Did mandatory intercompany accounting entries labeled rent create Florida sales tax when one insurance subsidiary occupied another's building without paying consideration?

Subject

Real Property Rental Charge Required of Insurance Companies

Plain-English summary

The Department concluded that the insurance affiliates' required accounting entries did not create taxable real-property rent. One subsidiary owned the building and another occupied it, but no rent or other consideration was actually charged or paid and the parties had no written lease.

Insurance accounting rules required the companies to allocate shared expenses and record income and expense amounts labeled rent on their financial statements. The Department recognized that reporting mandate but focused on the sales-tax statute's requirement that the lessor or licensor receive payment or another form of consideration for the right to use the property.

Because the property-owning subsidiary received nothing from the occupying subsidiary, it was not engaged in leasing or licensing the property to that affiliate on the stated facts. Recording income from itself for use of its own building and making intercompany accounting entries did not create sales-tax liability.

What this means for you

The ruling distinguished regulatory accounting from an actual taxable transaction. A mandated book entry labeled rent did not substitute for payment, consideration, or a lease arrangement.

The conclusion was limited to the no-payment, no-consideration facts. An intercompany transfer of cash, property, services, or another form of consideration could change the analysis.

Common questions

Q: Did the occupying subsidiary pay rent? No. The request said no consideration was charged or paid.

Q: Why did the companies record rent at all? Insurance accounting rules required group companies sharing personnel and facilities to allocate expenses as if the companies had originally paid them.

Q: Was there a written lease between the affiliates? No.

Q: Did the accounting entry make the owner a real-property lessor? No. Without payment or other consideration, the Department did not treat the owner as being in the leasing business as to that affiliate.

Citations and references

• Fla. Stat. § 212.031(1)(c), (1)(d), and (3) — tax on real-property rent or license consideration and receipt of payment
• Fla. Stat. § 212.02(2) — business definition discussed in the advisement
• Fla. Admin. Code R. 12A-1.070 — real-property rentals, leases, and licenses
• Fla. Admin. Code R. 4-137.001(4) — insurance accounting manual incorporated by reference
• Lord Chumley's of Stuart, Inc. v. Department of Revenue, 401 So. 2d 817 (Fla. 4th DCA 1981) — cited by the Department
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-020

Original ruling text

Mar 25, 1997

Re: Technical Assistance Advisement 97(A)-020
Real Property Rental Charge Required of Insurance Companies
Section 212.031(1)(c), F.S.
Rule 12A-1.070, F.A.C.
XXX (Parent)
XXX (Subsidiary Owner)
XXX (Subsidiary Tenant)

Dear:

This is a response, styled a Technical Assistance Advisement, to
your letter dated December 17, 1996, wherein you ask whether
Subsidiary Owner, a life insurance company and the owner of real
property, is obliged to collect sales tax from Subsidiary

Tenant, a property and casualty insurance company, on rent
charged by Subsidiary Owner for the occupancy of the real
property by Subsidiary Tenant. Both of the firms are

subsidiaries of Parent.

You state on page 3 and on page 4 of your letter that rent "...
was reflected only on the financial statements of [Subsidiary
Owner] and [Subsidiary Tenant], and at no time was any
consideration charged by [Subsidiary Owner] nor paid by
[Subsidiary Tenant] for that occupancy." As to the financial
reports of insurance companies, you cite, on page 3, a document
styled Accounting Practices and Procedures Manual for Fire and
Causality Companies which is promulgated by the National
Association of Insurance Commissioners (herein Manual), as
mandating the inclusion "... in both income and expense an
amount for ‘rent’ relating to the occupancy of its own

buildings."

You add that acting on these mandates the Florida Department of
Insurance "... requires insurance companies that operate on a
group basis, including the sharing of personnel and facilities

in conducting business, to apportion expenses involved to those

companies incurring the expenses in the same classifications as

if originally paid by those companies." As a consequence, you
assert, that Subsidiary Owner was required to apportion "... to
[Subsidiary Tenant] an amount denominated as ‘rent’ for the

occupancy of its building.”

As support for your position that the rent charged by Subsidiary
Owner is not subject to sales tax you cite, in addition to the
mandates of the Manual and the Florida Department of Insurance,
the requirement that the tax imposed by s. 212.031(1)(c), F.S.,

is on the receipt of the rent by the lessor as described in s.
212.031(3), Florida Statutes. You also contend that Subsidiary
Owner is not in the business of leasing real property as the

term business is defined in s. 212.02(2), Florida Statutes. You
further argue, on page 8, that compliance with a mandate imposed
by a governmental unit should relieve the taxpayer "... from
additional tax burdens as a result of that compliance." You
provided the Department with Florida case law which you assert

supports your contentions.

Department Response

The Department agrees the tax imposed by s. 212.031(1)(c), F.S.,
as to the lease of or the grant of a license to use real

property, must be paid as provided in s. 212.031(3), F.S., when
there is lease or license payment received by the lessor or
licensor. The consideration may be in any of the forms

described in s. 212.031(1)(d), Florida Statutes. Rule 12A-

1.070, F.A.C., interprets these statutes. Here, no payment is

received by Subsidiary Owner from Subsidiary Tenant.

Further, solely as to Subsidiary Tenant, Subsidiary Owner, is

not in the business of leasing or of granting the privilege of

the use of real property because it receives no payment or any
other form of consideration as described in s. 212.031, F.S.,

from Subsidiary Tenant. The facts as provided to the Department
reveal no written lease agreement between the parties for the

use or occupancy of the real property. See, Lord Chumley's of
Stuart, Inc. v. Department of Revenue, 401 So.2d 817 (Fla. 4DCA
1981).

Also, the Department is aware of the strictures imposed on

insurance companies operating in this state as to the use of

real property. The authoritative character of the Manual is
expressed in an administrative rule promulgated by the Florida
Department of Insurance, Rule 4-137.001(4), F.A.C., which
requires annual and quarterly statements of insurance companies
to"... be prepared in accordance with the [Manual]... [and]

which are hereby adopted and incorporated by reference...."

Consequently, Subsidiary Owner incurs no sales tax liability

from recording income from itself for the use of its own

building as specified in the Manual 4-3, nor in the accounting
entries which recognize income to Subsidiary Owner from the use
or occupancy of its building by Subsidiary Tenant, because no
consideration as described in s. 212.031, F.S., was received by

Subsidiary Owner.

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

Ctrl. No. 27333