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Rental of Real Property or Rental of TPP vs Leased Equipment

We received several inquiries lately on the topic of the rental of real property versus the rental of tangible personal property (TPP) in the context of third-party owned equipment used by businesses. This is an interesting and broadly applicable topic as any number of Florida businesses can have machines placed on-site which generate payments to the business and the equipment owner. Think about it – how many times of you seen an ATM in a hotel, mall, convenience store, or other non-banking establishment? The business location does not own the ATM, but you know the business is being paid to allow the ATM to be placed there. Have you ever thought about how much it costs to buy all the video games at an amusement park? The question is – Do you really think an amusement park owns all those video games? How about the juke box at a bar? Do you think your high school really owned that vending machine where you bought all those cokes as a kid? You may never have thought about it before, but the situation where a third party places equipment in the middle of a business to generate income for both the business location and the equipment owner is in virtually every business you visit.

The question we have been getting is whether the payments made to the location owner should be considered rent or can it be merely a revenue sharing agreement. If it is considered "rent," then of course we have sales tax implications in Florida. Depending on the type of equipment, we may have sales tax implications on the revenue generated by the equipment itself. For example, the price you pay to play an amusement machine in Florida is subject to sales tax. Yes - there really is a tax inherent in that quarter you put into an amusement machine. Wait, perhaps I may be dating myself. The latest games I've seen kids play seem to take dollars more than quarters. Either way, if the revenue generated by the machine is subject to sales tax and the portion of the revenue paid to the location owner is consider rent and also subject to sales tax – then wouldn't this be taxing the same revenue twice – double taxation?


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Researching these exact questions brought to my attention a case decided in 1997. The case of S & W AirVac Systems, Inc. v. Dept. of Revenue, State of Florida, 697 So. 2d 1313 (Fla. 5th DCA 1997), addressed "air-vac" machines placed at convenience stores and gas stations. (a copy of this case is downloadable at the end of this article) S & W Air Vac Systems, Inc., the company that owned the vacuum equipment, had agreements with store owners that paid compensation based on a percentage of gross receipts by the air-vac unit. The Florida Department of Revenue claimed that S & W Air Vac was renting the space where the machine was kept and the payments paid to the location business owner should have been subject to sales tax. S & W Air Vac sued the Department of Revenue disputing that the taxpayer was liable for use taxes on the rental of real property per Sec. 212.031, Florida Statutes ("F.S."). The taxpayer lost at the trial level and appealed the lower court's decision. In both the trial and appeal, S & W Air Vac argued several theories that the arrangement involved a revenue sharing agreement, a bailment, a joint venture, or did not involve a license agreement. We will explore each of these arguments below:

REVENUE SHARING AGREEMENT: S&W tried avoid sales and use tax by characterizing its agreement as a "revenue sharing agreement." The court found that S&W's payment was based upon the right to place its machine on the business owner's property. In noting that the business owner was not entitled to additional compensation once S&W removed its machine, the Court concluded S&W received a license to use real property.

BAILMENT: S&W then tried to avoid sales and use tax by characterizing its agreement as a "bailment" with the convenience store. The Court cited Fla. Jur.2d Bailments to provide a brief definition of bailment as a contractual relationship among parties in which the subject matter of the relationship is delivered temporarily to and accepted by one other than the owner. The analysis here looks to the level of possession, custody, and control surrendered by the bailor to the bailee. The Court cited several treatises addressing possession, custody, and control. Likewise S&W's prior argument, the Court ruled the facts did not support a bailment since S & W solely maintained the unit with no involvement by the store owners. (Planning note: If S&W could show that the location owner had complete possession and control of the air vac systems, then a bailment argument would have more merit).

JOINT VENTURE: S & W then argued that its arrangement with the convenience store owners constituted a joint venture. To qualify as a joint venture, five elements much be met: (1) common business purpose, (2) joint control or right of control, (3) joint proprietary interest in the property, (4) a right to share in profits, and (5) a duty to share in any loses. The Department seemed to concede there was a common business purpose but found there was no joint control or right of control, no joint propriety interest in the subject matter, no right to share in the profits and no duty to share in any losses which may be sustained. In denying Appellant's last argument, the Department cited the statutory definitions of "license" and "business" and concluded the store owners operated commercial premises designed to generate revenue and could be in the "business of granting a license. . . ."


