Was mortgage interest paid directly by a related corporate tenant as co-maker taxable as Florida commercial rent?

Subject

Real Property Lease Between Related Entities: Payment to Mortgagee

Plain-English summary

The corporate tenant's direct payment of mortgage interest was not taxable as rent. The tenant was directly and independently liable as a co-maker on the renewed note, the lease documents stated the full actual rent, the interest did not reduce or offset that rent, and the parties did not report the interest as rental expense or rental income for federal purposes.

This supplement refined the earlier TAA 93A-069 analysis using the additional documents and facts. It did not address the separate rule the requester expressly excluded, and its conclusion was limited to interest payments.

What this means for you

A tenant's payment to a landlord's mortgagee can be taxable rent when it supplies value for occupancy or reduces the landlord's obligation. Here, the documented independent co-maker debt and absence of any rent offset supported different treatment.

Common questions

Did the tenant's interest payment reduce the contractual rent? No.

Was the tenant independently liable to the lender? Yes, as a primary co-maker.

Did the parties report the interest as rent? No.

Does this supplement decide how principal payments are taxed? No. Its current request and conclusion specifically addressed interest.

Citations and references

• Fla. Stat. §§ 212.031(1)(a), (c), (d), 212.08(13), and 213.22
• Fla. Admin. Code r. 12A-1.070(1)(c)-(d) and (4)(b)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-069

Original ruling text

Status: Supplemental to TAA 93A-069, issued October 12, 1993

Jul 12, 1994

RE: Supplement to TAA 93A-069
Sales and Use Tax on Real Property Lease Between Related
Entities: Payment to Mortgagee
Section 212.031, F.S.
Rule 12A-1.070, F.A.C.
XXX (Hereinafter referred to as "Lessor")
XXX (Hereinafter referred to as "Lessee")

Dear :

This is in response to your letter of October 26, 1993, and
recent telephone conversations, in which you requested that we
specifically address the issue of interest paid directly to the
mortgagee by Lessee, based on additional information provided by
you. The original issue, payments made directly to the
mortgagee by the Tenant/Lessee under a promissory note, was
addressed in Technical Assistance Advisement (TAA) #93A-069,
dated October 12, 1993. As in your original TAA request, you do
not request an advisement with reference to Rule 12A1.070(19)(c), F.A.C., and this response does not consider that
Rule.

REVIEW OF TECHNICAL ASSISTANCE ADVISEMENT 93A-069

Original Request for a Technical Assistance Advisement

Your Original letter of June 30, 1993, written on behalf of your
client stated in significant part the following:

"[Lessors] are the owners of certain real property
consisting of land and building located in XXX. [Lessor]
leases this real property to [Lessee], a family operated
corporation in which [Lessors] owns eighty percent (80%) of
its stock. The remaining twenty percent (20%) is owned by

[Lessor's] two children. [Lessor] and the two children are
officers of [Lessee] and operate [Lessee] on a day-to-day
basis.

"[Lessor] acquired the subject real property in January,
1990 and entered into a lease agreement dated January 31,
1990 with [Lessee] for an initial term of two years.
Recently, a second one year extension to the original lease
documented was executed effective through February 28,
1994.

"On February 1, 1993, the initial three year promissory
note between only [Lessor] and the mortgagee matured and a
new three year note was executed. To provide additional
security and comfort to the lender, [Lessee] was added as
an additional primary obligor to this instrument. It is
contemplated, however, that [Lessee] will make payment(s)
to the mortgagee directly for principal and/or interest
under such promissory note in which [Lessee] is a primary
obligor. When such payment(s) are made, there will be no
reduction or offset of rent due [Lessor] under the
aforementioned lease agreement. Therefore, the monthly rent
due [Lessor] through February, 1994 will be paid in
accordance with the terms of the renewal and extension
agreement and any payment to mortgagee by [Lessee] will be
due to [Lessee's] obligation created by the promissory note
in which it is a primary obligor."

