TAA 16A-008 - Sales and Use Tax - Rental of Real Property
Question: Advice is requested on whether certain payments that are made by a lessee to the lessor, in addition to rent, are subject to floridasales tax as a partof the total rental consideration.
Answer: Yes. The additional payments are payments for the right to occupy and use the leased premises (Real property) And are subject to sales tax as a part of the total rental consideration.
June 24, 2016
Re: Technical Assistance Advisement 16A-008
Sales and Use Tax – Rental of Real Property
Sections: 212.031, Florida Statutes (“F.S.”)
Rule: 12A-1.070, Florida Administrative Code (F.A.C.)
Dear XXXX:
This letter is a response to your petition February 5, 2016, for the Florida Department of Revenue’s (the “Department”) issuance of a Technical Assistance Advisement ("TAA") concerning the above referenced party and matter. Your petition has been carefully examined and the Department finds it to be in compliance with the requisite criteria set forth in Chapter 12-11, Florida Administrative Code. This response to your request constitutes a TAA and is issued to you under the authority of s. 213.22, F.S.
Requested Advisement
Advice is requested on whether certain payments that are made by a lessee to the lessor, in addition to rent, are subject to Florida sales tax as a part of the total rental consideration.
Brief Answer
Yes. The additional payments are payments for the right to occupy and use the leased premises (real property) and are subject to sales tax as a part of the total rental consideration.
Facts
You are a representative for the XXXX (the “Lessor”). According to your letter, on or about June 1, 1998, both Lessor and XXX, Inc. (the “Lessee”) entered into a thirty year lease agreement (the “Original Lease”) for the lease of certain real property that served as the premises for certain hospitals located in XXXX County, Florida (collectively the “Leased Premises”). The Original Lease contained, among other things, several provisions relating to the rental of the Leased Premises. Article III, section 3.3, of the Original Lease states that the annual rental payment for the Leased Premises for the Lease Term shall be $300,000.1 Article VI, sections 6.1 – 6.6 require the Lessee to maintain certain types and levels of insurance coverage for the protection of both the Lessor and Lessee. Article VII, sections 7.2 and 7.3 of the Original Lease provide that repairs, alterations, and improvements shall be made at Lessee’s expense, and will become the property of the Lessor.
Several competitor hospitals objected to the lease agreement between the Lessor and Lessee, as Lessee did not have to pay various property taxes and assessments for the Leased Premises that would normally have been levied against the Leased Premises if Lessor were not exempt from taxes and related assessments. In order to address these concerns, on or about December 2, 2005, both Lessor and Lessee signed an amendment to the Original Lease (the “First Amendment”). The First Amendment contained, among other things, several provisions that extended the lease term,2 and added an additional property to the Leased Premises,3 and several provisions related to rent and additional payments. The First Amendment amends section 3.3 of the Original Lease to provide, in part, the following:
3.3.2 The Lessee shall pay to Lessor on an annual basis, either as rent or by virtue of a payment to XXXX County of an amount (“Additional Payment”)4 equal to sum of the following:
3.3.2.1 An amount equal to that portion of the ad valorem taxes that would have been paid to XXXX County on the Leased Premises …
3.3.2.2 An amount equal to that portion of the ad valorem taxes that would have been paid to the XXXX Fire and Rescue District … and/or any other special taxing district that may be established pursuant to law; and
3.3.2.3 An amount equal to all special assessments levied by XXXX County through any municipal Service Benefit Unit …; and
3 3.3.2.4 An amount equal to all ad valorem tax levied by XXXX County through any Municipal Service Taxing Unit created by XXXX County pursuant to the provisions of Section 125.01, Florida Statutes.
Lessor did not charge, collect, or remit sales tax to the Department on the additional rental payments. Subsequent to the signing of the First Amendment, the Lessor was audited by the Department. The Department assessed sales tax on the additional rental payments made by Lessee to Lessor, as a part of the total rental consideration for the Leased Premises.
Lessor disagreed with the assessment and filed a Petition for Formal Administrative Hearing (the “Administrative Hearing”).
During the pendency of the Administrative Hearing, on or about September 13, 2013, both Lessor and Lessee signed a second amendment to the Original Lease (the “Second Amendment”). The Second Amendment amends Article III, section 3.3 “Rental Payments,” of the Original Lease and First Amendment, and states, among other things, that rent payments are $3,300,000.00 per year, and the rental payments may be subject to Florida sales tax.5 Section 3.3.2 “Additional Payment for County Services” provides for additional payments in an amount equal to the ad valorem and special assessment taxes, to be paid for by Lessee. The Second Amendment states that the additional payment is not intended to constitute rent and is not intended to create an event subject to Florida sales tax.6
On December 30, 2011, after the Administrative Hearing on the issue, the Judge issued a recommended order and ruled that the additional payments were a part of the rental consideration paid by Lessee to Lessor, regardless of the parties’ intent, and were subject to sales tax.7 Your inquiry states that, in the abundance of caution, the Lessor has included sales tax on the “Additional Payments” on most of its recent invoices to the Lessee.
