What percentage of a hotel's county-airport ground rent was taxable when guest dwelling areas and commercial or inaccessible areas shared the leased property?

Plain-English summary

Florida determined that 21% of this hotel's county-airport ground rent was subject to commercial-real-property sales tax. The operator had proposed only 7.23%, but the Department added the full restaurant and lounge areas and 32,503 square feet of inaccessible leased land to the taxable numerator.

The hotel occupied 188,990 square feet under a ground lease. Its ground floor included guest rooms, utility and office areas, banquet and conference rooms, a pool, lounge, library, restaurant, and other hotel spaces. The operator had paid tax on all rent and then sought an allocation for portions used exclusively as dwelling units.

Mixed-use hotel rent required a reasonable allocation

Section 212.031 excluded real property used exclusively as dwelling units. When one lease covered both taxable and excluded uses, subsection (1)(b) and Rule 12A-1.070(14)(a) required the Department to identify the taxable and exempt portions based on the lease and other available information.

The Department said the method must be reasonable and case-specific. For this ground lease, it accepted a square-footage fraction:

• Numerator: Ground-level land and improvements used for the hotel's business, commercial spaces such as restaurants and lounges, areas used exclusively by the operator, separately charged guest facilities, and leased land not available to guests.
• Denominator: The total square footage of all ground covered by the lease, including land and ground-level improvements.

Only the ground level counted because this was a ground lease, not a lease of each upper-floor hotel area.

Two adjustments raised the taxable share

The Department rejected two parts of the hotel's calculation:

1. The entire restaurant and lounge were commercial spaces and not used exclusively as dwelling units.
2. The 32,503 square feet between the retention-pond berms and airport aviation property were inaccessible to guests and therefore belonged in the taxable numerator.

After those changes, the taxable area was 38,881 square feet out of 188,990 square feet, producing a 21% taxable ratio.

What this means for you

Hotel operators

Guest rooms and qualifying guest common areas can support the dwelling-unit exclusion, but restaurants, lounges, offices, service areas, and other business-use spaces remain taxable.

Ground lessees

Leased land can be taxable even when undeveloped or unusable if it is not principally available to guests as part of the dwelling use. The analysis is not limited to the building footprint.

Accountants and property managers

Maintain surveys, floor plans, access facts, fee schedules, and square-foot calculations. Florida expressly treated allocation as a case-by-case factual determination.

Common questions

Q: What percentage of rent was taxable?
A: 21%, based on 38,881 taxable square feet divided by 188,990 total leased square feet.

Q: Why were the restaurant and lounge taxable?
A: They were commercial spaces, not real property used exclusively as dwelling units.

Q: Why was inaccessible land taxable?
A: It was part of the leased ground but was not accessible to or used by hotel guests as a dwelling-related common area.

Q: Did the Department accept the hotel's proposed 7.23% allocation?
A: No. It adjusted the numerator and reached 21%.

Citations and references

• Fla. Stat. § 212.031(1)(a)2. — exclusion for real property used exclusively as dwelling units
• Fla. Stat. § 212.031(1)(b) and (c) — reasonable allocation of mixed taxable and nontaxable rent
• Fla. Admin. Code r. 12A-1.070(14)(a) — Department determination of exempt and taxable mixed-use rent
• Department of Revenue v. Vanjaria Enterprises, 675 So. 2d 252 (Fla. 5th DCA 1996) — reasonable case-by-case allocation

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-053

Original ruling text

SUMMARY
QUESTION: What portion of the rental payments from a lessee to a lessor is subject to Florida sales tax wherein the
property is subject to a ground lease and the lessee is operating a hotel on that property?
ANSWER - Based on Facts Below: Section 212.031(1)(b), F.S., and Rule 12A-1.070(14)(a), F.A.C., provide that the
Department shall identify those portions of "rent" that are taxable and those that are tax-exempt. In reaching this
determination, the Department must develop a case-by-case approach that is reasonable. There are several
approaches that may be used to reach a reasonable determination. Which approach is most reasonable is a decision
that must be made depending on the facts and circumstances of the individual taxpayer.
Under the facts provided in this request, the taxable portion was determined by dividing those areas that are not used
exclusively as dwelling units (the numerator) by the entire leased space (the denominator). The numerator of this
fraction included, for example, a restaurant, lounge, offices and areas around the hotel building which were
unimproved and/or inaccessible to guests. The denominator of this fraction consisted of the entire square footage of
the real property being leased (i.e., "the ground").

