Did a federal section 482 imputation of rent create Florida commercial-rent tax when related companies had no lease or actual rental payment?

Subject

Real Property Rental

Plain-English summary

The section 482 imputed rent was not subject to Florida commercial-rent tax. The operating company and its wholly owned realty subsidiary had no lease or other occupancy agreement, and the operating company paid no cash, property, services, or other consideration for use of the premises.

The companies reported imputed rental income and expense only on their federal and state income-tax returns to comply with section 482. That income-tax allocation did not create “rent or license fee charged” or consideration due to a landlord under section 212.031.

What this means for you

An accounting or income-tax imputation between related entities did not substitute for an actual rental payment. The ruling did not address any real payments to the subsidiary or to other parties connected with the property.

Common questions

Q: Was the imputed rent taxable? No.

Q: Why not? There was no lease and no actual consideration exchanged for occupancy.

Q: Did booking income and expense on tax returns change the answer? No.

Citations and references

• Fla. Stat. § 212.031(1)(a) and (c) — commercial real-property rental tax
• Fla. Admin. Code r. 12A-1.070(4)(b) — taxable rental consideration
• I.R.C. § 482 and Treas. Reg. § 1.482-1(a) — related-party income allocation
• Lloyd Enterprises, Inc. v. Department of Revenue, 651 So. 2d 735 (Fla. 1995)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01A-055

Original ruling text

SUMMARY

QUESTION: Whether sales tax is due pursuant to section
212.031(1)(a),(c), F.S., where Taxpayer is required to
impute a rental amount pursuant to section 482 of the
Internal Revenue Code, but there is no lease agreements or
actual consideration exchanged for the right of occupancy.

ANSWER - Based on Facts Below: No. The specific facts and
documentation provided by the Taxpayer indicate that no
rental consideration is actually being exchanged for the
right to occupy the subject property, thus there can be no
rental payment to tax pursuant to section 212.031(1)(c),
F.S.

Aug 30, 2001

Re: Technical Assistance Advisement 01A-055
Sales and Use Tax - Whether the Subject Real Property
Transaction creates lease payments taxable pursuant to
section 212.031(1)(a),(c), F.S.
Sections: 212.031(1)(a), (c), Florida Statutes
Rule 12A-1.070(4)(b), Florida Administrative Code
(herein Taxpayer or the Company)
Taxpayer FEI number: XX
(herein Realty)
(herein City-County)

Dear :

This is in response to your request, dated May 4, 2001, received
May 7, 2001, for the Department's issuance of a Technical
Assistance Advisement ("TAA") concerning the above referenced
parties 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. On June 19, 2001,
the Department received the requested supplemental documents
from your firm, which have now been examined. This response to

your request constitutes a TAA and is issued to you under the
authority of section 213.22, F.S.

Documents provided by Taxpayer

You have provided the following relevant documents:

Development Agreement between Realty, City, and County
Development Agreement between the Company Taxpayer, City, and
County

Facts

The facts as provided in your letter and supplemental
documentation may be summarized as follows:

Realty is a wholly owned subsidiary of Company. Company is in
the business of providing information technology services.
Company and Realty have entered into separate development
agreements with City-County whereby City-County intends to
convey by deed title of two parcels of real property (the
Property) to Realty. In exchange for such conveyance, and with
the financial assistance via municipal grants of City-County,
Realty will develop the Property to construct an Information
Technology Support Center. Company will occupy and operate the
Facility, providing full-time employment opportunities for the
City-County residents.

The development is intended to benefit City-County, as CityCounty desires to have Information Technology Employment Centers
located within their boundaries and recognizes the potential for
economic development, along with infusion of tax and utility
revenue from such development. Furthermore, City-County
recognizes that the employment opportunities stemming from such
development will benefit their citizens and produce economic
vitality for their area.

Charges for pre-construction consulting services, such as
construction management, property management, and the scouting
of sites, are billed to the Company. A construction in progress
account is maintained on the Company's books. Upon completion

of construction, the balance in the construction in progress
account is transferred to Realty via an intercompany journal
entry. The building is constructed using the Company's cash
flow that is subsequently reimbursed through a municipal grant.
The Property is not encumbered by a mortgage due to the local
government grant.

