Which payments under a Florida mineral-extraction agreement were taxable as rent or mineral sales?

Plain-English summary

Florida treated the agreement's payments differently according to what each payment purchased.

Cash royalties and the lessor's in-kind share paid for extracted minerals rather than the right to use land. Those mineral sales were exempt for resale when the registered lessee supplied a valid resale certificate. The $500 minimum payment and the lessee's payment of the lessor's ad valorem tax were consideration for the real-property right and were taxable unless the land was assessed as agricultural.

Restoration and reclamation costs were not taxable rent, and liquidated damages for estimated lost minerals were not subject to sales or use tax.

What this means for you

• Labels did not control; the purpose of each payment did.
• Mineral royalties required sales-tax treatment unless a resale certificate applied.
• Minimum rent and the lessor's property tax were taxable real-property consideration.

Common questions

Q: Were mineral royalties taxable as rent? A: No.

Q: Was the minimum monthly payment taxable? A: Yes, unless the agricultural-land exemption applied.

Q: Were reclamation costs or liquidated damages taxable? A: No.

Citations and references

• Fla. Stat. § 212.02(10)(h) — real property
• Fla. Stat. § 212.031(1)(a)1., (1)(c), (3) — real-property rentals
• Fla. Stat. § 212.05 — tangible personal property sales
• Fla. Admin. Code r. 12A-1.070(4)(b) — taxable rent
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-029

Original ruling text

Apr 25, 1996

Re: Technical Assistance Advisement 96A-029 Mineral Extraction Agreement Section 212.02(10)(h), 212.031(1)(a)1., (1)(c), and (3), 212.05, F.S. Rule 12A-1.070(4)(b), F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to your letter dated November 28, 1995, wherein you pose three assertions as to the liability of either the lessor or lessee of real property for sales or use tax arising from an agreement captioned, Mineral Extraction Agreement (herein Agreement), an unexecuted copy of which you attached to your letter. The lessor (herein Lessor), is identified in the Agreement as XXXX. The lessee (herein Lessee), is identified as XXXX.

You also provided a copy of an earlier Department communication, styled a Letter of Technical Advice, bearing the date of September 11, 1995, which expressed a determination as to the imposition of sales or use tax with respect to, as you describe on page 2 of your letter, "... substantially the same mineral extraction agreement and issues."

The instant Agreement conveys to the Lessee a property right, commonly styled a profit a prendre, which is described in the prefatory portion of the first page of the Agreement as limited to "... the sole purpose of mining limerock and other extractive materials...." This citation also provides the definition of the term "minerals." The term is given a more specific meaning in Article 2. which states that "minerals" means "... all limerock deposits and other similarly extractive and earthy materials suitable for use as road material, rubble, fill or aggregate...."

The Agreement terminates, as provided in Article 2.(a), "...

when all of the minerals have been excavated, mined and removed... and all restoration and reclamation have been completed... unless sooner terminated...." Further, this provision limits the phrase "when all of the materials have been excavated, mined and removed" to minerals which "... can ordinarily be mined and used by Lessee in its operations or marketed at a reasonable profit to Lessee...."

The Agreement provides in Article 3. for three types of payments to the Lessor: 1) $.30 per ton or 6% percent of the sales price of limerock; 2) $.30 per ton of dirt and other fill materials; and 3) a minimum payment of $500 per month.

The Agreement also provides for a fourth type of payment which is described as an "in-kind" payment. This provision, which appears in Article 3.(g), grants to the Lessor the right to "... elect to take in kind 6% of the Minerals extracted by Lessee." These minerals are referred to as "Reserved Minerals" in the Agreement. The remaining excavated minerals which belong to the Lessee are styled "Nonreserved Minerals."

The three assertions to which you seek the Department's response appear on page 4 of your letter in the following form:

(1) Albeit the Agreement "... creates a lease or license to use real property, except in instances when the minimum royalty is paid, there is no consideration provided for such lease or license which is [subject to sales or use tax]",

(2) That the lessee's "... payment of royalties or delivery of the Reserved Minerals in exchange for the Nonreserved Minerals will constitute an exempt sale for resale [provided that the lessee is a registered dealer for sales or use tax purposes] and otherwise complies with the requirements for the resale exception," and,

(3) "Payment of the minimum royalty will be [subject to sales or use tax] unless and to the extent that the agricultural exemption provided by [s. 212.031(1)(a)1., F.S.,] does not apply."

Department response

The Department affirms the opinion expressed in its Letter of Technical Advice dated September 11, 1995, to the extent as provided herein.

With respect to your first assertion, the Department finds that a lease of, or a license to use real property is conveyed by the Agreement, but that only one of the four types of payments, which is the minimum payment, is subject to tax as given for the lease of, or a license to use, real property.

The mining activity permitted by the Agreement occurs in connection with real property as that term is defined in s. 212.02(10)(h), Florida Statutes. The statute defines real property, in part, as "... surface land, improvements thereto, and fixtures...." In applying this definition to the instant facts, particularly the phrase "surface land" it is the understanding of the Department that the mining activity at issue is not "shaft mining," but the stripping of the surface land which posterior to such stripping remains "surface land." Consequently, the mining activity is one which occurs in connection with real property as that term is defined in s. 212.02(10)(h), Florida Statutes.