August 27, 2004

Re: Technical Assistance Advisement 04A-053
XXX ("the Taxpayer")
Taxable Portions of a Hotel Lease
Sales and Use Tax
Section 212.031, Florida Statutes ("F.S.")
Rule 12A-1.070, Florida Administrative Code ("F.A.C.")
Dear :
This response is in reply to your letter dated June 7, 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 the
identification of taxable portions of a hotel 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.
The following documents were submitted with your request: a copy of the ground lease; plans of the first floor of the
hotel and site; a survey of the property before development reflecting total land area; a summary indicating the areas
on the property that you believe are taxable, non-dwelling areas; and a statement of sales tax and total land rents paid
from April 23, 2003 to June, 2004.
ISSUE

What portion of the rental payments from a lessee to a lessor is subject to Florida sales tax wherein the property is
subject to a ground lease and the lessee is operating a hotel on that property?
FACTS
Based on your letter and the other documents you have provided, the relevant facts can be summarized as follows:
The Taxpayer has entered into a Land Lease with a Florida county on land owned by the county and used for aviation
purposes (i.e., an airport). The county was desirous of developing portions of its airport property that were not
required for aviation purposes. The Taxpayer was desirous of developing and leasing certain portions of the county’s
airport property for purposes of operating a hotel.
The Taxpayer operates a nationally known hotel on the leased property. The hotel’s ground floor consists of a few
guest rooms, utility rooms, office areas, banquet/conference rooms, a pool, lounge, library, a restaurant and other
areas one would typically expect to find at a hotel.
The Taxpayer had been paying Florida sales tax to its lessor (the county) without taking into consideration those
portions of the ground lease that might be tax-exempt (i.e., used exclusively as dwelling units).
REQUESTED ADVISEMENT
Your letter provides, in part:

... we are requesting confirmation that the land lease will be 92.77% tax exempt and 7.23% taxable for purposes of
sales tax determination;...

TAXPAYER'S POSITION
Along with your letter, you provided a summary of what you considered to be the "taxable portions of the leased
property." This summary provides the following relevant information:
Name of Area (Taxable)Square Footage
Restaurant
Buffet

*639
394

Prep Kitchen

464

Kitchen Storage

82

Cooler/Freezer

216

Employee Break

160

Employee M/W

158

Linen Storage Room

166

Mtg Rm/Other Storage

108

Elect. Equipment

38

Elev. Equipment

68

Engineer Maint Office

179

Service Corridor

154

Service Yard

550

Lounge

*954

Front Desk

81

Work Room

144

Training

70

OCTV Room

67

Office

100

Office

128

Laundry/Linen Chute

538

Telephone

82

Linen Storage

94

Storage

23

Elect. Equipment

37

Elevator Equipment

80

Storage

42

Mechanical Room

172

Electrical Room

95

Storage

178

Pool Equipment
Subtotal

126
6,387

• Allocate ½ Restaurant (non tax) (320)
• Allocate ½ Lounge (non tax)

(477)

Total Taxable Building Areas 5,591
Add: Taxable Retention Areas 8,081
Total Taxable Areas

13,672

Total Land Leased Areas

188,990

Land Lease Taxable %

7.23%

Land Lease Non-Taxable %

92.77%

During recent telephone conversations, you and I discussed the west side of the property between the west parking
lot and the airport's property used for aviation. This area contains the "retention areas." A chain link fence separates
the airport’s aviation property from your leased property.

You advised me that the area from the eastern edge of the berms of the retention ponds, west to the airport's property
used for aviation, encompasses 32,503 square feet. You advised me that this area is essentially inaccessible to your
guests. You advised me that the area between the eastern edge of the berms and the west parking lot is landscaped,
is accessible to the hotel's guests and is, in fact, used by guests to exercise and to walk their dogs.
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 unless such property is:

2. Used exclusively as dwelling units.

(b) When a lease involves multiple use of real property wherein a part of the real property is subject to the tax herein,
and a part of the property would be excluded from the tax under subparagraph (a)1., subparagraph (a)2.,
subparagraph (a)3., or subparagraph (a)5., the department shall determine, from the lease or license and such other
information as may be available, that portion of the total rental charge which is exempt from the tax imposed by this
section....
(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.... In the case of a
contractual arrangement that provides for both payments taxable as total rent or license fee and payments not subject
to tax, the tax shall be based on a reasonable allocation of such payments and shall not apply to that portion which is
for the nontaxable payments.

