Did a county-arena concession services agreement create a taxable lease or license of real property?

Plain-English summary

Florida found that a food-and-drink concession services agreement for a county-owned arena did not create a taxable lease or license of real property.

The arena operator and service provider exercised joint control. The operator approved key operational matters, could inspect records, maintained equipment, and shared decisions over access, personnel, signs, inventories, and operating hours. The agreement also denied the service provider any ownership, leasehold, rental, license, or possessory right in the concession premises.

The financial arrangement also looked unlike rent. The parties divided receipts and, depending on the concession area, shared losses or placed them on the operator. The service provider did not owe a fixed license payment from its own assets, and the operator could receive nothing if operations performed poorly.

Because the relationship involved joint operations and profit-and-loss sharing rather than payment for occupancy, the Department found no taxable real-property lease or license.

What this means for you

Venue and concession operators

The contract's substance controls. Shared operational control, shared risk, and the absence of possessory rights can distinguish a services relationship from taxable rent.

Accountants and tax professionals

Do not classify every percentage distribution as rent. Determine who controls the premises, who bears losses, whether a payment is owed regardless of results, and whether the provider receives a right of possession.

Common questions

Did the concession provider lease arena space? No. The agreement expressly denied leasehold, license, and possessory rights.

Why were the distributions not rent? They came from a jointly controlled operation with profit-and-loss sharing, not a one-way payment for occupancy.

Did the agreement's title decide the issue? No. The Department analyzed the detailed rights, controls, and economics.

Citations and references

• Fla. Stat. § 212.02(10)(i)
• Fla. Stat. § 212.031
• Fla. Stat. § 212.031(1)(a)10.
• Fla. Admin. Code R. 12A-1.070(1)(a)8.
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-022

Original ruling text

SUMMARY

Operator and Service Provider entered into an agreement
labeled a "Concession Services Agreement" (the "Agreement")
under which Service Provider operated food and drink
concessions in a county-owned arena operated by Operator.
The issue is whether the Agreement creates a taxable
license of real property pursuant to section 212.031, F.S.
The answer is "no" because Service Provider and Operator
exercised joint control over the concessions and Service
Provider did not pay a fee to Operator that could be
considered a license fee. Instead, the parties shared
profits and, to some degree, losses.

May 19, 1999

Re: Technical Assistance Advisement 99A-022
Sales & Use Tax - Commercial Rental Tax
Sections 212.02(10)(i); 212.031; 212.031(1)(a)10., F.S.
Rule 12A-1.070(1)(a)8., F.A.C.
XXX ("Operator")
F.E.I. XX
XXX ("Service Provider")
XXX("County")

Dear :

This is in response to your letter dated March 9, 1999, for the
Department's issuance of a Technical Assistance Advisement
("TAA") concerning the above referenced parties and matter.
Your letter has been carefully examined and the Department finds
it to be in compliance with the requisite criteria set forth in
Chapter 12-11, F.A.C. This response to your request constitutes
a TAA and is issued to you under the authority of section
213.22, F.S.

Issue Presented

Operator and Service Provider have entered into an agreement
labeled a "XXX" (the "Agreement"). The issue is whether the
Agreement creates a taxable lease or license of real property
pursuant to section 212.031, F.S.

Discussion of Facts

Under agreements with County, Operator is developing and will
operate an Arena on property owned by County. The Arena and the
real property on which the Arena is constructed will at all
times be owned by County.

The Arena will include "Premium Areas" consisting of suites,
loges, club seats, courtside lounges, "star" boxes, back stage
areas, press rooms, employee meal rooms, a "family" room, and a
250-seat restaurant. The Arena will also contain 14 general
concession food and beverage stands, approximately 26 portable
concession carts and kiosks, and a number of vending machines
("General Concession Areas"). Collectively, the Premium Areas
and the General Concession Areas are referred to by the
Agreement as "Foodservice Locations."

Service Provider is engaged in a number of locations in the
United States in the business of providing services for
restaurants, arena concessions and other food facility
operations.

The provisions of the Agreement are crucial to the determination
of the issue, and all relevant provisions of the Agreement are
summarized in this presentation of the facts.

In Paragraph 2 of the Agreement, Operator "grants Service
Provider the exclusive right to provide services for and
operate, subject to Operator's reasonable approval, the entire
food and beverage service operations (collectively, the
"Operations") of, for and to the entire Arena...." Operator
allows Service Provider access to what is referred to as the
"Foodservice Facilities", and agrees not to permit any other
person or entity to use or provide services for the Foodservice
Facilities. Operator retains reasonable access to the
Foodservice Facilities and agrees not to inappropriately or

unduly interfere with Service Provider's access to such
facilities.

