Was a tenant's direct payment of the landlord's property taxes taxable as rent?

Subject

Collection and Payment of Sales Tax on Real Property Taxes

Plain-English summary

The tenant's direct payment of property taxes to the tax collector was subject to Florida sales tax as part of the rent. The payment did not escape tax merely because it went directly to the taxing authority instead of first passing through the landlord.

The lease made payment of the taxes a condition of occupying the premises and treated nonpayment as a default that could lead to eviction. The Department therefore treated the payment as consideration for the right to use the property and as a benefit paid on the landlord's behalf.

What this means for you

For the lease analyzed here, substance controlled over the payment route. A tenant-paid landlord expense can be part of taxable real-property rent when the lease requires it as consideration for occupancy.

Common questions

Did it matter that the tenant paid the tax collector directly? No. The Department said the recipient of the payment did not determine whether it was taxable rent.

Why was the property-tax payment treated as rent? The lease required it for continued occupancy and made nonpayment a default.

Does every tenant-paid property expense receive the same treatment? This ruling addressed the specific lease and property-tax obligation described in the request.

Citations and references

• Fla. Stat. §§ 212.031(1)-(2) and 213.22
• Fla. Admin. Code r. 12A-1.070(1), (4)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-052

Original ruling text

Title:

Collection and Payment of Sales Tax on Real Property Taxes

Sep 14, 1994

Re: Technical Assistance Advisement 94(A)-052 Sales Tax - Ad Valorem Property Taxes Petitioner: XXX (Herein the "Landlord") Address: XXX Sales Tax Number: XXX Other Party: XXX (Herein the "Tenant")

Dear :

This response is in reply to your June 6, 1994, petition for the Department's issuance of a Technical Assistance Advisement ("TAA") pursuant to s. 213.22, F.S. Your petition regards the referenced matter and parties. The Department has carefully examined your petition and finds it to meet the criteria set forth in Chapter 12-11, F.A.C., requisite to issuance of a TAA. Therefore, the Department is by this response issuing the requested TAA.

DISCUSSION OF FACTS

Your petition imparts the following significant information regarding the issues under advisement herein:

"This is a follow-up to a letter of opinion received from Gail Williams, Taxpayer Assistance Specialist, Bureau of Tax Information and Media Services[,] regarding the collection and payment of sales tax on real property taxes.

"We are having a dispute with one of our tenants, [Tenant,] over this matter. They are of the opinion that since their Lease calls for the payment of real estate tax directly to the taxing authority and not the landlord, there is no sales tax due on such amount.

"According to our interpretation of opinions we have received from the Department of Revenue and Rule 12A1.070(4)(a) and (b), FAC, the property tax is subject to sales tax regardless of the fact that Ad Valorem taxes were paid directly to the XXX.

"Enclosed please find a copy of our lease agreement with
[Tenant] and copies of correspondence with [Tenant] and the Department of Revenue relating to this matter.

The document entitled "Lease Agreement" (the "Lease") submitted in support of your petition contains the following terms and conditions relevant to the issue under advisement herein: Article 8 of the Lease: "... Tenant shall, and will, during the term of this lease, pay and discharge all such duties, taxes, assessments and payments, extraordinary as well as ordinary, whether foreseen or unforeseen, as shall during the term hereby demised be laid, levied, assessed or imposed upon, or become due and payable, or liens upon the Demised Premises, or any part thereof, or the leasehold estate hereby created.... In any event, all such taxes and assessments shall be paid by Tenant at least three (3) months prior to the date on which the Demised Premises, or any part thereof, might be sold or forfeited because of the non-payment of said tax or assessment...."

Article 21 of the Lease: "Upon the happening of any one or more of the following events:

"(a) Tenant's default in the payment of any rental or other monies due hereunder for a period of ten (10) days....

"Landlord, at its option, may exercise any one or more of the following options:

"(1) Terminate tenant's right to possession under this lease and re-enter and take possession of the Demised Premises and relet or attempt to relet said premises.... "(2) Declare this lease to be terminated, ended and

null and void, and re-enter upon and take possession of the Demised Premises whereupon the term hereby granted and all right, title and interest of Tenant in the Demised Premises shall end...."

REQUESTED ADVISEMENT

You endeavor to elicit the Department's advice regarding the issue of whether the Tenant is obligated to pay sales tax on the ad valorem real property taxes it pays directly to the Tax Collector on the demised premises on behalf of the Landlord pursuant to the terms and conditions of the Lease.

