Did a lessee owe sales tax on the shortfall between its master-lease rent and the lower rent collected from a subtenant?

Plain-English summary

The Florida Department of Revenue concluded that the lessee had to pay sales tax on the difference between its master-lease rent and the lower rent paid by its subtenant. The lessee remained contractually bound for the full lease payment even though it no longer used the property.

The master lease required monthly rent of $48,227.26 and tax of $3,134.77. The subtenant paid $37,500 in rent and $2,437.50 in tax, while the lessee paid the $10,727.26 rent shortfall and $697.27 in tax. Together, the two tax payments equaled the tax due on the full master-lease rent.

Florida's anti-pyramiding rule prevented collecting tax twice on the same rental amount, but it also prohibited reducing the state's tax through a progression of lease and sublease transactions. Because the subtenant and lessee each paid tax only on their respective portions, the Department found no pyramiding and denied the requested $2,091.81 refund.

What this means for you

Commercial lessees that sublease

Subleasing for less than the master rent did not erase the tax on the unpaid difference when the original lessee remained liable for it.

Landlords

The total tax collected across the subtenant and lessee had to equal the tax on the full rent required by the master lease.

Accountants and tax professionals

Track the master obligation, subtenant payment, shortfall, and tax on each component. The ruling analyzed whether the total tax was duplicated or reduced, not simply how many parties made payments.

Common questions

Q: Why was tax due after the lessee stopped using the property?
A: The lessee remained bound by the master lease and still had to pay the rent difference.

Q: Did taxing the subtenant's rent and the lessee's shortfall pyramid the tax?
A: No. Each portion was taxed once, and together they equaled the tax on the full master-lease payment.

Q: Was the lessee entitled to the requested refund?
A: No. The Department said no refund was due under these facts.

Q: How would a lessee pursue an erroneous-rent-tax refund generally?
A: The ruling said the lessee should seek reimbursement from the landlord; after reimbursing the lessee, the landlord could pursue the Department claim.

Citations and references

• Fla. Stat. § 212.031(1)(c) — tax on total rent charged for real property
• Fla. Stat. § 212.031(2)(b) — no pyramiding and no reduction of tax through successive transactions
• Fla. Admin. Code r. 12A-1.070 — real-property rentals
• Fla. Stat. §§ 212.054 and 212.055 — county discretionary sales surtax cited for the additional one-half percent
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-065

Original ruling text

Dec 23, 1996

Re: Technical Assistance Advisement 96(A)-065
Inverse Pyramiding - Lease and Sublease of Real Property
Section 212.031(1)(c), and (2)(b), F.S.
Rule 12A-1.070, F.A.C.
XXXX (Lessee)
XXXX (Sublessee)
XXXX (Landlord A)
XXXX (Landlord B)

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated October 4, 1996, wherein you ask whether
Lessee has a legal duty to remit sales tax to the State on the
difference between the lease payment made under a real property
lease by Lessee, and the lease payment made by Sublessee. You
identify Landlord A, on page 2 of your letter, as selling or
assigning, sometime during the lease term its interest in the
real property to Landlord B. You provided the Department with
copies of the lease between Landlord A and Lessee, and the
sublease agreement between Lessee and Sublessee.

You state on the first page of your letter that Lessee entered
into the lease on April 30, 1991, and from approximately that
date through July 1, 1996, remitted to Landlord A the monthly
payments of $48,227.26, as to which Lessee also remitted to
Landlord A $3,134.77 in sales tax. You provide the information,
on page 2, that on May 29, 1996, Lessee entered into a sublease
agreement with Sublessee for a term from May 15, 1996 to July
31, 1999, with two, one-year options.

You also assert, on page 2, that Lessee "... is still liable for
the difference between its lease rate under the Lease and the
sublease rate under the Sublease Agreement." However, you state
that Lessee "... retains no interest in this property and has
had no use of this property since July 1, 1996."

You reveal that, pursuant to the sublease, Sublessee, pays
$37,500 monthly rent and forwards this sum and the applicable
sales tax thereon of $2,437.50 to Lessee who sends both payments
to Landlord A. Then, you describe on page 2, that Lessee "...
forwards to the Landlord A additional sums to cover the
difference between the lease rate charged to Lessee and the
sublease rate being paid by [Sublessee]."

