Could a commercial landlord separate electricity at year-end, refund rent tax, and buy required cleaning services for resale?

Plain-English summary

Florida accepted the landlord's annual reconciliation statement as a sufficient separate statement of electricity and gas charges. Although the monthly bills used estimated combined amounts, the year-end statement compared those estimates with the actual utility charges. Separately itemized utilities at or below the landlord's cost were therefore excluded from taxable rent when the landlord had paid tax to the utility provider.

The landlord could credit the erroneously collected rent tax on its sales-tax return only after refunding that tax to the tenant and keeping the required records. Because the mistaken charge had been taxed as rent, the refund calculation used the 6% rent-tax rate described in the TAA rather than the 7% electricity rate.

Required nonresidential cleaning charges produced two distinct taxable transactions, not prohibited pyramiding: the landlord bought taxable cleaning services as the ultimate consumer, and the tenant paid taxable rent that included the cleaning cost. The landlord could not issue a resale certificate because it did not satisfy the rule for reselling taxable services and the cleaning obligation was a nonoptional part of the lease.

What this means for you

Commercial landlords

If utilities are to be excluded from rent, identify them separately and reconcile estimates to actual charges. Refund tenant tax before claiming the corresponding return credit.

Tenants and accountants

A required lease cost can become part of taxable rent even when the underlying service was separately taxed to the landlord. The two taxes apply to different transactions.

Common questions

Was monthly separate billing mandatory? Not on these facts. The annual reconciliation statement adequately separated the actual utility charges.

Could the landlord take a credit before refunding the tenant? No. The TAA required the landlord to refund the erroneous tax first.

Was taxing both cleaning and rent prohibited double taxation? No. Florida treated the landlord's cleaning purchase and the tenant's rental payment as separate taxable privileges.

Could the landlord buy the cleaning service tax-free for resale? No. The landlord was the service's consumer and did not meet the resale-rule conditions.

Citations and references

• Fla. Stat. § 212.031(1)(a), (1)(c), (7)
• Fla. Stat. § 212.05(1)(e)1.d., (1)(j)1.b.
• Fla. Stat. § 215.26
• Fla. Admin. Code R. 12A-1.014(3), (6), (7)
• Fla. Admin. Code R. 12A-1.0161(5)(a)
• Fla. Admin. Code R. 12A-1.070
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-028

Original ruling text

SUMMARY

QUESTION 1: Is the requirement for separately stated
electricity charges met when an annual reconciliation
report is issued by the landlord to the commercial property
tenant showing the itemized charges for electricity?

ANSWER - Based on Facts Below: Yes. If the electricity is
not to be taxed as part of the rental amount of commercial
real property, the charge for electricity to the tenant
must be separately stated. If the electricity is not
separately stated in the monthly billing, an annual
reconciliation statement issued by the landlord to the
tenant which separately states the electricity satisfies
the requirement.

QUESTION 2: Does a pyramiding of the tax occur when
cleaning is paid by the landlord of commercial real
property, and a charge for cleaning was also included in
the taxable lease payment?

ANSWER - Based on Facts Below: No. The tax on commercial
cleaning is levied under a different statute from the tax
levied on rental of commercial real property.

QUESTION 3: Could a landlord of commercial real property
issue a resale certificate to the cleaning provider when
the conditions of the rule on the resale of services were
not met?

ANSWER - Based on Facts Below: No. The rule provisions
must be met if a sale for resale of a service is to be
exempt from tax.

Jun 29, 1999

Re: Technical Assistance Advisement (TAA 99A-028)
XXX (herein Petitioner)

XXX (herein Tenant)
Electricity; Refunds; and Industrial Cleaning in Connection
With the Lease of Real Property
Sections 203.012(9), 212.031(1)(a), and (1)(c),
212.05(1)(e)1.d., F.S.
Rules 12A-1.014(3), (6), and (7), 12A-1.0161(5)(a), 12A1.070, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to
your undated letter received in the Department offices on XX.
Petitioner is a lessor of a building leased to the Tenant.
Lessor provides electricity and natural gas, both measured
through its meters, to the Tenant. Nonresidential cleaning
services are also provided to the Tenant. The utilities and
cleaning services are billed the Tenant as additional rent.

You ask five questions which center on the requirement that
utilities billed the tenant of a nonresidential building must be
separately stated if such utilities are not to be part of the
taxable rent. In this instance, the principal issue is whether
the monthly estimates of the utility charges, or the year-end
reconciliation statements comparing the estimate with the actual
charges of utilities, provide the required separate billing of
the utilities.

You provided the Department with a copy of the lease (herein
Lease), executed on August 23, 1996, between Petitioner and
Tenant. You also attached seven other exhibits. These included
data sheets identifying the various charges billed to the
Tenant; Petitioner's receivable ledgers; expense estimates;
year-end reconciliation statements; utility payment history;
and, billing sheets to the Petitioner from the utility for the
purchase of electricity and gas.

