Were payments and documents in a Chapter 331 synthetic-lease financing subject to Florida taxes?

Subject

Lease Transactions

Plain-English summary

The described synthetic-lease financing did not produce Florida sales tax on lease payments, and the Chapter 331 authority financing exempted the transaction's documents from documentary stamp and nonrecurring intangible taxes. The agreement was a lease for financial reporting but had the economic substance of financing for tax purposes; basic rent equaled loan principal and interest, and the petitioner bore ownership-like risks and benefits.

The Department also noted that more than half the land was used for spacecraft assembly and space-launch facility operations, supplying a separate sales-tax exemption for payments after July 1, 2000. If no documentary-stamp exemption applied, execution and delivery outside Florida meant no tax on the lease itself. If no intangible-tax exemption applied, tax would reach only debt secured by Florida real property.

What this means for you

The labels in financing documents did not control their tax treatment. The Department examined the transaction's economic substance, the authority's statutory exemption, execution and recording, security in Florida real property, and the project's actual use.

Common questions

Q: Were the synthetic-lease payments taxable real-property rent? No.

Q: Did Chapter 331 cover documentary stamp and intangible tax? Yes, for the described authority-financed documents and transactions.

Q: Was there another sales-tax basis? Yes. More than half the land was used for qualifying spacecraft activities after July 1, 2000.

Citations and references

• Fla. Stat. § 199.133 — nonrecurring intangible tax
• Fla. Stat. § 199.185(1)(d) — government-obligation exemption
• Fla. Stat. §§ 201.08(1), 201.24 — documentary stamp tax and government-obligation exemption
• Fla. Stat. § 212.031(1)(a), including former subparagraph 12 — real-property leases and space-flight exemption
• Fla. Stat. § 331.354 — Chapter 331 authority tax exemption
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00M-002

Original ruling text

SUMMARY

QUESTION: Are payments made pursuant to an agreement styled
a "lease" subject to sales tax when intended to be made in
payment of interest and principal which arise from a
financing arrangement?

ANSWER - Based on Facts Below: No sales tax is due on such
payments because the agreement is construed as part of a
financing arrangement and not made for the right to use or
occupy real property.

QUESTION 2: Is the taxpayer subject to Documentary Stamp
Tax?

ANSWER 2 - Based on Facts Below: Due to financing by a
government body of authority pursuant to Chapter 331, F.S.,
the exemption from taxes applies to the documents and
transactions comprising all aspects of the transaction.

QUESTION 3: Is the taxpayer subject to Intangible Tax?

ANSWER 3 - Based on Facts Below: Due to financing by
government body of authority pursuant to Chapter 331, F.S.,
the exemption from taxes applies to the documents and
transactions comprising all aspects of the transaction. If
for any reason neither Lessor's statutory exemption nor any
other exemption applied to either the loan or the lease
transactions, the intangible tax would apply only to the
extent the lease is secured by real property situated in
the State of Florida.

Aug 15, 2000

Re: Technical Assistance Advisement No. 00M-002
Florida Documentary Stamp Tax, Intangible Tax and Sales and
Use Tax
Lease Transactions

Sections 199.175, 201.08, 212.031, 331.354, F.S.
XXX ("Petitioner," also "Lessee" and "Construction Agent")
XXX ("Lessor")
XXX ("Administrative Agent")
XXX ("CP Lender")
XXX ("Administrator")
XXX (collectively, the "Banks")

Dear :

This is in response to your request for a Technical
Assistance Advisement pursuant to s. 213.22, F.S., and Rule 1211.003, F.A.C.

Facts as Presented by Petitioner

The following is the description of the transactions
outlined in your letter. You have also enclosed for our
determination with your letter the documents used in the lease
transactions as follows:

1. Participation Agreement

2. Lease

3. Assignment of Lease and Rents

4. Loan Agreement

5. Construction Agency Agreement

6. Construction Documents Assignment

7. Liquidity Asset Purchase Agreement

The purpose of the transaction is to provide financing for
the construction of certain improvements, consisting of
structures, fixtures and equipment to be used for XXX
(referred to as the "Financed Improvements"), on certain
land situated in XX County, Florida (the "Land," and
together with the Financed Improvements, the "Project"),

for the use of Petitioner.

The Land is owned by XXX, which has ground leased the Land
to Petitioner. Petitioner has ground subleased the Land to
Lessor, which, in turn, has sub-subleased the Land to
Petitioner. Please note that Petitioner does not seek
guidance from the Department regarding these ground lease
and sublease arrangements.

