Were tenant-improvement reimbursements taxable rent, and could a property buyer inherit the seller's unpaid Florida sales tax?

Plain-English summary

The tenant-improvement reimbursements were taxable commercial rent. The lease expressly included them in base rent, the tenant paid them directly to the landlord as part of each monthly rental payment, the improvements were required before occupancy, and the landlord retained the improvements and their economic benefit when the lease ended.

Florida rejected the argument that the payments were construction-loan repayments. They were consideration for using and occupying the property.

The ruling also said a buyer purchasing the commercial rental business for consideration could become personally liable for the seller's unpaid sales tax, interest, and penalties. The buyer needed to withhold enough purchase money until the seller produced Department proof of payment or otherwise use the statutory protection process.

What this means for you

Lease labels, payment terms, occupancy conditions, and who ultimately owns the improvements can turn improvement reimbursements into taxable rent. A property acquisition can also carry sales-tax successor liability when the transaction includes the rental business and the buyer does not follow the withholding rules.

Common questions

Q: Did separating the improvement amount on the invoice make it nontaxable? No. It remained part of the monthly base rent.

Q: Why was it rent instead of a loan repayment? The landlord funded and kept the improvements, received the payments directly, and could repossess the premises for nonpayment.

Q: Could the buyer rely completely on a simple tax receipt or certificate? The statute quoted in the ruling says protection from undiscovered deficiencies requires the available audit process.

Citations and references

• Fla. Stat. § 212.031(1)(a) and (c) — tax on commercial real-property rent
• Fla. Admin. Code r. 12A-1.070(4)(b) — taxable rental consideration
• Fla. Stat. § 212.10(1) — successor or transferee liability
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-034

Original ruling text

SUMMARY

QUESTION 1: Whether payments included as a part of monthly
rental payments, payable directly to a landlord as part of
the base rent under the governing agreement, are taxable
rental payments when such payments are made as
reimbursements under a provision for the construction of
tenant improvements.

ANSWER 1- Based on the facts below: Yes, payments included
as a part of monthly rental payments payable directly to a
landlord as part of the base rent under the governing
agreement are taxable rental payments when such payments
are made as reimbursements under a provision for the
construction of tenant improvements.

QUESTION 2: Whether a purchaser of real property will
become liable for any sales and use tax which has not been
paid by the seller of such property, when seller failed to
collect sales tax on tenant improvement reimbursements
taxable as rental consideration.

ANSWER 2- Based on the facts below: Yes, a purchaser of a
business, such as commercial rental property, for
consideration will become liable for any sales and use tax
which has not been paid by the seller with respect to that
business.

Aug 28, 2002

Re: Technical Assistance Advisement 02A-034
Sales and Use Tax - Real Property Improvement/Additional
Rent
Statutes: Sections 212.031(1)(a) and (c), F.S
Rules: 12A-1.070(4)(b), F.A.C.
XXX ("Buyer")
FEI #: XX
XXX ("Seller/Lessor")

FEI #: XX

Dear :

This is in response to your request for a Technical Assistance
Advisement (TAA) regarding the taxability of real property
improvement charges classified as additional rent.

Facts

Seller/Lessor entered into an industrial lease agreement with
XXX ("Lessee") for the rental of a XX square foot warehouse bay
on or about XX. Under paragraph 29 of the lease agreement,
entitled "As is," the Seller/Lessor undertook, at his sole cost
and expense, to perform certain work ("Landlord's Work") to make
the premises suitable for the Lessee. This work was described
in Schedule A of the lease agreement, and it included the
construction of a XXX. The cost of constructing these
improvements was amortized over a ten-year period, with a fiveyear balloon of all principal, unless the lender extended for
another five years.

Seller/Lessor and Lessee entered into an addendum to the lease
to reflect the increase in Base Rent due to the amortization of
the cost of the improvements. Lessee was required to pay Seller
$XX in sixty equal monthly payments of $XX from XXX, through
XXX. If Lessee elected to exercise its option to extend the
lease term an additional five years, it was required to pay
Seller/Lessor an additional $XX in sixty equal monthly payments
of $XX. If Lessee did not elect to extend the lease an
additional five years, it was required to pay Seller/Lessor a
final payment of $XX, due on XX.

I. Tenant Improvement Reimbursements

Requested Advisement

Whether payments included as a part of monthly rental payments,
payable directly to a landlord as part of the base rent under
the governing agreement, are taxable rental payments when such
payments are made as reimbursements under a provision for the

construction of tenant improvements.

Applicable Law and Discussion

Section 212.031(1)(a), F.S., provides that it is 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, with
certain enumerated exceptions.

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

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....

The improvement reimbursements paid by Lessee to Seller/Lessor
for the right to use and occupy the premises are apportioned in
paragraph 29 of the lease and Addendum 1 as "Base Rent." The
reimbursements are included as a line item in the monthly rental
invoices, and are paid as a component part of each monthly
rental payment made directly to Seller/Lessor. Thus, the lease
agreement itself contemplates that the money paid for the
specified improvements is rent paid for the use of the property.

