Could a tenant use a related entity's exemption certificate, and were lease-settlement proceeds taxable?

Plain-English summary

A commercial tenant relied on a sales-tax exemption certificate held by a related entity that was not the named tenant. After the lease was breached, litigation sought unpaid rent and common-area-maintenance charges.

Florida held that only the entity named on a Consumer's Certificate of Exemption could use it. Because the lease was made directly with another entity, tax was due on rent paid by or for that named tenant.

Settlement proceeds were taxed according to what they represented. Amounts for CAM charges owed while the tenant occupied the premises were taxable. Amounts labeled as rent for the period after the tenant abandoned the property were not consideration for use or occupancy and were not taxable under section 212.031.

What this means for you

Related status did not transfer an exemption certificate. Lease and exemption documents had to name the same entity, and settlement allocations had to reflect whether each amount paid for an actual occupancy right.

Common questions

Could the tenant use its affiliate's exemption certificate? No. The lease had to be directly with the certificate holder.

Were occupied-period CAM settlement amounts taxable? Yes.

Was claimed rent after abandonment taxable? No, because it was not paid for the right to use or occupy the premises.

Citations and references

• Fla. Stat. § 212.031 (commercial real-property rent tax)
• Fla. Stat. § 212.08 (exempt purchases)
• Fla. Admin. Code r. 12A-1.038 (exemption certificates)
• Fla. Admin. Code r. 12A-1.070 (real-property rentals)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-036

Original ruling text

SUMMARY
QUESTIONS: (1) Where one entity is the named tenant on a commercial lease, can a related entity present its
Consumer's Certificate of Exemption to the landlord for Florida sales tax purposes?
(2) Are the proceeds of a litigation settlement considered "rent consideration" for Florida sales tax purposes when
those proceeds are not in exchange for the right to use or occupy commercial real property?
ANSWERS - Based on Facts Below: (1) Only the entity on a Consumer's Certificate of Exemption can enjoy the
benefits of that Certificate. Therefore, the named tenant was not entitled to the exemption enjoyed by its related entity
named on the exemption certificate. Florida sales tax was due on the total rent consideration paid by, or on behalf of,
the named tenant.
(2) Florida sales tax would be due on those portions of the settlement proceeds that represent the CAM charges that
were due under the Lease while the named tenant occupied the leased premises.
Those portions of the settlement proceeds that represent rent not paid subsequent to the named tenant abandoning
the leased premises would not be subject to Florida sales tax because those monies are not being paid in exchange
for the right to use or occupy real property.

September 8, 2005

Re: Technical Assistance Advisement 05A-036
Commercial Rentals - Exemption Certificates
Sales and Use Tax
Sections 212.031, 212.07, and 212.08, Florida Statutes ("F.S.")
Rules 12A-1.038 and 12A-1.070, Florida Administrative Code ("F.A.C.")
XXX ("the Taxpayer")
FEIN: XX
Dear:
This response is in reply to your letter dated March 18, 2005, requesting the Department's issuance of a Technical
Assistance Advisement ("TAA") pursuant to Section 213.22, F.S., and Rule Chapter 12-11, F.A.C., regarding a
Consumer's Certificate of Exemption being presented in a Commercial Real Property Rental context. 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.
ISSUES

Where one entity is the named tenant on a commercial lease, can a related entity present its Consumer's Certificate of
Exemption to the landlord for Florida sales tax purposes?
In addition, are the proceeds of a litigation settlement considered "rent consideration" for Florida sales tax purposes
when those proceeds are not in exchange for the right to use or occupy commercial real property?
FACTS
Your letter provides, in part:

I represent the Plaintiff, [the Taxpayer].... This letter is to request formal determination as to whether or not my client is
responsible to collect sales tax from a commercial tenant [XXX]. When the lease was executed in..., [XXX]
represented itself as a not for profit corporation and exempt from sales tax. As a result, sales tax was not collected on
rents paid in the approximate amount of $XX in XX and XX. Further, in XX, the lease was breached and a lawsuit has
been brought for unpaid rents in the approximate amount of $XX. The discovery process has revealed that [XXX]
never applied for exempt status under IRS Code 501(c)(3) and is not exempt from state sales tax. The discovery
process has also revealed XXX for-profit companies reporting the same commercial space as their principal address
to the Florida Secretary of State....

