Could a commercial tenant exclude separately stated trademark and logo fees from taxable Florida rent?

Plain-English summary

Florida treated the separately stated trademark, service-mark, and logo fees as taxable commercial rent on the facts presented. The statute permits a reasonable allocation to genuinely valuable intangible rights, but the tenant did not establish the rights' market value, actual use, relationship to its business, or a legitimate business purpose.

The Department said an arm's-length label or stated percentage was not enough. The allocation had to reflect economic substance and market reality and be supported by books, records, appraisals, or other persuasive evidence.

What this means for you

Separating intangible-property fees from rent can work only when the rights have independent value and the allocation is commercially real and documented. A lease amendment designed only to relabel rent will remain vulnerable to tax.

Common questions

Q: Are trademark payments always included in taxable Florida rent? No. The statute can exclude reasonable payments for intrinsically valuable personal property.

Q: Why did this allocation fail? The tenant did not substantiate value, use, business purpose, or a reasonable division between rent and the intangible rights.

Citations and references

• Fla. Stat. § 212.031(1)(c) — taxable rent and reasonable allocations
• Fla. Stat. § 212.12 — records and substantiation
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-002

Original ruling text

SUMMARY

QUESTION: Are separate payments by the tenant to the
landlord for trademark, service mark, or logo rights of the

landlord subject to the tax on real property rentals?

ANSWER-Based on the Facts Below: Yes. Section
212.031(1)(c), F.S., requires that the payments be

reasonably allocated. The allocation of payments is not
reasonable where no substantial, competent, and persuasive
evidence is provided to establish the value of the

trademark, service mark, or logo rights of the landlord
received by the tenant. Furthermore, it was not

established that there was a legitimate business purpose

for the tenant to purchase the rights in such personal

property.

Jan 24, 2003

Subject: Technical Assistance Advisement 03A-002
Real Property Lease Agreements
Sales and Use Tax
Section 212.031(1)(c), F.S.
XXX ("Lessee"), Petitioner

Taxpayer Identification Number: XX
Dear :
This is in response to your letter dated January 29, 2002,
regarding the taxability of payments pursuant to real property

leases.

ISSUE

Are the separately stated fees paid for the trademark,
servicemark, or logo right of the commercial facility owner

subject to sales tax?

FACTS

Your letter provides the following in part:

[Lessee] is re-negotiating its real property commercial

lease agreements with various owners of real property for
the purpose of using the property as a retail store and
showrooms open to the general public. In addition to rent
and ad Valorem payments, the lease agreements provide for
the right to use a trademark, service mark, or logo of the
individual commercial facility owner. This right is to be
included in the commercial lease agreement as a separately
stated fee. This provides [Lessee] with the right to use

the trade name and/or logo of the commercial facility owner
in a limited commercial capacity. Increases in the
trademark, service mark and logo fee in future years will

be made in accordance with the Consumer Price Index
adjustment provisions of the lease. Ad Valorem payments in
the leases will be adjusted as necessary, based on changes
made in the assessed value of the property by the property

appraiser [with] jurisdiction over the property...

A copy of the third amendment of lease for one of the leased

locations provides the following in part:

I. Section 3.02 Fixed Rent. Delete in the first sentence
$275,000 and substitute it with $190,450.00[,] which amount
will be effective on May 1, 2002.

Il. Add Section 3.05 Trademark Fee. Tenant shall pay to the

Landlord a Trademark payment in the amount of, $106,274.00,
per annum which shall be payable in equal monthly
installments on the first day of each month in advance of,
$8,856.17, without prior demand therefore commencing on May
1, 2002, which annual rate shall be subject to adjustment
pursuant to the consumer price index as set forth in

Exhibit B of the Lease, in exchange for the privilege of

using the Trademark..., in any lawful commercial activity

Tenant may wish to use the Trademark in.

Petitioner provided a list of the 32 lease sites from 11

different lessors. The proposed lease payment allocation

amounts were $3,486,295 for trademarks, $1,037,029 for 2000
property tax payments, and $6,041,297 for rent. For each lease,
the trademark fee is approximately 33% of the total payment

amount.

