When could a master lessee use a resale certificate for Florida commercial property it planned to sublease?

Subject

Resale Certificates for Commercial Master Leases and Subleases

Plain-English summary

A partnership could give the property owner a resale certificate only if it immediately subleased substantially all of the property for the same lease period. Retaining an incidental portion did not defeat resale treatment, but retaining more than an incidental portion did.

If too much space was vacant, used by the partnership, or donated to a charity, the owner had to collect sales tax on the master lease. When the partnership later subleased that property for the same period, it could take a pro rata credit for tax already paid. That credit prevented tax from pyramiding through the lease chain while preserving the state's tax amount.

The Department generally viewed common areas, including parking, as rights conveyed to subtenants rather than retained taxable space. Because it had not reviewed the actual leases, however, it would not give an absolute conclusion about those areas.

What this means for you

Florida's resale-certificate treatment for real-property subleases was narrow. A plan or intent to find tenants was not enough: substantially all of the space had to be re-leased for the same lease period, subject only to an incidental retained portion.

Space given free to a charity counted as used by the partnership, not as subleased space. If that donated space plus other partnership-used space exceeded an incidental amount, the master lease was taxable and the credit mechanism—not a resale certificate—applied.

Common questions

Q: Could the partnership use a resale certificate when substantially all space was subleased? Yes, if the subleases covered the same lease period and only an incidental portion was retained.

Q: Did vacant space count as subleased because it was being marketed? No. More-than-incidental vacancy made the master lease immediately taxable.

Q: How was double taxation avoided when space was later leased? The partnership could take a pro rata credit under Rule 12A-1.070(8) for tax already paid on the master lease.

Q: How did the Department treat donated charity space? As space used by the partnership. Combined with other retained space, it could prevent use of a resale certificate.

Q: Were common areas treated as retained space? Generally no, because nonexclusive common-area rights were part of what subtenants received, but the Department reserved judgment without the actual leases.

Citations and references

• Fla. Stat. § 212.031(1)(a), (1)(c) — tax on the total rent for use of real property
• Fla. Stat. § 212.031(2)(b) — no tax increase or decrease through a progression of transactions
• Fla. Admin. Code rr. 12A-1.038(1), 12A-1.039(1) — resale certificates
• Fla. Admin. Code r. 12A-1.070(8), (9) — credits and substantially-all sublease treatment
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-020

Original ruling text

SUMMARY

Resale certificates are not contemplated by the statutes
but the statutes do prohibit the pyramiding of tax on a
series of transactions. Thus, for administrative
convenience and to ensure that pyramiding does not occur,
the rules provide for the use of resale certificates in
lease transactions involving real property under certain
very limited circumstances.

The use of resale certificates are provided for in the
rules only where substantially all of the property is released. Thus, if a lessee of real property, does not release, for the same lease period, substantially all the
property, a resale certificate cannot be used. In such an
event the lessor shall collect the tax from the lessee, and
the lessee may later take credit for such tax when the real
property is re-leased for the same lease period to
sublessees.

Vacant property, if more than an incidental portion of the
property leased from the lessor, will cause the transaction
between the lessor and the lessee to be immediately taxable
because not all of the property leased will be immediately
subleased. As a consequence, the lessee should pay tax to
the lessor but may take a credit for such taxes when the
property is subleased.

Real property donated to a charity which then uses such
space in furtherance of its charitable purposes is treated
as though used by the lessee. Thus, if this donated space,
when combined with other space used by the lessee is more
than incidental, the lessee should not provide a resale
certificate to lessor but should pay tax to the lessor.

Apr 08, 1998

Re: Technical Assistance Advisement 98A-020

Lease and Sublease of Commercial Real Property
XXX (herein Taxpayer)
Section 212.031(1)(a), (1)(c), and (2)(b), F.S.
Rule 12A-1.038(1), F.A.C.
Rule 12A-1.039(1), F.A.C.
Rule 12A-1.070(8), and (9), F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated February 27, 1996, wherein you asked whether
sales or use tax may be imposed on certain transactions in
connection with the lease and sublease of real property. You
describe, on pages 1 and 2 of your letter, real property that is
owned by Taxpayer, that is leased by Taxpayer to various limited
partnerships (herein Partnerships), which in turn sub-lease
portions of the property to third party tenants. The
Partnerships may occasionally have space in a building which is
vacant (although being held out for lease) or space which is
being used by the Partnerships themselves as a leasing office or
for other partnership purposes. In one of the commercial
properties, there is space which is donated to a charity for use
for that charity's operations. The Partnerships collect sales
tax on the lease payments made by the third-party tenants,
hereafter referred to as "sub-lessees."

