Sales and Use Tax TAA 14A-006 Tenant Improvement Allowance
QUESTION: IS THE TAXPAYER REQUIRED TO COLLECT OR PAY SALES TAX ON THE UNUSED
PORTION OF A TENANT’S TENANT IMPROVEMENT ALLOWANCE WHEN IT IS APPLIED
AS A CREDIT TO REDUCE THE RENT OTHERWISE DUE FROM THAT TENANT?
ANSWER: THE TAXPAYER’S APPLICATION OF THE UNUSED PORTION OF THE TENANT
IMPROVEMENT ALLOWANCE, AS A CREDIT TO OFFSET A TENANT’S RENTAL OBLIGATION,
IS NOT SUBJECT TO SALES TAX UNDER SECTION 212.031, F.S. BASED ON THE INFORMATION
PROVIDED, THE CREDIT PROVIDED BY THE TAXPAYER TO THE TENANT FOR THE UNUSED
TENANT IMPROVEMENT ALLOWANCE IS NOT A BENEFIT FLOWING FROM THE TENANT
TO THE TAXPAYER. THIS IS BECAUSE NO BENEFIT OTHER THAN THE REDUCTION IN
RENT CAN BE RECEIVED ACCORDING TO THE LEASE.
March 6, 2014
Re: Subject: Technical Assistance Advisement – TAA 14A-006 Sales
and Use Tax – Tenant Improvement Allowance Section 212.031, Florida
Statutes (F.S.) Rule 12A-1.070, Florida Administrative Code (F.A.C.) XXX
(“Taxpayer”) FEI # XXX
Dear XXX:
This is in response to your letter dated XXX, requesting this Department’s
issuance of a Technical Assistance Advisement (“TAA”) pursuant
to section 213.22, F.S., and Rule Chapter 12-11, F.A.C., concerning the
taxability of the Taxpayer’s application of a tenant improvement
allowance as a credit to offset rent for the lease of real property in
Florida. An examination of your letter has established you have complied
with the statutory and regulatory requirements for issuance of a TAA.
Therefore, the Department is hereby granting your request for a TAA.
Facts
Your letter provides the following, in part:
* * *
. . . Taxpayer owns commercial property located in Florida that it leases
to tenants. As an inducement to tenants to lease its properties, it is
not uncommon for Taxpayer to offer a Tenant Improvement Allowance (“TIA”)
in an amount specified in the lease agreement. The TIA is applied against
expenses incurred by Taxpayer in making improvements to the property to
be leased by the tenant. If the TIA exceeds the amount expended by Taxpayer
in making the improvements, the tenant can elect to apply the unused portion
of the TIA as a credit against the rent due under the lease agreement.
Unless the tenant elects in writing to apply the unused TIA balance as
a credit against rent within twelve months after commencement of the construction
of the improvements, the tenant loses any rights it might otherwise have
to the unused TIA balance. In other words, the tenant is only allowed
to apply the TIA against the cost of the improvements or against the rent
due under the lease agreement.
Furthermore, because it is a true inducement to the tenant, there is no
obligation for the tenant to directly or indirectly repay the TIA to Taxpayer
regardless of whether the TIA is applied against the improvement costs,
the rent or both. Subsequent rent payments under the lease do not include
any amount intended to recoup the TIA, regardless of how it is applied
or utilized by the tenant.
* * *
The Taxpayer provided a copy of the XXX (the “Agreement”) executed
on XXX, between Taxpayer, as “Landlord” and XXX, as “Tenant.”
The Taxpayer provides that the Agreement is representative of TIA provisions
included in taxpayer’s leases with its tenants. The Agreement provides
the following, in part:
* * *
XXX LEASEHOLD IMPROVEMENTS
. . . 8. Landlord agrees to construct in the XXX at Tenant’s sole
cost and expense, subject to application of the Tenant Improvement Allowance
. . . . Landlord shall provide Tenant with an allowance (“Tenant
Improvement Allowance”) of up to XXX Dollars . . . for expenditure
on the Tenant’s Work. Tenant’s right to any undisbursed portion
of the Tenant Improvement Allowance shall expire twelve (12) months following
the . . . Commencement Date, and Tenant shall not receive any payment
for any unused portion of the Tenant Improvement Allowance; provided,
however, Landlord will apply any unused portion of the Tenant improvement
Allowance towards Rent due under the Lease so long as Tenant provides
Landlord with written notice of its intent to so credit any undisbursed
portion against Rent within thirty (30) days after the expiration such
twelve (12) month period.
* * *
Requested Advisement
The Taxpayer requests that the Department issue a TAA declaring that Taxpayer is not required to collect or pay sales tax on the unused portion of a tenant’s TIA when it is applied as a credit to reduce the rent otherwise due from that tenant.
Applicable Authority and Discussion
Section 212.031(1)(a), F.S., provides that Florida sales tax applies to
the privilege of engaging in the business of renting, leasing, letting,
or granting a license for the use of real property. Section 212.031(1)(c),
F.S., provides that the tax on this privilege is levied on the total rent
charged and paid for such real property by the person charging or collecting
the rental or license fee. It is further provided in section 212.031(1)(d),
F.S., that when the rental or license fee is paid by way of property or
“other thing of value,” this also becomes a taxable element
of rent. Rule 12A-1.070(4)(b), F.A.C., supports the statute, providing
that the tax imposed on the lease or rental of real property includes
all considerations due and payable by the tenant to its landlord “for
the privilege of use, occupancy, or the right to use or occupy any real
property for any purpose.” The tax is due and payable by the lessee
at the time of the receipt of the rental or license payment by the lessor.
