How should a hotel operator allocate its lease payment between taxable administrative space and exempt guest dwelling and common areas?

Plain-English summary

The Florida Department of Revenue approved square footage as a reasonable way to allocate a mixed-use hotel lease between taxable and exempt rent. It did not approve the hotel's proposed 4.32% taxable share because the taxpayer supplied only first-floor data, omitted upper-floor measurements, and included at least one employee-only area in the wrong category.

The lessee rented the hotel land, buildings, improvements, fixtures, and related property. The ground floor included guest rooms, guest amenities, administrative and back-of-house space, subleased shops and restaurants, and common areas. Upper floors contained additional guest accommodations.

The formula used hotel-only space over all leased property

The Department's reasonable method was:

taxable rent = total rent × taxable hotel-use square footage ÷ total leased square footage

The numerator included areas used exclusively by the hotel operator for its own business, such as administration, laundry, housekeeping, employee cafeteria and restrooms, offices, storage, equipment rooms, and electrical or mechanical rooms.

It also included land used exclusively by the lessee, including restricted land that could not be developed and was unavailable to guests.

The denominator included every leased floor and all land demised under the lease—not only the ground floor shown in the taxpayer's table.

Guest dwelling and common areas were excluded

Section 212.031(1)(a)2. excluded property used exclusively as dwelling units. Guest rooms and common areas principally provided to guests therefore stayed out of the taxable numerator.

The ruling agreed that tennis courts, workout room, game room, and pool area offered free only to hotel guests were guest-use areas. It similarly recognized lobby space, guest corridors, elevators, stairways, grounds, and other guest areas.

But the bag-storage room was locked and accessible only by hotel employees, so it had to move from guest space into the taxable numerator.

Subleased areas were excluded to avoid pyramiding

Restaurants, shops, offices, and other spaces subleased to businesses that paid their own rental tax were excluded from the numerator. Including them again in the prime-lease calculation would impose the same tax twice, contrary to section 212.031(2)(b).

The ruling also warned that any taxable administrative or service areas on upper floors had to be included.

What this means for you

Hotel operators

Measure every floor and all leased land. Classify each space by actual use, not just by its location inside a hotel.

Commercial landlords and property managers

Support the allocation with the lease, surveys, floor plans, amenity policies, subleases, and proof of tax paid by subtenants.

Hospitality tax teams

Employee-only rooms are generally different from guest amenities. Free guest access supported exclusion here; separately charged uses may require analysis under another Chapter 212 provision.

Common questions

Q: Did the Department approve 4.32% as the taxable share?
A: No. It explained the method but lacked upper-floor data and had not verified the submitted measurements.

Q: What belonged in the numerator?
A: Space and land used exclusively by the hotel operator for its business, excluding guest dwelling/common areas and qualifying taxed subleases.

Q: What belonged in the denominator?
A: The entire square footage of all leased floors and all leased land.

Q: Were guest amenities excluded?
A: Yes, for the free guest-only tennis courts, workout room, game room, and pool described.

Q: Why was employee-only bag storage taxable?
A: It was controlled and used by hotel employees rather than being an area principally provided for guests.

Citations and references

• Fla. Stat. § 212.031(1)(a)2. — dwelling-unit exclusion
• Fla. Stat. § 212.031(1)(b)-(c) — reasonable allocation of mixed-use rent
• Fla. Stat. § 212.031(2)(b) — prohibition on pyramiding rental tax
• Fla. Admin. Code r. 12A-1.070(14)(a) — Department allocation of taxable and exempt rent

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-014

Original ruling text

SUMMARY
QUESTION: What portion of the rental payments from a lessee to a lessor is subject to Florida sales tax wherein the
lessee has leased both land and a hotel?
ANSWER - Based on Facts Below: Section 212.031(1)(a)2., F.S., excludes real property when such property is
"used exclusively as dwelling units."
Section 212.031(1)(b), F.S., authorizes the Department to determine the taxable portion of the total rent payment
when, in a lease of real property, there are multiple uses of such property and a portion of the property is subject to
the tax while another portion is not subject to the tax because of the applicability of an exemption, such as Section
212.031(1)(a)2., F.S. The Department's interpretation of this statute provides in Rule 12A-1.070 (14) (a), F.A.C., that
the Department shall determine from the lease or license agreement or other pertinent information available, that
portion of the rental charge that is exempt from tax.
The following equation is a reasonable method useful for calculating the taxable portion of a lease payment under a
lease for multiple use property such as a hotel. The equation multiplies the total rent or license fee by a fraction, the
numerator of which is the square footage used by the lessee for its own purposes, and the denominator of which is
the entire square footage of the land demised by the lease.

