Were a single-member LLC subsidiary's net-profit and cash-flow distributions to its property-owning LLC parent taxable as rent?

Plain-English summary

Florida said the subsidiary's distributions of net profits and cash flow to its property-owning LLC parent would not be taxable rent if they were genuine profit distributions rather than payments tied to property costs. The answer depended on timing, amount, control, accounting, and the LLC membership agreement.

The parent planned to buy and hold title to commercial property. Its single-member subsidiary would use part of the property without a written or oral lease and without paying stated rent. The parent would be the mortgagor and would directly pay the mortgage, property taxes, and property insurance.

Federal disregard did not merge the entities for sales tax

The subsidiary was disregarded as a separate entity for federal income tax and reported through the parent's partnership return. But the ruling quoted then-section 608.471(3), which treated a federally disregarded LLC as a separate legal entity for non-income-tax purposes.

Florida therefore still examined whether value flowed from the occupying subsidiary to the property-owning parent for the right to use commercial real estate.

Profit distributions were not automatically rent

The subsidiary planned to distribute all net profits and cash flow to the parent, which would then distribute amounts to its members after other parent-level expenses. Florida recognized that related-party income or profit transfers could be different from rent.

The Department set three conditions:

1. Distributions must not coincide with when the property's expense obligations come due.
2. Distribution amounts must not coincide with the amount of those property obligations.
3. The people controlling distributions must use a true measure of income or profit, not the amount of mortgage, tax, insurance, or other property costs.

If the membership agreement, accounting, and actual distributions met those conditions, the payments were not rent consideration.

Property costs remained a warning sign

Florida's related-party rental rule taxed direct or indirect payments and consideration in kind furnished by an occupant to a related property owner. A payment can be rent even if made to a third party on the owner's behalf.

Here, the parent—not the subsidiary—was to pay the mortgage, taxes, and insurance, while partners funded any property shortfall through capital contributions. That separation supported the conditional answer.

What this means for you

LLC groups sharing commercial property

Document how distributions are calculated and approved. Regular payments matching the owner's mortgage or tax calendar can look like rent even when labeled profits.

Holding companies

Pay and record ownership expenses at the property-owning entity if that matches the intended structure. Preserve membership agreements, distribution resolutions, and profit calculations.

Accountants and tax professionals

Compare payment dates and amounts against every property obligation. Federal disregarded-entity treatment does not by itself answer Florida sales-tax treatment, and the cited 2004 LLC statute should be checked against current law.

Common questions

Q: Did the subsidiary have a lease?
A: No written or unwritten lease was planned, and it would not pay stated rent.

Q: Were all subsidiary-to-parent distributions nontaxable?
A: No. The ruling's answer depended on the three conditions showing genuine profit rather than property-expense payments.

Q: Who paid the mortgage, property taxes, and insurance?
A: The property-owning parent was to pay them directly.

Q: Did federal income-tax disregard eliminate separate-entity treatment?
A: No. The 2004 statute quoted in the ruling treated the LLCs separately for non-income-tax purposes.

Citations and references

• Fla. Stat. § 212.02(2), (10)(i), and (12) — business, license, and person definitions
• Fla. Stat. § 212.031(1)-(3) — commercial-rent tax and consideration in money or other value
• Fla. Stat. § 608.471(3) — 2004 separate-entity rule for federally disregarded entities
• Fla. Admin. Code r. 12A-1.070(1), (4), (8), and (19) — real-property rental and related-party rules
• St. Johns Trading Co. v. Department of Revenue, DOAH Case No. 84-1652 (1985) — no compensation beyond accounting entries
• Department of Revenue v. Ryder System, Inc., 406 So. 2d 1299 (Fla. 1st DCA 1981) — no actual subsidiary rental payment
• Regal Kitchens, Inc. v. Department of Revenue, 641 So. 2d 158 (Fla. 1st DCA 1994) — separate-entity and landlord-tenant analysis

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-032

Original ruling text

SUMMARY

QUESTION: Are any portions of the "income" or "profits"
realized by a single-member LLC subsidiary, and passed
through to its LLC parent holding company, "rent
consideration" for Florida sales tax purposes?

ANSWER - Based on Facts Below: No, provided: the
distributions do not coincide with the time at which the
property's expense obligations are due; the amount of the
distributions do not coincide with the amount of the
property's expense obligations; and those controlling the
amount of income or profit flowing to the parent/owner base
that amount on a true reflection of income or profit and
not on the amount of the property's expense obligations.