You requested advisement on the following issue:

"[W]hether any payment by [Lessee] directly to the
mortgagee under the promissory note dated February 1, 1993
for principal and/or interest without any reduction or
offset of rent due [Lessor] would be deemed to be rent
subject to the state's sales tax rather than repayment of
debt under said note."

Included with your original request were copies of the
aforementioned documents, described as follows:

1. The original lease agreement, dated and effective

January 31, 1990, between Lessor and Lessee, for a term
commencing March 1, 1990, and expiring February 28, 1992,
which provided in part:
"(b) During the initial term of this lease, the Lessee
shall pay the Lessor the total fixed sum of XXX, plus
applicable sales tax payable in the sum of XXX plus
applicable sales tax for each month of the initial term,
payable on the 1st day of each month.
"(c) The amount of rent to be paid to the Lessor for any
extended term(s) hereunder shall be fair market value to be
negotiated by the parties and payable in the same manner as
the rent during the initial term."

2. The lease renewal and extension agreement, dated and
   effective February 28, 1993, which extended the lease
   agreement until February 28, 1994, and provided in part:

"By execution of this agreement, it is agreed among the
parties that the Lessee shall pay the Lessor the total
fixed sum of XXX, plus applicable sales tax, payable in the
sum of XXX for the month of March, 1993 and XXX for the
months of April, 1993 through February, 1994, plus
applicable sales tax for each month payable on the 1st day
of each month. All other terms and conditions of the
original lease agreement shall remain the same."

3. The original promissory note, dated January 31, 1990,
   between the Lender and Lessor, for a loan amount of XXX, to
   be repaid in 36 monthly installments of XXX.
4. A promissory note, dated February 1, 1993, between the
   Lender and Lessor/Lessee, for a loan amount of XXX, to be
   repaid in monthly installments of XXX plus interest.

Review of Prior Determination

In response to your original request, the following Statutory
and Regulatory authority were cited and discussed:

Section 212.08(13), F.S.:

"No transactions shall be exempt from the tax imposed by

this chapter except those expressly exempted herein...."

Section 212.031, F.S.,:

"(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.
"(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." (Emphasis Supplied)

Rule 12A-1.070(4), F.A.C.:

"(b) The tax shall be paid at the rate of... 6 percent...
on all considerations due and payable by the tenant or
other person actually occupying, using, or entitled to use
any real property to his landlord or other person for the
privilege of use, occupancy, or the right to use or occupy
any real property for any purpose...."

The Department held the following:

"By operation of the above cited statute and administrative
rule, the sales tax is levied on all considerations due and
payable by the tenant for the privilege to occupy or use
real property. It is immaterial whether such consideration
is paid directly to the lessor/owner of such real property
or to his designee. Further, such consideration may be
paid by way of property or other thing of value.

"In such circumstances as those related in your original
request, where both lessor/owner and tenant/lessee are
liable on the mortgage secured by the real property, while

the liabilities of both may be reduced, the lessor/owner
enjoys the additional benefit of having its equity in the
property increased.... [T]his reduction of the
lessor/owner's liability on the promissory note and
increase in equity on the property is the payment of an
`other thing of value' under the express provisions of
section 212.031(1)(d), F.S., and is thereby fully subject
to tax under that statute...."

In support of this position, the Department cited the case of
Seaboard Coast Line Railroad Company v. Rueben O'D. Askew, Case
No. 72-15 (2d Cir., 1972), in which the Court made the following
observation.

"A lease of real property vests in the lessee the right to
use, occupy and enjoy the leased premises subject, of
course, to the terms of the lease. The consideration paid
by the tenant for the privilege conferred by the lease is
`rent.' Rent may be payable in cash, or in some commodity,
or by rendering specified services. Rent may be payable
directly to the lessor or to some other person either
specified in the lease or directed by the lessor...."

The Court went on to observe that Section 212.031. F.S., imposes
a tax upon "...`the total rent charged' for the renting, leasing
of letting of real estate" and further observed that the
language in this section "... clearly indicated a legislative
intent to tax the full benefits flowing to the landlord for the
use of leased premises."