March 3, 2005

Re: Technical Assistance Advisement 05A-014
Sales and Use Tax - Taxable Portions of a Hotel Lease
Section 212.031, F.S. (Florida Statutes)
Rule 12A-1.070, F.A.C. (Florida Administrative Code)
Dear:
This is a response to your letter dated November 15, 2004, for the Department's issuance of a Technical Assistance
Advisement ("TAA") pursuant to 213.22, F.S., and Chapter 12-11, F.A.C., regarding the above referenced matter and
parties. An examination of your petition 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.
We have been provided with a copy of the lease agreement, a drawing of the leased property, and a drawing of the
ground level floor plan.
ISSUE
What portion of the rental payments from a lessee to a lessor is subject to Florida sales tax wherein the lessee has

leased both land and a hotel?
FACTS
The taxpayer (Lessee), a hotel operator, is leasing land and a hotel from a limited liability company (Lessor). The
agreement entered into by both parties styled "LEASE AGREEMENT," provides the following:
ARTICLE I
1.1 Leased Property.
The leased property (the "Leased Property") is comprised of Lessor’s interest in the following:
(a) the land described in Exhibit "A" attached hereto and by reference incorporated herein (the "Land");
(b) all buildings, structures and other improvements of every kind including, but not limited to, alleyways and
connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and off-site), parking areas and roadways
appurtenant to such buildings and structures presently situated upon the Land (collectively, the "Leased
Improvements");
(c) all easements, rights and appurtenances relating to the Land and the Leased Improvements;
(d) all equipment, machinery, fixtures, and other items of property required or incidental to the use of the Leased
Improvements as a hotel,...
ARTICLE 5
5.1 Ownership of the Leased Property.
Lessee acknowledges that the Leased Property is the property of Lessor and that Lessee has only right to the
possession and use of the Leased Property upon the terms and conditions of this Lease....
The ground floor of the hotel consists of guest rooms, landscaped areas, tennis courts, a pool area, several subleased
areas for which sales tax is paid by the sublessee, a one story service building used by Lessee, and other common
areas typically found at a full service hotel. The drawing indicates the hotel has several floors used for guest
accommodations. Lessee has remitted sales tax to Lessor on the full amount of the lease payment without
considering that certain portions of the lease might be tax exempt.
TAXPAYER POSITION
It is your contention that most of the lease payments to the Lessor are exempt from sales tax based upon the fact that
the property is a hotel and qualifies as multiple use property. You assert that the taxable portion of the rental payment
is calculated by taking the rental payment and multiplying it by a fraction, the numerator of which consists of all square

footage used exclusively by the Lessee in the administration of its business and the denominator of which consists of
the entire leased square footage. Also, you maintain that areas to which hotel guests are given free access are not
included in the numerator because they are exempt as a dwelling unit and areas that are subleased by the Lessee are
not included in the numerator because tax is already collected on this area.
Based upon our recent phone conversation, you indicated that the area and square footage provided are for the first
floor only. Below is a list you provide of the spaces that you assert are taxable and non-taxable:
Taxable Area

Square Footage

Hotel Administration1,108
Back of House:
Laundry
Housekeeping
Employee Cafeteria
Office Space
Employee Restrooms
Storage
Equipment Rooms5,433
Electrical/Mechanical Rooms 733
Total Taxable Area7,2744.32%
(Subleased) Area
Restaurant & Lounge
Eckerds
Travel Office
Beauty Salon
Lobby Gift Shop
Mr. Jacks Gift Shop
Skanska
Ashmore Gallery
Area used by guests
Tennis Courts (free to hotel guests)
Workout Room (free to hotel guests)
Game Room (free to hotel guests)
Pool Area (free to hotel guests)
Public restrooms in lobby
Guest lobby and seating areas

Percentage

Guest bag storage (free to hotel guest)
Guest rooms
Front desk area accessed by guests
Public grounds
Driveway for guest dropoff/pickup
Public corridors
Guest elevators
Guest stairwells
Total Non-Taxable Area

161,003

95.68%

Footage Subject to Lease 168,277

100%

Total Ground Floor Square

Based upon the above reasoning and areas you consider to be taxable, it is your contention that 4.32%
(7,274/168,277) of the lease payment is subject to tax. Accordingly, you maintain that monthly tax in the amount of
$801.36 ($265,000 x 4.32% x 7%) should be paid to the Lessor.
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 unless such property is:

2. Used exclusively as dwelling units.

(b) When a lease involves multiple use of real property wherein a part of the real property is subject to the tax herein,
and a part of the property would be excluded from the tax under subparagraph (a)1., subparagraph (a)2.,
subparagraph (a)3., or subparagraph (a)5., the department shall determine, from the lease or license and such other
information as may be available, that portion of the total rental charge which is exempt from the tax imposed by this
section....
(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.... 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.

