Did a utility management agreement create taxable leases of the utility's premises or equipment?

Plain-English summary

The Department ruled that the utility's agreement was a nontaxable management contract, not a taxable license to use real property. The utility kept all customer revenues, bore the utility business's economic risk, controlled the manager's detailed performance, and paid the manager monthly for completed services.

The utility required the manager to work from the utility-owned premises for customer convenience. The manager paid nothing for that use; all consideration flowed from the utility to the manager. Those facts did not create a taxable real-property license.

The same reasoning applied to utility-owned equipment the manager had to use. The utility was not selling or leasing equipment to the manager, and no consideration flowed from the manager for it, so there was no taxable equipment lease.

What this means for you

The contract's economic substance controlled. Revenue ownership, risk of loss, operational control, payment direction, and consideration showed that the manager was providing services on the utility's behalf rather than renting the utility's property.

Common questions

Was required use of the utility's premises taxable? No, because it was part of the management arrangement and the manager paid no consideration for it.

Was use of the utility's equipment taxable? No. There was no lease for consideration.

What fact most distinguished management from a property license? The utility retained the business and its risk, while paying the manager for enumerated services and controlling performance.

Citations and references

• Fla. Stat. §§ 212.02, 212.05, and 212.031; King v. Young, 107 So. 2d 751 (Fla. 2d DCA 1958); American Home Assurance Co. v. Larkin General Hospital, Ltd., 593 So. 2d 195 (Fla. 1992); and Keith v. News & Sun Sentinel Co., 667 So. 2d 167 (Fla. 1995), as cited in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-045

Original ruling text

SUMMARY
QUESTION 1:
Is Agreement a taxable lease or license of real property?
ANSWER:
No, the payment provisions, allocation of the risk of loss, and other facts presented
clearly indicate that Agreement is a nontaxable management contract. Taxpayer, not
Manager, is the person clearly engaged in the utility business. The Agreement does not
create a taxable license to use the Premises. Under this Agreement, Manager is managing
Taxpayer’s utility business, for which Taxpayer pays Manager a monthly fee based on
the services provided.
QUESTION 2:
Is Agreement a taxable lease of Equipment?
ANSWER:
No, as provided above, the Agreement is for Manager to operate Taxpayer’s utility
business. Taxpayer is not in the business of selling or leasing any Equipment to Manager
for consideration. There can be no sale or lease without consideration.
September 22, 2009
XXX
Re:

Technical Assistance Advisement 09A-045
License or Management Agreement
Sales and Use Tax
Sections 212.02, 212.05, 212.031, Florida Statutes (F.S.)
XXX (“Taxpayer”)
FEIN: XXX
XXX (“Manager”)
FEIN: XXX

Dear XXX:
This is in response to your letter dated August 28, 2009, requesting this 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 the above referenced matter and party. 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 a TAA.

Technical Assistance Advisement
Page 2 of 8
FACTS
Your letter provides in part:
On or about August 1, 2006, the [Taxpayer] and [Manager] entered into
the [“Management Services Agreement” (“Agreement”)]. The Agreement
requires [Manager] to provide meter reading and related field services,
utility account billing and delinquency processing services, and various
customer and other services to the [Taxpayer’s] utility customers. . . .
[T]he Agreement requires that [Manager] be located at and operate from
XXX XXX [(“Premises”)]. Under the Agreement, the [Taxpayer] pays
[Manager] for services rendered. . . .

Under the Agreement, Manager occupies the Premises, owned by Taxpayer, and Manager
uses tangible personal property (“Equipment”), owned by Taxpayer.
The Agreement provides in part:

ARTICLE 2 – TERM OF CONTRACT AND TERMINATION
PROVISION

. . . [The Agreement] may also be terminated by the [Taxpayer] with or
without cause forthwith upon giving 30 days written notice to Manager to
cure any breach of this Agreement or failure to perform. . . .
Unless the Manager is in breach of this Agreement, the Manager shall be
paid for services rendered to the [Taxpayer’s] satisfaction through the date
of termination. . . .
ARTICLE 3 – PAYMENTS TO MANAGER
A. The [Taxpayer] shall compensate the Manager for its services under
this Agreement in accordance with the schedule provided in
Exhibit B.
B. Manager shall promptly provide the [Taxpayer] with an invoice for
services on a monthly basis. . . . The charges listed shall be consistent
with the compensation and terms of payment specified in the contract,
and Manager shall include any supporting reports verifying monthly
activity with the invoice. The [Taxpayer] shall deduct from the
payment to the Manager, any penalties incurred by Manager arising
out of the non-compliance with the terms and conditions of the
contract. . . . The [Taxpayer] shall pay invoices within thirty (30) days
of receipt.

Technical Assistance Advisement
Page 3 of 8

ARTICLE 5 – PERSONNEL
The Manager is, and shall be, in the performance of all work services and
activities under this Agreement, an Independent Contractor . . . .

ARTICLE 17 – ACCESS AND AUDITS
The Manager shall maintain adequate records to justify all charges,
expenses, and costs incurred in estimating and performing the work for at
least three (3) years after completion of this Agreement. The [Taxpayer]
shall have access to such books, records, and documents as required in this
section for the purpose of inspection or audit during normal business hours
at the Manager’s place of business.

EXHIBIT A: SCOPE OF SERVICES REQUIRED AND OTHER
PROVISIONS
A. METER READING SERVICES
1) Manager shall read or attempt to read each of the [Taxpayer’s] meters
. . . monthly no less than 28 days and no more than 33 days from the
previous month’s read for each meter. . . .

3) Manager shall read the meters using Manager’s own handheld or other
meter reading devices approved by the [Taxpayer]. . . . Manager’s meter
reading devices must be capable of uploading the meter reading data and
field comment codes to the [Taxpayer’s] utility billing and work order
systems. . . .
4) Manager shall read every meter accurately and shall be responsible for
all reading errors. . . .
5) Where meters cannot be read . . ., Manager shall take immediate steps
to investigate why the meter reading could not be obtained . . . .
6) Manager shall read the meters on the day scheduled in accordance with
a route schedule approved by the [Taxpayer]. . . .
7) Meter readers shall perform their duties no earlier than 7 a.m. and no
later than 6 p.m. unless approved by the [Taxpayer]. Meter readers shall
perform their duties on Monday through Friday, or on weekends when
necessary. Meters shall be read in all weather conditions . . . .

16) Manager shall notify the [Taxpayer] immediately of any delay or
inability to read the scheduled meter routes . . . .

Technical Assistance Advisement
Page 4 of 8
B. OTHER FIELD SERVICES
1) Manager shall provide the necessary trained personnel to perform the
following field services:
a. Turn on or turn off service . . . .
b. Night service . . . .

g. Customer education. . . .

C. CUSTOMER SERVICE
1) Manager shall provide courteous, responsive and timely customer
service over the phone and over the counter, as well as in the field, to the
[Taxpayer’s] utility customers in response to their questions regarding
billed services and specific billings. . . .
2) Customer service personnel shall be scheduled to cover the work hours
of 7:30 a.m. until 5:00 p.m. weekdays. Additionally, Manager shall
provide extended customer service by phone from 5:00 p.m. to 5:30 p.m.

5) The [Taxpayer] shall provide initial training on the utility billing and
related systems upon execution of the contract . . . .

10) Manager shall be responsible for processing new account applications
....

17) Manager is responsible for identifying, correctly computing and
completing all account adjustments. . . .
18) Customer service personnel shall follow [Taxpayer] procedures . . .
related to addressing public records requests . . . .

D. BILLING AND DELINQUENCY PROCESSING SERVICES
1) Manager shall use the [Taxpayer’s] utility billing system, both
hardware and software, to maintain the master records of the [Taxpayer’s]
utility customers, and to prepare timely bills to customers. . . .

3) Manager shall upload meter readings from the reading devices on a
same-day basis.

6) Manager shall print the bills and prepare them for pickup by
[Taxpayer’s] mail processor by 12 noon daily. . . .

