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:

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. . . 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.

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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:

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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.

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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