Briefly, my client questioned the name discrepancy on the exemption certificate presented by the tenant, and the
response was "[entity on exemption certificate, not XXX] is in fact the legal entity doing business as '[variation on XXX
name]' the two companies are in fact one in [sic] the same." It is not disputed that [entity on exemption certificate, not
XXX] registered the fictitious name of [variation on XXX name]; however, the party to the lease is [XXX] which is a
separate and distinct entity. Both entities [XXX] and [entity on exemption certificate, not XXX] - have common officers,
directors and management; but, for reasons unknown, [XXX], never filed its application for exempt status with the IRS
and is not a non-profit entity.
[Entity on exemption certificate, not XXX], the holder of the exemption certificate, is taking the position that although it
is not a named party to the lease and did not execute the lease, it nevertheless occupied the premises and paid rents;
therefore, its certificate of exemption is applicable and sales tax is not owed. At the same time, because it is not a
named party to the lease, [entity on exemption certificate, not XXX], is also taking the position that it has no liability
under the lease and, therefore, is not responsible for the unpaid rent.
Without the landlord's knowledge or consent, several for-profit entities appear to have also occupied the leased space.
The for-profit entities also report common officers, directors, and management with the defendant corporations: [list of
XXX (X) entities is omitted for confidentiality purposes].

With your letter, you provided us with copies of various documents. Included in those documents is the Lease entered
into by the Taxpayer and "XXX" We observe that the names of the entities being described as "XXX" and "entity on
exemption certificate, not XXX," possess clearly different names in reality.

The Lease provides for Base Rent. In the "boilerplate language" of that paragraph, Florida sales tax is addressed.
However, we note that a handwritten sentence was added at the end of this paragraph: "Tenant is a tax exempt
business."
We were provided a copy of the Consumer's Certificate of Exemption that was presented to the Taxpayer. The entity
identified on the Certificate is being referred to as "entity on exemption certificate, not XXX."
We were also provided copies of public inquiry repots from the Florida Department of XXX, Division of XXX. These
reports indicate that "XXX" and "entity on exemption certificate, not XXX" are two (2) separate and distinct Florida
corporations, with different Federal Employer Identification numbers.
I also spoke by telephone with your office and was advised that XXX and the other related entities are no longer in
possession of the leased premises and will not be returning to the leased premises. Further, your client is seeking
damages which include common area maintenance [CAM] charges due but not paid while the tenant and related
entities occupied the leased premises. Other damages sought include those rents due for the remainder of the Lease
but after the tenant and related entities abandoned the leased premises.
REQUESTED ADVISEMENT
Your letter also provides, in part:

... [P]lease provide a determination on two issues:
i) Is [Taxpayer] responsible for assessing and collecting sales tax on rents already paid under the lease?
ii) Is [Taxpayer] responsible for assessing and collecting sales tax on the remaining balance of rents owed? ... I would
appreciate your advising if my client should proceed by accessing sales tax on settlement funds, i.e., the remaining
rents owed.

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. Such charges shall be

included in the total rent or license fee subject to tax under this section whether or not they can be attributed to the
ability of the lessor's or licensor's property as used or operated to attract customers....

(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 212.07, F.S., provides, in part:

(2) ... Except as otherwise specifically provided, any dealer who neglects, fails, or refuses to collect the tax herein
provided upon any, every, and all retail sales made by the dealer or the dealer's agents or employees of tangible
personal property or services which are subject to the tax imposed by this chapter shall be liable for and pay the tax
himself or herself.

(8) Any person who has ... leased, occupied, or used or was entitled to use any real property... and cannot prove that
the tax levied by this chapter has been paid to his or her vendor, lessor, or other person is directly liable to the state
for any tax, interest, or penalty due on any such taxable transactions.

