Was the tenant's payment under the separate mall lease-termination agreement taxable rent?

Subject

Termination Agreement

Plain-English summary

The lease-termination payment was not subject to sales tax as commercial rent. The tenant's rights to use or occupy the mall premises ended on the termination date, and the separate agreement made the payment full satisfaction of the tenant's obligations rather than consideration for continued occupancy.

The landlord recorded the payment as other revenue, not rental income. Although the Department did not know how the tenant recorded it, the agreement itself established that the payment was for termination rather than use of real property.

What this means for you

Bookkeeping labels mattered but did not override the transaction documents. Rule 12A-1.070(4)(g) looked at both parties' records and allowed other evidence, including the lease and termination agreement, to establish what the payment actually purchased.

Common questions

Q: Was the payment taxable rent? No, on the submitted agreement.

Q: Did the tenant retain occupancy rights after payment? No. All use and occupancy rights ended on the effective termination date.

Q: Did the Department know the tenant's accounting treatment? No, but it found the agreement itself sufficient.

Citations and references

• Fla. Stat. § 212.031 — tax on commercial real-property rentals
• Fla. Admin. Code r. 12A-1.070(4)(g) — lease-cancellation and termination payments
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-018

Original ruling text

SUMMARY

QUESTION: Is the payment received under an agreement to
terminate a lease consideration for the right to use real
property and therefore taxable under section 212.031, F.S.?

ANSWER - Based on Facts Below: No. It is clear from the
terms of the termination agreement that the termination
payment is not a payment for the use or occupancy of the
premises. All rights of the tenant to use or occupy the
property cease as of the effective date of termination
specified in the termination agreement. Additionally, the
landlord does not record the termination payment on its
books and records as rental income. Although we do not know
if the tenant records the termination payment as a rental
expense, the termination agreement establishes that the
payment is for other than the use of the real property.

Apr 19, 2000

Re: Technical Assistance Advisement 00A-018
Sales and Use Tax - Termination Agreement
Section 212.031, F.S.
Rule 12A-1.070(4)(g), F.A.C
XXX ("Client")
Sales Tax # XX

Dear :

This is in response to your letter dated XX, for the
Department's issuance of a Technical Assistance Advisement
("TAA") concerning the above referenced party and matter. Your
letter has been carefully examined and the Department finds it
to be in compliance with the requisite criteria set forth in
Chapter 12-11, F.A.C. This response to your request constitutes
a TAA and is issued to you under the authority of section
213.22, F.S.

Facts

Your client operates, through a partnership, a regional shopping
mall located in Florida. From time to time, a tenant may desire
to terminate its lease with the mall, and the typical lease
agreement used by your client contains no provisions regarding
early termination. In such an event, the tenant and the mall
will enter into a termination agreement separate and apart from
the lease agreement. The typical termination agreement provides
that the tenant shall vacate and surrender the premises and that
the termination payment constitutes the full and complete
satisfaction of all of the tenant's obligations to the landlord.

Your client does not record the termination payment as rental
income. The consideration is instead recorded as "other
revenue," a category that remains separate on the year-end
financial statements.

Requested Advisement

Your client has requested an advisement as to whether the lease
termination payment is consideration for the right to use real
property.

Discussion

Section 212.031, F.S., imposes sales tax on the privilege of
leasing commercial real property. The tax is imposed on all
consideration due and payable for the privilege of occupancy.
The Department has in its Rules specifically dealt with the
situation of lease termination payments.

Rule 12A-1.070(4)(g), F.A.C., provides:

1. The amount charged by a lessor to a lessee to cancel or
   terminate a lease agreement is subject to tax if the lessor
   records such charge as rental income in its books and
   records. If such charge is not recorded as rental income by
   the lessor, then such charge is not considered a payment
   for the lease of the real property but as a payment to
   cancel or terminate the lease agreement.

2. Notwithstanding the provisions of subparagraph 1.,
above, if the amount paid by a lessee to a lessor to cancel
or terminate a lease agreement is recorded as a rental
expense in the lessee's books and records, then such
payment is subject to tax. However, if the lessee does not
record that payment as a rental expense, then such payment
is not considered a payment for the lease of the real
property but as a payment to cancel or terminate the
agreement, and is not subject to tax....

3. Should the lessor or lessee record the payment as rental
   income or expense, respectively, but provide sufficient
   documentation, such as a lease or other tangible evidence,
   to establish that the payment is for other than the use of
   the real property, then such payment is not subject to tax.

4. Should the lessor or lessee record the payment as other
   than rental income or rental expense, respectively, but
   sufficient documentation exists, such as a lease or other
   tangible evidence, to establish that the payment was
   additional payment for the use of the real property, then
   such payment is subject to tax.

It is clear from the terms of the termination agreement that the
termination payment is not a payment for the use or occupancy of
the premises. All rights of the tenant to use or occupy the
property cease as of the effective date of termination specified
in the termination agreement. Additionally, the landlord does
not record the termination payment on its books and records as
rental income. Although we do not know if the tenant records
the termination payment as a rental expense, the termination
agreement establishes that the payment is for other than the use
of the real property. Accordingly, a termination payment, made
pursuant to the form of lease termination agreement provided to
us, is not subject to 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 upon 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 from that which is 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 that 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 that 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,

Robert D. Heyde
Senior Attorney
Control # 40906