Is an unused landlord-funded tenant improvement allowance taxable when the lease permits it only as a credit against rent?

Plain-English summary

The Florida Department of Revenue concluded that a landlord did not have to collect sales tax on the unused portion of a tenant improvement allowance when the lease allowed that amount only as a credit against rent.

The allowance was funded by the landlord. Any unused amount could be applied to the tenant's rent only if the tenant made the required election, and the tenant could not receive cash, equipment, moving-cost reimbursement, property, or another benefit. Because the credit did not produce a benefit flowing from the tenant to the landlord, it was not rental consideration received by the landlord.

The Department contrasted this arrangement with one in which a tenant can choose money or other consideration instead of the rent credit. In that situation, the tax would be measured without reducing the rent.

What this means for you

Commercial landlords and tenants

The lease terms control. A landlord-funded allowance that can only reduce rent may be treated differently from an allowance that the tenant can take as cash, property, reimbursement, or another benefit.

Accountants and tax professionals

Separate landlord-funded improvements from tenant-funded improvements. This advisement expressly addressed only the landlord-funded arrangement described in the request.

Common questions

Q: Was the unused allowance credited against rent taxable?
A: No, under the stated lease terms.

Q: Could the tenant take the unused allowance in cash?
A: No. The lease permitted only a rent credit.

Q: Would the result necessarily be the same if the tenant could choose cash or property?
A: No. The Department said rent generally cannot be reduced for tax purposes when the tenant can elect to receive other consideration.

Citations and references

• Fla. Stat. §§ 212.031(1)(a), (c), and (d), 212.031(3), and 213.22
• Fla. Admin. Code r. 12A-1.070(4)(b)
• Department of Revenue v. Seminole Clubs, Inc., 745 So. 2d 473 (Fla. 5th DCA 1999)
• Florida Revenue Commission v. Maas Brothers, Inc., 226 So. 2d 849 (Fla. 1st DCA 1969)
• Seaboard Coast Line Railroad Company v. Askew, Case No. 72-15 (Fla. 2d Jud. Cir. 1972)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 14A-006

Original ruling text

Executive Director
Marshall Stranburg

QUESTION: IS THE TAXPAYER REQUIRED TO COLLECT OR PAY SALES TAX
ON THE UNUSED PORTION OF A TENANT’S TENANT IMPROVEMENT
ALLOWANCE WHEN IT IS APPLIED AS A CREDIT TO REDUCE THE RENT
OTHERWISE DUE FROM THAT TENANT?
ANSWER: THE TAXPAYER’S APPLICATION OF THE UNUSED PORTION OF
THE TENANT IMPROVEMENT ALLOWANCE, AS A CREDIT TO OFFSET A
TENANT’S RENTAL OBLIGATION, IS NOT SUBJECT TO SALES TAX UNDER
SECTION 212.031, F.S. BASED ON THE INFORMATION PROVIDED, THE
CREDIT PROVIDED BY THE TAXPAYER TO THE TENANT FOR THE UNUSED
TENANT IMPROVEMENT ALLOWANCE IS NOT A BENEFIT FLOWING FROM
THE TENANT TO THE TAXPAYER. THIS IS BECAUSE NO BENEFIT OTHER
THAN THE REDUCTION IN RENT CAN BE RECEIVED ACCORDING TO THE
LEASE.

March 6, 2014

Re:

Subject: Technical Assistance Advisement – TAA 14A-006
Sales and Use Tax – Tenant Improvement Allowance
Section 212.031, Florida Statutes (F.S.)
Rule 12A-1.070, Florida Administrative Code (F.A.C.)
XXX (“Taxpayer”)
FEI # XXX

Dear XXX:
This is in response to your letter dated XXX, requesting this Department’s issuance of a
Technical Assistance Advisement (“TAA”) pursuant to section 213.22, F.S., and Rule
Chapter 12-11, F.A.C., concerning the taxability of the Taxpayer’s application of a tenant
improvement allowance as a credit to offset rent for the lease of real property in Florida.
An examination of your letter has established you have complied with the statutory and
regulatory requirements for issuance of a TAA. Therefore, the Department is hereby
granting your request for a TAA.

