Are profits distributed by a single-member LLC occupant to its parent property owner taxable as rent for Florida sales tax purposes?

Plain-English summary

Florida concluded that a single-member LLC's genuine profit distributions to its parent property owner were not taxable commercial rent under the proposed arrangement. The answer depended on the distributions reflecting actual income or profit—not functioning as payments of the owner's mortgage, property tax, insurance, or other property obligations.

The parent LLC would own commercial real property and let its wholly owned single-member LLC use it without a written or unwritten lease and without recorded rent. The subsidiary's net profits and cash flow would pass to the parent, while the parent would hold title, owe the mortgage, and pay the property taxes and insurance.

Related entities are separate for Florida sales tax

Florida taxes the rental, lease, or licensing of commercial real property. Rent can include money or another thing of value, and related-party arrangements are taxable when the occupant furnishes consideration to the owner.

The subsidiary's disregarded status for federal income tax did not merge the entities for this purpose. Section 608.471(3) treated a federally disregarded single-member LLC as a separate legal entity for non-income taxes.

The Department also explained that a written lease is not required to create a landlord-tenant relationship. Payments made for the owner's benefit can be taxable rent even when paid indirectly.

Genuine profits were not rent under three conditions

The Department distinguished distributions of actual business earnings from payments structured to cover the real property's expenses. It said the proposed distributions would not be taxable rent if:

1. Their timing did not coincide with when the property's expense obligations were due.
2. Their amount did not coincide with the amount of those obligations.
3. The people controlling the distributions based them on a true reflection of income or profit, not on the property's expenses.

The LLC membership agreement, distribution timing, amounts, and control would be important evidence. If the accounting and all three conditions matched the request, the distributions of net profits and cash flow would not be taxable rent under Chapter 212.

What this means for you

Related companies sharing commercial property

Calling a transfer a distribution does not decide its tax treatment. Florida can treat value flowing from an occupant to a related property owner as taxable rent when the transfer pays or tracks the owner's property costs.

Owners of disregarded single-member LLCs

Federal income-tax disregarded status does not eliminate the entity distinction for Florida sales tax. Transactions between the owner and subsidiary still require a non-income-tax analysis.

Accountants and tax professionals

Document how distributions are calculated and approved. A membership agreement and records showing that distributions follow real profits rather than mortgage, tax, or insurance schedules support the distinction drawn in this advisement.

Common questions

Q: Were the subsidiary's profit distributions taxable as rent?
A: No, provided their timing and amount did not match the property's expenses and they reflected true income or profit.

Q: Did the absence of a written lease prevent sales tax?
A: No. The Department said a landlord-tenant relationship and taxable rent can exist without a written lease.

Q: Was the subsidiary ignored because it was disregarded for federal income tax?
A: No. Florida treated it as a separate legal entity for non-income taxes under section 608.471(3).

Q: What facts could turn a distribution into taxable rent?
A: Transfers timed or sized to cover the owner's property obligations, or otherwise made for the owner's benefit as consideration for occupancy, could be rent.

Citations and references

• Fla. Stat. § 212.02(2), (10)(i), and (12) — definitions of business, real-property license, and person
• Fla. Stat. § 212.031(1)-(3) — sales tax on commercial real-property rent or license consideration
• Fla. Stat. § 213.22(1) — limited precedential effect of a Technical Assistance Advisement
• Fla. Stat. § 608.471(3) — separate non-income-tax treatment of federally disregarded entities
• Fla. Admin. Code r. 12A-1.070(4) and (19) — commercial rent and related-party consideration
• Regal Kitchens, Inc. v. Department of Revenue, 641 So. 2d 158 (Fla. 1st DCA 1994) — no written lease required; corporate form carries tax burdens
• Department of Revenue v. Ryder System, Inc., 406 So. 2d 1299 (Fla. 1st DCA 1981) — no rent where subsidiaries made no monetary rental payment

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-061

Original ruling text

SUMMARY
QUESTION: Are any portions of the "income" or "profits" realized by a single-member LLC subsidiary, and passed
through to its LLC parent holding company, "rent consideration" for Florida sales tax purposes?
ANSWER - Based on Facts Below: No, provided: the distributions do not coincide with the time at which the
property's expense obligations are due; the amount of the distributions do not coincide with the amount of the
property's expense obligations; and those controlling the amount of income or profit flowing to the parent/owner base
that amount on a true reflection of income or profit and not on the amount of the property's expense obligations.