May 18, 2004

Re: Technical Assistance Advisement 04A-032
Florida Sales and Use Tax
Taxability Issues Regarding Related Party Real Property
Rentals
Sections 212.031, 213.22, and 608.471(3), F.S. ("Florida
Statutes")
Rule 12A-1.070, F.A.C. ("Florida Administrative Code")

Dear :

This response is in reply to your letter dated November 13,
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 related entities and the
rental of commercial real property. 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.

On August 4, 2003, you requested a TAA on the same issue
presented in the November 13, 2003, request. Because additional
facts were needed in order to respond to your request, the
Department issued a Letter of Technical Advice ("LTA") on
October 30, 2003. Your letter of November 13, 2003, provided
additional facts (as will be provided below). In addition, in
response to my letter of December 18, 2003, you provided further
information (which will also be provided below).

ISSUE

Are any portions of the "income" or "profits" realized by a
single-member LLC subsidiary, and passed through to its LLC
parent holding company, "rent consideration" for Florida sales
tax purposes?

FACTS

Your letter of August 4, 2003 provides in part:

The single-member LLC subsidiary, ("Sub"), will use real
property owned by the LLC parent holding company, (the
Taxpayer), without paying rent to the LLC parent holding
company. There will not be any written or unwritten lease
agreement between (the Taxpayer) and the single-member LLC
subsidiary (Sub) regarding the use of the real property to
be used by the single-member LLC....

Your letter of November 13, 2003 provides in part:

1) (The Taxpayer) is a partnership for federal income tax
purposes. As such profits and loss and separate items of
income and deduction pass through to its partners and are
taxed at the individual partner level.

2) (The Sub) is a single-member LLC that is treated as a
division of (the Taxpayer) for federal income tax purposes.
As such(,) profits and loss pass through to the single-

member parent, (the Taxpayer), and are reported on its
federal partnership return (Form 1065).

3) The partners of (the Taxpayer) will make capital
contributions to the (T)axpayer to the extent of any
shortfall or anticipated shortfall between the costs
associated with the subject property and the rental revenue
received from any tenants renting the property. (Sub) would
not rent the real property. All net profits and cash flow
from (Sub) would be distributed to (the Taxpayer). (The
Taxpayer) then will distribute these net profits and cash
flow to its members after subtracting the expenses of (the
Taxpayer) other than those associated with the portion of
real property used by (Sub).

4) For federal income tax purposes, the taxpayer will not
indicate the receipt of rental payments related to the use
of the property by (Sub) on the taxpayer's federal
partnership return (Form 1065). (Sub) as a division of the
taxpayer does not file its own federal tax return.

5) For financial accounting purposes, neither the taxpayer
nor (Sub) will indicate the receipt or payment of rental
payments related to the use of the property by (Sub) on any
financial or accounting records maintained by the Taxpayer.

Your letter of December 22, 2003, provides that the real
property at issue is under construction and the Taxpayer has
signed a contract to purchase it when construction is completed.
Further, the Taxpayer will: (1) hold title to the property; (2)
be the mortgagor of the property; (3) be responsible for
property taxes; (4) be responsible for payment of property
insurance; and (5) will be the actual entity paying the
mortgage, property taxes and insurance premiums.

TAXPAYER'S POSITION

Your letter of August 4, 2003, relies on two (2) LTA's issued by
the Department and on the following two (2) cases: St. Johns
Trading Company v. Department of Revenue, DOAH Case Number 84-

1652 (1985) and Department of Revenue v. Ryder System, Inc., 406
So.2d 1299 (Fla. 1st DCA, 1981). The authority you cite, above,
all held that there was no Florida sales tax liability based on
facts and circumstances similar to the arrangement you propose
between the Taxpayer and the Sub. Your position, therefore, is
that no Florida sales tax would be due under the arrangement you
propose.

APPLICABLE STATUTES AND RULES

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

(2) "Business" means any activity engaged in by any person,
or caused to be engaged in by him or her, with the object
of private or public gain, benefit, or advantage, either
direct or indirect....

(10)(i) "License," as used in this chapter with reference
to the use of real property, means the granting of a
privilege to use or occupy a building or a parcel of real
property for any purpose.

(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)(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....

(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....

(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. (emphasis supplied)

(2)(b) It is the further intent of this Legislature that
only one tax be collected on the rental or license fee
payable for the occupancy or use of any such property, that
the tax so collected shall not be pyramided by a
progression of transactions, and that the amount of the tax
due the state shall not be decreased by any such
progression of transactions.

(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 213.22(1), F.S., provides in part:

... Technical assistance advisements shall have no
precedential value except to the taxpayer who requests the
advisement and then only for the specific transaction
addressed in the technical assistance advisement, unless
specifically stated otherwise in the advisement....

