Were monthly payments under a long-term lease-purchase agreement taxable as rent when the agreement required transfer of the deed?

Plain-English summary

The agreement was labeled a lease-purchase arrangement and required monthly payments over 20 years, but those payments exactly amortized the purchase price plus interest. The seller had to deliver the deed at the end of the term and retained no reversionary interest.

The buyer could obtain the deed earlier by paying the remaining balance and bore the risk and benefit of changes in property value. The arrangement also supplied redemption rights associated with instruments treated as mortgages under Chapter 697.

The Department therefore treated the agreement as an installment sale or contract for deed, not a rental of real property. The monthly payments were not subject to section 212.031 sales tax.

What this means for you

Substance can override a lease label when the agreement economically transfers ownership and merely secures payment of the purchase price.

Common questions

Did the seller retain a reversion? No.

What did the monthly payments represent? Amortized principal and interest on the purchase price.

Were the payments taxable rent? No.

Citations and references

• Fla. Stat. §§ 212.031, 697.01, and 697.02 and Fla. Admin. Code r. 12A-1.070, as cited in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 11A-026

Original ruling text

SUMMARY
QUESTION: Whether monthly payments made to obtain the deed for real property is
subject to the tax imposed by section 212.031, F.S.
ANSWER: No. The agreement between Taxpayer and the seller is for the sale of real
property, which is not subject to the sales tax. Installment sales are deemed a mortgage for
purposes of Chapter 697, F.S. The seller retains a lien on the property until the purchase
price is paid. Taxpayer has the right of redemption in the event of default for purposes of
Chapter 697, F.S.
September 2, 2011
XXX
Subject: Technical Assistance Advisement (“TAA”) 11A-026
Sales and Use Tax
Installment sale contract
Section 212.031, Florida Statutes (F.S.)
Rule 12A-1.070, Florida Administrative Code (F.A.C.)
XXX (the “Resort”)
XXX (“Taxpayer”)(“Lessee”), Petitioner
FEI#: XXX
Business Partner#: XXX
XXX (the “Company”)
Business Partner#: XXX
XXX (“Original Purchaser”)
XXX (“Assignee”)
Business Partner#: XXX
Dear XXX:
This letter is a response to your firm’s petition dated May 2, 2011, and additional
correspondence provided thereafter for the Department’s issuance of a Technical
Assistance Advisement (“TAA”) concerning the above referenced party and matter. Your
petition has been carefully examined, and the Department finds it to be in compliance with
the requisite criteria set forth in Chapter 12-11, F.A.C. This response to your request
constitutes a TAA and is issued to you under the authority of s. 213.22, F.S.
Issue

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Whether monthly payments paid by Taxpayer to obtain the deed for property is subject to
the sales tax imposed by section 212.031, F.S.
Facts
Original Purchaser had entered into an Asset Purchase Agreement (the “APA”) dated
XXX, with Company and various other parties (collectively, the “Sellers”), pursuant to
which Original Purchaser agreed to acquire the assets of the Company XXX.
Under the APA, Original Purchaser acquired the assets of Company, XXX. In regard to
XXX property, constituting mostly real property and improvements (“XXX Property”),
Original Purchaser entered into the Lease/Purchase Agreement (“LPA”), dated XXX. A
copy of the LPA, three amendments to the LPA, and other documents were provided.
Original Purchaser retained other XXX property.
On XXX, Original Purchaser assigned all of its interest in the LPA to Assignee. A copy of
the Assignment and Assumption of Lease/Purchase Agreement (the “Assignment”) was
provided. Under the Assignment, Assignee assumed all of Original Purchaser’s
obligations and duties under the Purchase Agreement and the LPA, including the First
Amendment of the LPA.
Taxpayer is referred to as “Lessee” in the LPA. The LPA requires Original Purchaser to
provide a deed to XXX Property to Taxpayer at the end of the 20-year term of the LPA. At
the end of the term, Original Purchaser has no reversionary interest. The LPA permits
Taxpayer to purchase the property and obtain the deed at an earlier date if the remaining
balance of the original XXX selling price is paid. The monthly rent payments provided by
Article 13 of the LPA are exactly equal to the monthly payment of principal and interest
that would be required to fully amortize the initial principal amount of XXX over twenty
years at XXX percent (XXX%) interest. In addition, Taxpayer is required to pay property
taxes and insurance.
The LPA requires that all right and title to the XXX Property must be transferred to the
Taxpayer for no additional consideration upon completion of such term so long as all rent
payments have been made under the LPA. Article 23 of the LPA provides for a “Final
Closing Date” as to when the transfer of the deed takes place. The LPA provides that the
“final closing of the conveyance of the XXX Property to Lessee shall occur on the earlier
of (i) payment by Lessee to Assignee of the Payoff Amount or (ii) the expiration of the
Term after all payments of Rent … have been made by Lessee to Assignee….” The
“Payoff Amount” is the unpaid portion of XXX plus accrued interest at XXX percent
(XXX%) through the Final Closing Date.
Article 14 of the LPA provides Taxpayer exclusive use of XXX Property subject to
a prior use agreement permitting XXX XXX and Assignee certain access rights to
XXX facilities, amenities, and other areas. The rights provided to the XXX run
with land for ninety-nine years. The recitals of the LPA provide that the LPA is in
the nature of an installment sale and that the XXX Property is to be conveyed at the

