Were cash payments labeled dividends taxable as commercial rent when a subsidiary occupied its parent's building and the parent used the payments for building expenses?

Plain-English summary

Florida treated the subsidiary's cash dividends to its parent as taxable rent for occupying the parent's commercial building. The payment label did not control because real consideration flowed from the occupant to the property owner.

The parent intended to use the dividends for mortgage payments, property taxes, and casualty insurance on the building. Unlike cases involving only offsetting journal entries, this arrangement involved actual payments and a benefit to the lessor.

Florida reached the same result with or without a written lease. The ruling noted that a portion attributable to use of the parent's trade name might be exempt, but the facts did not establish whether any allocation applied.

What this means for you

Under the historical law applied here, related entities had to examine actual payments and indirect benefits connected with occupancy, not merely labels such as dividend or the absence of a formal lease.

Common questions

Q: Did calling the payment a dividend prevent rental tax?
A: No. Florida treated the cash as consideration for building use.

Q: Was a written lease required?
A: No. The result was the same without one.

Q: Why did actual payment matter?
A: It distinguished this arrangement from cases with only accounting entries and no compensation flowing to the owner.

Q: Did Florida decide the trade-name portion?
A: No. It said a properly supported portion might be exempt but the allocation was unclear.

Citations and references

• Fla. Stat. § 212.02 — persons and related definitions
• Fla. Stat. § 212.031 — historical commercial real-property rental tax
• Fla. Admin. Code r. 12A-1.070 — related-party commercial occupancy
• Regal Kitchens, Inc. v. Department of Revenue, 641 So. 2d 158 (Fla. 1st DCA 1994)
• Department of Revenue v. Ryder System, Inc., 406 So. 2d 1299 (Fla. 1st DCA 1981)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-039

Original ruling text

SUMMARY

QUESTION: Are "dividends" paid by a subsidiary
corporation/lessee to its sole shareholder/lessor subject
to sales tax under Florida statutes as "rent" on commercial
real property?

ANSWER-Based on Facts Below: Yes. In this instance, the
subsidiary corporation/lessee is obtaining the right to
occupy and use a building (commercial real property) owned
by the sole shareholder/lessor. Subsidiary's payment of
dividends are subject to sales tax because the dividend is
clearly consideration paid to the solo shareholder/lessor
for such use of the building. Furthermore, the dividend is
a benefit to the solo shareholder/lessor because it intends
to use the dividend to pay for building expenses (i.e.,
mortgage payments, property taxes and casualty insurance
premiums). The dividend is a payment rather than a mere
journal entry in the books and records of the entities.

Jul 22, 2003

Subject: Technical Assistance Advisement 03A-039
Lease of Commercial Property
Sales and Use Tax
Sections 212.02 and 212.031, F.S. ("Florida Statutes")
Rule 12A-1.070, F.A.C. ("Florida Administrative Code")
XXX ("Taxpayer")

Dear :

This response is in reply to your letter dated April 17, 2003,
requesting this Department's issuance of a Technical Assistance
Advisement ("TAA") pursuant to Section 213.22, F.S., and Chapter
12-11, F.A.C., regarding the referenced matter and party. An
examination of your letter has established that you have
complied with the statutory and regulatory requirements for
issuance of a TAA. Therefore, the Department is hereby granting

your request for issuance of a TAA.

ISSUE

Whether "dividends" paid by a subsidiary corporation/lessee to
its sole shareholder/lessor are subject to sales tax under
Florida statutes as "rent" on commercial real property.

FACTS

Your letter provides in part:

[The Taxpayer], a Florida Corporation, engages in the
business of providing legal services to clients located
primarily in the State of Florida. [The Taxpayer] has many
individual shareholders... that engage in the practice of
law through [the Taxpayer]. [The Taxpayer] is classified
as a Subchapter S corporation for federal income tax
purposes. [The Taxpayer] owns, among other things, the
land, building and fixtures where it primarily engages in
the practice of law (collectively, the "Building"). The
Building is currently subject to a mortgage. [The
Taxpayer] regularly pays compensation to its Shareholders
and annually distributes dividends to its Shareholders.

