Did related-party cash flow and reimbursements constitute taxable rent without a written lease?

Plain-English summary

A dealership occupied commercial property owned by related landholding entities without a written or oral lease and without recording rent. It paid management fees, expense reimbursements, and discretionary cash-flow distributions to their common parent, which contributed funds to the landholders.

Florida found a landlord-tenant relationship because one person occupied another's property. The entities had created the structure for business benefits, including liability separation and financing, so the landholders and parent were in the rental business.

The occupant's payments had the qualities of indirect rent because part of the money funded mortgage, property-tax, insurance, and other property expenses. If the parent could reasonably identify those obligations, only that amount was taxable rent; otherwise, all money flowing from the occupant to the parent was taxable consideration.

What this means for you

Related-party rent tax follows substance rather than labels or bookkeeping. No written lease or direct owner payment is required when occupant funds ultimately satisfy the property's obligations.

Common questions

Was a written lease required? No. Occupancy of another person's property established the landlord-tenant relationship on these facts.

Were all distributions automatically rent? Florida focused on whether and to what extent the money paid property expenses rather than true income or profit distributions.

Why did identifying the expense amount matter? A reliable allocation limited tax to the property obligations; without one, all occupant-to-parent payments were treated as rent.

Citations and references

• Fla. Stat. § 212.031 (tax on commercial real-property rent)
• Fla. Admin. Code r. 12A-1.070(19) (related-party leases and direct or indirect consideration)
• Fla. Stat. § 608.471 (single-member limited liability companies)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06A-004

Original ruling text

SUMMARY:
QUESTION: Is Florida sales tax due under Section 212.031, F.S., wherein the entity occupying a piece of commercial
real property makes certain distributions and "cash flow" payments to its ownership who, in turn, makes contributions
to the related owners of the properties in question in order to satisfy the expense obligations related to the properties?
ANSWER - Based on Facts Below: There is a landlord/tenant relationship present because one person is occupying
the real property of another person.
The owners of the properties and the parent are "in the business" of renting, as they have created this business
arrangement for specific business benefits (i.e., to insulate the occupying entity from liabilities associated with existing
environmental conditions affecting the properties and to facilitate financing).
The various monies flowing from the occupant to its parent have the qualities of rental consideration because parts of
the monies are ultimately used to satisfy the properties' expense obligations.
If the parent can reasonably identify the amount of the properties' expense obligations, then Florida sales tax would
only be due on the amount equal to the properties' expense obligations. Otherwise, the Department will view all of the
various monies flowing from the occupant to the parent as rental consideration subject to Florida sales tax under
Section 212.031, F.S.

April 11, 2006

Re: Technical Assistance Advisement 06A-004
Commercial Property Issues
XXX (alternatively referred to as "the Taxpayer" and "Parent")
FEIN: XX
Sales and Use Tax
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 letter dated 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 the Department's
position on the issue of a business arrangement involving the use and occupancy 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.

Along with your letter, you also provided us with a copy of the following documents: (1) Articles of Organization for
"Dealership"; (2) Operating Agreement of "Dealership"; (3) Articles of Organization for "Landholder 1" and Amended
and Restated Articles of Organization for "Landholder 2" and "Landholder 3"; (4) Operating Agreement for
"Landholder 1" and Amended and Restated Operating Agreements of "Landholder 2" and "Landholder 3"; (5) Articles
of Organization for "Parent"; (6) Loan Agreement between "Parent", "Landholder 1", "Landholder 2" and "Bank"
(alternatively referred to as "Lender"); Promissory Note executed by "Parent" in favor of "Lender"; Promissory Note
executed by "Landholder 1" in favor of "Lender"; Promissory Note executed by "Landholder 2" in favor of "Lender";
Mortgage and Security Agreement ("Mortgage") by "Landholders" in favor of "Lender"; (collectively, the "Loan
Documents"); (7) Management Agreement between "Parent" and "Dealership"; (8) a statement describing the nature
of business and industry code for each entity involved in this Request; (9) Secretary of State filings made by "Parent",
"Dealership" and each "Landholder"; and (10) Diagram which illustrates the ownership and relationship of the various
parties to the transaction.
ISSUE
Is Florida sales tax due under Section 212.031, F.S., wherein the entity occupying a piece of commercial real property
makes certain distributions and "cash flow" payments to its ownership who, in turn, makes contributions to the related
owners of the properties in question in order to satisfy the expense obligations related to the properties?
FACTS
The real property involved here ("the Properties") consists of three (3) parcels owned collectively by three (3) artificial
entities ("the Landholders").
The "Dealership" occupies and uses the Properties to operate an automobile dealership.
The Taxpayer is "the Parent" of the Landholders and the Dealership. The Parent, in turn, is owned by two (2) natural
persons and a trust.
Your letter provides, in part:

