1. Taxation of Services in Florida Florida Taxation and Budget Reform Commission Finance and Taxation Committee September 13, 2007

2. SERVICES THAT ARE PART OF A TANGIBLE PERSONAL PROPERTY TRANSACTION Non-optional delivery and transportation charges Engineering services “inextricably intertwined” with the sale of telecommunications equipment “PURE” SERVICES SPECIFICALLY TAXED Non residential cleaning Non residential pest control Security services, detective, burglar protection services Communication services ALTERATION, REMODELING, MATINENANCE, ADJUSTMENT AND REPAIR OF TANGIBLE PERSONAL PROPERTY Business Equipment Repair Tire repair Jewelry Repair/soldering Shoe repair Clothing alterations/repair Furniture Restoration Paint/chrome applications Vehicle repair Fabrication of TPP “PURE” SERVICES Laundry Lawn care Domestic services Fitness trainer Music lessons PROFESSIONAL AND PERSONAL SERVICES Professional Attorney Documents Banking Services Architectural Blueprints Credit Reporting Accounting Services Funeral Services Insurance Insurance Policies Claims Documents Personal Pedicure Manicure Beauty Salon/Barber Shop Massage Taxable NON-TAXABLE SERVICES

3. Florida’s Experience with Broad Sales and Use Tax on Services in 1987   Defining Services/Sales Price   Situsing Services   Use Tax Provisions   Resale   Exemptions   Specific Industries   Administrative Issues

4. Defining Services 1987 Services Tax applied generally to “all services” 1987 Services Tax applied generally to “all services” The Legislature used the Standard Industrial Classification (SIC Code) The Legislature used the Standard Industrial Classification (SIC Code) Imperfect and often overlapping Imperfect and often overlapping Typically defines establishments not activities Typically defines establishments not activities Outdated Outdated

5. Sales Price “the total amount paid for tangible personal property or services … without deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service cost, interest charged, losses or any other expense whatsoever.” “the total amount paid for tangible personal property or services … without deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service cost, interest charged, losses or any other expense whatsoever.”

6. Situsing WHERE WAS A SERVICE SOLD Occurs in Florida if more than 50% of the costs of performing the service are incurred in the state Occurs in Florida if more than 50% of the costs of performing the service are incurred in the state WHERE WAS A SERVICE USED IndividualsBusinesses where real property related to service is located where real property related to service is located where the purchaser receives tangible personal property representing service where the purchaser receives tangible personal property representing service where the business situs of tangible personal property related to service is located where the business situs of tangible personal property related to service is located where the greater proportion of services are performed where the greater proportion of services are performed where the purchaser’s local market related where the purchaser’s local market related to the service exists multistate business – where it is doing business – apportioned multistate business – where it is doing business – apportioned single state business – where it does business single state business – where it does business

7. UNIQUE SITUSING RULES Advertising – Benefit in Florida Advertising – Benefit in Florida to the extent advertising is disseminated in the state to the extent advertising is disseminated in the state Transportation – Benefit in Florida Transportation – Benefit in Florida on an allocated basis with 50% at point of origin and 50% at point of termination on an allocated basis with 50% at point of origin and 50% at point of termination Services provided to the estate of a decedent – Services provided to the estate of a decedent – Benefit Benefit where decedent last established residency where decedent last established residency

8. Use Tax Provision Eliminate Competitive Disadvantage Eliminate Competitive Disadvantage Taxable where the Benefit is Enjoyed or Used Taxable where the Benefit is Enjoyed or Used Administrative Issues Administrative Issues

9. Exemptions Services sold in Florida, but used out of state Services sold in Florida, but used out of state Employee services Employee services Occasional or isolated sales Occasional or isolated sales Partner’s services Partner’s services Intercompany sales Intercompany sales

10. PYRAMIDING (resale provisions) Extremely Contentious Issues Extremely Contentious Issues 1987 Legislation used Restrictive Definition 1987 Legislation used Restrictive Definition Brokers or intermediaries Brokers or intermediaries Written contract specifically identifying the ultimate customer Written contract specifically identifying the ultimate customer Separately state value on subsequent resale Separately state value on subsequent resale Tangible personal property used by person providing service was taxable Tangible personal property used by person providing service was taxable

11. EXEMPTIONS (necessities of life) Health and Medical Services Health and Medical Services Social Services Social Services Educational Services Educational Services Services Associated with Agricultural Products Services Associated with Agricultural Products Residential Sewage and Garbage Residential Sewage and Garbage Bus Transportation/Taxi Cabs Bus Transportation/Taxi Cabs

12. EXEMPTIONS (to remove competitive disadvantage) Realtors Commissions (Added 5¢ to doc stamp tax) Realtors Commissions (Added 5¢ to doc stamp tax) Motor Freight Transportation (Added 5¢ per gallon to tax on diesel) Motor Freight Transportation (Added 5¢ per gallon to tax on diesel) Water/Rail Transportation Water/Rail Transportation Insurance Insurance Financial Services Financial Services Interest/Discount Charges Interest/Discount Charges Certain Legal Services Certain Legal Services  Criminal  Child Support  Bankruptcy  Civil Rights

13. EXEMPTIONS (to stimulate jobs) Commissions to Insurance Agents Commissions to Insurance Agents Forestry Services Forestry Services Motion Picture Production Motion Picture Production Security/Brokerage Services Security/Brokerage Services Membership Fees to Nonprofit Groups Membership Fees to Nonprofit Groups

14. EXEMPTIONS (for institutions) Churches (buy and sell) Churches (buy and sell) Governmental Entities Governmental Entities Non-Profit Organizations Non-Profit Organizations

15. ADVERSTISING SERVICES Taxed only on charges for medium itself and costs of brokering medium Taxed only on charges for medium itself and costs of brokering medium Computed on portion of sales or cost price that reflects market coverage in Florida as a % of total market coverage Computed on portion of sales or cost price that reflects market coverage in Florida as a % of total market coverage

16. CONSTRUCTION SERVICES If the cost of the construction service was less than $5,000, it was deemed fully taxable If the cost of the construction service was less than $5,000, it was deemed fully taxable If the cost of the construction service was greater than $5,000, tax was due on 50% of the total contract price If the cost of the construction service was greater than $5,000, tax was due on 50% of the total contract price The prime contractor could get credit for other services purchased, but had to meet the restrictive documentation requirement noted previously The prime contractor could get credit for other services purchased, but had to meet the restrictive documentation requirement noted previously

17. OPERATIONAL ISSUES Short Implementation Time Short Implementation Time Large Taxpayer Education Effort Large Taxpayer Education Effort Increase in Registered Dealers (30%) Increase in Registered Dealers (30%) Compliance Learning Curve Compliance Learning Curve (Billings and Delinquencies Increased 50%) (Billings and Delinquencies Increased 50%) Cash Basis Reporting/No Estimated Tax Cash Basis Reporting/No Estimated Tax

18. QUESTIONS