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end of the LPA term upon completion of all rent payments. Articles 15 and 17 of
the LPA provide that Taxpayer is to insure all property and take all insurance risks
as to XXX property replacement and damage. Article 17 provides Taxpayer takes
loss or gain in relation to condemnation payoffs. Article 18 permits Taxpayer to
make improvements without Assignee’s consent. Article 22 of the LPA provides
Taxpayer the right to take title to “XXX Property” by paying off the balance due in
the event of default of Taxpayer.
For accounting purposes, Taxpayer treats XXX Property addressed by the LPA as
purchased as of the Commencement Date. Taxpayer depreciates the cost of the XXX
Property for accounting purposes.
Requested Advisement
The LPA is an installment sale agreement and not a true lease. Therefore, the tax imposed
by section 212.031, F.S., is not required.
Taxpayer Position
The petition provides several arguments as to why the LPA is not subject to the tax
imposed by section 212.031, Florida Statutes. First, the LPA is not a lease in substance.
Taxpayer maintains that, unlike a lease which provides for reversion of the property to the
landlord at the end of the lease, the LPA provides for title to transfer to Taxpayer.
Taxpayer claims that the intent of Taxpayer and Original Purchaser was to make an
installment sale of the XXX Property.
The petition provides that the sale should also be construed as a mortgage for purposes of
section 697.01, F.S. The petition cites Bridgestone/Firestone, Inc. v. Department of
Revenue, DOAH Case Number 92-2483, 15 FALR 4874 (1993); Markell v. Hilbert, 192
So. 392 (Fla. 1939); Sun Oil Company v. Commissioner of Internal Revenue, 562 F.2d 258
(3rd Cir. 1977); and Bank of Miami Beach v. Fidelity and Casualty Company of New York,
239 So.2d 97 (Fla. 1970). The petition also cites several Technical Assistance
Advisements (TAA), including TAA 02M-005 (June 5, 2002), TAA 2002(A)-029 (June
28, 2002), TAA 04A-025 (March 31, 2004), and TAA 2004(M)-002 (November 16, 2004).
The petition cites Rule 12A-1.071(1)(d), (e), and (f), Florida Administrative Code
(F.A.C.).
Applicable Authority and Discussion
In Florida, the renting, leasing, letting, or the granting of a license for the use of any real
property is subject to 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
section 212.031(3), F.S., and Rule 12A-1.070(4), F.A.C. The total consideration, whether
direct or indirect, furnished by a lessee to the lessor, is subject to Florida sales tax.
“The relation of landlord and tenant generally arises from an agreement, or lease, which
may be either express or implied, pursuant to which one person – the tenant or lessee –

