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