Under Paragraph 3, Service Provider is to provide certain preopening consultation and support services, primarily in the
design of the Concession Premises ( the Foodservice Locations
and the Foodservice Facilities) and the development of operating
procedures. Operator is solely responsible for all costs
associated with all pre-opening support services, and Service
Provider is not responsible for paying any of the costs and fees
incurred in connection with development, design, construction,
"fixturing," equipping and finishing all areas of the Arena,
including the Concession Premises.

Under Paragraph 4, Operator is responsible for the maintenance
and repair of all furniture, fixtures and equipment used in the
foodservice operations. Operator is to provide utility service
and pest control for the foodservice operations (utility service
to the Premium Areas is a Premium Areas Expense, which means
that each party will share some burden of the expense according
to the profit sharing arrangements described below). Operator
is solely responsible for providing security to all areas of the
Arena, including the Concession Premises. Operator is
responsible for all trash removal.

Service Provider, under Paragraph 5, is to provide the following
services:

(a) Provide on-site administration, management, and direction
of day-to-day operation of the Food Service Locations;

(b) Purchase all necessary supplies, including food and
beverage items, subject to reasonable approval of Operator
as to types of items;

(c) Provide daily janitorial services for the Foodservice
Facilities and around the General Concession Areas;

(d) Develop menus, portions and prices of foods and beverages,
with the reasonable approval of Operator;

(e) Consult with Operator concerning replacement of equipment
and purchases of additional equipment at Operator's cost;

(f) Consult with Operator to eliminate operational problems,
improve operations and coordinate Operator's support
services;

(g) Perform such other services as Operator and Service
Provider deem appropriate to improve operations to at least
the level provided by Service Provider in other similar
locations;

(h) Provide Operator with access to Service Provider's
proprietary software so that Operator may profile its
customers in the Premium Areas;

(i) Jointly perform with Operator a semi-annual inventory of
all equipment and a monthly inventory of all food and
beverage supplies; and

(j) Assist Operator in its commitment to Minority Business
Enterprises.

Paragraph 6 provides that each year Service Provider is to
prepare an Operating Budget, which addresses, among other items,
labor costs, promotion and marketing costs, and anticipated menu
and pricing issues. A capital expenditures budget is also to be
prepared (the cost of capital expenditures is borne by
Operator). The budgets are to be incorporated in Operator's
budget for the Arena, which must be approved by County and
lenders.

Under Paragraph 7, Service Provider agrees to conduct operations
diligently and in good faith so as to maximize gross receipts
and net receipts. The hours and days of operation shall be
established by mutual agreement between Service Provider and
Operator. Service Provider shall reasonably preserve the
condition of the Concession Premises, but Operator is solely
responsible for replacement or modification of any element of
the Concession Premises.

Under Paragraph 8, Service Provider undertakes to provide
trained personnel and sufficiently stock the operations so as to
maximize gross receipts and net receipts, and to coordinate with
Operator in the installation of a perpetual inventory system.
Operator and Service Provider agree to cooperate in securing
sponsorship agreements for the Arena and for the concession
areas. This may necessitate Service Provider using or offering
certain products, so long as quality and costs are not affected
adversely. All reasonable costs that Service Provider incurs
shall be fully reimbursed by Operator.

Paragraph 9 provides that Service Provider shall propose to
Operator, and obtain its approval of, Service Provider's
organizational structure, including job titles and salary
ranges. Service Provider agrees to provide a high level of
training and supervision of its employees, and Operator and
Service Provider shall work together to present "seamless"
operations to the patrons of the Premium Areas. In General
Concession areas, it is contemplated that a large number of
volunteers will be used, and Operator agrees to help Service
Provider in the establishment and maintenance of the volunteer
program.

Service Provider will hire an experienced, on-site general
manager who shall be subject to Operator's reasonable approval
and who shall consult with and regularly report to Operator.
Operator may compel the termination of any of Service Provider's
employees upon reasonable and significant objection.

In Paragraph 10, Service Provider agrees to obtain and maintain
all food, liquor and other necessary licenses and permits, and
pay from the operating budget all fees and taxes. Service
Provider is to be the named licensee, with Operator named as an
additional licensee.

Service Provider agrees, under Paragraph 11, to timely file all
returns and pay all taxes relating to operations and to deposit
on a daily basis all gross receipts in a mutually agreed bank
account. The bank account is to be held in the name of Service
Provider, but the Agreement provides that all funds in the
account are funds of Operator, to be held and disbursed by

Service provider on behalf of Operator. As Premium Area patrons
will be billed for services provided by both Service Provider
and by Operator unconnected with concessions, the parties agree
to cooperate in billing and tracking the accounts, presenting a
"seamless" collection procedure to patrons.