DISCUSSION AND ANALYSIS OF LAW

The following statutory, administrative, and case law is consulted as relevant to addressing the issue under advisement herein:

Section 212.031, F.S.: "Lease or rental of or license in real property.-"(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. "(2)(a) The tenant or person actually occupying, using, or entitled to the use of any property from which the rental or license fee is subject to taxation under this section shall pay the tax to his immediate landlord or other person granting the right to such tenant or person to occupy or use such real property...." (Emphasis Supplied)

In ascertaining the legislative intent for the scope of the term "rent" as used in s. 212.031(1)(c), F.S., above, we must adhere to the following fundamental principles for statutory construction established by the Florida Supreme Court:

It is a fundamental principle of statutory construction that legislative intent and policy concerns must control our construction of statutes and that the determination as to the intent of the legislature is based upon the plain and ordinary meaning of the language in the statute itself. See Holly v. Auld, 450 So.2d 217 (Fla. 1984).

In the matter of St. Petersburg Bank & Trust Co. v. Hamm, 414 So.2d 1071 (Fla. 1982), the Florida Supreme Court held that while legislative intent controls construction of statutes, that intent is determined primarily from language of the statute; plain meaning of statutory language is first consideration.

In the matter of S.R.G. Corp. v. Department of Revenue, 365 So.2d 687 (Fla. 1978), the Florida Supreme Court held that legislative intent must be determined primarily from language of statute, as the legislature must be assumed to know the meaning of the words and to have expressed its intent by the use of the words found in the statute.

The denotative meaning of the word "rent" represents its plain and ordinary meaning. To this end we consult Black's Law Dictionary, Sixth Edition, which defines the word "rent" as follows:

"Rent. Consideration paid for use or occupation of property...."

Article 8 under the Lease requires the Tenant's payment of the property taxes in order to use or occupy the demised premises. Failure on the part of the tenant to pay the property taxes constitutes an act of default under Article 21 of the Lease and subjects the Tenant to eviction at the Landlord's discretion. Accordingly, the property taxes under such circumstances clearly

come within the scope of the term "rent" in s. 212.031(1)(c), F.S., intended by the Legislature. Rule 12A-1.070, F.A.C.: "Leases and Licenses of Real Property; Storage of Boats and Aircraft. "(1)(a) Every person who rents or leases any real property or who grants a license to use, occupy, or enter upon any real property is exercising a taxable privilege.... "(4)(a) The tenant or person actually occupying, using, or entitled to use any real property from which rental or license fee is subject to taxation under s. 212.031, F.S.,... shall pay the tax to his immediate landlord or other person granting the right to such tenant or person to occupy or use such real property. "(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. Ad valorem taxes paid by the tenant or other person actually occupying, using, or entitled to use any real property to the landlord or other person granting the right to such tenant or person to occupy or use such real property, including transactions between affiliated entities, are taxable. (Emphasis Supplied)

An agency's administrative interpretation of a statute by rule has been accorded great deference by the courts, and will not be overturned unless the agency's interpretation of the statutes is clearly erroneous; reviewing court will defer to any interpretation within the range of possible interpretation. See Pershing Industries v. Department of Banking, 591 So.2d 991, 993 (Fla. 1 DCA 1991); Eager v. Florida Keys Aqueduct Authority, 580 So.2d 771 (Fla. 3 DCA 1991); Natelson v. Department of Ins., 454 So.2d 31 (Fla. 1 DCA 1984); State ex rel. Szabo Food Serv., Inc. of N.C. v. Dickinson, 286 So.2d 529 (Fla. 1973), reh. den. Jan. 9, 1974.

An agency rule cannot enlarge, modify, or contravene the statute it interprets. See s. 120.52(8), F.S.; Florida Marine Fisheries Commission v. Organized Fishermen of Florida, 610 So.2d 92 (Fla.

1 DCA 1992); State, Bd. of Trustees v. Lost Tree Vill., 600 So.2d 1240, 1244 (Fla. 1 DCA 1992); Cataract Surgery Center v. Health Care, 581 So.2d 1359, 1361 (Fla. 1 DCA 1991), reh. den. July 16, 1991; Adam Smith Ent. v. Dept. of Env. Reg., 533 So.2d 1260, 1266 (Fla. 1 DCA 1989), reh. den. Jan. 10, 1990; U.S. Shoe Corp. v. Dept. of Prof. Reg., 578 So.2d 376, 379 (Fla. 1 DCA 1991).

