Which shopping-center electricity charges were excluded from taxable rent, and which remained taxable?

Plain-English summary

The Florida Department of Revenue separated three shopping-center charges for sales-tax purposes. A separately stated tenant-light-and-power component was not taxable rent because the landlord paid sales tax to the utility, billed the electricity separately, and passed it through at the same or a lower price without profit or markup.

The tenant's HVAC energy charge was taxable because it included operation, maintenance, repair, and consultant costs along with energy. The common-area charge was also taxable because electricity was combined with other operating costs rather than separately stated. Both therefore failed the utility exception in Rule 12A-1.070(4)(e).

Passing through the tenant's proportionate share of the sales tax already charged by the utility did not count as a markup. If the landlord also collected rental sales tax on qualifying separately stated electricity and remitted it to the state, the ruling said the refund was owed to the landlord under the submitted facts. The Department found no tenant refund on those facts, although a landlord could assign refund rights if a tenant had such rights under different facts.

What this means for you

Shopping-center landlords

Keep qualifying tenant electricity separate from HVAC, maintenance, repair, consultant, and common-area operating costs. Commingling the charges made the full item taxable rent here.

Commercial tenants

A separately stated utility reimbursement could be excluded even though the lease called it additional rent. Electricity embedded in broader HVAC or CAM charges remained taxable.

Accountants and tax professionals

Apply all three conditions: the landlord paid sales tax to the utility, the tenant charge was separately stated, and the tenant paid the same or a lower price. The apportioned utility tax itself was not a markup.

Common questions

Q: Was the separately billed tenant electricity taxable?
A: No. The tenant electric component met all three requirements of the utility pass-through rule.

Q: Were HVAC energy and common-area electricity charges taxable?
A: Yes. They included non-electricity costs or combined electricity with broader operating expenses, so electricity was not separately stated.

Q: Did passing through the utility's sales tax create a markup?
A: No. The ruling treated the tenant's apportioned share of the state-imposed utility tax as part of the at-cost reimbursement, not a landlord markup.

Q: Who was entitled to a refund of duplicate tax under the submitted facts?
A: The landlord, assuming it had remitted to the state the rental sales tax collected on the qualifying electricity charge.

Citations and references

• Fla. Stat. § 212.031(1)(c) — sales tax on total rent or license fees for real property
• Fla. Admin. Code r. 12A-1.070(4)(e) and (e)1. — conditions and example for excluding tenant utility reimbursements from taxable rent
• Omni International of Miami, Ltd. v. Department of Banking and Finance, 444 So. 2d 540 (Fla. 3d DCA 1984) — cited on duplicate electricity-tax payments and the landlord's refund
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-067

Original ruling text

Dec 26, 1996

Technical Assistance Advisement - 96(A)-067
Electricity Charges as Part of Taxable Rent for Real
Property
XXXX (Landlord)
XXXX (Tenant)
Section 212.031(1)(c), F.S.
Rule 12A-1.070(4)(e), and (4)(e)1., F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated July 30, 1996, wherein you asked five
questions relative to sales tax on electricity charged tenants
by landlords of shopping centers as a part of the taxable rent
of real property under s. 212.031, Florida Statutes. The real
property leases running between the landlords and the tenants
designate the electricity and the other various charges as
"additional rental."

You pose these questions in behalf of seven entities each of
which either owns or operates a shopping center in Florida.

You attached to your letter several lease documents and other
agreements executed between Landlord and Tenant. The former is
the lessor of a shopping center. Tenant is identified in the
Lease and in the other documents as a tenant of Landlord.

You did not provide any copies of documents or of agreements
executed by any of the other shopping center entities.
Consequently, the Department will respond to your questions
solely on the basis of a review of the documents or agreements
executed by the Landlord and Tenant.

The lease agreement pertinent to this review is styled Lease
Agreement (herein Lease). The contract was executed August 12,
1991, and is effective for the term commencing the earlier of

November 1, 1991, or the date Tenant has opened for business,
and terminates no earlier than in 10 years.