See section 212.031(3), F.S.
Under certain conditions, real property improvements funded by a tenant
are consideration subject to tax. Such a condition exists when the costs
of tenant funded improvements are applied as a credit to reduce the amount
of rent due. See Department of Revenue v. Seminole Clubs, Inc., 745 So.2d
473 (Fla. 5th DCA 1999). This TAA does not address the taxability of tenant
funded improvements, but focuses solely on improvements funded by a landlord.
As a general practice, a tenant improvement allowance is a negotiated amount
of money a landlord is willing to spend to improve or customize commercial
office space for the needs of a particular tenant. In some cases, the
tenant will pay for the improvement, and the landlord will reimburse the
expenses paid by the tenant up to a certain negotiated amount. In other
cases, the landlord will pay for the improvements, and the tenant will
reimburse the landlord for costs that exceed the agreed upon allowance.
In either case, the tenant improvement allowance represents an amount
to be paid by the landlord. The real property improvements funded by a
landlord are not part of taxable rental consideration.
In cases where the costs of the improvements are less than the agreed upon
allowance, the difference is a savings to the landlord.
For certain leases in which unused tenant allowances automatically reduce
rental amounts due and payable for purposes of s. 212.031, F.S., by the
amount of the unused allowance, the tax may be due on the reduced rent.
However, when unused tenant allowances are refunded to the tenant in money,
equipment, moving cost reimbursement, property, other reimbursements,
or other consideration, then the tax is due on the full amount of the
rent, without offset. See s. 212.031(1)(d), F.S. Therefore, if a tenant
is allowed an option of different consideration or a credit, the total
rent for purposes of s. 212.031(1)(c), F.S., is determined without deduction.
In addition, if the election pursuant to the lease requires the tenant
to report the benefit received as income for federal income tax purposes,
no reduction can be made because the benefit is construed to be consideration.
In the instant case, the Agreement provides that the Taxpayer “will
apply any unused portion of the Tenant Improvement Allowance towards Rent
due.” The Taxpayer “shall not receive any payment for any
unused portion of the Tenant Improvement Allowance.” The Taxpayer
can apply the Tenant Improvement Allowance to the completion of the Improvements,
and any unused portion can only be applied towards rent. The unused portion
does not become a monetary benefit that the Taxpayer can use for any purpose,
including the payment of rent. If such were the case, the Taxpayer’s
payment of rent from proceeds derived from the unused portion of the Tenant
Improvement Allowance would be rental consideration subject to tax. In
other words, if the Tenant could receive a payment from the Taxpayer for
the unused Tenant Improvement Allowance and subsequently could choose
to pay the Taxpayer rent from the payment received, the rental payment
would be subject to tax.
As provided, the tax is due and payable by the lessee at the time of the
receipt of the rental payment by the lessor. In Florida Revenue Commission
v. Maas Brothers. Inc.. 226 So.2d 849, 853 (Fla. App. 1st DCA 1969), the
Court determined that the reason for this is, in part, “primarily
for the protection of the landlord and relieves him from liability for
payment of the tax unless and until the rental is actually received by
him. . . .” The court concluded that “[t]he amount of tax
to be paid is measured by the amount of rentals received, and is the sum
equivalent to [the tax multiplied by the amount of] the rentals charged
and paid.” Id. at 351.
In Seaboard Coast Line Railroad Company v. Askew, Case Number 72-15 (Fla.
Second Judicial Circuit 1972), the court provided that the language of
section 212.031, F.S., “clearly indicates a legislative intent to
tax the full benefits flowing to the landlord for the use of the leased
premises.” When the amount saved by the Taxpayer is applied as an
offset to the Tenant’s rental consideration due, the application
of the savings does not become consideration paid for the right to occupy
the Taxpayer’s property. It represents an amount that would have
been reimbursed by the Taxpayer to the Tenant. While the amount of savings
has value, it does not become rental consideration because it is not an
amount paid to and received by the Taxpayer.
Here, based on the information provided, the credit provided by the Taxpayer
to the Tenant for the unused Tenant Improvement Allowance is not a benefit
flowing from the Tenant to the Taxpayer. This is because no benefit other
than the reduction in rent can be received according to the lease.
Conclusion
The Taxpayer’s application of the unused portion of the Tenant Improvement
Allowance, as a credit to offset a tenant’s rental obligation, is
not subject to sales tax under section 212.031, F.S.
This response constitutes a Technical Assistance Advisement under section
213.22, F.S., which is binding on the Department only under the facts
and circumstances described in the request for this advice as specified
in section 213.22, F.S. Our response is predicated on those facts and
the specific situation summarized above. You are advised that subsequent
statutory or administrative rule changes, or judicial interpretations
of the statutes or rules, upon which this advice is based, may subject
similar future transactions to a different treatment than that expressed
in this response. You are further advised that this response, your request
and related backup documents are public records under Chapter 119, F.S.,
and are subject to disclosure to the public under the conditions of section
213.22, F.S. Confidential information must be deleted before public disclosure.
In an effort to protect confidentiality, we request you provide the undersigned
with an edited copy of your request for Technical Assistance Advisement,
the backup material, and this response, deleting names, addresses, and
any other details which might lead to identification of the taxpayer.
Your response should be received by the Department within 15 days of the
date of this letter.
Sincerely,
Brinton Hevey Tax Law Specialist Technical Assistance and Dispute Resolution
850 717-6839
Record ID: 152916