How did Florida apply the county surtax $5,000 cap to computer leases under a master agreement and separate supplements?

Plain-English summary

Florida treated every computer-equipment lease supplement as a separate lease for the county surtax $5,000 cap.

Option A and B supplements were operating leases. Their cap applied independently to each installment payment. An Option B-prime supplement was also an operating lease when its purchase option exceeded the lesser of $100 or 1% of the contract price, so the same per-installment rule applied.

When an Option B-prime purchase option did not exceed that threshold, the supplement was a conditional sale from inception. In that situation, the $5,000 cap applied once to the total gross proceeds required under the supplement, not separately to each payment.

What this means for you

• The master agreement did not combine all supplements into one lease.
• Operating-lease payments each received a separate cap calculation.
• A nominal purchase option changed the supplement into a conditional sale.
• Conditional-sale treatment applied the cap once to the whole supplement.

Common questions

Q: Was the cap applied to the aggregate master-agreement payment?
A: No. Each supplement was separate.

Q: How were ordinary operating leases treated?
A: The cap applied to each installment payment.

Q: What counted as a nominal purchase option?
A: An amount not exceeding the lesser of $100 or 1% of the contract price.

Q: How was a conditional sale treated?
A: The cap applied once to all gross proceeds under that supplement.

Citations and references

• Fla. Stat. § 212.054(2), (3) — discretionary sales surtax
• Fla. Admin. Code r. 12A-15.004(2) — surtax exemptions and $5,000 cap
• Fla. Admin. Code r. 12A-1.071(1)(d)-(f) — operating and conditional-sale leases
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-009

Original ruling text

Jan 31, 1996

Re: Technical Assistance Advisement 96(A)-009
Discretionary Sales Surtax - Term Lease Master Agreement
and Term Lease Supplement
Petitioner: XXXX (herein the "Taxpayer or Lessor")
FEI: XXXX
s. 212.054, F.S.
Rule 12A-15.004, F.A.C.

Dear :

This response is in reply to your June 7, 1995, petition for the
Department's issuance of a Technical Assistance Advisement
("TAA") pursuant to s. 213.22, F.S., and Rule 12-11, F.A.C.
Your petition regards the referenced matter and Taxpayer. The
Department has carefully examined your petition and finds it to
meet the criteria set forth in Chapter 12-11, F.A.C., requisite
to issuance of a TAA. Therefore, the Department is hereby
issuing the requested TAA.

DISCUSSION OF FACTS

Your petition and supporting documents impart the following
significant information regarding the issues under advisement
herein:

We respectfully request a Technical Assistance Advisement
addressing the application of discretionary (local option)
sales tax for periods after 12/31/93 on transactions
described below, involving the lease of tangible personal
property by various Florida entities, from a lessor. The
lessor is [Taxpayer] who is located at.... The transaction
involves a lease for computer equipment under a term lease
master agreement ("master agreement") and term lease
supplements ("supplements") between [Taxpayer] as the
lessor, and a Florida entity as the lessee.

[Taxpayer], the lessor, is the taxpayer at issue. Taxpayer
is not currently under audit by the Florida Department of
Revenue. As the surtax is the liability of [Taxpayer]
rather than its lessee's, we do not deem it relevant to
this request for technical advice to survey our Florida
lessee[s] to determine if they are currently under audit by
the Florida Department of Revenue.

Facts:

The lessee is located in a Florida county which imposes a
discretionary sales surtax. [Taxpayer], the lessor, is an
out-of-state leasing company registered as a dealer in
Florida. The lessor and lessee agreed to a master
agreement for the lease of computer equipment. The master
agreement sets forth the terms and conditions by which the
hardware equipment is leased to the lessees. An
itemization of the leased computer equipment is separately
listed on schedules, `supplements', attached to the master
agreement. The supplements, which are created when the
lease agreement is initially established between the
parties and/or when the equipment is upgraded, added to
and/or replaced, incorporate the terms and conditions of
the master agreement.

