Could a controlled entity use a resale certificate for prepaid mall rent, and was refunded unearned rent taxable?

Plain-English summary

The controlled entity could give the mall owner an annual resale certificate instead of paying sales tax on the prepaid prime-lease rent. About 85% of the mall was already leased to commercial tenants. The controlled entity would sublease the property and was required to lease any unsubleased space back to the fee owner, apart from only incidental space retained for its own use.

The controlled entity remained responsible for collecting and remitting sales tax on rent received from subtenants. The Department also found that a refund of the unearned part of prepaid rent after early lease termination was not a taxable transaction.

What this means for you

Resale treatment shifted tax collection from the prime lease to the subleases; it did not eliminate tax on taxable tenant rent. The result depended on the controlled entity subleasing substantially all the premises and retaining no meaningful vacant space for itself.

Common questions

Q: Was tax due on vacancies under the prime lease? Not when the controlled entity tendered the annual resale certificate under the described structure.

Q: Did the controlled entity still collect tax from commercial subtenants? Yes.

Q: Was returned unearned prepaid rent taxable? No.

Citations and references

• Fla. Stat. § 212.031(1)(a), (c) — tax on commercial real-property rent
• Fla. Admin. Code r. 12A-1.070(9) — sublease resale treatment
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-028

Original ruling text

SUMMARY

QUESTION 1: If a Fee Owner leases real property to a
Controlled Entity that is required to sublease the property
and leaseback to the Fee Owner any portions it fails to
sublease (apart from a minimal portion of the property
retained for its own use), may the Controlled Entity avoid
the imposition of sales tax on prepaid rent by supplying
the Fee Owner with a copy of its annual resale certificate?

ANSWER 1 - Based on Facts Below: Yes. Because the vast
majority of the property will be subleased at the beginning
of the lease term, and because any remaining property must
be leased back to the to the Fee Owner, the Controlled
Entity may avoid the imposition of sales tax on prepaid
rent by supplying the Fee Owner with a copy of its annual
resale certificate.

QUESTION 2: In the event that the Lease Agreement is
terminated prior to the end of the lease term and the
unearned portion of the prepaid rent is refunded to the
Controlled Entity, would such refund be subject to sales
tax?

ANSWER 2 - Based on Facts Below: No. The refund of the
unearned portion of the prepaid rent in the event of a
termination is not a taxable transaction.

Jun 10, 2002

Re: Technical Assistance Advisement 02A-028
XXX ("Fee Owner")
F.E.I.# XX
Sales Tax # XX
XXX ("Controlled Entity")
Sales & Use Tax - Lease and Sublease of Real Estate
Section 212.031(1)(a), (c), F.S.
Rule 12A-1.070(9), F.A.C.

Dear :

This is a response to your letter dated May 16, 2002, requesting
the issuance of a Technical Assistance Advisement concerning the
above referenced matter.

Facts

You state in your letter referenced above that your client, XXX
(Fee Owner), owns XX (Mall) in Florida. The Fee Owner will form
a wholly controlled entity, which may be either a limited
partnership or limited liability company (Controlled Entity).
The Fee Owner will own all of the interest in the Controlled
Entity.

The Fee Owner will lease the Mall to the Controlled Entity for a
term of less than 99 years (Lease). All of the rent due under
the Lease will be prepaid upon the execution of the Lease. The
prepaid rent will be based on a market value rent. Various
provisions of the Lease would allow the Controlled Entity to
terminate the Lease. Upon the termination of the Lease, the
unearned portion of the prepaid rent would be refunded to the
Controlled Entity. The Controlled Entity would not have an
option to purchase the Mall.

The Mall is 85% leased to commercial tenants. 15% of the
available space in the Mall is currently vacant, but the Fee
Owner is actively attempting to lease the vacant space to
commercial tenants. The Controlled Entity will not use any of
the vacant space for its own use.

Requested Advisement

I. You request that the Department determine whether the
Controlled Entity would be able to issue a resale certificate to
the Fee Owner pursuant to Rule 12A-1.070(9), F.A.C., and not be
required to pay sales tax on the payment of pre-paid rent.

II. You also request that the Department determine whether, in
the event of termination of the Lease, prior to the end of the

lease term, a refund of the unearned portion of the prepaid rent
would be exempt from sales tax.

Applicable Law

Section 212.031(1)(a), F.S., provides:

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....

Section 212.031(1)(c), F.S., provides:

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....

Rule 12A-1.070(9), F.A.C., provides:

(9) If a tenant or other person sublets or assigns his
interest in all of the leased or licensed premises, or
retains only an incidental portion of the entire premises,
then such tenant or other person may elect not to pay tax
on the prime lease or license, provided that such tenant or
other person shall register as a dealer and collect and
remit tax due on the sub-rentals or assignments and pay the
tax due on the portion of the rental charges or license
fees pertaining to any taxable space which he retains. If
the tenant or licensee elects not to pay the tax to his
landlord, or other person granting the right to occupy or
use such real property, he should extend to his landlord or
such other person a resale certificate.

Response

I. The Controlled Entity, which will sublease the property to
sublessees, may tender an Annual Resale certificate to the Fee
Owner, and by this tender be freed of the obligation to pay
sales tax on the Lease to the Fee Owner. Because the Controlled
Entity will tender a resale certificate, there is no obligation

to assess tax on the vacancies. The Controlled Entity is
obligated to collect the applicable sales tax on the rental
payments it receives from the sublessees.

II. The refund of the unearned portion of the prepaid rent in
the event of a termination is not a taxable transaction.

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, 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 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,

Case Bodiford
Attorney
Technical Assistance and Dispute Resolution
(850) 922-4714

cab/
Control No. 50366