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Sales and Use Tax TAA 18A-006 Rentals, Leases - Real Property

QUESTION:

Are the management fees, subsidy fees, general and administrative fees, and incentive fees paid by the
Condominium Association to the Taxpayer subject to sales tax?

ANSWER:

No. The payment provisions and allocation of the risk of loss indicate that the Agreement is not a lease or
a license to use real property. The consideration flows from the Condominium Association to the
Taxpayer. The Condominium Association bears all the risks of loss flowing from the Agreement. The
Taxpayer is compensated for providing services. The Taxpayer does not make any payments to the
Condominium Association for the use of the Premises. The management fee, subsidy fee, general and
administrative fees, and incentive fee paid by the Condominium Association to the Taxpayer are not
subject to sales tax.

April 10, 2018

Re: Technical Assistance Advisement No. 18A-006
Sales and Use Tax– Food Service Agreement
Sections 212.031, 212.06, and 212.18, Florida Statutes (F.S.)
Rule 12A-1.060, Florida Administrative Code (F.A.C.)
XX, FEI # XX (the Taxpayer)
XX Sales and Use Tax Account #
XX (the Condominium Association)

Dear XX:

This is in response to your letter dated December 18, 2017, requesting this Department’s issuance of a
Technical Assistance Advisement (“TAA”) pursuant to section 213.22, F.S., and Rule Chapter 12-11,
F.A.C., concerning the taxability of a food services agreement between the Taxpayer and the
Condominium Association. An examination of your letter has established you have complied with the
statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby
granting your request for a TAA.

Facts

Your letter dated December 18, 2017, provides that following in part:
. . . Relevant Facts:

[The Taxpayer] . . . entered into a Foodservice agreement with an unrelated party, [the Condominium Association], a Florida not-for-profit corporation . . . .

Pursuant to the provisions of the contract,
[The Taxpayer]:
• is granted the exclusive right to manage the food and beverage services under the control of [the Condominium Association] at the premises.
• provides food and non-alcoholic beverage service, serviced through the Restaurant operations on a “room service basis” to residential condominiums at the building, as and when requested by the residents of the building.
• represents that it will abide by the rules and regulations set forth by [the Condominium Association].
• agrees to operate the restaurant on a schedule set by [the Condominium Association].
• complies with [the Condominium Association]'s directives and instructions regarding menus, pricing, marketing and other operational issues.
• recruits, hires (as its own employees), trains, compensates, supervises, directs, and disciplines personnel as appropriate.
• maintains and cleans the premises, including prompt removal of trash and cleaning all restaurant and related kitchen equipment.
• arranges for linens for the operation of the premises and arranges for laundering or dry cleaning of same upon request of [the Condominium Association].
• arranges for delivery to the premises of food, beverages, and supplies as mutually agreed to by the parties
• is responsible for the day-to-day management of the Facilities in conformance with policies, standards, and procedures established by [the Condominium Association].
• provides monthly financial and operational statements to [the Condominium Association].
• receives a monthly management fee from [the Condominium Association].
• receives a general and administrative fee from [the Condominium Association].
• receives a monthly subsidy from [the Condominium Association] to the extent cost and expenses exceed revenues.
• receives an incentive fee or pays a penalty fee based on performance to budget.
[The Condominium Association]:
• makes available on the premises at its expense, all utilities needed for the operation of the premises including electricity, gas, steam, water, heat, air conditioning, telephone, data service and internet.
• provides at its expense trash disposal and removal service from the premises.
• provide at its expense, pest control at the premises.
• pays the management fee to [the Taxpayer].
• funds an operating account to receive and disburse funds in accordance with the agreement.
• pays a monthly subsidy as set forth in the monthly statement to [the Taxpayer].
• receives a referral fee if [the Taxpayer] performs off-[site] services for residents of the Building or their families.
As a part of the management service agreement, [the Taxpayer] files the sales tax returns on behalf of [the Condominium Association] for sales of prepared food (both on-premises through the restaurant and catered) under [the Condominium Association]'s Florida sales and use tax account number.
* * *
Along with the request for advisement, you included a copy of the Foodservice Agreement between the Condominium Association and the Taxpayer (the Agreement), dated March 31, 2016. The Agreement provides the following in part:

. . . RECITALS:
WHEREAS, [the Condominium Association] is the Condominium Association for a condominium project presently under development which will be comprised of (i) a building containing approximately XX condominium units, . . . as well as (ii) certain appurtenant amenities, including a restaurant, lounge, espresso bar, pool bar and beach service (the “Amenities”));

. . . WHEREAS, certain portions of the Premises shall be utilized for the management and provision of ‘members only’ services to the owners and occupants of units in the Building and guests of same, where liquor, wine and beer may be available on a restricted basis only under the terms and conditions of the Liquor License as more specifically defined herein;