Of the various terms and conditions addressed in the master
agreements, the more significant provisions, are summarized
below:

1) Agreement Term - The Agreement is effective when signed
by both parties and may be terminated by either party upon
one month's written notice. Each lease then in effect
shall survive any termination of the Agreement.

2) Options - There are two basic lease type[s]; B' is a lease with a fair market value purchase option at the end of the lease andB prime' is a lease where the lessor
assumes for tax purposes that the lessee is the owner.

3) Lease Term - The lease is effective when signed by both
parties. The term of the lease expires at the end of the

number of payment periods.

4) Rent - The lessee pays the lessor for each payment
period. The lessee['s] obligation to pay begins on the
rent commencement date. Rent is invoiced in advance as of
the first day of each payment period and is due on the day
following the last day of the payment period.

5) Lease Not Cancellable; Lessee's Obligation Absolute Lessee's obligation to pay shall be absolute and
unconditional and shall not be subject to any delay,
reduction, set off, defense, counterclaim or recoupment for
any reason whatsoever, including any failure of the
equipment, programming or licensed program materials or any
representations by [Lessor].

6) Sublease and Relocation of the Equipment; Assignment by
Lessee - Upon Lessor's prior written consent, which will
not be unreasonably withheld, lessee may sublet the
equipment or relocate it from the equipment location. No
sublease or relocation shall relieve the lessee of its
obligations under the lease. The lessee shall not remove
the equipment from the United States. The lessee shall not
assign, transfer or otherwise dispose of the lease or
equipment, or any interest therein, or create or suffer any
levy, lien or encumbrance thereof except those created by
the lessor.

7) Ownership, Personal Property and Licensed Program
Materials - The equipment under lease is and shall be the
property of the lessor. Lessee shall have no right, title
or interest therein except as set forth in the lease.

8) Taxes - Lessee shall reimburse [Lessor] for, or shall
pay directly if so requested by lessor, as additional rent,
all taxes, charges and fees imposed or levied by any
governmental body or agency, in connection with the
purchase, ownership, leasing, possession, use or relocation
of the equipment.

9) Casualty Insurance; Loss or Damage - Lessor will

maintain, at its own expense, insurance covering loss of or
damage to the equipment with a $5,000 deductible per
incident. If any item of equipment is lost, stolen,
destroyed or irreparably damaged for any cause whatsoever
(Casualty Loss) before the date of installation, the lease
for that item will terminate. If any item of equipment
suffers casualty loss, or is otherwise damaged, on or after
the installation date, the lessee shall promptly notify the
lessor[.] If the lessor determines that the item can be
economically repaired, the lessee shall place the item in
good condition and working order and the lessor will
reimburse the lessee the reasonable cost of such repair,
less the deductible. If not so repairable, the lessee
shall pay the lessor the lesser of $5,000 or the fair
market value of the equipment immediately prior to the
casualty loss. Upon the lessor's receipt of payment the
lease for that item shall terminate.

10) Liability Insurance - The lessee shall obtain and
maintain comprehensive general liability insurance, in an
amount of $1,000,000 or more for each occurrence, with an
insurer having a `Best's Policyholders' rating of B+ or
better. The policy shall name lessor as an additional
insured as lessor's interests may appear and shall contain
a clause requiring the insurer to give lessor at least one
month's prior written notice of the cancellation, or any
alteration in the terms of the policy. Lessee shall
furnish to lessor, upon request, evidence that such
insurance coverage is in effect.

Each supplement incorporates the terms and conditions of
the master lease agreement and separately lists the
computer hardware equipment. Although the lease payment is
computed as a percentage of the aggregate acquisition cost
of the equipment, one aggregate monthly payment amount is
identified in the supplement addressing the rental payment
terms subject to the conditions of the master lease. Lease
payments payable in this aggregate amount are remitted
monthly to the lessor. Additional supplements may be
attached to the master lease listing other
components/computer hardware leased at a subsequent date

which are subject to the governing provisions of the master
lease.