Your letter of September 4, 2002, provides the following:

Previous amendments related to CPI increases in rent and
have no bearing on the proposed inclusion of the
trademark/servicemark to the lease. Only one agreement was
renegotiated to include the trademark/servicemark.... None

of the other leases were amended to include the trademark

payment...

[Lessee] would continue to use and enjoy the real property
in the same manner as now, as indicated in our request,
except the lease amendment would pay for a trademark

uSE....

The value is set between the landlords and [Lessee] through

negotiation...

The Department requested appraisals of the fair market value for
the rental and trademark for each location. To date, no
appraisals were provided. The lease agreements provided do not
describe how the trade name, logo, trademark, or copyright is to
be used. In response to the Department's request for
information, the September 4, 2002, letter provided that the fee

is paid in order to protect the value of the landlord's

trademark, service mark, or logo and to restrict the use of such

by Lessee. No other use was indicated in the letter.

REQUESTED RULING

The right to use the trademark of the commercial facility
property owner is an intrinsically valuable right independent of
any real property rights under a lease even when made part of a
lease. Where the parties agree in an arm's-length transaction
that the separately stated fee for the right to use a trademark
shall be set at a sum certain, which is a fraction of the total

of all the fees paid allocated to the use of the real property,

those fees are reasonably allocated under s. 212.031, F.S. That
fee for the right to use that trademark, service mark, or logo

is not taxable under s. 212.031, F.S.

TAXPAYER POSITION

Petitioner maintains that appraisals are not required and that
the Department cannot change its historical position and require
an appraisal to determine the fair market value of either the
rental or use of the trademark, that such a requirement as

policy would be an improperly promulgated Rule. Petitioner
maintains there is no requirement as to how the trademark is to
be used and that the parties need only to engage in arm's-length
negotiation of the amounts, regardless if the trademark is used

or not.

APPLICABLE STATUTE

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

(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. Payments
for intrinsically valuable personal property such as
franchises, trademarks, service marks, logos, or patents
are not subject to tax under this section. In the case of a
contractual arrangement that provides for both payments
taxable as total rent or license fee and payments not
subject to tax, the tax shall be based on a reasonable
allocation of such payments and shall not apply to that

portion which is for the nontaxable payments.

ANALYSIS

Section 212.031(1)(c), F.S., provides that payments for
intrinsically valuable personal property such as franchises,
trademarks... are not considered payments subject to the tax on
real property rentals as provided by section 212.031, F.S.
Section 212.031(1)(c), F.S., requires that the payments be
allocated pursuant to a contract and that the determination of

the allocation of the payment amounts be reasonable.

The payment allocation must be of economic substance and in
accordance with market reality. Bridgestone/Firestone, Inc. v.
Department of Revenue, DOAH Case Number 92-2483, 15 FALR 4874
(1993), Dept. of Revenue v. Seaboard Coastline R.R. Co., 480

So.2d 1349 (Fla. 1st DCA 1985), review denied, 492 So.2d 1331

(Fla. 1986); Department of Revenue v. Anheuser-Busch, 527 So.2d
877 (Fla. 1st DCA 1988), review denied, 537 So.2d 568 (Fla.

1988).

Since the Florida courts will view an arm's length agreement in
light of its substance and not its labeling or form, the

allocation should be consistent with the appraised value of both
the real property and any ascertainable intangible personal
property which by itself standing alone has marketable value.
See paragraphs 56 through 59 of the Final Order in Airport

Limousine Service of Orlando, Inc., v. Department of Revenue,

Division of Administrative Hearings, March 23, 1995. Also see
State ex rel. N/S Associates v. Board of Review of the Village

of Greendale, 473 N.W. 2d 554 (Wisc. App. 1991) (The test for

isolating intangible business value is as simple as asking
whether the disputed value is appended to the property, and thus
transferable with the property, or is it independent of the

property so that it either stays with the seller or dissipates

upon sale).

