Legislature Limits Documentary Stamp Tax

A documentary stamp tax is imposed by Chapter 201, Florida Statutes, and consists of a collection of five separate taxes, each of which has its own rules and procedures. Documentary stamp tax is imposed on deeds, original issues of stock, bonds, notes and other obligations not secured by mortgages, and mortgages. The 2002 Florida legislative reforms involved the documentary stamp tax imposed upon original issues of stock and the tax imposed on notes and other obligations not secured by a mortgage.

Under prior law, documentary stamp tax in the amount of $0.35/$100 is imposed on original issues of stock within the State of Florida. The tax was based upon the par value of the stock, or if none, upon the consideration given for the stock. In order to avoid the tax, issuers of stock reduced the par value of each certificate or hired an out-of-state transfer agent to issue the stock. For many start-up corporations, the tax imposed on the original issue of stock was less than the price of the stamp required to mail in the return.

Effective May 1, 2002, the documentary stamp tax on original issues of stock was repealed. Ch. 2002-218, L.O.F., Section 60.

Notes and other obligations not secured by a mortgage recorded in Florida are subject to documentary stamp tax if the document is executed or delivered within the State of Florida. It is common for borrowers and lenders in large loan transactions to execute and deliver their documents outside the geographic boundaries of the State of Florida in order to avoid this tax. The Florida Department of Revenue requires documentation be maintained in order to prove that execution and delivery occurred outside the State of Florida. This documentation often takes the form of a notary block on the promissory note itself and contemporaneous affidavits of the borrower and/or lender as to out-of-state execution and delivery. If the paperwork substantiating the out-of-state closing is not properly prepared, a presumption exists that the transaction is taxable.

A majority of the larger loan transactions not involving mortgages are closed out-of-state. Lenders and borrowers incur substantial expense and administrative difficulties in making certain that their transactions are not subject to the documentary stamp tax.

The new legislation offers a creative solution to the problem of arranging and documenting out-of-state closings. The Florida Legislature amended Section 201.08 F.S. to fix the maximum amount of tax payable on a note or other obligation not secured by a mortgage at $2,450. Ch. 2002-26 L.O.F. This cap would apply to any obligations in excess of $700,000. The legislators reason that borrowers and lenders would prefer to pay $2,450 than arrange and document an out-of-state closing. The creation of a documentary stamp tax cap also has other benefits. Paying the tax once will exempt subsequent renewals. Previously, if the initial document is executed and delivered out-of-state, all renewals also had to be executed and delivered out-of-state to maintain the exemption.

If an out-of-state closing is not properly documented, the maximum exposure is $2,450. The documentary stamp tax cap is effective July 1, 2002 and superceded other similar provisions, such as Ch. 2002-218 L.O.F.

The documentary stamp tax cap creates and interesting interaction with the multi-state collateral rule contained in F.A.C. Rule 12B-4.053(31). Pursuant to F.A.C. Rule 12B-4.053(31), an out-of-state note secured by mortgages on property located both inside and outside of Florida is subject to a reduced tax base. Preliminary conversations with the Florida Department of Revenue personnel indicate that there will be no change in the administration of this rule when the underlying promissory note is an out-of-state note.

A different result occurs for a Florida note secured by mortgaged property located in more than one state. Under prior law, if the underlying note were a Florida note, the administrative rule was inapplicable and tax was payable on the full amount of the Florida note. While no formal agency position has been adopted on this issue to date, the Department of Revenue personnel informally indicated under the new law: (i) if the tax derived under the administrative rule is more than $2,450., then the administrative rule will apply whether the underlying note is a Florida note or an out-of-state note; and (ii) if the tax derived by the rule is less than $2,450., then the tax would be $2,450., or the tax calculated on the face amount of the note, whichever is less. In either case, the tax is paid on the mortgage at the time of recording.

Provided as an educational service by John Raymond Dunham, III, Esq..

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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.