Your Homeowners’ Association may not be Taking Advantage of a Favorable Tax Break

A major expense for many homeowners’ and condominium owners’ associations is the cost of the utilities for common areas of the communities. The good news for such associations, however, is that they are entitled to an exemption for the sales tax related to their utilities as long as a few requirements are met—a fact of which many associations are not even aware.

The exemption from sales tax with respect to utilities is governed by both the Florida Statutes and the Florida Administrative Code, and the relevant provisions of each must be read and analyzed in conjunction with one another. For example, Florida Statute §212.08(7)(j), entitled “Sales, Rental, Use, Consumption, Distribution, and Storage Tax; Specified Exemptions,” states:

Household fuels.—Also exempt from payment of the tax imposed by this chapter are sales of utilities to residential households or owners of residential models in this state by utility companies who pay the gross receipts tax imposed under s. 203.01, and sales of fuel to residential households or owners of residential models, including oil, kerosene, liquefied petroleum gas, coal, wood, and other fuel products used in the household or residential model for the purposes of heating, cooking, lighting, and refrigeration, regardless of whether such sales of utilities and fuels are separately metered and billed direct to the residents or are metered and billed to the landlord. If any part of the utility or fuel is used for a nonexempt purpose, the entire sale is taxable. The landlord shall provide a separate meter for nonexempt utility or fuel consumption. For the purposes of this paragraph, licensed family day care homes shall also be exempt.

Additionally, Florida Administrative Code §12A-1.053(1)(a), entitled “Electrical Power and Energy,” states:

The sale of electric power or energy by an electric utility is taxable. The sale of electric power or energy for use in residential households, to owners of residential models, or to licensed family day care homes by utilities who are required to pay the gross receipts tax imposed by Chapter 203, F.S., is exempt. Also exempt is electric power or energy sold by such utilities and used in the common areas of apartment houses, cooperatives, and condominiums, in residential facilities enumerated in Chapters 400 and 429, F.S., and in other residential facilities. However, if any part of the electric power or energy is used for a non-exempt purpose, the entire sale is subject to tax. (Emphasis added.)

Generally, sales of electricity are taxable transactions (Fla. Stat. §212.05(1)(e)1.c.). However, the sale of electricity is exempt when the electricity is: 1) sold to a residential household; and 2) no portion of the electricity is used for a nonexempt purpose (Fla. Stat.  §212.08[7][j]). “Residential household use” does not require that the electricity be used solely inside a residence, and electricity used for residential purposes outside of the residence or within a common area of a residential facility may also qualify under the residential household exemption (Fl. Admin. Code r. 12A-1.053[1][a]).

The term “common area” is defined in Florida Statute §718.103(8) as “[T]he portions of the condominium property not included in the units,” which is generally understood to mean any portion of a development that is not included within the private living quarters. Therefore, in a residential development, the common area could include roads within the development, parks, area pools, playgrounds, and the like. The area does not have to be contiguous to each residential unit or space to qualify as a common area.

The second requirement of §212.08(7)(j) is that no part of the electricity be used for a nonexempt purpose. This requirement means that the exemption does not apply if any of the electricity is used for a commercial purpose. In fact, the statute provides that any nonexempt use of the electricity disqualifies the whole amount from exemption. Thus, if one meter is used for multiple areas, and any one of those areas is nonresidential in nature, then the entire sale of electricity through that meter would be subject to tax. For instance, if there is a sales or administrative office within the community, and that office’s meter also serves the common elements of the community, then none of the power would be exempt. In such a scenario, it would be necessary to have a separate meter set up for the office.

Where more than one meter serves a residential area, the use related to each meter must be individually analyzed to determine whether the exemption applies to that meter. If the use of a common area is in conjunction with the operation of the residential households or fills the needs of residents; is intended for the exclusive use of the owners, tenants, and guests; is not held out for use by the public; and no charge is made for the use of the area; such use is covered by the exemption provided in §212.08(7)(j).

The fact that the association is exempt from paying sales tax for common areas then leads to the question of whether the community is entitled to a refund for the sales tax previously paid for utilities connected to the common elements of the community. The answer to that question is that, yes, the community may obtain a refund for such payments, but the refund will be limited to the previous three years only (Fla. Stat. §215.26). Additionally, to be entitled to the exemption on a continuing basis in the future, the association needs to complete and file a Sales and Use Tax Exemption Certificate with the State of Florida.

Therefore, if your homeowners’ or condominium owners’ association is presently paying sales tax for its utilities, the association should immediately assess whether any meters are providing power for solely common areas. If there are such meters, the association should file a Sales and Use Tax Exemption for any such meters, and should also seek a refund for the previous three years’ sales tax related those meters. If any meters in the community are providing power to common areas and non-exempt areas, the association should get a second meter so that all exempt power is registered to one meter and all nonexempt power is registered to another. Only then they will be able to take advantage of the exemption.