TAA 21A-007 Real Property Lease

QUESTION: Whether leasehold improvements are real property rental consideration? 

ANSWER: No. The tenant owns the improvements and the criteria in the Ruehl decision are not present.

April 23, 2021

Technical Assistance Advisement No. 21A-007

Sales and Use Tax – Real Property Lease Payments

XXXXXX (“Petitioner”)

XXXXXX (“County” or “Landlord”)

XXXXXX (“Tenant”) (“Taxpayer”)

ZAMS: 470174

BPN: XXXXXXX

FEI No.: XX-XXXXXXX

Sections 212.031, Florida Statutes (F.S.);

Rule 12A-1.070, Florida Administrative Code (F.A.C.)

Dear XXX XXXXX: 

This letter is a response to your petition on behalf of Petitioner, dated August 20, 2020, for the Florida Department of Revenue’s (the “Department’s”) issuance of a Technical Assistance Advisement ("TAA") with regards to the sales tax implications on the lease of real property. Your original petition, and additional documentation submitted thereafter 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. This TAA incorporates by reference the previous Letter of Technical Advice (“LTA”) to Taxpayer.

Requested Advisement 

Whether Taxpayer’s expenditures on real property improvements pursuant to the lease of real property are subject to sales tax?

Facts 

Petitioner is in the automobile retail and service industry. Petitioner and Tenant are related parties. XXXXXX County owns the XXXXXXXXX. Tenant entered into a 10-year lease agreement to lease real property located at the XXXXX from the County/Landlord. The lease is renewable for up to 20 additional years. A copy of the lease agreement was provided.

The leased premises must be used by the Tenant as an automotive dealership and repair facility. Tenant was required to pay an initial annual rental of $XXXXX, plus sales tax. The rental payment is a fair market value rental. The lease requires an increase of the rental amount based on an increased appraisal value. 

Pursuant to paragraph 5.06 of the lease agreement, the lease shall be deemed to be ‘triple net’ without cost or expense to Landlord for all costs and expenses including, but not limited to, cost and expenses relating to taxes, insurance, and the maintenance and operation of the leased premises. Paragraph 5.07 provides that Tenant is required to pay all taxes, fees, and special assessments on the premises, including leasehold improvements; while paragraph 5.08 indicates that “[a]ny and all sums of money or charges required to be paid by Tenant under this Lease, other than the annual rental, shall be considered “Additional Rent” . . ..” A copy of the County property tax assessment is included in request. County is identified as the lessor.

Article 6 of the lease agreement provides Tenant is required, at Tenant’s cost, to make certain improvements that must be approved by Landlord. Tenant was required to make initial leasehold improvements by constructing an automotive sales and service facility consisting of 50,000 square feet. Tenant made a “Minimum Capital Investment” of $5,000,000 for the initial leasehold improvements. Tenant is the owner of the improvements during the lease term. Tenant depreciates the cost of the improvements for accounting and federal income tax purposes. Ownership to the improvements will be transferred to Landlord at the end of the lease term, or earlier termination, except for removable furniture, fixtures, equipment, and lifts.

Questions 

Question #1: Is the $XXXXX minimum spending requirement relating to the leasehold improvements and facility construction considered an additional rental consideration subject to sales tax?

Question #2: If the required minimum leasehold requirement improvement costs of $XXXXX are considered taxable additional rental consideration, is spending beyond the required minimum also considered an additional rental consideration subject to sales tax?

Question #3: Are the ad valorem real property tax payments made to Landlord in relation to the lease agreement considered additional rental considerations subject to sales tax?

Requested Advisement 

The amounts paid for the leasehold improvements and property taxes are not rental considerations subject to sales tax. The request cites Florida Department of Revenue v. Ruehl No. 925, LLC, 76 So.3d 389 (Fla. 1st DCA 2011)(“Ruehl”); Florida Department of Revenue v. Seminole Clubs, Inc., 745 So.2d 473 (Nov. 19, 1999)(“Seminole”); and TAA 13A-023.

Law and Discussion 

Section 212.031(1)(a), F.S., provides that every person is exercising a taxable privilege who engages in the business of renting, leasing, or granting a license for the use of any real property. The sales tax is imposed on the “total rent or license fee charged for such real property by the person charging or collecting the rental or license fee.” See s. 212.031(1)(c), F.S. The total rent 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.” See Rule 12A-1.070(4)(b), F.A.C.

