How did Florida apportion taxable rent under a mixed-use hotel land lease?

Subject

Real Property Sales Tax Apportionment-Hotel

Plain-English summary

The taxable portion of the hotel's lease payment had to be apportioned by square footage, not by the percentage of rent tied to room revenue. Florida excluded the portion attributable to premises used exclusively as dwelling units, including guest rooms and common spaces principally provided to guests without a separate charge.

The taxable fraction used business-only and other non-guest space in the numerator. The denominator used the total leased land and improvements under the ruling's stated floor-area treatment. That fraction was applied to total rent, and the ruling described the tax rate as 6% for this 2000 transaction.

What this means for you

A revenue-based rent clause did not decide the allocation. The Department looked at the physical uses of the hotel property and how the lease covered the entire site.

Common questions

Q: Could the hotel exclude all rent calculated from room revenue? No.

Q: What allocation method controlled? Square footage.

Q: Did guest common areas count with the dwelling-unit side? Yes, where they were principally provided to guests without separate charge.

Citations and references

• Fla. Stat. § 212.03 — transient accommodations tax
• Fla. Stat. § 212.031(1)(a)-(c) — real-property rentals and multiple use
• Fla. Admin. Code r. 12A-1.070 — leases and licenses of real property
• Department of Revenue v. Vanjaria Enterprises, Inc., 675 So. 2d 252 (Fla. 5th DCA 1993)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-084

Original ruling text

SUMMARY

QUESTION: In the operation and lease of a hotel, is the
portion of the lease payment subject to sales tax computed
on a square footage basis, or on a standard which equates
the lease payment to a percentage of room rental income?

ANSWER - Based on Facts Below: The portion of the lease
payment subject to sales tax, in this instance, based on
the facts and circumstances presented to the Department,
shall be determined on a square footage measure and not on
a percentage of room rental income.

Dec 22, 2000

Re: Technical Assistance Advisement 00A-084
Real Property Sales Tax Apportionment-Hotel
XXX (herein Lessee)
XXX (herein Lessor)
Section 212.03, F.S.
Section 212.031(1)(a), (1)(a)2., (1)(b), and (1)(c), F.S.
Rule 12A-1.070, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated October 2, 2000, in which you ask the
Department to agree that Florida sales tax may not be imposed on
the portion of the lease payments of real property, used in the
operation of a hotel, when such a portion of the payments
required by the lease is based on a percentage of room rental
income. Lessee, the hotel operator, and Lessor executed a lease
of a certain parcel of land on September 22, 1994, for a term of
99 years. The Lessor owns the land. You attached to your letter
a copy of the lease document, which bears the legend XXX (herein
Lease).

In Section IV of the Lease the use to be made of the land by the

Lessee is described as "... for the purpose of constructing,
maintaining, and operating a first class, quality hotel with a
minimum of 100 rooms, and related amenities...."

Section VIII states partly as follows:

Title to any building or improvements of a permanent
character that shall be erected or placed upon the demised
premises by the Lessee shall forthwith vest in [Lessor]
subject[s] however, to the term of years granted the
Lessee....

The amount of the lease payment, as provided in Section V, C,
excluding the first year, is described as "... an annual minimum
rental of $20,000.00 payable in advance at the beginning of each
year." Also in Section V, C, the Lessee is required to pay as
"additional rent" a percentage of annual gross sales which
exceed the annual minimum of $20,000.00.

These percentages apply to room rental income at graduated
levels of such rental income, based on the amount of room
revenue per acre; and percentages of sales from restaurant food
sales; beer and wine sales; liquor sales; and a percentage of
what is described as "all other sales."

Considering the provisions in the Lease you assert on page 2 of
your letter that "... when rental fees [lease payments] are
determined by revenue [room rental income], the portion of the
exempt sales should be the portion of the rental fees which are
related to room revenue...." You also cite s. 212.031, F.S.,
which provides, in subsection (3), that when real property is
subject to a multiple use, the Department should determine from
the provisions of the lease, and from other available
information, what portion of the lease payment is not subject to
sales tax.

You also support your argument by citing Department of Revenue
v. Vanjaria Enterprises, Inc., 675 So.2d 252 (Fla. 5DCA 1993).
You assess "... the intention of the court, like the intention
of the legislature, is that the taxable share of the
distribution of rent should be based on an equitable method, and

that the method may not be the same in all cases." You assert
that "... a distribution based on [room] revenues is more
equitable in this case than a distribution based square
footage...."

The methodology advanced by you results in no portion of the
lease payment that is attributable to room rental income being
subject to sales tax. Thus, it is your position that if, as in
Section V, C, 2.5 percent of room rental income must be paid by
the Lessee, as a portion of the lease payment, all such portion
of the lease payment is exempt from the tax as levied by s.
212.031. Florida Statutes.