Child Support Enforcement – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – James McAdams, Director  Information Services – Damu Kuttikrishnan, Director

www.myflorida.com/dor
Tallahassee, Florida 32399-0100

Technical Assistance Advisement
Page 2 of 5
Facts
Your letter provides the following, in part:

. . . Taxpayer owns commercial property located in Florida that it leases to tenants.
As an inducement to tenants to lease its properties, it is not uncommon for
Taxpayer to offer a Tenant Improvement Allowance (“TIA”) in an amount
specified in the lease agreement. The TIA is applied against expenses incurred by
Taxpayer in making improvements to the property to be leased by the tenant. If the
TIA exceeds the amount expended by Taxpayer in making the improvements, the
tenant can elect to apply the unused portion of the TIA as a credit against the rent
due under the lease agreement. Unless the tenant elects in writing to apply the
unused TIA balance as a credit against rent within twelve months after
commencement of the construction of the improvements, the tenant loses any
rights it might otherwise have to the unused TIA balance. In other words, the
tenant is only allowed to apply the TIA against the cost of the improvements or
against the rent due under the lease agreement.
Furthermore, because it is a true inducement to the tenant, there is no obligation for
the tenant to directly or indirectly repay the TIA to Taxpayer regardless of whether
the TIA is applied against the improvement costs, the rent or both. Subsequent rent
payments under the lease do not include any amount intended to recoup the TIA,
regardless of how it is applied or utilized by the tenant.

The Taxpayer provided a copy of the XXX (the “Agreement”) executed on XXX, between
Taxpayer, as “Landlord” and XXX, as “Tenant.” The Taxpayer provides that the
Agreement is representative of TIA provisions included in taxpayer’s leases with its
tenants. The Agreement provides the following, in part:

XXX
LEASEHOLD IMPROVEMENTS
. . . 8. Landlord agrees to construct in the XXX at Tenant’s sole cost and expense, subject
to application of the Tenant Improvement Allowance . . . . Landlord shall provide Tenant
with an allowance (“Tenant Improvement Allowance”) of up to XXX Dollars . . . for
expenditure on the Tenant’s Work. Tenant’s right to any undisbursed portion of the
Tenant Improvement Allowance shall expire twelve (12) months following the . . .
Commencement Date, and Tenant shall not receive any payment for any unused portion of

Technical Assistance Advisement
Page 3 of 5
the Tenant Improvement Allowance; provided, however, Landlord will apply any unused
portion of the Tenant improvement Allowance towards Rent due under the Lease so long
as Tenant provides Landlord with written notice of its intent to so credit any undisbursed
portion against Rent within thirty (30) days after the expiration such twelve (12) month
period.

Requested Advisement
The Taxpayer requests that the Department issue a TAA declaring that Taxpayer is not
required to collect or pay sales tax on the unused portion of a tenant’s TIA when it is
applied as a credit to reduce the rent otherwise due from that tenant.
Applicable Authority and Discussion
Section 212.031(1)(a), F.S., provides that Florida sales tax applies to the privilege of
engaging in the business of renting, leasing, letting, or granting a license for the use of real
property. Section 212.031(1)(c), F.S., provides that the tax on this privilege is levied on
the total rent charged and paid for such real property by the person charging or collecting
the rental or license fee. It is further provided in section 212.031(1)(d), F.S., that when the
rental or license fee is paid by way of property or “other thing of value,” this also becomes
a taxable element of rent. Rule 12A-1.070(4)(b), F.A.C., supports the statute, providing
that the tax imposed on the lease or rental of real property includes all considerations due
and payable by the tenant to its landlord “for the privilege of use, occupancy, or the right
to use or occupy any real property for any purpose.” The tax is due and payable by the
lessee at the time of the receipt of the rental or license payment by the lessor. See section
212.031(3), F.S.
Under certain conditions, real property improvements funded by a tenant are consideration
subject to tax. Such a condition exists when the costs of tenant funded improvements are
applied as a credit to reduce the amount of rent due. See Department of Revenue v.
Seminole Clubs, Inc., 745 So.2d 473 (Fla. 5th DCA 1999). This TAA does not address
the taxability of tenant funded improvements, but focuses solely on improvements funded
by a landlord.
As a general practice, a tenant improvement allowance is a negotiated amount of money a
landlord is willing to spend to improve or customize commercial office space for the needs
of a particular tenant. In some cases, the tenant will pay for the improvement, and the
landlord will reimburse the expenses paid by the tenant up to a certain negotiated amount.
In other cases, the landlord will pay for the improvements, and the tenant will reimburse
the landlord for costs that exceed the agreed upon allowance. In either case, the tenant
improvement allowance represents an amount to be paid by the landlord. The real
property improvements funded by a landlord are not part of taxable rental consideration.

