Was a mandatory, separately itemized waste-removal reimbursement taxable as rent?

Subject

Lease of Real Property/Waste Fee Charges

Plain-English summary

The mandatory waste-removal reimbursements were taxable as part of rent. Tenants had to pay the landlord's charge to remain in possession.

Separately itemizing the charge or calling it reimbursement did not preserve a separate tax identity. Because it was contractually required for continued use, it became part of total rent.

What this means for you

A lease charge's substance mattered more than its invoice label. Mandatory amounts paid to the landlord for continued possession could enter the taxable rent base.

Common questions

Q: Did separate itemization avoid tax? No.

Q: Did the reimbursement label avoid tax? No.

Q: What fact drove the result? The charge was mandatory for continued possession.

Citations and references

• Fla. Stat. § 212.031(1)(a), (c), (d) — taxable real-property rent
• Fla. Admin. Code r. 12A-1.070 — real-property leases
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-034

Original ruling text

SUMMARY

QUESTION: Is a payment to the landlord by the tenant of a
charge for waste removal subject to sales tax when the
charge is separately itemized and characterized as a
reimbursement to the landlord?

ANSWER - Based on Facts Below: Any charges, unless
otherwise exempt, in addition to any amount denominated as
rent or license fee, which are not optional but
contractually obligated to be paid by the tenant or
licensee to remain in possession, or which allow the
privilege of use to continue, lose their identity as
individual charges and become taxable elements of the
"total rent or license fee" irrespective whether the
charges are separately itemized or characterized as a
"reimbursement" to the landlord.

Title:

Lease of Real Property/Waste Fee Charges

Jun 28, 2000

Re: Technical Assistance Advisement 00A-034
Whether, in the lease of real property, certain waste fees
are taxable portions of the lease payment
XXX (herein Lessor)
XXX (herein City)
Section 212.031(1)(a), (1)(c), and (1)(d), F.S.
Section 212.031(7), F.A.C.
Rule 12A-1.070, F.A.C.

Dear:

This is a response, styled a Technical Assistance Advisement, to
your letter dated May 23, 2000, in which you asked whether the
Lessor, an owner and operator of a shopping center, in
contracting and paying for the removal of trash produced by its
commercial tenants, is obligated to collect sales tax on the

charge for the waste removal in the instance when the Lessor is
reimbursed for such costs by each tenant. The Lessor has failed
to include the waste removal charge as an element of the taxable
rent to the tenants of the shopping center. You note that an
audit of the Lessor for the period September, 1994 through
August, 1999, yielded a sales tax deficiency, which you assert
resulted entirely from the imposition of tax on the waste
removal charge.

You also attached to your letter copies of the following
documents:

(1) Two lease agreements executed by the Lessor and
tenants the terms of which are for one lease, January
1991 through December 1998, and for the other lease a
term from August 1998 through September 2001 (herein
Lease or Leases).
(2) Invoice to the Lessor from a cartage company.
(3) Letter from the City in which it is announced that the
City would not continue the collection of waste and
advising that private cartage companies should be
retained.

(4) Letter Lessor sent to a tenant expressing the tenant's
responsibility to reimburse the Lessor for the cartage
cost.
(5) Reports which summarize the costs to Lessor which
costs exceed the reimbursement by the tenants to the
Lessor.

You state, on the first page of your letter, that Lessor "...
charges the tenants a basic rent based on square footage and no
additional rent for the privilege or right to use or occupy the
real property." [emphasis replicated] You add that with the
exception of the waste removal cost, "[e]ach tenant is
responsible for paying directly to the suppliers of utilities,
insurance and other operating expenses."

You recount that on August 10, 1994, the City gave notification
that it would cease the collection of commercial solid waste. In
its letter, you state that the City "... advised the tenants to

obtain the services of a qualified hauler and provided a list of
private haulers certified by the City...."

In lieu of each tenant individually negotiating a cartage
contract, you assert that the Lessor agreed to contract for the
waste removal with an understanding that each tenant would
reimburse the Lessor for the estimated waste removal cost. You
state that the estimate of the waste removal cost is provided by
the tenant. In its billing to each tenant, the Lessor
separately itemizes the real property rent, and the applicable
sales tax on such rent. The separately stated waste removal
charge is not included as an element of the taxable rent.

You ask the Department to state whether, under such
circumstances, the waste removal charge is an element of the
taxable real property lease payment. You add, on page 3 of your
letter, that if the waste removal cost is taxable, the
Department should provide guidance as to the "... form in which
the transaction should be documented in order to reflect the
true intention of the parties to reimburse an expense paid in
advance and, therefore exempt from sales tax."

You contend, on page 3, that sales tax is not applicable when
the following four elements are present:

1 - Charges constitute an expense of the tenant for
property or service received by the tenant and advanced by
the landlord[.]
2 - Landlord actually pays the sales tax[.]
3 - Landlord separates the amount of rent from these
charges[.]
4 - Landlord charges the tenant the same or a lesser
amount, i.e., landlord makes no profit on the passthrough[.]

You cite the decision in Omni International of Miami, Ltd. v.
Department of Banking and Finance, 444 So.2d 540 (Fla.3DCA
1984), and note that Rule 12A-1.70, F.A.C., and two previous
Department communications have provided the four elements
enumerated above.

