Was a hotel tradename fee taxable, and how was taxable rent allocated?

Subject

Lease of a Hotel and Use of a Tradename

Plain-English summary

The separately stated hotel tradename fee was not subject to sales tax, and the proposed square-footage method could allocate the taxable real-property rent. The Department accepted the arm's-length allocation of 30% of the lease payment to the name because the trademark had value independent of the leasehold.

For the rent allocation, the numerator included space the lessee used for its own purposes, such as offices, maintenance, laundry, storage, and certain separately charged recreational areas. It excluded guest rooms and guest common areas, as well as subleased restaurant space and separately rented banquet or conference rooms. The denominator was all square footage and land under the lease.

What this means for you

A contract covering both taxable real-property rent and nontaxable intellectual-property rights needed a reasonable allocation. The Department accepted this allocation but expressly did not verify the taxpayer's square-footage measurements or classifications.

Common questions

Q: Was the 30% tradename payment taxable? No. The lease separately stated it, the name had independent value, and the Department found the arm's-length allocation reasonable.

Q: Were guest rooms and ordinary guest common areas included in taxable-use square footage? No. Guest rooms, hallways, parking, lobbies, sidewalks, and guest amenities without a separate charge were treated as dwelling-unit areas outside the numerator.

Q: Did subleased restaurant space enter the numerator? No. That rent was taxed at the sublease level, and including the space again would pyramid the tax.

Citations and references

• Fla. Stat. § 212.031(1)(a)2. — dwelling-unit exclusion
• Fla. Stat. § 212.031(1)(b) — allocation for mixed-use property
• Fla. Stat. § 212.031(1)(c) — taxable rent and nontaxable intrinsically valuable personal property
• Fla. Stat. § 212.031(2)(b) — anti-pyramiding rule
• Fla. Admin. Code r. 12A-1.070 — real-property rentals
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-029

Original ruling text

SUMMARY

QUESTION: Pursuant to a lease of a hotel, are the
separately stated fees paid for the right to use a
trademark of the hotel owner reasonable and subject to

sales tax?

ANSWER - Based on Facts Below: The value of a trademark has

a worth independent of the value of the leasehold interest.
The payment of 30 percent in exchange for the right to use
the trademark is reasonable and not subject to sales tax

when agreement is reached in an arms length negotiation.

QUESTION: Pursuant to a lease of a hotel, should the areas
used exclusively for dwelling units and the inseparable

parts of such dwelling units, including hallways, and

parking be included in the numerator in computing the

taxable areas of the lease?

ANSWER - Based on Facts Below: Areas used as dwelling

units; common areas principally provided for the use of
guests and for which the lessee does not impose a charge,
are not spaces which are included in the numerator in

computing the taxable portion of a hotel lease.

Jun 14, 2000

Re: Technical Assistance Advisement 00A-029
Lease of a Hotel and Use of a Tradename
XXX (herein, collectively, Lessee)
XXX (herein Owner)
XXX (herein Property or Hotel)
XXX, a tradename (herein Name)
Section 212.031(1)(a)2., (1)(b), (1)(c), and (2)(b), F.S.
Rule 12A-1.070, F.A.C.

Dear:

This is a response, styled a Technical Assistance Advisement, to
your letter dated March 22, 2000, in which you asked whether,
pursuant to a lease of the Property, a payment given in
consideration for the right to use the Name, and a payment made
pursuant to a lease of the Property would be subject to sales

tax. You provided the Department with a copy of the lease

agreement (herein Lease) between Owner and Lessee.

Owner is the owner of the Property, consisting of land and
improvements thereon, which is operated as a hotel and
conference center pursuant to a lease of the Property by the
Lessee. The Lessee also subleases certain portions of the
premises to at least one third-party sublessee who operates

therein a business, which includes a restaurant.

In accordance with the Lease, a monthly payment of XX is made by
the Lessee to the Owner for the right to use the Name. In your
letter you described the sum as a negotiated fee "... arrived at

in an arms length transaction between the parties to the lease."

You cite s. 212.031(1)(c), F.S., as applicable to this element

of the transaction. Pursuant to the exception provided by this
statute, you state that the payment made for the use of the Name
would not be subject to sales tax. Also, the Lease requires the
Lessee to pay a monthly rent of XX for the use of the Property

exclusive of the use of the Name.

You state that the portion of this payment, given for the right

to lease the Hotel, would not be subject to sales tax because a
part of the Hotel is used exclusively as dwelling units. You
attached to your letter a four-paged engineering list, which
bears the legend Square Footage Analysis. This Square Footage
Analysis identifies the various uses or spaces within the Hotel
and provides a square footage measure for each such use or
space. All the uses or spaces are divided into three categories,
each of which is described as follows: 1) a portion of the Hotel
used by the Lessee for its own purposes; 2) portions of the
Hotel used by the guests; and 3) portions of the Hotel subleased

to a third-party[ies].

