Which payments between a sole shareholder-landlord and the wholly owned corporate tenant were taxable in Florida?

Subject

Lease of Real Property - Transfer of Vehicles

Plain-English summary

Florida treated most payments connected with the corporation's use of its shareholder's real property as taxable rent, even though the parties had no written lease. The corporation occupied the property, paid amounts labeled rent, maintained the premises, and recorded the transactions. That established a landlord-tenant relationship between two legally distinct parties.

Taxable rent included the stated rent, payments on the landlord's mortgage, insurance protecting the landlord, the landlord's property taxes, and improvements the tenant was required to make. Qualifying utility reimbursements were excluded when the landlord had paid sales tax and billed them separately at no more than cost. Casual, minimal repairs and maintenance were also excluded, as was the corporation's payment of tax on its own tangible property.

The shareholder's mileage reimbursement was not a taxable vehicle lease because the shareholder owned, operated, and controlled the vehicles while working for the corporation. But an actual transfer of the vehicles to the corporation was taxable. The tax used the sales price, subject to the ruling's 80%-of-average-loan-price documentation rule.

What this means for you

Related parties cannot disregard their separate legal identities when that would produce a tax advantage. Florida looked at the substance of occupancy and payment, not the absence of a written lease. It also separated owner-operated vehicle services from an actual vehicle sale or lease.

Common questions

Q: Did no written lease mean no taxable rent? No. Occupancy, rent checks, maintenance duties, accounting entries, and the parties' treatment of the payments established a tenancy.

Q: Were all property-related payments taxable? No. Qualifying separately stated utilities, casual or minimal repairs, and the tenant's own tangible-property tax were excluded.

Q: Was mileage reimbursement a vehicle rental? No. The shareholder-owner kept physical operation and control, making it a service transaction rather than a lease.

Q: Was transferring the vehicles to the corporation taxable? Yes. Florida did not recognize an occasional-sale exclusion for motor vehicles required to be titled or registered.

Citations and references

• Fla. Stat. § 212.031(1)(a), (1)(c), and (7) — commercial rent and qualifying utility charges
• Fla. Admin. Code r. 12A-1.070(4)(c), (12) — property-tax and insurance components of rent
• Lord Chumley's of Stuart, Inc. v. Department of Revenue, 401 So.2d 817 (Fla. 4DCA 1981)
• Regal Kitchens, Inc. v. Florida Department of Revenue, 641 So.2d 158 (Fla. 1DCA 1994)
• Omni International of Miami, Ltd. v. Department of Banking and Finance, 444 So.2d 540 (Fla. 3DCA 1984)
• Fla. Admin. Code r. 12A-1.071(10)(b), (d) — equipment leases and operator-controlled services
• Fla. Stat. §§ 212.02(2), 212.05(1)(a)1.b. — motor-vehicle transfers and sales price
• Fla. Stat. § 213.22 — Technical Assistance Advisements

OCR citation check: all three case citations in the scanned ruling resolved in the required list-mode verification.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-075

Original ruling text

Sep 25, 1998

Re: Technical Assistance Advisement 98A-075
Lease of Real Property - Transfer of Vehicles
XXX (herein Tenant)
XXX (herein Lessor)
Sections 212.02(2), 212.031(1)(a), and (1)(c),
212.05(1)(a)1.b., F.S.
Rules 12A-1.070(4)(c), and (12), 12A-1.071(10)(b), and (10)
(d), F.A.C.

Dear:

This is a response, styled a Technical Assistance Advisement, to
your letter dated XXX, wherein you ask whether sales or use tax
is applicable to certain transactions within two fact patterns;
namely, the lease of real property, and the transfer of

vehicles. All of the transactions within these two fact patterns
occur between an individual and a corporation of which the

individual is the sole shareholder.