You request guidance on whether the “additional payments” are subject to Florida sales tax.
Law and Response
Florida law imposes a state sales tax on the general privilege of engaging in the business of renting, leasing, letting, or granting a license for the use of any real property. See s. 212.031, F.S. The tax is imposed at the rate of six percent (6%) on “the total rent or license fee charged for such real property by the person charging or collecting the rental or license fee.”8 (Emphasis provided.) See s. 212.031(1)(c), F.S. The total rental or license fee includes “all considerations due and payable by the tenant … to his landlord … for the privilege of use, occupancy or the right to use or occupy any real property for any purpose,” and specifically includes ad valorem taxes paid by the tenant to the landlord or any other person on behalf of the landlord. See Rule 12A-1.070(4)(b), (c), F.A.C. See also Cascella v. Canaveral Port Authority, 827 So.2d 308, 310 (Fla. 5th DCA 2002)(Citing Black’s Law Dictionary 1299 (7th ed. 1999)). With respect to insurance premiums paid by a tenant, Florida law provides that any portion of the premium which secures the protection of the landlord or person granting the right to occupy or use such real property and which is separately stated or itemized is regarded as rental or license fee consideration and is taxable. See Rule 12A-1.070(12), F.A.C.
The tax is to be charged by the landlord, in addition to the total amount of the rental, “in and by a rental or license fee arrangement with the tenant … and shall be due and payable at the time of the receipt of” rent payments by the landlord. See s. 212.031(2)(a),(3), F.S. The tax shall be separately stated as Florida tax on any tangible evidence of sale. See s. 212.07(2), F.S. The tax is to be paid by the tenant to the landlord. See s. 212.031(1)(b), F.S. A landlord who fails to remit the tax due is liable for paying the tax, as well as interest and penalties. See generally ss. 212.07 and 212.12, F.S. Similarly, a tenant who fails to pay the tax on taxable rental payments is “directly liable to the state for any tax, interest, or penalty due on any such taxable transactions.” See s. 212.07(8), F.S.
Under the facts presented, Lessor is engaged in the privilege of renting real property to Lessee; therefore, the general rule of taxability applies. Based on a review of all lease agreements, the base rental payments of $3,300,000.00 per year, plus any additional considerations due and payable by the Lessee for the privilege of use and occupancy, or the right to use or occupy, the Leased Premises are subject to sales tax. The First and Second Amendments state that the Lessee shall pay to Lessor, on an annual basis, either as rent or by virtue of a payment to XXXX County of an amount (“Additional Payment”) equal to the sum of the amounts that would equal or approximate to certain portions of the ad valorem or special assessment taxes that would have been assessed against the property if Lessor were not exempt.9 These “Additional Payments” are payments for the right to occupy and use the Leased Premises (real property) and are subject to sales tax, as discussed above, as a part of the total rental consideration. See s. 212.031(1)(c), F.S.
Your inquiry states that the Lessor has included sales tax on the “Additional Payments” on “most” of its recent invoices to the Lessee. Please note that the Lessor must charge, collect, and remit the tax to the Department, and, if the Lessor fails to remit the tax due, Lessor is liable for paying the tax, as well as interest and penalties. See generally ss. 212.07 and 212.12, F.S. Similarly, the Lessee is directly liable to the state for any tax, interest, or penalty due on the taxable transactions if Lessee fails to pay the tax. See s. 212.07(8), F.S. Furthermore, please note that the “total rental consideration” may also include certain payments for real property improvements10 that are required by the lease agreement and 5 become the property of the Lessor, and certain payments for insurance premiums that secure the protection of the Lessor, and which is separately stated on a contract or invoice. See Rule 12A-1.070(12), F.A.C.
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, Pamela Hernandez, Esq. Senior Attorney Technical Assistance & Dispute Resolution
Record ID: 209642
End Notes:
- See s. 3.3 “Rent” of the Original Lease.
- The First Amendment modified section 3.1 “Lease Term” of the Original Lease and extended the term for an additional fifteen years.
- Section 3.2 of the First Amendment amended the “Leased Premises” section of the Original Lease.
- According to your inquiry, these amounts were deliberately structured to equal or approximate the actual costs or assessments that would have been factored into the total ad valorem taxes and real property assessments levied on the property.
- See s. 3.3.1 “Rent” of the Second Amendment.
- See s. 3.3.2.4 of the Second Amendment.
- Lessor eventually entered into a settlement agreement with the Department to pay the assessment.
- Discretionary county sales surtax, if any, is also owed on the rental charge if the 6% Florida state sales tax applies. See s. 212.054, F.S.
- As mentioned in your request, these amounts were deliberately structured to equal or approximate the actual costs or assessments that would have been factored into the total ad valorem taxes and real property assessments levied on the property.
- The taxability of the amounts 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. See Department of Revenue v. Seminole Clubs, Inc., 745 So.2d 473 (Fla. 5th DCA 1999), and Department of Revenue v. Ruehl No. 925, LLC, 76 So.3d 389 (Fla. 1st DCA 2011).