In brief, Dealership will use and occupy the real properties owned by Landholders without paying rent for such use.
There will not be any written or oral lease agreement between Dealership and any Landholder regarding the use of
the real property by Dealership.
Owners own 100% of the outstanding member interests of Parent. Parent owns 100% of the outstanding member
interests of Landholder 1, Landholder 2 and Dealership, and indirectly owns 100% of the outstanding member
interests of Landholder 3. Dealership and each Landholder are disregarded entities for federal and Florida income tax
purposes....
Landholder 1 and Landholder 2 each own fee simple title to certain real property, and Landholder 3 owns a leasehold

interest in certain real property, in each case located in [a Florida City, and County] (hereinafter, collectively, the
"Properties"), which are encumbered by the Mortgage in favor of Lender. The Mortgage secures promissory notes
evidencing separate loans advanced by Lender to Parent, Landholder 1 and Landholder 2, respectively, as more
completely evidenced by the Loan Documents.
Dealership occupies and operates retail automobile, parts and service operations on the Properties. There is no lease
agreement, written or oral, between any Landholder and Dealership. There will be no payments made by Dealership
to any Landholder for the use and occupancy of the Properties. For federal income tax purposes and financial
accounting purposes, Landholders will not record the receipt of rental payments related to the use of the Properties by
Dealership, and Dealership will not record the payment of rent for the use of the Properties.
Parent shall make periodic contributions to Landholders to maintain its investment. As stated above, Landholders are
disregarded entities for federal and Florida income tax purposes, and as such, profits and losses are included with
Parent's activity. Parent will be taxed as a Partnership and its profits and losses will be taxed at the Owner's level.
Dealership shall make periodic payments of management fees to Parent. Dealership will also make periodic profit
distributions to Parent. The management fees and profit distributions from Dealership to Parent: (1) are based on a
true reflection of Dealership's allocable share of the cost to Parent of providing management services, and the market
value of such management services, in the case of management fees, and income or profit, in the case of profit
distributions, (2) do not coincide with the amount of expense obligations allocable to the Properties, and (3) do not
coincide with the time at which such expense obligations are due.
Additionally, the following facts are provided:
1) Landholders hold title to the Properties.
2) Landholders are the mortgagors of the Properties. The obligations secured by the Mortgage are guaranteed by
Parent, Dealership, Landholder 1, Landholder 2 and, to a limited extent, by [natural person owner] and [natural person
owner].
3) Landholders are responsible for payment of ad valorem property taxes on the Properties and premiums for property
insurance covering the Properties, and Landholder 1, Landholder 2 and Parent are responsible for payments to
Lender secured by the Mortgage. Dealership is not paying any expenses associated with the Properties used by
Dealership but owned by Landholders.
4) Parent, Dealership and Landholder 1 are all first year entities with December 31, 2005 as the initial tax year end.
Landholder 2 and Landholder 3 were formed in 2003 by an unrelated third party ("Former Owner"). As disregarded
entities, Landholder 2 and Landholder 3 did not file federal tax returns for 2003 or 2004, and their respective profits
and losses were included in the activities of their then sole member, Former Owner. On September 1, 2005, Parent
acquired all of the outstanding member interests of Landholder 2 and Landholder 3 from Former Owner.

The Operating Agreement of Dealership provides, in part:

"Cash Flow" means all cash funds derived from operations from the Company [the Dealership] (including interest
received on reserves), without reduction for any noncash charges, but less cash funds used to pay current operating
expenses and to pay or establish reasonable reserves for future expenses, debt payments, capital improvements, and
replacements as determined by the Member [Parent]. Cash Flow shall be increased by the reduction of any reserve
previously established.

"Profit" and "Loss" means, for each taxable year of the Company [the Dealership] (or other period for which Profit or
Loss must be computed) the Company's taxable income or loss determined in accordance with the Code [the Internal
Revenue Code of 1986, as amended, or any corresponding provision of any succeeding law].
4.1 Distributions of Cash Flow. Cash Flow for each taxable year of the Company [the Dealership] shall be
distributed to the Member [the Parent] as the Member, in the Member's sole discretion, determines.