You cite a previous communication issued by the Department in

which these same three categories were identified and as to
which an opinion was rendered as to taxability of each of the
three categories. You cite the provisions of s. 212.031(1)(c),
F.S., and the previous communication from the Department as
support for your opinion that the entire payment for the use of
the Name is not taxable and that only a portion of the payment
for the lease of the Hotel is taxable. You ask two questions
which are replicated below, after each of which the Department's

response appears.

Department Response

Question 1. "Whether, under the enclosed lease, the separately
stated fees paid for the right to use the trademark... of the

hotel owner are subject to sales tax."

Department Response

Section 212.031(1)(a), F.S., provides that sales or use tax is
levied on the privilege of engaging in the business of leasing
or the granting of a license to use real property. Section
212.031(1)(c), F.S., imposes the tax "... on the total rent or
license fee charged for such real property by the person

charging or collecting the rental or license fee."

Thus, if sales tax is to be avoided, either partially or
entirely, on the "total rent or license fee," an exclusion or
exemption must be applicable. In the facts provided by you,
there are two exclusions applicable to the two questions you

pose.

One such exclusion is that found in s. 212.031(1)(a)2., F.S.,
which removes from the classification of "real property" that
property which is used "exclusively for dwelling units." The
other exclusion, which is applicable to your first question,
appears in a portion of s. 212.031(1)(c), Florida Statutes.

This amendment was enacted in Chapter 95-391, s. 2, Laws of
Florida. In section 3, the intent of the legislature was to not
create new law but rather that the amendment "... clarifies and

confirms existing law...." The amendment reads as follows:

... [p]Jayments for intrinsically valuable personal property
such as franchises, trademarks, service marks, logos, or

patents are not subject to tax under this section.

In the case of a contractual arrangement that provides for
both payments taxable as total rent or license fee and
payments not subject to tax, the tax shall be based ona
reasonable allocation of such payments and shall not apply

to that portion which is for the nontaxable payments.

The Department agrees that the Name has a worth independent from
the value of the leasehold interest and that this independent
worth, established in the Lease as you state by arms length
negotiation, is 30 percent of the payment for the Lease. The
statute, s. 212.031(1)(c), F.S., cited above, provides that a
reasonable allocation be made for the intrinsically valuable
personal property. The Department agrees that, under the facts
presented, the separately stated payment of XX, as required by
provisions expressed in Article Ill, section 4, of the Lease,

for the right to use the Name, is reasonable. Consequently, as
mandated by s. 212.031(1)(c), F.S., the payment for the use of

the Name is not subject to tax.

Question 2. "Whether areas that are clearly used ‘exclusively
for dwelling units' and inseparable parts of such dwelling
units, including guest rooms, hallways, guest parking spaces,
elevator lobbies, and outdoor common areas, as well as those
areas subleased by third parties, should not be included in

computing the taxable area of the subject lease."

Department Response

Section 212.031(1)(a), F.S., imposes sales tax on the privilege
of engaging in the business of renting, leasing, or granting a
license to use real property. Section 212.031(1)(c), F.S.,
imposes the tax on the "total rent or license fee" received
pursuant to a lease or license of real property. Rule 12A-1.070,

F.A.C., interprets the statute.

Section 212.031(1)(a)2., F.S., excludes real property, which is

taxed under the statute, when such property is " [uJsed

exclusively as dwelling units." As mandated in s. 212.031(1)(b),
F.S., when, in a lease of real property, there is multiple use

of such property, that a portion of the property is subject to

the tax and a portion is not subject to the tax because of, for
example, the applicability of s. 212.031(1)(a)2. F.S., the

Department is authorized to determine the taxable portion.

A method useful in calculating the "taxable portion" is to

multiply the total rent or license fee by a fraction, the

numerator of which is the space used by the Lessee for its own
purposes, and the denominator of which is the entire square
footage of the demised premises. The calculation is described in

detail in the following paragraphs.

You are alerted that the Department does not affirm either the
square footage apportionment or the classifications of uses

which have been provided to the Department in the Square Footage
Analysis. The Department does state that if the measurements are
correct and the spaces are allocated properly to the assigned

uses as hereinafter described, the method of calculation you

propose is correct.

Further, the Department assumes that there is no other property
subject to the Lease other than those spaces enumerated in the

Square Footage Analysis.
Also, you are alerted that the applicability of the calculation
set forth below does not extend to a fact pattern wherein the

improvements are owned by a ground lessee.

