How did Florida treat an electric utility's planned lease assignment, head lease, intermediate lease, and sublease of plant equipment?

Plain-English summary

Assigning the earlier lease rights and obligations to the new investor was not itself taxable. The planned head lease and intermediate facilities lease also could avoid tax as resale transactions if each re-lessor registered as a dealer and gave the upstream lessor a valid resale certificate.

Tax came into focus at the final sublease back to the utility. Equipment meeting all cited electricity-production requirements was exempt; equipment that failed those requirements was taxable. The exemption required equipment necessary for production, used at a fixed location, burning qualifying boiler fuel, and primarily producing electricity for sale.

The utility's direct-pay certificate for tangible personal property did not cover real-property leases. Separate real-property direct-pay authority would be required for any real-property portion.

What this means for you

Each step in a lease chain needs its own documentation. Resale treatment depends on registration and timely certificates, while the end user's exemption depends on the actual equipment and use.

The Department had not received draft agreements, so its answers were conditional on the described structure. Material differences in the later documents required a new analysis.

Common questions

Q: Was assignment of the old lease taxable? No. Transfer of contractual rights and obligations was not itself a taxable privilege under the cited sales-tax chapter.

Q: Were the head and facilities leases taxable? Not if the downstream lessee registered and issued a resale certificate for its intended re-lease.

Q: Was every item in the final sublease exempt? No. Only equipment satisfying all electricity-production exemption criteria qualified.

Q: Could the utility use its tangible-personal-property direct-pay certificate for real-property rent? No. It needed separate approval for real-property leases.

Citations and references

• Fla. Stat. § 212.05(1)(c), (d), and (f) — equipment leases and utility purchases
• Fla. Stat. § 212.08(5)(c) — qualifying electricity-production equipment
• Fla. Stat. § 212.07(1)(b) and Fla. Admin. Code r. 12A-1.038 — purchases or leases for resale
• Fla. Admin. Code r. 12A-1.071 — tangible personal property leases
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-044

Original ruling text

Jul 01, 1997

Re: Technical Assistance Advisement 97(A)-044
Sale/Leaseback
Sections 212.05(1)(c), (1)(d), and (1)(f), 212.08(5)(c),
F.S.
Rule 12A-1.071, F.A.C.
XXX (herein Utility)
XXX (New Investor)
XXX (herein SPC)

Dear:

This is a response, styled a Technical Assistance Advisement, to
your letter dated June 4, 1997, wherein you described certain
planned transactions, to which Utility, New Investor, and SPC
are to be parties, of tangible personal property in what is
loosely classed as a sale and leaseback arrangement. In your
letter and during telephone conversations on June 11 and June
12, 1997, you described Utility as operating a plant comprised
of two units.

The tangible personal property at issue consists of three
classes. Class 1 is comprised of essentially a turbine and a
boiler, owned and used by Utility in its operation of Unit 1.
This property was "sold" to an investor, and simultaneously
"leased" back by Utility in a contract herein identified as the
1983 Agreement which was subject, you state, to the then
applicable provisions of s. 168(f)(8) of the Internal Revenue
Code.

Class 2 property consists of certain electrical equipment, such
as transformers, which serves solely Unit 1, but which was not
included within the equipment subject to the sale and leaseback
transaction of the 1983 Agreement. Class 3 property, which also
was not a part of the 1983 Agreement, is equipment which serves
both Unit 1 and Unit 2, consisting of, for example, underground
storage tanks, and a waste water system.

The planned transactions about which you pose five questions
involve the assignment by Utility of all its rights, title, and
interest in the 1983 Agreement to New Investor. Also, New
Investor will assume the duty of Utility to make certain
payments under the agreement. This assignment will be part of
what you have identified as the Head Lease.

Included also in the Head Lease will be a purported lease by
Utility to New Investor of all the property in Class 1, and all
the property in Class 2 and Class 3. The term of the Head Lease
is projected to be in excess of 50 years.

