Sales and Use Tax TAA 12A-023

QUESTION: Whether sales tax must be collected during “rent free” periods in which rent

income is recorded for financial accounting purposes or when rentals from real property are paid

to the landlord.

ANSWER: Sales tax must be collected on rentals of real property leases when rental

consideration is received.

October 3, 2012

Subject: Technical Assistance Advisement – TAA 12A-023

Sales and Use Tax

Real Property Rentals

Section 212.031, Florida Statutes (“F.S.”)

Rule 12A-1.070, Florida Administrative Code (“F.A.C.”)

XXXXXXXXXXXXXX

XXXXXXXXXXXXXX), Petitioner (“Taxpayer”)

FEI#: XXXXXXXX

Business Partner#: XXXXXXX

Dear Mr. XXXXX:

This letter is a response to your firm’s petition dated July 20, 2012, for the Department’s

issuance of a Technical Assistance Advisement (“TAA”) concerning the above referenced party

and matter. Your petition has been carefully examined, and the Department finds it to be in

compliance with the requisite criteria set forth in Rule Chapter 12-11, F.A.C. This response to

your request constitutes a TAA and is issued to you under the authority of s. 213.22, F.S.

Issue

Whether Taxpayer is required to collect or pay sales tax on an amount recorded as rental income

during the “rent free” periods provided for by Taxpayer’s leases when no consideration was

received.

Facts

The petition provides, in part:

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Interim Executive

Director

Marshall Stranburg

Taxpayer owns commercial property located in Florida that it leases to tenants. As an

inducement to tenants to lease its properties, it is not uncommon for Taxpayer to offer

“rent free” periods under a lease. These rent free periods may be for several months or

longer depending on the circumstances. Taxpayer’s leases state that no rent is due from

the tenant for these designated rent free periods. There are no special conditions for

receipt of the rent free periods other than general compliance with the lease terms. In

other words, these rent free periods are not conditioned on the tenant making some other

payment or performing any service or providing any other or additional consideration to

Taxpayer. For bookkeeping purposes, Taxpayer does reflect the portion of “free rent”

that would have otherwise been paid as “rental income.” However, this “free” portion of

rental income is amortized as an expense to the property over the term of the lease. . . .

[T]here is no amount actually payable by or received from the tenant.

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The petition further provides that Taxpayer collected tax based on the bookkeeping entries from

its commercial tenants and remitting it to the State. Recently, however, a tenant objected to

paying the sales tax on the free rent based on the fact that no rent was actually paid.

A copy of the Taxpayer’s standard form lease agreement and exhibits was provided, as well as

the following explanation: Actual leases vary as to which exhibits are included. The rent free

period is addressed in Schedule L of the agreement. The determination whether a tenant receives

a rent free period is done on a case by case basis. Schedule L provides, in part, the following:

So long as Tenant is not in default under the Lease, Tenant shall not be required

to pay Basic Rent for the first … months of the Term of the Lease (herein called

the “Basic Rent Free Period”).

All other terms and provisions of the Lease shall, however, remain in full force

and effect during the Basic Rent Period and thereafter including without

limitation the payment of Additional Rent for Additional Services, including but

not limited to, after-hours HVAC, electricity in excess of electricity required for

normal office use, and any other special services requested by Tenant.

Taxpayer Position

The petition provides:

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Regarding commercial leases of real property, section 212.031(1)(c), Florida Statutes,

imposes the sales tax ‘. . . on the total rent or license fee charged for such real property by

the person charging or collecting the rental or license fee.’ Similarly, Rule 12A1.070(4)(f), Florida Administrative Code, provides that the tax on commercial rentals is

due ‘at the time of the receipt of the rental or license fee payment.’

****

Taxpayer asserts that “[i]t is clear from these provisions that sales tax is due only on amounts

charged by the lessor or paid by the lessee. In the present case, there is no amount charged or

paid for the rent free periods. Although tax is imposed on ‘any consideration’ paid for the rental

of realty, nothing of any value is required of the tenant . . . other than compliance with the

general terms and conditions of the lease.” The petition further provides that “accounting entries

in the absence of the payment of actual consideration are not sufficient to create a sales tax

liability.” The petition cites to Southern Paving Company v. Department of Revenue, 399 So.2d

11 (Fla. 1st DCA 1981). The petition further states:

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As a lessor, Taxpayer is only concerned with collecting the correct amount of sales tax due to the

State. However, as an agent of the State in the collection of the tax, Taxpayer must not impose

or collect any more from its tenants than the amount that is actually due. In this case, Taxpayer

believes that sales tax is not imposed for periods when no rent is charged to or paid by the tenant.

****

Ruling requested

The petition requests binding advice to the effect that Taxpayer is not required to collect or pay

sales tax for the “rent free” periods.

Applicable Law and Discussion

Section 212.031(1)(a), (c), (d), and (3), F.S., provides, in part, the following:

(1)(a) It is declared to be the legislative intent 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 ….

****

(c) For 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 for such real property shall 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. Such charges shall be included in the

total rent or license fee subject to tax under this section whether or not they can be

attributed to the ability of the lessor's or licensor's property as used or operated to

attract customers….