Technical Assistance Advisement
Page 5 of 8
E. GENERAL ADMINISTRATION
1) Manager shall be located at and operate from [Premises].

14) Manager shall administer the [Taxpayer’s] payment plan program
utilizing the [Taxpayer’s] utility billing system in accordance with the
[Taxpayer’s] requirements . . . .

ATTACHMENT A: SCHEDULE OF SPECIAL QUERIES AND
REPORTS FOR COMPLIANCE WITH THE SCOPE OF SERVICES
REQUIREMENTS
[Lists thirty-four (34) queries and reports Manager is required to run
monthly and provide to Taxpayer.]

ATTACHMENT B: SCHEDULE OF PENALTIES FOR NON
COMPLIANCE WITH THE SCOPE OF SERVICES REQUIREMENTS
[Lists sixty-two (62) penalties that will reduce the amount Manager is
paid. The penalties range from “each day readings are taken outside
normal reading hours” for $3.50/meter to “failure to demonstrate adequate
training to address the various payment methods offered by [Taxpayer]”
for $100/occurence and “entering a message on the utility bill or mailing
an insert without [Taxpayer] approval” for $500/occurence.]

EXHIBIT B: MANAGER FEES
Contractual Services:
Billing, Customer Service and Meter Reading¹
Field Service – All Work Orders (Regular and Night Service)²
Year 1
Monthly
Volume
40,000
2,250

Year 1 Per
Item Fixed
Rate
$2.577000
$6.00

Item
accounts
@
¹
work orders @
²

Costs to be Paid by [Taxpayer] and Not Included in Manager Fee:
Postage and Mail Processing Costs
N/A
Bill Printing, Forms and Related Supplies
N/A
Furnished Office Space
N/A
Furnished Hardware/Software
N/A
Further, all customer utilities payments are paid to Taxpayer, not to Manager. Manager
does not pay any consideration to Taxpayer.
ISSUE I
Is Agreement a taxable lease or license of real property?

Technical Assistance Advisement
Page 6 of 8
TAXPAYER POSITION
Taxpayer argues that under the Agreement, Manager is providing a management service
to Taxpayer. Taxpayer argues that there is no taxable use of the Premises.
DISCUSSION
The privilege of engaging in the business of renting, leasing, letting, or the granting of a
license for the use of any real property is subject to Florida sales tax under Section
212.031, F.S. Section 212.02(10)(i), F.S., defines “license” as “the granting of a
privilege to use or occupy a building or a parcel of real property for any purpose.”
Section 212.02(2), F.S., defines “business” broadly as “any activity” engaged in “with the
object of private or public gain, benefit, or advantage, either direct or indirect.”
Therefore, if Taxpayer is granting Manager a license to use the Premises, then the total
consideration paid for that right is taxable. See Section 212.031(1)(c) and (d), F.S.
However, if Taxpayer is not in the business of leasing or licensing real property, then
sales tax would not be due under Section 212.031, F.S. One way Taxpayer may not be in
the business of leasing or licensing real property is if the Agreement is in the form of a
management agreement.
A management agreement is typically in the nature of an employment contract, under
which the Manager would be considered as in the nature of an agent or employee of
Taxpayer, charged with managing the Taxpayer’s utility businesses. Under a
management agreement, the relationship between Manager and Taxpayer with regard to
the ownership and operation would be in the nature of that of a principal and agent or
employer and employee, rather than licensor and licensee. See King v. Young, 107 So.2d
751, 753 (Fla. 2d DCA 1958). Manager would be acting on behalf of Taxpayer’s utility
business, and Manager would be required to account to the principals.
Unless the provisions of an agreement or the actual practice of the parties indicate
otherwise, the intent of the parties to a contract should govern the construction of that
contract. See American Home Assurance Co. v. Larkin General Hospital Ltd., 593 So.2d
195, 197 (Fla. 1992); Keith v. News & Sun Sentinel Co., 667 So.2d 167, 171 (Fla. 1995).
In determining the intent of the parties, the terms of a contract are considered as a whole,
and not in isolation. Jerry’s Inc. v. City of Miami, 591 So.2d 1000, 1001 (Fla. 3d DCA
1991). Therefore, the proper focus in determining the relationship created by the
Agreement is upon the collective terms of the Agreement.
The paramount consideration when determining whether the Agreement constitutes a
management agreement or whether a license to use real property arises is how the
Agreement allocates the risk of economic loss. This inquiry indicates which party is in
the utility business, and it indicates whether or not a management agreement has been
entered into.

