Were a county's public-transit equipment head leases, subleases, and related loan documents exempt from Florida taxes?

Plain-English summary

The county's described public-transit lease structure avoided Florida sales, intangible, and documentary stamp taxes when all stated conditions were met. For sales tax, the registered head lessees had to provide valid resale certificates to the county, and the county had to provide valid governmental exemption certificates to them. That covered head-lease, sublease, and head-lease-acquisition payments.

The leasehold interests were exempt from intangible tax during the sublease terms because each system operated for a public purpose as a public transit system.

The head leases, subleases, and loans were not subject to documentary stamp tax because they were made, executed, and delivered outside Florida and were not secured by Florida real property or a security agreement filed or recorded in Florida. The parties had to retain proof of out-of-state execution and delivery.

What this means for you

Each tax depended on a different condition: certificates and dealer registration for sales tax, actual public use for intangible tax, and execution, delivery, security, and recordation facts for documentary stamp tax. The Department handled the separate property-tax question outside the TAA because that tax was locally administered.

Common questions

Q: Were all lease payments exempt from sales tax automatically? No. Valid resale and governmental exemption certificates were required.

Q: Why was the leasehold intangible exempt? The equipment was operated for the county's public-transit purpose.

Q: What kept the documents outside documentary stamp tax? Out-of-state making, execution, and delivery, plus no Florida real-property security or filed or recorded Florida security agreement.

Citations and references

• Fla. Stat. ch. 199 and § 196.012 — public-purpose leasehold exemption
• Fla. Stat. § 201.08 — documentary stamp tax on obligations
• Fla. Stat. §§ 212.05(1)(c)-(d), 212.07, and 212.08(6) — equipment leases, resale, and government exemption
• Fla. Admin. Code rr. 12A-1.038(4), 12A-1.039, and 12A-1.071(7) — exemption certificates and lease-for-release
• Fla. Admin. Code r. 12B-4.053(33) — out-of-state execution and delivery
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02M-008

Original ruling text

SUMMARY

QUESTION: Are leases of qualified technical equipment to
and by county exempt from tax?

Documentary Stamp Tax

ANSWER - Based on Facts Below: Assuming the Head Lease,
Subleases, and any other documents such as Loans are made,
executed, and delivered outside of Florida, and are not
secured by Florida real property or any filed or recorded
security agreement, such documents would not be subject to
Florida documentary stamp tax. Per Rule 12B-4.053(33),
F.A.C., sufficient documentation should be maintained to
establish that the documents are executed and delivered
outside of Florida.

Intangible Tax

ANSWER - Based on Facts Below: Leasehold interests where
the lessee serves or performs a governmental, municipal, or
public purpose, as defined in s. 196.012, F.S., is exempt
from Florida intangible tax. During the Sublease terms,
each system will be operated for a public purpose (i.e., a
public transit system), and thus during this time frame the
leasehold interest in the Head Leases and Subleases would
be exempt from intangible tax imposed under Chapter 199,
F.S.

Sales Tax

ANSWER - Based on Facts Below: Assuming that the Head
Lessees elect to extend to the County a valid Annual Resale
Certificate in compliance with Rule 12A-1.039, F.A.C., and
the County extends a valid exemption certificate to each
Head Lessee in compliance with Rule 12A-1.038(4), F.A.C.,
none of the rental payments under the Head Leases or
subleases (including payments to acquire the Head Lease
interest) would be subject to the Florida sales and use tax
imposed by Chapter 212, F.S. See also Rule 12A-1.071(7),
F.A.C.

**********

Aug 09, 2002

Re: Technical Assistance Advisement No. 02M-008
Sales and Use Tax, Documentary Stamp Tax, Intangible Tax,
Property Tax - Qualified Technical Equipment Lease
Chapter 199, F.S., Sections 196.012, 201.08, 212.05(1)(c)
and (d), 212.07, 212.08(6), 213.22, F.S.
Rule Chapter 12-11, F.A.C., Rules 12A-1.038(4) 12A-1.039,
12A-1.071(7), 12B-4.053(33), F.A.C.
XXX (hereinafter "County")
XXX (hereinafter "Trust")
XXX (hereinafter "Company A")
XXX (hereinafter "Company B")
XXX (hereinafter "Company C")
XXX (hereinafter "Company D")
XXX (hereinafter "Company E")
XXX (hereinafter "Company F")
XXX (hereinafter "Company G")
XXX (hereinafter "Company H")

Dear :

This is in response to your letters to the Florida Department of
Revenue dated June 24, 2002 and July 16, 2002 and discussion
held in person on July 23, 2002. You asked for a technical
assistance advisement setting out the applicability of Florida
sales and use tax, Florida intangible tax, ad valorem property
tax, and Florida documentary stamp tax to a qualified technical
equipment lease, set out below.

Facts

You describe three transactions involving tangible personal
property, (i.e., XXX used in the County's XXX and XXX systems
and other technical system assets owned by the County). The
first transaction will involve XXX assets owned by various
agencies, including the County XXX (i.e., XXX equipment used in

the XXX systems). The second transaction will involve other
components of the XXX system, including the XXX system utilized
in the XXX and XXX systems. The third transaction will involve
certain components of the XXX system, XXX equipment, and XXX
system utilized in the XXX and XXX systems.