What does this mean? It means we now know how NOT to structure these types of business arrangements if the one wants to avoid sales and use tax in Florida. It also tells us that the type of agreement between the parties is vitally important to the determination of whether there sales tax applies to the agreement. (Download the case to read the Court's more thorough discussion of each of these potential arguments). So the question becomes how can you structure an arrangement for amusement machines or other types of equipment to be placed in a business without incurring a sales tax for renting either the machine to the location owner or the premises to the equipment owner? One solution comes to mind. What if the location operator was a part owner of the amusement machines? It would be hard for the Florida Department of Revenue to argue that the location operator is renting the location to himself – so it would be very hard to argue that sales tax would be due.

Word of caution – Florida sales and use tax statutes recognize all types of business entities, even those commonly owned or disregarded for federal income tax purposes. Therefore, if you are delving into setting up a business structure to minimize the impact of FL sales tax, then you really need to make sure the right entities have ownership in the equipment.


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Another interesting case worth mentioning is Packaged Ice Inc vs FL Department of Revenue, DOAH Case NO. 02-1110, decided on August 27, 2002. (a copy of this case is downloadable at the end of this article) Without going into a full briefing of this case, we have an ice manufacturing company that installed on its customer's premises equipment capable of producing and bagging ice at the point of sale to the final consumer. So instead of manufacturing ice off site, bagging it, then bringing it to customers – this company was manufacturing and bagging the ice directly in the customer's business (e.g. a convenience store). The company still sold the bags of ice to the business, who in turn sold the ice to the final customer. In this case, the Florida Department of Revenue argued that the ice company was renting the equipment to the store and sales tax should be paid on the equipment rental. The court held that the company was NOT renting the equipment to the store. The Court found that the agreements clearly reflected that Packaged Ice Inc was selling bagged ice and not renting the equipment. Worthy of note – the court never addressed whether Packaged Ice, Inc. was renting the space where the ice manufacturing machine was located.


Whether the income generated from the equipment is subject to sales tax is a completely separate question. In S & W Air Vac's case, the user of the equipment is likely considered paying for a vacuuming service and would not be subject to sales tax (although one could logically argue the final user is renting the equipment and tax should be due). A customer using an amusement machines is subject to sales tax, albeit at a 4% rate. Alternatively, the use of an ATM would not be considered taxable (a non-taxable service). The answer to these questions are not always immediately clear and you really have to know the industry and how the FL DOR has historically treated the particular activity to at least get into the ball park of the right answer.


Another critical issue to consider when dealing with sales tax generated by equipment placed on someone else's location is who will be responsible to collect, remit, and report the sales tax generated from the equipment. This is very important because whoever is deemed responsible becomes liable for all the mistakes. Whether you are the owner of the machine or the location owner – you really want to make sure this question is answered clearly and definitively.

The general rule for who is responsible for collecting and remitting the tax is the person that actually collects the sales proceeds and tax is most likely the person responsible. Such is the general rule in this case, with a minor exception for amusement machines. Section 212.05(1)(h)2.c., Florida Statutes, provides:

If the proprietor of the business where the machine is located does not own the machine, he or she shall be deemed to be the lessee and operator of the machine and is responsible for the payment of the tax on sales, unless such responsibility is otherwise provided for in a written agreement between him or her and the machine owner.


One last this that needs to be addressed – whether the equipment itself needs to be registered. For example, amusements machines have special registration requirements. Registration with the Department is required upon initial operation of the amusement machine. A registration certificate is not required for every individual machine but rather only distinct registrations for each county where the machines will be located in. The operator must then display the certificate on the premises where the amusement machines are being operated. The certificate will list the number of machines the operator can operate. If an operator wants to operate more machines at a location than are listed on the certificate, then a new certificate will be needed. There is an annual fee of $30 per machine and must be renewed each year before the beginning of the State's fiscal year which is July 1st. Don't disregard this requirement because there is a penalty of $250 per machine for failing to obtain and display the certificate. There is a corresponding penalty of $250 on the lessee of any machine on the lessee's location that doesn't have a valid (current) certificate. And, these penalties are especially harsh because they are in addition to any other taxes, penalties or interest due. Final note – sales and use tax auditors are trained to look for these registration certificates and will include the fine in the audit results if the certificate is missing, expired, or does not cover all the machines on the premises.


This entire discussion has been focused on the use of equipment on property other than that of the primary owner of the equipment. However, the primary owner of the equipment has another sales tax concern – whether sales tax is due on the purchase of the equipment. If the equipment is purchased exclusively for re-rental, then the equipment can be purchased using the sale for resale exemption under Rule 12A-1.039, Florida Administrative Code (giving the vendor a resale certificate). If the equipment owner will be using the equipment without re-renting it (not exclusively for re-rental), then the sale for resale exemption would not apply and sales tax must be paid at the time of purchase.


