Which shopping-mall tenant charges were taxable as rent, and when could a separately billed electricity reimbursement be excluded?

Plain-English summary

Florida treated almost every listed shopping-mall tenant charge as taxable rent, with a narrow exclusion for qualifying electricity reimbursements.

The standard lease required fixed minimum rent, percentage rent, and numerous additional charges. The Department found taxable the common-area maintenance charge, real-estate tax charge, sprinkler charge, insurance charge, initial and recurring marketing charges, refuse charge, landlord-work charges, and reimbursements for water, gas, and telephone service.

Those payments were required for the right to use and occupy the premises and were designated as additional rent. The water, gas, and telephone amounts were approximate operating-cost reimbursements rather than true resales of separately identified services.

Electricity was different. An allocated electricity cost was not taxable rent if it was separately billed, the lessor had paid the tax on the tenant's electricity, the allocation used a reasonable method such as a submeter or square footage, and the tenant paid no more than the lessor's cost. Any amount above cost became taxable additional rent.

What this means for you

• Calling a charge maintenance, insurance, marketing, utilities, or reimbursement did not remove it from taxable rent.
• The lease's treatment of the charges as additional rent supported taxation.
• Electricity required separate billing, prior tax payment, reasonable allocation, and an at-cost-or-lower tenant charge.

Common questions

Q: Were common-area maintenance and property-tax charges taxable? A: Yes. They were part of the payment for use and occupancy of the mall space.

Q: Were water, gas, and telephone reimbursements taxable? A: Yes. The Department treated them as overhead recovered through rent.

Q: When was electricity excluded?
A: Only when separately billed under the ruling's tax-paid, reasonably allocated, and no-markup conditions. Any markup was taxable rent.

Citations and references

• Fla. Stat. § 212.031(1)(a), (c) — tax on the total rent charged for use or occupancy of real property
• Fla. Admin. Code r. 12A-1.070 — real property rentals and licenses
• Omni International of Miami v. Department of Banking and Finance, 444 So. 2d 540 (Fla. 3d DCA 1984) — electricity allocation cited by the Department
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-042

Original ruling text

Aug 12, 1996

Re: TAA 96A-042
Taxable Elements of a Shopping Mall Lease Section 212.031(1)(a), and (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 April 15, 1996, wherein you asked whether certain enumerated charges which are paid by the tenants of a shopping mall in accordance with real property leases of space within such mall which is owned and operated by XXXX (herein Lessor), are subject to sales or use tax. You provided the Department with a copy of what you described as a "standard lease" (herein Lease), executed by Lessor and various tenants of the shopping mall.

The Lease provides in Article 6 that each tenant is obligated to pay to Lessor what is described as a "Fixed Minimum Rent." In addition, each tenant is obligated under Article 7. to pay a "Percentage Rent" computed on the gross sales of each tenant. The Lease also provides that the tenant pay other charges in addition to the Fixed Minimum Rent, and the Percentage Rent. These other charges are described in various articles of the Lease. You ask whether any of these charges, including the Fixed Minimum Rent and the Percentage Rent, escape the imposition of sales or use tax.

The several enumerated charges, described in various articles of the Lease, and about which you ask, are presented as follows. The order you gave in your letter to these charges has been altered. Further, the style of some of the charges has also been changed to conform to the designation, or general description as in the instance of the tenant's share of insurance premiums.

These charges are:

Fixed Minimum Rent

Percentage Rent
Tenant's Common Area Maintenance Charge
Tax Charge (Real Estate Charge)
Sprinkler Charge
Insurance premium charge (Insurance Charge) Initial Marketing Charge Marketing Charge Refuse Charge Exhibit 2 Charges Utilities water gas telephone electricity

As to these charges you opine that the only charge which may be exempt from sales or use tax is that of electricity.

Department Response

Section 212.031(1)(a), F.S., imposes the tax on the privilege of leasing or licensing the use of real property. Section 212.031(1)(c), F.S., specifies that the tax shall be computed "... on the total rent or license fee charged for real property by the person charging or collecting the rental or license fee." This statutory provision also provides that the tax is levied on the payments given in exchange for the grant "... of a privilege to use or occupy real property for any purpose and shall include base rent, percentage rents, or similar charges." Rule 12A-1.070, F.A.C., interprets these statutory provisions.

Thus, Florida law imposes sales or use tax, by operation of s. 212.031, F.S., on the total rent or license payment when such payment is given for the right to use or occupy real property for any purpose. Applying these statutory provisions to the enumerated charges depicted above, the payments made by the tenant styled Fixed Minimum Rent, and Percentage Rent are determined to be subject to sales or use tax.