The term “lease” is defined by Black’s Law Dictionary at 907 (Deluxe 8th edition, 2004) as, among other things, “[a] contract by which a rightful possessor of real property conveys the right to use and occupy the property in exchange of consideration.” Rent is defined as “consideration paid, usually periodically, for use or occupation of real property.” See Cascella v. Canaveral Port Authority, 827 So.2d 308 (Fla. 5th DCA 2002)(citing Black’s Law Dictionary 1299 (7th ed. 1999)).

Tax is imposed on the total consideration furnished by the lease to the lessor. This includes consideration paid directly to the lessor, or indirectly to someone other than the lessor on the lessor’s behalf. All payments made on behalf of the owner of commercial real property that benefit the owner of the commercial real property are considered “rent consideration” and are therefore subject to Florida sales tax. See Seaboard Coastline Railroad Company v. Askew, #72-15 (Fla. Cir. Ct., 2nd Cir., Leon Co., 1972).

The court in Seaboard addressed the issue of what is included as rental consideration. The court established that consideration paid by the tenant for the privilege conferred by the lease is “rent.” The court determined that rent may be payable in cash, or in some commodity, or by rendering specified services, and that rent may be payable directly to the lessor or to some other person either specified in the lease or directed by the lessor. Accordingly, the court concluded that the statutory language clearly indicates a legislative intent to tax the full benefits flowing to the landlord for the use of the leased premises. Specifically, ad valorem taxes paid by a tenant to any person, on behalf of the landlord, are subject to sales tax. See Rule 12A-1.070(4)(c), F.A.C.

The lease agreement requires Tenant to pay an initial annual fair market value rental consideration, and to spend a minimum of $XXXXX for initial leasehold improvements to build the dealership improvements of which Tenant is the owner. Even though a leasehold estate implies ownership of temporary real property rights, such as to hold and use land or property, the leasehold is only an interest, not physical or corporal property, therefore it is considered intangible personal property. Furthermore, Florida law provides that all leasehold estate, or related possessory interest, in property of the United States, the State of Florida, or any of its political subdivisions, municipalities, agencies, authorities, or other governmental units, are to be taxed as intangible personal property if the leased property is undeveloped or predominately used for a residential or commercial purpose, and rental payments are due in consideration of the leasehold estate or possessory interest.

Although s. 196.199, F.S., provides different tax exemptions to governmental property leased to nongovernmental entities, these exemptions only apply to non-governmental entities that perform “governmental, municipal, or public purpose function.” Tenant operates an automobile sales and services business, with no governmental, municipal, or public purpose. Consequently, Tenant’s leasehold right is subject to the governmental leasehold intangible personal property tax, sales and use taxes, and surtaxes.

As to the leasehold improvements, the circuit court decision in Ruehl was affirmed by the First District Court of Appeal. The Circuit Court opinion identified several factors as to whether the expenditures for leasehold improvements are considered additional rental consideration subject to sales tax. The factors were present in the Seminole decision. They include:

• 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 classified as rent, additional rent, rent-in-kind, or in lieu of rent; 

• there is no evidence the improvements provide an economic benefit to the landlord based on the useful life of the improvement compared to the term of the lease; and 

• there is no evidence that there was an attempt to reclassify rental payments to avoid the tax.

Responses 

Question #1: Is the $XXXXX minimum spending requirement relating to the leasehold improvements and facility construction considered an additional rental consideration subject to sales tax?

Response: Sales tax is not due on Tenant expenditures for leasehold improvements. The expenditures are not made in lieu of rent, and no credit is given against rental payments as in Seminole. The annual rental is a fair market value amount. Tenant is the owner of the dealership improvements. The improvements are made in order to put the premises in a condition suitable for the operation of Tenant’s business. The improvements are not classified as rent, additional rent, rent-in-kind, or in lieu of rent by Tenant. There are no facts to demonstrate that the improvements provide an economic benefit to County (“Landlord”) based on the useful life of the improvement compared to the term of the lease. Also, there is no evidence that there was an attempt to reclassify rental payments to avoid the tax. Based on these factors, the expenditures for the improvements are not consideration for the use of real property.

Question #2: If the required minimum leasehold requirement improvement costs of $XXXXX are considered taxable additional rental consideration, is spending beyond the required minimum also considered an additional rental consideration subject to sales tax?

Response: No. See the response to Question #1.

Question #3: Are the ad valorem real property tax payments made to County in relation to the lease agreement considered additional rental considerations subject to sales tax?

Response: Yes, for the real property owned by County. For the improvements owned by Tenant, the ad valorem payments are not subject to sales tax to the extent Tenant is not obligated by law to pay the property tax on property it owns. See the response to Question #1.

Concluding Statement

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.

Chuck Wallace 

Senior Attorney 

Technical Assistance & Dispute Resolution 

Florida Department of Revenue