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

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