You also attached to your letter a copy of a previously issued
Technical Assistance Advisement, issued by the Department on
December 15, 1994. This Department communication expressed a
determination that electricity charged the tenant is not a
taxable element of the rent when the electricity amount,

although not itemized as a separate charge each month, was
separately invoiced to the Tenant in a year-end reconciliation
statement. This statement revealed the actual year-end utility
charges as compared to the estimated monthly utility charges. A
similar reconciliation statement is present in the instant
facts.

The five questions are paraphrased below, after each of which
the Department's response immediately appears:

Question 1. Does the lease satisfy the separately stated
requirement in Rule 12A-1.070(4)(e), F.A.C., as to utility
charges separately billed the Tenant?

Department Response

It is helpful in responding to this and other questions to first
provide a brief background of the taxability of electricity and
gas charges both as sales of tangible personal property and as
elements of rent charged a tenant in a lease of nonresidential
real property.

Section 212.031(1)(a), F.S., imposes sales tax on the privilege
of engaging in the business of leasing or of granting a license
to use real property. Section 212.031(1)(c), F.S., levies the
tax on the "... total rent or license fee charged for such real
property...." Rule 12A-1.070, F.A.C., interprets the statute.

Section 212.05(1)(e)1.d., F.S., imposes sales tax on the sales
of electrical power or energy. Rule 12A-1.053, F.A.C.,
interprets the statute.

Petitioner has contracted with the utility provider (herein
Utility) for the provision of electricity and gas to the
commercial building of which the Petitioner is the lessor.
Since there is no exemption provided in the statutes for the
sale of electricity and gas to the Petitioner, sales tax was
charged to, and paid by, the Petitioner.

Section 212.031(7), F.S., effective July 1, 1998, provides in
full that:

Utility charges subject to sales tax which are paid by a
tenant to the lessor and which are part of a payment for
the privilege or right to use or occupy real property are
exempt from tax if the lessor has paid sales tax on the
purchase of such utilities and the charges billed by the
lessor to the tenant are separately stated and at the same
or lower price than those paid by the lessor.

Thus, such separately itemized utility charges as described in
the statute cited above, are not taxable elements of the rent.

Considering all of the above, the answer to your question as to
whether the text of the Lease satisfies the requirement of a
separately itemized charge to the tenant is "no."

The Lease, in Section 5, describes the payment given by the
Tenant for the right to use or occupy the premises as Base Rent,
and Additional Rent. Section 5.(i) and (ii) provides the
computation used in the calculation of the Base Rent. The term
"Additional Rent" is comprised of 6 categories of payments to be
made by the Tenant as reimbursement to the Petitioner.
Collectively, the categories are described as "services".
"Services" encompasses the category of "utilities", as expressed
in Section 6.(a), which include water, sewer, gas and
electricity. "Services" also consist of janitorial services,
trash removal services, ad valorem taxes and similar items.

The only Lease provisions for the billing of the utilities to
the Tenant are found within two paragraphs of Section 6, on
pages 8 and 9 of the Lease. These paragraphs provide that the
Tenant will pay each month, 1/12 of the estimated yearly
"services" as computed by the Petitioner. Then, on or about
March 31st of each year, the Tenant is to receive a statement
which reconciles the estimated monthly amounts billed the Tenant
with the actual amounts paid by the Petitioner. From this
reconciliation statement the Tenant either receives a refund or
will be billed a deficiency when the comparison is made between
the estimated "services" paid by the Tenant and the actual
"services" paid by the Petitioner.

These Lease provisions do not satisfy the requirement that
utilities be separately stated to a tenant if such charges are
not to be included as elements of the taxable rent. The Lease
text does not establish a sufficient mandate that each utility
be separately itemized. It merely provides that a statement
must be given the Tenant showing the actual charges for all
"services" as compared to the estimated charges. As noted
above, "services" include many items besides electricity and
gas. Thus, as a direct answer to Question 1., the Lease
provisions do not provide the basis for holding that the
electricity and gas charges are not taxable elements of the rent
paid by Tenant.

The unasked question, however, is whether the "statement", which
Section 6 of the Lease requires to be provided to the Tenant,
itself provides the required separate itemization of electricity
and gas charges. The answer is "yes".

In a telephone discussion on May 20, 1999, the Department
learned that the exhibit bearing the legend [Tenant]
Reconciliation Statement is the actual "statement" provided to
the Tenant. The reconciliation statement is attached to the
invoice addressed to the Tenant. You have labeled these
documents as Exhibit 7. This statement clearly shows a separate
itemization of the actual amounts paid for electricity and gas,
as well as for other services, by the Petitioner. The statement
also shows the amounts of sales tax paid.