Technical Assistance Advisement
Page 7 of 8
Here, the payment provisions, allocation of the risk of loss, and other facts presented
clearly indicate that Agreement is a nontaxable management contract. Taxpayer, not
Manager, is the person clearly engaged in the utility business. Taxpayer collects all
revenues stemming from the utility business. Taxpayer then pays Manager a reasonable
fee based on the monthly services provided by Manager. See Exhibit B. Taxpayer
clearly has the risk of loss, as it must pay Manager’s fees, based on the services
completed, not based on the utility business. Therefore, if Manager read all the
customer’s meters and all utility customers failed to pay their bills, then Taxpayer would
be required to pay Manager for the reading services, even though Taxpayer had not
collected from those services.
Also, Manager’s fees are affected by Manager’s performance of the services. Under the
Agreement’s Scope of Services, Manager is required to provide ninety-four (94)
enumerated services to Taxpayer and its utility customers. See Exhibit A. If Manager
fails to perform those required services, then the Manager’s fee is reduced, and the
Manager is penalized under Exhibit A/Attachment B. Therefore, Taxpayer is acting as an
employer over Manager, controlling exactly how Manager must and must not operate the
Taxpayer’s utility business.
Under the Agreement, Taxpayer, not Manager, requires Manager to occupy the Premises
owned by Taxpayer. This is required solely for ease of use for Taxpayer’s utility
customers, because Taxpayer operates from these Premises. This additionally supports
the fact that Taxpayer is in the business of providing the utilities, while Manager is
simply providing employees for meter reading, billings, and customer service.
Further, under the facts provided, Manager pays no consideration to Taxpayer. The
agreement expressly provides that no consideration is being paid by Manager for the use
of the Premises. See Exhibit B. The only consideration flowing under the Agreement is
from Taxpayer to Manager.
Therefore, the Agreement does not create a taxable license to use the Premises. Under
this Agreement, Manager is managing Taxpayer’s utility business, for which Taxpayer
pays Manager a monthly fee based on the services provided.
ISSUE II
Is Agreement a taxable lease of Equipment?
TAXPAYER POSITION
Taxpayer argues that under the Agreement, Manager is providing a management service
to Taxpayer. Taxpayer argues that there is no taxable lease of the Equipment.

Technical Assistance Advisement
Page 8 of 8
DISCUSSION
The sale of tangible personal property is subject to tax. See Section 212.05, F.S. The
term “sale” is defined as the transfer of title or possession, or both, lease, or rental, of
tangible personal property for a consideration. See Section 212.02(15)(a), F.S. Service
only transactions, except those authorized for taxation by Chapter 212, F.S., are generally
not subject to tax. Here, the Equipment owned by Taxpayer is clearly tangible personal
property, as defined by Section 212.02(19), F.S.
However, as provided above, the Agreement is a management agreement for Manager to
operate Taxpayer’s business. Under the facts presented, Taxpayer is not in the business
of selling or leasing any Equipment to Manager for consideration. Taxpayer, not
Manager, requires Manager to use Taxpayer’s Equipment. This is required because
Taxpayer’s Equipment is used to operate the utility business.
Further, under the facts provided, Manager pays no consideration to Taxpayer. The
agreement expressly provides that no consideration is being paid by Manager for the use
of the Equipment. See Exhibit B. The only consideration flowing under the Agreement
is from Taxpayer to Manager. Therefore, there can be no sale or lease without
consideration.
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,

H. French Brown, IV
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 922-4708
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