FLORIDA REAL PROPERTY LEASE FOR RE-LEASING - EXEMPT FROM SALES TAX?
Arnold Palmer once said, "Golf is deceptively simple and endlessly complicated." The same can be said of sales taxes and a recent Technical Assistance Advisement ("TAA") issued by the Florida Department of Revenue ("FL DOR") is a perfectly frustrating example. As the only state in the country with a sales tax on the rental of commercial real estate, Florida must invent ways to deal with complicated real estate transactions with absolutely no guidance from other states or, in some cases, completely convoluting the law. Such is the case with TAA 12A-010 (April 6, 2012), which attempts to shed a bit of clarity on the issue of subletting real property to governmental tenants.
This TAA has a rather simple set of facts. Business A rents all the space in a commercial building from Landlord. This lease is subject to sales tax as commercial rent, unless an exemption applies. Business A does not need all the space and sublets the property to a sub-tenant that just happens to be a governmental entity. The sublease is exempt from sales tax on rent as a governmental entity. So the simple question at the heart of the TAA is whether Landlord is allowed to exempt Business A from sales tax on the portion of the rent attributable to what is re-rented to the governmental sub-tenant.
Cutting to the chase, as the facts and questions are proposed in the TAA, the answer is NO, sales tax must be collected on the whole rent collected from Business A. The TAA attempts to use section 212.031(2)(b), Florida Statutes ("F.S."), to assert that allowing such a reduction in rent would be a decrease in sales tax due the government via "reverse pyramiding." More specifically, rule 12A-1.070(5) provides:
Only one tax on the rental or license fee payable from the occupancy or use of any real property from which the rental or license fee is subject to taxation under Sec. 212.031, F.S., shall be collected, and the tax shall not be pyramided by a processional of transactions; however, the amount of tax due the State of Florida shall not be decreased by any such progression of transactions.
While a very creative argument, the sales tax exemption granted to governmental entities is not reverse pyramiding. The reason why the Landlord cannot accept the exemption certificate of the governmental sub-tenant is simply because there is no legislative or administrative mechanism that would allow the Landlord to accept the governmental sub-tenants exemption certificate through the tenant as a way to exempt Business A from part of the sales tax obligations on part of the rent due to Landlord. As the TAA correctly points out, the governmental entity would have to rent the property directly from the Landlord to allow the Landlord to accept an exemption certificate from the governmental entity.
What the TAA does not address, but should, is whether Business A could give Landlord a resale certificate for the rent, thereby exempting Landlord from a collection obligation on any of the rent. Business A could then self accrue sales tax on the portion of the property used by Business A and accept the sales tax exemption certificate from the governmental sub-tenant. If this would be allowed, then would it not affectively accomplish what the parties were attempting to do? Only a month later, the FL DOR spelled out how a landlord can except a resale certificate from a tenant when the tenant plans to re-rent a substantial portion of the leased premises in TAA 12A-020 (Sept. 7, 2012). Why would the FL DOR not provide this obviously relevant information to the taxpayer requesting the TAA at the heart of this article? Because the taxpayer did not ask the question specific enough and the FL DOR is not in the business of helping taxpayers lower their tax burdens. This is also a good example of why the author often refers to the FL DOR as "our comrades in Tallahassee."
Just to clarify, the concept of reverse (aka inverse) pyramding refers to reducing the overall tax to the government by the sum total of all subleases being less combined rent on the master lease. For example, presume that a master lease was signed at the height of the real estate market for $50,000 a month and the tenant properly gave a re-sale (re-lease?) certificate to the landlord/owner. The first level tenant released the property to various sub-level tenants for a collective rent of $100,000 per month. The state has no problem with this scenario because more tax dollars are collected. However, as the real estate market crashes, the first level tenant has trouble re-leasing the parts of the property and has to substanially reduce rental rates. (Sound familiar to anyone?) Eventually, the landlord's overall rental income from the various pieces of the property are less than the $50,000 a month due on the master lease. According to the Department of Revenue's position under Rule 12A-1.070(5), FAC, the first tier landlord may not remit less sales tax on all the sub-rentals than the $50,000 master lease would require. There is some real question whether the FL DOR has the authority to do this, but this is their position. If the first teir landlord is only re-renting part of the property, then there the taxpayer must caculate what is the minimum rent that must be submitted under this logic, usually by square footage. However, it is strongly adviseable to have the FL DOR sign off on the alocation method via a TAA.
Rather than hurling a TAA request onto the wall to see if it sticks, this TAA is also good example of why it is advisable to first request a Letter of Technical Advice ("LTA"), which is both anonymous and non-binding (on the Department and the taxpayer) During the LTA process, communication is the key. If you actively communicate with the agent(s) working on the LTA during the process and get feedback on the direction the answer is going, then you can have a chance to explore other ways to handle the transaction that might get a better answer. Only after the answer and your proposed facts are as you would like, you submit a TAA request to make the answer binding.
If you have any questions about this TAA, sales tax on real property (sub)leases, or the LTA/TAA process in general, then please do not hesitate to contact our firm for a free initial consultation.
ABOUT THE AUTHOR: MR. SUTTON IS A FLORIDA LICENSED CPA AND ATTORNEY AND A SHAREHOLDER IN THE LAW FIRM the Law Offices of Moffa, Sutton, & Donnini, P.A. MR. SUTTON IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM AND HIS PRIMARY PRACTICE IS FLORIDA SALES AND USE TAX CONTROVERSY. MR. SUTTON WORKED FOR THE STATE AND LOCAL TAX DEPARTMENT OF A BIG FIVE ACCOUNTING FIRM FOR A NUMBER OF YEARS AND HAS BEEN AN ADJUNCT PROFESSOR OF LAW AT STETSON UNIVERSITY COLLEGE OF LAW SINCE 2002 TEACHING STATE AND LOCAL TAX, ACCOUNTING FOR LAWYERS, AND FEDERAL INCOME TAX I. YOU CAN READ MORE ABOUT MR. SUTTON IN HIS FIRM BIO.
AUTHORITY
§ 212.031(1) F.S., (Real property rentals are subject to sales tax and tax rate)
§ 212.031(2)(b), F.S., (inverse pyramiding)
Rule12A-1.070(5), FAC (pyramiding of taxes)
TAA 12A-010 (April 6, 2012)
TAA 12A-020 (Sept. 7, 2012)
ADDITIONAL RESOURCES
FL TAA ALERT – RENT FREE MONTHS vs SALES TAX?, November 11, 2012, by James Sutton, CPA, Esq.
FLORIDA TAXPAYER BILL OF RIGHTS, July 8, 2012, by James Sutton, CPA, Esq.
© 2012 All rights reserved - James H Sutton Jr