Question Posed: "Is a lease such as the one described above from
[Taxpayer] to the various partnerships exempt from sales tax as
a sale for resale pursuant to Florida Administrative Code 12A1.070(9)?"

Department Response

Section 212.031(1)(a), F.S. (1996), generally provides that a
sales tax is imposed on the privilege of engaging in the
business of leasing or granting a license to use real property.
Paragraph (1)(c) of the statute levies the tax on the "...total
rent or license fee charged..." for the use of real property.
Section 212.031(2)(b), F.S. provides that there shall be no
increase in tax caused by a progression of transactions and that
there shall be no decrease in tax collected by the State due to

a progression of transactions.

Although the statutes do not contemplate the application of sale
for resale concepts to the lease and re-lease of real property,
the statutes do prohibit the pyramiding of taxes upon the same
transaction. See Section 212.031(2)(b), F.S. Thus, for
example, a lease of real property from January 1, 1997 to
January 31, 1997, and a re-lease of that same exact property for
the same exact period of time should not result in tax on both
the original lease and the re-lease. Thus, for administrative
convenience and to ensure that the pyramiding does not occur,
the rules provide for the use of resale certificates in lease
transactions involving real property under certain very limited
circumstances.

Rule 12A-1.038(1), F.A.C., provides for the tender of a resale
certificate under conditions described in the rule. Rules 12A1.039(1), F.A.C., and 12A-1.070(9), F.A.C., identify the sublease of real property as an appropriate use of a resale
certificate only where substantially all of the property is released. The rules provide that retention of an incidental
portion of the property will not prevent the sub-lease from
being viewed as a sub-lease of all of the leased property.
Thus, if the Partnerships sub-lease all or all but an incidental
portion of the property leased from Taxpayer, the Partnerships
may properly provide a resale certificate to Taxpayer and
Taxpayer will be thereby excused from collecting sales tax on
its lease of property to the Partnerships. In contrast, if the
Partnerships do not re-lease, for the same lease period,
substantially all the property leased from Taxpayer, a resale
certificate cannot be used and Taxpayer should collect tax from
the Partnerships. Upon re-lease for the same lease period by
the Partnerships to third parties, Rule 12A-1.070(8), F.A.C.,
provides that the Partnerships would be entitled to take credit
on a pro rata basis for the tax previously paid. The
application of Rule 12A-1.070(8), F.A.C., to partial re-leases
ensures that the tax to the State does not decrease through a
progression of transactions as prohibited by Section
212.031(2)(b), F.S.

Common areas, including those spaces used for parking, would

not, generally be taxable to the Partnerships. This position is
bottomed on the rationale that a nonexclusive license granted to
sub-lessees to use a portion of the real property other than
that which the sub-lessees actually occupy in accordance with a
lease, is a part of the property rights conveyed by the lease to
the sub-lessees. However, the Department, not having any of the
leases in hand, cannot respond with any absolute certitude as to
the Partnerships' liability for tax on these common areas.

If not all of the property leased by Taxpayer to the
Partnerships (other than an incidental portion) is immediately
re-leased to third parties, it is improper for the Partnerships
to proffer and for Taxpayer to accept a resale certificate.
Vacant property, if more than an incidental portion of the
property leased from Taxpayer, will cause the transaction
between Taxpayer and the Partnerships to be immediately taxable
because not all the property leased from Taxpayer will be
immediately sub-leased to third parties. Instead, pursuant to
Rule 12A-1.070(8), F.A.C., the Partnerships must pay the tax on
the leased property. However, when the Partnerships do sub-lease
the property, they may take credit for taxes paid pursuant to
the anti-pyramiding provisions of Section 212.031(2)(b), F.S.
See also, Rule 12A-1.070(8), F.A.C. Thus, the key is that if
not all of the property leased from Taxpayer will be immediately
sub-leased, the Partnerships need to pay Taxpayer the tax and
take credit for taxes collected by the Partnerships on
subsequent sub-leases of the property. The State collects on
the series of transactions only once and the amount the State
collects will not decrease due to the series of transactions.
See Section 212.031(2)(b), F.S. Depending on the amount of rents
charged the sub-lessees, the Partnerships could end up in
possession of certain portions of the property leased from
Taxpayer on which, through the use of credits as provided in
Rule 12A-1.070(8), F.A.C., the Partnerships pay no sales tax.

Space donated to a charity which then uses the space in
furtherance of its charitable purposes is treated as being used
by the Partnerships. Thus, if this space, when combined with
other space used by the Partnerships is more than incidental,
the Partnerships should not provide a resale certificate to
Taxpayer and should pay sales tax to Taxpayer.

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 to made to the
request or the response.

Sincerely,

Robert G. Parsons
Tax Law Specialist
Technical Assistance and
Dispute Resolution

Ctrl. No. 24935