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