Documentary Stamp Tax Explained
Documentary stamp tax is a tax that is imposed in the form of stamps on documents, which must be paid prior to their presentation in court or other transaction. The tax is thus considered a court-fee. However, documentary stamp tax is different from judicial fee, which is paid for instituting civil proceedings in the court. The documentary stamp is a fee that must be paid to the state, which can be charged for duties of all executive offices; however, a judicial fee is chargeable only for the benefit of the judiciary and is remitted in its entirety to the judiciary.
So what is a documentary stamp tax? The answer is simple: it is a tax imposed on documents executed, delivered, or recorded in any office and should also be paid as a prerequisite to the right of any person to bring to the court certain documents. The tax can be paid by way of stamps or through debit to the bank account of the relevant office. In some cases, documentary stamp tax can be collected after its accrual within the statutory deadlines, and the act of late payment of tax does not affect the validity of the document which is subject to the enforcement of the documentary stamp tax from the present moment. Any person culpable for making a documentary stamp tax should be deemed to be each of the individuals who are responsible for the making of the respective document or instrument , including the signers, drawers, acceptors, bailers, borrowings and bailors, mortgagors, mortgagors, vendors, and vendees.
Documentary stamp tax is levied on many kinds of documents, including but not limited to: And there are exceptions. In addition to the types of instances when a documentary stamp tax is required to be paid, it is worth mentioning that, pursuant to the operative legislation, documentary tax is a readjustment tax levied on executory contracts with separate payments and/or which are specifically referred to in the contract. It should also be pointed out that documentary stamp tax is applicable to documents executed in favor of the government. While proper documentary stamp tax must be paid prior to the presentation of a document in court, the law provides for the delivery of a copy of the document subjected to the enforcement of documentary stamp tax to the court, instead of the original copy which is withheld from its submission to the court until the return of information that the documentary stamp tax has been fully paid.
The Origins of Documentary Stamp Tax
Documentary stamp tax is a tax on documents relating to a sale, loan, lease or other transfer of interest in Florida real property. The tax was first imposed by the Territorial Legislature in 1861. General Laws of Florida 1861, p. 479. The document tax was imposed at the rate of twenty-five cents for each deed, mortgage, trust deed or other written instrument to be recorded in the public records. In 1894, the rate was increased to fifty cents for these instruments "when executed and delivered." Gen. Laws 1894, ch. 3878, §§ 1-3. The statute continued to apply on an "execution and delivery" basis until 1924 when it was changed to apply upon the execution of certain documents. Gen. Laws 1924, ch. 10333. However, it was not until 1937 that the statute was changed to apply upon delivery of the documents as well. Chapter 18069, Laws of Florida (1937). At that time, phone company stock was included in the list of taxable "intangible personal property." Ch. 18069, § 3(5)(h), Laws of Fla. (1937). This remained true in a 1943 amendment deleting such corporations from the list of tax exempt companies. Ch. 21868, Laws of Fla. (1943). In 1945, the Florida legislature included tax exemption for certain stock, notes, bonds and securities. Ch. 26992, Laws of Fla. (1945). Bond coupons were exempted a year later. Ch. 27010, Laws of Fla. (1946). The exemption for stock was amended to exempt only tax-exempt stocks in 1953. Ch. 27262, Laws of Fla. (1953). In 1959 tax exemption was extended to "mutual savings bank bills, notes and obligations" and in 1963 to "national banks, state banks, state building and loan associations, foreign banks, mortgage companies, and all institutions authorized to do banking business." Ch. 63-85, Laws of Fla. (1963). The definition of "taxable transactions" was amended in 1955 to include exchanges of any interest in real property, legal documents executed upon sale, purchase or exchange of services and "each note, bond, debenture, or other obligation to pay money borrowed in exchange for cash or property." Ch. 60-228, Laws of Fla. (1955). The documentary stamp tax laws continued to evolve through the late 1960’s and the early 1970’s with a focus on amending the definition of taxable documents related to the sale of personal property. A comprehensive revision of the chapter, however, was not adopted until a complete re-codification by the legislature in 1977, to become effective January 1, 1978. The intent was to recodify the documentary stamp law in order to eliminate the "confusion, uncertainty and inequities" caused by the piecemeal amendments over the years. Ch. 77-102, Laws of Fla. (1977). Other than a few minor changes, such as "dues and subscriptions", the 1977 revision essentially codified existing law. In 1992, ch. 92-318, Laws of Fla. created a limited exemption for "any instrument [, license, permission, right, power, or franchise] valued without regard to any lien or mortgages thereon, given or granted solely in exchange for a tax credit given under s. 220.183(2)" for specified pre-1996 conservation easements. The definition of "document" was amended three years later to include a "certificate of indebtedness issued by [any] mortgage banking business conducting a reciprocal international mortgage banking business with the United States …." Ch. 95-148, Laws of Fla. The current exemptions for "newspapers and periodicals … magazines and other publications" were created in 1998. See ch. 98-301, Laws of Fla.
