Under Florida's former commercial-rent tax, was a tenant's payment to remove a percentage-rent clause taxable as rent?

Plain-English summary

For the 2003 ruling period, Florida found that the tenant's “penalty” payment was not taxable rent because it paid for removal of a percentage-rent clause, not for the right to use or occupy the property. The tenant wanted to assign the lease, and the proposed new tenant required elimination of that clause.

The percentage-rent provision would have applied only if gross sales exceeded a redacted threshold; that threshold had never been reached. The landlord agreed to terminate the clause in exchange for an amount tied to previously abated base rent.

At the same time, the tenant separately paid rent arrears and abated rent and paid sales tax on those amounts. Its September 22, 2003 letter listed the clause-removal amount as a distinct “Penalty Payment.”

Evidence of the payment's purpose controlled

Rule 12A-1.070(4)(g) addressed amounts paid to cancel or terminate a lease. The Department applied the same principle to cancellation of a particular clause within a continuing lease.

The rule looked at both accounting treatment and other tangible evidence:

• A payment recorded as rent could still be nontaxable if documents established that it was for something other than property use.
• A payment recorded as something other than rent could still be taxable if documents showed that it was additional consideration for occupancy.

Florida found the tenant's contemporaneous letter sufficient to establish that this payment purchased release from the percentage-rent obligation rather than occupancy rights.

Current-law note

The commercial-rent tax discussed here is historical. Florida TAA 25A-010 states that section 212.031's tax was repealed effective October 1, 2025. No state sales tax or discretionary sales surtax applies to rent or license fees for rental or occupancy periods beginning on or after that date.

The payment-characterization analysis may still matter for older periods and other legal or tax questions, but TAA 03A-057 decided only the former Florida rent-tax issue presented.

What this means for you

Commercial tenants and landlords

State the exact purpose of a lease-modification payment in the amendment, settlement letter, invoice, and accounting records. Separate true rent arrears from consideration for releasing a nonoccupancy obligation.

Lease administrators and accountants

Labels such as “penalty” or “rent” did not control by themselves. The ruling examined the underlying right purchased and the supporting documentation.

Real-estate and tax professionals

Determine whether the payment changes occupancy rights, cancels a separate obligation, settles rent, or combines multiple purposes. This ruling depended on a documented single purpose.

Common questions

Q: Was the penalty payment taxable under the former rent tax?
A: No. It was for eliminating the percentage-rent clause, not for occupancy.

Q: Did the entire lease have to end?
A: No. Florida applied the lease-cancellation rule to termination of a specific clause while the lease continued.

Q: Did the tenant still pay tax on actual rent?
A: Yes. The facts said it paid tax on the separate rent arrears and abatement amounts.

Q: Was calling the payment a penalty enough?
A: No. The contemporaneous letter and surrounding transaction established its nonrent purpose.

Citations and references

• Fla. Stat. § 212.031(1), (3) — former commercial-real-property rent tax
• Fla. Admin. Code r. 12A-1.070(4)(b), (f), (g) — former rent and cancellation-payment rules
• Fla. Stat. § 213.22 — Technical Assistance Advisements
• Florida TAA 25A-010 — official repeal confirmation

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-057

Original ruling text

SUMMARY

QUESTION: Is Florida sales tax assessed against a "penalty"
payment made to a lessor when the "penalty" payment is part
of an agreement that excuses the lessee from a clause in
the lease and not for the right to occupy real property?

ANSWER - Based on Facts Below: Rule 12A-1.070(4)(g),
F.A.C., provides that a payment made to cancel or terminate
a lease will not be subject to Florida sales tax under
certain circumstances. While the above Rule addresses the
cancellation or termination of an agreement, we are of the
opinion that Rule 12A-1.070(4)(g), F.A.C., also applies to
the cancellation or termination of certain clauses within a
lease agreement. Sufficient documentation was presented in
the form of other tangible evidence to establish that the
payment was "for other than the use of real property."

Dec 04, 2003

Re: Technical Assistance Advisement 03A-057
Florida Sales and Use Tax
Taxability of "Penalty" Related to a Commercial Real
Property Lease
Section 212.031, F.S. ("Florida Statutes")
Rule 12A-1.070, F.A.C. ("Florida Administrative Code")
FEIN: XXX

Dear :

This response is in reply to your letter dated October 10, 2003,
requesting the Department's issuance of a Technical Assistance
Advisement ("TAA") pursuant to Section 213.22, F.S., and Chapter
12-11, F.A.C., regarding the taxability of a "penalty payment"
related to a commercial real property lease. An examination of
your letter has established that you have complied with the
statutory and regulatory requirements for issuance of a TAA.
Therefore, the Department is hereby granting your request for

issuance of a TAA.

You previously requested a Letter of Technical Advice on
September 30, 2003. You provided, at that time, a copy of a
document titled "Lease Modification No. 4" and another titled
"Lease Modification No. 5." With your request for a TAA, you
have provided a letter dated September 22, 2003 from yourself to
XXX ["the Landlord"].

ISSUES

Is Florida sales tax assessed against a "penalty" payment made
to a lessor when the "penalty" payment is part of an agreement
that releases the lessee from a clause in the lease and not for
the right to occupy real property?

FACTS

Your letter provides in part:

... Our Company, [the Taxpayer], entered into a lease
agreement on March 22, 1999 which was amended on Jan. 25,
2002 (Lease Modification No. 4) and again on Jan. 9, 2003
(Lease Modification No. 5)....