[The Taxpayer] is currently contemplating a reorganization
(the "Reorganization") of its operations whereby [the
Taxpayer] would form a Florida wholly-owned subsidiary
corporation that would qualify as a qualified Subchapter S
corporation ("Sub") and would be a disregarded entity for
federal income tax purposes. [The Taxpayer] would transfer
all of its assets except for the Building to the Sub. [The
Taxpayer] would remain liable on the mortgage of the
building. Thus, [the Taxpayer] would thereafter only own
the Building, subject to the mortgage, and the stock of the
Sub, and would not engage in the practice of law. [The
Taxpayer] would change its corporate name. The Sub would
then commence engaging the practice of law, using the
[Taxpayer] trade name, and would use the Building for this
purpose. Just as before the Reorganization, dividends would
ultimately be distributed to the Shareholders. Thus, such

dividends would be distributed by the Sub to [the
Taxpayer], as the shareholder of Sub.... Since [the
Taxpayer] would remain responsible for the mortgage on the
Building, the Sub would have more cash available to
distribute as dividends than [the Taxpayer] had before the
Reorganization. Otherwise, however, the amount of such
dividends distributed by the Sub to [the Taxpayer] would
not bear any relationship to the use of the Building by the
Sub. All of these dividends would be characterized on the
books of the Sub and [the Taxpayer] as dividends paid by
the Sub and received by [the Taxpayer] and would not be
characterized as rent. The amount of the dividends would
be determined by [the Taxpayer], as the sole shareholder of
the Sub. (emphasis added)

[The Taxpayer] is currently contemplating two alternative
arrangements.... Under the first alternative (the "First
Alternative"), [the Taxpayer] and the Sub would enter into
a written lease agreement... whereby the Sub would have the
right to use and occupy the Building but would not be
obligated to pay any rent or other consideration. No
consideration would be transferred by the Sub to [the
Taxpayer] for the Sub's use and occupancy of the Building.
No amount would be carried on the books of the Sub as a
rental expense or on the books of [the Taxpayer] as rental
income.... [The Taxpayer] would be responsible for the
following expenses related to the ownership of the
Building...: (i) mortgage payments (including principal and
interest); (ii) property taxes and (iii) casualty insurance
premiums. The source of payment by [the Taxpayer] for such
Building Expenses would in large part be the dividends from
Sub. Sub would be responsible for the following expenses
related to the occupancy of the Building...: (i) utility
expenses (such utility accounts would be in Sub's name) and
(ii) expenses for the upkeep of the Building, such as lawn
maintenance, security services, and repairs and
maintenance. (emphasis added)

The second alternative... would be identical to the First
Alternative except that under the Second Alternative there
would be no lease agreement between [the Taxpayer] and the

Sub....

THE TAXPAYER'S POSITION

Your letter provides in part:

... when a corporation uses another related corporation's
real property, sales tax is only imposed if rent or other
consideration is actually exchanged for the use or
occupancy of such real property. If no such rent or other
consideration is exchanged, then no sales tax is imposed.
Under the Second Alternative, [the Taxpayer] will never
receive rent or other consideration from the Sub in
exchange for the Sub's use and occupancy of the Building.
Accordingly, no sales tax should be imposed on the Sub's
use and occupancy of the Building. Therefore, as explained
under the First Alternative, dividends of cash generated by
the Sub from the practice of law and distributed by [the
Taxpayer] should not be subject to sales tax. In addition,
rent imputed for federal income tax purposes under IRC
section 482 and the regulations thereunder should also not
be subject to sales tax.

APPLICABLE STATUTES AND RULES

Section 212.02, F.S., provides in part:

(12) "Person" includes any individual, firm, copartnership,
joint adventure, association, corporation, estate, trust,
business trust, receiver, syndicate, or other group or
combination acting as a unit and also includes any
political subdivision, municipality, state agency, bureau,
or department and includes the plural as well as the
singular number.