The Management Agreement between the Dealership and the Parent provides, in part:

3. Manager's Expenses. Dealer [the Dealership] shall reimburse Manager [Parent] for Dealer's proportionate share of
   Manager's expenses incurred in connection with the performance of management services to Dealer and others to
   whom Manager provides comparable services, including (a) Manager's general overhead and administrative
   expenses attributable to its performance of its obligations under this Agreement, and (b) any salaries, bonuses or
   other compensation payable to Manager's employees dedicated to the performance of management services to
   Dealer and others to whom Manager provides comparable services, including and [sic] employee benefit plan
   contributions, postage, telephone, and travel and entertainment expenses; provided, however, Manager shall not be
   entitled to reimbursement from Dealer for any costs associated with owning or operating the real properties
   underlying the Business for which Manager or any of its subsidiaries, other than Dealer, may be responsible,
   such as, without limitation, principal and interest payments on any funded debt secured by a mortgage on
   such real property, ad valorem property taxes, and premiums on property insurance covering such real
   property. Dealer’s proportionate share of such expenses shall be determined jointly by Dealer and Manager
   based upon such formula as they shall mutually determine to be appropriate from time to time. Dealer shall
   have the right to examine the books and records of Manager during normal business hours, and upon prior
   reasonable notice, to verify the amount payable by Dealer hereunder. [emphasis supplied]
4. Compensation. In consideration of the performance of Manager's duties under this Agreement, Dealer shall pay to
   Manager management fees (the "Management Fees") in a quarterly amount equal to $1,000.00, prorated for any
   partial fiscal quarter during the term of this Agreement. Management Fees shall be payable quarterly in arrears.

The three (3) Promissory Notes related to the Properties each detail the monthly principal installments due. Under all
of the Notes, payments are due on the first day of each month commencing on XX and continuing through the first day
of each calendar month thereafter until XX. For the months of XX through XX (by way of example), a total of $XX in
monthly principle installments will be due.
REQUESTED ADVISEMENT
Your letter also provides, in part:

Is Florida sales tax due wherein: the entity occupying a piece of commercial real property is indirectly related to the
entity which owns the property; 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 financial
accounting purposes; and, the owner pays all expenses related to the property?

TAXPAYER'S ARGUMENT
In your letter of XX, you assert that "... the transaction described herein should not be treated as a real property lease
or a payment of rental consideration for Florida sales tax purposes." You cite to two (2) Technical Assistance
Advisements issued by the Department as well as to the cases of: St. Johns Trading Company, Inc. v. Department of
Revenue, DOAH Case No. 84-1652 (1985); and Department of Revenue v. Ryder System, Inc., 406 So.2d 1299 (Fla.
1st DCA, 1981). Further, you provide that:
... Landholders are not engaged in the business of renting, leasing, or letting real property, but were created as part of
an overall financing arrangement for the Properties and to insulate Dealership from liabilities associated with the
existing environmental conditions affecting the Properties.
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....

(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.

(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 advisement sought actually addresses two (2) issues. The first issue is whether there exists a "true"
landlord/tenant relationship wherein there is no written lease agreement between the person occupying the property
and the person(s) owning the property. The second issue is whether the flow of money between the occupying
person, the parent of all the persons, and the owners of the property, contain any consideration paid in exchange for
the right to use or occupy the properties in question.
The terms "landlord," "tenant" and "landlord/tenant relationship" are not defined in Chapter 212, F.S. However, Black's
Law Dictionary defines "landlord and tenant relationship" as follows:
... The relationship exists where one person occupies premises of another in subordination to other's title or rights and
with his permission or consent. Black's Law Dictionary 790 (5th ed. 1979).
It has been held that 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).
It can be seen that a landlord and tenant relationship does exist under the facts presented. Here, the Dealership (a
"person" in its own right) occupies the property of another "person" (i.e., the Landholders).
The next issue (the issue of whether there is taxable rental consideration flowing between the Dealership and the
Landholders) is more complicated.
Generally speaking, 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. See Section 212.031, F.S.
Sales tax is due on the total rental consideration paid for the right to use or occupy commercial real property. See
Rule 12A-1.070, F.A.C. The total consideration, whether direct or indirect, furnished by a lessee to the lessor, is
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.) [emphasis supplied]
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.
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.
Your letter cites to two (2) cases (St. John's Trading Company and Ryder System, Inc.) which, unfortunately, are of no
assistance. St. John's Trading Company involved the issue of whether or not the taxpayer's business practice of
recording journal entries as "rent" exposed it to Florida sales tax. The Hearing Officer found Florida sales tax was not
due because there was no actual transfer of funds (related to the journal entries labeled "rent") made between the
taxpayer's stores and their owner. In Ryder System, Inc., the First District Court of Appeal upheld the trial court's
finding that there was no landlord and tenant relationship. In its per curiam decision, the First District Court of Appeal
did not provide any facts:
The trial court's order was based upon a finding that rent was paid. In this case, the court below found no landlord and
tenant relationship and that Ryder Systems, Inc. was not engaged in the business of renting, leasing or letting any real
property. Since there was no finding a rental payment was made, the trial court correctly disapproved the tax. The
judgment below is, therefore, affirmed. Department of Revenue v. Ryder System, Inc., 406 So.2d 1299 (Fla. 1st DCA,
1981).
The holdings of St. John's Trading Company and Ryder System, Inc. do not assist us because: (1) there are funds
flowing between the Dealership and the Landholders, via the Parent; and (2) there is a landlord and tenant
relationship because the Dealership is occupying the property of the Landholders.
Technical assistance advisements 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. See Section 213.22(1), F.S. While the Department's previously issued Technical
Assistance Advisements are of no precedential value, they contain some key factors that might assist us here.
The Department has previously recognized that there may be situations wherein "income" or "profit" flowing between
related entities would not be "rental consideration." The Department has previously advised that it would require a
review of all relevant and controlling documents involved with the transaction and relationship presented. The
Department is interested in the timing, amount and control of the distributive shares of earnings or cash flow between
the parties involved. The Department looks to all of the relevant and 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.

