Sales and Use Tax TAA 13A-023

Tenant Improvements

QUESTION: Are a tenant’s reimbursement of funds expended on the tenant’s behalf subject to the tax imposed in section 212.031, F.S., when the funds are for improvements solely to make the premises suitable for the tenant’s intended operation, are not mandatory, and are not in lieu of rent?

ANSWER: No, the improvement repayments are not subject to the tax imposed by section 212.031, F.S. The improvements are made in order to “to allow [the Taxpayer] to occupy the Premises for the use and purposes intended.” There is not a requirement to spend a specific or minimum amount of money on the improvements, there is no credit given against rental payments, the improvements are not explicitly classified as rent, additional rent, rent-in-kind, or in lieu of rent, and there is no evidence that there was an attempt to reclassify rental payments to avoid the tax.

October 28, 2013

Re: Subject: Technical Assistance Advisement – TAA 13A-023 
Sales and Use Tax – Tenant Improvements 
Section 212.031, Florida Statutes (F.S.) 
Rule 12A-1.070, Florida Administrative Code (F.A.C.) 

Dear XX:

This is in response to your letter received on August 27, 2013, 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 repayment of a “Landlord’s Allowance” by a lessee 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] . . . is a Florida Limited Liability Company operating in XX, Florida. Taxpayer recently leased a property from a commercial property owner . . . [Landlord]. Under the terms of the lease, Landlord would, up to a set amount of cost to Landlord, improve the property at Landlord’s expense to the condition suitable for Taxpayer’s operations, hereinafter called the “Turnkey Improvements.” This set maximum cost to landlord is herein after referred to as the “Landlord’s Allowance.” In the event that the cost of the Improvements exceeded the Allowance, Taxpayer agreed to reimburse Landlord for the cost of the Improvements above the Allowance amount. The amount of the improvements in excess of the allowance is hereinafter referred to as the “Tenant’s Costs.” Per the lease, the Tenant’s Costs represent a reimbursement of monies expended by Landlord on Tenant’s Behalf. The improvements were done solely to put the property in condition suitable to the taxpayer’s operations. There was no requirement in the lease that a set amount of improvements were required and had the costs of improvements not exceeded the Landlord’s allowance no monies would have been due from the taxpayer. The improvements were not in any way in lieu of rent. The improvements were not mandatory.

Included with your request for advisement is a copy of a lease agreement executed November 30, 2011, by the Taxpayer and Landlord (the Agreement). The Agreement provides the following in part: 
. . . 5. Rent: Late Charge. For purposes of this Lease, all sums due from [the Taxpayer] . . . shall be deemed to be “rent” whether or not specifically designated as such. . . .

* * *

9. Maintenance; Utilities. 

. . . (d) At the expiration or earlier termination of the Term, [the Taxpayer] shall surrender the Premises to Landlord . . . . All leasehold improvements (other than movable trade fixtures . . . ) shall at the expiration or earlier termination of this Lease become Landlord's property; provided, however, that [the Taxpayer] shall, at the expiration or earlier termination of the Term, at its sole cost, remove such of the leasehold improvements (except for improvements installed by Landlord prior to the Commencement Date) and trade fixtures in the Premises as Landlord shall require to be removed and restore the Premises to the condition existing prior to such removal. . . . 

Included with the Agreement is a copy of Exhibit D, the “Work Letter.” The Work Letter provides the following in part: 

(a) Landlord, at its expense, will cause Substantial Completion, as hereinafter defined, of the improvements listed on Schedule I attached hereto and made a part hereof (the “Turnkey Improvements”) . . . . 

(b) Landlord, at its expense . . ., will cause Substantial Completion, attached hereto and made a part hereof (the “Allowance Improvements”) . . . . 

(c) For purposes hereof, the Turnkey Improvements and the Allowance Improvements are collectively referred to as the “Tenant Improvements” or as the “Landlord's Work.” 
. . .

(h) “Substantial Completion” shall mean that a certificate of occupancy (temporary or final, so long as Tenant can occupy the Premises) has been obtained for Landlord's Work and that the Tenant Improvements are sufficiently complete so as to allow Tenant to occupy the Premises for the use and purposes intended without unreasonable disturbance or interruption . . . . 

(l) . . . If [the Taxpayer] requests (and Landlord approves) any non-Building-standard improvements, then any and all non-Building-standard improvements . . . will be at [the Taxpayer’s] expense . . . (“Tenant’s Costs”). 

(m) With respect to the Allowance Improvements, Landlord will provide the following allowances as a credit against the cost of the construction of the Allowance Improvements, as well as architectural and engineering fees and permit fees: 

i. Office Area (approximately 31,292 square feet): $10.00 per square foot of the Office Area (the “Office Allowance”). 

ii. Warehouse Lighting: $215,000. (the "Lighting Allowance"). 

iii. Emergency lighting and fire alarm devices: $20,000.00 (the "Emergency Lighting/Fire Alarm Allowance"). 

