Could a rental-car company allocate an 8% on-premises commission between taxable counter space and nontaxable brand and reservation rights?

Subject

Reasonable Allocation of Consideration Paid for a Lease of Real Property

Plain-English summary

The Department accepted the taxpayer's proposed allocation of the 8% on-premises commission: 5.8 percentage points were nontaxable, and 2.2 percentage points were taxable as consideration for using real property. The rental-car company operated under a retailer's name and used its trademarks, logos, reservation system, credit-card services, and related support.

For off-premises rentals, where the rental company used its own or leased facility, it paid the retailer 5.8% of net sales for the brand and related rights and services. At counters on the retailer's property, the stated commission increased to 8% of net sales up to the contractual quarterly threshold.

Florida taxed payments for the privilege of using real property but excluded payments for intrinsically valuable personal property such as trademarks, service marks, logos, franchises, and patents. When one agreement covered both, the statute required a reasonable allocation.

Although the agreement did not expressly label the 5.8% and 2.2% components, the Department found the off-premises price provided a reasonable arm's-length measure of the brand and service rights. It therefore treated 5.8% as nontaxable and the additional 2.2% charged for on-premises operation as taxable. A separate fair-market-rent appraisal was unnecessary on the stated facts.

What this means for you

Percentage payments under a mixed license agreement were not automatically all rent. A supported allocation could separate taxable real-property use from nontaxable trademark and service rights.

The Department advised future contracts to state the allocation expressly, but warned that even a written allocation would still be reviewed for reasonableness. Taxpayers also had to keep records adequate to prove the taxable and nontaxable portions.

Common questions

Q: Why was the 5.8% component nontaxable? It matched the commission charged when the company used the retailer's brand and related services without using the retailer's real property.

Q: Why was the additional 2.2% taxable? It appeared only when the rental-car counter operated on the retailer's premises and therefore represented the real-property privilege.

Q: Did the agreement itself expressly assign those percentages? No. The Department inferred the allocation from the different off-premises and on-premises pricing and found it reasonable.

Q: Should future mixed agreements state separate amounts? Yes. The Department recommended specific allocation for clarity, subject to a reasonableness review.

Citations and references

• Fla. Stat. § 212.031(1)(c) — tax on real-property rent and license fees, exclusion for intrinsically valuable personal property, and reasonable allocation
• Fla. Stat. § 212.02(10)(i) — license to use or occupy real property
• Fla. Admin. Code R. 12A-1.070 — real-property rentals, leases, and licenses
• Fla. Stat. §§ 212.13(2), 212.12(6), and 213.35 — records sufficient to establish tax treatment
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-052

Original ruling text

Mar 25, 1997

Re: Technical Assistance Advisement 96A-052 Reasonable Allocation of Consideration Paid for a Lease of Real Property Sections 212.031, 212.02, F.S. Rule 12A-1.070, F.A.C.

Dear :

This response is in reply to your letter dated July 8, 1996, where you ask the Department, on behalf of your client, XXXX (Taxpayer), to identify taxable and nontaxable payments made under its license agreement with XXX (Corporation), a XXX Corporation. This reply constitutes a Technical Assistance Advisement ("TAA") pursuant to s. 213.22, F.S.

STATED FACTS

Taxpayer is a rental car company which does business under its own name. Corporation is a retail store. Taxpayer and Corporation have entered into a license Agreement ("the Agreement"). Pursuant to the Agreement, Taxpayer operates its business using Corporation's name, logos and trademarks, as well as the ability to benefit from Corporation's reservation, credit card and related services, in the course of operating a rental car business, which is held out to the public as the Corporation's rental car company.

For the use of Corporation's name, logos and trademarks, and the associated benefits, Taxpayer pays Corporation a specified percentage of net sales. To illustrate, section 7(b) of the Agreement provides:

For rentals to Off Premises [Corporation] customers, Licensee shall pay to [Corporation] Commission which shall be equal to five and eight tenths percent (5.8%) of net sales.

Additionally, section 7(a) of the License Agreement provides:

For rentals to On Premises [Corporation] customers and On Premises Licensee Customers, Licensee for each On Premise Licensed Business Location shall pay to [Corporation] Commission which shall be equal to eight percent (8%) of net sales up to one hundred fifty thousand dollars ($150,000) per quarter based upon [Corporation's] fiscal year and six percent (6%) of net sales in excess of one hundred fifty thousand dollars ($150,000) in the same quarter per On Premise Licensed Business Location.

