Did Florida documentary stamp tax apply to interest that a borrower could not avoid during a loan's first 36 months?

Plain-English summary

The lender's Florida loan documents stated principal plus interest as the promised payment amount. The borrower had no right to prepay any principal or accrued interest during the first 36 months and could seek discretionary permission to prepay only after that period.

Florida ruled that documentary stamp tax applied to the principal plus the interest unavoidably payable during those first 36 months. That interest was fixed and absolute when the documents were executed, so it was a determinable sum certain rather than a contingent obligation.

The calculation remained subject to the $2,450 documentary stamp tax cap. If a mortgage or other lien was filed or recorded in Florida, tax on that instrument was based on the amount it secured.

What this means for you

Prepayment rights can change the documentary stamp tax base. Interest is more likely to be contingent when the borrower can freely prepay and avoid it; an enforceable no-prepayment period can make the interest during that period taxable at execution.

Common questions

Was tax based only on principal? No. It included principal plus the first 36 months of required interest.

Why was that interest not contingent? The borrower had no right to prepay during the period.

Did a cap apply? Yes, the TAA stated a $2,450 cap.

Citations and references

• Fla. Stat. § 201.08(1) and Fla. Admin. Code rr. 12B-4.052(6) and 12B-4.054(4), as quoted and discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 11B4-006

Original ruling text

Executive Director
Lisa Vickers

TAX: Documentary Stamp Tax
TAA NUMBER: 11B4-006
ISSUE: Promissory Notes – Basis of Tax
STATUTE CITE(S): Section 201.08(1), F.S.
RULE CITE(S): 12B-4.052(6), 12B-4.054(4), F.A.C.
QUESTION: In the case of a note signed, executed, and delivered to the lender in Florida where the terms of the loan
documents specify the borrower has no right to prepay the stated principal sum or any portion of accrued interest for
the first 36 months of the loan, on what amount should documentary stamp tax be calculated?
ANSWER: The documentary stamp tax should be calculated on the total amount of principal, plus interest the borrower
promises to pay for the first 36 months of the note (subject to the cap of $2,450). The first 36 months of interest are a
determinable sum certain the borrower promises to pay, and are not a contingent obligation.

March 03, 2011
XXX
XXX
XXX
Re: Technical Assistance Advisement No. 11B4-006
Documentary Stamp Tax
Promissory Notes – Basis of Tax
Section 201.08(1), F.S., Rules 12B-4.052(6), 12B-4.054(4), F.A.C.
XXX (the “Taxpayer”)
Dear XXX:
This is in response to your letter dated XXX, requesting a determination of the amount upon which
the documentary stamp tax is to be measured on loans made by the Taxpayer to XXX professionals in
Florida. This response constitutes a Technical Assistance Advisement under Chapter 12-11, Florida
Administrative Code (F.A.C.), and is issued to you under the authority of Section 213.22, Florida Statutes
(F.S.).
FACTS PRESENTED BY PETITIONER
Taxpayer makes loans to XXX (the “Borrower”) throughout the U.S., including Florida. Loan
documentation provided with your request includes Exhibit “A” and Exhibit “B,” as more fully described
below:

1. Exhibit A - XXX (Note); used to make loans prior to XXX;
2. Exhibit B – XXX (the Agreement), used to make loans on or after XXX, through the present time.
   The amount set forth on the face of the Note and Agreement represents the sum of principal and
   interest payments to be paid by the Borrower under either loan. The language in the Note and the
   Agreement provides in pertinent part:
   Child Support Enforcement – Ann Coffin, Director z General Tax Administration – Jim Evers, Director
   Property Tax Oversight – James McAdams, Director z Information Services – Tony Powell, Director

