Were distributions to a related property owner taxable after the parties ended their written lease?

Plain-English summary

A business ended a written lease with its sole owner after an SBA mortgage was paid off. The business would continue occupying and maintaining the facility, while distributions would continue flowing to the owner. The requester said those distributions would reflect income and profits and would not match the timing or amount of property expenses.

Florida said a distribution is taxable when it is consideration for the property's use and occupancy. The Department would examine the purpose, timing, amount, and supporting documents, including whether distributions truly reflected income and profits rather than property obligations.

Here, the claimed new arrangement conflicted with the documents provided and with federal returns reporting rental liability. Florida therefore concluded that the parties would continue operating as their documents indicated and that the distributions were taxable under section 212.031.

What this means for you

Ending a written lease or relabeling payments as distributions does not by itself end real-property rent tax. Florida focused on the arrangement's substance and the consistency of the parties' contracts, returns, expenses, and payment pattern.

Common questions

Are all owner distributions automatically rent? No. The ruling says the question is whether the distributions are consideration for use and occupancy of the property.

What facts would Florida examine? The purpose of the distributions, whether their timing and amount track property expenses, whether they reflect income and profits, and whether the documents and returns consistently support that account.

Why were these distributions taxable? The taxpayer's description conflicted with the submitted documents, so the Department concluded the existing taxable arrangement continued.

Citations and references

• Fla. Stat. § 212.031 (tax on renting or licensing real property)
• Fla. Admin. Code r. 12A-1.070(19) (related-party real-property rentals)
• Fla. Stat. § 608.471(3) (disregarded LLC treatment for non-income taxes)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-042

Original ruling text

SUMMARY
QUESTION: Where a lease agreement for real property between related parties previously existed, are distributions
made subsequent to termination of the lease agreement subject to sales tax under section 212.031, F.S.? Under the
facts presented, Lessee will pass through to the Owner, as distributions, all income and profits realized and Lessor will
bear the same expenses of the facility as was the case under the former lease. Lessee will continue to occupy the
facility and will bear the cost of maintaining the building as it did under the former lease.
ANSWER - Based on Facts Below: Once Lessee issues distributions, its sole stockholder, the Lessor/Owner of the
Property, may apply such funds for any legal purpose, including any and all expenses of real property it owns.
However, if the purpose of those distributions is for the use and occupancy of the property, then such distributions will
be subject to tax. As a result, the Department will examine all relevant facts and documents. Under the facts
presented, the taxpayer's characterization of the new transaction is inconsistent with the documents provided the
Department. In that case, the Department can only conclude that the parties will continue operating as indicated in the
documents provided, thereby creating a taxable transaction. Accordingly, the Department concludes that, under the
present circumstances, such distributions are taxable under Section 212.031, F.S.

October 18, 2005

Re: Technical Assistance Advisement 05A-042
Sales and Use Tax
Related Parties: Real Property Rentals
Sections 212.02(10)(i), (12), 212.031, 213.22, F.S.
Rule 12A-1.070, F.A.C.
XXX("Lessor")
FEIN: XX
XXX ("Lessee")
FEIN: XX
XXX ("Owner")
Dear:
This is a response to your letters dated April 26, 2005, May 5, 2005, and August 12, 2005, requesting the issuance of
a Technical Assistance Advisement (TAA) concerning the above referenced party and matter. Your letters and
supporting documents have been carefully examined, and the Department finds your request to be in compliance with
the requisite criteria set forth in Chapter 12-11, F.A.C. This response to your request constitutes a TAA, and is issued
to you under the authority of section 213.22, Florida Statutes.
Issue

