How did Florida calculate the taxable portion of rent when a hotel lease included guest areas, operator space, and subleased commercial space?

Plain-English summary

Florida apportioned a mixed-use hotel's lease payment with a square-footage fraction. The taxable share equaled total rent multiplied by operator-consumed space divided by the entire leased premises.

The numerator included offices, maintenance and service areas, commercial shops operated by the hotel lessee, and other space the lessee consumed for its own business. Pools, health clubs, locker rooms, and golf-course areas also entered the numerator when guests paid a separate charge to use them.

Guest rooms and common areas principally provided for guests—including hallways, lobbies, guest parking, elevators, and outdoor common areas—were excluded as dwelling-unit space when no separate use charge applied. Separately subleased restaurants, retail shops, travel counters, and similar areas also stayed out of the numerator to prevent taxing the same space at both the prime-lease and sublease levels.

The denominator included every square foot under the lease, including land and all areas above or below grade. The resulting fraction was multiplied by total rent, and tax was due when the landlord received the payment.

What this means for you

Hotel owners and operators

Maintain reliable floor plans and usage classifications. A room's treatment can change when the operator imposes a separate charge or begins subleasing it.

Accountants and tax professionals

The formula prevents both overtaxing exempt guest space and pyramiding tax on separately taxed subleases. Review the actual leases, subleases, and use of every area before applying it.

Common questions

What went in the numerator? Space consumed by the hotel lessee for its own business, plus separately charged recreational space.

What stayed out? Guest dwelling and common areas, as well as space separately subleased to third-party businesses.

What went in the denominator? The entire square footage subject to the landlord's lease.

How was the taxable rent calculated? Total rent was multiplied by the numerator divided by the denominator.

Citations and references

• Fla. Stat. § 212.031(1)(a), (1)(b), (1)(c), (2)(b), (3)
• Fla. Stat. § 212.04
• Fla. Admin. Code R. 12A-1.070
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-026

Original ruling text

SUMMARY

The apportionment of the taxable lease payment for a hotel
is made on the basis of a fraction the numerator of which

is the total square footage used exclusively by the lessee
and the denominator of which is the total square footage
under lease. The fraction multiplied by the lease payment

is the amount subject to sales tax.

May 26, 1999

Re: Technical Assistance Advisement TAA 99A-026
Taxable Portion of a Hotel Lease
Sections 212.031(1)(a),(1)(b),(1)(c),(3), 212. 04, F.S.
Rule 12A-1.070, F.A.C.
XXX (herein Petitioner) FEI No. XX
XXX and its wholly owned subsidiaries (herein,

collectively, Lessee)

Dear:

This is a response, styled a Technical Assistance Advisement, to
your letter dated XX. You ask what portion of a lease payment
is subject to sales or use tax in the instance when land and a
hotel is leased by the Petitioner to the Lessee who operates the

hotel, but who also subleases certain spaces to third parties.

You describe the Petitioner as an investment trust, which "...
directly, or indirectly, through controlled subsidiaries and
partnerships, owns 12 hotel properties (herein Hotel(s)) within

Florida..."

The Hotels, as you describe, "... provide guest accommodations
together with related amenities such as restaurants and shops,
parking spaces, meeting rooms, banquet facilities, pools, health
clubs, outside common areas, etc." You assert that " [i]n
general, the areas under lease can be placed into three

categories: (i) areas used exclusively by its guests, (ii) areas

that are subleased by the Lessee to unrelated third party
commercial operators, and (iii) areas used by the Lessee for the
operation of its business and are not open to access by its

guests.”

You then list the spaces under each category as follows:

"TABLE 1-AREAS FOR USE BY GUESTS

Lobbies

Guest Rooms

Hallways

Parking Spaces for Guests
Pool and Locker Room
Health Club

Elevator Lobbies

Outdoor Common Areas
Banquet Rooms*

Meeting Rooms*

*To the extent such rooms are not in use by guests they are from

time to time subleased to third parties"

"TABLE 2-AREAS SUBLEASED

Airline and Car Rental Booths"

"TABLE 3-AREAS USED BY LESSEE

Gift Shop
Lobby Bar
Restaurant
Laundry
Kitchen
Personnel
Engineering
Shop
Housekeeping
Training
Offices

Sales and Accounting

Front Office

Back House Corridor

Reservations

Baggage

PBX

Mechanical Room

Storage Area

Service Elevators

Locker Rooms for Staff

Parking Spaces in Excess of Hotel Rooms

Other"

You add that "[c]ertain of the areas listed as 'Used By Lessee’
(Table 3) could be sublet to third party operators in which case

these areas would be reclassified to Table 2."

You ask the Department for a determination as to the Lessee's
sales tax obligation with respect to the lease with the

Landlord. You cite a previous Technical Assistance Advisement
and offer as the correct taxable amount of the lease the
following: The total lease payment multiplied by a fraction "...
the numerator of which is the aggregate square footage of the
areas identified [in] Table 3 above (but only to the extent not
used by guests or subleased to a third party) and denominator
[of which] is the aggregate square footage of the areas

identified on Tables 1, 2, and 3 above."

Department Response

Note is first made that the Department has not been provided
with any documents, except for your letter, relevant to the
transactions such as copies of leases or subleases, or drawings
of floor plans, or premises. The Department will consider your
figures in square footage as given for illustrative purposes
intended to be used only in revealing the procedure to be
followed in ascertaining the tax liability of the Petitioner and

of the Lessee. Further, the Department assumes that there is no
other property subject to lease to the Lessee other than those

spaces enumerated in all three tables.

Also, you are alerted that the applicability of the calculation

set forth below does not extend to a fact pattern wherein the

improvements are owned by a ground lessee.