Lease mod. No. 4 included a provision in par. 4 that called
for tenant's obligation to pay percentage rent if gross
sales exceeded $[#]. Gross sales subsequent to that point
in time never exceeded that amount and so we were never
subjected to percentage rent.

Lease mod. No. 5 includes a provision in par. 4 that says
that the percentage rent ceases when we have paid [#]% of
the total amount of base rent abated pursuant to par. 3 of
Lease Mod. No. 4, or on "rent fixing date" if landlord
adjusts the base rent to fair market value.

Neither of these [occurrences] has taken place; however, at
our request, the landlord has agreed to terminate the
percentage rent clause and we have agreed to pay him an

amount equal to [#]% of the total amount of base rent that
has been abated.

... The reason we asked the landlord to eliminate the
percentage rent clause is that we wanted to assign this
lease and the new tenant requested that we eliminate the
percentage rent provision. It WAS NOT consideration to
occupy the property, it was purely a negotiated amount that
we paid the landlord to eliminate a provision in the lease
modification. [emphasis in original]

Simultaneous with removing the percentage rent, we paid the
landlord for the rent arrears and abatement in the amount
of $[##,###.##] and we paid the 7% sales tax on that
amount. At the same time we paid the landlord a penalty of
$[##,###.##] in order to get them to remove the percentage
rent clause.... [emphasis in original]

Your letter dated September 22, 2003, from yourself to the
Landlord, provides the following:

We agree to pay the following:

Rent arrearage for 2001

$##,###

Interest
$##,### x 4%/365 days x 296 days
$##,### x 4%/365 days x 296

$#,###.##

Rent Abatement

Jan. - Dec. 02 $#,###.##/month x 12

$##,###.##

Jan. - Sept. 03 $#,###.##/month x 9

$##,###.##

Total Rent Abatement

$##,###.##

Penalty Payment

$##,###.##

Total amount due

$###,###.##

Plus applicable sales tax.

TAXPAYER'S POSITION

Your letter provides in part:

... we request that you consider not allocating the sales
tax on that penalty amount since this was clearly not a
consideration of our occupancy.

APPLICABLE STATUTES AND RULES

Section 212.031, F.S., provides in part:

(1)(a) 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....

(c) 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....

(3) The tax imposed by this section shall be in addition to
the total amount of the rental or license fee, shall be
charged by the lessor or person receiving the rent or
payment in and by a rental or license fee arrangement with
the lessee or person paying the rental or license fee, and
shall be due and payable at the time of the receipt of such
rental or license fee payment by the lessor or other person
who receives the rental or payment....

Rule 12A-1.070(4), F.A.C., provides in part:

***
(b) The tax shall be paid at the rate of 5 percent prior to
February 1, 1988, and 6 percent on or after February 1,
1988, 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.

(f) The tax shall be due and payable at the time of the
receipt of the rental or license fee payment by the lessor
or other person who receives the rental or payment. The
owner, lessor, or person receiving the rent or license fee
shall remit the tax to the Department at the times and in
the manner provided in Rule 12A-1.056, F.A.C.

(g)1. The amount charged by a lessor to a lessee to cancel
or terminate a lease agreement is subject to tax if the
lessor records such charge as rental income in its books
and records. If such charge is not recorded as rental
income by the lessor, then such charge is not considered a
payment for the lease of the real property but as a payment
to cancel or terminate the lease agreement.

2. Notwithstanding the provisions of subparagraph 1.,
   above, if the amount paid by a lessee to a lessor to cancel
   or terminate a lease agreement is recorded as a rental
   expense in the lessee's books and records, then such
   payment is subject to tax. However, if the lessee does not
   record that payment as a rental expense, then such payment
   is not considered a payment for the lease of the real
   property but as a payment to cancel or terminate the
   agreement, and is not subject to tax. If the lessee records
   the payment as a rental expense but does not remit tax to
   the lessor on such payment, then the lessee is required to
   remit the tax on such charge directly to the Department of
   Revenue. The lessee is required to remit the tax on form
   DR-15, Sales and Use Tax Return, if a registered dealer, or
   if unregistered, the lessee is required to remit the tax on
   form DR-15MO, Out-of-State Purchase Return. Forms DR-15 and

DR-15MO are incorporated by reference in Rule 12A-1.097,
F.A.C.

3. Should the lessor or lessee record the payment as rental
   income or expense, respectively, but provide sufficient
   documentation, such as a lease or other tangible evidence,
   to establish that the payment is for other than the use of
   the real property, then such payment is not subject to tax.

4. Should the lessor or lessee record the payment as other
   than rental income or rental expense, respectively, but
   sufficient documentation exists, such as a lease or other
   tangible evidence, to establish that the payment was
   additional payment for the use of the real property, then
   such payment is subject to tax.

DISCUSSION

Florida sales tax is due on the total rent consideration paid
for the right or privilege to occupy or use real property. Rule
12A-1.070(4)(g), F.A.C. provides that a payment made to cancel
or terminate a lease will not be subject to Florida sales tax
under certain circumstances. While the above Rule addresses the
cancellation or termination of an agreement, we are of the
opinion that Rule 12A-1.070(4)(g), F.A.C., also applies to the
cancellation or termination of certain clauses within a lease
agreement (e.g., the scenario you have presented to us).

Your letter of September 22, 2003 (from yourself to the
Landlord) sufficiently establishes that the "penalty payment"
was not for the privilege to use real property. Therefore,
pursuant to Rule 12A-1.070(4)(g)3., F.A.C., the "penalty
payment" would not be subject to Florida sales tax.

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 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,

Eric R. Peate
Senior Attorney
Technical Assistance & Dispute Resolution
(850) 922-4714

Control No.: 57129