Was an intercompany development and management fee taxable as commercial rent because it was calculated from the cost of real property facilities?

Plain-English summary

Florida ruled that the intercompany development and management fee was not taxable commercial rent.

The parent paid its wholly owned subsidiary an annual fee equal to 1.75% of the cost of facilities the subsidiary owned, or 1.75% of the capitalized value of facilities it leased. The subsidiary acquired, designed, built, financed, leased, administered, and managed sales and service facilities.

The agreement did not give the parent any right to use, occupy, or control those properties, and the parent occupied none of them. It also stated that the payment was for development and management services.

Because section 212.031 taxed consideration for the privilege of using or occupying real property, the cost-based calculation did not make this service fee taxable rent.

What this means for you

• A fee tied to property value was not automatically rent.
• The absence of any use, occupancy, or control right was decisive.
• The written agreement's service description and the parties' actual non-occupancy facts both supported the result.

Common questions

Q: Did the 1.75% property-cost formula make the fee taxable?
A: No.

Q: Did the parent receive a right to occupy the facilities?
A: No.

Q: What did the fee pay for?
A: Facility development, acquisition, design, construction, financing, leasing administration, and management services.

Citations and references

• Fla. Stat. § 212.031(1)(a), (c) — tax on leasing or licensing real property
• Fla. Admin. Code r. 12A-1.070(4) — taxable consideration for real-property use or occupancy
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-037

Original ruling text

Jul 26, 1996

Re: Technical Assistance Advisement 96A-037
Sales and Use Tax - Development and Management Fee
s. 212.031(1)(a)(c), F.S., and Rule 12A-1.070(1), F.A.C.
Parties: XXXX (Herein "Corporation A")
XXXX (Herein "Corporation B")

Dear :

This response is in reply to your February 1, 1996, petition for
the Department's issuance of a Technical Assistance Advisement
("TAA") pursuant to s. 213.22, F.S. Your petition regards the
referenced matter and parties. 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 by this response issuing the
requested TAA.

DISCUSSION OF FACTS

Your petition imparts the following background information
relative to the issue under advisement herein:

[Corporation B] is a wholly owned subsidiary of
[Corporation A]. [Corporation B] has entered the InterCompany Agreement [the "Agreement"] pursuant to which
[Corporation A] makes payments to [Corporation B] for the
services rendered as described under Paragraph 2 of the
[Agreement]. Calculation of the amount of the amount of
payment to be made to [Corporation B] pursuant to Paragraph
2 of the [Agreement] is determined upon value of the
capitalized cost of the real property that is owned and
managed by [Corporation B]. The [Agreement] gives
[Corporation B] no right to occupy or use any property but
merely makes a payment of a percentage of the capitalized
cost of the real property owned and controlled by
[Corporation B] for management and development services.

The copy of the Agreement submitted in support of your petition
has been carefully examined. We consult the following relevant
portions of the Agreement for purposes of this ruling:

1. PURPOSE OF THE AGREEMENT.
   [Corporation A] agrees to pay to [Corporation B] certain
   fees for services rendered by [Corporation B] in developing
   land and building facilities, including acquisition,
   design, construction, financing and leasing services and
   the administration of such services, and for services
   rendered by [Corporation B] in managing land and building
   facilities in which [Corporation B] has a fee and/or
   leasehold interest. Such land and building facilities
   (hereinafter called "Facilities") are those intended to be
   used as sales and service facilities for a dealer in
   [Corporation A's] products.

2. DEVELOPMENT AND MANAGEMENT FEES.
   [Corporation A] shall pay to [Corporation B] development
   and management fees equal to one and three quarters percent
   (1-3/4%) per annum of the cost to [Corporation B] of the
   Facilities it acquires and holds; it being understood that
   (a) the cost to [Corporation B] of each property owned by
   [Corporation B] at the time [Corporation A] acquired the
   stock of [Corporation B] from... shall be deemed to mean
   the part of the cost to [Corporation A] of the stock of
   [Corporation B] attributable to such property, and (b) with
   respect to any Facilities in which [Corporation B] has only
   a leasehold interest, the capitalized value of the lease
   shall be considered to be eight and one-half (8-1/2) times
   [Corporation B's] annual rental obligation and the fee
   shall be one and three quarters percent (1-3/4%) per annum
   of such capitalized value. A pro rata portion of the
   annual fee shall be paid to [Corporation B] monthly.

The Agreement is absent of any provisions specifying that
payment of the "development and management fees" described in
Paragraph 2 of the Agreement serves to grant Corporation A a
right to use or control use of the Facilities as a rentee,
lessee, or licensee, thereof. Moreover, Corporation A does not

occupy any portion of the Facilities. Also, the Agreement is
silent as to the consequence resulting from nonpayment of the
"development and management fees." Pursuant to section 1 of the
Agreement, the "development and management fees" described in
section 2 of the Agreement are paid by Corporation A to
Corporation B in exchange for Corporation B providing
development and management services consisting of acquisition,
design, construction, financing and leasing services and the
administration of such services, as well as management of the
Facilities.

REQUESTED ADVISEMENT

You request that the Department rule on the issue whether the
"development and management fees" described in Paragraph 2 of
the Agreement are subject to sales or use tax under s. 212.031,
F.S., as consideration paid for the rental, lease, or license to
use real property.

DISCUSSION OF LAW

Section 212.031, F.S., provides in relevant part the following:

(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....
(Emphasis Supplied)

Additionally, Rule 12A-1.070(4), F.A.C., provides in relevant
part the following:

(4)(a) The tenant or person actually occupying, using, or
entitled to use any real property from which rental or
license fee is subject to taxation under s. 212.031,
F.S.,... shall pay the tax to his immediate landlord or
other person granting the right to such tenant or person to

occupy or use such real property.
(b) The tax shall be paid at the rate of... 6 percent 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.... (Emphasis Supplied)

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

Inasmuch as the Agreement does not contain any provisions which
expressly or implicitly specify that payment of the "development
and management fee", described in Paragraph 2 of the Agreement,
grants Corporation A the privilege of use, occupancy, or the
right to use of the Facilities, the facts fail to support that
such fee is consideration paid in exchange for the rental,
lease, letting, or license for use of the Facilities. This is
further supported by the fact that Corporation A does not occupy
any portion of the Facilities. Lastly, additional support is
given to this position by the fact that section 1 of the
Agreement specifies that the payment of the "development and
management fee" is in exchange for development and management
services consisting of acquisition, design, construction,
financing and leasing services and the administration of such
services, as well as management of the Facilities. Accordingly,
the totality of these factors causes a finding that the
"development and management fee" described in section 2 of the
Agreement is not subject to the sales or use tax levied under
the provisions of s. 212.031, F.S.

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
Tax Policy and Dispute Resolution

DW/
Control No. 24621