The amount of this difference you compute as $10,727.26. On
page 3 you compute the sales tax on this monthly difference as
$697.27 which you assert has been paid by Lessee to Landlord A
for each of three consecutive months ending August 1, 1996.

Considering these facts, you seek a determination whether Lessee
is obligated to pay the sales tax on the difference between the
rent required under the two lease agreements.

You contend on page 3 that "[r]equiring sales tax on the
difference between the two lease rates would essentially pyramid
the transactions and result in double sales taxation on the
property." You cite as support for your position the provisions
of both s. 212.031(2)(b), F.S., and the applicable
administrative rule. You also cite three previous Department
communications on this issue.

You add that Lessee "... requests a refund of $2,091.81
representing the sales tax computed on the rental difference
paid to the Landlord A, by Lessee, on August 1, 1996, September
1, 1996, and October 1, 1996."

Department Response

Section 212.031(1)(c), F.S., imposes sales tax on the privilege
of engaging in the business of leasing, or granting a license
for the use of, real property and the tax is applied to the "...
total rent or license fee charged for such real property by the
person charging or collecting the rental or license fee."
Considering the facts you present, Lessee collects the
applicable rent and sales tax on such rent from Sublessee
pursuant to the sublease agreement between the two parties.

Lessee then remits these monies to Landlord A together with the
lease payment difference and the applicable sales tax on such
difference. The remittance of the rent difference by Lessee is
not some gratuitous transfer but is required of the Lessee by
the rent terms in the lease agreement to which Lessee remains
bound.

You contend the remittance of the sales tax by Lessee on the
rent difference between the lease and the sublease results in a
pyramiding of the tax which is prohibited by s. 212.031(2)(b),
F.S., which states in part that "... only one tax be collected
on the rental or license fee... [and] that the tax so collected
shall not be pyramided by a progression of transactions...."

While the Department agrees that this cited text forbids the
collection of more than one tax on the demised or licensed
property so that, considering the instant facts, Lessee and
Sublessee shall not be liable for the applicable sales tax on
each of their respective payments, the Department disclaims the
applicability of this statutory provision to the payment made by
Lessee, which is only in the amount of the difference between
the two agreements. Thus, there is no pyramiding of the tax
because the amount of the tax is only the total of the tax which
is imposed on the amount of the payment required of the Lessee,
the larger portion of which is paid by Sublessee, and the
remaining part is paid by Lessee.

The additional sales tax remitted by the Lessee on the rent
difference is required by the remaining language of the above
cited statute which reads "... that the amount of the tax due
the state shall not be decreased by any such progression of
transactions." The implementation of this provision requires the
tax to be paid on the entire amount of the lease payment
mandated in the lease between Lessee and Landlord A.

The sales tax on such payment, as you provide on page 2. of your
letter, is in the amount of $3,134.77. The sales tax required
of the Sublessee is, as you state on page 2., in the amount of
$2,437.50. The additional sales tax then paid by Lessee on the
rent difference is $697.27 which when added to the tax on the

rent payment made by Sublessee of $2,437.50 equals the sales tax
required to be paid under the agreement between Lessee and
Landlord A of $3,134.77.

Consequently, the total sales tax remitted to the Department is
not decreased by the progression of transactions represented by
the lease and sublease agreements, which decrease is prohibited
by s. 212.031(2)(b), Florida Statutes. Neither have the
transactions resulted in a pyramiding of the tax as you contend.

In sum, the State has received the tax which is mandated by the
statute.

Note is made that the sales tax rate applicable to the figures
you provide is 6.5 percent. The State sales tax rate on the
privilege of renting or licensing the use of real property is 6
percent as established in s. 212.031(1)(c), Florida Statutes.
Thus, an assumption is made that included in the "sales tax"
computation is one-half percent attributable to the applicable
county discretionary sales surtax as provided in ss. 212.054 and
212.055, Florida Statutes.

Further, while asserting that no refund would be due considering
the instant facts, and merely as an explanatory addendum, note
is made that a refund of tax sought by a lessee of real property
should be pursued by such lessee against the landlord rather
than the Department. Following evidence that the lessor had
reimbursed the lessee for any erroneous tax, a refund claim
addressed to the Department by the lessor would then be
appropriate.

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

Ctrl. No. 26793