Was a $200,000 payment to end a Florida real-property lease early subject to sales tax as rent?

Plain-English summary

The $200,000 early-termination payment was not subject to sales tax as rent.

The payment was exchanged for the lessor's general release and caused the lease to end as of May 1, 1995. The proposed agreement designated the payment as liquidated damages, required the lessor not to account for it as rental income, and ended the tenant's right to use, enjoy, or occupy the premises after the effective date.

What this means for you

The result depended on the complete termination arrangement, not merely the label placed on a payment. The ruling emphasized the release, the end of occupancy, and the parties' agreed accounting treatment.

Common questions

Q: Was the payment made for continued use of the property?
A: No.

Q: How did the agreement characterize the payment?
A: As liquidated damages rather than rental income.

Q: Did the original lease already require a similar termination payment?
A: No. The ruling said the original lease contained no such liquidated-damages provision.

Citations and references

• Fla. Stat. § 212.031(1)(a), (c) — sales tax on leasing real property
• Fla. Admin. Code r. 12A-1.070 — real-property rentals
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-010

Original ruling text

Mar 15, 1995

Re: TAA 95A-010
Termination Payment on the Lease of Real Property
Section 212.031(1)(a), and (1)(c), F.S.
Rule 12A-1.070, F.A.C.

Dear:

This is a response, styled a Technical Assistance Advisement, to
your letter dated January 26, 1995, in which you ask whether a
certain payment to the lessor of real property is subject to

sales tax when made by your firm, XXXX (herein Lessee), as a
lessee of the real property, in exchange for the early

termination of the lease. The lessor of the real property is a

XXXX (herein Lessor).

You provided the Department with a copy of a proposed
termination agreement styled Lease Termination Agreement. You
also supplied copies of documents among which were a Lease
Agreement, executed on December 18, 1981, and a contract styled
First Amendment to Lease Agreement, executed in August 3, 1990.
Both these documents reveal that the lessee was, as to the

former agreement, the XXXX, and, as to the latter contract, the
lessee was the XXXXX. As to both those firms, Lessee is the

successor in interest.

The payment by Lessee, which is at issue, in the amount of
$200,000, is to be exchanged for a general release executed by
Lessor which together, as described in article 2 of the Lease
Termination Agreement, will cause the present lease term "... to
cease and expire as if May 1, 1995, was the natural expiration
date originally set forth in the [lease], and the parties shall

be released from all further liability under the [lease]."

You state that the Lessee wishes to conclude the lease
termination and you add "... the taxability of the lease

termination payment is a critical part of the negotiations."

You state in the second page of your letter that the lease
termination payment is "... being designated by the parties as
liquidated damages for the early termination of the [lease] and
not as rental income, and this designation is deemed to be

controlling over any contrary designation by either party.”

You cite a Technical Assistance Advisement, further identified
as TAA 90A-050, as support of your position that the lease
termination payment is not subject to sales tax because the
payment is not to be considered as part of the "total rent" as

provided in s. 212.031, Florida Statutes.

Department response

Section 212.031(1)(a), F.S., with some enumerated exceptions
not relevant to the current issue, imposes sales tax on the
privilege of engaging in the business of leasing real property.
Paragraph (1)(c) of the statute provides that "[f]or the
exercise of such privilege, a tax is levied in an amount of 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, F.A.C., interprets the statute.

In the proposed Lease Termination Agreement the sum of $200,000
is designated as "liquidated damages" in article 2. on page 2,

and provided that the lessor "... specially agrees not to

designate the [termination payment of $200,000] as rental income
on its accounting, tax or other records." This article further
provides that "[s]hould [Lessor] fail to designate the

[termination payment] solely as liquidated damages, [Lessor]
shall indemnify and hold [Lessee] harmless from and against all
sales tax liability that may arise out of or relate to the

[termination agreement]." The Department notes that the

original lease contained no liquidated damages provision
describing any similar payment required of Lessee in the event

of an early termination of the lease.

It is the Department's position that the payment at issue is not
given in exchange for the right to use, enjoy, or occupy real
property and is not subject to sales tax as levied by s.

212.031, F.S., when, as here, both parties agree that the

payment is to be designated as "liquidated damages" (whether or
not such a payment operates to merely liquidate a claim of
Lessor), and the agreement provides that Lessor shall not
account for the payment as rental income. It is undisputed that
Lessee shall not use, enjoy, or occupy the real property after

the effective date of the proposed termination agreement.

Hence, with respect to the present lease agreement, there is no
provision of s. 212.031, F.S., which is applicable to either the
termination payment, or the formerly demised premises after the

moment of the effective date of the termination agreement.

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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