Technical Assistance Advisement
Page 4 of 5
In cases where the costs of the improvements are less than the agreed upon allowance, the
difference is a savings to the landlord.
For certain leases in which unused tenant allowances automatically reduce rental amounts
due and payable for purposes of s. 212.031, F.S., by the amount of the unused allowance,
the tax may be due on the reduced rent. However, when unused tenant allowances are
refunded to the tenant in money, equipment, moving cost reimbursement, property, other
reimbursements, or other consideration, then the tax is due on the full amount of the rent,
without offset. See s. 212.031(1)(d), F.S. Therefore, if a tenant is allowed an option of
different consideration or a credit, the total rent for purposes of s. 212.031(1)(c), F.S., is
determined without deduction. In addition, if the election pursuant to the lease requires
the tenant to report the benefit received as income for federal income tax purposes, no
reduction can be made because the benefit is construed to be consideration.
In the instant case, the Agreement provides that the Taxpayer “will apply any unused
portion of the Tenant Improvement Allowance towards Rent due.” The Taxpayer “shall
not receive any payment for any unused portion of the Tenant Improvement Allowance.”
The Taxpayer can apply the Tenant Improvement Allowance to the completion of the
Improvements, and any unused portion can only be applied towards rent. The unused
portion does not become a monetary benefit that the Taxpayer can use for any purpose,
including the payment of rent. If such were the case, the Taxpayer’s payment of rent from
proceeds derived from the unused portion of the Tenant Improvement Allowance would be
rental consideration subject to tax. In other words, if the Tenant could receive a payment
from the Taxpayer for the unused Tenant Improvement Allowance and subsequently could
choose to pay the Taxpayer rent from the payment received, the rental payment would be
subject to tax.
As provided, the tax is due and payable by the lessee at the time of the receipt of the rental
payment by the lessor. In Florida Revenue Commission v. Maas Brothers. Inc.. 226 So.2d
849, 853 (Fla. App. 1st DCA 1969), the Court determined that the reason for this is, in part,
“primarily for the protection of the landlord and relieves him from liability for payment of
the tax unless and until the rental is actually received by him. . . .” The court concluded
that “[t]he amount of tax to be paid is measured by the amount of rentals received, and is
the sum equivalent to [the tax multiplied by the amount of] the rentals charged and paid.”
Id. at 351.
In Seaboard Coast Line Railroad Company v. Askew, Case Number 72-15 (Fla. Second
Judicial Circuit 1972), the court provided that the language of section 212.031, F.S.,
“clearly indicates a legislative intent to tax the full benefits flowing to the landlord for the
use of the leased premises.” When the amount saved by the Taxpayer is applied as an
offset to the Tenant’s rental consideration due, the application of the savings does not
become consideration paid for the right to occupy the Taxpayer’s property. It represents
an amount that would have been reimbursed by the Taxpayer to the Tenant. While the
amount of savings has value, it does not become rental consideration because it is not an
amount paid to and received by the Taxpayer.

Technical Assistance Advisement
Page 5 of 5
Here, based on the information provided, the credit provided by the Taxpayer to the
Tenant for the unused Tenant Improvement Allowance is not a benefit flowing from the
Tenant to the Taxpayer. This is because no benefit other than the reduction in rent can be
received according to the lease.
Conclusion
The Taxpayer’s application of the unused portion of the Tenant Improvement Allowance,
as a credit to offset a tenant’s rental obligation, is not subject to 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 that 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,

Brinton Hevey
Tax Law Specialist
Technical Assistance and Dispute Resolution
850 717-6839
Record ID: 152916