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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