Petitioner is a highly diversified global enterprise that
primarily researches, designs, develops, manufactures and
integrates XXX.

Lessor is charged with the purpose, function, and
responsibility "XXX". Among its statutory powers, Lessor
is empowered to "XXX."

The Participation Agreement provides, either by its own
terms or by reference to the other Operative Documents, for
two transactions which are so interrelated as to comprise
one transaction (the "Overall Transaction"): (1) a loan
transaction whereby advances are to be made by the CP
Lender and the Facility Lenders at the request of
Petitioner, as Construction Agent for the Lessor, to
finance the construction of the Financed Improvements; and
(2) a lease transaction comprised of the "lease" of the
Financed Improvements by Lessor to Petitioner, as Lessee.
The parties intend that the Overall Transaction constitute
a "synthetic lease" for tax and accounting purposes,
meaning that it will be treated as an operating lease from
Lessor to Petitioner for purposes of Petitioner's financial
reporting and as a financing of the Financed Improvements
owned by Petitioner for purposes of federal, state and
local taxes.

Lessor will finance most of the cost of constructing the
Financed Improvements on the Land through loans extended by
the CP Lender and the Facility Lenders (collectively, the
"Lenders") to Lessor pursuant to the Loan Agreement in an
aggregate principal amount not to exceed approximately $XX.
Lessor's obligation to repay these loans, with interest,

will be evidenced by the CP Note and the Facility Note,
respectively (collectively, the "Notes"). Lessor will have
no personal liability under the Notes. Payment of debt
service and all other amounts due under the Notes will be
paid solely from the rent and other amounts paid by Lessee
under the Lease, as more particularly described below.

By the Assignment of Lease, Lessor will assign to
Administrative Agent, on behalf of the Lenders, Lessor's
rights under the Lease and the amounts paid by the Lessee
under the Lease. At closing, the Notes will not be secured
by a mortgage on the Financed Improvements. However,
Lessor will agree that, upon the occurrence of certain
conditions affecting the financial condition of Lessee, it
will grant to the Lenders a mortgage and security interest
in the Financed Improvements. Such mortgage and security
interest will only be executed upon the occurrence of such
conditions and no documents would be recorded or become
effective until that time.

Pursuant to the Construction Agency Agreement, Lessor
appoints Lessee to serve as Lessor's agent for the
construction of the Financed Improvements. Lessee, as
Construction Agent under the Construction Agency Agreement,
agrees to construct the Financed Improvements on the Land.
The proceeds from the loans under the Loan Agreement will
be disbursed to Lessee, as Construction Agent, to reimburse
Lessee for costs incurred in constructing the Financed
Improvements on the Land.

Pursuant to the Construction Documents Assignment, Lessee
assigns to Lessor, to secure Lessee's performance as
Construction Agent under the Construction Agency Agreement,
all of Lessee's interest in the construction contracts,
engineering services agreements, plans and specifications,
permits and approvals. In turn Lessor assigns to the
Administrative Agent all of Lessor's interest in such
collateral.

Pursuant to the Lease, Lessor will lease the Financed
Improvements upon completion to Petitioner, as Lessee, for

a term of twenty (20) years. Although the Lease provides
for an initial term of five years, with an option to renew
for three additional 5-year renewal terms, at the
expiration of the initial term or any renewal term, the
Lease must either be renewed, or Lessee must prepay the
"Lease Balance," meaning the sum of the outstanding loans
to Lessor and all amounts owing by Lessee under the
Operative Documents. In the event of prepayment of the
Lease Balance, Lessee is deemed to have elected all renewal
terms, and the Lease remains in effect for the entire term
of 20 years, without any further payment of rent.

Lessee is required by the Lease to pay to Lessor (or to
Administrative Agent on behalf of Lessor) Base Rent equal
to the principal and interest due on the Notes. In
addition, Lessee will pay as Supplemental Rent all other
amounts or obligations which Lessee assumes or agrees to
pay under the Operative Documents, including, but not
limited to, finance fees. Lessee will bear all risk of
loss to the Financed Improvements, including condemnation
and casualty, will be responsible for all maintenance,
insurance, taxes and other obligations with respect to the
Financed Improvements, as more particularly described in
the Lease. Lessee will also have rights consistent with
ownership of the Financed Improvements for federal, state
and local income tax purposes, such as the right to grant
easements.