Section 608.471, F.S., provides in part:

***
(3) Single-member limited liability companies and other
entities that are disregarded for federal income tax
purposes must be treated as separate legal entities for all
non-income-tax purposes. The Department of Revenue shall
adopt rules to take into account that single-member
disregarded entities such as limited liability companies
and qualified subchapter S corporations may be disregarded
as separate entities for federal tax purposes and therefore
may report and account for income, employment, and other
taxes under the taxpayer identification number of the owner
of the single-member entity.

Rule 12A-1.070, F.A.C., provides in part:

(1)(a) Every person who rents or leases any real property
or who grants a license to use, occupy, or enter upon any
real property is exercising a taxable privilege....

(4)(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.

(8) When a tenant (lessee) or other person occupying,
using, or entitled to use any real property (licensee)
sublets or assigns some portion of the leased or licensed
property, he may take credit on a pro rata basis for the
tax that he paid to his landlord or other such person on
the space that he subleases or assigns....

(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.

DISCUSSION

The issue presented is whether any portions of the "income" or
"profit" passed to the owner of a piece of commercial real
property by its subsidiary (the occupant of the property) are
subject to Florida sales tax because those payments are actually
a form of rent consideration.

In Florida, the renting, leasing, letting, or granting a license
for the use of any real property is subject to Florida sales
tax. Sales tax is due on the rental consideration paid for the
right to use or occupy commercial real property. See Rule 12A1.070(4) and (19), F.A.C. When the rental or license fee of any
such real property is paid by way of any "other thing of value,"
Florida sales tax is due on the value of the "other thing of
value." See Section 212.031(1)(d), F.S.

The lease or rental of real property between related "persons"
is taxable. See Rule 12A-1.070(19), F.A.C. "Person" is defined
at Section 212.02(12), F.S., and includes all types of entities
including individuals and corporations. Further, limited
liability companies that are disregarded for federal income tax
purposes are treated as separate legal entities for all nonincome tax purposes under Florida law. See Section 608.471(3),
F.S.

All payments made on behalf of the owner of commercial real
property that benefit the owner of the commercial real property

are considered "rent consideration" and are therefore subject to
Florida sales tax. See Rule 12A-1.070(19)(b), F.A.C., and
Seaboard Coastline Railroad Company v. Askew, #72-15 (Fla. Cir.
Ct., 2nd Cir., Leon Co., 1972). (Rent consideration may be
payable directly to the lessor or to some other person directed
by the lessor.) Finally, there need not be a written lease in
order for there to be a landlord/tenant relationship. See Regal
Kitchens, Inc. v. Department of Revenue, 641 So.2d 158 (Fla. 1st
DCA, 1994).

When a business decision is made to create separate legal
entities for purposes of owning and occupying real property to
achieve advantages such as preferred financing, tax advantage,
risk control, insurance coverage, or the like, the formalities
of such arrangements are recognized for purposes of imposing
Florida sales tax on transactions between those separate legal
entities. See Seaboard Coastline Railroad Company. Courts have
held that parties are not free to "... disavow the existence of
the corporation for the purpose of obtaining a tax advantage."
Regal Kitchens, 641 So.2d at 163. The Regal Kitchens opinion
also held that: "Those who seek the protection afforded by
incorporation must also accept the burdens." Id.

The facts presented are distinguishable from St. John's Trading
Company, Inc. v. Florida, DOAH Case No. 84-1652 (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 offsetting 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.

However, the Department recognizes that there may be situations
(similar to the one presented) wherein "income" or "profit"
flowing from a subsidiary/occupant to a parent/property owner

would not be "rental consideration." Key to any determination
on behalf of the Department would be a review of the LLC's
membership agreement. The Department would be interested in the
timing, amount and control of the distributive shares of
earnings or cash flow to the parent/owner. The Department would
look to the membership agreement to ascertain: (1) that
distributions do not coincide with the time at which the
property's expense obligations are due; (2) the amount of
distributions do not coincide with the amount of the property's
expense obligations; and (3) those controlling the amount of
"income" or "profit" flowing to the parent/owner base that
amount on a true reflection of income or profit and not on the
amount of the property's expense obligations.

CONCLUSION

Under the facts presented, compensation flows from the Sub to
the Taxpayer in the form of "(a)ll net profits and cash flow
from (the Sub)." If all the conditions as described above are
met, and the accounting for the "income" or "profit" is made as
you describe in your request letter, then those distributions
would not be "rental consideration" taxable under Chapter 212,
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 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 & Dispute Resolution
(850) 922-4714

Control No.: 58012