Did internal journal entries allocating common-area maintenance costs to wholly owned subsidiaries create taxable Florida rent?

Subject

Common Area Maintenance Charges Allocated to Subsidiaries via Journal Entries

Plain-English summary

The parent's internal common-area-maintenance allocations were not taxable rent because no subsidiary actually paid or furnished anything of value. The parent leased Florida buildings, paid tax on its own rent, and shared space with three wholly owned subsidiaries. It paid utilities, lawn care, security, repairs, and maintenance, then recorded each subsidiary's share through intercompany journal entries.

The entries debited a “Due from subsidiary” receivable and credited management fees. When the receivable became large, the parent offset it through its investment-in-subsidiary account. No checks, bank transfers, services, property, or other consideration moved from subsidiary to parent, and the parent owned 100% before and after the accounting adjustment.

Florida rejected any broad rule that related-party CAM allocations are always nontaxable. CAM charges actually paid by a tenant to a landlord are normally taxable rent, and payment between a subsidiary and parent can be taxable even without a written lease because it may be an understood condition of occupancy.

The narrow no-tax result existed only because these entries were budgeting and accounting records rather than payment of the receivable.

What this means for you

Book entries can represent real consideration, so labeling something an allocation or offset does not control. The question is whether the related tenant transfers cash, services, property, credit, increased ownership value, debt satisfaction, or another thing of value to the landlord.

The Department expressly said the ruling would be null and void if an audit found that subsidiaries paid consideration for CAM or uncovered inconsistent facts.

Common questions

Q: Are CAM charges generally taxable as rent in Florida? Under the rule applied here, yes when a tenant pays them for the right to use or occupy real property.

Q: Does the absence of a written intercompany lease prevent tax? No. Actual related-party payments can support an inference of an unwritten occupancy condition.

Q: Why were these journal entries not payment? They transferred no cash or other value and did not change the parent's 100% ownership of the subsidiaries.

Q: Did writing off the receivable through an investment account create consideration? No on the stated facts. The Department treated the offset as accounting rather than value received.

Citations and references

• Fla. Stat. § 212.031(1)(c)-(d), (3) — taxable real-property rent, in-kind consideration, and tax due upon receipt
• Fla. Admin. Code r. 12A-1.070(4), (19) — CAM charges and consideration between related lessors and lessees
• Zero Food Storage Division of American Consumer Industries v. Department of Revenue, 330 So. 2d 765 (Fla. 1st DCA 1976)
• Department of Revenue v. Ryder System, Inc., 406 So. 2d 1299 (Fla. 1st DCA 1981)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-028

Original ruling text

SUMMARY

As provided by section 212.031(3), F.S., the tax on rental consideration "shall be due and payable at the time of the receipt of such rental or license fee payment by the lessor or other person who receives the rental or payment." Therefore, the allocation of common area maintenance charges by a parent corporation to a wholly-owned subsidiary corporation via accounting journal entries is not taxable, when no cash or other consideration is being furnished by the subsidiary to the parent in exchange for the common area maintenance.

Apr 23, 1998

Re: Technical Assistance Advisement 98A-028 Sales and Use Tax -- Common Area Maintenance Charges Allocated to Subsidiaries via Journal Entries Section 212.031, F.S.; Rule 12A-1.070, F.A.C. XXX ("Taxpayer")

Dear :

Your letter of January 20, 1998, requested a Technical Assistance Advisement concerning the above referenced matter. This response constitutes a Technical Assistance Advisement (TAA) under Chapter 12-11, Florida Administrative Code, and is issued to you under the authority of s. 213.22, Florida Statutes.

STATED FACTS

Taxpayer (sometimes referred to as "parent") is a closely-held holding company for approximately 40 subsidiaries. Taxpayer leases a few buildings from a partnership. These buildings are located in Florida. Taxpayer pays rent to the partnership, and remits sales tax on that rent.

Three subsidiary corporations of Taxpayer, along with Taxpayer, occupy the buildings in question. Taxpayer owns 100% of each subsidiary. Taxpayer incurs various expenses for the upkeep of the buildings, such as utilities, lawn maintenance, security services, and repair and maintenance work. Taxpayer pays sales tax to the vendors for those expenses which are taxable. At month's end, internal accounting entries are generated to allocate the costs incurred for the common area maintenance (C.A.M.) of the buildings to each of the subsidiaries. An account entitled "Due from [subsidiary]" is debited when the C.A.M. charges are allocated, while an account entitled "Management fees" is credited. Examples of the journal entries are reprinted in the Determination.

The subsidiaries do not issue checks to the parent for either the rent or the common area maintenance charges, and no funds transfer occurs between the subsidiary and parent company bank accounts for the charges at issue. Also, no written lease agreement exists between Taxpayer and its subsidiaries.

Taxpayer has little direct income. It pays many expenses on behalf of its subsidiaries, and therefore it generates a huge loss each year that is consolidated for federal tax purposes with its subsidiaries.