In addition, Lessee will be required to prepay the Lease
Balance upon the occurrence of certain events, such as the
occurrence of a casualty or condemnation that is so
substantial as to render restoration or the Financed
Improvements impractical. Upon payment of the Lease
Balance, the Lease will continue for the balance of its
term, including all renewal terms.

Upon the occurrence of an event of default under the Lease,
Lessor has several remedies, including remedies
conventionally offered to a landlord as well as the rights
of a mortgagee and secured creditor in the Financed
Improvements. Pursuant to Section 22.1 of the Lease,

Lessee grants to Lessor a mortgage and security interest in
the Financed Improvements to secure the obligations of
Lessee under the Lease and the other Operative Documents.

Lessee may elect to prepay the Lease Balance to cure an
event of default under the Lease. Lessee also has the
option of prepaying the Lease Balance in the absence of
Lease default. Upon such prepayment in either case, the
Lease remains in effect for the balance of its term,
including renewal terms.

Upon the expiration or termination of the Lease, the
Financed Improvements will revert to Lessor or the then
owner of the fee interest in the Land. Based upon a study
conducted by an independent consultant retained by
Petitioner and Petitioner's own internal analysis, the
economic useful life of the Financed Improvements will have
been exhausted and the Financed Improvements will have
little or no residual value at the end of the term of the
Lease. Accordingly, Lessee will have obtained the full
benefits of the use of the Financed Improvements.

Section 22.1 of the Lease also provides as follows:

"It is the intention of the parties that:

(a) the Overall Transaction constitute an operating lease
from Lessor to Lessee for purposes of Lessee's financial
reporting, including, without limitation, under Financial
Accounting Standards Board Statement No. 13 and
Interpretation No. 23;

(b) for purposes of federal and all state and local income
or franchise taxes (and any other tax imposed on, or
measured by, income), documentary, intangibles and transfer
taxes and for purposes of bankruptcy, insolvency,
conservatorship and receivership law (including the
substantive law upon which bankruptcy, conservatorship and
insolvency and receivership proceedings are based):

(i) the Overall Transaction (including, without limitation,

the transactions and activities during the Construction
Period referred to or contemplated by the Construction
Agency Agreement, subject to the limitations in Article XIV
of the Participation Agreement) constitute a financing and
preserves ownership in the Leased Property for the benefit
of Lessee, Lessee will be entitled to all tax benefits
ordinarily available to owners of property similar to the
Leased Property for tax purposes and the obligations of
Lessee to pay Basic Rent shall be treated as payments of
interest and principal to the Lenders, and the payment by
Lessee of any amounts in respect of the Lease Balance shall
be treated as payments of principal to the Lenders; and

(ii) (a) that this Lease be treated as a mortgage and
security agreement, encumbering the Leased Property, and
that Lessee, as grantor or mortgagor, hereby grants to
Lessor, as mortgagee and secured party, or any successor
thereto, a first and paramount Lien on the Leased Property,
(b) that Lessor shall have, as a result of such
determination, all of the rights, powers and remedies of a
mortgagee available under Applicable Law to take possession
of and sell (whether by foreclosure or otherwise) the
Leased Property, (c) that the effective date of such
mortgage shall be the effective date of this Lease, (d)
that the recording of this Lease, if and when this Lease is
recorded pursuant to the Participation Agreement, shall be
deemed to be the recording of such mortgage, and (e) that
the obligations secured by such mortgage shall include the
Lease Balance and all Basic Rent and Supplemental Rent
hereunder and all other obligations of and amounts due from
Lessee hereunder and under the Operative Documents".

Comparable language is set forth in Section 5.1 of the
Participation Agreement.

(k) Execution, Delivery and Recordation of Documents - The
Operative Documents were executed and delivered by the
parties at closing. None of the Operative Documents were
executed or delivered by any of the parties within the
State of Florida. Further, none of the Operative Documents
or any memoranda of the Operative Documents or any other

instruments will be recorded in the State of Florida,
unless and until Lessor is required to grant a mortgage on
the Financed Improvements in the future as described above.
In such event, Lessor will execute, deliver and record in
the State a mortgage on the Financed Improvements, together
with related security agreements and financing statements.

Requested Ruling by the Petitioner

You seek the Department's confirmation of your
understanding of the application of Florida's sales/use tax
pursuant to Chapter 212, F.S., the intangible personal property
tax pursuant to Chapter 199, F.S., and excise tax or documentary
stamp tax pursuant to Chapter 201, F.S., to this transaction.

