Was a tenant's liquidated-damages payment for early termination of a Florida real-property lease subject to sales tax?

Subject

Lease Termination Payments

Plain-English summary

The early termination payment was not subject to sales tax if the lessor did not record it as rental income. The tenant paid liquidated damages to end the lease, vacate the premises, and obtain release from future rent and other lease obligations. The payment therefore was not consideration for a right to use or occupy real property.

The Department added an express accounting limitation: a termination fee recorded by the recipient as rental income would be taxable.

What this means for you

The ruling distinguished compensation for fully extinguishing a lease from rent paid for occupancy. Both the termination agreement and the lessor's books mattered to the result.

Common questions

Did the tenant retain a right to occupy the premises? No. The agreement ended the lease and required the tenant to vacate.

Why was the payment outside the real-property rental tax? It compensated the lessor for liquidated damages rather than purchasing use, enjoyment, control, or occupancy.

When did the Department say the fee would be taxable? If the recipient recorded it as rental income.

Citations and references

• Fla. Stat. §§ 212.031(1)(a), 212.031(1)(c), and 213.22
• Fla. Admin. Code r. 12A-1.070(4)(b)
• Hutchison v. Tompkins, 259 So. 2d 129 (Fla. 1972)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-023

Original ruling text

Mar 30, 1994

Re: TAA 94A-023
Sales and Use Tax on Lease Termination Payments
Rule 12A-1.070, F.A.C.
Section 212.031, F.S.

Dear :

This reply is to your letter dated September 17, 1993,
written on behalf of your client, XXX (hereinafter referred to
as "Lessor"). In your letter, you requested the issuance of a
Technical Assistance Advisement regarding the application of
sales tax on payments made pursuant to early termination of a
real property lease. This response constitutes a Technical
Assistance Advisement under Chapter 12-11, Florida
Administrative Code, and is issued to you under the authority of
s. 213.22, Florida Statutes.

DISCUSSION OF FACTS

Your letter provides the following information:

"The subject lease was to expire by its terms in 1998.
However, [Lessor] and its tenant agreed to an early
termination of the lease, effective as of September 1993.
Under the termination agreement, the parties agreed to the
following material terms:

1. That the lease term would terminate as of September 1993
   and the tenant would vacate the premises at that time.
2. That the tenant would pay [Lessor] a sum of money upon
   execution of the agreement as liquidated damages for early
   termination.
3. That the tenant would be released from all future rents
   and all other monetary obligations, whether known or
   unknown, arising out of or in connection with the lease
   (except claims of third parties).
4. That [Lessor] would be released from all obligations to

tenant under the Lease, etc."

Along with your request, you have included a copy of the
Real Property Lease, executed on November 8, 1992, between
Lessor and XXX (hereinafter "Lessee").

RELEVANT AUTHORITY

Section 212.031(1(a), F.S., provides in pertinent part:

"(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 unless such
property is:... (Exceptions not an issue)
"(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."

Rule 12A-1.070(4)(b), F.A.C., describes the imposition of
tax on such privilege as:

"... 6 percent on or after February 1, 1988, 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...."

REQUESTED ADVISEMENT AND DEPARTMENT'S RESPONSE

Pursuant to the above cited statutory and regulatory
authority, sales tax is imposed on the total consideration
received for the privilege of renting, leasing, letting, or
granting a license to use real property.

In your request, you make reference to another Technical
Assistance Advisement (TAA), regarding a lease termination
payment, and state:

"In our view, the cited TAA, together with the applicable
statutes and regulations, do not impose a tax on the
subject payment."

Please be advised that a Technical Assistance Advisement is
binding on the Department only under that specific set of facts
and circumstances described in the request. However, we agree
that a termination payment of the nature you describe in your
request is not exchanged for the right to use, enjoy, control,
or occupy the premises for which payment is made, as required by
s. 212.031, F.S., and Rule 12A-1.070(4)(b), F.A.C. Such
payment, when given by lessee as a satisfaction and accord for
the complete extinguishment of the lessor's claim for the lease
payment relative to any unexpired portion of the lease, is not
subject to sales tax. The payment is given as compensation for
liquidated damages rather than a payment made by the lessee in
exchange for the right or privilege to use, enjoy, or occupy the
real property. Further guidance is provided by Hutchison v.
Tompkins, 259 So.2d 129 (Fla 1972) (also referenced in your
letter), which determined that, "Damages must be readily
ascertainable at time of drawing of contract in order for
liquidated damages clause to constitute penalty." You are
alerted, however, that such a termination fee is taxable if the
one receiving such fee records the fee in its books and records
as rental income.

Consequently, based on the facts you have provided, if the
lease termination payment you have described is not recorded as
rental income by Lessor, then the lease termination payment is
not subject to sales tax by Lessor under the rules cited.

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/pb