What portions of an assisted-living operator's facility lease and resident payments were subject to Florida sales tax?

Plain-English summary

Only the operator's pro rata rent attributable to commercial-use areas and unimproved grounds was subject to Florida sales tax under this 1997 ruling. Resident rooms and the areas supporting resident care were treated as property used exclusively as dwelling units.

The Department followed a circuit-court decision concluding that every area contributing to nursing-home resident care could share the dwelling-unit exemption. It limited the taxable portion to spaces such as beauty or gift shops and to unimproved surrounding land, using an allocation such as square footage.

Payments by residents under one-year assisted or independent living agreements were also exempt because the written leases provided continuous residence for longer than six months. A separate care-facility exemption could also apply if the facility was designed and operated primarily for aged, infirm, or otherwise care-dependent residents.

What this means for you

The facility operator could not assume its entire head lease was exempt without examining actual space use. Commercial shops and unimproved land had to be separated from resident and care-support areas.

Furniture, appliances, and other landlord personal property were bundled into the real-property lease without separate consideration. On those facts, their inclusion did not change the lease's tax treatment.

Common questions

Q: Were administrative and care-support areas taxable? Not merely because staff used them. Under the court-guided approach, areas contributing to resident care were treated as dwelling use.

Q: Which areas remained taxable? Commercial-purpose spaces such as beauty or gift shops and unimproved grounds.

Q: How was the taxable rent determined? By a pro rata allocation of the leased property, such as square footage.

Q: Were resident payments taxable? The one-year resident agreements were exempt as bona fide written leases for continuous residence longer than six months; qualifying special-care rentals provided another stated basis.

Q: Did bundled furniture and equipment make the whole lease taxable? No. Because the personal-property consideration was not separately stated, the Department treated it as part of the real-property lease.

Citations and references

• Fla. Stat. § 212.03(1) — living-accommodation rentals and continuous-residence agreements over six months
• Fla. Stat. § 212.031(1)(a)2. — real property used exclusively as dwelling units
• Fla. Stat. § 212.08(7)(i) — rooms and meals for aged, infirm, or care-dependent persons
• Fla. Admin. Code r. 12A-1.001(11) — institutions caring for persons needing special care
• Fla. Admin. Code r. 12A-1.070(14) — allocation of mixed-use real-property rent
• Beverly Enterprises of Florida, Inc. v. Department of Revenue, Case No. 94-2259-CA-16-L (Fla. 18th Cir. Ct. 1996) — nursing-home areas contributing to resident care
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-054

Original ruling text

SUMMARY

Consistent with the decision rendered in Beverly
Enterprises of Florida, Inc. v. DOR, Fla. 18th Cir. Ct.
1996 (Case No. 94-2259-CA-16-L), the lease payments
attributable to the dwelling units of a nursing home are
exempt from sales tax in accordance with s.
212.031(1)(a)2., F.S. Guided by Beverly, the Department
takes the view that only the areas of a nursing home used
for commercial purposes (e.g., beauty shops and gift shops)
or the unimproved grounds surrounding the nursing home are
not exclusively used as dwelling units, and are
consequently subject to tax. Tax is based upon the pro
rata share of the leased property used for commercial
purposes or unimproved grounds.

Aug 13, 1997

Re: Technical Assistance Advisement 97A-054
XXX ("Corporation")
XXX ("Lessor")
Sales Tax - Real Property Lease: Assisted Living Facility
Sections 212.03(1), 212.031(1)(a) and 212.08(7)(i), Florida
Statutes (F.S.), and Rules 12A-1.001(11) and 12A-1.070(14),
Florida Administrative Code (F.A.C.)

Dear :

This letter is in response to your petition of February 25,
1997, for a Technical Assistance Advisement based on the fact
pattern similar to that contained in the Letter of Technical
Assistance issued on December 20, 1996. On June 5, 1997, I
received a copy of the XXX via facsimile. Also on June 5, 1997,
I received a copy of the Lease and Security Agreement between
the Lessor and the Corporation dated March 1, 1996. You
indicate that to the best of your knowledge, the Corporation is
not under audit, there is no litigation involving the
Corporation or any person who is party to the transaction, or

any other current consideration by the Department. Having
received these lease agreements, the Department has carefully
examined your petition and finds it to meet the criteria set
forth in Chapter 12-11, F.A.C., requisite to issuance of a TAA.
Therefore, the Department is by this response issuing the
requested TAA. Your request provides the following facts:

[Corporation], licensed under Chapter 400 of the Florida
Statutes (the same chapter which requires licensing for
nursing homes) operates an assisted/independent living
facility within the State of Florida. The facility is used
to provide housing for the elderly. Originally one-third
(1/3) of the beds (rooms) in the facility were licensed for
assisted living. Recently that number was increased to
over one-half (1/2) of the facility. There are a number of
beds (rooms) which are leased to elderly residents who do
not necessarily require the level of day-to-day care of the
assisted living patients.