Issue One

With respect to the real property issue, you describe the
individual (herein Lessor), as the owner of real property. The
tenant of the property is the wholly owned corporation (herein
Tenant). During a conversation on or about XXX, the Department
learned that the two parties have not executed a written lease.
However, it is the understanding of the Department that Tenant
issues checks to the Lessor for the payments as hereinafter
enumerated and discussed, and that appropriate accounting
entries are made on the books and records of both parties as a
consequence of such payments. Further, it is the understanding
of the Department that each party applies the federal law as
expressed in the Internal Revenue Code (herein IRC) to the

issuance and receipt of such checks.

Department Response

Payments made for the right to use or to occupy real property
are subject to sales or use tax as imposed by s. 212.031(1)(c),
Florida Statutes. The statute imposes the tax "... on the total
rent or license fee charged for such real property by the person
charging or collecting the rental or license fee." Rule 12A-

1.070, F.A.C., interprets the statute.

You ask whether payments are subject to the tax imposed by s.
212.031(1)(c), F.S., when made by Tenant to Lessor as rent: when
Tenant makes payments on behalf of Lessor with respect to a
real property mortgage; in payment of insurance, property tax,

and utilities; and, when Tenant makes improvements to the real

property, including general maintenance and repairs on such

property.

Albeit there is no written lease between the parties, the
Department finds that a landlord/tenant relationship exists
between the parties, in that Tenant occupies the premises,
Tenant has duties to perform with respect to the tenancy,
including maintaining the property, and Tenant acknowledges the
landlord by making actual rent payments. It is the understanding
of the Department that the checks are deposited in the account
of the Lessor; accounting entries are made consistent with
accepted account practices and procedures; and, the federal tax

consequences of the payments are recognized.

As a consequence, the Department distinguishes the holding in
Lord Chumley's of Stuart, Inc. v. Department of Revenue, 401

So.2d 817 (Fla. 4DCA 1981), which found that mortgage payments,

property tax payments, and insurance payments made to corporate
beneficiaries with respect to real property, the title of which
was held by a trustee, were not taxable. The court found that
the trustee did not receive any payments from the corporate
beneficiaries in the form of rental payments or otherwise. The
corporate beneficiaries took depreciation on the properties. The
court concluded that the trustee did not enjoy any of the
benefits of ownership of the real property. The court did not
find the existence of a landlord-tenant relationship between the
trustee and the corporate beneficiaries. Thus, the court
concluded that the trustee was not in the "business™ of renting

real property.

Here, as in Regal Kitchens, Inc. v. Florida Department of

Revenue, 641 So.2d 158 (Fla. 1DCA 1994), there is a landlord-

tenant relationship. Checks are written by Tenant and deposited
by Lessor. Checks are denominated as "rent." Other payments are
made directly to Lessor, or are made to others on behalf of

Lessor. These payments are connected to the use or occupancy of

real property by Tenant.

The absence of a written lease is not a bar to the conclusion
that Tenant is paying Lessor for use and occupancy of the

property. See, Regal Kitchens, Inc., id. at 163. Thus, the

payments denominated as "rent" paid by Tenant to Lessor are

subject to sales or use tax.

The term "business" is defined in s. 212.02(2), F.S, as "... any
activity... with the object of private or public gain, benefit,

or advantage, either direct or indirect." In the instant

situation, since actual payments are made to Lessor by Tenant,
there are patent and direct advantages and benefits which accrue
to both Tenant and Lessor. The rent payments made to Lessor
strengthen its equity position in the property provided there is
an extant indebtedness of Lessor with respect to the property.
If there is no such debt, the funds received by Lessor accrue to
the obvious advantage of Lessor in asset form. There are other
direct advantages which exist, including tort limitation and
creditor liability, and present and future Federal income tax

advantages.

Finding that Tenant is a lessee of the property of the Lessor, a
conclusion is made that all payments, except the payments for
utilities as discussed in a subsequent paragraph, made on behalf
of Lessor by Tenant, either directly, or to others, are also
elements of the taxable rental payment made by Tenant for the

use or occupancy of the real property.