The enumerated charge styled Tenant's Common Area Maintenance Charge, is described in Article 34(a), as imposing the duty on each

tenant to pay "... a share of the Operating Costs of the common areas of the Shopping Center." The term Operating Costs is defined to include a variety of operating costs which is broadly meant to embrace "... the total costs and expenses incurred in operating, maintaining, and repairing the common areas and facilities...." The tenant's share of these costs is determined, in Article 34(b), by an arithmetic relationship between the square footage leased by each tenant and the Operating Costs.

Article 33 grants to each tenant "... a license... to use the common areas..." which are those areas further defined in the article as spaces over which the Lessor has exclusive control and management. Article 43 provides rights to the Lessor upon default, for failure of the tenant to "... pay, when due, any rental, charge or other sum payable hereunder...." In the event of default provisions of Article 43(b) grant to the Lessor the right to either terminate the lease and terminate the tenant's right to occupy the premises, or to continue the lease in the event of the abandonment of the premises by the tenant.

Further, Article 12(a) provides that "[i]n addition to the Fixed Minimum Rent and Percentage Rent, all other payments to be made by Tenant hereunder shall be deemed for the purposes of securing collection to be Additional Rent...."

Consequently, by the operation of the cited statutory and Lease provisions, the amount paid by tenant designated as Tenant's Common Area Maintenance Charge is an element of the taxable lease payment made by the tenant and is subject to the tax under s. 212.031, Florida Statutes.

Similarly, the Tax Charge (you style the payment as a Real Estate Charge), as assessed under Article 32; the Sprinkler Charge as described in Article 31(d); the insurance premium charge (you style this payment as an Insurance Charge), as described in Article 39(b); the Initial Marketing Assessment Charge, a one-time fee paid by the tenant as described in Article 1(v); the Marketing Charge, which is a predetermined amount as stated in Article 1(u); the Refuse Charge as specified in Exhibit C, paragraph (b), which is based on a "... reasonable estimate of the amount of refuse and garbage generated and the frequency or use by [the tenant]"; and all the charges you

style as Exhibit 2 Charges, which are to be paid by the tenant as required in Exhibit B, Article III under the legend Description of Landlord's Work, are subject to sales tax as elements of the lease payment required for the use and occupancy of the real property. Again, it is noted that all these charges under the provisions of Article 12(a) are designated as Additional Rent.

The remaining charges to be paid by the tenant under the Lease are grouped under the legend Utilities, and include the billing of the tenant by the Lessor as to water, gas, telephone and electricity services. With the exception of the charge for electricity as discussed in a following paragraph, all the charges for water, gas, and telephone are taxable elements of the payment required under the Lease and are subject to the tax as imposed by s. 212.031, Florida Statutes. The tax applies to these charges because the charges are not made in the nature of a sale of such services to the tenant, but as a mere recitation of overhead items which must be recovered by the Lessor through reimbursement by the tenant.

Thus, in none of these charges are the specific components of the billing to the Lessor by the utility vendors replicated in the Lessor's billing to the tenants. Rather, the reimbursement to the Lessor is an approximate amount of cost recovery by the Lessor of the actual cost of the utilities which was borne by the Lessor. In such a method of billing, the identity of the individual items is lost and the billing becomes a method of simple reimbursement of certain operating costs to the Lessor.

By operation of the cited statutory provisions, and the Lease stipulation that these charges shall be paid by the tenant as additional rent, the conclusion is reached that these payments, as all of the other previously discussed charges, are made by the tenant in exchange for the right to use and occupy the leased premises. Consequently, these charges are part of the total lease payment subject to sales or use tax.

However, the charge for electricity is not part of the total lease payment subject to sales or use tax. You described the premises as serviced by a common meter. Presumably, the Lessor negotiates with the utility provider for the electric service. The Lessor pays the utility provider for the cost of the electricity, and then by some

allocative method apportions the electricity cost to the tenants. In such a circumstance the apportioned cost borne by the tenants is not an element of the total lease payment subject to sales or use tax.

Electricity billed the tenant is not taxable as an element of the lease payment irrespective whether such cost is designated as a portion of the rent, or, for example, as part of an otherwise taxable common area maintenance charge, provided the cost of the electricity is separately billed to the tenant, that the sales tax on the electricity consumed by the tenant, as determined either by a submeter, square footage or lumens apportionment, or other estimate, has been paid by the Lessor, and further provided that the cost of the electricity billed the tenant is at the same or lower price as that billed the Lessor by the utility provider. See, Omni International of Miami v. Department of Banking and Finance, 444 So.2d 540 (Fla. 3DCA 1984).

Should the Lessor bill the tenant more than the cost of the electricity to the Lessor, the excess shall be considered as additional rent and subject to tax as imposed by s. 212.031, Florida Statutes.

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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