However, even those residents do receive assistance with
their daily living activities. Certain areas of the
facility (i.e. storage closets, administrative offices,
etc.) are used by the administrative staff which provide
the requisite services for all residents.

In order to procure this facility, [Corporation] entered
into an agreement with an unrelated [Lessor].
[Corporation] first located an existing facility which
could serve as an assisted/independent living facility and
then approached the Lessor in an effort to have the Lessor
purchase the property on behalf of [Corporation]. In
exchange, the [Corporation] promised to pay in monthly
installments, just below 10% of the purchase price, plus
any portion of renovations funded by the Lessor. These
monthly payments are scheduled to increase over time based
on an increase in revenue from the assisted/ independent
living facility.

The initial term for the agreement between [Corporation]
and the Lessor is twelve years. After that time,
[Corporation] has the option of extending the agreement for

an additional ten years. There may be a total of three
extensions. At the time of each extension, the monthly
payment will be based upon the fair market value of the
property as of the renewal date, times the then current
year treasury rate, plus 350 basis points, with the
understanding that the total payment may not decrease from
the prior year. [Corporation], by a mutually agreeable
mechanism, agrees to fund expenditures to ensure that the
property remains in the same quality condition as the
property was on the date of the closing. There is no
provision for a bargain/sale agreement between
[Corporation] and the Lessor. Assuming for purposes of
this request that the transaction between [Corporation] and
the Lessor is a "lease" rather than a "mortgage", please
address the following questions[.]

Pertinent provisions of the lease include:

THIS LEASE AND SECURITY AGREEMENT ("Lease") is made and
entered into as of the 1st day of March, 1996 by and
between [Lessor] ("Landlord"), and [Corporation] ("Tenant")

WHEREAS, Landlord is the owner of that certain real
property, all improvements thereon and all appurtenances
thereto, constituting a [number]-unit assisted living/
independent living facility, more specifically described in
Exhibit "A" attached hereto, together with certain of the
furniture, machinery, equipment, appliances, fixtures,
supplies and other personal property used in connection
therewith as more specifically described on Exhibit "B"
attached hereto ("Landlord Personal Property"). The
foregoing property owned by Landlord shall be collectively
referred to in this Lease as the "Premises";...

Exhibit "B", Landlord Personal Property, provides a
description and amount of numerous and various furniture items,
kitchen supplies, and appliances in the Facility Inventory.
Items include an ice machine, beds, exercise bikes, and
dinnerware.

Residents of the facility may elect to enter into a lease

agreement for congregate living or assisted living services. In
addition, residents may elect from three different levels of
additional care beyond the standard services included as part of
either lease agreement. Both the Assisted Living Agreement and
the Congregate Living Lease Agreement are for a term of one
year.

The questions and your responses are quoted after the
Relevant Authority, along with the Departmental response.

RELEVANT AUTHORITY

Section 212.03(1), F.S. (1995), provides:

(1) It is hereby declared to be the legislative intent that
every person is exercising a taxable privilege who engages
in the business of renting, leasing, letting, or granting a
license to use any living quarters or sleeping or
housekeeping accommodations in, from, or a part of, or in
connection with any hotel, apartment house, roominghouse,
or tourist or trailer camp. However, any person who rents,
leases, lets, or grants a license to others to use, occupy,
or enter upon any living quarters or sleeping or
housekeeping accommodations in apartment houses,
roominghouses, tourist camps, or trailer camps, and who
exclusively enters into a bona fide written agreement for
continuous residence for longer than 6 months in duration
at such property is not exercising a taxable privilege.
For the exercise of such taxable privilege, a tax is hereby
levied in an amount equal to 6 percent of and on the total
rental charged for such living quarters or sleeping or
housekeeping accommodations by the person charging or
collecting the rental. Such tax shall apply to hotels,
apartment houses, roominghouses, or tourist or trailer
camps whether or not there is in connection with any of the
same any dining rooms, cafes, or other places where meals
or lunches are sold or served to guests.

Section 212.08(7)(i), F.S. (1996), provides:

(i) Hospital meals and rooms. Also exempt from payment of

the tax imposed by this chapter on rentals and meals are
patients and inmates of any hospital or other physical
plant or facility designed and operated primarily for the
care of persons who are ill, aged, infirm, mentally or
physically incapacitated, or otherwise dependent on special
care or attention. Residents of a home for the aged are
exempt from payment of taxes on meals provided through the
facility. A home for the aged is defined as a facility
that is licensed or certified in part or in whole under
chapter 400 or chapter 651, or that is financed by a
mortgage loan made or insured by the United States
Department of Housing and Urban Development under s. 202,
s. 202 with a s. 8 subsidy, s. 221(d)(3) or (4), s. 232, or
s. 236 of the National Housing Act, or other such similar
facility designed and operated primarily for the care of
the aged.