REQUESTED ADVISEMENT

1. Taxpayer requests a determination that the common area
   maintenance charges that are allocated to the subsidiaries by the parent are not rent subject to tax under Chapter 212, F.S.
2. Taxpayer requests a determination that since no actual
   payment of common area maintenance charges occurs, no tax is due.

APPLICABLE LAW

The following statutory and administrative law is relevant to the issue under advisement:

Section 212.031, F.S., establishes the taxability of rental consideration for the lease, rental, or license to use real property:

212.031 Lease or rental of or license in real property.-(1) ... (c) For the exercise of such privilege, [a] tax is levied in an amount equal to 6 percent of and on the total rent or license fee charged for such real property by the person charging or collecting the rental or license fee. The total rent or license fee charged for such real property shall include payments for the granting of a privilege to use or occupy real property for any purpose and shall include base rent, percentage rents, or similar charges. . . .

(d) When the rental or license fee of any such real property is paid by way of property, goods, wares, merchandise, services, or other thing of value, the tax shall be at the rate of 6 percent of the value of the property, goods, wares, merchandise, services, or other thing of value.

(3) The tax imposed by this section shall be in addition to the total amount of the rental or license fee, shall be charged by the lessor or person receiving the rent or payment in and by a rental or license fee arrangement with the lessee or person paying the rental or license fee, and shall be due and payable at the time of the receipt of such rental or license fee payment by the lessor or other person who receives the rental or payment....

Rule 12A-1.070, F.A.C., provides additional guidance with respect to the above law:

12A-1.070 Leases and Licenses of Real Property; Storage of Boats and Aircraft.

(4)(a) The tenant or person actually occupying, using, or entitled to use any real property from which rental or license fee is subject to taxation under s. 212.031, F.S., and shall pay the tax to his immediate landlord or other

person granting the right to such tenant or person to occupy or use such real property.

(b) The tax shall be paid at the rate of 5 percent prior to February 1, 1988, and 6 percent on or after February 1, 1988, on all considerations due and payable by the tenant or other person actually occupying, using, or entitled to use any real property to his landlord or other person for the privilege of use, occupancy, or the right to use or occupy any real property for any purpose.

(c) Ad valorem taxes paid by the tenant or other person actually occupying, using, or entitled to use any real property to the lessor or any other person on behalf of the lessor, including transactions between affiliated entities, are taxable.

(d) Common area maintenance charges paid by a tenant to the lessor for the privilege or right to use or occupy real property are taxable.

(f) The tax shall be due and payable at the time of the receipt of the rental or license fee payment by the lessor or other person who receives the rental or payment. The owner, lessor, or person receiving the rent or license fee shall remit the tax to the Department at the times and in the manner provided in Rule 12A-1.056, F.A.C.

(19)(a) The lease or rental of real property or a license fee arrangement to use or occupy real property between related "persons," as defined in s. 212.02[(12)], F.S., in the capacity of lessor/lessee, is subject to tax.

(b) The total consideration, whether direct or indirect, payments or credits, or other consideration in kind, furnished by the lessee to the lessor is subject to tax despite any relationship between the lessor and the lessee.

(c) The total consideration furnished by the lessee to a related lessor for the occupation of real property or the use or entitlement to the use of real property owned by the

related lessor is subject to tax, even though the amount of the consideration is equal to the amount of the consideration legally necessary to amortize a debt owned by the related lessor and secured by the real property occupied, or used, and even though the consideration is ultimately used to pay that debt.

DETERMINATION

Question 1:

The Department hereby rejects Taxpayer's proposed determination, to the extent that is might be construed as stating, in general, that common area maintenance charges that are allocated to subsidiaries by a parent are not rent subject to tax under Chapter 212. The holding in this Advisement that the particular transaction at issue is not subject to tax rests properly upon the unique facts and circumstances set forth in the discussion of the second question, below.

Rule 12A-1.070(4)(d), F.A.C., provides that "[c]ommon area maintenance charges paid by a tenant to the lessor for the privilege or right to use or occupy real property are taxable." Because C.A.M. charges are normally paid as a condition of the lease agreement, they are paid for the privilege or right to occupy the real property, and are therefore tantamount to "rent."

Rule 12A-1.070(19)(a), F.A.C., elucidates the implicit statutory mandate that all leases and rentals of real property are taxable, irrespective of the relationship between lessor and lessee. When C.A.M. charges are actually paid by a subsidiary to a parent, but no written lease agreement requires the payment to be made, the Department will make an inference that such payment is not voluntary, but rather is an unwritten, understood condition of occupying the real property, and the said payment will be subject to tax as rent. See Zero Food Storage Division of American Consumer Industries v. Dep't of Revenue, 330 So.2d 765 (Fla. 1st DCA 1976) (holding that a payment made by subsidiary to parent, which the trial court determined was "rent," is taxable, despite the fact that there was no written

lease or rental agreement between parent and subsidiary requiring that such payment be made).

