Limited Scope Audits as an efficient method to identify use tax noncompliance among individuals and businesses. These audits are not random; they are typically initiated after the DOR identifies evidence of unpaid sales tax on taxable transactions. Limited Scope Audits allow auditors to evaluate a taxpayer’s compliance with use tax obligations and expand the audit if further noncompliance is suspected. This approach is a significant shift from randomized full-scope audits, offering a more targeted and resource-effective means of uncovering tax liabilities.

Understanding Florida’s Use Tax

Florida imposes a 6% state tax on both sales and use of taxable items:

1. Sales Tax: Applies to retail sales of tangible personal property, real property rentals, and certain services.
2. Use Tax: Applies to items used, consumed, distributed, or stored in the state when sales tax wasn’t paid.

Unlike sales tax, which is generally collected by sellers, use tax compliance is usually the consumer’s responsibility. Taxing authorities can enforce collection from sellers only if the seller has “nexus” with the state, which refers to a sufficient connection. If a seller does not have nexus, the burden then shifts to the consumer to remit use tax.

Limited Scope Audits of Individuals

The DOR has increasingly issued Notices of Intent to Conduct a Limited Scope Audit (DR-846) to individual consumers. While labeled “limited,” these audits often require individuals to produce extensive records and can act as a gateway to broader investigations.

How Individuals Are Targeted

These audits often begin when the DOR identifies high-value tangible personal property entering Florida—commonly through customs. Items such as construction materials or equipment, artwork, or jewelry purchased out of state are frequent triggers.

Florida’s “Six-Month Rule”

Florida presumes that items purchased more than six months before entering the state were intended for use outside of Florida and are thus exempt from use tax. However, this rule applies only to purchases made in other states, U.S. territories, or Washington, D.C. Purchases from foreign countries are not protected by the six-month rule, leaving these transactions vulnerable to audits.

For individuals who never filed a tax return with the DOR, the statute of limitations is open-ended, allowing the DOR to assess tax back to the transaction date. For high-net-worth individuals moving to Florida with valuable possessions from overseas, this can result in an expensive assessment. If records aren’t provided, the DOR is authorized to estimate assessments, often leading to significant liabilities.

The Evolving Role of Remote Sales

Prior to the landmark South Dakota v. Wayfair (2018) case, online purchases were often understood to be “sales tax-free” unless the retailer had a physical presence in the state. Of course, most of these “sales tax free” purchases were subject to use tax. Wayfair eliminated the physical presence nexus requirement, allowing states to establish economic nexus thresholds.

In 2021, Florida enacted an economic nexus threshold of $100,000 in annual sales, requiring more online retailers to collect and remit sales tax. While this addressed compliance for large retailers, smaller online businesses and foreign entities often remain unaware of their obligations, resulting in ongoing use tax liabilities for individual consumers.

Marketplace Facilitators

To further address the issue, Florida enacted statutes requiring marketplace facilitators, like Amazon, to collect sales and use tax on behalf of third-party sellers operating on their platforms. While this can resolve compliance issues for many retailers, the DOR is now focusing on smaller sellers and high-value remote purchases through Limited Scope Audits.

Automobiles, Boats, and Planes: Easy Targets for Limited Scope Audits

Vehicles, boats, and aircraft are prime targets for Limited Scope Audits due to their high value and ease of tracking via third-party records, ports, and airports.

Automobiles

• Florida offers a partial exemption for motor vehicles sold to nonresidents, taxing them at the purchaser’s home state rate if specific conditions are met.
• Some states may not offer credits for tax paid in Florida, potentially resulting in double taxation.

Boats

• Use tax may apply when a boat is brought into Florida within six months of purchase from another state or when purchased in a foreign country.
• Special rules and exemptions exist, such as the $18,000 tax cap for boat sales, designed to deter offshore purchases.

Aircraft

• Similar to boats, aircraft brought into Florida are subject to use tax unless specific exemptions apply (e.g., temporary stays or sales to nonresidents).

These high-value items represent a cost-effective focus for the DOR, with audits often beginning as Limited Scope but expanding into full audits if noncompliance is detected.

The Construction Industry and Use Tax

The construction industry is one of the most frequently targeted for Limited Scope Audits, often starting with the identification of untaxed materials delivered into Florida.

Common Pitfalls

• Misclassification of Transactions: Whether a transaction is a real property contract, sale of tangible personal property, or a retail sale plus installation can significantly affect taxability.
• Subcontractor Compliance: One noncompliant subcontractor on a project can trigger audits for others involved, often expanding into full audits.

Without proper records, contractors and subcontractors face substantial tax liabilities spanning multiple years.

Conclusion

The Florida Department of Revenue’s reliance on Limited Scope Audits has proven to be an efficient way to uncover use tax noncompliance, particularly for high-value items and industries like construction. As economic nexus laws have streamlined tax compliance for large retailers, the DOR has shifted its focus to smaller businesses, individuals, and high-value transactions. Taxpayers, especially those who frequently move items across state or international borders, should be vigilant about Florida’s use tax laws to avoid unexpected liabilities.