The administrative Rule applicable to the above statute is
Rule 12A-1.001(11), F.A.C. It provides:

(11) HOSPITALS. Room charges and meals furnished to
patients or inmates as a part of the room charges are
exempt, as are rooms and meals furnished employees under
their employment contract. This rule also applies to
institutions designed and operated primarily for the care
of persons who are ill, aged, infirm, mentally or
physically incapacitated, or for any reason dependent upon
special care or attention.

Section 212.031(1)(a)2., F.S. (1996), provides:

212.031 Lease or rental of or license in real property.
(1)(a) It is declared to be the legislative intent that
every person is exercising a taxable privilege who engages
in the business of renting, leasing, letting, or granting a
license for the use of any real property unless such
property is:...

2. Used exclusively as dwelling units.

Rule 12A-1.070(14), F.A.C., which provides further

administrative elucidation for s. 212.031(1)(a)2., F.S., is
quoted below.

(14)(a) When a rental, lease, or license to use or occupy
real property involves multiple use of such real property
wherein a part of the real property is subject to tax, and
a part of the property is excluded from the tax, the
Executive Director or the Executive Director's designee...
shall determine from the lease or license and such other
information as may be available, that portion of the total
rental charge or license fee which is exempt from the tax.
When, in the judgment of the Executive Director or the
Executive Director's designee..., the amount of rent or
license fee stated in the lease or license arrangement for
the taxable portion of the real property does not represent
true value, the Executive Director or the Executive
Director's designee... shall make a determination of the
proper amount of rent or license fee applicable thereto for
the purpose of determining the amount of tax due from such
other information as is available.

(b) As an example, the portion of the premises leased or
rented by for profit entities, qualifying as homes for the
aged, or licensed as a nursing home or hospice under
Chapter 400, which is used as a dwelling unit is taxable on
a pro-rata basis. The pro-rata portion shall be determined
by the square footage of the portion of the dwelling that
is normally accessed and used by the residents compared to
the total square footage of the nursing home premises.

1. The areas which are normally accessed and used by the
   nursing facility residents are exempt. These include:
   a. Front lobby
   b. Receptionist's office
   c. Bookkeeper's office (operates as a bank for the
   residents)
   d. Residents' rooms
   e. Hallways
   f. Public restrooms
   g. Social Service's office
   h. Residents' conference room/Party room

i. Therapy rooms
j. Dining rooms
k. Activity rooms/Day rooms
l. Treatment rooms
m. Chapel
n. Central bath/Whirlpool
o. Residents' pantry/small kitchen area (usually have
microwaves and cabinets for residents' use)
p. Grounds which are improved and developed for the
residents' use, including lawns, trails, sidewalks,
patios, picnic areas
q. Driveways and parking areas.

2. The areas which are not normally accessed and used by
   the facility's residents are taxable. These include:
   a. Kitchen
   b. Laundry room
   c. Employees' lounge
   d. Hallways connecting non-accessible rooms
   e. Linen closets
   f. Oxygen storage closets
   g. Nurses' stations
   h. Director of Nursing's office
   i. Administrator's office
   j. Director of Admission's office
   k. Housekeeping office
   l. Electrical room
   m. Pharmaceutical storage rooms
   n. Storage rooms for facility's supplies
   o. Sterilization rooms
   p. Medical records office
   q. Janitor's closet
   r. Outside storage of facility's equipment
   s. Areas used for commercial purposes (e.g., beauty
   shops)
   t. Unimproved grounds (Emphasis Supplied)

The Department is in the process of drafting proposed
amendments to subparagraphs 1. and 2. of Rule 12A-1.070(14)(b),
F.A.C., quoted above, in the wake of the circuit court decision
rendered in Beverly Enterprises of Florida, Inc. v. DOR, Fla.

18th Cir. Ct. 1996 (Case No. 94-2259-CA-16-L). Beverly involved
the issue whether the lease to a for-profit corporate lessee of
a physical facility which was utilized by the lessee to conduct
its nursing home business was subject to sales tax pursuant s.
212.031, F.S. The court held, under the specific facts
involved, that the entire nursing home was used exclusively as
dwelling units since each and every area of the nursing home
contributed to the ultimate care of the residents residing
therein. However, the court recognized that not all nursing
homes function in the same way as that involved in Beverly. The
court stated that to the extent that the leased nursing home
premises are not used for room rental or the furnishing of
patient care, then that pro rata portion of the lease payments
will be taxable.

INQUIRIES AND RESPONSE

Question 1:

What portion of the payments made by [Corporation] to the
Lessor are subject to Florida Sales and Use Tax?