The equity participants for these transactions will be Companies
A, B, and C respectively (also referred to herein as "Equity
Participants.") Diagrammatic flow charts summarizing the
transactions (including the parties thereto) are attached as
Exhibits 1,2, and 3, respectively. You attached, as Exhibit 4,
a brief memorandum from the County's Company H advisor, XXX and
XXX (hereinafter "Advisor"), which you state more particularly
describes the assets that are the subject of each of the three
proposed transactions.

You present an "Overview of Transaction Structure" and describe
the structure of each of the three transactions as follows:

Since the County has not approved the transfer of legal title to
the equipment to a third party, each transaction will commence
with the County leasing the subject equipment to the Trust
established by the respective equity participant pursuant to a
long term lease (each, a "Head Lease," collectively "Head
Leases") of approximately XX years. The Trust will be treated
as a grantor trust (or otherwise disregarded) for federal income
tax purposes, and it is not commercially domiciled in Florida.
The trust in turn will lease each system back to the County for
a lease term of approximately XX years (each a "sublease,"
collectively "subleases"). Among the rights granted under the
sublease, the County has an "early buy-out option" at
approximately the XX year mark, as well as an end-of lease
purchase option.

The cash flows work in a fashion typical for a transaction of
this structure, depicted in the diagrams referenced above. The
Trust will make a prepayment under each Head Lease, equal to the
fair market value of each system. The funds utilized by the
Trust will come from an equity contribution supplied by the
respective equity participant and from the proceeds of non-

recourse debt lent to the Trust by a third party lender. In the
Company A and Company C transactions, the debt is supplied
approximately XX% by Company D and XX% by Company E. In the
Company B transaction, XX% of the non-recourse debt is supplied
by Company E. Collectively, the debt incurred by Companies A,
B, and C will hereafter be referred to as the "Loans."

The County will utilize the proceeds of the repayment under each
Head Lease to economically defease, pursuant to agreements with
independent third parties, its rental obligations under each
sublease, including the purchase option price in the event that
the "early buy-out" is exercised. The difference between the
amounts required for the economic defeasance and the amount of
prepaid Head Lease rent represents the County's cash benefit for
participation in the transaction. Based on the most recent
price runs supplied by the equity participants to the County,
the County's benefit for the present series of transactions
should approximate XX% of the appraised fair market value of all
of the systems as of the closing date (based on an assumed loan
rate of XX% and an assumed implicit interest rate on the
defeasance accounts of XX%); this estimate is subject to change
depending on the differential between the assumed interest rate
in the pricing runs and the actual interest rates on the day of
closing.

The economic defeasance of the equity portion of the lease
rentals, including the purchase option payable on the Early BuyOut Date, works identically in the Company B and Company C
transactions, and is slightly different in the Company A
transaction. In the Company A transaction, the County will
purchase a series of US Treasury strip securities to provide a
source of funds to pay and secure the equity portion of the
lease rentals. In the Company B and Company C transactions, the
County will make a payment to Company F, which will act as the
equity payment undertaking. The obligations of Company F, will
be guaranteed by XXX (the ultimate Company F parent entity),
which currently maintains a AAA credit rating.

The economic defeasance of the debt portion of the lease rentals
in the Company A and Company C transactions will be as follows.
The County will enter into two payment undertaking agreements:

(i) a "Series A Payment Undertaking Agreement" with Company G
and (ii) a "Series B Payment Undertaking Agreement" with Company
F. The aggregate of the funds generated pursuant to these two
payment undertaking agreements will match the debt portion of
the lease rentals. In the Company B transaction, there will
only be one payment undertaking agreement in connection with
securing a source of payment for the debt portion of the rent,
an agreement with Company G.

As is customary in transactions of this nature, certain
contingent obligations of the County to the Trust that would
arise only in the event of an early termination of the lease in
certain circumstances are secured by means of an insurance
policy written in favor of the Trust by Company H. In addition,
there are customary security arrangements for transactions of
this type designed to assure the equity participant and the
lenders that it will receive the lease rents and supplemental
lease payments.

As is also customary in these transactions, the sublease
documentation provides for certain alternatives for the County
in the event the County decides not to exercise its early-buy
out option. If the early buy option is not exercised, the
sublease continues until the end of the sublease term. At that
point, the County has the right to acquire the Head Lease
interest for its then fair market value or, alternatively, will
be required to return each system to the Trust, in which case
the Trust is entitled to exercise its rights with respect to
each system for the remainder of the Head Lease term pursuant to
the terms and conditions of the Head Lease. The Head Lease term
should end after the expiration of the useful life of the
equipment. At the end of the Head Lease term, the County can
cause the system to revert to the County for no consideration.

None of the documents entered into in connection with the
transactions described above will be made, delivered, executed,
filed or recorded in Florida.