Section 212.031, F.S., as amended in 1995 by section 2 of Chapter 95-391, L.O.F., establishes a tax on the privilege of leasing, letting or granting a license to use real property, and provides: (1)(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 free for such real property by the person charging or collecting the rental or license fee. The total rental or license fee charged for such real property shall include payments for the granting of a privilege to use or occupy real property for any purpose and shall include base rent, percentage rents, or similar charges. Such charges shall be included in the total rent or license fee subject to tax under this section whether or not they can be attributed to the ability of the lessor's or licensor's property as used or operated to attract customers. Payments for intrinsically valuable personal property such as franchises, trademarks, service marks, logos, or patents are not subject to tax under this section. In the case of a contractual arrangement that provides for both payments taxable as total rent or license fee and payments not subject to tax, the tax shall be based on a reasonable allocation of such payments and shall not apply to that portion which is for the nontaxable payments. (E.S.)

In light of the 1995 statutory amendment to s. 212.031, F.S., and the different consideration paid to Corporation for "on premises" and "off premises" customers, you are requesting technical advice regarding the Department's application of the new statutory language as it relates to the allocation of the consideration paid by Taxpayer to Corporation for the taxable right to use real property and the non-taxable privilege to use "intrinsically valuable"

property.

TAXPAYER'S POSITION

You state that the use of Corporation's name, logo and trademarks serves to create the impression that when a customer rents a vehicle pursuant to this arrangement, the customer would believe that it was doing business with Corporation, not Taxpayer.

In further describing the Agreement between Taxpayer and Corporation, you state that the Agreement provides that Taxpayer will pay Corporation different amounts for various aspects of the business arrangement; and, only a portion of what Taxpayer pays to Corporation, you contend, is related to the actual use of Corporation's real property. In support of that proposition you refer to sections 7(a) and 7(b) of the Agreement.

You state that section 7(a) of the Agreement, supra, requires that where Taxpayer in addition to its use of Corporation's trademarks, logos and reservation or credit card services, is permitted to use the real property of Corporation from which to conduct business, Taxpayer pays Corporation an additional 2.2% commission for a total of 8%.

Further, you contend that section 7(b) of the Agreement, supra, provides that where Taxpayer conducts business using the trademarks, logos and/or reservation or related services of Corporation at a facility owned or leased by Taxpayer, it pays a commission of 5.8% of "net sales" for its licensed use of the trademarks, logos and reservation or related services of Corporation.

In light of the different payment requirements resulting from the "on premises" and "off premises" car rentals, you conclude that the arms-length contractual agreement between the parties simply evinces the value inherent in Taxpayer's use of Corporation's name and credit facilities.

Further, you state that under the 1995 legislative amendment to s. 212.031. F.S., supra, you indicate the payments made by Taxpayer to Corporation would not be subject to sales tax, with respect to the 5.8% commission paid to Corporation for transactions that occur off

Corporation's premises. You assert that the 5.8% commission is paid strictly for the license to use Corporation's trademarks, logos and reservation or related services; and, you contend that with respect to the 8% commission paid on transactions that occur from counters operated by Taxpayer on Corporation's premises, an argument could be made that part of the license fee constitutes payment for Taxpayer's use of Corporation's real property. Therefore, the application of the 1995 statutory amendment, once the parties make a "reasonable allocation" of the 8% fee - allocating part as payment for use of the licensor's trademarks, logos and services, and part as payment for the use of the Corporation's real property - would result in only a portion of the 8% fee (i.e., the 2.2%) constituting payment for a lease or license to use the Corporation's real property.

In reaching the above conclusion, you explain that as it relates to the reasonableness of the allocation of the total payment between the portion that is paid for the use of real property and the portion that is paid for other "intrinsically valuable" property, there are two feasible methods. The first would have been to value the real property, using a fair market rent analysis for each location on Corporation's property at which Corporation operates a rental car counter. Tax would then be collected solely on the portion of the commission estimated as fair market rent. All commissions over and above the appraiser's estimate of fair market rent would then be allocated to use of Corporation's trademarks, logos and reservation or related services.

The second alternative you propose is to value the use of the trademarks, logos and reservation or related services first. In this case, you assert that the use of the Corporation's trademarks, franchises, reservation and other related services has a discrete value that is clearly identified by reference to the 5.8% charge for use of those items alone. Employing this second alternative, the 5.8% of the 8% commission would need to be allocated to the use of the patents, trademarks and services of Corporation, and 2.2% of the commission would be allocated to the use of Corporation's real property.

Taxpayer in this case is proposing to use the second alternative to avoid the additional cost and administrative burden that would be incurred if the first method were to be employed.