The Lease provides, in Section 5.2., for the payment by Tenant
of an Annual Basic Rental which is more fully described in
Section 5.3.; an annual percentage rental; and of several other
expenses including electricity, all of which are denominated in
the Lease as "additional rental."

Pertinent to your questions are the provisions within the Lease
which describe the charges for electricity to be borne by
Tenant.

The terms and the computation relative to the costs of
electricity to be borne by Tenant are largely provided in
addenda to Lease styled Schedule E, and Schedule F, both of
which were executed August 12, 1991.

The Lease, Schedule E, and Schedule F provide for the following
electricity charges to be paid as additional rent by Tenant:

(1) Tenant Electric Component - This charge is provided
for in Schedule E and is a recovery by the Landlord of the
electricity consumed within the premises of the Tenant through
operation of Tenant's electrical fixtures, appliances and
equipment.

(2) Tenant HVAC Energy Charge - This charge is provided
for in Schedule F and is a recovery by the Landlord of Tenant's
proportionate share of the combined cost of electricity and of
maintenance and repair of the heating, ventilation, and air
conditioning within the Landlord's portion of the shopping
center.

(3) Common Area costs which include electricity - These
charges are provided for in Section 10.4 of the Lease. This
provision reads in part as follows:

Tenant will pay Landlord, as Additional Rental, a proportionate
share of the Landlord's Operating Costs which shall be computed
by multiplying Landlord's Operating Costs... by a fraction, the

numerator of which is Tenant's Floor Area and the denominator of
which is Landlord's Leased Floor Area.

Section 10.5 defines Landlord's Operating Costs as including
providing light and power to the Common Areas, energy costs for
heating, ventilating and air conditioning the Common area, and
energy costs of other operations. The term Operating Costs also
includes many costs in which electricity is not a part.

In your letter you cite Omni International of Miami, Ltd. v.
Department of Banking and Finance, 444 So.2d 540 (Fla. 3DCA
1984). You also cite Rule 12A-1.070, F.A.C., as applicable to
the issue of the inclusion of a charge for electricity as a
taxable element of rent paid for the right to use or occupy real
property.

To further clarify the charges that are billed to the Tenant,
the following depiction replicates the invoice you provided the
Department which was received from the Landlord by the Tenant:

MINIMUM RENT/RETAIL
COMMON AREA
REAL ESTATE TAX/SPEC ASSES[SMENT]
HVAC EQUIP CONTRIBUTION
TENANT HVAC ENERGY CHARGE
TENANT ELECTRIC[ITY] COMPONENT
WATER & SEWER
TENANT TRASH
SPRINKLER
FIRE INSURANCE
LIGHT & POWER EQUIP CONTRIBU[TION]
MERCHANTS ASSOCIATION
SALES TAX

It is noted that sales tax of 7 percent, which is the total of
the State sales tax of 6 percent and the local option
discretionary sales surtax of 1 percent, was applied to the sum
of these charges which was then billed to the Tenant as rent.
Thus, the Tenant was charged sales tax on the total of all the
above charges, on some elements of which, Landlord had
previously paid sales tax, including electricity billed to the

Landlord at a master meter.

You conclude that electricity separately stated, on which the
Landlord had paid sales tax, is not part of the taxable rent
under s. 212.031, F.S., if the Landlord does not mark up the
electricity billed to the Tenant.

You state that the electricity which is part of the Common Area
costs and the Tenant's HVAC Energy Charge is part of the taxable
rent because it is not separately stated.

Department Response

In a telephone discussion with you on September 4, 1996, it was
agreed that only three charges are at issue. These are Common
Area; Tenant HVAC Energy Charge; and, Tenant Electric Component.
These entries are the focus of the following discussion.

