Did related entities owe Florida commercial-rent sales tax when the occupant paid no cash rent directly to the property owner?

Plain-English summary

Florida found taxable commercial-rent consideration even though the related operating company paid no cash rent directly to the property owner. The entities' occupancy agreement, mandatory property-related obligations, and rent adjustments showed a taxable landlord-tenant arrangement.

The owner held mortgaged real property where a related company operated a multi-brand new- and used-car business. The agreement said the occupant owed no rent or other compensation directly to the owner, but both entities recorded rent adjustments under Internal Revenue Code section 482 and Treasury Regulation section 1.482-1 for federal and state income-tax purposes.

Related-party status did not remove the tax

Rule 12A-1.070(19) expressly covered leases, rentals, and occupancy arrangements between related persons. It taxed direct or indirect payments, credits, and consideration in kind furnished for use of the related owner's real property.

Florida recognized the parties as the separate legal entities they had chosen to create. The occupant used another entity's land with that owner's permission, which established a landlord-tenant relationship despite the agreement's statement that no rent was payable.

Mandatory improvements were rent consideration

The occupant had to provide alterations and improvements, and those improvements remained the owner's property. Failure to perform obligations under the occupancy agreement constituted default.

Because the required improvements benefited the owner and were furnished for the right to occupy the property, Florida treated those amounts as taxable rental consideration.

Owner-protective insurance was taxable

The occupant also had to maintain liability and property-damage insurance protecting the owner. Rule 12A-1.070(12) distinguished a tenant's own insurance from the separately stated portion protecting the landlord.

Florida taxed the premiums protecting the owner because that responsibility was separately stated in the occupancy agreement and benefited the owner.

Recorded rent adjustments were taxable too

Both entities identified amounts as rent through their section 482 adjustments. Florida concluded that those amounts were subject to tax under section 212.031, even without a direct payment from occupant to owner.

The owner itself paid the mortgage and ad valorem taxes. The ruling's express taxable findings focused on the rent adjustments, required alterations and improvements, and owner-protective insurance premiums.

What this means for you

Related entities sharing commercial property

A “no rent” clause does not end the analysis. Required expenditures, credits, accounting adjustments, and benefits furnished to the owner can be indirect rent consideration.

Commercial property owners

Review who receives the lasting benefit of tenant-funded improvements and insurance. Direct payment to a third party can still be consideration for occupancy.

Accountants and tax professionals

Reconcile occupancy agreements with tax and accounting records. If both entities identify an amount as rent for income-tax purposes, Florida may treat it as rent for sales-tax purposes as well. Avoid extending this ruling to costs it did not expressly include in its conclusion.

Common questions

Q: Did any rent check move from the occupant to the owner?
A: No. Florida still found taxable direct or indirect consideration.

Q: Did the entities' common ownership matter?
A: It did not exempt the arrangement. Florida's rule specifically taxed related-party real-property arrangements.

Q: Were tenant-funded improvements taxable?
A: Yes. They were mandatory, benefited the owner, and remained the owner's property.

Q: Was every insurance premium taxable?
A: The ruling taxed premiums protecting the owner against liability and property damage because that responsibility was separately stated. The cited rule distinguished insurance bought solely for the tenant's own protection.

Citations and references

• Fla. Stat. § 212.02(2) — business includes activity for direct or indirect gain, benefit, or advantage
• Fla. Stat. § 212.02(10)(i) — license to use or occupy real property
• Fla. Stat. § 212.02(12) — broad definition of person, including corporations and partnerships
• Fla. Stat. § 212.031(1) and (3) — tax on commercial rent or license-fee consideration
• Fla. Admin. Code r. 12A-1.070(4) — taxable consideration for use or occupancy
• Fla. Admin. Code r. 12A-1.070(12) — insurance protecting tenant versus landlord
• Fla. Admin. Code r. 12A-1.070(19) — related-party arrangements and indirect consideration
• Seaboard Coastline Railroad Co. v. Askew, No. 72-15 (Fla. Cir. Ct. 1972) — rent may be paid to the lessor or another person
• Regal Kitchens, Inc. v. Department of Revenue, 641 So. 2d 158 (Fla. 1st DCA 1994) — separate corporate form and landlord-tenant treatment

