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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