Did subsidiary occupants owe Florida sales tax when they used a related parent's commercial property without paying stated rent?

Plain-English summary

Florida found no taxable commercial rent under the proposed related-party arrangement only if the subsidiaries truly paid nothing for their use of the parent's property. Calling cash flow a profit distribution did not control the result; its economic relationship to the property expenses did.

The taxpayer was an S corporation that owned and operated Florida marinas. It proposed keeping the real estate in the parent while moving operations into qualified Subchapter S subsidiaries or single-member LLCs. Those subsidiaries would occupy the parent's property without a written or unwritten lease or stated rent. The parent would remain responsible for the mortgage, property taxes, insurance, maintenance, and other property expenses.

Three conditions for nontaxable distributions

The Department said subsidiary income or profit flowing to the parent would not be rental consideration when the records showed that:

1. distributions did not coincide with the dates the property's expenses were due;
2. distribution amounts did not coincide with the amounts of those expenses; and
3. the people controlling distributions based them on a true reflection of income or profit, not on the property's expense obligations.

The Department would review membership agreements or other controlling documents, federal returns, and relevant books and records to test those points.

Substance controlled

Florida taxed consideration for renting, leasing, letting, or licensing commercial real property, including property, services, or another thing of value paid instead of cash. Related-party status did not remove that tax, and a written lease was not required.

The TAA warned that distributions would become taxable rental consideration if they were effectively the vehicle used to satisfy the parent's property expenses. Florida also treated federally disregarded single-member entities as separate legal entities for non-income-tax purposes.

Under the limited proposed facts and the required answers about distributions, however, the Department concluded that no sales tax was due because the subsidiaries paid no consideration for their use and occupancy.

What this means for you

Related entities sharing commercial property should document why and when profits are distributed. Labels such as “distribution,” the absence of a lease, and federal disregarded-entity treatment do not prevent Florida from identifying rent when money or value actually pays the owner's property obligations.

Common questions

Q: Did the lack of a written lease prevent sales tax?
A: No. The ruling said a landlord-tenant relationship and taxable consideration could exist without a written lease.

Q: Were all subsidiary distributions treated as rent?
A: No. Genuine profit distributions could be outside the rent tax if their timing, amounts, and control were independent of property expenses.

Q: What would make a distribution taxable rent?
A: Using it in substance to pay the parent's property expenses.

Q: Did federal disregarded-entity status merge the entities for Florida sales tax?
A: No. The TAA quoted Florida law treating those entities separately for non-income-tax purposes.

Citations and references

• Fla. Stat. § 212.02(2), (12) — definitions of business and person
• Fla. Stat. § 212.031 — tax on commercial real-property rent or license consideration
• Fla. Stat. § 213.22(1) — TAA reliance limitation
• Fla. Stat. § 608.471(3) — separate treatment of disregarded entities for non-income taxes
• Fla. Admin. Code r. 12A-1.070 — real-property rentals, related persons, and indirect consideration

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-068

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: distributions to shareholders do not coincide with the time at which
the property's expense obligations are due; the amount of distributions to shareholders do not coincide with the
amount of the property's expense obligations; and those controlling the amount of income or profit flowing to the
shareholders base that amount on a true reflection of income or profit and not on the amount of the property's
expense obligations.

December 21, 2004

Re: Technical Assistance Advisement 04A-068
Florida Sales and Use Tax
Related Party Commercial Real Property Rentals
Sections 212.02, 212.031, 213.22, and 608.471(3), F.S. ("Florida Statutes")
Rule 12A-1.070, F.A.C. ("Florida Administrative Code")
XXX (alternatively, "the Taxpayer" and "Parent")
FEIN: XX
Dear:
This response is in reply to your letter dated October 19, 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
With your letter of October 19, 2004, you transmitted another letter, dated September 22, 2004, that provides, in part:

***
... ("Taxpayer", "Parent") is an S Corporation which is in the business of the sale and service of boasts and yachts and
other marina operations. The taxpayer owns and operates marinas in multiple locations all in the State of Florida. In
addition, a small portion of their real estate is rented to a tenant. For business reasons, taxpayer is considering
reorganizing its corporate structure.
Specifically, taxpayer is considering "dropping down" certain assets and its business operations to subsidiaries. The
subsidiaries (Subs) will be corporations which qualify as Qualified Subchapter S Subsidiaries (QSSS's) for federal tax
purposes and/or single member LLC's, which likewise are disregarded entities for federal tax purposes. After the
reorganization, [the Taxpayer] will continue to hold all of the real estate it currently owns. However, the subsidiary
LLC's and QSSS's will operate the businesses for each location. These businesses will be operated out of real estate
owned by [the Taxpayer], as owner of the real estate, will be responsible for maintenance, real estate taxes,
insurance, debt service and other expenses related to operate the real estate. Note that some of the real estate is
rented to third party tenants and sales tax is collected and will continue to be collected on the rental income received.
The Subs will use the real property owned by the Parent holding company without paying rent to the Parent holding
company. There will not be any written or unwritten lease agreement between the Parent and the Subs regarding the
use of the real property to be used by the Subs.
1) [The Taxpayer] is an S Corporation for federal income tax purposes. As such[,] profits and loss and separate items
of income and deduction pass through to its shareholders and are taxed at the individual shareholder level.
2) The Subs will be single-member LLC's and/or Qualified Subchapter S Subsidiaries that are disregarded entities
treated as divisions of the Taxpayer for federal income tax purposes. As such, profits and loss pass through to the
Taxpayer, and are reported on its federal S Corporation return (Form [1120S]).
3) The shareholders of the Taxpayer will make capital contributions to the Taxpayer to the extent of any shortfall or
anticipated shortfall between the costs associated with the subject properties and the rental revenue received from
any tenants renting the property or net profits received from the Subs. The Subs will not rent the real property and
there will be no written or unwritten lease agreement between the Parent and the Subs. All net profits and cash flow
from Subs will be distributed to the Parent. The Parent will distribute net profits and cash flow to its shareholders at its
discretion after paying its expenses, including the expenses related to the real estate, and retaining capital it deems
necessary to retain for business reasons.
4) For federal income tax purposes, the taxpayer will not indicate the receipt of rental payments related to the use of
the property by Subs on the taxpayer's federal S Corporation return (Form 1120S). The Subs as divisions of the
taxpayer do not file their own federal tax returns.
5) For financial accounting purposes, neither the taxpayer nor Subs will indicate the receipt or payment of rental
payments related to the use of the property by Subs on any financial or accounting records maintained by the
Taxpayer.

6) 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
The letter of September 22, 2004, further provides, in part:

The taxpayer believes that because no rent will actually be paid by the Subs to the Parent and there will be no written
or unwritten lease agreement between the Parent and the Subs, there will be no "rent consideration" for Florida sales
tax purposes. Further, the net profits of the Subs which are remitted to the Parent do not constitute "rent
consideration" for Florida sales tax purposes and no sales tax will apply to them.
The taxpayer relies on TAA's (for guidance, not precedential value) 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 cited all held that
there was no Florida sales tax liability based on facts and circumstances similar to the arrangement proposed
between the Taxpayer (Parent) and the Sub. The Taxpayer[']s position, therefore, is that no Florida sales tax would be
due under the proposed arrangement.

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....

(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 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
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. 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.

Turning to the facts asserted in the letter of September 22, 2004, the Department is concerned that distributions made
by the Subs to the Taxpayer/Parent will, in effect, be vehicles by which the property expenses will be satisfied. In such
a situation, those distributions would be considered "rental consideration" subject to Florida sales tax under Section
212.031, F.S., because the true substance of the distributions is to pay property expenses on behalf of the
Taxpayer/Parent.
However, the Department recognizes that there may be situations 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 subsidiaries' membership agreements and/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 parent/owner. The Department would look to the membership agreement and/or other
controlling documents, Federal tax returns, and other relevant books and records to ascertain that: (1) 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) 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
Contingent on the limited facts as stated, and contingent on the answers to the questions concerning the distributions
made the Subs to the Taxpayer/Parent, 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 the Subs for the
use and occupancy of the Taxpayer's/Parent'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.: 61845