Section 212.031(1)(c), F.S., imposes sales tax on the "total
rent or license fee" paid by the Tenant. Rule 12A-1.070(4)(e),
F.A.C., interprets the statute with respect to utility charges
including electricity. Rule 12A-1.070(4)(e), F.A.C., states
that:

Utility charges paid by a tenant to the lessor for the
privilege or right to use or occupy real property are
taxable, unless the lessor has paid the sales tax to the
utility company on such utilities consumed by the tenant,
and the utilities billed by the lessor to the tenant are
separately stated on the lessor's invoice to the tenant at
the same or lower price as that billed by the utility
company to the lessor.

The Department takes note of the decision in Omni International,
id., and has recognized the import of this decision in Rule 12A1.007(4)(e), F.A.C., cited above.

Question 1.

Your first question, given the facts and other information
revealed above, asks: Should the Landlord and the other shopping

centers charge and collect tax on their pass through of
separately stated Tenant light and power?

Department Response

Paragraph (4)(e) of Rule 12A-1.070, F.A.C., cited above,
provides a three part test in determining whether the Landlord's
cost of utilities may be "passed through" to the Tenant as part
of a taxable rental: (1) that the sales tax is billed and the
Lessor pays sales tax on the utility service subsequently used
by the Tenant; (2) electricity "passed through" to the Tenant is
separately stated; and (3) the electricity separately stated
must be at the same or lower price than charged the Landlord.

Sales tax, applying these criteria, is not applicable to the
electricity billed the Tenant in the line item on the invoice
styled Tenant Electric Component. This account should not be an
element of the total rent which is subject to sales tax.

This conclusion is based on provisions in Schedule E, paragraph

1. wherein the electric charge to the Tenant is determined by an
   "... electrical engineer [who] shall make an estimate of the
   annual total of average monthly charges (the `Electricity
   Component') which Tenant would otherwise pay to the public
   utility authority furnishing such electrical energy in the area
   in which the Shopping Center Area is located if such electrical
   energy were not furnished by Landlord."

You state in the last sentence of the first full paragraph on
page 5. of your letter that "[t]he [Landlord and the other
shopping centers] do not make a profit nor do they mark up the
cost of electricity of power and light."

Further, the Tenant Electric[ity] Component appears as a
separate item on the invoice billed to the Tenant. Finally, the
Lessor has paid the sales tax on the electricity when billed by
the utility.

Thus, the three tests of Rule 12A-1.070(4)(e), F.A,C. have been
met.

Consequently, Tenant Electric[ity] Component is not subject to
sales tax pursuant to s. 212.031(1)(c), Florida Statutes.

However, as to the item styled Tenant's HVAC Energy Charge,
Section 12.2 of the Lease entitled Heating, Ventilating and Air
Conditioning obliges the Tenant to pay "... as Additional Rental
and in the same manner as Annual Basic Rent is payable, all
charges as the same may be adjusted from time to time, and as
more particularly set forth in said Schedule F."

In Schedule F, subparagraph B.(b) requires that the computation
of the Tenant's HVAC Energy Charge include "... the actual cost
to Landlord of such energy, operation, maintenance and repair as
is attributable by Landlord to the heating, ventilating and air
conditioning of Landlord's Floor Area, together with costs and
fees of Landlord's consultant...."
Consequently, because the Tenant's HVAC Energy Charge includes
the cost of repair and operation of the equipment together with
certain consultant fees, the Tenant's HVAC Energy Charge is part
of the total rent subject to sales tax because this item fails
to meet the requirements of Rule 12A-1.070(4)(e), F.A.C., which
requires the electricity to be separately stated.

Similarly, the electricity which is part of the account
identified in the invoice as Common Area, is also an element of
the total rent subject to sales tax because, as with respect to
the Tenant's HVAC Energy Charge, the electricity is not
separately stated. In Lease Section 10.4. styled Tenant to
Share Expense of Common Area, the Tenant is required to pay as
Additional Rental an amount which is described as Landlord's
Operating Costs. The latter term is defined in Section 10.5 of
the Lease as including various charges only some of which are
described as electricity.

Thus, the test in Rule 12A-1.070(4)(e) F.A.C., is not satisfied.
The entry Common Area, albeit composed partly of a charge for
electricity, is part of the total rent subject to sales tax.