How Documentary Stamp Tax is Assessed
Documentary stamp taxes are additional charges assessed by the state on specific documents, transactions, and even events. Any one of these can create a litany of new taxes owed to the state over the life of a single residence.
Given that the documentary stamp tax is an ad valorem tax based on "each $5 or fraction thereof" of consideration paid and evidenced by written instruments, keeping track of the ever-changing rates is imperative to avoid an underpayment. From 1939 through present, rate changes include:
Many of the documents subject to documentary stamp tax have been around for most of a century, and each change has had the effect of creating an entirely new set of fees. For residential transactions, there are five main forms of documentation: mortgages, water and sewer assessments, deeds, notes, and assignments. Not all transactions involve each type of documentation, but many involve nearly all.
The documentary stamp tax applies to most documents that create, evidence, transfer, or convey a right to property. These include instruments, writings, and papers that secure debt, notes, discharges, satisfactions, bills of sale, mortgages, trust deeds, assignments, releases, orders, powers of attorney, and proxies. In addition, the documentary stamp tax applies to insurances, contracts, policies, and notices involving the assumption of debts or liabilities.
Taxable items include:
Although the list looks long, approximately 80 percent of documentary stamp tax revenue collected involves only two items: mortgages and notes.
The documentary stamp tax rate applicable to each item is a percentage of the consideration paid, which includes money or the fair market value of other property, service, or other consideration. Some transactions do not involve consideration paid and are not subject to the documentary stamp tax. All other transactions, even ones involving multiple considerations, are subject to the documentary stamp tax.
Taxable consideration can include:
For the exception to apply, the amount of the consideration paid must be ascertainable and must not or may not be ascertained. When the amount is ascertainable, it is determined first and then the documentary stamp tax is deducted from the amount. When the amount cannot be ascertainable, the tax is deducted first and the balance of the consideration is then allocated to each party in proportion to the deductions.
Documentary Stamp Tax on Various Transactions
While a wide range of transactions can be subject to the tax, when it is based on total consideration, documentary stamp tax typically applies to the transfer of real and tangible personal property, the issuance of promissory notes, notes receivable, mortgages, the conveyance or transfer of obligations to pay rent, sales of stock and bonds, bonds to secure debts or loans of money, notes evidencing advances, agreements to execute bonds, games and gaming devices, cutting mats, stocks and bonds, letters of credit, mortgages and other obligations, an agreement to pay or extend credit, extending the time of payment for products sold, and wind turbines.
State-Specific Documentary Stamp Tax Rules
The variation in documentary stamp tax laws at the state level can add another layer of complexity to an already difficult compliance burden. Varying rates, triggers, exemptions and authorities further compartmentalize the issue in the predominantly donor advised space. The chart below provides an overview of state documentary stamp tax laws and a summary of each state’s requirements. Taxpayers should consult state law, the state taxing authority, and counsel to ensure proper compliance with state laws and requirements.