Section 212.031, F.S., provides in part:

***
(1)(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.

(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, F.A.C., provides in part:

***
(4)(a) The tenant or person actually occupying, using, or
entitled to use any real property from which rental or
license fee is subject to taxation under s. 212.031, F.S.,
and shall pay the tax to his immediate landlord or other
person granting the right to such tenant or person to
occupy or use such real property.

(b) The tax shall be paid at the rate of 5 percent prior to
February 1, 1988, and 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.

(19)(a) The lease or rental of real property or a license
fee arrangement to use or occupy real property between
related "persons," as defined in s. 212.02(12), F.S., in
the capacity of lessor/lessee, is subject to tax.

(b) The total consideration, whether direct or indirect,
payments or credits, or other consideration in kind,
furnished by the lessee to the lessor is subject to tax
despite any relationship between the lessor and the lessee.

(c) The total consideration furnished by the lessee to a
related lessor for the occupation of real property or the
use or entitlement to the use of real property owned by the
related lessor is subject to tax, even though the amount of
the consideration is equal to the amount of the
consideration legally necessary to amortize a debt owned by
the related lessor and secured by the real property
occupied, or used, and even though the consideration is
ultimately used to pay that debt.

RESPONSE

The key issue presented is whether the dividend paid from the
Sub to the Taxpayer is rental consideration. The Sub is given

the right, by the Taxpayer, to use and occupy the Building (real
property). Thus, there is rental of real property. The Sub
appears to be paying consideration for that right to use and
occupy the Building. Black's defines "consideration" as:

Some right, interest, profit or benefit accruing to one
party, or some forbearance, detriment, loss, or
responsibility, given, suffered, or undertaken by the
other. Black's Law Dictionary, 277, 5th Ed. 1979.

Under the facts presented, an actual payment of a "dividend"
will be made from the Sub/lessee to the Taxpayer/lessor. The
payment of this dividend is a benefit to the Taxpayer/lessor
because the Taxpayer (who can use it as it pleases) intends to
use it to pay for the Building Expenses (i.e., mortgage
payments, property taxes and casualty insurance premiums). This
is a "payment" rather than a mere "journal entry" in the books
and records of the companies.

This scenario is distinguishable from St. John's Trading
Company, Inc. v. Florida, Case No. 84-1652, Fla. Div. Adm. Hear.
(Jan. 3, 1985). In St.John's, "... there was no compensation
flowing from Jax to St. Johns for the occupancy of the stores
owned by St. Johns." Id., at para. 20. Only off-setting journal
entries were made. Thus, there was no taxable rental
consideration. Likewise, in the Ryder System case, the First
District affirmed the finding of the lower court that held "...
there was no finding a rental payment was made..." (Department
of Revenue v. Ryder System, Inc., 406 So.2d 1299 (Fla. 1st DCA
1981)) in a situation in which subsidiary corporations used a
building owned by the parent. No actual payments in money were
made by the subsidiaries to the parent. Only accounting
adjustments were made to take into account certain building
expenses.

Further, your letter provides that:

[t]he Lease Agreement would merely detail the Sub's right
to use and occupy the Building but it would not obligate
the Sub to pay any rent or other consideration. (your
letter at page 4) (emphasis added)

However, another portion of your letter provides that the
Taxpayer will determine the amount of the dividends.

Because there is real consideration flowing from Sub/lessee to
the Taxpayer/lessor for the use and occupation of the Building,
the "dividend" is subject to Florida sales tax. This result is
the same whether or not there is a written lease agreement. See
Regal Kitchens, Inc. v. Department of Revenue, 641 So.2d 158
(Fla. 1st DCA 1994).

Please note, that it is unclear if any part of the dividend paid
by the Sub is designed to compensate parent for use of parent's
trade name. If so, that portion of the dividend could be exempt
under Section 212.031(1)(c), 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,

Eric R. Peate
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 922-4714

ERP
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