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

(14)(a) When a rental, lease, or license to use or occupy real property involves multiple use of such real property
wherein a part of the real property is subject to tax, and a part of the property is excluded from the tax, the Executive
Director or the Executive Director's designee in the responsible program shall determine from the lease or license and
such other information as may be available, that portion of the total rental charge or license fee which is exempt from
the tax. When, in the judgment of the Executive Director or the Executive Director's designee in the responsible
program, the amount of rent or license fee stated in the lease or license arrangement for the taxable portion of the real
property does not represent true value, the Executive Director or the Executive Director's designee in the responsible
program shall make a determination of the proper amount of rent or license fee applicable thereto for the purpose of
determining the amount of tax due from such other information as is available.

***
DISCUSSION
The issue presented requires one to make a reasonable, case-by-case analysis in order to determine which areas of a
hotel (and specifically under a ground lease) would be subject to Florida sales tax under Section 212.031, F.S.
Section 212.031(1)(b), F.S., and Rule 12A-1.070(14)(a), F.A.C., provide that the Department shall identify those
portions of "rent" that are taxable and those that are tax-exempt. In reaching this determination, the Department must
develop a case-by-case approach that is reasonable. See Department of Revenue of the State of Florida v. Vanjaria E
nterprises, 675 So.2d 252 (Fla. 5th DCA, 1996). There are several approaches that may be used to reach a
reasonable determination. Which approach is most reasonable is a decision that must be made depending on the
facts and circumstances of the individual taxpayer.
In reaching the determination as provided in your request, you have used a method that involves a fraction to
determine which percentage of the rent paid is subject to Florida sale tax. This method recognizes that the Lessee will
owe Florida sales tax in the amount that results when the rate of 6 percent is multiplied by the fraction of the total
lease payment, which fraction is computed as follows: The numerator is the square footage of the land and
improvements used by the Lessee in the operation of the business, such as the office area and all spaces, that are
used exclusively by the Lessee or that do not constitute guest rooms or common areas principally provided to guests.
Further, areas and spaces used for commercial purposes (e.g., restaurants and lounges) are not considered to be
used "exclusively as dwelling units" and would therefore be included in the numerator. The numerator should also
include square footage for which a guest is charged a separate fee to use (e.g., steam room, tennis courts, etc.). The
denominator is the total square footage of the entire area subject to the Lease, including the land and the
improvements thereon.
Furthermore, only the square footage that physically comprises the ground level of the lease is considered in the case
of a ground lease. Thus, the numerator would include the ground level of any leasehold improvements and any land
demised under the lease whether undeveloped or developed and used exclusively by the Lessee. This could include
areas of land demised by the lease, which can not be developed (for example, lands subject to environmental
restrictions (e.g., beach dunes) that cannot be used by the hotel guests, but are still a percentage of the total square
footage demised.)
After reviewing the plans of the first floor of the hotel and site, we respectfully take exception to two (2) of your
determinations. First, the full area of the restaurant and lounge should be considered taxable as they are commercial
spaces in nature and not exclusively used as dwelling units. Second, the 32,503 square feet of inaccessible land
between the eastern edge of the berms of the retention ponds to the airport property (used for aviation purposes)
would be included in the taxable numerator.
CONCLUSION
The following calculation would appear to be a reasonable determination based on the facts presented to us.

We would modify your summary to the following extent: (1) the full square footage of the restaurant and lounge would
be considered to be a taxable area; (2) the area identified as the "retention area" would be backed-out (for sake of
convenience) and the 32,503 square feet discussed immediately above would be considered to be a taxable area.
Making these adjustments, one arrives at 38,881 square feet of taxable area which would be our numerator. With
188,990 square feet as our denominator (the total leased property), one arrives at a taxable ratio of 21%.
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 and Dispute Resolution
(850) 922-4714
ERP/
Ctrl # 60517