Were a commercial tenant's allocated operating expenses taxable as additional rent?

Subject

Additional Rent Subject to Sales Tax

Plain-English summary

The tenant's allocated operating expenses and real-estate taxes were taxable as additional rent because the lease required them as a condition of occupying the building. The listed costs included water, trash, sewer, maintenance, security, landscaping, insurance, pest control, common-area services, and real-estate taxes.

The landlord was not reselling each underlying product, service, or tax. Those items lost their separate identity and became an accounting measure used to compute the total rental consideration. Tax paid by the landlord on an underlying purchase therefore did not create prohibited tax pyramiding; the landlord's purchase and the tenant's rental payment were distinct taxable privileges.

The exception was electricity supplied through a single or master meter. When the landlord had paid sales tax to the utility and passed through only the tenant's apportioned actual cost, that amount was excluded from taxable additional rent. Any charge above the landlord's electricity cost was taxable rent.

What this means for you

Commercial-lease tax followed the tenant's payment obligation, not the tax character of each cost on the landlord's books. Mandatory reimbursements generally entered the rent base unless a specific rule, such as the at-cost electricity treatment, applied.

Common questions

Were maintenance, insurance, and real-estate-tax reimbursements taxable? Yes, because the leases made them mandatory components of total rent.

Was that double taxation? No. The Department treated the landlord's purchase and the tenant's payment for occupancy as different transactions.

Was electricity treated the same way? No. An at-cost, previously taxed master-meter pass-through was excluded, but a markup was taxable.

Citations and references

• Fla. Stat. §§ 212.031(1)(c), (1)(d), and (2)(b); 212.05(1)(k)2.; 212.08(4)(a)1.; and 213.22
• Fla. Admin. Code r. 12A-1.070(4)(b)
• Ryder Truck Rental, Inc. v. Bryant, 170 So. 2d 822 (Fla. 1964)
• Omni International of Miami, Ltd. v. Department of Banking and Finance, 444 So. 2d 540 (Fla. 3d DCA 1984)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-065

Original ruling text

Title:

Additional Rent Subject to Sales Tax

Dec 14, 1994

Re: TAA 94A-065
Whether certain expenses paid directly by lessor but apportioned to the tenant as additional rent are subject to sales tax Sections 212.031(1)(c), (1)(d), and (2)(b), 212.05(1)(k)2., 212.08(4)(a)1., F.S. Rule 12A-1.070(4)(b), F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to your letter dated October 28, 1994, in which you asked whether certain charges billed by your firm, XXX (herein Agent), as the agent for XXX, the owner of a four floor building (herein Property), to the tenant, XXX (herein Lessee) for the right to occupy Property are subject to Florida sales tax as imposed by s. 212.031, Florida Statutes. You provided the Department with two lease agreements, one of which is styled Office-Lease, and the other agreement is styled Office Lease Agreement. Property is located within an area known as the XXX in XXX.

The former contract (herein Lease #1) identifies the landlord as XXX and the tenant as XXX. The latter contract (herein Lease

2) identifies the lessor as the XXX and the tenant as XXX, Government Support Systems Division.

In clarification of the structure of the transactions, the Department learned in telephone conversations with a representative of your firm on November 4, and November 7, 1994, that XXX, and XXX are predecessors in interest to XXX which, as was previously stated, is the owner of Property. The legal name of Lessee is XXX, Government Support Systems Division.

At issue is whether certain expenses which are paid by Lessor to the vendors, or a government unit, and then apportioned by Agent

as a charge denominated as Additional Rent to Lessee is a taxable element of the rent paid by Lessee pursuant to s. 212.031, Florida Statutes. There is no dispute that sales tax is properly charged by Agent on the base rent.