(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.
Rule 12A-1.070, F.A.C., provides in part:
(14)(a) When a rental, lease, or license to use or occupy real property involves multiple use of such real property
wherein a part of the real property is subject to tax, and a part of the property is excluded from the tax, the Executive
Director or the Executive Director's designee in the responsible program shall determine from the lease or license and
such other information as may be available, that portion of the total rental charge or license fee which is exempt from
the tax. When, in the judgment of the Executive Director or the Executive Director's designee in the responsible
program, the amount of rent or license fee stated in the lease or license arrangement for the taxable portion of the real
property does not represent true value, the Executive Director or the Executive Director's designee in the responsible
program shall make a determination of the proper amount of rent or license fee applicable thereto for the purpose of
determining the amount of tax due from such other information as is available.
DEPARTMENT RESPONSE
The Department has not been provided with the square footage of the upper floors, and we have not verified the
square footage of the figures that were provided. This response will communicate to you the proper usage of the
methodology you are using to calculate the taxable portion of your lease agreement.
Section 212.031(1)(a), F.S., imposes sales tax on the privilege of engaging in the leasing of, or the granting of a
license to use real property. Section 212.031(1)(c), F.S., imposes the tax on the total rent or license fee charged for
such real property by the person charging or collecting the rental or license fee. However Section 212.031(1)(a)2.,
F.S., excludes real property when such property is "used exclusively as dwelling units."
Section 212.031(1)(b), F.S., authorizes the Department to determine the taxable portion of the total rent payment
when, in a lease of real property, there are multiple uses of such property and a portion of the property is subject to
the tax while another portion is not subject to the tax because of the applicability of an exemption, such as Section
212.031(1)(a)2., F.S. The Department's interpretation of this statute provides in Rule 12A-1.070 (14) (a), F.A.C., that
the Department shall determine from the lease or license agreement or other pertinent information available, that
portion of the rental charge that is exempt from tax.
The following equation is a reasonable method useful for calculating the taxable portion of a lease payment under a
lease for multiple use property such as a hotel. The equation multiplies the total rent or license fee by a fraction, the
numerator of which is the square footage used by the lessee for its own purposes, and the denominator of which is
the entire square footage of the land demised by the lease.
Computing the numerator

The numerator is comprised of the total square footage of the premises that is used exclusively by the Lessee for its
hotel related purposes, plus any other square footage used by the Lessee that is not guest rooms or common areas
principally provided for use of the guests, and for which either, (a) the Lessee does not impose a charge for the use of
such areas (e.g., a lounge providing complimentary food and drinks); or (b) the Lessee imposes a separate charge for
the use of an area and that charge is subject to tax under a provision of Chapter 212, F.S., other than Section
212.031, F.S. (e.g., a health club requiring an additional charge). Also, the numerator would include any land demised
under the lease whether developed or undeveloped, and used exclusively by the lessee. This includes areas of land
that cannot be developed due to certain restrictions and cannot be used by the hotel guests.
Pursuant to our phone conversation, you indicated that use of the tennis courts, workout room, game room, and pool
area are available free to guests only, and not offered to non-guests for a fee. Therefore, you are correct in identifying
this as an area used by the guest and not to be included in the numerator. You also indicated that the guest bag
storage area is locked and accessible by hotel employee's only. Consequently, this area should be removed from area
used by the guest to the taxable area, as space used by the hotel and included in the numerator.
Areas that would not be included in the numerator are areas you designate as subleased spaces, wherein the tax is
paid by the sublessee. The numerator may not include these areas, because doing so would cause them to be subject
to the same tax twice, once to the sublessees, and then to the lessee. Specifically, Section 212.031(2)(b), F.S.,
prohibits the pyramiding of tax by a progression of transactions. You also should note that this statute does not permit
the amount of tax due to the state to be decreased by such progression of transactions.
If any of the described taxable areas are located on the upper floors of the demised area, these areas must also be
included in the numerator. Other than the noted changes, the Department agrees with the areas you describe as
taxable, subleased, and area used by guests.
Computing the denominator
The denominator is the entire square footage the taxpayer has leased from the lessor. This square footage includes
all the areas of all floors plus all of the land area demised.
Computing the Taxable portion of Rent payments
The result of dividing the numerator by the denominator as described above is multiplied by the rent amount to
calculate the portion of the total rent subject to tax.
This response constitutes a Technical Assistance Advisement under s. 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 s. 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.
If you have any further questions with regard to this matter and wish to discuss them, you may contact me directly at
(850) 488-9666.
Sincerely,
T. Val Burgess
Tax Law Specialist
Technical Assistance & Dispute Resolution
TVB/Control No.62145