Were mineral-rights payments for access to agriculturally assessed property subject to rent tax?

Plain-English summary

A property owner granted a related company access and operating rights to extract minerals and received a payment measured by the extraction company's after-profit cash flow.

Florida found that the county property appraiser classified the land as agricultural property. The statutory real-property rental tax excluded property assessed as agricultural, so the mineral-rights transactions were not taxable on the stated facts.

The Department expressly declined to give prospective treatment if the property's assessment classification later changed.

What this means for you

The agricultural assessment, not the agreement's label, controlled this ruling. A later reclassification could require a new analysis.

Common questions

Were the mineral-rights payments taxable rent? No while the property was assessed as agricultural.

Did Florida decide the result after a future reclassification? No. The ruling expressly withheld prospective advice for that situation.

Who established the relevant classification? The county property appraiser's assessment records.

Citations and references

• Fla. Stat. § 212.031(1)(a)1. (agricultural-property exclusion)
• Fla. Stat. § 193.461 (agricultural classification cited by the exclusion)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-049

Original ruling text

SUMMARY
QUESTION: Are the payments made to a property owner from a company with rights to engage in mineral extraction
subject to sales tax?
ANSWER - Based on Facts Below: The property in question is assessed by the County Property Appraiser as
agricultural property. Therefore, the transactions in question are not subject to tax pursuant to s. 212.031(1)(a)1., F.S.
No prospective advice is given regarding the appropriate tax treatment in the event that at some future point in time
the properties in question are classified for assessment purposes something other than agricultural property.

November 22, 2005

Re: Technical Assistance Advisement 05A-049
Sales and Use Tax - Mineral Rights Agreement
Sections: 212.02, 212.031, F.S.
Petitioners: XXX (herein "Taxpayer M")
XXX (herein "Taxpayer A")
FEI's: XX & XX
Dear:
This letter is a response to your petition dated May 26, 2004, for the Department's issuance of a Technical Assistance
Advisement ("TAA") concerning the above referenced party and matter. Your petition has been carefully examined
and the Department finds it 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 s. 213.22, F.S.
FACTS
The petition sets forth the following facts:
[Taxpayer A] owns a parcel of land located in... Florida consisting of approximately 1,280 acres (the "Property") and all
improvements located thereon including, but not limited to, equipment used and/or necessary to the operation on the
land of a fully permitted and lawfully operated mining operation.... The Property contains significant deposits of
limestone, sand and other natural materials (collectively the "Minerals").
... [T]he owners of both entities are almost identical, except for the exclusion of [Financial Institution] as a member of
[Taxpayer M. Financial Institution] is [an off shore] based financial institution which has provided all of the permanent
financing for the acquisition and development of the Property. For various business reasons, [Financial Institution]
desired not to have a direct interest in an entity actively engaged in a mineral extraction and mining operation, but [it]
does desire to benefit from any net profits realized from such operations and [it] is willing to bear its share of the

