Which shopping-mall operating-cost pass-throughs and parking charges were taxable as Florida rent or parking, and how did the mall have to state tax?

Plain-English summary

Mandatory operating-cost pass-throughs were generally taxable as commercial rent, with a narrow exception for the landlord's actual electricity cost.

When the landlord separately billed a tenant only its proportionate actual electricity cost and had already paid sales tax to the utility, the reimbursement was not taxable rent even if the lease called it rent. Any electricity markup or administrative charge was taxable rent, and the ruling also subjected the markup to the stated gross receipts tax.

Other recurring operating expenses required as a condition of occupancy were taxable as rent, whether or not the landlord had paid sales tax when first purchasing them.

For parking, the fixed self-parking charge was taxable. An optional $2 valet service was nontaxable when separately itemized from the $1 parking-space rental and the customer could choose self-parking. At the stated 6.5% combined rate, the $1 tax-included price had to be shown as 93 cents parking rent and 7 cents tax, not 93.5 cents and 6.5 cents. Monthly liability had to be calculated from the actual number of parking transactions rather than by dividing aggregate receipts.

What this means for you

The ruling distinguished reimbursement of an already-taxed utility from other lease consideration and from a markup on that utility. It also required tax-included parking prices to follow the Department's bracket calculation and required optional services to be genuinely separable.

Common questions

Q: Was an actual electricity reimbursement taxable rent? A: No, if separately billed at cost after the landlord paid the applicable sales tax.

Q: Was an electricity markup taxable? A: Yes. The markup or administrative charge was taxable as rent and also subject to the stated gross receipts tax.

Q: Were other operating-cost pass-throughs taxable? A: Yes when they were mandatory consideration for occupancy.

Q: Was the valet charge taxable?
A: No, if separately stated as an optional service while the parking-space rental remained taxable.

Q: How did the mall state a $1 tax-included parking charge? A: As 93 cents rent and 7 cents tax under the stated rate and bracket.

Citations and references

• Fla. Stat. §§ 212.031, 212.05, 212.02 — commercial rent and sales tax
• Fla. Admin. Code rr. 12A-1.070, 12A-1.073, 12A-1.086, 12A-1.004 — rent, utilities, and tax statements
• Fla. Stat. § 203.01 — gross receipts tax on electricity markup
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-039

Original ruling text

Aug 10, 1995

Re: Technical Assistance Advisement 95A-039 Sales and Use Tax - Real Property Leases: Pass Through of Operational Expenses Statutes: 212.031, 212.05, 212.02, F.S. Rules: 12A-1.070, 12A-1.073, 12A-1.086, 12A-1.004, F.A.C. Petitioner: XXXX (herein "Taxpayer") FEI: XXXX

Dear:

This is a response to your petition received June 15, 1995, for the Department's issuance of a Technical Assistance Advisement ("TAA") concerning the above referenced party and matter. Your petition has been carefully examined and the Department finds it to be in compliance with the requisite criteria set forth in Chapter 12-11, F.A.C. This response to your request constitutes a TAA and is issued to you under the authority of s. 213.22, F.S.

DISCUSSION OF FACTS

You provided the Department with a lease agreement, parking management agreement, and a closing agreement. This information imparts the following discussion concerning the matter under advisement:

[Taxpayer] is a Florida general partnership which owns and operates a XXXX (hereafter "Mall"). The Taxpayer leases spaces to tenants of the Mall pursuant to written lease agreements. Said lease agreements, in addition to charging a base rent, also pass through a pro rata share of certain operational expenses, including but not limited to, common area operational expenses, real estate taxes and insurance premiums. The leases uniformly provide that all amounts payable under the lease agreement, including pass through operational expenses, are considered rent.

The Taxpayer passes through common area electricity costs to tenants as a separately stated charge on monthly billings. The common area electricity is separately metered in the name of the Taxpayer. The Taxpayer pays the electricity bill, including applicable sales tax, and subsequently passes through the expense to the tenants of the Mall.

In addition to leasing space to tenants, Taxpayer also has a parking garage in the Mall whereby the general public can self park at a fixed rate of $1.00. The signs at the Mall and the receipts given those parking separately state the
$1.00 charge is 93.5 cents for parking space rental and 6.5 cent sales tax.

Valet parking by attendants is offered at the Mall to take the car from the vehicle owner at a convenient location and park the car within the Mall parking areas and then return the car to the owner for a charge of $3.00. The signs and the receipts separately state the $1.00 charge for rent, the tax on $1.00, and the $2.00 charge on which no tax is being charged.