For example, Rule 12A-1.070(4)(c), F.A.C., specifically notes
that the payment of ad valorem taxes by the tenant is a taxable
element of the total rent or license fee. Similarly, Rule 12A-
1.070(12), F.A.C., describes the payment of insurance by the

tenant as part of the taxable rent when made by the tenant to

secure the protection of the landlord and when such payment is

separately stated or itemized.

You are alerted that whatever payments are required to be paid
by Tenant for the right or privilege to use or occupy real
property, these payments are taxable elements of the rent. All
such elements lose their identity as specific payments
ostensibly made for a specific purpose, and become, instead,
within the reach of sales tax which is imposed on the total rent

or license fee charged by Lessor to Tenant.

Consequently, the total rent or license fee which is subject to

tax includes the rent payment, payment made to the mortgagee,
any insurance payments which secure the protection of the
Lessor, and the payment of property taxes of the Lessor by
Tenant. The Department has held that the utility payments made
by Tenant in the instance when the utility service, (including
telephone service), is itself subject to sales tax and is

measured through a single meter which utility is then charged to
Tenant, is not part of the taxable rent solely on the decision

of Omni International of Miami, Ltd. v. Department of Banking
and Finance, 444 So.2d 540 (Fla. 3DCA 1984). Effective July 1,
1998, subsection (7) was added to s. 212.031, F.S., as expressed
ins. 3, Chapter 98-140, L.O.F., which codified this position by

stating that utility charges are not part of the total rent or
license fee subject to sales or use tax when"... paid by a
tenant to the lessor and which are part of a payment for the
privilege or right to use or occupy real property... if the

lessor has paid sales tax on the purchase of such utilities and
the charges billed by the lessor to the tenant are separately
stated and at the same or a lower price than those paid by the

lessor."

The cost of improvements made to the property by Tenant is also

a taxable element of the rental or license fee charged to the

Tenant when required to be made by Tenant. Again, note should
be taken that these individually designated payments, including
any required improvements to real property which must be made by
Tenant, lose their identity as individual costs, such as

improvement costs, and merely become taxable elements of the

"total rent or license fee" which is made subject to the tax by

s. 212.031(1)(c), Florida Statutes.

Further, as to such improvements, Tenant seeks the benefit of
the corporate business form and, with respect to the
improvement, recognizes the benefit of the non-cash expense of
depreciation. The choice of the business form is available to

all, but the consequences of the choice must also be borne. As

stated in Regal Kitchens, Inc. supra at 163: "Individuals may

incorporate to shield themselves from personal liability, or for
many reasons, but they may not then disavow the existence of the
corporation for the purpose of obtaining a tax advantage."

Tenant clearly is a separate and distinct legal entity from

Lessor.

The expense borne by Tenant of causal repairs and maintenance to
the property is not a taxable element of the rental or license

fee, because the burden of maintaining the property in the

condition it was received is a recognized part of landlord-

tenant relationship, bottomed on the duty of the tenant not to
commit waste on the demised premises. Thus, any expense borne
by Tenant to make such causal and de minimis repairs is not part

of the total taxable rent or license fee.

To the other remaining question within Issue 1, the response is
in the negative as to whether the payment by Tenant of its
obligation to pay ad valorem tax on its own tangible personal
property is part of the total rent or license fee subject to

sales or use tax. The payment by Tenant of one of its own
obligations, such as the tax on tangible personal property

titled in Tenant, is not an element of the taxable rent. The
Lessor receives no benefit of the payment by Tenant of such

obligation.

Within this issue you state that certain vehicles are owned by
Lessor and are used by Lessor as an employee of Tenant during
course of employment. Tenant reimburses Lessor for vehicle
expense on a per mile basis as allowed by the Internal Revenue
Code. You ask for verification that such reimbursement creates a
lease of the vehicle by Tenant as counseled by Department of

Revenue personnel.