CURRENT REQUEST

Your letter of October 26, 1993, states in pertinent part:

"... The additional information is furnished in order that
the issue presented relating to treatment of interest paid
directly to the mortgagee by the Lessee as co-maker of a
promissory note with the Lessor will be respected as the
payment of interest pursuant to the promissory note since
such payment in not `charged' by the Lessor under Section
212.031(1)(c), F.S....

"The lease agreement and lease renewal and extension
agreement set forth all the terms of the lease arrangement
(Paragraph 18). No mention of the mortgage note payable or
its terms and obligations is made in the sale lease
agreement requiring (or charging) the Lessee to pay
interest due under the promissory note. Any payment of
such interest by Lessee would be due to the standing of
Lessee as a co-maker (primary obligor) on the renewed
promissory note. Adding the Lessee as co-maker on the
promissory note increased the security and comfort to the
lender and to further induce the lender to renew the loan.
Lessee as co-maker is directly, independently and fully
liable for repayment of the renewed note.
...
"... Lessor and Lessee seek to have its issue decided by
applying Section 212.031, F.S., and Rule 12A-1.070(4),
F.A.C., and the language charged' anddue and payable',
respectively."

Your letter further states in part:

"Should the FDOR issue the foregoing advisement requested
and payments are made directly to the lender by the Lessee
for interest incurred under the renewed promissory note,
such payments as interest only could be made since Lessee
is a co-maker on the note. But for its direct and primary
position as a co-maker on the renewed note, the Lessee
could not (and would not) make any payments to the lender
as interest. But since it is legally bound as a co-maker
(primary obligor) on the note, interest paid by the Lessee
can be paid as such and deducted on its federal income tax
return under Section 163(a) of the Internal Revenue Code of
1986, as amended.

In support of your position, you have submitted the following
additional documents for our review:

(1) Lessee's Statement of Income for the fiscal year ended
March 31, 1994
(2) Lessee's General Ledger for the period 4/01/93 through

3/31/94
(3) Lessor's Schedule E of Form 1040 for the calendar year
1993

DISCUSSION AND DEPARTMENT'S RESPONSE

Section 212.031(1)(a), F.S., with enumerated exemptions not
pertinent to the instant issue, imposes tax on the privilege of
renting, leasing, letting, or granting a license for the use of
any real property. Paragraph (1)(c) of the statute establishes
the rate of such tax and describes the levy of the tax on the
total consideration paid for the privilege of renting, leasing,
letting, or having a license to use real property. Paragraph
(1)(d) further states that such consideration may be paid by way
of property, goods, wares, merchandise, services, or any other
thing of value. Rule 12A-1.070(4)(b), F.A.C., which interprets
the above statute, describes the imposition of sales tax on all
considerations due and payable by the tenant in exchange for the
privilege, or for the right to use or occupy the demised real
property.

Pursuant to your correspondence and the documentation provided
by you (i.e., copies of the lease agreement; lease renewal and
extension; the original promissory note and new promissory note,
dated February 1, 1993; Lessee's Statement of Income and General
Ledger pages; and Lessor's Schedule E of Form 1040), and our
several telephone conferences, it is the Department's
understanding that the following facts have been presented as
true statements:

(1) The lease agreement and lease renewal and extension
agreement set forth all the terms of the lease agreement
and lease payments represent the true or actual
consideration received.
(2) There is no reduction or offset in the amount of rent paid
in consideration for the Lease due to the payment of
interest by Lessee.
(3) Lessee as co-maker is directly, independently, and
fully liable for repayment of the renewed note.
(4) The amount of interest paid by Lessee pursuant to the
terms of the promissory note is not treated as Rental

Expense by Lessee or Rental Income by Lessor for Federal
Income Tax purposes.

It is the Department's position, based upon the above facts as
presented, that the payment of interest directly to the lender
by Lessee under the promissory note would be deemed to be
repayment of debt under said note rather than rent and would not
be subject to sales or use tax by operation of Section
212.031(1)(a),(c), and (d), F.S. and Rule 12A-1.070(1)(c), (d),
and (4)(b), F.A.C.

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 and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Delores Overcash
Technical Assistant

/DO
Control #11773