Arizona
Arizona imposes a documentary stamp tax on every grant, bargain sale, deed, instrument or writing, except wills, which, in consideration of a valuable consideration, transfers, grants, assigns or surrenders any interest in real property. The tax is imposed at the rate of $2 for every $500, or fractional component thereof, of consideration or agreed value, whichever difference is greater.
California
Under California law, a documentary transfer tax is imposed on the transfer of an interest in real property located within a California county, city, city and county, or other local taxing district. Every county, city, city and county, city and county special tax district and city special tax district may impose the tax at the rate of $1.10 for every $500, or fractional component thereof, of consideration paid for the real property interest being transferred. Cities and counties also may impose an additional excise tax. However, 32 cities and counties are statutorily prohibited from imposing the tax.
Indiana
Indiana imposes a deed tax on the recorder’s recording of instruments that convey an interest in real property located within the state of Indiana. The tax is levied at the rate of 25 cents per $100 of consideration, with the exception of transfers associated with: (1) a gift, devise or inheritance; (2) a sale of property resulting in no gain or loss for federal income tax purposes; and (3) a transfer to the United States or the state of Indiana.
Kentucky
Kentucky law imposes a state recordation tax for both documentary and blank tax stamps. For documentary stamps, if a taxpayer fails to pay the minimum amount due for the purchase of stamp(s) typically levied on mortgage or other indebtedness instruments in Kentucky, the taxpayer must pay 100 percent of the tax due (including all applicable interest and penalties) when filing the documentary stamp tax return. For blank tax stamps, in order to record the instrument, the recorder must affix a blank tax stamp to the instrument equal to $3 for each $1,000, or fraction thereof, of indebtedness or obligation. The tax is not levied on instruments without a stated monetary amount. This tax should not be confused with the state’s realty transfer tax.
Nevada
Nevada law taxes the recording of all instruments, paper or notices for value received. The amount of tax varies based on the type of transaction, but generally, the tax rate is $1.95 for every $500.
Ohio
Ohio law imposes an excise tax on mortgages, notes, bonds, bonds of guaranty and like instruments. The tax is levied at the rate of $0.50 for every $100, or fractional part thereof, of the amount secured by the mortgage, note, bond or like instrument.
Oregon
Oregon law imposes a tax on all deeds, instruments or writings which convey any interest in real property within the state of Oregon. The tax is levied at the rate of $1.00 per $1,000 of consideration or actual value, whichever is greater. The tax is not levied where the transfer is merely nominal, such as a transfer of title for financing convenience where the transferor retains the actual possession or use of the property subject to the transfer. Exceptions also exist for: (1) deeds and instruments of conveyance where the grantor is the United States, a state or a political subdivision; (2) quit claim deeds; (3) the conveyance of less than fee simple to secure the payment of money; (4) deeds executed in connection with a tax foreclosure sale; (5) transfers to the United States, the state of Oregon, and various political subdivisions; (6) the conveyance of crops, farm products or railroad rolling stock; (7) leases for a term of 30 days or less; (8) the transfer of interest between principals; (9) the conveyance of interest in real property in an involuntary eminent domain proceeding; and (10) reservations in developments in a farm lot.
Texas
Texas imposes an excise tax on every deed, instrument or writing whereby a deed, mortgage, lien, contract or obligation to make a return or report is made or taken. The excise tax has two bases: (1) a $0.75 per each $100 of consideration, or fractional component thereof, paid for a deed, instrument or writing, whichever is greater, and (2) a minimum flat rate of $1.20 for every deed, instrument or writing. In addition, the tax is not levied where the transfer is nominal.
Virginia
Virginia imposes a state recordation tax for the recording of all deeds, certain certificates, declarations and all other writings, except wills and applications to admit a will to record. The tax is levied at the rate of $0.50 for every $500, or fractional component thereof. In addition, Virginia imposes a local recordation tax in a locality. The local recordation tax rate varies among localities in Virginia.
Documentary Stamp Tax Exemptions
There are a number of exemptions applicable to documentary stamp taxes that must be considered in any transaction that would otherwise be subject to the tax. In general, documentary stamp tax exemptions include: (i) statutory exemptions for certain types of documents and transactions; (ii) exemptions for specified classes of persons; and (iii) exemptions pursuant to administrative guidance from the State Department of Revenue, which may be published as Revenue Rulings or informal documents.