A lease agreement does not exist between Realty and the Company,
nor are there any written agreements relevant to the occupation
of the building. No cash payment is identified as rental
consideration or exchanged for the right to use or occupy the
Property. There are no journal entries that represent Company's
payment of rental consideration for the right to use or occupy
the Property.

The Company was granted a five year property tax abatement by
the County. The Company is responsible for its own insurance
expense. Rental expense/rental income is not booked for
financial purposes. However, rental expense/rental income is
booked by the Company and Realty for tax purposes and appears on
both state and federal tax returns in order to comply with
section 1.482-1, Internal Revenue Code. The Company files a
consolidated federal income tax return and a consolidated
Florida Corporate Income Tax Return.

The service provider will bill charges for electricity, water,
and sewer usage directly to the Company.

On July 7, 2001, an employee with your firm verified that there
are no documents, contracts, or agreements of any type relevant
to the occupancy of the Property by the Company. Nor is there
any type of rental consideration exchanged for such occupancy;
but section 482, Internal Revenue Code, requires your client to
impute a rent for a determination of value, even though no rent
is actually being paid by the Company to Realty. Furthermore,
on August 6, 2001, the Department received written
correspondence from your firm stating the following. "Section
482 of the Internal Revenue Code requires the computation of
rent as if an arm's length transaction had occurred." Taxpayer
therefore reported rent expense for tax purposes only, using
rent previously paid for a similar sized structure.

Requested Advisement

You have requested an advisement that Florida sales tax is not
due on the amount reported by the Company for federal and state
income tax purposes as rental expense as required by section
482, Internal Revenue Code.

Taxpayer's Argument

It is Taxpayer's belief that a landlord and tenant relationship
does not exist between Realty and Company. There is no payment
of rent made to use or occupy the premises. In Department of
Revenue v. Ryder Systems, Inc., 406 So.2d 1299 (Fla. 1st DCA
1981), the court found no landlord tenant relationship and found
that Ryder Systems, Inc. was not engaged in the business of
renting, leasing, or letting any real property. Since there was
no finding that a rental payment was made, the assessed tax was
disapproved.

Section 212.031(1)(c), F.S., imposes tax at the rate of 6
percent on the total rent or license fee charged. When the fee
is paid by way of property, goods, wares, merchandise, services
or other thing of value, tax is due at the rate of 6 percent of
the value. In Seaboard Coast Line Railroad Company v. Askew,
Case Number 72-15 (Fla. Second Judicial Circuit), the court
stated that Section 212.031, F.S., "... clearly indicates a
legislative intent to tax the full benefits flowing to the
landlord for the use of the leased premises". Basically, to
constitute a payment of rent, the payment must be required by
the lease, benefit the landlord and be for the use and the
occupancy of the property. None of these criteria apply to the
fact pattern described herein.

Similar to the court's finding in Lloyd Enterprises, Inc. v.
Department of Revenue, 651 So.2d 735 (Fla. 1995), none of the
numerous subparts of Rule 12A-1.070, F.A.C., applies
specifically to the fact pattern described herein. Section
212.031, F.S., reads simply that "... it is declared to be the
legislative intent that every person is exercising a taxable
privilege who engages in the business of renting, leasing, or

letting, or granting a license for the use of any real
property...." You believe that the Department cannot conclude
that Realty has been engaging in any such business. There are no
rent payments, cash or otherwise, made for the right to use or
occupy the premises. The property was purchased via a grant
from a local municipal government and is not encumbered by a
mortgage (hence there are no intercompany journal entries to
decrease a mortgage payable). The only indication of rental
expense or rental income is on the Company's state income tax
return and federal income tax return.

Tax laws should be construed strongly in favor of the taxpayer
and against the government, with all ambiguities or doubts
resolved in the taxpayer"s favor. See Maas Bros., Inc. v.
Dickinson, 195 So.2d 193; Florida S&L, Inc. v. Department of
Revenue, 443 So.2d 120; Rainey v. State, Dept. of Revenue, 353
So.2d 207. The Florida Supreme Court, in rendering its decision
in the Maas Bros. case, cited the following passage from State
ex rel. Seaboard Air Line R. Co. v. Gay (Fla. 1948):

This salutary principle is found in the reason that the
duty to pay taxes, while necessary to the business of the
sovereign, is still a duty of pure statutory creation and
taxes may be collected only within the clear definite
boundaries recited by statute....