Department Response

Section 212.031(1)(a), F.S., imposes sales tax on the privilege
of engaging in the leasing or the granting of a license to use
real property. Section 212.031(1)(c), F.S., imposes the tax on
the "... total rent or license fee charged for such real
property by the person charging or collecting the rental or
license fee." Rule 12A-1.070, F.A.C., interprets the statute.

However, as to real property used "exclusively as dwelling
units," s. 212.031(1)(a)3., F.S., excludes such premises from
classification as "real property" subject to tax. This
recognition of the dual character of real property, that is,
property used "exclusively as dwelling units," as in a hotel or
motel, and other property of the hotel or motel which is not
used exclusively for such purpose, is revealed in the provisions
of s. 212.031(1)(b), F.S., which provide in relevant part:

When a lease involves multiple use of real property wherein
a part of the real property is subject to the tax herein,
and a part of the property would be excluded from the tax
under... subparagraph (a)2.,... the department shall
determine, from the lease or license and such other
information as may be available, that portion of the total
rental charge which is exempt from the tax imposed by this
section....

Thus, in apportioning the lease or license payment required of a

lessee or licensee of real property, sales tax may not be
imposed on that portion of the lease or license payment
attributable to the premises used "exclusively as dwelling
units."

The basis for such an exclusion is that the lease or rental
payments received from persons leasing or renting premises such
as hotel and motel rooms will be subject to the tax under
another statute, s. 212.03, F.S., which levies, in general,
sales tax on the transient use of premises used exclusively as
dwelling units, in for example, hotels and motels.

In determining the apportionment of the sales tax applicable to
the lease payment at issue, between premises within the hotel
used "exclusively as dwelling units," and other space within and
without the hotel used for purposes other than "exclusively as
dwelling units," the Department finds that given the facts and
circumstances presented, the controlling standard, in this
instance, will be square footage measure, rather than the "room
rental income" exclusion you advocate.

The Department does not agree with your contention, as you state
on page 3 of your letter, that "... a distribution based on
revenues is more equitable in this case than a distribution
based on square footage, as the lease payments are based on
[room rental] revenues." Your contention is bottomed on the
provision of the Lease as cited above, that, a portion of the
Lease payment made by the Lessee will be an amount equal to 2.5
percent of room rental income.

The base annual rent for the leased property is a fixed amount
of $20,000, which amount is not related in any manner to
revenues produced from the various activities that are conducted
by the Lessee on the leased property. The base rent is related
to the square footage of the entire property leased by the
Lessee, and is due even if no revenues are received by the
Lessee from its hotel and commercial operations. The "additional
rent" payable is based on a percentage of revenues the Lessee
receives from the various activities it conducts on the
property. However, in the case of the additional rent applicable
to room revenues, the specific percentage payable is tied to the

room revenues received per acre (or square footage) of the
entire property covered by the Lease. Thus, it appears that the
rent payable by the Lessee is determined more by the square
footage of the entire leased property, than it is by revenues
derived from activities that may be carried on by the Lessee on
such property.

Also, it is the case that the income from room rentals comes not
from solely the area of the room itself but from the entire
environment of the hotel. In considering the execution of a
lease of room space, lessees will evaluate, for example, the
overall esthetic ambiance of the hotel premises, including the
grounds, its structural design and maintenance, lobby and
hallway appointments and condition, as well as, the room itself
and, then, in conjunction with price make a decision to contract
for a term of occupancy.

Thus, the Department, in the square footage measure, recognizes
that the language, which describes the premises "exclusively as
dwelling units," includes not only the room but the hallways,
lobby, parking areas, and other spaces used by the room lessees
which are not subject to separate charge and which the room
lessees have a nonexclusive right to use.

As a consequence, phrased in general, without the provision of
any square footage measure, a conclusion is reached that the
Lessee will owe Florida tax in the amount which results when the
rate of 6 percent is multiplied by the fraction of the total
lease payment, which fraction is computed as follows: The
numerator is the square footage of the land and improvements
used by the Lessee in the operation of the business, such as the
office area and all spaces, which either are used exclusively by
the Lessee, or which do not constitute guest rooms or common
areas principally provided to guests. The denominator is the
total square footage of the entire area subject to the Lease,
including the land and the improvements thereon, excluding the
floor, which is on the grade of the land. Thus, the denominator
is the total square footage of the land and the square footage
of all floors above and below, if any, of the ground floor.

Since the Department is basing its conclusion on the specific

facts and circumstances of the matter at issue, the holding in
Vanjaria does not require a different result.

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. 42618