Paragraph 12 limits access to the Concession Premises to persons
designated by Operator and Service Provider and grants Operator
sole discretion to approve or disapprove of all signs and
displays to be utilized by Service Provider.

Paragraph 13 defines gross receipts and net receipts for the
Premium Areas. Gross receipts include interest income but not
gratuities, taxes, or pass-through charges. Net receipts are
defined as gross receipts minus an exhaustive list of expenses.
One of those expenses is the Premium Areas' Service Provider's
Fee, defined as 5.5 percent of the gross receipts from the
Premium Areas. That amount is to be paid to Service Provider.

Net receipts are to be split between Service Provider and
Operator (assuming a full season of use of the Arena by the team
scheduled to play there) as follows:

1. Net receipts between one cent and $600,000 shall be
   "distributed" to Operator.

2. Net receipts between $600,000 and $900,000 shall be
   "paid" to Service Provider.

3. Net receipts above $900,000 shall be split evenly, 50
   percent being "distributed" to Operator, and 50
   percent being "paid" to Service Provider.

Service Provider guarantees that Operator shall have distributed
to it at least $300,000 of net receipts from the Premium Areas
each contract year.

Paragraph 14 defines gross receipts and net receipts for the
General Concession Areas. The definition of gross receipts is
not unlike the definition of gross receipts for the Premium
Areas, and net receipts are defined similarly to net receipts

from the Premium Areas, except that instead of a fee to the
Service Provider of 5.5 percent of gross receipts, the fee is
defined as $150,000 per contract year.

Paragraph 14 then provides that gross receipts shall be
distributed between the parties, after payment of expenses
including the $150,000 fee, with Operator being entitled to a
distribution, depending on the level of gross receipts, ranging
from 55 percent of gross receipts to 50 percent of gross
receipts. If, however, there are insufficient funds, after
paying expenses, to pay Operator its entitlement, the amount to
be distributed to Operator will be the actual amount available.
All remaining gross receipts, after expenses, in the bank
account shall be paid to Service Provider. If, after paying all
of the above, there are net receipts available for distribution,
the first $500,000 shall be "paid" 30 percent to Service
Provider and "distributed" 70 percent to Operator, and all net
receipts above $500,000 shall be split evenly.

Paragraph 15 provides that all working capital required in both
the Premium Areas and the General Concessions Areas is the sole
responsibility of Service Provider. All net losses incurred in
the Premium Areas are allocated equally to Operator and Service
Provider. All net losses incurred in the General Concession
Areas are the sole responsibility of Operator.

Under Paragraph 16, Service Provider must provide Operator,
within 24 hours after each event in the Arena, a statement of
gross receipts and expenses. Each month, Service Provider must
provide Operator an interim accounting. Each year, a final
accounting shall be provided by Service Provider to Operator in
a mutually agreeable format. At any time, Operator, at its sole
expense, may inspect the books and records of Service Provider.

The term of the Agreement is set forth in Paragraph 17. The
term is 10 years, but Operator may terminate Service Provider's
services in the General Concession Areas at the conclusion of
the fifth year. There are provisions for the termination by
either party in the event of a default by the other party.

Paragraph 19 provides that "Service Provider shall have no

ownership leasehold, rental, license or possessory rights in the
Concession Premises, nor any claim of ownership with respect
thereto...."

Paragraph 27 provides that Service Provider cannot assign the
Agreement, or its rights and duties under the Agreement, without
the reasonable consent of Operator. If Operator sells its right
to operate the Arena, the Agreement will be transferred to the
purchaser, with the reasonable approval of Service Provider.
Operator will use its best efforts to obtain from all
lienholders and creditors an agreement that Service Provider
will not be disturbed in its activities in the Concession
Premises.

Service Provider has already consented to an assignment of the
Agreement by Operator to a trustee for Operator's primary
lenders. In that consent agreement, Service Provider has agreed
that all payments to be made under the Agreement shall be
delivered to a lockbox account established pursuant to the
lending agreements. If the Agreement is terminated without the
trustee's consent, Service Provider has agreed to enter into a
like agreement with the trustee.

Discussion and Analysis of Law

In reaching a determination as to taxability, it is necessary to
determine if the Agreement constitutes either a lease or license
of real property for purposes of section 212.031, F.S.
Characteristics of a lease and license are set forth below.

Lease. Although section 212.031, F.S., imposes a commercial
rentals tax on every person who engages in the business of
renting, leasing or letting, or granting a license for the use
of, any real property, the statute specifically exempts, in
section 212.031(1)(a)10., F.S., real property:

Leased, subleased, or rented to a person providing food and
drink concessionaire services within the premises of a
movie theater, a business operated under a permit issued
pursuant to chapter 550, or any publicly owned arena,
sports stadium, convention hall, exhibition hall,

auditorium or recreational facility....

