Did a physician's corporation owe Florida rent tax for using a building owned by the physician and spouse through a related LLC without paying rent?

Plain-English summary

Florida found no commercial-rent sales tax when a physician's professional corporation used a building owned by a related husband-and-wife LLC without paying rent or property expenses. The conclusion was conditional: distributions from the corporation to the physician could not be a disguised method of funding the LLC's mortgage, tax, insurance, or other ownership costs.

The physician was the sole shareholder of the professional corporation. The physician and spouse equally owned the LLC that was constructing the building. The LLC would hold title, owe the mortgage, and pay the mortgage, ad valorem tax, and insurance. The professional corporation would occupy at least part of the building without a written or oral lease, record no rental expense, and pay none of those property costs.

The owners planned to make periodic contributions to the LLC. The professional corporation expected to elect S-corporation treatment, so its profits would pass through to the physician.

No written lease did not settle the issue

Florida taxes consideration for renting, leasing, or licensing commercial real property, including indirect payments and things of value. Related-party transactions receive the same treatment, and a landlord-tenant relationship can exist without a written lease.

The Department therefore looked beyond the absence of rent entries on the entities' federal returns and accounting records. Separate legal entities remained separate for Florida non-income taxes.

Profit distributions needed to satisfy three conditions

The Department would review the corporation's bylaws and other controlling documents, focusing on distribution timing, amount, and control. It required that:

1. Distributions not coincide with when property expenses were due.
2. Distribution amounts not coincide with the amounts of those expenses.
3. Distributions be based on true income or profit rather than the property's obligations.

If those conditions were met, the corporation furnished no consideration for occupancy and section 212.031 did not apply. If distributions effectively financed the LLC's property expenses, they could be treated as taxable rent consideration.

What this means for you

Physicians and other professional corporations

Using family-owned commercial space without a formal lease does not end the sales-tax inquiry. Cash flows between the practice, owner, and property LLC must support the claim that no rent was paid.

Family-owned property LLCs

Document capital contributions independently from the operating business's profit distributions. Matching dates or amounts can suggest an indirect property payment.

Accountants and tax professionals

Review governing documents and actual bank activity, not only rent accounts on the books. Florida's analysis centered on substance, control, timing, and amount.

Common questions

Q: Did the practice pay sales tax merely because the entities were related?
A: No. The proposed arrangement had no taxable rent only because the practice furnished no direct or indirect consideration under the stated conditions.

Q: Did the LLC pay all property costs?
A: Yes. It held title and paid the mortgage, property tax, and insurance.

Q: Could S-corporation distributions become taxable rent?
A: Yes in substance, if their timing or amount showed that they were a vehicle for paying the LLC's property obligations.

Q: Did the lack of a lease guarantee no tax?
A: No. Florida said a taxable occupancy arrangement can exist without a written lease.

Citations and references

• Fla. Stat. § 212.02(2), (10)(i), and (12) — business, real-property license, and person definitions
• Fla. Stat. § 212.031 — commercial real-property rent or license consideration
• Fla. Stat. § 608.471(3) — separate non-income-tax treatment of disregarded LLCs
• Fla. Admin. Code r. 12A-1.070(4) and (19) — related-party rent and indirect consideration
• Regal Kitchens, Inc. v. Department of Revenue, 641 So. 2d 158 (Fla. 1st DCA 1994) — no written lease required; separate entities carry tax consequences
• Department of Revenue v. Ryder System, Inc., 406 So. 2d 1299 (Fla. 1st DCA 1981) — no rent where related occupants made no monetary rental payment

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-057

Original ruling text

SUMMARY
QUESTION: Is Florida sales tax due wherein: the entity occupying a piece of commercial real property is related to the
entity which owns the property; it is alleged that no consideration flows from the occupant to the owner for the use and
occupancy of the real property; neither entity recognizes any "rental" income or expenses for Federal tax purposes or
accounting purposes; and, the owner pays all expenses related to the property?
ANSWER - Based on Facts Below: No, provided that the distributions made to the related ownership: (1) do not
coincide with the time at which the property’s expense obligations are due; (2) do not coincide with the amount of the
property's expense obligations; and (3) are based on a true reflection of income or profit and not on the amount of the
property’s expense obligations.