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enters into possession and occupancy of the premises of another – the landlord or lessor –
for a consideration, usually the payment of rent.” 34 Fla. Jur., Landlord and Tenant, § 1.
A lease involves the conveyance by the owner of an estate to another of a portion of his
interest, and thus is a conveyance of an interest in real property. See, e.g., DeVore v. Lee,
30 So.2d 924 (Fla. 1947). The terms “landlord and tenant” and “lessor and lessee” are
generally used interchangeably. See, e.g., Section 715.102, F.S. The estate of a landlord
during existence of an outstanding leasehold estate is called the reversion. At the
expiration of the lease, the reversionary interest of the landlord once again ripens into
perfect title. 34 Fla. Jur., Landlord and Tenant, § 12.
The LPA recital provides that Original Purchaser and Taxpayer intended to create an
installment sale of the XXX Property. The meaning of the terms “Installment land
contract,” “Land contract,” and “Contract for deed” relate to installment sales of real
property. Black’s Law Dictionary, Special Deluxe 5th edition (1979), defines “Installment
land contract at page 717 as “Type of contract by which buyer is required to make periodic
payments towards the purchase price of land and only on the last payment is the seller
required to deliver a deed. Also called a “contract for deed or long-term land contract.”
“Land contract” is defined at page 790, as:
Contract for the purchase and sale of land upon execution for which title is
transferred. Term commonly refers to an installment contract for the sale of
land whereby purchaser (vendee) receives the deed from the owner (vendor)
upon payment of final installment. The vendor retains legal title to the
property as security for payment of contract price. May also be “contract
for deed,” or “installment land contract.”
Also, “Contract for deed” is defined at page 294, as, “An agreement by a seller to deliver
the deed to the property when certain conditions have been met, such as completion of
payments by purchaser.” These types of agreements on an installment basis can be
construed as mortgages. Hialeah, Inc. v. Dade County, 490 So.2d 998 (Fla. 3rd DCA
1986)(Lease payments equaling interest plus principal on landlord’s mortgage balance over
$9 million dollars plus a $100 purchase option construed as mortgage.).
Taxpayer argues that the substance of the transaction should control over its form.
However, the best evidence of the intent and meaning of the contracting parties is the
language used in the contract. Jacobs v. Petrino, 351 So.2d 1036, 1039 (Fla. 4th DCA
1976). Accordingly, in determining intent, courts initially look to the agreement between
the parties and honor that agreement, unless the provisions of an agreement or the actual
practice of the parties indicate otherwise. Keith v. News & Sun Sentinel Co., 667 So.2d
167, 171 (Fla. 1995). This principle applies when determining whether a transaction
creates a lease, bailment, charter, or another type of contractual relationship. See 11 Fla.
Jur. Contracts §143; 5 Fla. Jur. Bailments § 3. The Department similarly looks to the
intent of the parties as evidenced by the provisions of a contract to determine its tax
consequences. See Rules 12A-1.070(22)(d) and 12A-1.071(1)(a), F.A.C.

Page 5

It is well settled that where the terms of a contract are unambiguous, the parties’ intent
must be determined from within the four corners of the document. Barakat v. Broward
County Hous. Auth., 771 So.2d 1193, 1194-1195 (Fla. 4th DCA 2000). Another well
settled principle is that a contract is ambiguous only when it is of uncertain meaning and
may fairly be understood in more ways than one. 1 Atlas Sewing Center, Inc. v. Belk’s
Dep’t Store, Inc., 162 So.2d 274, 275 (Fla. 2d DCA 1964). In the absence of ambiguity,
the plain meaning of the contractual language controls. Misala, Inc. v. Eagles, 662 So.2d
1389 (Fla. 4th DCA 1995).
Tax authorities have long been permitted to discount the form in which a transaction is
cast, and determine tax consequences based upon the transaction’s substance. See Parker
v. The Hertz Corp., 544 So.2d 249, 250 (Fla. 2d DCA 1989) (citing Helvering v. F & R
Lazurus & Company, 308 U.S. 252, 255 (1939)). Importantly, courts have also long
recognized that while a taxpayer is free to structure his transaction as he chooses, “once
having done so, he must accept the consequences of his choice, whether contemplated or
not . . . and may not enjoy the benefit of some other route he might have chosen to follow
but did not.” Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134,
149 (1974); North American Company v. Green, 120 So.2d 603, 610 (Fla. 1959) (“We are
not privileged to make the taxability of a transaction dependent upon any consideration of
some alternative procedure which might not have been taxable.”).
Because taxpayers have been accorded less freedom than tax authorities to disavow the
form they have chosen, they are generally bound to the tax consequences that follow from
their choice. See Bradley v. United States, 730 F.2d 718, 720 (11th Cir. 1984); Illinois
Power Co. v. Commissioner, 87 T.C. 1417, 1430 (1986), aff'd 896 F.2d 580 (D.C. Cir.
1990); Regal Kitchens, Inc. v. Department of Revenue, 641 So.2d 158, 163 (Fla. 1st DCA
1994). This rule seeks to avoid the uncertainty that would result from allowing the
taxability of a transaction to depend on whether an alternative form exists under which
more favorable tax consequences would result. National Alfalfa, supra, at 149;
Department of Revenue v. McCoy Motel, Inc., 302 So.2d 440, 443 (Fla. 1st DCA 1974). 2
Thus, the form in which the parties cast a transaction generally determines its substance for
tax purposes.