The Department has also previously recognized there may be some situations wherein the true substance of a
distribution is to pay property expenses on behalf of the owner of the property. In those situations, the distribution is
subject to Florida sales tax because the distribution is merely another form of rent consideration.
The Department has viewed a subsidiary's payment of dividends to its sole shareholder/lessor to be a form of rent
consideration paid for the use of the building it occupied.
Applying the above factors to the facts presented in your request, we can make the following determinations.
First, do the "distributions" from the Dealership or the periodic contributions from the Parent to the Landholders
coincide with the amount of the Properties' expense obligations and/or are they made at the time the Properties'
expense obligations are due? Money flows between the Dealership and the Parent in three (3) forms: (1)
"management fees" in the amount of $1,000 every quarter; (2) "reimbursements" for Parent's expenses, which
include, but are not limited to, the Dealership's proportionate share of "... principal and interest payments on any
funded debt secured by a mortgage on [the Properties], ad valorem property taxes, and premiums on property
insurance covering [the Properties]"; and (3) "Cash Flow" distributed to the Parent at the Parent's sole discretion.
Periodic contributions will be made from the Parent to the Landholders.
The answer, then, is that a portion of the money flow coincides with the amount of the Properties' expense obligations
in that the Dealership will "reimburse" the Parent for a proportional share of the Properties' expense obligations. In
addition, the Parent, at its sole discretion, can pull funds from the Dealership's "cash flow." From the information
provided, it is unclear when the periodic contributions from the Parent to the Landholders will be made.
Second, are the "distributions" based on a true reflection of income or profit and not on the amount of the Properties'
expense obligations? The Dealership will reimburse the Parent for its (the Dealership's) proportionate share of the
Properties' expense obligations (as provided for in the Management Agreement). The proportionate share will be
based on a formula determined jointly by the Dealership and the Parent.
Third, are the "distributions" used to pay the Properties' expense obligations? Distributions are made from the
Dealership to the Parent. The Parent will make periodic contributions to the Landholders in order to "maintain its
investment." Part of the money flowing from the Dealership to the Parent will be used to pay for the Properties'
expense obligations (via the contributions), however, the Department is unable to determine from the facts specifically
what those amounts will be.
CONCLUSION
There is a landlord/tenant relationship present because one person is occupying the real property of another person.
The Landholders and the Parent are "in the business" of renting, as they have created this business arrangement for
specific business benefits (i.e., to insulate the occupying entity from liabilities associated with existing environmental
conditions affecting the properties and to facilitate financing).

The various monies flowing from the Dealership to Parent have the qualities of rental consideration because parts of
the monies are ultimately used to satisfy the Properties' expense obligations.
If the Parent can reasonably identify the amount of the Properties' expense obligations, then Florida sales tax would
only be due on the amount equal to the Properties’ expense obligations. Otherwise, the Department will view all of the
various monies flowing from the Dealership to the Parent as rental consideration subject to Florida sales tax under
Section 212.031, 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 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 # 17696