Did an annual tenant-improvement credit reduce taxable commercial rent when the lease did not require the tenant to make improvements?

Plain-English summary

Florida ruled that the annual tenant-improvement credit reduced the commercial rent subject to sales tax.

The office lease required monthly base rent of $22,842, subject to increases, plus additional rent for specified taxes, expenses, charges, and reimbursements. It also gave the tenant an annual improvement credit against monthly base rent regardless of whether the tenant actually made or paid for improvements.

Because improvements were not mandatory under the lease, the Department treated the credit as a straightforward reduction of base rent. The tenant could not separately deduct optional improvement costs, but the lease credit itself was excluded.

What this means for you

• An unconditional rent credit reduced the taxable payment when it did not reimburse required tenant work.
• Optional improvement spending did not create an additional deduction.
• The ruling's formula was base rent plus additional rent, less the stated improvement credit.

Common questions

Q: Did the tenant need to make improvements to receive the credit? A: No.

Q: Was the improvement credit taxable rent? A: No. It reduced the base rent paid.

Q: Could the tenant also subtract its own optional improvement costs? A: No. The Department allowed the contractual credit, not a separate deduction for optional costs.

Citations and references

• Fla. Stat. § 212.031(1)(c) — tax on commercial real-property rent
• Fla. Admin. Code r. 12A-1.070 — real property rentals and licenses
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-039

Original ruling text

Jul 30, 1996

Re: Technical Advisement Assistance 96A-039 Real Property Improvement Credit Section 212.031(1)(c), F.S. Rule 12A-1.070, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to your letter dated December 29, 1995, and your subsequent telephone conversation on or about April 8, 1996, wherein you assert that the documentation you have provided the Department in your letter dated December 29, 1995, satisfied the requirements for the issuance of a Technical Assistance Advisement as specified in Rule 12-11.003, Florida Administrative Code. The Department, while noting that a Letter of Technical Advice was issued in response to your letter, agrees that a Technical Assistance Advisement construing the same facts and documentation presented in your letter dated December 29, 1995, should also be issued.

In your letter you ask the Department whether, in accordance with a lease of real property, a copy of which you provided the Department, an improvement credit described in Paragraph 1.4(b) of the lease, which grants to the tenant such a credit without requiring the tenant to make such improvements, is part of the taxable rent.

You cite s. 212.031(1)(c), F.S., as the statutory provision which imposes sales or use tax on the privilege of engaging in the business of leasing, or granting a license to use, real property.

Considering the above cited lease provision, you opine that the improvement credit is not part of the taxable payment made by the lessee to the lessor in exchange for the lease of, or a license to use, the real property.

Department Response

The lease you provided the Department is styled Lease (herein Lease), and it provides that XXXX herein Lessor), has leased to XXXX (herein Lessee), what is described in Section 1.1 as the "... entire rentable area on the twentieth (20th) floor [of a certain building known as XXX, located in XXX]." Other rent provisions include those set forth in Paragraph 1.4(a), Section 1.5, Section 1.6, Section 1.8, Article V, and in Section 25.2 of the Lease.

The amount to be paid by Lessee to Lessor is described in Paragraph 1.4(a) as "Base Rent." This paragraph provides that the Base Rent shall be "... payable in equal monthly installments of $22,842.00 ...." Such rent in this contract provision is subject to certain increases as also provided in this paragraph.

In Section 1.5, Article V, and in Section 25.2. another payment required of the Lessee is described as "Additional Rent." This payment includes certain taxes, expenses, charges, and reimbursements to be paid by Lessee.

Paragraph 1.4(b) states in full that "[t]enant shall receive a tenant improvement credit each year (regardless of any amount it spends on tenant improvement, if any), which shall be credited against monthly Base Rent...."

In considering these contract provisions the Department concludes that the total rent subject to sales or use tax under provisions of s. 212.031(1)(c), F.S., and as this statute is interpreted in Rule 12A-1.070, F.A.C., does not include the tenant improvement credit provided in Paragraph 1.4(b) because such a credit operates as a reduction in the Base Rent to be paid by the Lessee. Lessee, for purposes of computing the imposition of sales or use tax, may not include any costs of improvements to the demised property, during the term of the lease, because such improvements are not mandated as a condition of the Lease.

Contract provisions which also apply to improvements to the demised premises are found in Section 3.1, Section 3.2, and in Section 3.3 of the Lease.

The total rent subject to sales or use tax is the aggregate of Base Rent, and Additional Rent, less the improvement credit.

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 Law Specialist
Tax Policy and Dispute Resolution

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