1

Similarly, a word or phrase in a contract is ambiguous only when it is of uncertain meaning and may be
fairly understood in more ways than one. 11 Fla. Jur. Contracts § 157.
2

The case law cited above recognizes that taxpayers have the freedom to structure their transactions as they
see fit and are intimately acquainted with the facts underlying the substance of the chosen transactional
structure. Tax authorities, on the other hand, do not have direct access to the facts underlying a particular
transaction and must by necessity rely upon the taxpayer’s representations regarding the transaction when
determining the resulting tax consequences. See Plante v. Commissioner, 168 F.3d 1279, 1282 (11th Cir.
1999) ("If a party could alter the express terms of his contract by arguing that the terms did not represent
economic reality, the Commissioner would be required to litigate the underlying factual circumstances of
'countless' agreements.") (quoting North Am. Rayon Corp. v. Commissioner, 12 F.3d 583, 587 (6th Cir.
1993)).

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In Regal Kitchens v. Department of Revenue, 641 So.2d 158 (Fla. 1st DCA 1994), the
court determined the following in part:

Section 212.031, Florida Statutes (1993), provides in part 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." Regal
Kitchens maintains that the transaction in this case is not taxable because
8600 Associates is not engaged in the business of leasing property. We
disagree. 8600 Associates was established for the sole purpose of taking
title to the property and leasing it back to Regal Kitchens. On these facts it
appears that 8600 Associates is in the business of leasing property. In fact,
that is its only business.
The term "business" is defined in subsection 212.02(2), Florida Statutes
(1993), as "any activity engaged in by any person, or caused to be engaged
in by him, with the object of private or public gain, benefit, or advantage,
either direct or indirect." This definition is broad enough to encompass
many different forms of rental arrangements, including the transaction in
this case. See, e.g., Kirk v. Western Contracting Corp., 216 So.2d 503 (Fla.
1st DCA), cert. denied, 225 So.2d 535 (Fla.1969). The stockholders of
Regal Kitchens would not have titled the property in the name of a
partnership and leased it back unless there was some benefit inherent in that
arrangement. Nothing in subsection 212.02(2) Florida Statutes (1989),
suggests that the term "business" is limited to those who engage in regular
course of dealing with different clients or customers. A person who rents a
single duplex unit is engaged in business as is the owner of an apartment
who rents thousands of units.

Regal Kitchens contends that the payments cannot be regarded as "rent"
because 8600 Associates is merely the "alter ego" of Regal Kitchens.
Specifically, Regal argues that "[t]he effect of the relationship between the
parties and the 'lease arrangement' is that four individuals own and 'lease'
the subject real estate to themselves and pay the mortgage indebtedness
represented by a first and second mortgage." This argument puts Regal
Kitchens in the unusual position of a corporation attempting to pierce its
own corporate veil. Having set up a corporation, ostensibly for the purpose
of establishing itself as a separate legal entity, Regal now argues that it is
actually not distinct from the related partnership, 8600 Associates. Regal's
characterization of the transaction is inconsistent with the corporation laws
and the terms of the lease itself.
Those who seek the protection afforded by incorporation must also accept
the burdens. Individuals may incorporate to shield themselves from
personal liability, or for many other reasons, but they may not then disavow
the existence of the corporation for the purpose of obtaining a tax