Each lessor and Lessee must have a true competing interest to
use the instrinsically valuable property right to establish that
the allocation is based on a true market reality and at arm's
length. See Illinois Cereal Mills, Inc. v. Commissioner, T.C.
Memo. 1983-469, affirmed, 789 F.2d 1234 (7th Cir.), cert.
denied, 479 U.S. 995 (1986); Sonnleitner v. Commissioner, 598

F.2d 464 (5th Cir. 1979); Major v. Commissioner, 76 T.C. 239
(1981); Forward Communication Corp. v. United States, 608 F.2d
485 (Ct. Cl. 1979).

Typically, intangible assets are identifiable (i.e., legally

recognized), capable of private ownership, marketable (i.e.,
capable of being financed and/or sold separate and apart from

the tangible property), and possess value (i.e., have the

potential to earn income). Otherwise the existence of the

assets is of no consequence. See "Entrepeneurial Profit
Revisited", Gaylord A. Wood, Journal of Property Tax Management,
Summer 1994.

Lessee's books, records, papers, and other documentation must
clearly demonstrate that the allocation of the payments made be
reasonable, representing true market reality, for section
212.031(1)(c), F.S., to apply. See section 212.12(13), F.S.,
section 212.031(3), F.S., and section 212.12(6)(a), F.S.
Furthermore, the Department is charged with a duty to ensure
that parties claiming reasonable allocations of lease payments
to rent and other items not subject to tax substantiate this

allocation. See section 212.12(5), F.S.

The Department will view the reasonableness of allocations of
payments made pursuant to a lease agreement on a case by case
basis in reference to the parameters mentioned above, ultimately
determine whether the allocation is in fact made in good faith

or instead lacks any basis. See Bystrom v. Union Land

Investment, Inc., 477 So.2d 585, 586 (Fla. 3rd DCA 1985)(Good

faith for property tax valuation purposes will mean "real,

actual, and of a genuine nature as opposed to a sham or
deception".). Transactions involving a reasonable allocation of
real property and another right must in fact be "reasonable" and
therefore cannot be structured simply to avoid sales tax,

providing no basis for the allocation.
RESPONSE
Here, the basis for the allocation has not been shown to

reasonably apportion the market values of the use the trademark

and the rental of real property. The trademark is not actually

going to be used by Lessee (September 4, 2002, letter). In fact
it has not even been established that the trademark is even
related to the Lessee's business to substantiate there is any
motive involved with the alleged negotiations regarding the
allocation. It is unclear if the trademarks even have value,

and if so, what that value is. Lessee has not established how
the use of the trademark will make Lessee's business more
profitable than without the use of the trademark. No appraisals
were done to establish market values of the rental payments or

use payments of the trademark.

You indicate that the Department's historical position is not to
require an appraisal and that the Department is attempting to do
so in all cases. You should refer to TAA 96A-052. It states in

part:

.... We note that there are no indicators present that this
apparent arms length pricing of the separate components is
unreasonable. Therefore, it would be unnecessary to value

the real property using a fair market rent analysis...

Even an express allocation, however, would be examined for

reasonableness....

As clearly provided by the above law, here, Taxpayer must
maintain records adequate to establish the taxable or

nontaxable status of its transactions....

Clearly, based on the above cited language, the Department's
position is to review each allocation on a case by case basis;
and each taxpayer is required to maintain records to establish

how it determined that a given allocation is reasonable.

Based on the information provided to the Department, it cannot

be established how the allocation was made between the parties.
Competing interests between the Lessee and each lessor have not
been established. There is no apparent connection as to how the
Lessee, a furniture store, would care to use a realty company's
trademark to further its business interests or how that

trademark would have any value whatsoever to Lessee. No

evidence was provided to demonstrate why the rental value should

be decreased by a third in almost every lease involving separate
lessors who would supposedly have different trademarks with
different values. As such, the allocations have not been shown

to be reasonable for purposes of section 212.031(1)(c), F.S.

Furthermore, since the trademark will not actually be used, and
the Lessee has no plans for its use, it has no value to the
Lessee. Therefore, based on the preceding reasons provided, the
trademark payments received are for the right of occupancy and
subject to the sales tax imposed pursuant to section 212.031,

F.S.

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 advise 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,

Charles Wallace
Senior Attorney
Technical Assistance and Dispute Resolution

(850) 922-4734

CW!
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