Did a marital settlement create a taxable commercial lease when a former spouse paid monthly rent, utilities, and property-tax increases for business space?

Plain-English summary

Florida treated the marital settlement agreement as a commercial lease and taxed the rent required by it under the 2003 commercial-rental law. A lease did not need to be a stand-alone document. The settlement named the parties, described the property, stated a term, and required consideration.

The former husband operated his business from part of the property transferred to the former wife. He paid $1,000 monthly, utilities, and certain increases in the owner's ad valorem property taxes.

Total rent consideration controlled

The $1,000 payment was taxable rent. Property taxes paid by the tenant on the owner's behalf were also taxable. Utility payments made for the privilege of occupancy could be taxable subject to exceptions in the cited rule, but the Department lacked enough information to give a specific utility determination.

The ruling also noted that even an oral or unwritten commercial lease could be subject to tax; legal form did not override the actual rental relationship.

What this means for you

For historical periods governed by the cited commercial-rent tax, review every tenant-paid amount, including owner expenses, rather than only the payment labeled rent. Verify current law separately because this ruling applied 2003 provisions.

Common questions

Q: Could a marital settlement contain a lease?
A: Yes. No authority required the lease to be a separate document.

Q: Was the $1,000 monthly payment taxable?
A: Yes, under the commercial-rent law applied in the ruling.

Q: Were tenant-paid property-tax increases taxable?
A: Yes, because they were paid on the owner's behalf as part of occupancy.

Q: Did Florida decide the utility treatment?
A: Not completely. The ruling said utility payments could be taxable but lacked facts needed to apply exceptions.

Citations and references

• Fla. Stat. § 212.031 — historical commercial real-property rental tax
• Fla. Stat. § 212.07 — collection and tenant liability
• Fla. Stat. § 689.01 — lease formalities discussed in the ruling
• Fla. Admin. Code r. 12A-1.070 — historical commercial rental rule
• Regal Kitchens, Inc. v. Department of Revenue, 641 So. 2d 158 (Fla. 1st DCA 1994)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-045

Original ruling text

SUMMARY

QUESTIONS: (1) Whether a commercial can be created by a
Marital Settlement Agreement; (2) if a commercial lease
exists, is Florida sales tax due; and (3) what payments
required by the lease are subject to Florida sales tax?

ANSWER - Based on Facts Below: (Issue 1) A valid lease
generally contains the following essential terms: (1) the
names of the parties; (2) a description of the demised
realty; (3) a statement of the term of the lease; and (4)
the rent or other consideration. No authority was located
or presented which indicates a valid lease must be a
separate document. In addition, an unwritten or oral lease
agreement is subject to Florida sales tax. (Issue 2)
Florida sales tax is assessed on leases of commercial real
property, with some exceptions, pursuant to Section
212.031, F.S. (Issue 3) Florida sales tax is applied to the
total rent consideration payable, pursuant to Section
212.031(3), F.S.

Sep 18, 2003

Subject: Technical Assistance Advisement 03A-045
Lease of Commercial Property
Sales and Use Tax
Sections 212.031, 212.07 and 689.01, F.S. ("Florida
Statutes")
Rule 12A-1.070, F.A.C. ("Florida Administrative Code")

Dear:

This response is in reply to your letter dated August 21, 2003,
requesting the 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.

ISSUES

(1) Whether a commercial can be created by a Marital Settlement
Agreement; (2) if a commercial lease exists, is Florida sales
tax due; and (3) what payments required by the lease are subject
to Florida sales tax?

FACTS

Your letter of August 21, 2003 provided a copy of a "Marital
Settlement Agreement" entered into between yourself and your
former husband. As part of the settlement, your former husband
conveyed his interest in the real property located at [street
address] to you. As part of the settlement, you conveyed your
interest in the business known as "Business" to your former
husband. The business is located at the above street address
and has been operating from there since prior to the dissolution
of the marriage.

The Marital Settlement Agreement provides in part:

3. REAL PROPERTY. The parties own the following described
   real property, which is the marital home, located at
   [street address], [City], [County], Florida, and more
   particularly described as follows: [legal description
   omitted here]....

As and for equitable distribution of the marital property,
the Husband shall give to the Wife within ten (10) days a
signed Quit Claim Deed ready for recording, conveying his
interest in the said property....

(f) The Husband shall lease back from the Wife the portion
of the property presently used by his tree service company.
The Husband will pay $1,000.00 per month as a lease payment
to the Wife, plus any authorized increases in the monthly

lease payment. The monthly lease payment will be subject to
increase upon the happening of the following event: if the
ad valorem real property taxes increase, which increase is
not the result of improvements to the property by the Wife,
then the Husband will pay one-half of the increase in ad
valorem taxes as an additional lease payment. The lease
term shall be at the will of the Husband, provided he gives
the Wife at least ninety (90) days advance written notice
of any termination of the lease. Should the Husband
terminate the lease sooner than ten (10) years from the
date of this Agreement, or if the $1,000.00 monthly lease
payments cease for any reason, the described lease payments
shall become alimony payments for the remainder of the
period of time ending ten (10) years from the date of this
Agreement.... Additionally, the Husband agrees to pay the
[power] bill and the [water and sewer] bill for the
property....

