How did Florida's annual intangible tax apply to fund shares holding municipal leases or repurchase agreements backed by federal securities?

Subject

Valuation - Business Trust

Plain-English summary

The investment-company funds themselves were exempt, and their shares were fully exempt only when the valuation-date portfolio contained solely exempt assets. The annual tax was measured using net asset value at the close of the last business day of the prior calendar year.

Florida municipal lease obligations and certificates of participation were not treated as direct municipal obligations. Repurchase agreements collateralized by United States government securities were likewise not direct federal obligations and were taxable at face value. If either taxable asset appeared in the portfolio, the ruling exempted the portion attributable to direct United States obligations but treated the remaining net asset value as taxable.

What this means for you

The issuer and legal character of each portfolio asset mattered. Security backed by an exempt obligation was not necessarily itself an exempt direct obligation.

Common questions

Q: Were the funds themselves subject to intangible tax? No, under the Investment Company Act exemption described in the ruling.

Q: Were fund shares fully exempt when the portfolio held only exempt assets? Yes.

Q: Were municipal lease interests and federally collateralized repurchase agreements exempt? No. The ruling treated both as taxable assets rather than direct government obligations.

Citations and references

• Fla. Stat. §§ 199.032, 199.103, 199.175, and 199.185 — annual intangible tax, valuation, situs, and exemptions
• Fla. Admin. Code r. 12C-2.002(1)(x)2. — repurchase agreements
• Department of Revenue v. Page, 541 So. 2d 1270 (Fla. 5th DCA 1989)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93C2-027

Original ruling text

Oct 06, 1993

Re: Technical Assistance Advisement No. 93(C)2-027
Intangible Personal Property Tax
Application of Annual Intangible Tax to Funds' Shares
Sections 199.032, 199.103, 199.175, 199.185, F.S.
Rule 12C-2.002, F.A.C.
XXX (Trust)
XXX (Funds)

Dear :

This is in response to your recent request for a technical
assistance advisement.

Facts

The Trust is an unincorporated business trust organized
under the laws of the State of Delaware. The Trust is
registered with the Securities and Exchange Commission as an
open-end management investment company under the Investment
Company Act of 1940, as amended. The Trust is authorized to
issue an unlimited number of shares of beneficial interest in
separate series or portfolios. Each Fund is classified as a
diversified investment company.

The Funds have a common objective of providing Florida
investors with a high level of current interest income that is
exempt from federal income tax and the opportunity to own shares
the value of which is exempt from Florida intangible personal
property tax.

In addition to its investments in Florida Tax-exempt
securities, each Fund may also invest in repurchase agreements
secured by U.S. government obligations and/or municipal lease
obligations and certificates of participation in such
obligations.

Requested Advisement

1. Will either of the Funds be subject to Florida's
intangible personal property tax?

2. If, on the last business day of the previous calendar
   year, a Fund's portfolio of investments consists
   solely of Florida tax exempt securities, U.S.
   government or agency securities, and cash or cash
   equivalents, is the entire net asset value of a share
   of the Fund exempt from the annual intangible tax?
3. Assuming a Fund's portfolio consists, on the last
   business day of the previous calendar year, of Florida
   Tax-exempt securities, U.S. government or agency
   securities, and cash or cash equivalents, will the
   inclusion of Florida municipal lease obligations in a
   Fund's portfolio subject any portion of the net asset
   value of a share of the Fund to Florida's annual
   intangible tax?
4. Assuming a Fund's portfolio consists, on the last
   business day of the previous calendar year, of Florida
   tax-exempt securities, U.S.government or agency
   securities and cash or cash equivalents, will the
   inclusion of repurchase agreements secured by U.S.
   government obligations in a Fund's portfolio subject
   any portion of the net asset value of a share of the
   Fund to Florida's annual intangible tax?

Law and Discussion

Section 199.032, F.S., imposes an annual tax of 2 mills on
the just value of all intangible property, owned by Florida
residents, as of January 1 each calendar year. The tax is based
upon the value of the intangible property as prescribed by s.
199.103(2), F.S. This subsection requires that shares of
corporations, mutual funds, money market funds or trusts be
valued at their net asset value, unless exempt under s. 199.185,
F.S.

Intangible personal property has a taxable situs in Florida
if it is owned, managed, or controlled by a Florida resident on
January 1 of the tax year as provided in s. 199.175(1), F.S.

Section 199.103(1)(g), F.S., provides that the assets of
companies registered under the Investment Company Act of 1940,
are exempt from the intangible personal property tax.

Notes, bonds, and other obligations issued by the State of
Florida or its municipalities, counties, and other taxing
districts shall be exempt from taxation under s. 199.185(1)(d),
F.S. However, a certificate of participation is not a direct
issue of the municipality. As stated in your letter, a lease
obligation does not constitute a general obligation of the
municipality for which the municipality's taxing power is
pledged, although the lease obligation is ordinarily backed by
the municipality's covenant to budget for the payments due under
the lease obligation. Shares or units of a business trust are
exempt if the portfolio of assets contains only assets which are
exempt from taxation. The net asset value of a business trust
with taxable assets must be proportionately reduced if the
portfolio of assets contains debt obligations of the United
States Government.

Rule 12C-2.002(1)(x)2., F.A.C., states that repurchase
agreements where securities are offered as collateral for the
agreement are taxable at face value. Repurchase agreements
secured by U.S. government obligations, the type in which the
Fund invests, are not considered direct obligations of the U.S.
government; and therefore, not exempt from intangible personal
property tax. See Department of Revenue v. Page, 541 So.2d,
1270 (5th DCA, 1989)

Conclusion

To answer your first question, the assets of companies
organized under the Investment Company Act of 1940 are exempt
from the intangible personal property tax. Further, the
principal business location is outside Florida.

Your second question is answered in the positive. If on
the last business day of the previous calendar year, the Funds'
portfolio of assets consists solely of securities which are
exempt from the intangible personal property tax, the entire net
asset value of the shares of the Funds are exempt from Florida's

annual intangible tax.

In the third question, the inclusion of Florida municipal
lease obligations in a Fund's portfolio will subject a portion
of the net asset value of a share of the Fund to Florida's
annual intangible tax as follows: (i) the portion of the net
asset value of the Fund that is attributable to direct
obligations of the United States Government is exempt from
taxation; (ii) if the remaining portion of the net asset value
of the Fund, after removing the portion representing United
States Government obligations, represents any asset which is
taxable under Florida law, then the remaining portion of the net
asset value of the Fund is subject to tax.

In the fourth question, the inclusion of repurchase
agreements secured by U.S. government obligations in a Fund's
portfolio will subject a portion of the net asset value of a
share of the Fund to Florida's annual intangible tax as follows:
(i) the portion of the net asset value of the Fund that is
attributable to direct obligations of the United States
Government is exempt from taxation; (ii) if the remaining
portion of the net asset value of the Fund, after removing the
portion representing United States Government obligations,
represents any asset which is taxable under Florida law, then
the remaining portion of the net asset value of the Fund is
subject to tax.

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 the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

Nadine C. Posey
Technical Assistant
Technical Assistance

NCP/mh