Were shopping-center common-area and liability-insurance payments taxable rent when the merchants owned their buildings?

Subject

Real Property - Fees and Insurance Paid by Property Owner

Plain-English summary

The shopping center did not have to collect sales tax on common-area maintenance and liability-insurance payments from three merchants who owned their own buildings and surrounding land. The merchants were not tenants, and the shopping-center company was not their landlord.

The payments arose under reciprocal easement agreements that gave the parties shared rights to use common areas and allocated maintenance costs by square footage. The Department treated the payments as consideration for easements, not as rent or license fees for occupying real property under section 212.031.

If tax had been collected in error, the property owner had to obtain the refund from the dealer. After refunding the customer, the dealer could seek a Department refund or take a credit on a later return.

What this means for you

The legal relationship behind a commercial-property payment matters. Common-area charges paid by a tenant can be rental consideration, while the same categories of cost paid by a property owner under a reciprocal easement can fall outside the real-property rental tax.

Common questions

Why were the maintenance and insurance payments not taxable? They were paid by property owners for reciprocal easement rights, not by tenants for possession or use granted by a landlord.

Did the merchants' ownership matter? Yes. The Department expressly relied on the absence of a lessor-lessee relationship.

How was tax collected in error refunded? The customer sought the refund from the dealer; the dealer could then claim a Department refund or credit after repaying the customer.

Citations and references

• Fla. Stat. § 212.031(1)(a) and (2)(a)
• Fla. Admin. Code rr. 12A-1.070(4)(b) and 12A-1.014(7)
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-068

Original ruling text

Dec 21, 1994

RE: TAA 94A-068
Sales Tax - Real Property - Fees and Insurance Paid by
Property Owner
s. 212.031, Florida Statutes
Rule 12A-1.070(4)(b), Florida Administrative Code

Dear :

This is in response to your letter dated April 16, 1993, in
which you request, on behalf of your company, XXXX (hereinafter
"Company"), the issuance of a Technical Assistance Advisement on
the taxable status of common area maintenance fees and liability
insurance fees when paid by merchants who are also the property
owners of their buildings. On February 26, 1993, a Letter of
Technical Advice was issued regarding the same issue.

Your letter of January 22, 1993, provides, in part, the
following information:

"I represent the Landlord of [Company], an open air retail
shopping center. Three of our 65 merchants... own their
own buildings and some land surrounding their buildings.
We have a `Reciprocal Easement Agreement' (REA) with each
of these stores. Per the REA Agreement, each store has
agreed to pay their pro-rata share of the Common Area
Maintenance Fees and Liability Insurance.

"Per the FDR's Sales and Use Tax, Chapter 12A-1.070, 4(a),
we have always charged sales tax against these payments.
However, since [Company] is not their Landlord and they are
not our tenants, per se, and we do not have a `Lease
Agreement' with them, should we, in fact, be charging sales
tax against their CAM and Insurance Payments to us?"

Section 212.031(1)(a), F.S., provides in 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...."

Section 212.031(2)(a), Florida Statutes, states:

"(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."

Rule 12A-1.070(4)(b), Florida Administrative Code, provides
in part:

"(4)(b) The tax shall be paid...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...."

Discussion

A review of "Company's" standard contractual agreement,
"Grant of Reciprocal Easements and Declaration of Covenants
Running with the Land, and Development Agreement" (hereinafter
"Agreement") reveals the following characteristics:

1. Grant of an easement conveying to both parties (and
   their employees, invitees, etc.), the reciprocal right to
   the use of the common areas described in paragraph 1.6.

2. The common area maintenance costs are enumerated in
   paragraph 1.7. as:

a. rental charge for maintenance equipment
b. supervision
c. insurance

d. taxes (personal property and assessments)
e. trash removal
f. landscaping
g. utilities
h. finance charges
i. parking area costs (see also subparagraph 3.8(b),
Article VII.)

3. The elements of the common area maintenance costs
   described in paragraph 1.7. are shared proportionately by
   the parties as provided in subparagraph 5.4.(b).

4. Company is responsible for the common area maintenance
   as provided for in paragraph 5.1. but third parties may do
   the actual work while Company remains responsible for the
   common area maintenance operation as in paragraph 5.3, and
   Company shall pay directly such costs as described in
   subparagraph 5.4.(a). The proportionate share of such
   costs to be borne by any party required to pay a
   proportionate share is computed pursuant to the formula, in
   which square footage is the measure, as described in
   paragraph 1.17.

5. Real property taxes against each parcel shall be paid
   individually by the owner of the parcel as described in
   paragraph 6.1.

6. On the sale of a parcel the transferee shall assume
   the obligations of the transferor as required in paragraph
   13.4.

7. Covenants in the Agreement run with the land as
   provided in Article XV.

8. Paragraph 16.1. provides that no partnership or joint
   venture is intended.

9. Modification of the Agreement can only be by a written
   and recorded instrument executed by all of the parties as
   provided in paragraph 16.3.

Section 212.031, F.S., addresses the taxable uses of real
property and includes renting, leasing, letting or granting a
license for the use of any real property as transactions which
are subject to sales tax. These transactions either convey real
property for a specified time for a specified amount or permit
or authorize the use of certain real property.

Black's Law Dictionary defines "Easement" as a right of use
over the property of another. It is an interest which one
person has in the land of another.

Determination

Based on our analysis of the Agreement, it is determined
that the payments made by the merchants, who own the real
property they occupy, to Company for their pro-rata share of the
common area maintenance fees and liability insurance would not
be taxable as rental income since there in no relationship
between Company and these merchants as "lessor" and "lessee".
The amounts paid by the three merchants who own their own
buildings and some land surrounding their buildings are in
consideration of the easement granted pursuant to the Agreement.
As a consequence, these amounts are not subject to sales tax,
because consideration given in exchange for an easement is
beyond the reach of s. 212.031, F.S.

In your letter of April 16, 1993, you also requested
information regarding the process for sales tax refunds.

Rule 12A-1.014(7), F.A.C., states:

"(7) A taxpayer who has overpaid tax to a dealer, or who
has paid tax to a dealer when no tax is due, must secure a
refund from the dealer and not from the Department of
Revenue."

The tax is to be refunded in the manner it is collected.
Once the dealer refunds the tax to the taxpayer, the dealer may
obtain a refund from the Department or take a credit on a
subsequent tax return.

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,

Bonnie Everton
Technical Assistant

/e
Cont. #8991