The Taxpayer does not operate the parking garage or provide the valet parking services at the Mall. The Taxpayer has entered into a written agreement with XXXX, an independent contractor (hereafter operator) to operate the parking garage, provide valet services, collect the revenues, and remit the proceeds to the Taxpayer. The Taxpayer pays the operator a fee for the services provided, including but not limited to, valet parking services.

REQUESTED ADVISEMENT

Your petition poses several questions in regard to the above facts. I will restate your questions and follow with the Department's position, which is predicated on the Florida Statutes (F.S.) and the Florida Administrative Code (F.A.C.).

DISCUSSION, ANALYSIS AND CONCLUSION OF LAW

Question #1:

Are separately metered electricity charges which are paid by the Taxpayer, including applicable sales and/or use tax and passed through and separately stated on bills to the tenants, subject to additional Florida sales and/or use tax to be collected and remitted by the Taxpayer?

Response

In consideration of the Omni International of Miami, LTD. v. Department of Banking and Finance. [444 So.2d 540, 1984 Fla. 3 DCA 225] decision, it is the Department's position that, in the instance where the proportionate cost of the electricity paid by the Taxpayer, and upon which the Taxpayer has paid sales tax, is passed through to a tenant, and the Taxpayer is simply reimbursed by the tenant for its actual electrical consumption, such electricity billed the tenant is not a taxable element of the payment for renting, leasing, letting, or granting a license to use space in the Mall. This position will be held irrespective of whether the lease or license agreement designates such proportionate electricity costs billed the tenant as part of the rent or license fee. However, you are alerted to the fact that in the event the electric utilities are marked up on the pass through, then the residual amount of charge to the tenants in excess of the Taxpayer's cost for such electric utilities is subject to tax as rent. This includes any amount designated as an administrative charge on the pass through of the electric utilities. Moreover, the amount of any mark up of the electric utilities would also be subject to gross receipts tax at the rate of 2.5% pursuant to s. 203.01, F.S.

Question #2:

Are recurring operational expenses, other than the separately metered electricity charges, paid by the Taxpayer, including applicable sales and/or use tax thereon, and which is passed through and separately stated

on bills to tenants, subject to additional Florida sales and/or use tax to be collected and remitted by Taxpayer?

Response

Section 212.031(1), 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...

"(c) For the exercise of such privilege, a tax is levied in an amount equal to 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.

"(d) When the rental or license fee of any such real property is paid by way of property, goods, wares, merchandise, services, or other thing of value, the tax shall be at the rate of 6 percent of the value of the property, goods, wares, merchandise, services, or other thing of value."

Rule 12A-1.070(4)(b), F.A.C., provides in part:

"(b) The tax shall be paid at the rate of 5 percent prior to February 1, 1988, and 6 percent on or after February 1, 1988, 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. Ad valorem taxes paid by the tenant or other person actually occupying, using, or entitled to use any real property to the landlord or other person granting the right to such tenant or person to occupy or use such real property, including transactions between affiliated entities, are taxable."

The Department has not adopted a position of expanding the scope of the Omni decision to embrace any other pass through

charges such as common area maintenance, insurance, etc. In short, the scope of Omni has been confined to the single issue, sales tax on the pass through of utilities (previously taxed). Therefore, the various other pass through charges which are denominated by the Lease as "rent", the nonpayment of which constitutes a default under the terms and conditions of the Lease, are taxable as mandatory rental consideration payable as a condition of occupying the premises.

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 12A-1.070, F.A.C. The rule provides that tax is due "... on all considerations due and payable from the tenant...." Thus, sales tax should be imposed on the "total rent" including any recurring operational expenses, other than electricity charges, if these expenses are mandatory rental consideration payable as a condition of occupancy. This holds true whether the expenses when first paid by Taxpayer were subject to Florida sales tax or not.

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 taxpayer.

Question #3:

Are recurring operational expenses which are not subject to sales and/or use taxes and which are paid by the Taxpayer and which are passed through and separately stated on bills

to tenants, subject to Florida sales and/or use tax to be collected and remitted by Taxpayer?

Response

See the answer to Question #2. The lease provides that all amounts payable under the lease agreement, including pass through operational expenses, are considered rent. Therefore, all operational expenses, whether subject to tax or not when first paid by Taxpayer, are denominated as rental consideration and are subject to tax under Section 212.031, F.S.