WHEREAS, [the Taxpayer], an independent contractor, is engaged in the business of managing and operating facilities providing food and beverage service; and
WHEREAS, [the Condominium Association] desires to retain the services of [the Taxpayer]
as its exclusive manager of food and beverage service for the Premises (as hereinafter defined), and [the Taxpayer] accepts the obligation to provide such services, all pursuant to the terms and conditions hereinafter set forth.
* * *
ARTICLE 1 DEFINITIONS
. . . P. “Liquor License” shall mean the Series 11 C - Club alcoholic beverage license to be applied for by [the Condominium Association] . . . which licenses the entire Premises for the service of liquor, beer and wine. The costs related to the procurement of, application for the Liquor License and other associated costs therewith shall be the sole cost and expense of [the Condominium Association].
* * *
ARTICLE 2 OBLIGATIONS OF [THE TAXPAYER]

A. [The Condominium Association] hereby grants to [the Taxpayer] the exclusive right (subject to the terms of this Agreement), and [the Taxpayer] hereby accepts the obligation, to manage the food and beverage services under the control of [the Condominium Association] at the Premises. [The Taxpayer] will also provide the food and non-alcoholic beverage service, serviced through the Restaurant operations on a “room service basis” to residential condominiums at the Building, as and when requested by the residents of the Building, within agreed upon hours, but no less than 10:30 a.m. to 2:30 p.m. and 5:00 p.m. to 10:00 p.m. Monday through Sunday. Other than in connection with the performance of the [the Taxpayer]’s services hereunder, [the Taxpayer] shall not use the Premises for any other purpose including, without limitation, using the Premises for any food and beverage service outside of the Building, regardless of whether said service is at the request of a resident of the Building. The parties acknowledge that [the Taxpayer] does not have the exclusive right to provide food and beverage services to condominiums at the Building or Event Room, as residents are free to obtain such services from any vendor they choose.

B. [The Condominium Association] hereby grants to [the Taxpayer] permission to use the Premises, and access and enter ancillary areas of the Building required (as determined by [the Condominium Association]) for the ingress, egress, and access to the Premises, in order to provide the services as contemplated herein, at such times and under conditions specified herein.

C. . . . The Restaurant will operate on the following days and times, which times may be changed from time to time by [the Condominium Association] upon reasonable advance notice to [the Taxpayer]:
(i) Monday through Friday: Lunch from 10:30 a.m. to 2:30 p.m.
(ii) Monday through Friday and Sunday: Dinner from 5:00 p.m. to 10:00 p.m.
(iii) Saturday and Sunday: Brunch from 10:00 a.m. to 3:00 p.m.
(iv) Saturday: Dinner 5:00 p.m. to 11:00 p.m.

D. . . . [the Taxpayer] shall comply with [the Condominium Association]’s directives and instructions regarding menus, pricing, marketing and other operational issues. . . .