www.myflorida.com/dor
Tallahassee, Florida 32399-0100

Technical Assistance Advisement 11B4-006
Page 2
XXX, XXX, XXX, XXX....
The Note and the Agreement each contain an addendum (the “Addendum(s)”), setting forth the
original principal amount of the loan (i.e., the amount financed), the term of the loan, and the total sum of
payments. The Addendum(s) contains language which expressly incorporates it into the Note and
Agreement, respectively.
The Note or Agreement, and the respective Addendum(s), were/are sent to the Borrower in
Florida, where they were/are executed and returned to the Taxpayer. The Borrower also executed a XXX
agreement in favor of the Taxpayer, which is incorporated by reference and made a part of the Note or
Agreement.
XXX, XXX. XXX. Pursuant to the provisions of Rule 12B-4.052(1), F.A.C., the Taxpayer
contends documentary stamp tax should be calculated on the original principal amount financed, as stated
in the Addendum(s) to the Note and Agreement, and not on the amount the Borrower promises to pay
reflected on the face amount of the Note and Agreement. In arriving at this determination, the Taxpayer
states the only absolute obligation of the Borrower due under the Note and Agreement is the repayment of
the principal amount borrowed, and any interest included in the amount the Borrower promises to pay is a
contingent obligation and therefore is not taxable.
REQUESTED RULING
The Taxpayer requests the Department issue a ruling that the tax should be calculated solely on the
original principal amount of the loan (the amount financed), as stated in the Addendum(s) to the Note and
Agreement, respectively.
LAW AND DISCUSSION
Section 201.08(1)(a), F.S., requires payment of documentary stamp tax on documents made,
executed, and delivered in Florida that evidence a written obligation to pay or repay a sum certain in
money at the rate of $.35 per $100.
Upon execution of the Note or Agreement, and the respective Addendum(s), the Borrower
promises to pay a stated sum, which represents the total payments of the principal amount plus interest
due and which will become due until the maturity date of the loan. The payments are payable in monthly
installments, as set forth in the Addendum(s), the terms of which are expressly incorporated and made part
of the Note or Agreement, respectively. The Borrower has no right to prepay any portion of the principal
or interest payments for the first XXX months of the loan. Provided the Borrower makes the required
payments over the XXX-month term, the Taxpayer has the discretionary authority to permit the Borrower
to prepay the total amount of the remaining outstanding principal balance by amending and modifying the
Note or Agreement. In advance of any prepayment, the Borrower must make a written inquiry to the
Taxpayer requesting permission to prepay the remaining balance due under the Note or Agreement. If the
Taxpayer agrees to the Borrower’s request, the Borrower must abide by specific requirements, including
paying a loan modification and amendment fee, based upon a tiered structure, to offset the Taxpayer’s
expenses and costs for the amendment and modification.
Rule 12B-4.052(6), F.A.C., titled “Written Obligation or Promise to Pay Money,” states in
pertinent part:

Technical Assistance Advisement 11B4-006
Page 3
(a) The tax levied by s. 201.08(1), F.S., is an excise tax on the promise to pay, and the terms and
certainty of payment are not material....
(b) Taxability of a written obligation to pay money is determined from the form and face of the
document.
1 Whether a document is taxable is determined by reference to that document and any other
document or documents expressly incorporated therein....
Therefore, to be subject to tax, a note or other written obligation to pay money must be signed by
the borrower in Florida or delivered to the lender in Florida and must contain:

1. An unconditional promise to pay;
2. A sum certain in money; and
3. The signature of the borrower.
   Rule 12B-4.054(4), F.A.C., titled “Contingent Obligations,” provides that a written promise to pay
   money that is not fixed and absolute at the time of execution is not subject to tax.
   The provisions of Rules 12B-4.052(1) and 12B-4.052(9), F.A.C., specify that the amount on which
   tax is measured on notes and other written obligations to pay money, when the loan documents provide for
   a discount of unearned interest or finance charges in exchange for early payment, is the amount financed
   or principal indebtedness. When a borrower promises to pay both the principal amount financed and
   interest during the term of a note, the only absolute obligation or indebtedness at the time the note is
   signed is for the amount financed and not for unearned interest. These regulations were incorporated into
   Chapter 12 B-4, F.A.C., based on the court ruling rendered in Department of Revenue v. North Port Bank,
   354 So.2d 463 (Fla. 1st DCA 1978). In North Port Bank, the borrower had the option of paying off the
   note at any time before it matured. Documentary stamp tax was calculated on the ascertainable sum
   certain which the borrower promised to repay when the note was executed, i.e., the principal indebtedness.
   However, there was no absolute measurable sum certain in interest on which documentary stamp tax could
   be imposed when the note was executed. The promise to pay interest was a contingent obligation, as the
   borrower had the right to prepay the loan at any time prior to maturity. In contrast, if a note or other
   written obligation to pay money contains an unconditional promise to pay the principal indebtedness plus
   a stated amount of interest, and the borrower has no right to prepay the loan prior to maturity,
   documentary stamp tax is due on the total sum certain contained in the promise to pay (principal plus the
   stated interest).
   DEPARTMENT'S RESPONSE
   Upon careful review of the terms and conditions specified in the loan documents, it has been
   determined that the total amount of the principal plus the interest the Borrower promises to pay for the
   first XXX months of the Note or Agreement constitutes an unconditional written obligation to pay a
   determinable sum certain in money. This amount is fixed and absolute at the time the Note or Agreement
   is executed by the Borrower, since the Borrower has no right to prepay the stated principal sum or any
   portion of accrued interest during this time frame. Since the first XXX months of interest are not
   contingent and are a determinable amount representing a sum certain the borrower promises to pay, the
   interest for the first XXX months is subject to documentary stamp tax.

Technical Assistance Advisement 11B4-006
Page 4
The documentary stamp tax should be calculated on the total amount of principal, plus interest the
Borrower is obligated to pay for the first XXX months of the Note or Agreement, subject to the cap of
$2,450. If there is a mortgage or other lien, such as the XXX agreement present in Exhibit B, filed or
recorded in Florida, documentary stamp tax is due on the filed or recorded instrument based on the
amount secured thereby.
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 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,
Joy. B. Eldred, CPA
Tax Law Specialist
Technical Assistance and Dispute Resolution
JBE/tlg
Record ID: 93791