In Lease #1 these expenses are identified in paragraph IV.3.(a) as "Operating Expenses." The same term is used in Lease #2 but the definition is provided in paragraph 4.(a). In both of these paragraphs the term is defined to mean "... all expenses paid or incurred by [Landlord in Lease #1, and Lessor in Lease #2] or on
[Landlord's or Lessor's] behalf in respect of the repair, operation, security, landscaping, maintenance of the property including, but not limited to, those expenses identified on Exhibit [H in Lease #1, and Exhibit B in Lease #2]."

Exhibit H and Exhibit B contain essentially the same language and both further define the term Operating Expenses as Landlord's Operating Expenses.

In Lease #2 there are 19 listed expense items which are paid by the Lessor but apportioned to the Lessee:

Water

Trash Removal

Sewer

Structural Maintenance

Common Area Utility Charges

Parking Lot Maintenance

Common Area Maintenance

Sprinkler System

Common Area Security

Fire Alarm

HVAC Maintenance

Real Estate Taxes

Elevator Service

Pest Control

Landscaping

Lessor's Insurance

Electricity

Exterior Window Cleaning

Common Area Janitorial Services

The language in paragraph IV.3.(b) of Lease #1 provides for the apportionment of the Lessor's Operating Expenses in the following manner:

"Tenant shall pay as additional rent, an amount equal to Tenant's Share of the Operating Expenses due for the ensuing 12 months as agreed with the Landlord, in 12 equal monthly installments (payable along with the Monthly

Installment of the Base Rent), commencing on the first day of the month."

The language in paragraph 4(a) of Lease #2, although phrased differently, results in the same computation as provided for in Lease #1.

Note is made that Electricity and Common Area Janitorial Services are not listed as Landlord's Operating Expenses in Lease #1 (see Exhibit H). These two expenses are included in Exhibit H under the legend, Tenant's Initial Operating Expenses in Lease #1.

Other than these two expenses, the Landlord's Operating Expenses are the same in both leases.

Included in the documentation you provided the Department was a copy of a letter from XXX, representing Lessee, addressed to Agent to which XXX asserted that Agent was erroneously charging sales tax on the part of the payment made by Lessee to Agent which represented the amount of the apportioned Lessor's Operating Expenses. XXX declared that in buying the various services and products from vendors, Landlord had paid the applicable sales tax in some instances. Thus, concluded XXX, the imposition of sales tax on the apportioned Lessor's Operating Expenses resulted in double taxation.

You also included in your documentation a letter from the Department dated July 27, 1994, written by Claudette Preston, a Department employee. Ms. Preston opined that considering Rule 12A-1.070(4)(b), F.A.C., sales tax was validly imposed on the items comprising additional rent.

Department response

The Department affirms the conclusion expressed in the letter to Agent by Department representative Preston to the extent as described in the following discussion.

Section 212.031(1)(c), F.S., requires sales tax to be imposed on the "... total rent... charged for such real property by the

person charging or collecting the rental... fee." This statute is interpreted specifically in paragraph (4)(b) in Rule 12A1.070, F.A.C., (a copy of which was provided Agent by Ms. Preston). The rule provides that tax is due "... on all considerations due and payable from the tenant...."

Thus, sales tax is properly imposed on the "total rent" charged Lessee for the right to use or occupy the Property. Such "total rent" shall include the Base Rent as that term is defined in Paragraphs II.B. and IV.2.(b) in Lease #1, and on the Annual Base Rent as that term is defined in paragraph 4. of Lease #2. Total Rent also includes those items replicated above which comprise the term "Additional Rent" or "Lessee's Share of the Operating Expenses", and Share of Real Estate Taxes" (with the exception of Electricity which will be explained in a later portion of this letter), because the payment of Additional Rent is required of Lessee, pursuant to the terms of the Lease, if Lessee is to comply with the lease contract.

In interpreting the provisions of s. 212.031(1)(d), F.S., which allows the payment of rent in forms other than cash, the court in Seaboard Coast Line Railroad Company v. Reubin O'D. Askew, Case Number 72-15, (Fla. Second Judicial Circuit 1972), stated that "[w]hile 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 the leased premises." See, also Attorney General Opinion 070-151.