September 23, 2004

Re: Technical Assistance Advisement 04A-057
Florida Sales and Use Tax
Related Party Commercial 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")
XXX ("LLC")
FEIN: XX
XXX ("P.A.")
FEIN: XX
Dear :
This response is in reply to your letter dated August 13, 2004, 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.
ISSUE
Is Florida sales tax due wherein: the entity occupying a piece of commercial real property is related to the entity which
owns the property; it is alleged that no consideration flows from the occupant to the owner for the use and occupancy
of the real property; neither entity recognizes any “rental” income or expenses for Federal tax purposes or accounting
purposes; and, the owner pays all expenses related to the property?
FACTS

Your letter of August 13, 2004, provides, in part:

... [P.A.] will use and occupy at least a portion of the real property owned by [LLC] without paying rent to [LLC] for
such use. There will not be any written or oral lease agreement between [LLC] and [P.A.] regarding the use of the real
property by [P.A.].
[LLC] is a member-managed limited liability company in which [Husband] and [Wife], who are husband and wife, are
the only members and each of them owns an equal number of its membership units. [Husband], who is a physician, is
the sole shareholder of [P.A.]. [LLC] is in the process of constructing a new building on the land owned by it which will
be used and occupied by [P.A.] in 2005. There will be no lease agreement between [LLC] and [P.A.] concerning the
use of the property. There will be no payments made by [P.A.] to [LLC] for the use and occupancy of this real
property. In the future, [LLC] may lease a portion of the building to an unrelated tenant under a written lease
agreement and will collect and remit sales tax concerning any lease payments.
The current members of [LLC] shall make periodic contributions to [LLC] to pay the ownership and operating
expenses of the real property. [LLC] is treated as a partnership for federal income tax purposes. As such, profits and
losses and separate items of income and deduction pass through to its partners and any income is taxed at the
individual partner level. [P.A.] currently is a "C" corporation, but, at the end of this year, the sole shareholder will elect
"S" corporation treatment for federal income tax purposes. As such, profits and losses will pass through to the
shareholder and any income is taxed at the individual shareholder level.

For federal income tax purposes, [LLC] will not indicate the receipt of rental payments related to the use of the
property by [P.A.] on its federal partnership return (IRS Form 1065). [P.A.] will not indicate the payment of rent for the
use of the property for federal income tax purpose on its federal corporate return (IRS Form 1120S). For financial
accounting purposes, neither the [LLC] nor [P.A.] will indicate the receipt or payment of rental payments related to the
use and occupancy of the property by [P.A.] on any financial or accounting records maintained by either entity.
The building on the subject real property is currently under construction and occupancy by [P.A.] is expected in
January 2005. Additionally, the following facts are provided:
1) The entity that will hold the title to the property is [LLC].
2) The entity that is the mortgagor of the property is [LLC] and [the mortgage] is guaranteed by its two members.
3) The entity responsible for payment of property taxes according to the [County] Tax Collector is [LLC].
4) The entity that will be responsible for payment of insurance on the property is [LLC].
5) The entity that is paying the mortgage, ad valorem taxes and insurance premiums is [LLC]. [P.A.] is not paying any

expenses associated with the property owned by [LLC] and used by [P.A.].

TAXPAYER’S POSITION
Your letter of August 13, 2004, relies on a TAA 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). You assert that 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 LLC and [P.A.]. 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]

***
(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.

(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 Florida sales tax is due where it is alleged that no "payments" will be made by the
occupant of a piece of commercial real property to the owner (a related entity) for the right to use and occupy the
commercial real property.
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
12A-1.070(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 Rule12A-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 non-income 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 12A1.070(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, supra. 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.
Under the facts presented, the Husband is the sole shareholder of the occupant of the property (i.e., P.A.). The
Husband and the Wife are the sole members of LLC, which owns the property. The Husband's medical practice (P.A.)
is generating revenue, which we assume, is being distributed in part to the Husband. The Husband will make periodic
contributions to the LLC to pay the ownership and operating expenses of the real property.
The Department recognizes that there may be situations wherein "income" or "profit" flowing between related entities,
in an arrangement such as the one before us, would not be "rental consideration." Key to any determination on behalf
of the Department would be a review of P.A.'s By-Laws or other controlling documents. The Department would be

interested in the timing, amount and control of the distributive shares of earnings or cash flow to the sole shareholder
(i.e., the Husband). The Department would look to the By-Laws or other controlling documents 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 does not coincide with the amount of the property's expense obligations; and (3) the distributions are
based on a true reflection of income or profit and not on the amount of the property’s expense obligations.
CONCLUSION
Under the facts as stated, and contingent on the answers to the questions concerning the distributions made by P.A.
to its sole shareholder, the arrangement you have described in your letter would not result in sales tax being due
under Section 212.031, F.S., because there would be no consideration being paid by P.A. for the use and occupancy
of LLC's real property.
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.: 61188