economic risk of loss associated with such activity.
The parties decided that the most effective way to accommodate [Financial Institution] was to form [Taxpayer M] and
permit it to operate the mining operations but require [Taxpayer M] to remit substantially all of its net profits to
[Taxpayer A] and require [Taxpayer M] to cover all operating expenses of [Taxpayer M]. This is effectuated through
the Mineral Rights Agreement, which grants to [Taxpayer M] the sole and exclusive right to withdraw Minerals from the
Property, but requires [Taxpayer M] to remit substantially all of its net profits to [Taxpayer A]. During the term of the
Mineral Rights Agreement, [Taxpayer M] has covenanted and agreed that it will not conduct any business operations
other than those reasonably related to operating the mineral extraction process for the Property, unless approved by
[Taxpayer A] and all of [Taxpayer A's] members. [Taxpayer M] was newly formed for the specific purpose of operating
the mineral extraction process on the Property. Under Section 3(e) of the Mineral Rights Agreement, [Taxpayer A] is
obligated to provide all funds necessary for [Taxpayer M] to conduct its operations, pay its employees, [and] satisfy
any operating deficits. It specifically state[s] that [Taxpayer A] bears all economic risk of loss associated with
[Taxpayer M's] operations.
[Taxpayer M's] rights under the Mineral Rights Agreement to access, operate and use the Property is non-exclusive
and it is intended that [Taxpayer A] also be permitted to use the Property. In the event of any conflicts between
[Taxpayer A's and Taxpayer M's] use of the Property, [Taxpayer A] has the right to resolve them in its sole and
absolute discretion which is not [] subject to review by any person or entity.
The term of the Mineral Rights Agreement is initially for one year, but thereafter automatically renews for additional
one year terms, unless either party gives at least 30 days prior written notice of non-renewal before the end of the
applicable term.
Section 9 of the Mineral Rights Agreement specifically states:
By reason of this Agreement, [Taxpayer M] shall be deemed to be an agent of [Taxpayer A, and Taxpayer A] shall be
deemed to be the principal of [Taxpayer M], with respect to the subject matter of this Agreement. It is the parties[']
intent that they not be considered joint venturers or partners and that this Agreement should not be construed to be a
lease of real or personal property and this Agreement shall be construed consistent with this intent.
Finally, the Mineral Rights Agreement contains numerous covenants requiring [Taxpayer M] to give [Taxpayer A and
Financial Institution] various forms of financial information, including but not limited to, audited annual financial
statements and tax returns.
According to the Mineral Rights Agreement, Taxpayer A purchased the Property for development into residential
building lots.
Section 2 of the Mineral Rights Agreement states in pertinent part as follows:
Operation. It is expressly agreed that [Taxpayer M] shall have the sole responsibility and all liability with respect to
Mineral Extraction....

Section 3 of the Mineral Rights Agreement states in pertinent part as follows:
Provision of Equipment, Employees and Rights to Access and Use Property. In order to permit [Taxpayer M] to
engage in Mineral Extraction, [Taxpayer A] gives (or shall give) to [Taxpayer M] (a) the right to use and possess all
equipment which it owns or leases,... (c) the right to access, operate and use the Property for the purposes set forth
herein.... [Taxpayer M's] right to use the items set forth in clauses (a) and (c) shall be non-exclusive
Section three also grants Taxpayer M the use of Taxpayer A's employees, Taxpayer A's name, funding (as noted in
Taxpayer's petition), and Taxpayer A's permits necessary for Mineral Extraction.
Section 4 of the Mineral Rights Agreement states in pertinent part as follows:
Mineral Rights Payment. In consideration for the provision of the equipment, employees and other rights described in
Section 2, [Taxpayer M] shall remit to [Taxpayer A] as consideration for the Minerals extracted from the Property a
sum equal to all of its After Profit Cash Flow (the "Mineral Rights Payment")....
REQUESTED ADVISEMENT
Advice is requested whether payments made by Taxpayer M to Taxpayer A pursuant to the Mineral Rights Agreement
are subject to Florida sales or use tax.
LAW, DISCUSSION AND CONCLUSION
Section 212.031(1)(a), Florida Statutes, imposes tax on the "renting, leasing, letting, or granting a license for the use
of any real property unless such property is:

1. Assessed as agricultural property under s. 193.461...."
   A review of the... County Property Appraiser's website reveals that the properties in question are assessed as
   agricultural property. Therefore, the transaction(s) in question are not subject to tax pursuant to Section
   212.031(1)(a)1., Florida Statutes. Please note that no prospective advice is given here regarding the appropriate tax
   treatment for the transaction(s) in question in the event that at some future date the properties are reclassified for
   assessment purposes to something other than agricultural property.
   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 upon 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,
Gary L. Gray
Revenue Program Administrator I
Technical Assistance and Dispute Resolution
850-922-4729
Control #: 60385