It is clear in the instant situation that the operating expenses are a factor in the computation of the consideration required for the lease and are determinative of the profitability of the property to the Landlord/Lessor.

Thus, the Base Rent in Lease #1, or the Annual Base Rent in Lease #2, and the Additional Rent in Lease #1, and the Lessee's share of the Operating Expenses and the Lessee's share of the Real Estate Taxes in Lease #2, are simply components of the Total Rent paid for the right to occupy the Property, which are part of all considerations due and payable from the tenant. Such payments, when given for the right to use or occupy real property, are subject to tax as provided in s. 212.031, Florida

Statutes.

The Department replies to the assertion made by XXX that sales tax may not be "pyramided" by stating that there is no pyramiding of the tax as prohibited in s. 212.031(2)(b), F.S., because Lessor is simply not reselling the individual items comprising the term Additional Rent. These items are merely an accounting measure or a billing justification used in arriving at the sum of the Additional Rent.

Lessor is not reselling, for example, water to Lessee. However, water is listed as one the 19 items comprising Additional Rent. The sale of water is in fact specifically exempted by statute in subparagraph (4)(a)1. of s. 212.08, Florida Statutes. Neither is Lessor reselling Pest Control or Real Estate Taxes.

Lessor is not reselling these itemized elements of Additional Rent because these items lose their identity when, as in the instant leases, the itemized charges are taxed, if at all, under statutes other than the statute which imposes tax on the payments made by a lessee for the right to use or occupy real property. These expense items become merely an accounting measure, or a billing justification used in arriving at the sum of the Additional Rent.

For example, pest control, in connection with nonresidential premises, is subject to sales tax by operation of subparagraph (1)(k)2. of s. 212.05, Florida Statutes. Lessor paid the sales tax on this service when the service was delivered.

Lessor's procedure of itemizing this charge as an accounting measure or as a billing justification in arriving at Additional Rent subject to tax under s. 212.031, F.S., does not support the theory that Lessor is engaged in reselling pest control. Similarly, the itemization of real estate taxes as an element of Additional Rent does not mean that Lessor is reselling the ad valorem tax which is imposed on the Property by the county in which it is located.

The statute which gives rise to the ad valorem tax is not that which taxes the payments for the lease of real property. These

are different transactions which may be subject to tax under statutes which are different from the statutes which taxes leases of or licenses to use, real property.

The court in Ryder Truck Rental, Inc. v. Bryant, 170 So.2d 822, 825 (Fla. 1964), in affirming the validity of sales tax on both the purchase of vehicles and the tax on the rental charges for the same vehicles, stated the proposition that "[c]learly, then, there is no 'pyramiding' or duplication of the tax since each is on a separate and distinct taxable privilege."

Here, there is no pyramiding or duplication of the tax because Lessor purchased the products or services in separate transactions from the instant transaction which involves the taxability of lease or license payments for the right or privilege to use or occupy real property.

The Department does note that the expense "Electricity" which is included in Lessor's Operating Expenses in Lease #2 may not be included as a taxable element of Additional Rent. The Department, considering the decision in Omni International of Miami LTD. v. Department of Banking and Finance, 444 So.2d 540 (Fla. 3DCA 1984), takes the position that in the instance where commercial premises are served by a single or master meter and the entire cost of the electricity, including sales tax, is paid by the lessor, any "pass through" of the tenant's apportioned cost is not subject to sales tax. Thus, the charge for electricity, as it appears within the computation of Additional Rent, if merely an apportionment of the actual charge Lessor paid for the electricity, and upon which the Lessor paid sales tax, may not be included as a taxable element of Additional Rent.

Should Lessor charge to Tenant some amount greater than the amount Lessor paid the utility for the electricity, the amount in excess of such utility charge is to be considered as Additional Rent which would be subject to sales 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,

Robert G. Parsons
Tax Law Specialist

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