Department Response

Section 212.031(1)(a), F.S., imposes the tax on the privilege of
engaging in the business of leasing or licensing the use of real
property. Section 212.031(1)(c), F.S., specifies that the tax
shall be computed "... on the total rent or license fee charged
for real property by the person charging or collecting the
rental or license fee." This statutory provision also provides
that the tax is levied on the payments given in exchange for the
grant "... of a privilege to use or occupy real property for any
purpose and shall include base rent, percentage rents, or
similar charges." Rule 12A-1.070, F.A.C., interprets these
statutory provisions.

Thus, Florida law imposes sales or use tax, by operation of s.
212.031, F.S., on the "total rent or license fee" when such
payment is given for the right to use or occupy real property
for any purpose. Applying these statutory provisions to the
waste removal charge described above, a conclusion is reached
that such charge is an element of the taxable rent which must be
paid by the tenant and collected and remitted by the Lessor.
The Department denies that a distinction can be validly made by
merely itemizing this charge on the billing to the tenants and
categorizing the payment by the tenants as a "reimbursement."

The Lessor, not the tenant, is obligated pursuant to its
contract with the cartage company for the payment of such waste
removal. Similarly, the Lessor may be obligated to pay salaries
for its administrative staff, to bear the cost of office machine
operation, or to tender payment to a mortgagee. Such charges, if
separately stated in the tenant's billing and characterized as
"reimbursements" to the Lessor, would nevertheless be considered
as elements of the "total rent or license fee" taxable to the
tenants. With the exception of the element of profit, the "total
rent or license fee" paid by a tenant is comprised of numerous
"reimbursements" to a lessor of its operating or business costs.

Thus, any charges, unless otherwise exempt, in addition to any
amount denominated as rent or license fee, which are not
optional but contractually obligated to be paid by the lessee or
licensee to remain in possession, or which allow the privilege

of use to continue, lose their identity as individual charges
and become taxable elements of the "total rent or license fee"
irrespective whether the charges are separately itemized. Thus,
the separately stated "reimbursement" to the Lessor for the
waste removal charge, which must be paid by a tenant to remain
in possession, is an element of the taxable rent.

The obligation of a tenant to pay the waste removal cost is
clearly a provision of both Leases. In Article 28, paragraph
(11) of both Leases, the tenant is to bear all costs of waste
removal. This provision of the Leases is referenced in your
letter to a tenant dated January 30, 1995, a copy of which you
provided the Department. Also, in a letter to the same tenant
dated October 23, 1995, you remind the tenant under the legend
which reads "ARREARS IN RENTAL PAYMENTS" of the requirement for
payment of the waste removal costs.

In Article 16 of both Leases a material breach of the contract
is defined, in part, as a failure of the tenant to "... pay the
rent at the time and in the manner as provided in this lease: or
[failure] to promptly and fully perform any and all of the
provisions of this lease...."

Thus, the payment of the waste removal cost is mandatory, and
failure to make such a payment is a material breach of the
contract. The remedies possessed by the Lessor under Article
16, in the event of a material breach as expressed in paragraph
(3), include the termination of the contract and in such an
event the Leases read that the tenant "... shall vacate the
premises."

The cost of improvements made to the property by tenants is also
a taxable element of the "total rent or license fee" when such
improvements are required by the lease or license agreement to
be made by a tenant. Again, note is made that individually
designated payments, such as the waste removal fee, the payment
by a tenant of a lessor's real property ad valorem assessment,
or any required improvements to real property if such tenant is
to remain in possession, lose their identity as individual
costs, and merely become elements of the "total rent or license
fee" which is made subject to the tax by s. 212.031(1)(c),

Florida Statutes.

In interpreting the provisions of s. 212.031(1)(d), F.S., which
allows the payment of rent in forms other than cash, the court
in Seaboard Coast Line Railroad Company v. Reubin 0'D. Askew,
Case Number 72-15 (Fla. Second Judicial Circuit 1972), stated
that "[w]hile 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 the leased
premises." See, also Attorney General Opinion 070-151.

However, any direct expense borne by a tenant, as required in
Lease Articles 21, for casual repairs and maintenance to the
real property is not a taxable element of the "total rent or
license fee." The burden of maintaining the property in the
condition it was received is a recognized part of landlordtenant relationship, bottomed on the duty of the tenant, as
expressed in Lease Articles 13 and 21, not to commit waste on
the demised premises. Thus, any expense borne by Tenant to make
such casual and de minimis repairs is not part of the taxable
"total rent or license fee."

Similarly, the provision as expressed in Lease Articles 18, of a
tenant's obligation to pay ad valorem tax on its own tangible
personal property is not part of the "total rent or license fee"
subject to sales or use tax. Also not part of the taxable rent
are the direct costs of a tenant as described by you on the
first page of your letter when paid by the tenant "... to the
suppliers of utilities, insurance and other operating costs."
When contracted directly by the tenant, such payments are not
part of the taxable "total rent or license fee."

You cite Omni International, Rule 12A-1.070, F.A.C., and two
previous Department communications as support for your principal
argument that the Department has held that certain separately
stated charges are not part of the taxable rent. You have
identified such nontaxable charges by the four characteristics,
which are enumerated above.

However, the Omni International case, Rule 12A-1.070, F.A.C.,
and the two Department communications relied on by you are

applicable solely, under certain conditions, to utility services
billed to tenants by a lessor. The definition of the term
"utility service" in s. 203.012(9), F.S., does not include waste
removal. Thus, the court case, the administrative rule and the
two Department communications lend no support to your argument.
Note is made that the holding in Omni International is now
codified, effective July 1, 1998, in s. 212.031(7), 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.

You are further advised that this response and 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 s. 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,

Robert G. Parsons
Tax Law Specialist
Technical Assistance and Dispute Resolution
Ctrl. No. 41570