Law and Discussion

Intangible Personal Property Tax

Section 199.133, F.S., imposes a one-time nonrecurring
intangible personal property tax on debt obligations secured by
a mortgage on Florida real property. Section 199.185(1)(d),
F.S., provides an exemption for notes, bonds, and other
obligations issued by the State of Florida or its
municipalities, counties, and other taxing districts, or by the
United States Government or its agencies.

Documentary Stamp Tax

Section 201.08(1), F.S., imposes an excise tax on
promissory notes, nonnegotiable notes, and written obligations
to pay money made, executed, delivered, sold, transferred, or
assigned in the state, and on mortgages, security agreement or
other instruments securing payment of such notes and
obligations. However, if there is a mortgage, trust deed, or
security agreement, together with a note, certificate of
indebtedness, or obligation, the tax shall be paid on the
mortgage, trust deed, or security agreement at the time of
recordation.

Section 201.24, F.S., exempts from documentary stamp tax

any obligation to pay money issued by a municipality, political
subdivision, or agency of the State.

Sales and Use Tax

Section 212.031(1)(a), F.S., imposes sales tax on the
privilege of engaging in the business of "... renting, leasing,
letting, or granting a license for the use of any real
property...." As the Lease constitutes a "synthetic lease" or
financing arrangement and not a lease, no landlord/tenant
relationship exists for purposes of such tax.

Further, effective July 1, 2000, s. 212.031, F.S., was
amended by the creation of subparagraph (1)(a)12. to provide an
exemption from sales tax for what the statute terms "space
flight business." The amendment is codified in Chapter 2000-183,
s. 1, Laws of Florida.

In your letter dated July 12, 2000, the Department learned
that, as you state on page 2, "... more than 50% of the land
subject to the Lease is used for spacecraft assembly and space
launch facility operations." Thus, even if the Lease were to be
construed as a taxable lease for sales tax purposes, the
payments made by the Petitioner, after July 1, 2000, would not
be subject to tax in accordance with the exemption granted in s.
212.031(1)(a)12., F.S.

Conclusion

Documentary Stamp Tax and Intangible Tax

Section 331.354, F.S., reads as follows, in part:

... The authority shall not be required to pay any taxes on
any project or any other property owned by the authority
under the provisions of this act or upon the income
therefrom. The bonds issued under the provisions of this
act or upon the income therefrom (including any profit made
on the sale thereof), and all notes, mortgages, security
agreements, letters of credit, or other instruments which
arise out of or are given to secure the repayment of bonds

issued in connection with a project financed under this
act, shall at all times be free from taxation by the state
or any local unit, political subdivision, or other
instrumentality of the state.... [Emphasis added.]

The exemption from taxation applies to Florida's
nonrecurring intangible personal property, documentary stamp,
and sales and use taxes, due to financing by a government body
or authority pursuant to Chapter 331, F.S. The exemption from
taxes applies to the documents and transactions comprising all
aspects of the transaction.

The subject Lease constitutes a "synthetic lease." A
"synthetic lease" is a transaction structured as a lease for
accounting purposes but having the overall economic substance of
a financing for federal income tax purposes. The Florida
Department of Revenue and the Florida Division of Administrative
Hearings have recognized that under certain circumstances, for
tax purposes, a document structured as a lease may be treated as
a mortgage.

If for any reason neither Lessor's statutory exemption nor
any other exemption applied to either the Loan or the Lease
transaction, the nonrecurring intangible personal property tax
would apply only to the extent the Lease is secured by real
property situated in the State of Florida.

In the absence of the statutory exemptions, no documentary
stamp tax would be payable in respect of the Lease by reason of
its execution and delivery outside of the State of Florida.

Sales and Use Tax

Section 212.031(1)(a), F.S., imposes sales tax on the
business of "... renting, leasing, letting, or granting a
license for the use of any real property...." As the Lease
constitutes a "synthetic lease" or financing arrangement and not
a lease, no Florida sales/use tax would be payable.

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 interpretation of the
statutes or rules upon which this advise is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response, your request
and related backup documents are public records under Chapter
199, F.S., and are subject to disclosure to the public under the
conditions of s. 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,

Baldan E. Sulker
Senior Tax Specialist
Technical Assistance & Dispute Resolution
Office of General Counsel

Robert Parsons
Tax Law Specialist
Technical Assistance and Dispute Resolution
Office of General Counsel

BES/RP/mh
Control No's 41324 & 41630