Department Response

Section 212.05, F.S., impose sales or use tax on the lease of
tangible personal property. Rule 12A-1.071, F.A.C, interprets

the statute. The reimbursement paid by Tenant to Lessor does not
create a taxable lease of tangible personal property because the
vehicle owned by Lessor and operated by Lessor in furtherance of
the business of Tenant is at all times operated and controlled

by Lessor. Thus, for this reason alone, the transaction is a
service transaction the nature of which is discussed in Rule
12A-1.071(10)(d), F.A.C., wherein it is provided that when in

this instance the Tenant "... does not take possession or have

any direction or control over the physical operation [of the

vehicle] the contract constitutes a service transaction and not

the lease of tangible personal property...." Here the direction

and control over the physical operation of the vehicle is solely

in the Lessor.

Thus, any reimbursement or other payment made by Tenant to
Lessor for the operation by Lessor of its own vehicles while in

the course of employment is not a lease of tangible personal
property. Note is made that the provision in Rule 12A-
1.071(10)(b), F.A.C., is not applicable. This provision

describes the agreement as a lease and taxable when the operator
is on the payroll of the customer. The seeming applicability of

this rule provision lies in the fact that Lessor is on the

payroll of Tenant and the vehicles are used by Lessor in the

course of employment.

However, this rule provision is not applicable to the instant

facts because the "operator" as described in the rule means an
operator employed by the customer at the time the equipment is
owned by another other than the operator. This rule means that
the control and direction is established when a lessor leases
equipment to a lessee and the operator of the equipment is
employed by the lessee. In such an instance, the transaction
would constitute a lease of tangible personal property and be
subject to tax. Here, however, the operator is also the owner.

Thus, the rule provision is not applicable.

As to the second issue, you also ask whether the transfer of the

vehicles from Lessor to Tenant would be subject to sales or use
tax. Should the transfers be subject to tax you ask for a
determination of the value of the transferred vehicles upon

which the tax would be imposed.

Department Response

The transfer of the vehicles from Lessor to Tenant would be
subject to tax. As expressed in s. 212.02(2), F.S., there may

be no occasional or isolated sale of a motor vehicle required to
be registered, licensed or titled in this state or by the United
States Government. Such transfers, unless otherwise exempt, as
in the instance of a purchase by a governmental unit or when the

vehicle is purchased for resale, are subject to sales tax.

The tax is on the selling price of the vehicle. Section
212.05(1)(a)1.b., F.S., states in part that should "... any
party to an occasional or isolated sale... report to the tax
collector a sales price which is less than 80 percent of the
average loan price... as listed in the most recent reference
price list... [then the tax is imposed ] on such average loan
price unless the parties to the sale have provided... an
affidavit signed by each party, or other substantial proof,

stating the actual sales price."

In another question outside of the two issues set forth above,

you ask whether rental payments made by Tenant would be taxable
if"... the building and land were recorded on the books and

ledgers of the corporation and the buildings were depreciated by
the corporation, but not actually transferred by deed to the

corporation."

Department Response

If qualified, as specified in s. 168, IRC, property can be
depreciated by a lessee who is deemed to be the "owner" for
federal income tax purposes. However, there is no comparable
Florida statute. Thus, payments will be subject to Florida
sales or use tax if they are given in exchange, as provided for
ins. 212.031(1)(a), F.S., "... for the renting, leasing,

letting, or granting a license for the use of any real

property..."

If the right or privilege to use or occupy real property is not
part of the consideration exchanged for the payment for such
right or privilege, then no legal basis exists for the

imposition of the sales or use tax. The mere recognition of the
depreciation by one of the parties is not dispositive of the

taxability of the payments.

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. The technical opinion as to ad
valorem property taxation is not binding on the Department as
the implementation of this tax is in the province of the office

of the county property appraiser.

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. 34626