The Department does not agree that the reimbursements are
properly construed as loan payments for construction services.
Seller/Lessor did not provide a short-term loan to cover
construction costs and did not pass on Lessee's payments to
another entity. Seller/Lessor was the terminus for the payments
made by Lessee. The obligation to pay rent does not commence
until substantial completion of the Landlord's Work in paragraph

29. If Lessee fails in its obligation to pay for such
    improvements (beginning with Lessee's obligation to commence
    payment of Base Rent under paragraph 2. following substantial
    completion of the Landlord's Work), Seller/Lessor can, subject

to the timing and notice restrictions contained in paragraphs

17. and 18., re-enter the property and take possession of the
    leased premises. The making of the improvements, the cost of
    which is to be borne fully by the tenant, is a condition
    precedent to occupancy. The making of the improvements is not
    optional for the tenant.

At the termination of the lease, all improvements become the
property of the Lessor. These improvements are of a nature that
would benefit any tenant of the Lessor's property, not just the
Lessee. The Lessee has no claim to the improvements at the
termination of the lease. Thus, the Lessor clearly receives an
economic benefit from the improvement.

Section 212.031(1)(c), F.S., imposes sales tax on the total rent
or license fee charged for the use or occupancy of real
property. Rule 12A-1.070(4)(b), F.A.C., describes the tax as
levied on all "considerations" paid by the tenant. While the
rule does not define "consideration," Black's Law Dictionary
(Sixth Ed. 1990), defines such term as an "... inducement to a
contract.... Some right, interest, profit, or benefit accruing
to one party...."

In this situation, the lease agreement itself specifically
indicated that the reimbursements for the improvements were to
be considered rent payments. The Lessee is required to make
such reimbursements in order to retain occupancy of the
premises. The Seller receives an economic benefit from the
reimbursements, as they represent amounts paid by the Lessee for
improvements that ultimately transfer to the Seller for the
Seller's use with respect to future tenants. Accordingly, the
Department must construe the tenant improvement reimbursements
as part of the total rent paid by Lessee for the use and
occupancy of the premises rather than as payments made pursuant
to a loan for construction services.

Response

Yes, payments included as a part of monthly rental payments
payable directly to a landlord as part of the base rent under
the governing agreement are taxable rental payments when such

payments are made as reimbursements under a provision for the
construction of tenant improvements.

II. Transferee Liability

Requested Advisement

Whether a purchaser of real property will become liable for any
sales and use tax which has not been paid by the seller of such
property, when seller failed to collect sales tax on tenant
improvement reimbursements taxable as rental consideration.

Applicable Law & Discussion

Section 212.10(1), F.S., provides the following:

(1) If any dealer liable for any tax, interest, or penalty
levied hereunder shall sell out his or her business or
stock of goods, the dealer shall make a final return and
payment within 15 days after the date of selling the
business; the dealer's successor, successors, or assigns
shall withhold a sufficient portion of the purchase money
to safely cover the account of such taxes, interest, or
penalties due and unpaid until such former owner shall
produce a receipt from the department showing that they
have been paid or a certificate stating that no taxes,
interest, or penalty are due. If the purchasers of a
business or stock of goods shall fail to withhold a
sufficient amount of the purchase money as above provided,
he or she shall be personally liable for the payment of the
taxes, interest, and penalties accruing and unpaid on
account of the operation of the business by any former
owner, owners, or assigns. Any receipt or certificate from
the department does not, without an audit of the selling
dealer's books and records by the department, guarantee
that there is not a tax deficiency owed the state from
operation of the seller's business. To secure protection
from transferee liability under this section, the seller or
purchaser may request an audit of the seller's books and
records. The department may contract with private auditors
pursuant to s. 213.28 to perform the audit. The department

may charge the cost of the audit to the person requesting
the audit.

Section 212.10(1) F.S., applies to voluntary transfers of a
business between a buyer and seller where the buyer either pays
for the business or assumes liability and debt as consideration
for the "buying out of the business or stock of goods." The
failure of the buyer to withhold a sufficient amount of that
payment, in accordance with Section 212.10(1) F.S., would make
the buyer personally liable for payment of the taxes, interest,
and penalties accruing and unpaid by the seller. Accordingly,
if Buyer is either paying for the business of Seller or assuming
liability and debt as consideration for buying out the business
or stock of Seller's goods, Buyer must withhold a sufficient
amount of that payment to cover the taxes, interest, and
penalties accruing and unpaid by Seller. The taxes, interest,
and penalties accruing and unpaid by Seller would include the
sales tax Seller failed to collect on tenant improvement
reimbursements paid by Lessee.

Response

Yes, a purchaser of a business, such as commercial rental
property, for consideration will become liable for any sales and
use tax which has not been paid by the seller with respect to
that business.

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.

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 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,

Case A. Bodiford
Attorney

Control # 50722

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proceeding before the Technical Assistance and Dispute
Resolution Office, should contact that office at 850-488-0717
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