Question 2:

Pursuant to Section 212.031(3), F.S., the tax on rental consideration "shall be due and payable at the time of the receipt of such rental or license fee payment by the lessor or other person who receives the rental or payment." Taxpayer does not receive payment in the situation at hand. No checks are being issued by subsidiary to parent. No cash is being transferred from the subsidiary bank accounts for the C.A.M. services. No services or other consideration are being furnished by the subsidiaries to the parent in exchange for the C.A.M. services.

Journal entries are entered in intercompany accounts to show the allocation of the common area maintenance charges to the subsidiaries. Pursuant to Rule 12A-1.070(19)(b), F.A.C., "the total consideration, whether direct or indirect, payments or credits, or other consideration in kind, furnished by the lessee to the lessor is subject to tax despite any relationship between the lessor and the lessee." In the instant situation, a debit to "Due From [subsidiary]" occurs each month for the C.A.M. allocation. This accounts receivable entry, in and of itself, does not constitute a "payment" or "credit."

Therefore, the inquiry becomes whether there is a future corresponding credit to the "Due from" accounts receivable that is considered a "payment" of that receivable for purposes of Section 212.031, F.S.

The following is a sample of Taxpayer's journal entries for the allocation of C.A.M. expenses, based on information gathered during an audit of Taxpayer:

1. Parent corporation pays bill to provider of C.A.M. (i.e.
   security guard services)
   Dr:

68XXX

Occupancy Expense

Cr:

CASH

Cash

2. Parent allocates the charges to the subsidiaries for their share of the maintenance charges: Dr:

133XX

"Due from" account for a particular sub

Cr:

758XX

Management fees

3. Eventually, to eliminate the receivable, Parent records an
   increase in an asset account entitled "Long Term Investments": Dr:

172XX

Long Term Investments (in subsidiary)

Cr:

133XX

"Due from" account for a particular sub

4. Excess equity is returned to Parent as a "dividend,"
   although no cash is transferred:
   Dr:

133XX

"Due from" account for a particular sub

Cr:

172XX

Long Term Investments (in subsidiary)

As is evident, the "Due from" account is reduced through a debit to "Investment in Subsidiary," which is the asset account that represents the parent's stock interest in its subsidiaries, and a credit to "Due from [subsidiary]," which is the accounts receivable. There is no correlation between entry four (the debit to "Investment in Subsidiary") and entry two (the original allocation). Apparently, from time to time, when the "Due from
[subsidiary]" account becomes extremely large, the parent decides to "charge-off" the large "debt" incurred by the subsidiary through use of the offsetting entry (entry three).

No cash or other consideration is transferred from subsidiary to parent to "pay off" the receivable. Nothing of value passes to the parent as a result of the offsetting entry which could be deemed "consideration" or "payment." Any increase in the parent's equity in a particular subsidiary does not result in a transfer of value, as the parent owns 100% of its subsidiaries before and after the offsetting journal entry.

In St. John's Trading Co. v. Dep't. of Revenue, Case no. 841652 (DOAH 1985), offsetting journal entries between a parent and subsidiary were used to account for rent owed by the subsidiary/tenant to the parent/landlord. The hearing officer determined that "although a landlord-tenant relationship existed..., no rent flowed from [sub] to [parent]." Thus, there was no taxable rental consideration for purposes of Section

212.031, F.S.

Department of Revenue v. Ryder System, 406 So.2d 1299 (Fla. 1st DCA 1981) (per curiam), involved subsidiary corporations using a building owned by a parent corporation. There was no written or oral lease or rental agreement between the parent corporation and the subsidiaries. No actual payments in money were made. Accounting adjustments were made, but they were based on various real property expenses, such as property taxes, mortgage debt, etc. The court affirmed the trial court's ruling against the Department, stating that "since there was no finding [that] a rental payment was made, the trial court correctly disapproved the tax." The court stated that because a rental payment was not made, Zero Food Storage, supra, was not applicable.

Similarly, in the situation at hand, offsetting journal entries are used to account for the common area maintenance charges. These journal entries are used for budgeting, financial planning, and financial accounting purposes. To deem such an offsetting entry as a "payment" would be to expand the scope of that term beyond what was intended by Section 212.031(3), F.S.

As stated previously, tax on the rental of real property is due when payment is received. Since Taxpayer never receives payment of the C.A.M. charges, and no evidence exists which shows that Taxpayer ever receives other consideration from its subsidiaries in exchange for the C.A.M. services, the Department hereby determines that no tax is due on the transaction at issue.

The holding in this advisement is based on the facts as represented, and if a subsequent audit establishes that consideration is being paid from subsidiaries to the parent in exchange for the provision of the C.A.M. services, or uncovers other facts inconsistent with this advisement, the holding in this advisement is null and void.

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,

Ralph G. Pepe
Tax Law Specialist
Technical Assistance & Dispute
Resolution
(850) 922-4802

Control #: 32597