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-044

Original ruling text

SUMMARY
QUESTION: Whether Florida sales tax due in a commercial lease arrangement involving related parties, wherein it is
alleged that no consideration flows directly from the occupant of the property to the owner of the property where both
the occupant and owner record adjustments for rent under Internal Revenue Code s. 482 and Treas. Regs. s. 1.482-1
for federal and state income tax purposes.
ANSWER - Based on Facts Below: The amounts paid by the occupant of the property for alterations and
improvements and the premiums paid by the occupant for insurance that protects the owner against liability and
protects the owner against property damage are subject to Florida sales tax, because the occupant is responsible for
these obligations for the benefit of the owner and the charge or responsibility for the insurance is separately stated
within the Occupancy Agreement. Further, the amounts identified as rent by both the occupant and owner are subject
to Florida sales tax under Section 212.031, F.S.

July 23, 2004

Re: Technical Assistance Advisement 04A-044
Florida Sales and Use Tax
Related Entities and Commercial Real Property Rental
Section 212.031, F.S. ("Florida Statutes")
Rule 12A-1.070, F.A.C. ("Florida Administrative

Code")

Dear :
This response is in reply to your letter dated January 17, 2004, 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 related
entities and commercial real property rentals. 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.
Along with your letter, you have provided the following documents: (1) a Partnership Agreement between the parties
involved; (2) Articles of Incorporation for the occupant of the property in question; (3) an Occupancy Agreement
between the owner of the property and the occupant of the property; and (4) the Master Loan Agreement related to
the property in question.
ISSUE
Is Florida sales tax due in a commercial lease arrangement involving related parties, wherein it is alleged that no
consideration flows directly from the occupant of the property to the owner of the property where both the occupant

and owner record adjustments for rent under Internal Revenue Code s. 482 and Treas. Regs. s. 1.482-1 for federal
and state income tax purposes?
FACTS
Your letter provides in part:

Applicant owns certain real property encumbered by mortgages. Applicant is responsible for the debt service
payments to a commercial lender (hereinafter, "Bank"). Subject and Partners (and their spouses) have executed
Guarantee Agreements with respect to the mortgages. Subject operates a multi-brand new and used retail car
operation. Such operations are performed on Applicant’s Premises.
Applicant and Subject will enter into an Occupancy Agreement (the "Agreement") which grants Subject the right to use
and occupy the Premises. The Agreement expressly states that Subject shall not be required to pay any rent to
Applicant and shall not be required to pay any other consideration or compensation to or for the benefit of Applicant
for the use and occupancy of the Premises. Applicant and Subject will, however, record adjustments for rent under
Internal Revenue Code s. 482 and Treas. Regs. s. 1.482-1 for federal and state income tax purposes only.
The Agreement calls for Subject to be liable for all costs that would be incurred to maintain the real property and
improvements. The costs that will be incurred to maintain the real property and improvements include maintenance,
repairs and utility charges. The Subject is also responsible for maintaining adequate insurance, agrees to indemnify
the Applicant and hold it harmless from and satisfy and discharge any and all loss and liability of every kind
whatsoever arising during the term of the Agreement. All payments made by Subject pursuant to the Agreement shall
be paid directly by Subject to the appropriate third party payee. Subject shall not make any type of payment to
Applicant under the Agreement, other than payments in the nature of indemnification or damages.
The terms between Applicant, Subject, Partners, and Bank on the mortgaged property hold Applicant as primarily
liable with Partners and Subject as secondarily liable in their capacity as guarantors. Partners will make capital
contributions to Applicant as needed to fund Applicant's operating needs. As stated above, Applicant has no power to
compel payment of any kind from Subject. Partners will determine independently whether to fund capital contributions
to Applicant, and the amount of any such contributions.

A review of the Occupancy Agreement indicates that the "owner" (a.k.a, the "Applicant") "... shall pay all real property
taxes and assessments which may be levied or assessed ... against or upon the Premises." (Occupancy Agreement,
para. 15) All alterations and improvements are to remain the property of the Applicant (Occupancy Agreement, para.
4) Failure by the Subject to perform any obligation under the Occupancy Agreement shall constitute default.
(Occupancy Agreement, para. 19)
Based on a telephone conversation with your office, the Applicant is the entity which directly makes the mortgage
payment to the lender.