Section 212.031(1)(a), F.S., imposes sales tax on the privilege
of engaging in the business of renting, leasing, or granting a
license to use real property. Section 212.031(1)(c), F.S.,
imposes the tax on the "total rent or license fee" received
pursuant to a lease or license of real property. Rule 12A-1.070,

F.A.C., interprets the statute.

Section 212.031(1)(a)2., F.S., excludes real property which is
taxed under the statute when such property is " [uJsed
exclusively as dwelling units." As mandated in s. 212.031(1)(b),
F.S., when in a lease of real property, there is multiple use of
such property such that a portion of the property is subject to
the tax and a portion is not subject to the tax because of, for
example, the applicability of s. 212.031(1)(a)2. F.S., the
Department is authorized to determine the taxable portion. A
method useful in calculating the "taxable portion” is to

multiply the total rent or license fee by a fraction, the
numerator of which is the space used by the Lessee for its own
purposes, and the denominator of which is the entire square
footage of the demised premises. The calculation is described in

detail in the following paragraphs.

Computing the numerator

The numerator is comprised of the total square footage of the
premises which is used exclusively by the Lessee for its own
purposes (e.g., offices, maintenance areas), plus any other
square footage consumed by the Lessee which is not guest rooms
or common areas principally provided for use of the guests, and
for which either (a) the Lessee does not impose a charge for the
use of such areas (e.g., lounge providing complimentary food and
drink); or (b) the Lessee imposes a separate charge for use of
such areas and such charge is subject to tax under a provision

of Chapter 212 other than section 212.031, F.S., (e.g., health

club for which a charge for use is imposed).

In the instant situation, the areas listed in Table 3 are the
various areas which appear to be either areas used exclusively

by the Lessee, or areas used by the Lessee which do not

constitute guest rooms or common areas principally provided to
the guests. Such areas include the Lessee's offices, maintenance
areas, and commercial shops. The areas would be included in the

numerator.

The numerator may not include any areas that can be considered
as being used "exclusively as dwelling units," as such areas are
exempt from tax pursuant to s. 212.031(1)(a)2., Florida

Statutes. Those areas would be guest rooms; common areas of the
premises (e.g., lobbies, elevators and hallways); and any other
areas principally used by the guests in the enjoyment of the
dwelling units, such as pool areas, provided that no separate

charge is imposed on any guest or patron for their use.

Table 1 appears to include certain areas that are clearly used
“exclusively for dwelling units" and areas that are inseparable
parts of such dwelling units. These areas should not be
included within the numerator, and include guest rooms,
hallways, guest parking spaces, elevator lobbies, and outdoor

common areas.

Additionally, Table 1 includes banquet rooms and meeting rooms.
If no separate charge is imposed on a guest or patron for their
use, these banquet and meeting rooms would appear to fall within
the scope of areas used as dwelling units. If a separate charge

is imposed for the use of such rooms, these rooms no longer fall
within the ambit of areas used exclusively as dwelling units.

The areas would constitute spaces consumed and possessed by
specific subtenants or sublessees, and not by all guests in
general. The separate charge for the use of such rooms would be

subject to tax pursuant to s. 212.031(1)(c), Florida Statutes.

While the separate charge for the banquet and meeting rooms
would be taxable, the areas of such rooms would still not be
included with the numerator. If such rooms were to be included

in the numerator, these rooms would be taxed twice - first to

the subtenants or sublessees, and then to the Lessee. However,

Ss. 212.031(2)(b), F.S., prohibits a pyramiding of the tax.

Thus, the banquet and meeting rooms would not be included within
the numerator, whether or not there is a separate charge imposed

for their use. The theory for their exclusion varies as to

whether or not a separate charge for their use is imposed.

However, there are some areas listed in table 1 that might need
to be included in the numerator. If a separate charge for the
pool, locker room, health club, or golf course were to be made,
these areas would not be considered as common areas for the
guests. The use of such facilities would be considered as a
charge for the use of recreational facilities, which is taxable
pursuant to s. 212.04, F.S., and not under s. 212.031, Florida
Statutes.. The Lessee, in using these areas in providing
recreational facilities for a fee, is consuming such space ina
commercial activity. As a consequence, whenever a separate
charge is made for the use of these facilities, the square
footage of such facilities must be included in the numerator as

spaces consumed by the Lessee.

If any space is subleased by Lessee to third parties for the use
in their business, such as, for example, space for restaurant,
retail shops, airline and car rental booths, such space also
would be taxed under s. 212.031, Florida Statutes.. Again,
because of the prohibition against pyramiding previously
mentioned, such areas would not be included in the numerator.
Thus, the areas set forth in Table 2 would not be included

within the numerator.

Thus, the numerator in the instant situation would be comprised
of Table 3, as described in your letter, with the addition of
the pool, locker room, health club or golf course if separate

charges are made to guests for the use of these areas.

Computing the denominator

The denominator is the entire square footage subject to the
lease with the Petitioner. This square footage includes all the
area of all the floors above or below grade, plus all of the

land area demised. In reference to your letter, this total

square footage under lease would include the total of Table 1,
Table 2, and of Table 3. An assumption is made, as stated in an
earlier portion of this communication, that there are no other

spaces under lease at this location by the Lessee.

Computation of Taxable portion of Rent Payments

The resultant fraction, comprised of the numerator and
denominator as calculated above, is multiplied by the total rent
or license fee charged to calculate the portion of the total
rental charge which is subject to tax. The tax is due and
payable at the time the Petitioner receives such rental or
license fee from the Lessee, as mandated by s. 212.031(3),

Florida Statutes.

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, FS, 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. 36866