Requested Advisements

You request the following advisements:

1. Assuming that the Head Lessees elect to extend to the
County a valid [Annual Resale Certificate] in compliance
with Rule 12A-1.039, F.A.C. and the County elects to extend
a valid exemption certificate to the head lessee in
compliance with Rule 12A-1.038, F.A.C., none of the rental
payments under the Head Lease or Subleases (including any
payments to acquire the Head Lease interest) would be
subject to the Florida Sales and Use tax imposed by Chapter
212, Florida Statutes.

2. None of the Head Leases, Sublease nor the Loans will be
   subject to the tax imposed by Chapter 201, Florida
   Statutes.

3. During the Sublease terms, no interest in the Head Leases
   (or in the underlying assets) nor any of the Subleases will
   be subject to property taxes whether imposed by Chapter 196
   or 199, Florida Statutes, or otherwise.

Law and Discussion on Sales Tax Issues

Sales tax may not be imposed on any payment made pursuant either
to the planned Head Leases or the subleases, as these agreements
have been described in your letters dated June 24, 2002, and
July 16, 2002, and in the discussions held on July 23, 2002.
Section 212.05(1)(c) and (d), F.S., imposes sales tax on the
rental of tangible personal property. Section 212.07, F.S.,
requires that only a registered dealer may issue a resale
certificate. Sales and rentals to governmental units are exempt
from sales tax pursuant to section 212.08(6), F.S. Rules 12A1.038(4) and 12A-1.039, F.A.C., authorized by Section 212.07,
F.S., and Rule 12A-1.071(7), F.A.C., which states: "The lease
payments on tangible personal property which is leased solely
for the purpose of leasing it to a third party are exempt. The
prime lessee is required to register with the Department as a
dealer and issue the prime lessor a resale certificate in lieu
of tax," are provisions that permit the County to lease the
property to the trust tax free, accepting the Trust's Annual
Resale Certificate, and permits the Trust to lease the property
back to the County, accepting the County's exemption

certificate. Thus, if the Trust is a registered dealer prior to
the transaction, it may issue its Annual Resale Certificate to
the County and not pay sales tax on the payments due under the
Head Lease. The County may participate in a tax-free lease back
by providing its exemption certificate.

Sales Tax Response

Assuming that the Head Lessees elect to extend to the County a
valid Annual Resale Certificate in compliance with Rule 12A1.039, F.A.C., and the County extends a valid exemption
certificate to each Head Lessee in compliance with Rule 12A1.038(4), F.A.C., none of the rental payments under the Head
Leases or subleases (including any payments to acquire the Head
Lease interest) would be subject to the Florida sales and use
tax imposed by Chapter 212, Florida Statutes. See also Rule
12A-1.071(7), F.A.C.

Documentary Stamp Tax Response

Section 201.08, F.S., imposes the documentary stamp tax at the
rate of $.35 per $100 on promissory notes and other written
obligations to pay money which are signed, executed and
delivered in the state based on the indebtedness secured
thereby. When a note is signed, executed and delivered outside
Florida but is secured by a Florida mortgage on either real or
personal property, documentary stamp tax is due upon recordation
of the mortgage or other security instrument based on the
maximum principal amount of indebtedness secured.

Rule 12B-4.053(33), F.A.C., provides in part:

... Promissory notes, nonnegotiable notes, and written
obligations to pay money (hereinafter, called notes) made,
executed, and delivered to a Florida lender in another
state are not subject to Florida's documentary stamp tax...

In the transaction at hand, neither the Head Lease, the
Subleases, nor the Loans will be made, executed, or delivered in
Florida. The Head Lease, Subleases, and the Loans are not
secured by real property located in Florida, nor will any

security agreement be filed or recorded in Florida. Based on
the provisions of the Florida statutes and regulations, such
documents will not be subject to the documentary stamp tax in
Florida. Please refer to Rule 12B-4.053(33), F.A.C., a copy of
which is enclosed, for procedures that provide proof sufficient
to establish that documents are executed and delivered outside
of Florida.

Intangible Tax Response

Chapter 199, F.S., imposes the Florida intangible personal
property tax on any leasehold interest of governmental property,
except for leasehold interests where the lessee serves or
performs a governmental, municipal, or public purpose or
function, as defined in Section 196.012, F.S.

During the Sublease terms, each system will be operated for a
public purpose, (i.e., a public transit system). Thus, during
this time frame, the leasehold interest in the Head Leases and
Subleases will be exempt from the Florida intangible tax under
Chapter 199, F.S.

Property Tax Response

The Department of Revenue does not have authority to issue a
Technical Assistance Advisement pursuant to Section 213.22,
Florida Statutes and Rule Chapter 12-11, Florida Administrative
Code, on property tax issues. Property tax is imposed and
administered at the local level and not at the state level.
However, we have responded to that portion of your request for
technical assistance advisement on property tax under separate
cover.

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 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 Section 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,

Karen Kugell
Senior Attorney
Technical Assistance and Dispute Resolution
Office of General Counsel
(850) 922-4834

Joy Eldred, CPA
Tax Law Specialist
Technical Assistance and Dispute Resolution
Office of General Counsel
850-922-4844

KK/JBE
Control Numbers: 50792 & 50797
Enclosure: Rule 12B-4.053(33), F.A.C.,