This opinion was reiterated in the Florida S&L Services and
Rainey cases.
Law

Section 212.031(1)(a), F.S., provides:

It is declared to be the legislative intent that every
person is exercising a taxable privilege who engages in the
business of renting, leasing, letting, or granting a
license for the use of any real property....

Section 212.031(1)(c), F.S., provides:

For the exercise of such privilege, a tax is levied in an
amount equal to 6 percent of and on the total rent or

license fee charged for such real property by the person
charging or collecting the rental or license fee. The total
rent or license fee charged for such real property shall
include payments for the granting of a privilege to use or
occupy real property for any purpose and shall include base
rent, percentage rents, or similar charges.... (emphasis
added)

Rule 12A-1.070(4)(b), F.A.C., provides the tax is payable

... on all considerations due and payable by the tenant or
other person actually occupying, using, or entitled to use
any real property to his landlord or other person for the
privilege of use, occupancy, or the right to use or occupy
any real property for any purpose. (emphasis added)

Section 482 of the Internal Revenue Code grants authority to the
Internal Revenue Service to "distribute, apportion, or allocate
gross income, deductions, credits, or allowances" between
related companies if it is necessary to prevent invasion of
income taxes or to clearly reflect income of companies. Treas.
Regs. section 1.482-1(a) provides that the purpose of Section
482 is "to ensure that taxpayers clearly reflect income
attributable to controlled transactions" to prevent avoidance of
income tax with respect to those transactions.

Analysis

As noted above, section 212.031(1)(a), F.S., provides, in
pertinent part, that it is a taxable privilege for a person to
engage in the business of renting, leasing, letting, or granting
a license to use any real property. 212.031(1)(c), F.S.,
requires sales tax to be levied on the total rent or license fee
charged for such real property by the person charging or
collecting the rental or license fee.

In the subject transaction, there is no lease agreement that has
been entered into between Realty and the Company, nor are there
any other written agreements relevant to the occupation of the
building by the Company. Furthermore, there are no payments of
rent, cash or otherwise, made to Realty by the Company for the

right to use or occupy the premises. Thus, there can be no
"total rent or license fee charged for such rental" in
accordance with section 212.031(1)(c), F.S., nor can there be
any "considerations due and payable by the tenant" for
occupancy, as stated in Rule 12A-1.070(4)(b), F.A.C.

Taxpayer states that rental expense/rental income is not booked
for financial purposes, but it is booked by the Company and
Realty on their state income tax return and federal income tax
return to comply with section 482, Internal Revenue Code, which
requires Taxpayer to make an imputation of rent even though no
rent is actually being paid to Realty by the Company.

As Taxpayer"s facts and documentation provided indicate that
there is no rental consideration actually being exchanged for
the right to occupy the subject Property, there can be no rental
payment that would be subject to the tax imposed pursuant to
section 212.031(1)(c), F.S. The fact that adjustments are made
under section 482 of the Internal Revenue Code to impute rental
income to Realty and a rental deduction to Company does not
change the result under chapter 212, F.S. The prerequisite for
making a section 482 adjustment in this case is that rental
payments are not being made. That section is specifically
intended to prevent artificially shifting income between related
entities by providing services or property for less than fair
market value to avoid federal income taxes.

This advisement addresses only the imputed section 482 rental
payments from Company to Realty discussed herein. It does not
address any payments that Company actually makes to Realty or
any payments that Company makes to other parties in relation to
the property.

Response

Based on the facts, law, and analysis as presented, a
determination is made that the amount booked as rental expense
on federal and state tax returns per section 1.482-1, Internal
Revenue Code, is not subject to commercial rental tax imposed
pursuant to section 212.031(1)(c), F.S.

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,

Shehla A. Milliron
Senior Attorney
Control # 45682