Voluntary exemptions of documentary stamp tax necessitate disclosure to the State Department of Revenue on the documentary that is subject to the exemption. Since the exemptions are voluntary, use of any of these exemptions cannot result in any additional tax liability on auditor challenge.
Statutory exemptions from documentary stamp tax include:
It should generally be noted that a Florida general partnership is not (absent the application of any other law) a separate legal entity, for this reason, the execution of a document by or on behalf of a general partnership is usually sufficient to avoid the application of an exemption where the exemption of the general partnership is applicable.
In the case of partnerships or limited liability companies, it is not uncommon for the partners or members to be treated for documentary stamp tax purposes as a single entity . For this reason, it is generally advisable to record the various exemptions utilized in a transaction involving the transfer of interests in these types of entities.
There are a number of exemptions that have been identified in relevant administrative guidance, but to date, only two (2) exemptions have been authorized by the State Department of Revenue:
As indicated in this exemption, there may be circumstances where no documentary stamp tax is due on the transfer of a partnership equity interest. In circumstances where no exemption is available, the general view continues to be that documentary stamp tax is due upon the mere transfer of a partnership equity interest. However, in circumstances where a partnership equity interest is transferred into a corporation organized under the laws of another jurisdiction, the State Department of Revenue has also recognized that no documentary stamp tax is due on the transfer of such equity interests.
Where a transfer of a partnership equity interest occurs as part of the reformation of a partnership, the department has consistently determined that no documentary stamp tax is due.
Revenue Ruling 83-20 exempts from documentary stamp tax certain deeds and agreements that do not trigger purchase money mortgages; specifically, payments in lieu of regular principal and interest payments.
Filing and Payment of Documentary Stamp Tax
For purposes of payment of documentary stamp tax, the first three months of each calendar year shall be the filing period for both actual and estimated tax payments of corporations and non-individual taxpayers. Individual taxpayers are required to file their documentary stamp tax returns upon or before the due date of their income tax return, either amended or not. Taxpayers that are amending their income tax returns must file their documentary stamp tax return only upon or before the due date of the amended tax return. Non-resident foreign corporations with no permanent establishment in the Philippines but with income arising from sources within the country that fail to file a tax return, or file an incomplete or inaccurate income tax return, shall be required to file and pay their documentary stamp tax returns accounting from January 1 to April 15. The following documents should be used as the basis for filing or paying the documentary stamp taxes: Particular documents which do not have corresponding documentary stamp duties are excluded from the list. If such documents are covered by a certificate of exemption, this certificate as well as the documents should be submitted together with the documentary stamp tax return. The tax rate for documentary stamps under Section 180 of Book VI of the National Internal Revenue Code, as amended, are reflected in the table below. x x x Should any of the documents requiring payment of tax be issued prior to amending an income tax return, and if during the amendment resultant tax arising from the documentary stamp tax has not been paid, the return for those documents shall be amended to include the documentary stamp tax and the return for the initial tax shall also be amended to show the correction. Where the documentary stamp tax return is amended to include actual taxes via over-remittance or underpayment during the initial filing, this should be shown as a debit or credit in the current filing. Failure to pay any deficiency documentary stamps tax within the time prescribed for the payment shall subject the delinquent taxpayer to the penalties provided under Section 248 (f) of the National Internal Revenue Code, as amended, in addition to the interest for late payment of tax, pursuant to Sections 248 (b) and 249 (b) of the National Internal Revenue Code as amended.
Documentary Stamp Tax Considerations for Buyers and Sellers
Buyers and sellers of real estate should also be aware that documentary stamp tax is paid on the consideration given for the purchase of an interest in Florida real estate. The term "consideration" is not defined in the Florida Documentary Stamp Tax statute, section 201.02, Florida Statutes, and judicial interpretation of that term has focused on its dictionary definition. The Florida Supreme Court has said that "consideration" means "the price, reward, or recompense given in return for a thing". In more general terms, consideration means something that gives rise to a right or obligation. The term encompasses any receipt for value regardless of whether the receipt is in the form of cash, property, or a debt assumption. At the same time, the Florida Supreme Court has noted that the purpose of the documentary stamp tax is to impose a tax on the transfer of an interest in real property without regard to form.