New Investor is then to "lease" all of the property within the
three classes of property to SPC, a wholly owned subsidiary of
Utility in accordance with an agreement you style as the
Facilities Lease. The term of the Facilities Lease will be
approximately 20 years. SPC as the "sublessee/sublessor" of all
of the property in the three classes will "sublease" all such
equipment to Utility under terms of what is identified by you as
the Sub-Facilities Lease. The term of this agreement is of the
same term as the Facilities Lease.

In the transactions described above, the 1983 Agreement was cast
as a "sale" by Utility to an investor, which was then followed
by a "leaseback" by Utility of the same equipment. This "sale"
and "leaseback" were required to gain the advantages permitted
under the "safe harbor" provisions in s. 168(f)(8), IRC. This
statute permitted the transfer of certain Federal tax benefits
by firms, such as Utility, to other entities who were putative
"buyers/lessors." These benefits included an investment tax
credit, represented by the "purchase," and an allowance for
depreciation of the property which was "purchased."

In exchange, the "seller/lessee" received a lump sum payment, or
a partial payment and a note from the "buyer/lessor." The
"seller/lessee" then made its own payments to the "buyer/lessor"
in accordance with the terms of a "lease" of the same property.

Under subsequent Federal tax law, such as that applicable to the
"leases" here at issue, the element of the "sale" is deemed to
have occurred when the "lease" qualifies under the provisions of

the law. The entity, such as New Investor, is, under such a
qualified lease, deemed to be the owner of the property subject
to the lease and enjoys the tax benefit consistent with such
"ownership."

It is the understanding of the Department that Utility has not
formed SPC, nor have the agreements identified as Head Lease,
Facilities Lease, and Sub-Facilities Lease been drafted.

Since no documents have been provided to the Department which
relate to the planned transactions, you are alerted that the
responses which reply to your questions should only be construed
to be determinative to the structure of the transaction as has
been discussed in your letter, and in telephone conversations on
June 11 and June 12, 1997. The Department will review, if asked,
any documents which in the future may be drafted.

Essentially, at issue here is the reach of s. 212.05, Florida
Statutes. This statute imposes sales tax on the privilege of
engaging in the business of leasing or renting tangible personal
property. Paragraph (1)(c) of the statute imposes the tax on
"... the gross proceeds derived from the lease or rental of
tangible personal property...." Paragraph (1)(d) imposes the
tax on the "... lease or rental price paid by a lessee or
rentee, or contracted or agreed to be paid by a lessee or rentee
to the owner of the tangible personal property." Rule 12A1.071, F.A.C., interprets the statute.

Considering the fact patterns described previously, you posit 5
issues. Each of these issues, framed by you, will be
replicated, after each of which the Department's position will
be expressed.

ISSUE 1. "Whether sales tax will be due in connection with the
New Investor's assumption of the 1983 Safe Harbor Lease and
payment of the rent due thereunder(?)"

Department Response

Considering solely the issue of whether an assignment of a
tangible personal property lease, as a discrete transaction, is

subject to sales or use tax, the response is in the negative.
While an assignment generally means the acquisition of the
rights without the assumption of the liabilities of the
assignor, absent a novation, here you state that New Investor
will assume Lessor's "... obligations and payment of rent
due...." See, generally Raimondi v. I.T. Chips, 480 So.2d 240,
241 (Fla. 4DCA 1985).

Nevertheless, the transfer of the rights and obligations of
Utility to New Investor is not itself the exercise of any
privilege under Part I, Chapter 212, F.S., which is subject to
sales or use tax.

The statute does not include in any of its provisions the
imposition of sales or use tax on a transaction which assigns
contractual rights or obligations, irrespective whether the
rights or obligations affect real or personal property.

ISSUE 2. "Whether sales tax will be due in connection with the
Head Lease(?)"