ISSUE

Whether the allocation method which would first value the use of the trademarks, franchises, logos and reservation or related services, which have a discrete value, and then allocate the remainder of the commission as being paid by Taxpayer for the use of Corporation's real property, is a reasonable interpretation of s. 212.031, F.S., as amended by section 2 of Chapter 95-391, L.O.F.?

THE DEPARTMENT'S RESPONSE AND DETERMINATION

Statutory Provisions

Section 212.02(10), F.S., provides as follows:

(i) `License,' as used in this chapter with reference to the use of real property, means the granting of a privilege to use of occupy a building or a parcel of real property for any purpose.

Section 212.031, F.S., as amended in 1995 by section 2 of Chapter 95-391, L.O.F., above, establishes a tax on the privilege of leasing, letting or granting a license to use real property. The "reasonable allocation" language, in that section, must be read as a whole, in conjunction with the "intrinsically valuable personal property such as franchises, trademarks, servicemarks, logos, or patents" language provided above it.

Therefore, the "allocation" provided in the statute applies only to intrinsically valuable personal property involved in the license.

Provisions from the Agreement

Section 1 of the License Agreement states:

LICENSE

1. (a) [Taxpayer] is in the business described in this
   paragraph, and has expertise in that business and has a marketing plan for that business. [Corporation] hereby grants

[Taxpayer] the exclusive privilege of conducting and operating, and [Taxpayer] shall conduct and operate, pursuant to the terms, provisions and conditions contained this Agreement, a licensed business for the rental of motor vehicles ..., in connection with the locations designated in Location Riders executed from time to time during the term of this Agreement
...

Section 8 of the License Agreement states:

USE OF RETAILER'S NAME

8. (a) [Taxpayer] shall operate the Licensed Business under the
   name of [Corporation] Rent-A-Car, [Corporation] Rent-A-Truck, or [Corporation] Car and Truck Rental. [Taxpayer] shall use the name of [Corporation] only in connection with the operation of the Licensed Business. [Taxpayer] shall not begin any business activity under this Agreement without [Corporation's] prior written approval of any and all names, other than the name "[Taxpayer]" or "[Taxpayer] Car/Truck" that [Taxpayer] intends to use in conjunction with the Licensed Business.

(b) [Taxpayer] shall only use the name of [Corporation], or any
[Corporation] trademark, service mark or trade name (Corporation Mark), when communicating with customer or potential customer or the Licensed Business. [Taxpayer] shall not use [Corporation's] Marks either orally or in writing, including, but not limited to, use of any letterhead, checks, business cards, or contracts, when communicating with persons or entities other than customer or potential customer of the Licensed Business. All such communications shall be done solely in [Taxpayer's] own name. In each [Taxpayer] location in which an Off Premise Location is operated, an interior or exterior sign containing the words "[Corporation] Rent-A-Car" or "[Corporation] Car & Truck Rental" Shall be displayed.

Likewise, subsections (c) through (j) specifically relate the manner in which Taxpayer shall use Corporation's Marks. Section 9 of the Agreement further details the conditions that must be met in order for Taxpayer to use Corporation's name on vehicles.

Analysis

Corporation has granted Taxpayer the privilege of using real property to conduct and operate Taxpayer's business, and this constitutes a license to use real property under s. 212.02(1), F.S. The license to use real property is taxable pursuant to s. 212.031, F.S.; therefore, the consideration paid by [Taxpayer] to Corporation for such privilege is taxable.

However, in addition to granting Taxpayer the taxable privilege of leasing and/or licensing real property, this agreement also grants the non-taxable privilege of using Corporation's "intrinsically valuable (intangible) property." Hence, pursuant to s. 212.031(1)(c), F.S., the fees paid for use of trademarks and logos are not subject to sales tax if such payments are not given for the privilege to use real property, because such payments would be consideration for "intrinsically valuable personal property." In fact, s. 212.031(1)(c), F.S., requires a "reasonable allocation" of the consideration paid "[i]n the case of a contractual arrangement that provides for both payments taxable as total rent or license fee and payments not subject to tax, [in order that] the tax shall be based on a reasonable allocation of such payments and shall not apply to that portion which is for the nontaxable payments."

Where a lease or license agreement also provides for the payment for intrinsically valuable personal property, the payments should be specifically identified as separate and specific amounts, and the tax is based on a reasonable allocation between the taxable consideration paid for the use of the real property, and the nontaxable consideration paid for the intrinsically valuable property. In the instant case, however, the Agreement does not separately identify the consideration paid for the privilege to use Corporation's real property and the license to use Corporation's trademarks, franchises, logos and reservation or related services.