TAXPAYER'S POSITION
Your letter provides in part:

It is Applicant's contention that a landlord and tenant relationship does not exist between Applicant and Subject since
payment is not required for the use of the Premises. Applicant has not power to compel payment from Subject, with
the exception of indemnification or damages as noted above.

Subject asserts that the ambiguities or doubts in the relevant tax laws governing this transaction should be resolved
strongly in Subject's favor....

In the present instance, there is no payment due for the privilege of occupying the premises. Moreover, the privilege to
use or occupy the real property is granted with only the condition that Subject assumes certain expenses of
maintaining the property, none of which are payable to Applicant or a related party. Thus, there is no "rent or license
fee charged" for such rental in accordance with s. 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.

In your letter, you cite to the following authority in support of your position: Seaboard Coastline Railroad Company v.
Askew, #72-15 (Fla. Cir. Ct., 2nd Cir., Leon Co., 1972); Department of Revenue v. Ryder Systems, Inc., 406 So.2d
1299 (Fla. 1st DCA, 1981); and St. John's Trading Company, Inc. v. Department of Revenue, DOAH Case No. 841652 (1985). You also cite to a number of cases regarding the proper handling of ambiguities in Florida tax law (e.g.,
Maas Brothers, Inc. v. Dickinson, 195 So.2d 193 (Fla. 1967)).
APPLICABLE STATUTES AND RULES
Section 212.02, F.S., provides in part:

(2) "Business" means any activity engaged in by any person, or caused to be engaged in by him or her, with the object
of private or public gain, benefit, or advantage, either direct or indirect....

(10) (i) "License," as used in this chapter with reference to the use of real property, means the granting of a privilege
to use or occupy a building or a parcel of real property for any purpose.

(12) "Person" includes any individual, firm, copartnership, joint adventure, association, corporation, estate, trust,
business trust, receiver, syndicate, or other group or combination acting as a unit and also includes any political
subdivision, municipality, state agency, bureau, or department and includes the plural as well as the singular number.

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, F.A.C., provides in part:

(4)(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.
(c) Ad valorem taxes paid by the tenant or other person actually occupying, using, or entitled to use any real property
to the lessor or any other person on behalf of the lessor, including transactions between affiliated entities, are taxable.
(d) Common area maintenance charges paid by a tenant to the lessor for the privilege or right to use or occupy real
property are taxable.
(e) Utility charges paid by a tenant to the lessor for the privilege or right to use or occupy real property are taxable,
unless the lessor has paid the sales tax to the utility company on such utilities consumed by the tenant, and the
utilities billed by the lessor to the tenant are separately stated on the lessor's invoice to the tenant at the same or
lower price as that billed by the utility company to the lessor.

(12) When a tenant or other person pays insurance for his own protection, the premium is not regarded as rental or
license fee consideration, even though the landlord or other person granting the right to occupy or use such real
property is also protected by the coverage. However, any portion of the premium which secures the protection of the
landlord or person granting the right to occupy or use such real property and which is separately stated or itemized is
regarded as rental or license fee consideration and is taxable.

(19)(a) The lease or rental of real property or a license fee arrangement to use or occupy real property between

related "persons," as defined in s. 212.02(12), F.S., in the capacity of lessor/lessee, is subject to tax.
(b) The total consideration, whether direct or indirect, payments or credits, or other consideration in kind, furnished by
the lessee to the lessor is subject to tax despite any relationship between the lessor and the lessee.
(c) The total consideration furnished by the lessee to a related lessor for the occupation of real property or the use or
entitlement to the use of real property owned by the related lessor is subject to tax, even though the amount of the
consideration is equal to the amount of the consideration legally necessary to amortize a debt owned by the related
lessor and secured by the real property occupied, or used, and even though the consideration is ultimately used to
pay that debt.