In a taxable transaction, unless an exception applies, documentary stamp tax must be paid on the equity amount realized by the seller. The equity amount is defined as the difference between the purchase price and the existing mortgage encumbering the subject property. For transactions involving partial releases from existing mortgages, the equity amount is the difference between the fair market value of the subject property and the mortgage(s) encumbering the subject property. Where the equity amount is less than the documentary stamp tax due, the buyer pays the excess on behalf of the seller. Documentary stamp tax is generally due and payable to the Florida Department of Revenue no later than 20 days after the date the documentary stamp tax statement is filed with the county tax collector.
The documentary stamp tax rate on deeds, instruments, etc. is 70 cents per $100. The rate schedule for the documentary stamp tax is as follows:
As noted above, the documentary stamp tax is paid on the equity amount realized by the seller. A seller’s equity amount is decreased by the existing mortgage(s) against the subject property. The effect of this provision is that the documentary stamp tax is payable by a seller (in a taxable real estate transaction) only if the purchase price exceeds the outstanding amount of the mortgage(s) encumbering the subject property. Note that only the equity amount realized by the seller is subject to documentary stamp taxation; the amount of a buyer’s mortgage encumbering the subject property in excess of the purchase price is not subject to tax.
Recent Developments and News on Documentary Stamp Tax
In 2019, the Florida legislature considered a bill (SB 774/HB 95) that would have altered the RFT. Specifically, the bill proposed increasing the documentary stamp tax rate to $0.60 per $100 of consideration paid or consideration funded in the future; of which, $0.35 would be paid into the State and Local Government Housing Trust Fund, and the remaining would be used to increase the documentary stamp tax rate of documents related to mortgages by another $0.10 to $0.38 per $100 of consideration paid or consideration funded in the future. However, the bill failed to gain traction in both chambers and was subsequently withdrawn from consideration.
It has been more than ten years since Florida last increased the documentary stamp tax rates. In 2010, the rates on documents related to mortgages and disbursements were increased from $0.35 per $100 consideration paid or consideration funded in the future, to $0.55. Despite this increase, it is arguable that the current rates do not generate enough revenue to support growing state and local governments. Acknowledging this, the State Legislature’s Office of Economic and Demographic Research projects that the rates will not produce enough revenue. (Fla. Dep’t of Revenue, Economic & Social Tech. Adv. Ctr., Documentary Stamp Tax Study 2004-05 (Vol. 1), at 63 (2005)).
This "unexpected" deficit , however, is not unexpected at all. In 2018, the State Legislature passed sweeping legislation to provide tax relief to residents. Undoubtedly, these changes significantly reduced projected revenue from a myriad of taxes including the sales and use tax, the alcoholic beverage excise tax, the parimutuel wagering tax, and the corporate income tax. (See Fla. Stat. § 29.021(3)(e)(3) (2018); Fla. Stat. § 561.1215(1)(b)(3) (2018); Fla. Stat. § 550.105(2)(b) (2018); and Fla. Stat. § 220.181(1)(d) (2018)).
So, while there has been no official word from the Florida Department of Revenue in 2019 on expected changes to the RFT, one thing is clear, should the legislature pursue further tax relief in its 2020 legislative session, it may need to look to increase the documentary stamp tax on mortgages in order to cover the difference. This is especially true when considering that Florida’s laws are subject to periodic sunset provisions which must be renewed by the legislature every two years, so long as the applicable taxes are still being levied. (See, e.g., Fla. Stat. § 218.320(1) (2018) (the revenue estimating impact of the documentary stamp tax is renewed (or sunsets) on July 1 of every odd-numbered year.))
Until then, we will likely need to wait and see what is in store for the 2020 legislative session.