Were payments to a property owner for dropping objections to an adjacent power plant and covering anticipated rental losses subject to Florida rent tax?

Plain-English summary

The fixed and monthly payments were not subject to Florida's tax on renting real property.

The property owner agreed not to oppose construction and operation of a cogeneration plant on adjacent property. The developer paid fixed compensation for that forbearance and for potential lost rental income, plus certain reimbursements tied to taxes, insurance, and common-area maintenance.

Nothing in the agreement gave the developer possession, occupancy, enjoyment, or use of the owner's premises. The Department therefore treated the payments as prospective damages or settlement compensation rather than taxable rent or license fees.

If tax had been collected on those payments, the developer had to request its return from the property owner. After refunding the tax, the owner could claim a credit or apply to the Department for a refund, subject to the applicable time limit.

What this means for you

Payment labels were not decisive. The ruling examined the actual rights exchanged and found no lease or license because the payer received no right to use the property.

Common questions

Q: Did the developer receive any right to occupy the neighboring property?
A: No.

Q: What were the payments for?
A: For abandoning objections and compensating anticipated financial losses from the adjacent facility.

Q: Could the property owner charge sales tax on those payments?
A: No, under the agreement described.

Q: How were prior overpayments recovered?
A: The payer first sought a refund from the payee, which could then take a credit or request a Department refund.

Citations and references

• Fla. Stat. § 212.031 — tax on renting, leasing, or licensing real property
• Fla. Stat. § 215.26 — tax refunds
• Fla. Admin. Code rr. 12A-1.070 and 12A-1.014 — real-property rentals and refunds
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-023

Original ruling text

Title:

Renting Real Property/Reimbursements for Anticipated
Losses

Jun 21, 1995

Re: TAA 95A-023
Sales tax - reimbursements for anticipated losses in the
renting of real property
Sections 212.031, 215.26, F.S
Rules 12A-1.014, 12A-1.070, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated February 20, 1995, wherein you asked whether
an annual payment identified as "Fixed Compensation" is subject
to sales tax, as imposed by s. 212.031, F.S., when paid by XXXXX
(herein Payor) to XXXX (herein Payee) as an inducement to Payee
to forebear the exercise of any right to object to the
construction by Payor of a co-generation plant on property
adjacent to property owned by Payee.

This question, as you reveal in your letter, was asked of the
Department by a representative of Payor. As stated in your
letter, the Department replied to that question in a letter
dated October 4, 1994, and concluded that the monthly payment
was not given by Payor in exchange for any rights or privileges
to use the real property of Payee. Consequently, the payments
were not subject to sales tax. Your firm, XXXXX, is an agent
for Payee.

The facts reveal that Payor, through its affiliate, XXXXX., is
the owner of certain real property (herein Adjacent Premises),
and has constructed on this property a co-generation plant
(herein Facility) located adjacent to real property owned by
Payee (herein Premises). Payee had objected to the construction
of the building.

You provided the Department with copies of a document styled,
Agreement (herein Agreement), executed by Payor and Payee on
August 6, 1992, and of a document styled, [Payor] and [Payee]
Agreement August 6, 1992, which solely provides a summary of the
terms of the Agreement.

The Agreement embodies the rights and obligations of the parties
as to the construction of the co-generation plant. The
intention of the parties is expressed in the following manner on
the first and second pages of the Agreement: "...in order to
induce [Payee] to relinquish any right it may have to object to
the development and construction of the Facility on the Adjacent
Premises, and to compensate [Payee] for the potential loss of
rental income from the Premises as a result of the construction
of the Facility on the Adjacent Premises, the parties hereto
have agreed to execute this agreement."

In paragraph 29 of the Agreement, Payee agrees that "... it
shall not take any action or assert any rights in opposition to
the development, construction and lawful operation of the
Facility ..." which shall include the forgoing of the right to
file any administrative proceeding or court action in opposition
to the construction, and to forgo the assertion of any rights or
take any action to delay or otherwise impede the construction of
the co-generation plant. Paragraph 31 requires the withdrawal
of a certain administrative proceeding by Payee before the
Agreement is to be effective.

In exchange for this forbearance, Payor agreed, as described in
paragraph 1 of the Agreement, to pay Payee for a term commencing
September 1, 1992, through August 31, 2002, a certain annual sum
designated as Fixed Compensation which is to be reduced by
certain credits the amount of which is dependent on the
continued lease of the Premises by two named tenants.

There are other provisions which determine adjustments in the
Fixed Compensation. Since these adjustments are not material to
the issue of taxation they will not be examined in detail.

Other rights and duties of the parties are described briefly as
follows:

Payor is also obligated, pursuant to sub-subparagraph
1.A.(ii), under certain conditions, to make monthly
payments to Payee (after certain allowed adjustments) equal
to the sum of real estate taxes, insurance, and common area
maintenance in connection with the Premises.

Payor has a right, by operation of paragraph 3., under
certain conditions, to receive rental income on any leases
designated as Future Leases which are defined as any leases
executed after the effective date of the Agreement which
shall include any renewals or extensions of existing
leases. Payor has the duty, pursuant to paragraph 21, to
pay up to a designated monetary limit, for certain
landscaping on the Adjacent Premises between the Premises
and the Facility.

A provision in paragraph 25, specifies that the Agreement
is to terminate if the Facility is not built.

Payee, under provisions of paragraph 27, has pledged to use
"... commercially reasonable efforts to enforce its rights
and remedies..." as against each tenant.

Department response

It is the Department's position that no provision of the
Agreement, or the Agreement read as one contract can be
construed as conveying to Payor a lease of, or granting to Payor
a license for the use of, the real property of Payee which is
identified herein and in the Agreement as the Premises.

Section 212.031, F.S., imposes, with certain enumerated
exemptions not relevant to the instant issue, sales or use tax
on the privilege of renting, leasing, or granting a license of
the use of real property for any purpose. Rule 12A-1.070,
F.A.C., interprets this statute.

However, there is no provision of the Agreement which allows the
possession, or the use of the premises by Payor consistent with
the lease of, or a license to use, real property. The payments,

including the annual Fixed Compensation and the monthly
Payments, that are required to be made by Payor, after the
adjustments provided for in the Agreement are taken into
account, are not given for the right to occupy, enjoy, or use
the Premises, but are rather prospective damages paid, or
compensation exchanged, in settlement for any financial loss of
Payee which may accrue due to the construction or operation of
the Facility.

Thus, Payee may not charge sales tax on the payments it receives
from Payor pursuant to the provisions of the Agreement. Payor
should request from Payee the return of any sales tax paid
Payee, if the basis of such tax were the provisions of the
Agreement. Upon the return of such taxes previously collected
from Payor, Payee may take credit on subsequent sales tax
returns, or may file an application for a refund with the
Department. You are alerted that s. 215.26, F.S., governs the
grant of refunds, and that this statute is interpreted in Rule
12A-1.014, Florida Administrative Rule. There is a time
limitation for the taking of credits or the granting of refunds.

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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