Question #4:

Must the Taxpayer separately state and separate on bills to tenants the costs not subject to sales and/or use tax and the costs which are subject to sales and/or use taxes?

Response

Given the facts presented, electricity, if separately billed or invoiced to the tenant, is not subject to tax, even if designated as additional rent. This is the Department's position as long as the Taxpayer simply passes through to his tenants the electricity charges previously paid to the power company on which Taxpayer has paid the applicable sales tax.

Question #5:

Are the Taxpayer's signs and receipts in compliance with Rule 12A-1.08[6]?

Response

Rule 12A-1.086, F.A.C., provides:

"A person engaged in any business taxable under Chapter 212, Part I, F.S., shall not advertise or hold out to the public in any manner, directly or indirectly, that he will

absorb all or any part of the tax, or that he will relieve the purchaser of the payment of all or any part of the tax, or that, when added to the selling price, the tax or any part thereof will be refunded either directly or indirectly by any method whatsoever. The tax shall be added to the sales price or rental and the amount of the tax shall be separately stated as Florida tax on any charge tickets, sales slips, invoices or other tangible evidence of sale or rental, and shall be a debt from the purchaser or consumer or lessee to the dealer or lessor until paid."

The Taxpayer's signs and receipts are in compliance with Rule 12A-1.086, F.A.C.

Question #6:

Is the Taxpayer's allocating 6.5 cents to tax and 93.5 cents to rental of a total charge of $1.00 a sufficient allocation, since an exact allocation would result in 93.8967136 cents rental and 6.1032864 cents tax?

Response

The taxpayer is operating a business in XXX. Currently, the tax rate in XXX. The state tax rate is 6% and the discretionary sales surtax rate for XXX is .5%. The correct allocation for XXX is 7 cents to tax and 93 cents to rental for a total charge of $1.00. You compute this by dividing $1.00 by 1.065 to get the rental amount of 93 cents. The actual division results in a taxable amount of
.938967. However, when you consult Form DR-28, Sales Tax Brackets on All 6 1/2% Taxable Transactions, the "Amount of Sale" range is from .93 - 1.07 and the associated "Tax" for this range is .07. To be mathematically correct using all of the available information, the tax due should be 7 cents and the taxable amount should be 93 cents.

Please note that to compute the monthly sales tax due on receipts for parking, the Taxpayer must not divide the total receipts received for the month by 1.065. The Taxpayer must maintain records which indicate the actual

number of parking sales made. For example, if the taxpayer has parking receipts for 50 parking sales, he should not compute tax by dividing the total receipts ($50.00) by 1.065, because he would incorrectly remit tax of $3.05. Instead, he should have records which would indicate that 50 parking receipts were issued. Based on this number, he would compute the tax due by multiplying 50 times .07 (the tax amount per parking rental sold, which is posted on the sign and receipts) to get the total tax due of $3.50.

Question #7:

Is the $2.00 charge for the service of parking a patron's car and retrieving same, subject to Florida sales and/or use tax to be collected and remitted by the Taxpayer?

Response

As long as the total $3.00 charge is itemized to reflect a
$1.00 charge for parking and a $2.00 charge for valet service, the $2.00 charge is not taxable. If the car owner can retrieve his own car, the $1.00 is taxable. If the car owner can elect to pay $2.00 for the valet service, then this is a service and is not taxable.

Question #8:

Must the Taxpayer separately state on signs and/or receipts the $2.00 charge for valet service, the 93.5 cent charge for parking space rental and the 6.5 cent charge for tax on the parking space rental?

Response

Yes, the Taxpayer must state on signs and/or receipts the
$2.00 charge for valet service, 93 cents for parking space rental and 7 cents for tax on the parking space rental.

Question #9:

Are the Taxpayer's signs and receipts in compliance with

Rule 12A-1.008?

Response

The signs and receipts should reflect a total charge of
$3.00. The rental charge amount should be 93 cents, the tax should be 7 cents, and the valet parking amount should be
$2.00, for a total of $3.00, to be in compliance with Rule 12A-1.086, F.A.C.

For your information and reference, I have enclosed copies of all cites made in the body of this letter from the Florida Statutes and the Florida Administrative Code. I have also enclosed Attorney General Opinion 070-151 and bracket cards for transactions ranging from 6% to 8%.

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 upon 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 from that which is 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 that 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 this response.

Sincerely,

Leigh C. Lindsay

Technical Assistant

Enclosures
Control #21849