Department Response

Although many elements of this proposed transaction appear
similar to the 1983 "Safe Harbor Lease" fact pattern which the
Department determined to be nontaxable because the
sale/leaseback transaction was merely a sale and lease back in
form and not substance, it is not necessary to answer those
issues again based upon the facts supplied by the taxpayer.

Specifically, if the New Investor registers as a dealer and
supplies Utility with a resale certificate at the time of lease,
indicating that New Investor intends to re-lease the property,
then the Head Lease is not a taxable event. See: Sec.
212.02(14), (15) and Sec. 212.07(1)(b), Florida Statutes; Rule
12A-1.038, Florida Administrative Code.

ISSUE 3. "Whether sales tax will be due in connection with the
Facilities Lease(?)"

Department Response

Again, it is not necessary to analyze this transaction regarding
"form v. substance" assuming the facts as supplied are true.
Rather, if SPC registers as a dealer and supplies New Investor
with a resale certificate indicating that SPC intends to release the equipment, there will be no tax due on the
transaction.

ISSUE 4. "Whether sales tax will be due in connection with the
Sub-Facilities Lease(?)"

Department Response

Of the statutes within Part I of Chapter 212, F.S., which relate
directly to the purchase of equipment for the use by an electric
utility, only two have relevance to the instant issues. Section
212.05(1)(f), F.S., establishes the predicate for the imposition
of sales tax on the purchase of equipment used in the furnishing
of public utility services. This statute imposes the tax on all
utility purchases of equipment used in the generation,
transmission, or distribution of electricity.

Section 212.08(5)(c), F.S., which you cite, exempts, under
certain conditions, the purchases of equipment used in the
production (generation) of electricity. The statute is
effective when these criteria are satisfied: (1) The equipment
is necessary for the production of electricity; (2) the
equipment is used at a fixed location, (3) the equipment burns
boiler fuel other than residual oils, and, (4) such energy must
be primarily for use in producing for sale tangible personal
property which, in this instance, is the sale of electricity.

Therefore, for the equipment, separately described in the SubFacilities Lease, that meets all the criteria in Section
212.08(5)(c), F.S., no sales tax will be due. For that
equipment which does not meet the statutory criteria, tax will
be due.

Further, the use of the word "purchase" in the statute obtains
equally to payments under a lease. Thus, Lessor would be the
beneficiary of an exemption for payments made pursuant to a

lease of equipment used in the production of electricity.

ISSUE 5. "Whether (Utility) can pay direct any sale tax that may
be due in the event that a portion of the Facilities are deemed
to be real property or non-exempt tangible personal
property.(?)"

You state that Utility is a registered dealer for the purposes
of the collection and remittance of sales tax. You further
state that Utility has been issued a Direct Pay Authority
Certificate that permits the direct pay of any sales tax due on
the purchase of tangible personal property. You have attached a
copy of the certificate, and a Department letter dated May 22,
1997, which was attached to the certificate.

Department Response

Utility has been issued a Certificate of Direct Payment
Authority For Purchase of Tangible Personal Property. The
Department has assigned the designation of TPP-0067 to this
certificate. However, Utility, notwithstanding the last
sentence in first full paragraph on page two of the Department
letter dated May 22, 1997, may not use the certificate in real
property transactions. Utility has not received direct pay
authority from the Department applicable to such transactions.
Therefore, if Utility is to be relieved from paying sales tax on
individual payments pursuant to a real property lease the
Department form styled Certificate Of Direct Payment Authority
For Real Property Lease must be filed with the Department, and
approval granted by the Department for such authority.

CONCLUSION

As set forth above, based upon the facts supplied, neither the
Head Lease, Facilities Lease, nor the Sub-Facilities Lease (of
exempt equipment) are taxable transactions.

As to all the issues, as previously noted, this determination
should be construed as applicable to the structure of the
planned transactions, because no documents were provided to the
Department. However, if upon a review in the future of such

documents, the facts assumed have changed, it will be necessary
to reevaluate whether the transactions are taxable.

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. 29256