Having examined this provision of the Agreement, the Department notes that no reference is made in the Agreement which specifically indicates that the 5.8% portion of the commission is being paid for the license to use the trademarks, franchises, logos and reservation or related services. In fact, there is no specific language which would connect the fees paid to Corporation as being exclusively for

the right to use its trademarks, franchises, logos and reservation or related services. Additionally, the Department notes that under the heading entitled "USE OF [CORPORATION] NAME," which describes the prescribed use of the Corporation's name, trademark, service mark or trade name, no reference is made to any portion of the commission which would have a discrete value (or a value which could otherwise be determined by calculation), and which could be construed as being paid for the use of the "intrinsically valuable property." it is clear that Corporation has transferred to Taxpayer the right to use Corporation's name, trademark, service mark or trade name, which is intrinsically valuable property, and which is not subject to sales and use tax. While the parties have made no direct allocation of the commission paid under the Agreement to distinguish or otherwise express that a portion of the consideration being paid for the right to use the trademarks, franchises, logos and reservation or related services, section 212.031(1)(c), F.S., specifically excludes most of these items from the tax.

In determining a reasonable allocation of the commission paid for the right to use Corporation's trademarks, franchises, logos and reservation or related services, the Department notes that when no real property is used by Taxpayer, Corporation is paid 5.8% for the use of these rights and services; whereas, when Corporation's real property is used, Corporation is paid an additional 2.2%. It is reasonable to assume that the 5.8% paid by Taxpayer to Corporation is paid for the use of Corporation's trademarks, franchises, logos and reservation or related services.

The Department agrees that the discrete charges identified in the agreement provide a sufficient basis for allocating the taxable and nontaxable portions of the payments, with the 5.8% component of the commission treated as a nontaxable payment for the use of intrinsically valuable intangibles and the corporation's reservation credit card and related services. We note that there are no indicators present that this apparent arms length pricing of the separate components is unreasonable. Therefore, it would be unnecessary to value the real property using a fair market rent analysis.

To conclude, the Department must advise that in the future, for the sake of clarity and simplicity, the parties should, in accordance

with the observations made in this analysis, specifically allocate the consideration paid by Taxpayer to Corporation, because more than one privilege (i.e., the taxable privilege to use real property, and the non-taxable privilege to use Corporation's intangible personal property) is being contracted. Even an express allocation, however, would be examined for reasonableness.

RECORD KEEPING

According to Florida law, every taxpayer has the legal obligation to maintain adequate books and records.

Section 212.13(2), F.S., provides in part:

(2) Each dealer, as defined in this chapter, shall secure, maintain, and keep as long as required by s. 213.35 a complete record of tangible personal property or services received, used, sold at retail, distributed or stored, leased or rented by said dealer, together with invoices, bills of lading, gross receipts from such sales, and other pertinent records and papers as may be required by the department for the reasonable administration of this chapter; all such records which are located or maintained in this state shall be open for inspection by the department at all reasonable hours at such dealer's store, sales office, general office, warehouse, or place of business located in this state.... Any dealer subject to the provisions of this chapter who violates these provisions is guilty of a misdemeanor of the first degree, punishable as provided in s. 775.082 or s. 775.083. (E.S.)

Section 213.35, F.S., provides, in part:

Each person required by law to perform any act in the administration of any tax enumerated in s. 72.011 shall keep suitable books and records relating to that tax, such as invoices, bills of lading, and other pertinent records and papers, and shall preserve such books and records until expiration of the time within which the department may make an assessment with respect to that tax pursuant to s. 95.091(3). (E.S.)

Section 212.12(6), F.S., expressly provides, in part:

(6)(a) ... It shall be the duty of every person required to make a report and pay any tax under this chapter,... to keep and preserve suitable records of the sales, leases, rentals, license fees, admissions, or purchases, as the case may be, taxable under this chapter; such other books of account as may be necessary to determine the amount of the tax due hereunder; and other information as may be required by the department.... (E.S.)

As clearly provided by the above law, here, Taxpayer must maintain records adequate to establish the taxable or nontaxable status of its transactions.

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.

Should you have any further questions concerning this matter, please do not hesitate to contact me.

Sincerely,

Eric A. de Moya, Esq.
Tax Law Specialist
Technical Assistance and Dispute Resolution (904) 922-4714

NOTICE UNDER THE AMERICANS WITH DISABILITIES ACT

Persons needing an accommodation to participate in any proceeding before the Department of Revenue, should contact the Department at (904)488-0717 (voice), or 1-800-DOR-8331 (TDD), at least five working days before such proceeding. You may also call via the Florida Relay System at 1-800-955-8770.

Control No. 25985