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advantage. This is not a case in which nominal parties to a business venture
are "paying rent to themselves" as Regal argues. On the contrary, this is a
case in which a corporation is paying rent to a general partnership.
The argument that Regal Kitchens is merely an "alter ego" of 8600
Associates is also belied by the language of the lease. Paragraph 27 states:
"[i]t is expressly understood that the Landlor[d] shall not be construed or
held to be a partner or associate of the Tenant in the conduct of its business.
The relationship between the parties hereto is and shall remain at all times
that of Landlord and Tenant." Having characterized its own relationship
strictly as that of a "tenant" of 8600 Associates, Regal Kitchens is not in a
position to argue that the Department of Revenue is powerless to collect
sales taxes due the State of Florida for the rental income. Nor should the
court participate in an effort to recharacterize Regal Kitchen's status as a
tenant, for that would only assist the owners in avoiding the consequences
of their own decision to incorporate. Id., at 162-163. (Emphasis supplied.)
Based on the decision in Regal Kitchens, the parties cannot disavow the existence
of the landlord and tenant relationship they intended as expressed in the documents,
regardless if the lease is part of a financing scheme. As such, the lease agreement
must be respected where the parties intended to create and arrange for a landlord
and tenant relationship for the leased property.
Prior to the decision in Regal Kitchens, the final order in Bridgestone/Firestone,
Inc. v. Florida Department of Revenue, Division of Administrative Hearings, No.
92-2483, 15 FALR 4874 (November 5, 1993), addressed whether a document titled
a lease was a mortgage. First, cases from the Division of Administrative Hearings
are merely instructive, not dispositive. For example, in regard to the use of a
special purpose entity in the recommended order of Bridgestone/Firestone, section
608.471(3), F.S., was amended in 2002, to provide that such limited liability
companies and other entities that may be disregarded for federal income or Florida
corporate income purposes, may not be disregarded for sales tax purposes.
Therefore, the use of special purpose entities for federal income law or bankruptcy
protection reasons, may not receive the same treatment as a matter of law for
Florida sales tax purposes. Also, the definition of “person” in section 212.02(12),
F.S., includes such entities. Therefore, agreements or actions by other parties will
not necessarily be imputed to another party. Second, Taxpayer relies on the term
“financing arrangement” from the recommended order. However, the final order
rejected the recommended order’s use of the term "financing arrangement" by
substituting the term "mortgage."
The final order provided in part:
Further, the cases construing what constitutes a "mortgage" under s. 697.01,
F.S., provides a better basis for determining what constitutes a "lease" under
Chapter 212, F.S., than does federal income tax law. . . .

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After a thorough review of the entire record, in which it is determined that
the document at issue was a mortgage, the Department notes that no finding
in this matter concludes that all similar agreements are to be characterized
as mortgages, and it reserves determination of the taxability of future sale
and leaseback transactions based on the facts of such transactions and
consideration of the applicable law. Id, at 4875-4876.
Therefore, as provided in the final order in Bridgestone/Firestone, the issue whether
an agreement or document alleged to be a lease is in substance a mortgage is
determined by the application of Chapter 697, F.S. Chapter 697 is titled
“INSTRUMENTS DEEMED MORTGAGES AND THE NATURE OF A
MORTGAGE.” Section 697.01(1), F.S., provides that all conveyances or
instruments of writing conveying or selling property for the purpose of securing the
payment of money are deemed mortgages. The instrument or conveyance must be
issued by the debtor to the creditor or a third party for the benefit of the creditor.
Section 697.01(2), F.S., provides that the conveyance is not construed as a
mortgage against a bona fide mortgage. Section 697.02, F.S., provides that a
mortgage is a specific lien on the property conveyed or sold, and not a conveyance
of the legal title or of the right of possession of the property. You indicated during
a telephone conference that there is no mortgage on XXX Property. The LPA
provides for the right to pay off the balance due, similar to the right of redemption,
in the event of default. One of the purposes of the Chapter as provided by section
697.01(1), F.S., is to make a document subject to the foreclosure rules which
provide the right of redemption.
Taxpayer cites four previous Technical Assistance Advisements (TAA’s). First, Section
213.22(1), F.S., provides “[t]echnical assistance advisements shall have no precedential
value except to the taxpayer who requests the advisement….” Therefore, Taxpayer cannot
rely on the Advisements as authority. In those Advisements, the title to the property
subject to the agreements was transferred after all payments were made, whether the
payments were installment payments, a nominal purchase option amount, or other option
amount that equaled the remaining debt balance owed. Also, the title transfer was
dependent upon payment. When a lease contains an option provision independent of the
previous payments, such agreements will be construed to be a lease, and the equitable
estate of the property does not relate back to the inception of the lease but to the date the
option is exercised. See Gautier v. Lapof, 91 So.2d 324 (Fla. 1956).
Here, the form of the LPA is for an installment sale and not a lease. The LPA does
not provide a reversionary interest to the Original Purchaser or Assignee typically
provided for in a lease. The LPA requires transfer of title by deed and the
payments are for payment of the purchase price plus interest. Taxpayer bears risk
and benefits of property value depreciation or appreciation. These provisions are
consistent with those required in an instrument involving an installment sale
(contract for deed or installment land contract) of real property.

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Conclusion
Based on the facts provided, the LPA is not a lease subject to the provisions of
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 10 days of the date of this letter.
Respectfully,

Chuck Wallace
Senior Attorney
Technical Assistance & Dispute Resolution
(850) 717-7541
Record ID: 102842