We believe none of the lease payments from [Corporation] to
the Lessor will be subject to Sales Tax, as the facility is
being re-leased to the elderly. Of course, [Corporation]
must render a properly executed Resale Certificate to the
Lessor. It is our understanding, however, [Corporation]
should assess and remit Florida Use Tax on any portion of
the premises which is not being re-leased or is otherwise
[is not] exempt from tax (see Question 3 below for
discussion).

Departmental Response

In accordance with Beverly, supra, the lease payments from
the Corporation (lessee) to the Lessor are attributable to real
property that ultimately will be used, at least in part, as
dwelling units. Thus, sales tax would be applicable only to the
areas of the property not exclusively used as dwelling units.
Using Beverly as guidance, the Department now takes the view
that only the areas of a nursing home used for commercial

purposes (e.g., beauty shops and gift shops) and the unimproved
grounds surrounding the nursing home are not exclusively used as
dwelling units, and are consequently subject to tax. The Lessor
would need to collect and remit tax from Corporation, prorated
based on any portion of the total property leased (such as
square footage) which is used for commercial purposes or which
constitutes unimproved grounds.

With regard to the Landlord Personal Property (tangible
personal property - TPP) found in Exhibit "B," since the
consideration for this TPP is not separately stated, the
Department construes that the TPP is part and parcel with the
lease of real property. The inclusion of the TPP in this
instance does not alter the taxability of the transaction.

Question 2:

What portion of the payments received by [Corporation] from
the residents of the facility [is] subject to Florida Sales
and Use Tax?

Any payments received by [Corporation] from the residents
of the facility will be exempt from Sales and Use Tax. All
of [Corporation's] leases with its tenants are for either
assisted or independent living accommodations for the
elderly. Further, all of the leases are on an annual basis.
Accordingly, as the leases between [Corporation] and its
tenants are either for assisted living, or residential
leases for a period of longer than six months, the leases
are exempt from Florida Sales Tax pursuant to Florida
Statutes s. 212.08(7)(i), s. 212.031(1)(a)2., FAC Rule 12A1.070(1)(a)2., and FAC Rule 12A-1.061(5)(b).

Departmental Response

The Lease between the facility and the residents may be
exempt under two provisions of Florida Sales and Use Tax law.

First, the lease agreements with the residents all have a
one-year term. Thus, such leases are bona fide written
agreements for continuous residence for longer than six months,

and are not subject to tax under s. 212.03(1) and (4), F.S.
(1995).

Second, based upon s. 212.08(7)(i), F.S., and Rule 12A1.001(11), F.A.C., if the facility is designed and operated
primarily for the care of persons dependent on special care or
attention or who are aged or infirm, the rentals paid by the
residents would not be subject to sales tax. In determining
whether the facility is designed and operated for the care of
populations having special needs, the Department would look for
design features that would address such needs (i.e., grab bars,
accessibility features, etc.).

Question 3:

What portion of the payments made by [Corporation] to the
Lessor are subject to Florida Use Tax for the Corporation's
personal use of the facility?

We believe no portion of the payments made by [Corporation]
to the Lessor are subject to Use Tax, as no part of the
facility is being used by [Corporation] for its own
activities. Pursuant to Florida Administrative Code, Rule
12A-1.070(14)(b) and Beverly Enterprises-Florida Inc. v.
Department of Revenue, No. 94-221073 (Apr. 30, 1996), any
portion of the facility used by the assisted living
residents or by the administrative staff in order to
provide the necessary care to the assisted living residents
is exempt from Florida Use Tax. This includes business
offices, cafeterias, employee lounges, employee parking
lots, laundry rooms, administrative offices, electrical
rooms, and other areas either used by the assisted living
residents or the administrative staff which provide the
necessary care for the residents. As to the non-assisted
living residents, any areas used by them (such as their own
dwelling units) are exempt from Florida Use Tax based upon
Florida Statutes ss. 212.031(1)(a)2., FAC Rule 12A1.070(1)(a)2., and FAC Rule 12A-1.061(5)(b), as property
leased for residential purposes for a period of longer than
six months.

Departmental Response

As indicated in our response to question 1, in the wake of
Beverly Enterprises of Florida, Inc. v. DOR, supra, the
Department now takes the view that only areas of the leased
premises which are used for commercial purposes (e.g., beauty
shops and gift shops) or which constitute unimproved grounds are
not used exclusively as dwelling units and are consequently
subject to tax. The Lessor would need to collect and remit tax
from Corporation, prorated based on any portion of the leased
property which is used for commercial purposes or which
constitutes unimproved grounds. As indicated in our response to
question 1, the inclusion of tangible personal property
incorporated into the transaction of lease of real property,
will not alter the taxability of this particular transaction.

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 confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Carol Schwarz
Senior Tax Specialist

Technical Assistance and
Dispute Resolution

/crs
Control No. 28239