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

Ctrl. No. 24140