A careful examination has been made of the copy of the Term
Lease Master Agreement (the "Master Lease") submitted with your
request. The following relevant text is quoted from the
preamble of the Master Agreement:

A Supplement shall refer to and incorporate by reference
this Agreement and, when signed by the parties, shall
constitute the lease (Lease) for the Equipment specified
therein....

Also of significance to the issue under advisement is section 18
of the Master Agreement which provides the following regarding
the options to purchase equipment under the Master Agreement and
corresponding Supplements:

PURCHASE OF EQUIPMENT. If Lessee is not then in default
under the Lease, Lessee may, upon three months prior
written notice to Lessor, purchase equipment upon
expiration of the Lease. Under Option A or B, the purchase
price shall be objectively determined by Lessor by using
the projected fair market sales value of the Equipment as
of such expiration

date plus, for Equipment under Option A, any recapture of
investment tax credit and any tax due thereon. Under
Option B Prime (B') the purchase price shall be an amount
determined by multiplying the Unit Purchase Price by the
Purchase Option Percent for such Equipment.
(Emphasis Supplied)

Moreover, we quote section 20 of the Master Lease in part
regarding the financing statements:

... Lessee shall execute and deliver to Lessor for filing
any Uniform Commercial Code financing statements or similar
documents Lessor may reasonably request.

Lastly, in our telephone conversation of September 26, 1995, you

were able to clarify that the purchase option amount under the
Option B Prime (B') may or may not exceed the lesser of $100.00
or 1 % of the contract amount. However, you further advised
that the Taxpayer has been accruing and remitting full tax on
the Option B Prime leases from their inception as conditional
sales.

REQUESTED ADVISEMENT

You endeavor to receive the Department's advice that:

1. The aggregate monthly rental payment[s] attributable to
   the lease of computer hardware equipment pursuant to the
   terms of the master lease are subject to an application of
   the discretionary county surtax on the first $5,000 of the
   single aggregate lease payment per month to [the Lessor].

2. Alternatively, in the absence of an application of the
   surtax to the payment in the manner described in paragraph

3. above, the monthly rental payment attributable to the
   lease of computer hardware is subject to an application of
   the discretionary county surtax on the first $5,000 of the
   aggregate monthly payment to [the Lessor] on a per
   supplement basis.

DISCUSSION OF LAW

The following statutory, administrative, and case law is
relevant to addressing the issue under advisement herein:

Section 212.054, F.S.: (2)(a) The tax imposed by the
governing body of any county authorized to so levy pursuant
to s. 212.055 shall be a discretionary surtax on all
transactions occurring in the county which transactions are
subject to the state tax imposed on sales, use, services,
rentals, admissions, and other transactions by this part.
The surtax, if levied, shall be computed as the applicable
rate or rates authorized pursuant to s. 212.055 times the
amount of taxable sales and taxable purchases representing
such transactions. If the surtax is levied on the sale of
an item of tangible personal property or on the sale of a

service, the surtax shall be computed by multiplying the
rate imposed by the county within which the sale occurs by
the amount of the taxable sale. The sale of an item of
tangible personal property or the sale of a service is not
subject to the surtax if the property, the service, or the
tangible personal property representing the service is
delivered within a county that does not impose a
discretionary sales surtax.
(b) However:

1. The tax on any sales amount above $5,000 on any item of
   tangible personal property and on long distance telephone
   service shall not be subject to the surtax. For purposes
   of administering the $5,000 limitation on an item of
   tangible personal property, if two or more taxable items of
   tangible personal property are sold to the same purchaser
   at the same time and, under generally accepted business
   practice or industry standards or usage, are normally sold
   in bulk or are items that, when assembled, comprise a
   working unit or part of a working unit, such items must be
   considered a single item for purposes of the $5,000
   limitation when supported by a charge ticket, sales slip,
   invoice, or other tangible evidence of a single sale or
   rental. The limitation provided in this subparagraph does
   not apply to the sale of any other service....
   (3) For the purpose of this section, a transaction shall be
   deemed to have occurred in a county imposing the surtax
   when:

(a)1. The sale includes an item of tangible personal
property, a service, or tangible personal property
representing a service, and the item of tangible personal
property, the service, or the tangible personal property
representing the service is delivered within the county.
If there is no reasonable evidence of delivery of a
service, the sale of a service is deemed to occur in the
county in which the purchaser accepts the bill of sale...."