The privilege of engaging in the business of leasing or licensing the use of real property is subject to sales or use tax as described in s. 212.031(1)(a), Florida Statutes. Rule 12A-1.070, F.A.C., interprets the statute.

However, the statute does enumerate several exemptions from the tax, one of which may be relevant to the instant issues. That is, if the land which is the subject matter of the Agreement is, as provided in subparagraph (1)(a)1. of the statute, assessed as agricultural land, the taxable provisions of s. 212.031, F.S., are not applicable. In your letter you failed to claim or disclaim the agricultural status of the demised land.

Provided the land is not exempt as agricultural land, the tax is imposed as described in paragraph (1)(c) of s. 212.031, F.S., on the "... total rent or license fee charged for such real

property by the person charging or collecting the rental or license fee." Subsection (3) of the statute specifies that the tax "... shall be due and payable at the time of the receipt of such rental or license fee payment by the lessor or other person who receives the rental or payment."

However, the Department finds that none of the payments set forth in Article 3. of the Agreement which compensate the Lessor 1) at the greater of the "sum of $.30 or 6% of the sales price" of limerock or similar road materials, 2) for other dirt, or like materials at the "the sum of $.30 for each ton," nor 3) the payment which can be elected to be received by the Lessor as provided in Article 3(g) as "in kind 6% of the Minerals extracted by the Lessee" is consideration given by the Lessee for the leasehold interest, or for the privilege to enter the property.

Rather, these three types of compensation to the Lessor are payments solely for the materials extracted from the real property. Phrased differently, these payments either in money, or in "reserved minerals" are exchanged for the sale of materials by the Lessor to the Lessee.

Thus, as you posit in your first assertion, there is no taxable consideration with respect to these three payments received by the "lessor or other person" as described in subsection (3) of s. 212.031, F.S., which is reachable under the statute because these payments arise not from the lease or license of real property, but from the sale of the extracted materials.

While no tax may be imposed by operation of s. 212.031, F.S., on the three types of payments, the Lessor is obligated to collect the tax from the Lessee on the sale of the materials as that tax is imposed under provisions of s. 212.05, F.S., unless the Lessee tenders to the Lessor a valid resale certificate.

Thus, considering all of the above, and in answer to your second assertion, the Department accedes to your reasoning that the payments of "royalties," in money, or in kind, are free of the tax imposed by s. 212.05, F.S., because "... [the transaction] will constitute an exempt sales for resale...." provided the

Lessee is a registered dealer for the purposes of collecting and remitting sales or use tax, and complies otherwise with the statutes and administrative rules which govern the use of such certificates.

Further, the Department agrees, as posited in your third assertion, that the minimum payment is subject to sales or use tax, absent the application of the agricultural exemption, as provided in s. 212.031(1)(a)1., Florida Statutes.

Unless the land subject to the Agreement is assessed agricultural land, as described in s. 212.031(1)(a)1., F.S., then the minimum payment is subject to tax, if made as described in Article 4 of the Agreement which reads in part, "[u]nless Lessor shall have elected to take its reserved Minerals in kind, Lessee shall pay to Lessor a minimum royalty of Five Hundred Dollars ($500.00) per month...."

This minimum payment, unlike the other three types of payments described above, which were expressly given for the materials extracted from the land, is a payment given for the lease of, or a grant of a license to use, the real property described in the Agreement. Such a minimum payment is not given in connection with the sale of materials.

It is the obligation of the Lessee to make such a payment irrespective whether any "minerals" or "other earthy materials" are extracted from the real property. Thus, such payment is given for the lease of, or the license to use, the real property and is subject to the tax as imposed by s. 212.031, F.S., provided that the agricultural exemption is not applicable.

There is also one additional payment which is subject to sales or use tax as imposed by s. 212.031, Florida Statutes. The payment by the Lessee of ad valorem tax on the demised premises, as provided in Article 16, which absent the Agreement would be an obligation of the Lessor, is also a taxable element in that such a payment by the Lessee is not consideration exchanged for the sale of minerals. Rule 12A-1.070(4)(b), F.A.C., provides the basis for the inclusion of this payment as part of the taxable rent. It is, as is the minimum payment described above, given

by the Lessee for the general right or privilege to use or occupy the real property.

However, not included as a part of the taxable payment are the restoration or reclamation costs borne by Lessee as mandated in Article 13. The Department concludes that the duty to pay such costs is similar to the duty which commonly devolves on a tenant to restore leased property to the condition which obtained at the commencement of a lease. These costs, in general, have not been found by the Department to come within the reach of s. 212.031, Florida Statutes.

Lastly, the provision of Article 10. which burdens the Lessee for "... the full amount of royalty on the estimated Minerals lost ...." is a provision in the nature of liquidated damages and is not subject to sales or use tax.

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 Policy and Dispute Resolution

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