Were a restaurant subsidiary's income and profits passed to its property-owning parent taxable rent?

Plain-English summary

A parent LLC owned both restaurant property and a single-member LLC that operated the restaurant. There was no written or unwritten lease, no rent was paid, and the restaurant's federal return did not report rental expense. Income and profit flowed to the parent under the entities' ownership arrangement.

Florida concluded that those distributions were not rental consideration on the stated facts. The parent was not in the business of leasing the property, and the distributions were described as a true reflection of income and profit rather than payments tied to property obligations.

The Department warned that its answer would change if distribution timing matched when property expenses were due, distribution amounts matched those expenses, or the amount flowing to the parent was based on something other than a true reflection of income or profit.

What this means for you

Related ownership and property occupancy did not alone turn genuine profit distributions into rent. The source and calculation of the payments, the entities' records, and whether payments track property costs were central to the result.

Common questions

Were the subsidiary's distributions taxable rent? No, on the specific facts presented.

What facts supported that answer? There was no lease or rent payment, the subsidiary reported no rental expense, and distributions reflected income and profit rather than property obligations.

What could change the result? Payments that coincide in timing or amount with property expenses, or that are not based on true income or profit.

Citations and references

• Fla. Stat. § 212.031 (commercial real-property rent tax)
• Fla. Admin. Code r. 12A-1.070(19) (related-party rentals)
• Fla. Stat. § 608.471(3) (disregarded LLC treatment for non-income taxes)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-039

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: Based on the specific facts presented, the "income" or "profits" realized by the
single-member LLC subsidiary, and passed through to its LLC parent holding company, is not "rent consideration" for
Florida sales tax purposes. This conclusion of the TAA is strictly limited to the facts as presented and with the
concerns of the Department.

September 28, 2005

Re: Technical Assistance Advisement 05A-039
Sales and Use Tax
Commercial Rentals - Related Parties - Income or Profit and Rental Consideration
Sections 212.02, 212.031, 213.22 and 608.471, Florida Statutes ("F.S.")
Rule 12A-1.070, Florida Administrative Code ("F.A.C.")
Dear:
This response is in reply to your letters dated XX and XX, requesting the Department’s issuance of a Technical
Assistance Advisement ("TAA") pursuant to Section 213.22, F.S., and Rule Chapter 12-11, F.A.C., regarding
commercial rentals between related parties. 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
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 XX, provides, in part:

XXX, as Trustee of his Revocable Trust Agreement ("Trust") ...is the sole Member of [Taxpayer], a Florida limited
liability company ...(the "Taxpayer").... The Taxpayer has elected to be taxed as a Subchapter "S" corporation
pursuant to Section 1361 of the Internal Revenue Code of 1986, as amended (the "Code"). The Taxpayer is the sole
owner of [Occupant], a Florida limited liability company ...and the Taxpayer has elected to treat [Occupant] as a

Qualified Subchapter "S" Subsidiary under the Code. As such, [Occupant] is not treated as a separate entity from the
Taxpayer for Federal Income Tax purposes and all of [Occupant’s] assets, liabilities, and items of income, deduction
and credit are treated as assets, liabilities and items of the Taxpayer. In addition, Taxpayer is the sole owner of the
real property (the "Property") upon which [Occupant] owns and operates a restaurant. There is no written or unwritten
lease agreement between the Taxpayer and [Occupant] regarding the use of the Property and no rent is paid from
[Occupant] to the Taxpayer in connection with [Occupant's] use of the Property.
The Taxpayer is a "pass-through" entity (similar to a partnership) for Federal Income Tax purposes. Thus, the
Taxpayer must pass through income and loss items separately to its shareholders and generally, an "S" corporation is
not subject to any corporate level tax on those items. The shareholders then report those items of income and loss at
the shareholder level for Federal Income Tax purposes.
The Trust will make contributions to the Taxpayer to the extent of any shortfall or anticipated shortfalls between the
costs associated with the Property and the income received from [Occupant]. [Occupant] will not rent the real property
and all net profits and cash flow from [Occupant] will be distributed to the Taxpayer.
For Federal Income Tax purposes, the Taxpayer will not indicate the receipt of rental payments related to the use of
the property by [Occupant] on the Taxpayer's Federal Income Tax return.
For financial accounting purposes, neither the Taxpayer nor [Occupant] will indicate the receipt or payment of rental
payments related to the use of the Property by [Occupant] on any financial or accounting records maintained by the
Taxpayer.
The Taxpayer currently holds title to the Property, is the Mortgagor of the Property, is responsible for property taxes, is
responsible for payment of property insurance, and is the actual entity paying the Mortgage, property taxes and
insurance premiums with respect to the Property.
... The Members Agreement does not provide for distributions which coincide with the time at which the Property's
expense obligations are due; does not provide for distributions to coincide with the amount of the Property's expense
obligations; and those controlling the amount of "income" or "profit" flowing to the Taxpayer in accordance with the
Agreement is a true reflection of income and profit and is not dependent upon the Property's expense obligations.

TAXPAYER'S POSITION
Your letter of XX, also provides, in part:
Based upon Technical Assistance Advisement No.: 04A-032 and the authorities therein relied upon, the author thereof
concludes that there was no Florida Sale Tax liability based upon facts and circumstances therein contained, which
facts and circumstances are substantially similar to the arrangement herein described between the Taxpayer and
[Occupant]. Therefore the Taxpayer's position is that no portion of the income or profits of [Occupant] passed through
to the Taxpayer are "rent consideration" for Florida sales tax purposes.

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.

(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....
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 a related entity (and the same being 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 the granting of 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.
Pursuant to the facts you presented, the Taxpayer is not in the business of leasing real property. First, the Occupant's
XXX Federal Tax Return, Form XXX Schedule XX, indicates that the Occupant did not report rental expense. Next,
the Taxpayer's Operating Agreement provides that the purpose of the Taxpayer is to "own and operate XXX and to
perform any and all business and operations as may be authorized by law."
Although the Taxpayer may not be "in the business" of renting under the facts provided, the Department's opinion
would change in the event it is later determined that any of the following occur: (1) the distributions made by Occupant
to the Taxpayer coincide with the time at which the property's expense obligations are due; (2) the amount of
distributions coincides with the amount of the property’s expense obligations; or (3) those controlling the amount of
"income" or "profit" flowing to the Taxpayer based that amount on factors other than a true reflection of income or
profit.
CONCLUSION
Based on the specific facts presented, the "income" or "profits" realized by the single-member LLC subsidiary, and
passed through to its LLC parent holding company, is not "rent consideration" for Florida sales tax purposes. This

opinion is strictly limited to the facts as presented and with the concerns of the Department, as mentioned above.
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 Section 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
Ctrl # 14607