The $5,000.00 cap on the tax base subject to Discretionary Sales
Surtax ("Surtax") represents a partial exemption from Surtax.
In construing any statutory exemption, the Department must
adhere to and be guided by the long-standing and fundamental

precept of statutory construction, established by the Florida
Supreme Court, which mandates that exemptions from or exceptions
to taxing statutes must be strictly construed against the
taxpayer. See Asphalt Pavers v. Dept. of Revenue, 584 So.2d 57
(Fla. 1st DCA 1991); Dade Cty. Taxing Auth. v. Cedars of
Lebanon, 355 So.2d 1205 (Fla. 1978), reh. den. April 5, 1978;
Williams v. Jones, 326 So.2d 425 (Fla. 1975), reh. den. March 4,
1976; Straughn v. Camp, 293 So.2d 689 (Fla. 1974); United States
Gypsum Company v. Green, 110 So.2d 409 (Fla. 1959).

Rule 12A-15.004, F.A.C.: Specific Exemptions.
(1) Except as provided in this section, any transaction
subject to the state sales and use tax imposed on sales,
use, rentals, admissions, and other transaction by Part I,
Chapter 212, F.S., is subject to the surtax, if the
transaction occurs in a taxing county. A transaction that
is not subject to state sales and use tax is not subject to
the surtax.
(2)(a)1. The surtax does not apply to the sales amount
above $5,000 on any item of tangible personal property.
However, the surtax does apply to the first $5,000 of the
sales amount on any item of tangible personal property and
to all other transactions which are subject to the state
tax imposed on sales, use, rentals, and other transactions
by Part I, Chapter 212, F.S., without limitation, except as
provided in (3) below....
(b)1. For purposes of administering the $5,000 limitation
on any item of tangible personal property, if two or more
taxable items of tangible personal property are sold to the
same purchaser at the same time and, under generally
accepted business practice or industry standards or usage,
are normally sold in bulk or are items which, when
assembled, comprise a working unit or part of a working
unit, such items shall be considered a single item for
purposes of the $5,000 limitation when supported by a
charge ticket, sales slip, invoice, or other tangible
evidence of a single sale or rental....
(c) In the lease or rental of tangible personal property
each lease or rental payment made by a lessee or rentee, or
contracted to be paid by a lessee or rentee represents one
taxable transaction. Liability for the immediate payment

of the tax on all the payments required under the lease or
rental does not arise at the time of the execution of the
lease or rental.
(d) Where a purchase order is issued by the purchaser to
the selling dealer, or an agreement is made between the
selling dealer and the purchaser which is reduced to
writing, that provides for the purchase of a specific
quantity of tangible personal property which, according to
the terms and conditions set out in the purchase order or
agreement, is to be delivered to the purchaser within a
definite specified time, such transaction constitutes one
sale for purposes of the $5000 limitation. Delivery of the
tangible personal property so ordered within the time
specified in the purchase order or agreement will
constitute one sale notwithstanding that due to the nature
of the property it must be delivered in installments or
that multiple deliveries may be necessary to consummate
delivery to the purchaser. In the absence of a written
purchase order or written agreement reflecting the above
conditions, each individual delivery of tangible personal
property is to be considered one sale. Each individual
delivery of tangible personal property on purchase orders
for indefinite quantities or open-end purchase orders is
considered to be one sale....