DISCUSSION
The issue presented is whether Florida sales tax is due in a commercial lease arrangement involving related parties,
wherein it is alleged that no consideration flows from the occupant of the property to the owner of the property but
both the occupant and the owner of the property record adjustments for rent under Internal Revenue Code s. 482 and
Treas. Regs. s. 1.482-1 for federal and state income tax purposes.
In Florida, the renting, leasing, letting, or granting a license for the use of any real property is subject to Florida sales
tax. Sales tax is due on the rental consideration paid for the right to use or occupy commercial real property. See Rule
12A-1.070(4) and (19), F.A.C. Rental consideration also includes the payment of premiums on insurance which
protects the landlord or person granting the right to occupy real property. See Rule 12A-1.070(12), F.A.C.
The lease or rental of real property between related "persons" is taxable. See Rule12A-1.070(19), F.A.C. "Person" is
defined at Section 212.02(12), F.S., and includes all types of entities including individuals and corporations. A
"landlord and tenant relationship":
... exists where one person occupies premises of another in subordination to other's title or rights and with his
permission or consent. Black's Law Dictionary 790, 791 (5th ed. 1979).
All payments made on behalf of the owner of commercial real property that benefit the owner of the commercial real
property are considered "rent consideration" and are therefore subject to Florida sales tax. See Rule 12A1.070(19)(b), F.A.C., and Seaboard Coastline Railroad Company v. Askew, #72-15 (Fla. Cir. Ct., 2nd Cir., Leon Co.,
1972). (Rent consideration may be payable directly to the lessor or to some other person directed by the lessor.)
Finally, there need not be a written lease in order for there to be a landlord/tenant relationship. See Regal Kitchens,
Inc. v. Department of Revenue, 641 So.2d 158 (Fla. 1st DCA, 1994).
When a business decision is made to create separate legal entities for purposes of owning and occupying real
property to achieve advantages such as preferred financing, tax advantage, risk control, insurance coverage, or the
like, the formalities of such arrangements are recognized for purposes of imposing Florida sales tax on transactions
between those separate legal entities. See Seaboard Coastline Railroad Company. Courts have held that parties are

not free to "...disavow the existence of the corporation for the purpose of obtaining a tax advantage." Regal Kitchens,
641 So.2d at 163. The Regal Kitchens opinion also held that: "Those who seek the protection afforded by
incorporation must also accept the burdens." Id. Finally, the Regal Kitchens court held:
Nothing in subsection 212.02(2) Florida Statutes (1989), suggests that the term "business" is limited to those who
engage in regular course of dealing with different clients or customers. A person who rents a single duplex unit is
engaged in business as is the owner of an apartment who rents thousands of units. Id.
Under the facts presented, there is a "landlord and tenant relationship" because the Subject is occupying the land of
another person (i.e., the Applicant). The Subject is responsible (pursuant to the Occupancy Agreement) for providing
alterations and improvements and for maintaining liability and property damage insurance for the benefit of the
Applicant. Ad valorem taxes and mortgage payments are directly paid by the Applicant. The Subject is directly liable
for utility charges.
No payments flow directly from the Subject to the Applicant, and no third parties are paid directly by the Subject (save
for the insurance premiums) on behalf of the Applicant. However, the above obligations are not optional, but
contractually obligated to be performed by the Subject and failure to perform by the Subject results in default. The
above obligations benefit the Applicant and are for the use and occupancy of the property. Payments made by the
Subject for alterations and improvements, and payments by the Subject for maintaining liability and property insurance
are subject to Florida sales tax. Both the Subject and the Applicant record adjustments for rent under Internal
Revenue Code s. 482 and Treas. Regs. s. 1.482-1 for federal and state income tax purposes.
CONCLUSION
The facts show that the owner of the property is exercising a taxable privilege and is charging for use of real property
and consideration is due and payable by "the tenant or other person actually occupying, using, or entitled to use" to
"his landlord or other person" for the privilege of use...." The amounts identified as rent by both the Subject and
Applicant are subject to Florida sales tax under Section 212.031, F.S.
The amounts paid by Subject for alterations and improvements and the premiums paid by the Subject for insurance
that protects the Applicant against liability and protects the Applicant against property damage are subject to Florida
sales tax, because the Subject is responsible for these obligations for the benefit of the Applicant and the charge or
responsibility for the insurance is separately stated within the Occupancy Agreement. See Rule 12A-1.070(12), F.A.C.
Further, the amounts identified as rent by both the Subject and Applicant are subject to Florida sales tax under
Section 212.031, 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 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.: 58751