November 29, 2004

Re: Technical Assistance Advisement 04A-061
Florida Sales and Use Tax
Taxability Issues Regarding Related Party Real Property Rentals
Sections 212.031, 213.22, and 608.471(3), F.S. ("Florida Statutes")
Rule 12A-1.070, F.A.C. ("Florida Administrative Code")
XXX ("Taxpayer")
FEIN: XX
Dear:
This response is in reply to your letter dated September 23, 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 the rental of commercial real property. This letter follows letters from you received by the
Department on August 4, 2003, November 13, 2003, and December 22, 2003. 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.
ISSUE
Are any portions of the "income" or "profits" realized by a single-member LLC subsidiary, and passed through to its
LLC parent holding company, "rent consideration" for Florida sales tax purposes?
FACTS
Your letter of August 4, 2003 provides in part:

The single-member LLC subsidiary, ["Sub"], will use real property owned by the LLC parent holding company, [the
Taxpayer], without paying rent to the LLC parent holding company. There will not be any written or unwritten lease

agreement between [the Taxpayer] and the single-member LLC subsidiary (Sub) regarding the use of the real
property to be used by the single-member LLC....

Your letter of November 13, 2003, as modified by your September 23, 2004 letter, provides in part:

1) [The Taxpayer] is a partnership for federal income tax purposes. As such profits and loss and separate items of
income and deduction pass through to its partners and are taxed at the individual partner level.
2) [The Sub] is a single-member LLC that is treated as a division of [the Taxpayer] for federal income tax purposes. As
such[,] profits and loss pass through to the single-member parent, [the Taxpayer], and are reported on its federal
partnership return (Form 1065).
3) The partners of [the Taxpayer] will make capital contributions to the [T]axpayer to the extent of any shortfall or
anticipated shortfall between the costs associated with the subject property and the rental revenue received from any
tenants renting the property. [Sub] would not rent the real property. All net profits and cash flow from [Sub] would be
distributed to [the Taxpayer]. [The Taxpayer] then will distribute these net profits and cash flow to its members after
subtracting the expenses of [the Taxpayer].
4) For federal income tax purposes, the taxpayer will not indicate the receipt of rental payments related to the use of
the property by [Sub] on the taxpayer's federal partnership return (Form 1065). [Sub] as a division of the taxpayer
does not file its own federal tax return.
5) For financial accounting purposes, neither the taxpayer nor [Sub] will indicate the receipt or payment of rental
payments related to the use of the property by [Sub] on any financial or accounting records maintained by the
Taxpayer.

Your letter of December 22, 2003, provides that the real property at issue is under construction and the Taxpayer has
signed a contract to purchase it when construction is completed. Further, the Taxpayer will: (1) hold title to the
property; (2) be the mortgagor of the property; (3) be responsible for property taxes; (4) be responsible for payment of
property insurance; and (5) will be the actual entity paying the mortgage, property taxes and insurance premiums.
TAXPAYER'S POSITION
Your letter of August 4, 2003, relies on two (2) LTA's issued by the Department and on the following two (2) cases:
St. Johns Trading Company v. Department of Revenue, DOAH Case Number 84-1652 (1985) and Department of
Revenue v. Ryder System, Inc., 406 So.2d 1299 (Fla. 1st DCA, 1981). The authority you cite, above, all held that
there was no Florida sales tax liability based on facts and circumstances similar to the arrangement you propose
between the Taxpayer and the Sub. Your position, therefore, is that no Florida sales tax would be due under the

arrangement you propose.
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....
(d) When the rental or license fee of any such real property is paid by way of property, goods, wares, merchandise,
services, or other thing of value, the tax shall be at the rate of 6 percent of the value of the property, goods, wares,
merchandise, services, or other thing of value. [emphasis supplied]

(2)(b) It is the further intent of this Legislature that only one tax be collected on the rental or license fee payable for the
occupancy or use of any such property, that the tax so collected shall not be pyramided by a progression of
transactions, and that the amount of the tax due the state shall not be decreased by any such progression of
transactions.
(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....