Section 212.08(7)(p), F.S., provides:
Section 501(c)(3) organizations.--Also exempt from the tax imposed by this chapter are sales or leases to
organizations determined by the Internal Revenue Service to be currently exempt from federal income tax pursuant to
s. 501(c)(3) of the Internal Revenue Code of 1986, as amended, when such leases or purchases are used in carrying
on their customary nonprofit activities.
Rule 12A-1.038, F.A.C., provides, in part:
(1) It is the specific legislative intent that each and every sale, admission, use, storage, consumption, or rental is
taxable, unless such sale, admission, use, storage, consumption, or rental is specifically exempt. The exempt nature
of the transaction must be established by the selling dealer. Unless the selling dealer shall have taken from the
purchaser the required documentation as provided in subsections (3), (4), or (5) of this rule, the sale shall be deemed
to be taxable.

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

(4)(a) The tenant or person actually occupying, using, or entitled to use any real property from which rental or license

fee is subject to taxation under Section 212.031, F.S., shall pay the tax to his immediate landlord or other person
granting the right to such tenant or person to occupy or use such real property.
(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.

(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.

DISCUSSION
In Florida, the renting, leasing, letting, or granting a license for the use of any real property is subject to Florida ales
tax. Sales tax is due on the rental consideration paid for the right to use or occupy commercial real property (see
Section 212.031(1)(c), F.S., and Rule 12A-1.070(4), F.A.C.) and is due at the time of payment (see Section
212.031(3), F.S.) Common area maintenance charges paid for the right to use or occupy real property are taxable.
See Rule 12A-1.070(4)(d), F.A.C.
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 those
transactions. See Seaboard Coastline Railroad Company v. Askew, #72-15 (Fla. Cir. Ct., 2nd Cir., Leon Co., 1972).
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, Inc. v. Florida Department of Revenue, 641 So.2d 158, 163 (Fla. 1st DCA, 1994).
The XXX's opinion also held that: "Those who seek the protection afforded by incorporation must also accept the
burdens.
Exemptions to taxing statutes are strictly construed against the taxpayer. See State ex rel. Szabo Food Services, Inc.
of North Carolina v. Dickinson, 286 So.2d 529 (Fla. 1973).
A dealer who improperly exempts a transaction upon which tax is due is liable to the State for such tax, together with
penalty and interest. See Section 212.07(2), F.S. Likewise, any person who has leased real property and cannot
prove tax was paid is directly liable to the State for any tax, interest, or penalty due. See Section 212.07(8), F.S.
Florida sales tax is due on the total consideration paid in exchange for the right to use or occupy real property. Rent
paid for the right to use or occupy real property, even when paid late, is subject to Florida sales tax and due at the
time of payment. Therefore, any proceeds from litigation that represent past due rent are subject to Florida sales tax.
However, those parts of the litigation proceeds that would not be in exchange for the right to use or occupy real
property (i.e., damages that are for that period subsequent to a tenant abandoning the leased premises, and

presumably, no longer possessing the right to use or occupy the leased premises) are not subject to Florida sales tax
under Section 212.031, F.S.
CONCLUSION
Only the entity on a Consumer's Certificate of Exemption can enjoy the benefits of that Certificate. Therefore, XXX
was not entitled to the exemption enjoyed by "entity on exemption certificate, not XXX" Florida sales tax was due on
the total rent consideration paid by, or on behalf of, XXX.
A strict reading of the relevant statutes demonstrates that, in order for this lease to have been exempt from Florida
sales tax, the lease must have been directly made with the entity holding the Consumer's Certificate of Exemption.
"Entity on exemption certificate, not XXX" was not the entity on the Lease. A sale or lease must be made directly to
the exempt entity holding a Consumer's Certificate of Exemption. Here, the leased premises were leased directly to
"XXX"
Florida sales tax would be due on those portions of the settlement proceeds that represent the CAM charges that
were due under the Lease while XXX occupied the leased premises.
Those portions of the settlement proceeds that represent rent not paid subsequent to Tenant, Inc. abandoning the
leased premises would not be subject to Florida sales tax because those monies are not being paid in exchange for
the right to use or occupy real property.
Please note that the Department has a voluntary disclosure program for all the taxes that the agency administers,
including sales and use tax, whereby taxpayers who report unpaid tax liabilities may receive a reduction in penalties
and interest otherwise owing. See Section 213.21(7), F.S. I have enclosed a brochure that describes the program in
more detail.
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,

Eric R. Peate
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 922-4714
Ctrl # 13328