Every equipment owner will eventually sell some of the equipment. The question often comes up whether the equipment owner has to charge sales tax on the sale of equipment. If a company is renting the equipment, then the answer is most likely yes. Renting the equipment is considered selling for sales and use tax purposes and the owner would be required to collect sales tax on the sales of the equipment. If the company operates equipment that it owns without renting, then the equipment owner would not be considered in the business of selling the equipment. In this case, if the company only sold equipment two times a year or less, then these limited sales would qualify for the occasional or isolated sale exemption under Rule 12A-1.037, Florida Administrative Code – and such sale would not be subject to sales tax (or use tax to the buyer). This, however, presumes that the equipment is not a vehicle, boat, or plane required to be registered. The occasional or isolate sale exemption does not apply for registered vehicles.

Final note on sales of equipment. Ever trade in your car for a new one? Do you remember that you were allowed to deduct the trade in value of your old car from the price of the new car, effectively reducing the sales price for sales and use tax purposes? In other words, you only had to pay sales tax on the net purchase price of the new car after taking into account the trade in value. The same rule (provided in Sec. 212.09) is available for trading in equipment. So if you trade in equipment for new equipment, then you can deduct the value of the trade in from the sales price subject to sales tax. However, the trade in credit is only allowed if you trade in the equipment at the time of the new equipment purchase.


If you made it this far through this article, then you likely either operate in the equipment rental industry or you are renting equipment from a company that is in that industry. Whether you have vending machines, car wash equipment, ice machines, ATM's, amusement machines, jet skis, segways, juke boxes, jump starting equipment, or one of the hundreds of other types of equipment commonly rented to other businesses, we hope you found this article informative. Our law firm is dedicated to assisting businesses with Florida tax matters. In fact, the vast majority of our practice is devoted to Florida Sales and Use Tax Controversy. If you still have questions, then we encourage you to take advantage of our FREE INITIAL CONSULTATION policy. If we can help you resolve your concerns with a phone call, then great. If you really need to hire someone with a tax problem, then we are here to help.

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About the author: Mr. Sutton is a Florida licensed CPA and Attorney and a shareholder in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Sutton's primary practice is Florida tax controversy, with an almost exclusive focus on Florida sales and use tax. Mr. Sutton worked for in the State and Local Tax department of one of the Big Five accounting firms for a number of years and has been an adjunct professor of law at Stetson University College of Law since 2002 teaching State and Local Tax and at Boston University College of Law since 2014 teaching Sales and Use Tax. Mr. Sutton is a frequent speaker on Florida sales and use taxes for the FICPA, Lorman Education, NBI, and the Florida Society of Accountants. Mr. Sutton is also the State and Local Tax Chairman for the American Association of Attorney – Certified Public Accountants. You can read more about Mr. Sutton in his firm BIO HERE.

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About the author: Mr. Parker is a sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., based in the firm's Tampa office. Mr. Parker's practice includes state tax audits and controversies involving sales and use tax and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Parker received his law degree and L.L.M. in Taxation from the University of Florida. To learn more about Mr. Parker, please visit his firm bio.


Sec. 212.05(1)(h), Florida Statutes, Tax on Amusement Machines

Sec. 212.09, Florida Statutes, Trade-Ins Deducted

Sec. 212.031, Florida Statutes, Tax on Rental or License Fee for Use of Real Property

Sec. 212.052, Florida Statutes, Sales from Vending Machines, Sales to Vending Machine Operators

Rule 12A-1.037, Florida Administrative Code – Occasional or Isolated Sale Exemption

Rule 12A-1.039, Florida Administrative Code – Sale for Resale Exemption

Rule 12A-1.044, Florida Administrative Code – Vending Machines

Rule 12A-1.070, Florida Administrative Code – Leases and Licenses of Real Property

Rule 12A1.071, Florida Administrative Code – Rentals, Leases, or Licenses to Use Tangible Personal Property

S & W Air Vac Systems, Inc. v. Dept. of Revenue, State of Florida, 697 So. 2d 1313 (Fla. 5th DCA 1997)

Packaged Ice, Inc. v. Florida Dept. of Revenue, DOAH Case No. 02-1110, Aug, 27, 2002


FL controversy ALERT – CAR WASH TAKE ON FLORIDA DEPARTMENT OF REVENUE, published July 26, 2013, by James Sutton, CPA, Esq.

2014 FL SALES TAX EXEMPTION ON MANUFACTURING EQUIPMENT, published July 31, 2014, by James Sutton, CPA, Esq.

FL TAX – VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, published October 5, 2012, by Jerry Donnini, Esq.

WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA?, published May 1, 2012, by James Sutton, CPA, Esq.

FLORIDA SALES TAX AUDIT HELP, published July 14, 2013, by James Sutton, CPA, Esq.

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