Computing the numerator

The numerator is comprised of the total square footage of the
premises that is used exclusively by the Lessee for its own
purposes (e.g., offices, maintenance areas), plus any other

square footage consumed by the Lessee that is not guest rooms or
common areas principally provided for use of the guests, and for
which either (a) the Lessee does not impose a charge for the use
of such areas (e.g., lounge providing complimentary food and
drink); or (b) the Lessee imposes a separate charge for use of

such areas and such charge is subject to tax under a provision

of Chapter 212, F.S., other than section 212.031, F.S., (e.g.,

health club for which a charge for its use is imposed).

On page 1 of the Square Footage Analysis are the various areas
which appear to be either areas used exclusively by the Lessee,
or areas used by the Lessee which do not constitute guest rooms
or common areas principally provided to the guests. Such areas
include the Lessee's offices, maintenance and laundry areas,
pool house, pump house and storage space. These areas are

included in the numerator.

However, there are some other areas listed in the Square Footage
Analysis under the category of space used by the guests that may
also be included in the numerator. If a separate charge for the
Lessee operated pool (or if provided, locker rooms, health club,

or golf course) were to be made, then these areas would not be
considered as common areas for the use of the guests, but rather
as spaces used by the Lessee. Note is made that the prohibition
against the pyramiding of the tax as expressed in s.
212.031(2)(b), F.S., would not be applicable because the
separate charge would be for the use of recreational facilities,
which is taxable pursuant to s. 212.04, F.S., and not under s.
212.031, Florida Statutes. The Lessee is using these areas in
providing recreational facilities for a fee, and as such is
consuming such space in a commercial activity. As a consequence,
whenever a separate charge is made for the use of such Lessee
operated facilities, the square footage of such facilities must

be included in the numerator as spaces consumed by the Lessee.

However, the numerator may not include any areas that can be
considered as being used "exclusively as dwelling units," as

such areas are exempt from tax pursuant to s. 212.031(1)(a)2.,
Florida Statutes. Those areas, which are described on page 1 of
the Square Footage Analysis, are guest rooms; and common areas,
such as hallways, guest parking spaces, lobbies, and sidewalks.
Also, included as "dwelling units" would be other areas

principally used by the guests in the enjoyment of the dwelling
units, such as Lessee operated pool areas, provided that no

separate charge is imposed on any guest for their use.

Further, note is made that the Square Footage Analysis includes

spaces identified as banquet and conference rooms. If no
separate charge were imposed on a guest for their use, these
banquet and conference rooms would also be included within the

scope of areas used as dwelling units.

These rooms would not be considered as part of the "dwelling
units" if a Separate charge were imposed for their use. In such
an event, the areas would constitute spaces consumed and
possessed by specific subtenants or sublessees, and not by all
guests in general. The separate charge for the use of such
rooms would be subject to tax pursuant to s. 212.031(1)(c),
Florida Statutes. However, these rooms would still not be
included in the numerator. If such rooms were to be included in
the numerator, these rooms would be taxed twice - first to the
subtenants or sublessees, and then to the Lessee. However, s.
212.031(2)(b), F.S., prohibits a pyramiding of the tax. Thus,

the banquet and conference rooms would not be included within
the numerator whether or not a separate charge was imposed for

their use.

The space subleased by Lessee to third-parties, as depicted in
the Square Footage Analysis and identified as a restaurant and
restaurant-parking spaces, would be taxed under s. 212.031,
Florida Statutes. Again, because of the prohibition against
pyramiding, as previously mentioned, such areas would not be

included in the numerator.

Computing the denominator

The denominator is the entire square footage subject to the
Lease. This square footage includes all the area of all the

floors above or below grade, plus all of the land area demised.

In reference to your letter, this total square footage under

lease would include the total of the three categories described

in the Square Footage Analysis, which is given as 687,064 square
feet. An assumption is made, as stated in an earlier portion of

this communication, that there are no other spaces under lease

at this location by the Lessee.

Computation of taxable portion of rent payment

The resultant fraction, comprised of the numerator and
denominator as calculated above, is multiplied by the total rent
or license fee required to be paid by the Lessee. The result is
the taxable rent against which the sales tax rate is applied.

The sales tax is due and payable at the time the Petitioner
receives such rental or license fee from the Lessee, as mandated
by s. 212.031(3), Florida Statutes. Again, as stated previously,
the Department cannot affirm either the correctness of the
measurement nor the identity of the spaces provided in the

Square Footage Analysis.

This response constitutes a Technical Assistance Advisement
under s. 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 s. 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
expressed in this response. The technical opinion as to ad
valorem property taxation is not binding on the Department as
the implementation of this tax is in the province of the office

of the county property appraiser.

You are further advised that this response and your request are
public records under Chapter 119, FS, which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality

of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the

request or the response.

Sincerely,

Robert G. Parsons

Tax Law Specialist

Technical Assistance and Dispute Resolution

Ctrl. No. 40821