Was a $10,000 refundable security deposit under a Florida real-property lease subject to sales tax as rent?

Subject

Security Deposit Paid Pursuant to Lease of Real Property

Plain-English summary

The Department concluded that the lease's $10,000 refundable security deposit was not taxable rent when paid or when returned unused. The ten-year lease required the tenant to keep the cash deposit with the landlord, who had to place it in an interest-bearing escrow account after receiving the tenant's federal taxpayer identification number.

The tax result depended on what happened to the deposit. Florida imposed sales tax on the total rent or license fee charged for real property, meaning a payment made in exchange for the right to use or occupy the property.

• An unused amount returned to the tenant was not taxable rent.
• An amount applied to rent the tenant failed to pay was taxable as rent.
• An amount retained to correct a default other than unpaid rent was not taxable because it was not exchanged for occupancy or use of the property.

The lease allowed the landlord to draw on the deposit after a tenant default and required any unused balance to be returned within ten days after the tenant requested it following termination.

What this means for you

Under the rule applied in this 1997 advisement, calling a payment a security deposit did not settle its sales-tax treatment. The decisive question was whether the landlord ultimately used the money as rent for the right to occupy the real property.

Landlords and tenants therefore needed records showing why any portion of a deposit was retained. The same deposit could be partly taxable and partly nontaxable depending on whether it covered unpaid rent or another lease default.

Common questions

Q: Was sales tax due when the tenant placed the $10,000 in escrow? No. The deposit secured performance and remained refundable rather than serving as payment for occupancy.

Q: What if the landlord used the deposit for unpaid rent? That portion became taxable rent under section 212.031(1)(c).

Q: What if the landlord retained money for another default? The ruling concluded that such an amount was not taxable because it was not given in exchange for the right to use or occupy the property.

Q: Was the entire deposit automatically taxed if the landlord drew on it? No. Tax treatment followed the purpose for which each retained amount was used.

Citations and references

• Fla. Stat. § 212.031(1)(c) — sales tax on total rent or license fees charged for real property
• Fla. Admin. Code R. 12A-1.061(3) — cited in the advisement heading
• Fla. Admin. Code R. 12A-1.070 — Department rule interpreting the real-property rental statute
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-035

Original ruling text

May 08, 1997

Re: Technical Assistance Advisement 97(A)-035 Security Deposit Paid Pursuant to Lease of Real Property XXX (herein Tenant) XXX (herein Landlord) Section 212.031(1)(c), F.S. Rules 12A-1.061(3), 12A-1.070, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to your letter dated February 26, 1997, wherein you ask whether a security deposit paid by Tenant, in accordance with a real property lease dated December 31, 1996, between Landlord and Tenant (herein Lease), a copy of which you provided the Department, is subject to state sales tax. The term of the Lease is ten years, unless the agreement is terminated at an earlier date.

Department Response

The Tenant is obligated by provisions of the Lease to pay rent comprised of two elements: Section 3.1A requires Tenant to pay, in an unchanging amount per month, a sum described as Minimum Annual Rent, and in Section 3.1 B(i) Tenant is required to pay, as a certain percentage of "gross total annual receipts," an amount described as Additional Annual Rent. The latter term is defined in Section 3.1 B(i).

Section 28.1, captioned Security For Tenant's Performance, requires Tenant, in Section 28.1A, to "... maintain on deposit with Landlord at all times during the term of this Lease a cash security deposit in the amount of $10,000...." The lease provision then requires that "[u]pon receipt of the Security Deposit together with Tenant's federal taxpayer identification number, Landlord shall place the Security Deposit in an interest bearing escrow account."

In Section 28.1B the Landlord, upon default of the Tenant, "... shall be entitled to immediately draw upon the Security Deposit and apply or retain all or any part thereof... in the amount to correct [the Tenant's default]" Section 28.1C provides that "[a]ny unused portion of the Security Deposit shall be returned to Tenant after termination of the Lease within ten (10) days after Tenant's request therefor."

Florida law, in s. 212.031(1)(c), F.S., imposes sales tax on the "... total rent or license fee charged for... real property." Rule 12A-1.070, F.A.C., interprets the statute.

Section 212.031(1)(c), F.S., which imposes sales tax on the total rent or license charged for real property, requires a payment given, if it is to be taxed, to be in exchange for the right or license to use or occupy real property. Here, the security deposit is created for the purpose of securing the performance of Tenant according to the terms of the Lease, and after termination of the Lease, as provided in Section 28.1C, any unused portion of the security deposit is returned to the Tenant.

Thus, any unused portion which is returned to Tenant is not part of the taxable rent. However, any portion of the security deposit which is used to compensate Landlord for rent which was not paid by Tenant during the term of the Lease is part of the rent subject to sales tax in accordance with s. 212.031(1)(c), Florida Statutes.

Any portion of the security deposit which is used to compensate Landlord for other than a rent default is not subject to tax because such an amount if retained by the Landlord is not given in exchange for the right to occupy or use real property.

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
Technical Assistance and
Dispute Resolution

Ctrl. No.28076