The Marital Settlement Agreement does not address the handling
of Florida sales tax.

You provided that the issues you present to the Department here
are central to a "Motion for Civil Contempt/Enforcement" that
you filed in [Florida] County against your former husband.

THE TAXPAYER'S POSITION

Your letter provides in part:

[Former husband] does not have a sales tax number to my
knowledge. Since I have taken out the sales tax on these
[Business's] lease dollars, I am going back to court on the
statement that the lease payment is short, or not paid in
full.... The issue is: if the tax is added to the lease,
then the lease was not paid in full. The monies I received,
I paid tax on them. If you rule that this is not a real
lease, and no sales tax is due, then I need to request
information on how to get the overpayment back....

APPLICABLE STATUTES AND RULES

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

(1)(a) 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....

(2)(a) The tenant or person actually occupying, using, or
entitled to the use of any property from which the rental
or license fee is subject to taxation under this section
shall pay the tax to his or her immediate landlord or other
person granting the right to such tenant or person to
occupy or use such real property.

(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....

Section 689.01, F.S., provides in part:

No estate or interest of freehold, or for a term of more
than 1 year, or any uncertain interest of, in or out of any
messuages, lands, tenements or hereditaments shall be
created, made, granted, transferred or released in any
other manner than by instrument in writing, signed in the
presence of two subscribing witnesses by the party
creating, making, granting, conveying, transferring or
releasing such estate, interest, or term of more than 1
year.... No seal shall be necessary to give validity to any
instrument executed in conformity with this section.
Corporations may convey in accordance with the provisions
of this section or in accordance with the provisions of ss.

692.01 and 692.02.

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.,... 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.

(c) Ad valorem taxes paid by the tenant or other person
actually occupying, using, or entitled to use any real
property to the lessor or any other person on behalf of the
lessor, including transactions between affiliated entities,
are taxable.

(e) Utility charges paid by a tenant to the lessor for the
privilege or right to use or occupy real property are
taxable, unless the lessor has paid the sales tax to the
utility company on such utilities consumed by the tenant,
and the utilities billed by the lessor to the tenant are
separately stated on the lessor's invoice to the tenant at
the same or lower price as that billed by the utility
company to the lessor.

(16) Any person who has leased, occupied, or used or was
entitled to use any real property and cannot prove that the
tax has been paid to his lessor or other person shall be
directly liable to the State for any tax, interest, or
penalty due on any such taxable transaction.

RESPONSE

"A lease generally must contain the following essential terms:
(1) the names of the parties; (2) a description of the demised
realty; (3) a statement of the term of the lease; and (4) the
rent or other consideration." 34 Fla Jur 2d, Landlord and
Tenant s. 32. The provisions found within the Marital
Settlement Agreement satisfy the above listed essential terms
and the arrangement is, therefore, a lease. The Marital
Settlement Agreement was in writing and was signed by the lessor
and lessee before two witnesses. See Section 689.01, F.S. No
authority was found barring a valid lease from being
incorporated within another type of document.

Although we have determined that a written lease agreement was
entered into by the parties, it should be noted that unwritten
or oral lease agreements are also subject to Florida sales tax.
See Regal Kitchens Inc., v. Florida Department of Revenue, 641
So.2d 158 (Fla. 1st DCA 1994). The Court in Regal Kitchens held
that the issue should not turn on whether a rental agreement is
reduced to writing, but rather, whether there was a rental
agreement between the parties of any kind.

The property being leased is real property being used for
commercial purposes and is taxable under Section 212.031, F.S.
No facts have been presented to suggest that the leased property
falls under any exemption within Section 212.031, F.S.

As to the rental of commercial real property, Florida sales tax
is due on the total rent consideration. See s. 212.031(3), F.S.
The Marital Settlement Agreement requires the lessee of the
property to make the following payments: (1) a $1,000.00 payment
per month; (2) payment of the Utility bills; and (3) payment of
certain increases in the ad valorem property taxes.

The $1,000.00 payment per month is specifically made for the use
of the real property by the lessee and is thus rent
consideration. The payment of utility charges for the privilege
to use or occupy real property is taxable, with the exceptions
found within Rule 12A-1.070(4)(e), F.A.C. The Department cannot

provide specific guidance regarding utility charges paid here,
due to a lack of information. Finally, ad valorem property
taxes paid by the lessee on behalf of the lessor are taxable.
See Rule 12A-1.070(4)(c), F.A.C.

Tax is due on the amount of the total rent consideration as
discussed above. Pursuant to Section 212.031(2) and (3), F.S.,
and Rule 12A-1.070(4)(a), F.A.C., the tenant is responsible for
paying tax due to his landlord in addition to the total amount
of rental consideration paid for the use of the property.
Further, pursuant to Section 212.07(8), F.S., and Rule 12A1.070(16), F.A.C., any person leasing real property that cannot
prove that the tax due was paid to his lessor shall be directly
liable to the State.

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 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,

Eric R. Peate

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

ERP
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