(d) When the rental or license fee of any such real property is paid by way of

property, goods, wares, merchandise, services, or other thing of value, the tax

shall be at the rate of 6 percent of the value of the property, goods, wares,

merchandise, services, or other thing of value.

****

(3) The tax imposed by this section shall be in addition to the total amount of the

rental or license fee, shall be charged by the lessor or person receiving the rent or

payment in and by a rental or license fee arrangement with the lessee or person

paying the rental or license fee, and shall be due and payable at the time of the

receipt of such rental or license fee payment by the lessor or other person who

receives the rental or payment….

Rule 12A-1.070(4)(b) and (f), F.A.C., provides, in part, the following:

(b) The tax shall be paid at the rate of … 6 percent on or after February 1, 1988,

on all considerations due and payable by the tenant or other person actually

occupying, using, or entitled to use any real property to his landlord or other

person for the privilege of use, occupancy, or the right to use or occupy any real

property for any purpose.

****

(f) The tax shall be due and payable at the time of the receipt of the rental or

license fee payment by the lessor or other person who receives the rental or

payment….

Section 212.03(1)(a), F.S., provides that Florida sales tax applies to the privilege of engaging in

the business of renting, leasing, letting, or granting a license for the use of real property. Section

212.031(1)(c), F.S., provides the tax on this privilege is levied on the total rent charged and paid

for such real property by the person charging or collecting the rental. Section 212.031(1)(d),

F.S., provides that the rental consideration may be paid in a manner other than money. It

provides that rent may be paid by way of “property, goods, wares, merchandise, services, or

other thing of value.”

Rent is defined as “consideration paid, usually periodically, for use or occupation of property.”

Cascella v. Canaveral Port Authority, 827 So.2d 308, 310 (Fla. 5th DCA 2002)(Citing Black’s

Law Dictionary 1299 (7th ed. 1999)). Consideration includes either a benefit to the promisor or a

detriment to or obligation upon the promisee. 68 Am.Jur. 2d Sales and Use Taxes §66.

Detriment to an acquiring party may constitute consideration for a transfer of assets. Id.

Consideration is not limited to a money consideration and may include an assumption of liability

or other thing of value. Id.

In Seaboard Coastline Railroad Company v. Askew, Case #72-15 (Fla. Cir. Ct., 2nd Cir., Leon

Co., 1972), the court addressed the issue of what is included as rental consideration and held as

follows:

The consideration paid by the tenant for the privilege conferred by the lease is

“rent.” Rent may be payable in cash, or in some commodity, or by rendering

specified services. Rent may be payable directly to the lessor or to some other

person either specified in the lease or directed by the lessor…. Section 212.031

imposes a tax upon “the total rent charged” for the “renting, leasing or letting” of

real estate.... While taxes are not specifically mentioned, this language clearly

indicates a legislative intent to tax the full benefits flowing to the landlord for

the use of leased premises.... The payment of these taxes by the lessee is the

payment of money for account of the owner and for his benefit.... A [sales] tax is

imposed upon a transaction and measured by the rent. In every rental transaction

the amount of taxes upon the rented property is necessarily considered by the

parties in determining the rent to be charged and paid whether the taxes be paid

by the landlord from a fixed monthly or annual rental or paid for the landlord by

the tenant. (Emphasis Supplied)

Section 212.12(5), F.S., provides authority to the Department to make an estimated assessment

from the best information available when records are not provided to the Department during an

audit. In such cases, a journal entry reflecting rental income presumably reflects rental

consideration received of which an assessment is prima facie correct. The party assessed has the

burden to demonstrate otherwise. Landlords have the burden to keep and maintain all records

regarding a transaction to which the reported rental income relates. In this instance, Taxpayer

provided the lease agreement that provides for rent free periods.

The entries in this instance reflect income over the entire period of the lease with an amortization

expense amount reducing the net income from rentals in other periods. This type of accounting

treatment is consistent to that provided for by financial accounting standards regarding certain

types of leases including rent free periods. See Financial Accounting Standards Board (“FASB”)

Technical Bulletin Number 85-3 and FASB Bulletin Number 88-1. Both Bulletins refer to

Statement of Financial Accounting Standards Number 13, paragraphs 15 and 19b.

The accounting treatment reflected in the Bulletins is not intended to reflect rental consideration

received at the time of receipt, as is provided for by section 212.031(3), F.S., but to reflect an

accounting representation of the lease for financial accounting purposes. Since the entries

reflecting the amortized “rent free” period income do not reflect actual rental consideration

received, the tax does not apply on the amortized “rent free” period income. Taxpayer is

required to collect and remit sales tax in periods when rental consideration is received and on any

additional rental consideration received during the “rent free” period. Taxpayer’s books and

records should reflect the receipt of funds paid pursuant to Taxpayer’s lease agreements even

though rental income is recognized in a different period for financial accounting purposes.

Conclusion

Taxpayer is not required to collect or pay sales tax on an amount recorded as rent income during

the “rent free” periods provided for by Taxpayer’s leases when no consideration was received.

However, the tax applies when the rental consideration is received in the other periods and on

any additional rental consideration received during the “rent free” period.

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 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 10 days of the date of this

letter.

Respectfully,

Chuck Wallace

Senior Attorney

Technical Assistance & Dispute Resolution

(850) 717-7541

Record ID: 128830