Did a related company's mortgage payments and recorded depreciation create taxable rent when it occupied an LLC's Florida property without a written lease?

Plain-English summary

Florida treated an S corporation's occupancy of property owned by a related LLC as a taxable implied rental, even though there was no written lease and no payment labeled as rent.

The same owners held both entities. The LLC bought and developed the property, while the operating company occupied it, paid the LLC's mortgage, and recorded the mortgage payments plus depreciation as rental expense. The LLC recorded the corresponding amount as rental income and reported it on its sales-tax return.

Florida treated the LLC and corporation as separate legal persons for sales-tax purposes. The mortgage payments were consideration furnished for occupying the related lessor's property, and the parties' rental-expense and rental-income entries were strong evidence that depreciation was also part of the total consideration. Both amounts were therefore subject to sales tax.

What this means for you

Common ownership and the absence of a written lease do not prevent Florida commercial-rent tax under the law applied in this ruling. Payments of an owner's debt and amounts booked as rent can establish taxable consideration.

Common questions

Did the absence of a lease prevent tax? No. Florida found an implied rental arrangement.

Were the related entities disregarded? No. They were treated as separate persons for sales-tax purposes.

What amounts were taxable? The mortgage payments and depreciation recorded as rental income and expense.

Citations and references

• Fla. Stat. §§ 212.02, 212.031, and 608.471, and Fla. Admin. Code r. 12A-1.070, as quoted and discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 10A-026

Original ruling text

SUMMARY
QUESTION:
Is Florida sales tax due under Section 212.031, F.S., wherein the LLC that owns the property in
which Taxpayer occupies are both owned by Owners, LLC obtained a mortgage on the property
that is guaranteed by Taxpayer and Owners, and the Taxpayer makes the mortgage payment and
records the depreciation expense as rental expenses?
ANSWER: The arrangement with Taxpayer occupying real property owned by a related party is
an implied rental arrangement subject to sales tax. The mortgage payment and the depreciation
expense recorded as rental income/expense by both parties are total consideration furnished for
the use of real property, and are subject to sales tax.
June 7, 2010
XXX
Re:

Subject: Technical Assistance Advisement (TAA) 10A-026
Sales and Use Tax – Use of Real Property
Sections 212.02, 212.031, 608.471 Florida Statutes (F.S.)
Rule 12A-1.070, Florida Administrative Code (F.A.C.)
XXX (Taxpayer)
FEI #: XXX
XXX (Owners)
XXX (LLC)

Dear XXX:
This is in response to your letter dated May 14, 2010, 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., concerning the use of real property among related parties. An examination of
your letter has established 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.
Issue
Is Florida sales tax due under Section 212.031, F.S., wherein the LLC that owns the property in
which Taxpayer occupies are both owned by Owners, LLC obtained a mortgage on the property
that is guaranteed by Taxpayer and Owners, and the Taxpayer makes the mortgage payment and
records the depreciation expense as rental expenses?
Facts
Owners own Taxpayer and LLC. Taxpayer is a Subchapter S corporation. Taxpayer is in the
business of manufacturing, selling, and servicing pressure cleaners. LLC was formed to
purchase and develop unimproved real property for Taxpayer. In order for LLC to obtain a

Technical Assistance Advisement
Page 2 of 4
Small Business Administration (SBA) loan, Taxpayer and Owners had to personally guarantee
the loan.
No consideration is paid directly by Taxpayer to LLC for the use of real property; however,
Taxpayer pays the mortgage payments. The loan payments plus depreciation expenses are
recorded as rental expense to Taxpayer and rental income to LLC for tax purposes. This amount
is prorated on a monthly basis and reported on LLC’s monthly Florida sales and use tax return.
No written lease agreement exists between the parties, and no other consideration is paid for the
use of real property.
Taxpayer’s Position
Taxpayer argues that LLC is not engaged in the business of commercial rental activities because
its real property holdings are used exclusively by Taxpayer. The corporate structure was created
only to secure financing for the acquisition and improvement of real property to be used in
Taxpayer’s operating business, and Taxpayer asserts that the imputed rent is not taxable.
Taxpayer also argues that there is no landlord/tenant relationship. In the absence of a lease
agreement, the imputed rent is not subject to commercial rental sales tax.
Applicable Authority and Discussion
Section 212.031(1)(a), F.S., provides 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 ….” For purposes of Florida sale and use tax, “person” includes any individual, firm,
copartnership, joint adventure, association, corporation, etc. Section 212.02(12), F.S. As
provided by Section 212.02(12), F.S., the term “person” includes all types of entities, including
individuals and corporations. Limited liability companies and other disregarded entities for
federal income tax purposes are treated as separate legal entities for all sales tax purposes under
Florida law. Section 608.471(3), F.S.
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 v. Askew, #72-15 (Fla. Cir. Ct., 2nd Cir., 1972). Parties
are not free to “… disavow the existence of the corporation for the purpose of obtaining a tax
advantage.” Regal Kitchens, Inc. v. Department of Revenue, 641 So.2d 158, 163 (Fla. 1st DCA,
1994). The court in Regal Kitchens also held that “[t]hose who seek the protection afforded by
incorporation must also accept the burdens.” Id. Hence, the related entities in this case are
treated as separate and distinct persons for Florida sale and use tax purposes.
Taxpayer argues that LLC is not engaged in the business of commercial rental activities because
its real property holdings are used exclusively by Taxpayer. “Business” means any activity
engaged in by any person with the object of private or public gain, benefit, or advantage, either