If the Agreement constitutes a lease, the Agreement would appear
to fall within the exemption provided by section
212.031(1)(a)10., F.S. A lease is an interest in real property,
which although not an estate in land, does convey an interest in
land and a possessory interest in the land. The lessee holds
the property against all other claimants including the owner. A
lease conveys sovereignty over the premises described in the
contract. In Boden v. Carbonell, 354 So.2d 927, 929 (Fla. 2nd
DCA 1978), the Court found that when periodic rent is required,
for a definite term of years, when the contract provisions
included the grant of exclusive possession of a particularly
described area, and the agreement was styled a "lease," the
agreement did convey an interest in real property which created
a lease of real property.

The Agreement does not have the characteristics of a lease. The
Agreement itself is titled a "Concession Services Agreement" and
not a "lease." The Agreement specifically states in Paragraph
19 that the intention of the parties is that Service Provider
will not have a leasehold or rental interest. There is no
requirement that the Service provider pay rent. Service
Provider does not have exclusive possession of any of the
concession areas. Paragraph 2 of the Agreement specifically
states that Operator will have access to all of the areas
("Foodservice Facilities") in which Service Provider will be
engaged in rendering its services.

License. It has been the Department's consistent position that
the exemption from tax quoted above in section 212.031(1)(a)10.,
F.S., applies only to leases and not to licenses. See, Rule 12A
-1.070(1)(a)8., F.A.C.

The terms "lease" and "license" are mutually exclusive. The
indicia of a lease established by case law and set forth above
are not relevant in determining whether or not a license has
been granted. Section 212.02(10)(i), F.S., defines a license of
real property as the "... granting of a privilege to use or
occupy a building or a parcel of real property for any purpose."
A license is merely a personal privilege or permit to do

something on the land of another. A license, by its very
nature, is "... necessarily revocable at will." Devlin v. The
Phoenix, Inc., 471 So.2d 93, 95 (Fla. 5th DCA 1985).

In Paragraph 19 of the Agreement, the parties specifically
provide that Service Provider shall have no license or
possessory rights in the Concession Premises. The Agreement is
labeled a "Concession Services Agreement," and not a license
agreement.

More importantly, the conduct of the parties and the substance
of the Agreement do not evince an agreement for a taxable
license. Service Provider is given the right to use certain
specific concession stands and to operate in other areas
portable kiosks and carts, but Service Provider is not obligated
to give any consideration for that right of access.

Moreover, the purpose of the Agreement is to set forth the
rights and obligations of the parties with respect to the
operations of the food services, and not to give the Service
Provider the privilege to use or occupy real property. Pursuant
to the Agreement, operator exercises substantial controls over
such operation. Service Provider's general on-site manager
reports frequently to Operator. Budgets and menus must be
approved. Prices must be approved. The employee structure must
be approved. Operator may cause the dismissal of employees.
Inventories are jointly taken. Hours and days of operation must
be approved. Signs must be approved. Operator maintains the
equipment used by Service Provider. Operator is allowed to
examine the books and records of Service Provider at any time.

The parties' method of splitting profits and losses is not
typical of a license. In a typical license situation, the
consideration flows one direction: in payment for the use or
occupation of the property. The business is usually run by the
licensee, and the licensee bears the risk of loss in that
business, paying the licensor something no matter what the
result of operations. The payment may be a flat fee or a
percentage of profits, but it is usually the licensee who earns
the profits and then pays something to the licensor. Here,
Service Provider is not obligated to pay Operator from its own

funds or assets. Operator may receive nothing from the
arrangement; all net losses are at least shared by Operator or
borne fully by Operator. On the other hand, "fees" will be paid
to Service Provider even if there are no net profits.

The Agreement is not terminable at will, at least for the first
five years of its existence. As noted previously, a license, by
its very nature, is terminable at will.

The Department accordingly concludes that the relationship of
Operator and Service Provider does not involve the granting of a
taxable lease or license within the meaning of section 212.031,
F.S., and payments or distributions to the parties under the
Agreement are not subject to sales tax.

This response constitutes a Technical Assistance Advisement
under section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advise, as specified in section 213.22, F.S. Our
response is predicated upon 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 from that which is expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., which are subject to disclosure to the public under the
conditions of section 213.22, F.S. Confidential information
must be deleted before public disclosure. In an effort to
protect confidentiality, we request you provide the undersigned
with an edited copy of your request for Technical Assistance
Advisement, the backup material and this response, deleting
names, addresses and any other details which might lead to
identification of the taxpayer. Your response should be
received by the Department within 15 days of the date of this
letter.

Should you have any further questions concerning this matter,
please do not hesitate to contact me.

Sincerely,

Robert D. Heyde
Senior Attorney
Technical Assistance & Dispute Resolution

Control #36979