Thus, in ascertaining the proper application or Rule 12A1.070(4)(b), F.A.C., to the instant case, the provisions of such rule must be construed in pari materia together with the provisions s. 212.031(1)(c), F.S. The provisions of Rule 12A1.070(4)(b), F.A.C., cannot be construed in such manner as to conflict with s. 212.031(1)(c), F.S. Although an agency may by rule interpret and administer statutory provisions, its rules cannot enlarge, modify or contravene the provisions of a statute. Department of Business Regulation v. Salvation Ltd., 452 So.2d 65 (Fla. 1 DCA 1984); Department of Insurance v. Insurance Services Offices, 434 So.2d 908 (Fla. 1 DCA 1983), pet. denied, 444 So.2d 416 (Fla. 1984); Department of Health and Rehabilitative Services v. McTigue, 387 So.2d 454 (Fla. 1 DCA 1980); 4245 Corp. v. Division of Beverage, 371 So.2d 1032 (Fla. 1 DCA 1978). Administrative agencies entrusted with authority to carry out statutory provisions are prohibited from giving the statute an amendatory construction. Florida Growers Coop. Transport v. Department of Revenue, 273 So.2d 142 (Fla. 1 DCA 1973), cert. denied, 279 So.2d 33 (Fla. 1973). Contrary to the above case law, the rule construction asserted by the Tenant, that payment to the Landlord is the deciding factor as to the application of tax, requires a construction of the term "rent" narrower in scope than that afforded by the plain and ordinary meaning of such word. Thus, such construction violates the above noted rules of construction set out by Florida courts.

Additionally, the Tenant's preferred construction of the Rule, which has the application of tax turn on whether or not an amount is paid directly to the Landlord, seeks to exalt form over substance. Florida courts have rejected the notion that a taxpayer can exalt the form in which an agreement or transaction is cast over its substance. The substance of an agreement or transaction and not the form dictates its tax consequences. See

Dept. of Revenue v. Seaboard Coastline RR. Co., 480 So.2d 1349, 1353 (Fla. 1 DCA 1985), reh. den. Jan. 28, 1986, 492 So.2d 1331 (Fla. 1986), rev. den. June 13, 1986; Dept. of Revenue v. Anheuser-Busch, 527 So.2d 877, 883 (Fla. 1 DCA 1988), reh. den. Aug. 1, 1988. In substance, the Tenant must pay the property taxes as a condition of occupancy of the premises. Failure to do so results in default.

Lastly, the issue of taxability of property taxes as rent was specifically addressed in the matter of Seaboard Coast Line Railroad Company v. Askew, No. 72-15 (Fla. 2nd Cir. Ct. 1972). In this case, the court held as follows:

"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/specified in the lease or directed by the lessor.... Section 212.031 imposes a tax uponthe total rent charged' for the renting, leasing or letting' of real estate.... While taxes are not specifically mentioned, this language clearly indicates a legislative intent to tax the full benefits flowing to the landlord for the use of leased premises.... The payment of these taxes by the lessee is the payment of money for account of the owner and for his benefit.... A tax [sales tax] is imposed upon a transaction and measured by the rent. In every rental transaction the amount of taxes upon the rented property is necessarily considered by the parities in determining the rent to be charged and paid whether the taxes be paid by the landlord from a fixed monthly or annual rental or paid for the landlord by the tenant." (Emphasis Supplied)

CONCLUSIONS OF LAW

The facts and circumstances of the instant matter, as represented by your petition, the Lease, and other supporting documentation, clearly establish the contractual obligation of the Tenant to pay the property taxes on behalf of the Landlord on the demised premises as a condition of occupying the premises for the Lease term. Further, the Lease establishes beyond

dispute that failure on the part of the Tenant to pay the property taxes constitutes an act of default which the Landlord at its discretion may view as cause to institute action to evict the Tenant from the premises. Moreover, Tenant's strained construction of the rule (12A-1.070(4)(b), F.A.C.), that the application of sales tax to the property tax is somehow barred under the circumstance where the Tenant pays the property tax directly Tax Collector on behalf of the Landlord rather than to the Landlord, violates and infringes on the established rules of construction set out by Florida courts as discussed in the foregoing analysis of law. Lastly, as held by the court in Seaboard Coastline, supra, who the tenant pays the property taxes to is not determinative as to whether such amounts constitute taxable rental consideration.

Accordingly, we find that the Tenant's payment of property taxes on the demised premises directly to the Tax Collector on behalf of the Landlord pursuant to the terms and conditions embodied in the Lease is subject to sales tax as a component, in the words of Rule 12A-1.070(4)(b), F.A.C., of "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."

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,

Daniel M. Wagner, Jr.
Tax Law Specialist

DW/
Control No. 16036