Also relevant to the issue under the advisement are the
following provisions of Rule 12A-1.071(1)(d),(e), and (f),
F.A.C.:

(d) Where a contract designated as a lease transfers
substantially all the benefits, including depreciation, and
risks inherent in the ownership of tangible personal
property to the lessee, and ownership of the property
transfers to the lessee at the end of the lease term, or
the contract contains a purchase option for a nominal
amount, the contract shall be regarded as a sale of
tangible personal property under a security agreement
(commonly referred to as a conditional-sale type lease)
from its inception. The purchase option shall be regarded
as a nominal amount if it does not exceed $100 or 1 percent
of the total contract price, whichever is the lesser

amount.
(e) Whether a lease is a conditional sale-type lease or an
operating lease shall be determined in accordance with the
provisions of the agreement, read in light of the facts and
circumstances existing at the time the agreement was
executed. Taxpayers who calculated and paid taxes on
leases entered into after January 2, 1989, pursuant to any
amendments to paragraph (1)(d) of this rule adopted after
January 2, 1989, shall be deemed to be in compliance with
the requirements of this rule.
(f) In the case of a conditional sale-type lease executed
on or after the effective date of this rule, the Executive
Director or the Executive Director's designee in the
responsible division will consider these to be sales and
purchases from their inception with tax due and payable at
the moment the contractual agreement is entered into or
when the property comes to rest in this state if at a later
date. Charges for interest or financing are taxable unless
the rate of interest or the actual amount of interest
charged is separately stated on the customer's contract.

An agency's administrative interpretation of a statute by rule
has been accorded great deference by the courts, and will not be
overturned unless the agency's interpretation of the statutes is
clearly erroneous; reviewing court will defer to any
interpretation within the range of possible interpretation. See
Pershing Industries v. Department of Banking, 591 So.2d 991, 993
(Fla. 1 DCA 1991); Eager v. Florida Keys Aqueduct Authority, 580
So.2d 771 (Fla. 3 DCA 1991); Natelson v. Department of Ins., 454
So.2d 31 (Fla. 1 DCA 1984); State ex rel. Szabo Food Serv., Inc.
of N.C. v. Dickinson, 286 So.2d 529 (Fla. 1973), reh. den. Jan.
9, 1974.

CONCLUSIONS OF LAW

First, based on the text quoted above from the preamble of the
Master Agreement, the Department is compelled to find that each
Supplement constitutes a separate lease. Further, the
Department finds that Supplements which are written with Option
A or B constitute operating leases. Additionally, the
Department finds that Supplements which are written with Option

B prime constitute conditional-sale contracts only in those
instances where the purchase option turns out to be an amount
which does not exceed the lesser of $100.00 or 1% percent of the
contract price. See Rule 12A-1.071(1)(d), F.A.C., above.

However, in the case of Supplements which are written with
Option B prime where the purchase option turns out to be an
amount exceeding the lesser of $100.00 or 1% percent of the
contract price, the Department finds that such Supplements
constitute operating leases for Florida sales and use tax and
Surtax purposes.

Therefore, the Department finds that the $5,000 cap applies to
the Supplements as follows:

1. In the case of a Supplement which is written with
   Option A or B, the $5,000 cap will be applied
   independently to each installment (payment) under the
   Supplement consistent with the provisions of Rule 12A15.004(2)(c), F.A.C.

2. In the case of a Supplement which is written with
   Option B prime where the purchase option turns out to
   be an amount exceeding the lesser of $100.00 or 1%
   percent of the contract price, the $5,000 cap will be
   applied independently to each installment (payment)
   under the Supplement consistent with the provisions of
   Rule 12A-15.004(2)(c), F.A.C.

3. In the case of a Supplement which is written with
   Option B prime where the purchase option turns out to
   be an amount which does not exceed the lesser of
   $100.00 or 1% percent of the contract price, the
   $5,000 cap will be applied once to the gross proceeds
   required under the Supplement rather than
   independently to each installment (payment) under the
   Supplement.

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 confidential
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,

Daniel M. Wagner, Jr.
Tax Law Specialist

DW/
Control No. 21766