* * *

ARTICLE 3 OBLIGATIONS OF [the Condominium Association]
[The Condominium Association] shall:
. . . (b) Make timely payment of the Monthly Subsidy set forth in the Monthly Statement, in accordance with the provisions of Article 4(h) of this Agreement;
* * *
ARTICLE 4 TERM: MANAGEMENT FEE. G&A FEES:
INCENTIVE FEE: SUBSIDY PAYMENT
. . . (c) Management Fee. [The Condominium Association] will pay [the Taxpayer] a management fee (“Management Fee”) at the annual rate of $XX during the Term, such payment to be made in equal monthly installments of $XX per month . . . .
(d) G&A Fee. [The Condominium Association] will pay [the Taxpayer] a general and administrative fee (“G&A Fee”) of four percent (4%) of Gross Revenues (as herein defined), such payment to be calculated at the end of each month for the month . . . .
(e) Incentive Fee. [The Condominium Association] will pay [the Taxpayer] an incentive fee (“Incentive Fee”) equal to 30% of the subsidy savings (“Subsidy Savings”) for the prior Contract Year. A Subsidy Savings will exist if the total actual subsidy . . . for the just ending Contract Year is less the Annual Actual Subsidy for the preceding Contract Year. . . .
(f) Penalty Fee: If [the Condominium Association] determines that the just ending Contract Year’s Annual Actual Subsidy exceeded the budgeted subsidy . . . by more than ten percent (10%), then [the Condominium Association] shall deduct from the G&A Fee next due and payable . . . an amount equal to 30% of the difference in Annual Actual Subsidy less the Budgeted Subsidy to a maximum amount of twenty-five percent (25%) of the Management Fee. . . .
(g) Referral Fee. For purposes of this paragraph, “Affiliated Services” refers to any food or beverage related product or service, prepared, sold or delivered to or at an off-Premises location, by [the Taxpayer] or any entity that it controls, that controls it or that is under common control with it, at the request or for the benefit of a resident of the Building or for the immediate family of such a resident, the binding commitment for which is first entered into subsequent to the execution of this Agreement, and which is not included as Gross Revenue. [the Taxpayer] will pay [the Condominium Association] a 5% referral fee (“Referral Fee”) on all gross revenues from Affiliated Services. . . .
(h) Subsidy. [the Condominium Association] and [the Taxpayer] agree and acknowledge that the food service operations at the Premises are not self-funding out of foodservice revenues generated by operations at the Premises, and, accordingly, will require a subsidy from [the Condominium Association]. . . . [The Taxpayer] shall deliver to [the Condominium Association] a Monthly Statement for the immediate preceding month and invoice [the Condominium Association] for the actual monthly subsidy amount (“Monthly Subsidy”) (i.e., based on the actual amount by which all costs and expenses incurred in the foodservice operations for [the Condominium Association] for such month exceed all revenues received from such operations for such month) as set forth on the statement. [the Condominium Association] will pay each Monthly Subsidy within 10 days after [the Condominium Association]’s receipt of such statement.
(i) Account. Prior to the Commencement Date, [the Condominium Association] shall deposit into a segregated operating account (the “Account”), expressly for the benefit of [the Condominium Association] . . . an amount equal to $50,000.00 to be used as an “operating account.” . . .The account shall be used solely to receive and disburse funds in accordance with the terms of this Agreement, and shall be jointly accessible by both [the Taxpayer] and [the Condominium Association], but shall be managed by [the Taxpayer] on a day-to-day basis. All income, charges, payments, funds and fees attributable to the services provided under this Agreement, in whatever form, shall be promptly deposited in the Account. . . .
ARTICLE 5 BUDGET/ACCOUNTING PROCEDURE
(a) Budgets. The initial budget, a copy of which is attached hereto as Exhibit C and made a part hereof (the “Initial Budget”), sets forth all costs and expenses relating to the foodservice operation at the Premises as agreed upon by [the Taxpayer]and [the Condominium Association]. . . . [The Condominium Association] shall not be responsible for direct costs for labor, taxes, benefits, supplies, etc, with [the Condominium Association].’s only obligation being to [the Taxpayer] pursuant to the terms of the Agreement. . . .
* * *
ARTICLE 7 EMPLOYMENT REQUIREMENTS
A. The parties acknowledge and agree that all employees and personnel supplied by [the Taxpayer] are not [the Condominium Association]’s employees, personnel or agents, and [the Taxpayer] assumes flail responsibility for their acts related to the performance of [the Taxpayer]’s services at the Premises. [the Taxpayer] shall be solely responsible for the payment of compensation of [the Taxpayer]’s employees assigned to perform services hereunder, and such employees shall be informed that they are not entitled to any [the Condominium Association] employee benefits. . . .
* * *
ARTICLE 11 LICENSES, LAWS AND TAXES
. . . Excise sales or other taxes applicable to [the Taxpayer]’s services and sales under this Agreement and permitted or required by law to be collected from customers shall be collected by [the Taxpayer]and remitted to the proper jurisdiction. [the Taxpayer] shall promptly apply far and secure, at its cost, and thereafter maintain at all times when required, all permits and licenses necessary for [the Taxpayer]’s operations and performance of services under this Agreement. . . .
* * *
ARTICLE 15 NO JOINT VENTURE
Nothing herein contained shal1 have the effect of making [the Condominium Association] and [the Taxpayer] joint ventures or partners, and nothing herein contained shall be construed to mean that [the Condominium Association].and [the Taxpayer] are joint ventures or partners in connection with any business conducted at the Premises, and neither [the Condominium Association] nor [the Taxpayer] shall be liable for any of the obligations or duties of the other, or have the ability to bind the other to any commitment or obligation of any kind.
* * *
Included with the Agreement was Exhibit C, the “Initial Budget.” Review of the Initial Budget reveals that cost of goods sold, payroll, taxes, employee benefits, operating expenses, maintenance, utilities, and the management fees paid to the Taxpayer are deducted from revenues received from food and beverage revenues. The Initial Budget projects that the Condominium Association will make monthly Subsidy payments totaling over $XX the first year, in order to make up for the projected budget deficit.

You provided the following in an e-mail dated January 25, 2018:
[The Condominium Association] does not directly employ any personnel for the food operation. Since the employees that provide the service at the facility are employees of [the Taxpayer], the employees are on [the Taxpayer]'s payroll. The payroll costs including employer taxes and cost of employee benefits are fully reimbursed by [the Condominium Association] via the subsidy.
* * *
Requested Advisement

You request a determination regarding the taxability of the management fee, subsidy fee, general and administrative fees, and incentive fee paid by the Condominium Association to the Taxpayer.