Section 213.22(1), F.S., provides in part:
... Technical assistance advisements shall have no precedential value except to the taxpayer who requests the
advisement and then only for the specific transaction addressed in the technical assistance advisement, unless
specifically stated otherwise in the advisement....
Section 608.471, F.S., provides in part:

(3) Single-member limited liability companies and other entities that are disregarded for federal income tax purposes
must be treated as separate legal entities for all non-income-tax purposes. The Department of Revenue shall adopt
rules to take into account that single-member disregarded entities such as limited liability companies and qualified
subchapter S corporations may be disregarded as separate entities for federal tax purposes and therefore may report
and account for income, employment, and other taxes under the taxpayer identification number of the owner of the
single-member entity.
Rule 12A-1.070, F.A.C., provides in part:
(1)(a) Every person who rents or leases any real property or who grants a license to use, occupy, or enter upon any
real property is exercising a taxable privilege....

(4)(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.

(8) When a tenant (lessee) or other person occupying, using, or entitled to use any real property (licensee) sublets or
assigns some portion of the leased or licensed property, he may take credit on a pro rata basis for the tax that he paid
to his landlord or other such person on the space that he subleases or assigns....

(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 any portions of the "income" or "profit" passed to the owner of a piece of commercial
real property by its subsidiary (the occupant of the property) are subject to Florida sales tax because those payments
are actually a form of rent consideration.
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. When the rental or license fee of any such real property is paid by way of any "other
thing of value," Florida sales tax is due on the value of the "other thing of value." See Section 212.031(1)(d), F.S.
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. Further,
limited liability companies that are disregarded for federal income tax purposes are treated as separate legal entities
for all non-income tax purposes under Florida law. See Section 608.471(3), F.S.
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.
The facts presented are distinguishable from St. John's Trading Company, Inc. v. Florida, DOAH Case No. 84-1652
(1985). In St.John's, "... there was no compensation flowing from Jax to St. Johns for the occupancy of the stores
owned by St. Johns." Id., at para. 20. Only offsetting journal entries were made. Thus, there was no taxable rental
consideration. Likewise, in the Ryder System case, the First District affirmed the finding of the lower court that held "...
there was no finding a rental payment was made..." (Department of Revenue v. Ryder System, Inc., 406 So.2d 1299
(Fla. 1st DCA 1981)) in a situation in which subsidiary corporations used a building owned by the parent. No actual
payments in money were made by the subsidiaries to the parent. Only accounting adjustments were made to take into
account certain building expenses.
However, the Department recognizes that there may be situations (similar to the one presented) wherein "income" or
"profit" flowing from a subsidiary/occupant to a parent/property owner would not be "rental consideration." Key to any

determination on behalf of the Department would be a review of the LLC's membership agreement. The Department
would be interested in the timing, amount and control of the distributive shares of earnings or cash flow to the
parent/owner. The Department would look to the membership agreement to ascertain: (1) that distributions do not
coincide with the time at which the property's expense obligations are due; (2) the amount of distributions do not
coincide with the amount of the property's expense obligations; and (3) those controlling the amount of "income" or
"profit" flowing to the parent/owner base that amount on a true reflection of income or profit and not on the amount of
the property's expense obligations.
CONCLUSION
Under the facts presented, compensation flows from the Sub to the Taxpayer in the form of "[a]ll net profits and cash
flow from [the Sub]." If all the conditions as described above are met, and the accounting for the "income" or "profit" is
made as you describe in your request letter, then those distributions would not be "rental consideration" taxable under
Chapter 212, 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.: 61575