Where a lease agreement for real property between related parties previously existed, are distributions made
subsequent to termination of the lease agreement subject to sales tax under section 212.031, F.S.?
Facts
Pursuant to your letters, on March 20, 2000, Lessee and Lessor entered into an agreement for the lease of office and
operations facilities. Your letter of August 12, 2005, provides in part:
The owner of both [Lessee] and [Lessor] is [Owner]. [Lessee] is an XXX corporation and [Lessor] is a XXX LLC that
flows [through] on [Owner's] personal return.
Despite the fact that both the lessor and the lessee are owned by XXX, a lease was executed as a requirement of the
United States Small Business Administration ("SBA"), as a requirement of a loan agreement through SBA and ...
Bank. The lease was terminated effective January 1,2005.
Sales tax was paid by the lessee and collected by the lessor from the original date of the lease through December 31,
2004, when the lease was terminated.
Subsequent to the termination of the lease referred to above, [Lessor] has and will bear the same expenses of the
facility as was under the former lease. [Lessee] will continue to occupy the facility and will bear the cost of maintaining
the building as it did under the former lease. Any distributions from [Lessee] to [Owner] will not coincide with the time
at which the property expense obligations are due, nor will the amount of the distributions coincide with the amount of
the property expense obligations, and further, any distributions to [Owner] will be based on a true reflection of income
or profit and not on the amount of the property expense obligations. (Florida Technical Assistance Advisement 04A056, 9-23-2004 and 04A-057, 9-23-2004).
Distributions are and will continue to be made by [Lessee] to its shareholder based on cash flow and profits.
... In the future, our client will group the trade or business income from [Lessee] with the expenses of the building paid
by [Lessor] together on page 2 of schedule E per Federal Regulation Section 1.469-4 and be reported as part of the
business activity from [Lessee].
Taxpayer's Position
Your letters rely on the aforementioned Technical Assistance Advisements (TAA's) issued by the Department, which
determined that distributions to the owners were not subject to tax under s. 212.031, F.S., provided the distributions
did not coincide with the time at which the property's expense obligations were due; did not coincide with the amount
of the property's expense obligations; and were based on a true reflection of income or profit and not the amount of
the property's expense obligations You assert that the above arrangement is consistent with the facts in those
advisements and, therefore, the distributions to Owner are not subject to sales tax.
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....
(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.
(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 212.02(10)(i), F.S., provides:
(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.
Section 212.02(12), F.S., provides
(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 213.22(l), 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 pertinent 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)(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 occupy or use such property.

(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.
Law and Discussion

Pursuant to your particular set of facts, the issue presented is whether any portions of income or profits realized by a
single stockholder corporation, and passed through, as distributions, to its sole stockholder and owner of the property
it occupies, are rent.
Generally, under Florida law, a person who engages in the business of renting, leasing or granting a license for the
use and occupancy of real property is exercising a taxable privilege. Section 212.031, F.S. Specifically, the lease or
rental of real property between related "persons," in the capacity of lessor/lessee, is subject to tax. See Rule 12A1.070(19)(a), F.A.C. In addition, the Florida Administrative Code provides that the aforementioned lease or rental
payments furnished by the lessee to the lessor, which may be direct or indirect, payments or credits, or other
consideration in kind, is rental consideration and, therefore, taxable despite any relationship between lessor and
lessee. See Rule 12A-1.070(19), F.A.C. Moreover, in Florida, 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. See Rule 12A-1.070(19)(b), F.A.C., and Seaboard Coastline Railroad Company. Askew
, #72-15 (Fla. Cir. Ct., 2nd Cir., Leon Co., 1972).
Lessee's 2003 and 2004 Federal Tax Returns, Form 1120S, indicate that Lessee reported rental liability, which can
only be a result of paying monies to or on behalf of Lessor/Owner for the use of the property it occupies. Accordingly,
Lessor/Owner is in the business of leasing real property pursuant to Section 212.031, F.S. Since Lessor/Owner is in
the business of leasing real property, any consideration from Lessee for the use of the property is subject to tax.
In your request, you state that the SBA mortgage loan has been paid off and, accordingly, there is no further need for
a lease arrangement. Nevertheless, monies will flow from Lessee in the form of distributions to its sole stockholder,
the Owner. In this case, the issue is whether those distributions are a form of consideration for the use of the property,
which will benefit Lessor/Owner and, therefore, be subject tax.
Once Lessee issues distributions, its sole stockholder, the Lessor/Owner of the Property, may apply such funds for
any legal purpose, including any and all expenses of real property it owns. However, if the purpose of those
distributions is for the use and occupancy of the property, then such distributions will be subject to tax. As a result, the
Department will examine all relevant facts and documents. For example, if distributions coincide with the amount and
time when the Property's expense obligations are due, the Department will consider such amounts to be rent
consideration for the use and occupancy of the Property. In addition, the Department will require that Lessee prove
that such distributions are based on a true reflection of the Lessee's income and profits, not on the amount required to
fulfill the property's expense obligations. In this regard, your characterization of the new transaction is inconsistent
with the parties' previous federal income tax returns. For instance, the Lessee claimed rental liability in its 2003 and
2004 Federal Income Tax Returns.
Further, under the facts presented, Lessee will continue to occupy the facility and bear the cost of maintaining the
property as it did under the former lease. A copy of the lease agreement, dated March 20, 2000, between [Lessee]
and [Lessor], was included with your letter of May 5, 2005, together with amendments to the lease, dated January 1,
2002, and December 31, 2004. The original lease agreement provides, in paragraph C(3), for the payment of
"Additional Rent."