Question 2.

Your second question is expressed as follows: If the Landlord
and other shopping centers pass through the sales tax portion of
their bill for electricity from the utility, would this
constitute a markup? Or, is it considered the cost of the
electricity that should be passed through and not subject to
tax?

Department Response

The pass through to the Tenant of the cost of the electricity
apportioned to such Tenant would not be considered a mark up of
the electricity originally billed the Landlord by the utility.
The apportionment of the tax to the Tenant is not a mark up of
the electricity because the tax is imposed by the State, which
is quite apart from the electricity billed the Landlord by the
utility. While the apportionment of the tax is not a mark up of
the cost of electricity, neither the tax nor the electricity are
elements of taxable rent if the test in Rule 12A-1.070(4)(e),
F.A.C., is met.

This concept is revealed in Rule 12A-1.070(4)(e)1., Florida
Administrative Code. In this example $355.95 is designated as
Reimbursement for one fifth share of utilities on which sales
tax was paid by Landlord. This share includes the apportionment
of the charge for electricity by the utility plus the sales tax
applicable to such electricity. Consequently, the answer to
your question is that the inclusion of sales tax is not a mark
up of the electricity to the Tenant.

Question 3.

Your third question asks: As between the Landlord and the
Tenant, to whom is a refund owed if the Landlord bills sales tax
on the electricity charge (electricity and sales tax) to the
Tenants, and also pays the sales tax to the Utility? State?

Department Response

In the instance when the Landlord pays sales tax to the utility
and then collects sales tax on a separately stated billing of
the electricity to the Tenant, an impermissible tax is collected

from the Tenant.

It is noted that the amounts of the individual entries on the
invoice depicted above include sales tax charged to the Landlord
by the utility. Thus, the amount of the item Tenant
Electric[ity] Component of $322.91 includes the charge made by
the utility for electricity and the sales tax on such
electricity.

In deciding who is entitled to a refund, the Department looks to
the decision in Omni International, id. In that case the
Comptroller had denied a refund to the shopping center (Omni) by
contending that the tenants, rather than the shopping center,
had made a double payment. The court rejected this analysis and
awarded a refund to the shopping center because Omni, as was
found by the Hearing Officer "... had twice paid sales taxes on
the consumption by its tenants of electricity received through a
single master meter; first, when itself paid those amounts after
being billed by the power company, and again when it transmitted
the same taxes after being reimbursed by the tenants." Omni
International at 540.

The Department has acceded to this analysis. Consequently,
following the reasoning in Omni, and considering the accounts
depicted above, a refund is owed to Landlord to the extent that
Tenant Electric[ity] Component includes the electricity consumed
by the Tenant and the apportioned sales tax charged the Tenant
but paid by the Landlord to the utility when both the
electricity and the apportioned sales tax were part of the total
taxable payment for the real property rental. An assumption is
made that Landlord remitted to the State the sales tax billed to
and collected from Tenant on such electricity charges.

Question 4.

Your fourth question is framed as follows: Are HVAC Energy and
CAM L&P charges that are commingled with repairs, maintenance
charges and/or equipment, considered exempt when ultimately
passed through to the Tenant?

Department Response

As indicated in the response to Question 1., which appears
above, a charge for electricity, if it is not to be included as
a taxable element of rent must be, in addition to the other two
tests in Rule 12A-1.070(4)(e), F.A.C., separately stated.
Electricity commingled with other non electricity charges would
fail the test. Thus, HVAC Energy and CAM charges, if commingled
with electricity, would be taxable elements of rent.

Question 5.

You ask in the fifth question "[i]f there are any refunds due to
the Tenant can the Landlord assign the rights to those refunds
to the Tenant?

Department Response

It is first noted that with respect to the question posed by you
the Department can find no refunds to which the Tenant is
entitled. However, if the Tenant, considering other facts not
before the Department, was adjudged to have rights to refunds
and the tax had been paid into the State by the Landlord, such
refund rights could be assigned to the Tenant by the Landlord.

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. 26256