Florida Rules that Contract Language Renders Resale Exemption Inapplicable

Written transaction documentation must be consistent with the actual transaction, because discrepancies may open an avenue for the state to deny the intended tax treatment.

By Tina Chunn, SALT senior manager

When reviewing a transaction to determine its sales and use tax treatment, it is important to verify that the contract language is consistent with the actual transaction. Any discrepancies could lead to issues even if sales and/or use tax and any corresponding exemptions were applied properly.

Recently, Florida issued a Technical Assistance Advisement (“TAA”) disallowing the acceptance of a resale certificate by a taxpayer on the basis that the contract did not allow the taxpayer’s customer to resell the product. [1] In this instance, the taxpayer sold GPS tracking devices and provided tracking information to car dealers and purchasers of automobiles on a subscription basis. [2] The car dealer would provide a Florida resale certificate to the taxpayer for the GPS tracking device, as the car dealer would subsequently wire the GPS tracking device to the vehicle to be sold. These devices were not individually tracked for resale, but as a component of an inventory item (i.e., the car) maintained for resale.

However, the master contract between the taxpayer and the car dealer states that the GPS tracking devices cannot be resold without written approval of the taxpayer. The facts of the TAA note that, based on practice, approval is granted by the taxpayer in the normal course of business when the GPS tracking device is transferred to the purchaser of the automobile. The taxpayer argued that its acceptance of the resale certificate represents its implicit acceptance of the subsequent resale and that it has never limited nor challenged the transfer for resale.

Florida disagreed, pointing out that under the state sales tax rules, a seller may only accept a resale certificate “in good faith.” [3] Florida sales tax laws do not define good faith, so the TAA looked to Black’s Law Dictionary, which defined it as “…an intangible and abstract quality…encompass[ing], among other things, an honest belief…and the freedom from knowledge of circumstances which ought to put the holder upon inquiry.” Based on this definition, the state explained that “good faith does not include instances where Taxpayer had knowledge of circumstances where [it] should have questioned the use of the certificate or where Taxpayer knew that the sale was not for resale.”

In this case, the master contract specifically stated that the car dealer was not permitted to resell the GPS without prior written authorization from the taxpayer. Thus, the master contract on its face prohibits resales without written approval, and the fact that the taxpayer fails to enforce those terms by implicitly agreeing to the resale through accepting the resale certificate does not change the nature of the agreement. The TAA also notes that the car dealers use the GPS devices when they track vehicles and that the use of these devices also renders the resale exemption inapplicable since a reseller is not permitted to use the property purchased for resale. Therefore, the Florida resale certificate is not valid for this transaction.

As this TAA illustrates, despite the fact that both parties intended that the resale exemption apply, written documentation reflecting the terms of the transaction must also satisfy the tax rules or the state may use that document to deny the intended tax treatment.

The Aprio SALT team is experienced with reviewing sales transactions and corresponding contract language to determine the appropriate state sales and use tax treatment. Sellers that typically accept resale certificates should be aware of each state’s specific requirements, including whether the certificate may only be accepted in good faith. We are here to assist you with any concerns you may have regarding the proper determinations for your specific scenario. We constantly strive to keep our clients advised of important issues and developments in state and local taxes in order to help them address their specific tax situations. We will continue to monitor these and other significant sales tax developments, and we will include any updates in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn, SALT senior manager, at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] Florida Technical Assistance Advisement 16A-007, June 9, 2016.

[2] Car dealers need tracking information when the car is financed so that they can track the car for repossession in case of default. Purchasers who own their cars outright use the tracking information to locate their own cars.

[3] Many states have a good faith requirement.

This article was featured in the October 2016 SALT Newsletter. To view the newsletter, click here.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.