(3) ADDITIONAL RENT. In addition to the rents provided above, the Tenant shall pay, as additional rent, all such
additional charges as provided in Schedule A attached, including by way of example and not by way of limitation, all of
Common Expenses, real estate taxes, insurance premiums, and late payment penalties, together with all applicable
sales taxes due thereon.
Pursuant to s. 212.031(1)(c), Florida Statues (F.S.), and Rule 12A-1.070, F.A.C., tax is levied on all considerations
due and payable for the privilege of occupying any real property. This would include any separately itemized or
invoiced charges or pass-through charges. The only exception would be utilities billed to the tenant, which are
separately stated on the tenant's bill at the same or lower price as that billed by the utility provider to the lessor, and
upon which the lessor has paid sales tax on its purchase. Further, 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).
Consequently, prior to a determination that your client's business arrangement is a nontaxable transaction, the
Department will require that the parties amend all corporation documents to reflect the true substance of the
transaction (i.e., the specific purpose and method of distributions, the true purpose of the entities, etc.). Furthermore,
the Department will also require that the parties file federal income tax returns consistent with the transaction you
portrayed in your request.
Finally, in your request, you reference the two aforementioned TAA's issued by the Department as a source of
guidance. However, you are alerted that the provisions of section 213.22(l), F.S., deny precedential value to a
Technical Assistance Advisement to any person other than to the person to whom it was issued. Further, in an appeal
from a Declaratory Statement issued by the Department that provided an interpretation of Rule paragraph 12A1.070(19)(c), F.S., the court in Regal Kitchens, Inc. v. Florida Department of Revenue, 641 So.2d 158, 164 (Fla. 1
DCA 1994), held that "[a] tax exemption must be strictly construed against the party claiming the exemption.... If the
exemption at issue is strictly construed it must be limited to its terms and applied only to related corporations. The
Department has no duty, and arguable no right, to extend the exemption beyond its terms so that it applies to all
related party leases."
Conclusion
You premise your request on a statement that Lessee will pass through to the Owner, as distributions, all income and
profits realized and Lessor will bear the same expenses of the facility as was the case under the former lease, that
Lessee will continue to occupy the facility and will bear the cost of maintaining the building as it did under the former
lease, and that any distributions from Lessee to Owner will not coincide with the time at which the property expense
obligations are due, nor will the amount of the distributions coincide with the amount of the property expense
obligations, and further, any distributions to Owner will be based on a true reflection of income or profit and not on the
amount of the property expense obligations.
Further, pursuant to your faxed letter of October 12, 2005, "...property taxes will not be paid by the former lessee but
will be paid by the owner of the property. The only expenses that will be paid by the former lessee are and will be the
expenses they incur directly and for which they are directly billed by vendors...."

However, this characterization of the transaction is inconsistent with the documents provided the Department. In that
case, the Department can only conclude that the parties will continue operating as indicated in the documents you
provided, thereby creating a taxable transaction. Accordingly, the Department concludes that, under the present
circumstances, such distributions are taxable under Section 212.03 1, F.S.
This response constitutes a Technical Assistance Advisement under s. 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 s. 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 from that which is 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,
Dee Overcash
Technical Assistance and Dispute Resolution
Control No. 17065