To the extent that the total cost of the improvements to the Office Area exceeds the Office Allowance, and total cost of the emergency lighting and fire alarm devices exceeds the Emergency Lighting/Fire Alarm Allowance, [the Taxpayer] shall pay the full amount of such excess as part of Tenant’s Costs. [The Taxpayer] shall receive no credit or payment for any unused portion of the Office Allowance, Lighting Allowance, or Emergency Lighting/Fire Alarm Allowance; provided, however, that [the Taxpayer] may apply any unused portion of the Office Allowance, Lighting Allowance, or Emergency Lighting/Fire Alarm Allowance toward Tenant’s Costs in excess of the Tenant Specific Allowance (as hereinafter defined). 
(n) Tenant’s Costs shall be paid to Landlord as follows: 

i. Prior to commencement of construction of the Tenant Improvements, [the Taxpayer] shall pay Landlord an amount equal to fifty (50%) percent of the Tenant’s Costs, as such amount is then determined by reference to the Construction Budget, plus, if Tenant’s Costs exceed $50,000.00 (as determined by reference to the Construction Budget), [the Taxpayer] shall pay to Landlord the full amount of the excess over $50,000.00. 

ii. When fifty (50%) percent of the Tenant Improvements are complete in accordance with the plans and specifications (as verified in writing by Landlord’s architect), [the Taxpayer] shall pay Landlord an amount equal to the remaining unpaid balance of Tenant’s Costs, as such amount can then be reasonably determined by Landlord based on available information. 

iii. Within ten (10) days following Landlord’s submittal to [the Taxpayer] of a final accounting of Tenant’s Costs, [the Taxpayer] shall pay Landlord the then remaining balance of Tenant’s Costs, or Landlord shall reimburse Tenant as to any excess amounts previously paid, as the case may be. 

Tenant’s Costs represent a reimbursement of monies expended by Landlord on Tenant’s behalf. Payment when due shall be a condition to Landlord’s continued performance under this Exhibit. Any delay in construction of the Allowance Improvements or in Tenant taking occupancy of the Premises resulting from Tenant’s failure to make any Tenant’s Costs payments when due shall be Tenant’s responsibility. Tenant’s failure to pay any portion of Tenant’s Costs when due shall constitute a default under the Lease (subject to any applicable notice requirements or grace periods), entitling Landlord to all of its remedies thereunder. 
(o) In addition to the allowances set forth above, Landlord shall be responsible to contribute up to One Million Five Hundred and No/l00 ($1,500,000.00) Dollars (of which up to $250,000.00 can be used for moving expenses) for alterations and improvements to be made to the Premises by Tenant (including any necessary demolition and including any architectural and engineering fees) and/or for Tenant’s Costs described above (the “Tenant Specific Allowance”). . . .

* * *

Requested Advisement 

You request that the Department issue an advisement ruling that a tenant’s reimbursement of funds expended on the tenant’s behalf are not subject to the tax imposed in section 212.031, F.S., when the funds are for improvements solely to make the premises suitable for the tenant’s intended operation, are not mandatory, and are not in lieu of rent.

Applicable Authority and Discussion 

Section 212.031(1)(a) and (c), F.S., imposes a tax on the “total rent or license fee” charged for the renting, leasing, or letting of any real property. It is further provided in s. 212.031(1)(d), F.S., that when the rental 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., provides that all consideration due and payable by the tenant for the rights or privilege required by the lease is “rent” and includes a legislative intent to tax the full benefits flowing to the landlord for the use of the leased premises. See Seaboard Coast Line Railroad Company v. Askew, Case Number 72-15 (Fla. Second Judicial Circuit 1972). The court went on to say that the language of s. 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.” 

The taxability of the amount paid for improvements by a tenant depends on whether or not the improvements are required by terms of the lease agreement and are necessary in order to maintain possession of the property.

In Department of Revenue v. Ruehl No. 925, LLC, 76 So.3d 389 (Fla. 1st DCA 2011), the 1st District Court of Appeals affirmed the lower court’s ruling that certain improvements were not rent subject to Florida’s sales and use tax on commercial rentals, notwithstanding the improvements became the property of the landlord. Applying the Ruehl decision, the Department considers tenant improvements required to be completed by the lease or license that become the property of the landlord are not taxable as part of the total rental charged under the following conditions: 

• the improvements are made in order to put the premises in a condition suitable for the operation of the tenant’s business; 
• there is no requirement to spend a specific or minimum amount of money on the improvements; 
• there is no credit given against rental payments; 
• the improvements are not explicitly classified as rent, additional rent, rent-in-kind, or in lieu of rent; and 
• there is no evidence that there was an attempt to reclassify rental payments to avoid the tax.

In this case, review of the Work Letter provides that the Landlord will contribute various allowances “as a credit against the cost of the construction” of the subject improvements to the leased property. The purpose of the improvements is “to allow [the Taxpayer] to occupy the Premises for the use and purposes intended.” The Work Letter provides that to the extent that the total cost of the improvements exceeds the Landlord allowances, the Taxpayer shall pay the full amount of the excess to the Landlord. The Work Letter provides that the Taxpayer shall not receive “credit or payment” for any unused portion of the allowances. The Agreement does not require the Taxpayer to spend a specific or minimum amount to be paid by the Taxpayer. Review of the “Base Rent” section of the Agreement reveals that the repayments are not credited towards the monthly rental payments. Review of the Agreement reveals that the repayments have not been put in place as an attempt to reclassify rental payments to avoid sales tax.

The Agreement provides that “all sums due from Tenant . . . shall be deemed to be ‘rent’ whether or not specifically designated as such.” However, at the time of the signing of the Agreement, the repayments are not due, because it is unknown whether the cost of the improvements will exceed the Landlord’s allowances when completed. In other words, the repayments are not explicitly classified as rent, additional rent, rent-in-kind, or in lieu of rent per the terms of the Agreement. 

Conclusion 

Based on the information provided, the improvement repayments are not subject to the tax imposed by section 212.031, F.S. The improvements are made in order to “to allow [the Taxpayer] to occupy the Premises for the use and purposes intended.” There is not a requirement to spend a specific or minimum amount of money on the improvements, there is no credit given against rental payments, the improvements are not explicitly classified as rent, additional rent, rent-in-kind, or in lieu of rent, and there is no evidence that there was an attempt to reclassify rental payments to avoid the tax. 

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: 151208