Technical Assistance Advisement
Page 3 of 4
direct or indirect. Section 212.02(2), F.S. The Regal Kitchens court held that this definition is
broad enough to encompass many transactions, such as the one at issue. The facts in Regal
Kitchens are similar to the facts in this case: Regal Kitchens is a corporation that conducts its
business operations on improved real property owned by a general partnership known as 8600
Associates. The property consists of a manufacturing plant and offices. Four individuals own
both the corporation and the partnership. In 1977, Regal Kitchens sold the property to 8600
Associates, and 8600 Associates assumed the mortgage on the property and leased it back to
Regal Kitchens. In 1981, Regal Kitchens obtained a loan on the property by using the equity in
the property owned by 8600 Associates as collateral. The loan agreement provides that a default
on the first mortgage is a default on the second, and that the four principals, Regal Kitchens, and
8600 Associates are all guarantors of the loan.
Like 8600 Associates in Regal Kitchens, LLC is engaged in the business of renting, leasing,
letting, or granting a license for the use of real property. LLC was formed to own and lease the
property to Taxpayer for financing and/or other benefits. Taxpayer and Owners would not have
titled the property to LLC and leased it back unless there was some benefit inherent in that
arrangement.
Taxpayer further argues that there is no landlord/tenant relationship, and in the absence of a
lease agreement, the imputed rent is not subject to commercial rental sales tax. The terms
“landlord,” “tenant” and “landlord/tenant relationship” are not defined in Chapter 212, F.S.
However, Black’s Law Dictionary defines “landlord and tenant relationship” as the relationship
“where one person occupies premises of another in subordination to other’s title or rights and
with his permission or consent.” Black’s Law Dictionary, 790 (5th ed. 1979). A landlord/tenant
relationship exists in this case, since Taxpayer occupies the property of LLC. Also, an implied
tenancy may arise where a party has used another’s premises, accepting the benefits of such use.
First Nat’l Bank v. Green, 132 Ill. App. 2d 322, 270 NE2d 493 (Ill. 1st DCA 1971)
Rule 12A-1.070(19)(c), F.A.C., provides that “[t]he total consideration furnished by the lessee to
a related lessor for the occupation 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.” In this
case, Taxpayer pays the loan payments on a debt owned by the related lessor and secured by the
real property; hence, the mortgage payment is taxable as an amount furnished for the occupation
of real property. The amount recorded by the lessor or lessee as rental income or expense is
strong evidence that the amount recorded is part of the total consideration subject to sales tax;
hence, the mortgage payment plus depreciation expense recorded as rental income/expense is
subject to sales tax as total consideration paid for the use of real property. 1
Conclusion
1

For example, Rule 12A-1.070(4)(g), F.A.C., provides that the amount charged for termination of a lease is subject
to tax if the lessor records such charge as rental income or if the lessee records such charge as rental expense in its
books and records.

Technical Assistance Advisement
Page 4 of 4
The arrangement with Taxpayer occupying real property owned by a related party is an implied
rental arrangement subject to sales tax. The mortgage payment and the depreciation expense
recorded as rental income/expense by both parties are total consideration furnished for the use of
real property, and are subject to sales tax.
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 that 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,

Angel Sessions
Senior Tax Attorney
Technical Assistance and Dispute Resolution
(850) 922-4708
Record ID: 83529