Applicable Authority and Discussion

Section 212.031(1)(a), F.S., states that “every person is exercising a taxable privilege who engages in the business of renting, leasing, letting, or granting a license for the use of any real property.” Section 212.031(1)(c), F.S., provides that “[f]or 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” is defined to 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.”

In this case, if the Condominium Association is granting the Taxpayer a lease or license to use the Premises, then the total consideration paid for that right is taxable. Whether an instrument is a license or a lease depends generally on the manifest intent of the parties gleaned from a consideration of its entire contents.

The Agreement provides that “certain portions of the Premises shall be utilized for the management and provision of ‘members only’ services to the owners and occupants of units in the Building . . . .” The Condominium Association “retain[s] the services of [the Taxpayer] as its exclusive manager of food and beverage services for the Premises . . . .” The Condominium Association grants the Taxpayer “the exclusive right . . . to manage the food and beverage services under the control of [the Condominium Association] at the Premises.” The Taxpayer “shall not use the Premises for any other purpose.” The Agreement is absent of provisions regarding exclusive possession and control of the Premises typical of lease agreements. Due to the lack of exclusive possession and control of the Premises, the Agreement does not appear to be a lease.

Generally, a determination whether an agreement constitutes a license can be established based on the allocation of the economic risk of loss to the parties to the agreement. In most cases, with a license for the use of real property, the licensee receives a license for the use of a location in order to run its business. The business is run by the licensee, who bears the risk of loss in that business, paying the licensor no matter what the result of the business operations. The payment may be a flat fee or a percentage of profits, but it is the licensee who earns the profits and pays something over to the licensor. In this case, this inquiry indicates whether the money received by the Condominium Association is a return of the operational proceeds of sales of food and beverages to the Condominium Association, as owner of the business, or whether the Taxpayer is paying the Condominium Association for the right to use real property.

The Agreement provides that the parties “acknowledge that the food service operations at the Premises are not self-funding out of foodservice revenues generated by operations at the Premises, and, accordingly, will require a subsidy from [the Condominium Association].” The Taxpayer receives a guaranteed amount (the Management Fee), as well as a percentage amount based off Gross Revenues (the G&A fee) and the Condominium Association is required to fund budget shortfalls (Subsidy).
The amount the Taxpayer receives is affected by the Taxpayer’s performance of the services. Under the
Agreement the Taxpayer is encouraged to minimize costs and maximize profits through the imposition of Incentive and Penalty Fees. However, the Condominium Association bears the economic risk of loss by funding any budget shortages with the Subsidy Payments.

Here, the payment provisions, allocation of the risk of loss, and other facts presented clearly indicate that Agreement is not a license to use the Premises. The Taxpayer does not make payments to the Condominium Association for the use of the Premises. The Condominium Association pays the Taxpayer for the services it provides.

Your letter provides that as a part of the management service agreement, the Taxpayer files the sales tax returns on behalf of the Condominium Association for sales of prepared food under the Condominium Association's sales and use tax account.
Section 212.18(3), F.S., provides that all persons must be registered with the Department of Revenue before engaging in business subject to sales tax in Florida. Florida law defines those persons that are required to register, collect, and remit tax as “dealers.” Section 212.06(2)(b), F.S., defines the term “dealer” to include every person “who sells at retail or who offers for sale at retail, or who has in his or her possession for sale at retail . . . tangible personal property” in Florida. Rule 12A-1.060(1)(a)2., F.A.C., confirms the registration requirement for dealers that sell, lease, or grant license to use “tangible personal property subject to tax under Chapter 212, F.S.”

The agreement provides that the Condominium Association and the Taxpayer are not “joint ventures or partners,” and that “neither [the Condominium Association] nor [the Taxpayer] shall be liable for any of the obligations or duties of the other . . . .” The Taxpayer is an independent dealer making sales of taxable food products to the owners and occupants of the Condominium. As such, the Taxpayer is required to register to collect and remit sales and use tax. The Taxpayer should file and remit the sales tax collected for sales of food and drink under its own sales and use tax account.

Conclusions

The payment provisions and allocation of the risk of loss indicate that the Agreement is not a lease or a license to use real property. The consideration flows from the Condominium Association to the Taxpayer. The Condominium Association bears all the risks of loss flowing from the Agreement. The Taxpayer is compensated for providing services. The Taxpayer does not make any payments to the Condominium Association for the use of the Premises. The management fee, subsidy fee, general and administrative fees, and incentive fee paid by the Condominium Association to the Taxpayer 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 advice as specified in section 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 that 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., and 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.

Sincerely,
Brinton Hevey
Tax Law Specialist
Technical Assistance and Dispute Resolution
850/717-6839
Record ID: 40074

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