Thus, in all instances, when the year-end reconciliation
statement separately itemizes the electricity and the gas, which
are included within the calculation of Additional Rent and upon
which sales tax was charged to and paid by the Tenant, pursuant
to s. 212.031(1)(c), F.S., the sales tax attributable to the
electricity and the gas should be refunded to the Tenant
provided the Petitioner paid sales tax with respect to such
utilities.

You are alerted that electricity is taxed at a rate of 7 percent
when sold as tangible personal property as mandated in s.
212.05(1)(e)1.d., Florida Statutes. However, when electricity
or gas is erroneously taxed as an element of the "total rent or

license fee" the tax is imposed by s. 212.031(1)(c), F.S., at
the rate of 6 percent. Thus, the calculation of the refund to
the Tenant must be based on 6 percent, rather than 7 percent.

Question 2. May the Petitioner enter a credit on its tax return
for the amount of any refund of sales tax to the Tenant as a
result of the separately stated utility charges?

Department Response

Section 215.26, F.S., provides the statutory basis for the
refund of tax to the person who has erroneously paid the tax to
the State of Florida. A refund is allowed to such person when:
there is an overpayment of such tax; a tax was paid when there
was no tax due; or, when the tax was paid in error. Rule 12A1.014(7), F.A.C., provides that a taxpayer that has paid sales
tax to a dealer when no tax was due must obtain such refund from
the dealer rather than the Department. Subsection (6) of the
rule states that the dealer may obtain a refund from the State
or may take a credit on the sales tax return only after the
erroneously collected tax is refunded to the taxpayer.
Subsection (3) of the rule requires that internal records be
maintained by a dealer who claims a refund or credit as a result
of an erroneous collection of the tax.

Thus, Petitioner may take a credit on its sales tax return in
the amount of the sales tax refunded to the Tenant computed on
the sales tax erroneously charged the Tenant.

Question 3. You ask, if the answer to Question 1 is "no", would
the electricity and gas charged be excluded from the taxable
Additional Rent if such charges are separately stated.

Department Response

The Department agreed, in its answer to Question 1., that the
actual reconciliation statement sent to the Tenant was
sufficient to qualify as a separate billing of the electricity
and gas. As described above, separately itemized utility
charges imposed by a landlord at an amount which is less than or
equal to the amount paid to the utility company may not also be

part of the taxable rent to a tenant under s. 212.031(1)(c),
F.S., provided the landlord paid tax with respect to such
utilities to the utility company.

Question 4. You ask whether the commercial cleaning charged the
Tenant as part of Additional Rent upon which the Tenant paid
sales tax is a duplication of the tax when the Petitioner also
paid sales tax on the cleaning services to its vendors?

Department Response

The answer is "no".

Irrespective of whether the nonresidential cleaning service is
separately itemized within the category of Additional Rent
charged to the Tenant, it remains a part of the "total rent or
license fee" which must be paid by the Tenant to remain in
possession. The consideration paid by the Tenant for the right
to use or occupy real property is subject to tax under s.
212.031(1)(c), Florida Statutes.

Here, cleaning of nonresidential premises is taxable to the
contracting party, the Petitioner, under provisions of s. 212.05
(1)(j)1.b., Florida Statutes. However, the inclusion of that
service as a part of Additional Rent and taxed under s.
212.031(1)(c), F.S., does not represent a pyramiding or
duplication of the tax, which is forbidden both in s.
212.031(2)(b), F.S., and in s. 212.12(12), Florida Statutes.
The tax on nonresidential cleaning is imposed on a separate and
distinct privilege from the tax on engaging in the rental or
leasing of real property. The tax imposed on nonresidential
cleaning is imposed on the transaction between Petitioner and
its vendors. The Petitioner is the ultimate consumer who will
utilize the services in fulfilling its obligations to the
Tenant. The tax imposed on the real property rental is imposed
on the transaction between the Petitioner and its tenants.
Tenant is the ultimate consumer.

When the nonresidential cleaning expense is included as an item
of Additional Rent, this service expense loses its identity as a
cleaning expense and becomes merely a part of the "total rent or

license fee" agreed to be paid by the Tenant as a condition of
remaining in possession of the leased premises. The "total rent
or license fee" is taxed under s. 212.031(1)(c), Florida
Statutes.

The Florida Supreme Court has held that it is appropriate, in
the instance of different transactions, to tax each activity,
because "[c]learly there is no `pyramiding' or duplication of
the tax since each is on a separate and distinct taxable
privilege". Ryder Truck Rental, Inc. v. Bryant, 170 So.2d 822,
825 (Fla. 1964). "Where there are two taxpayers and two
separate taxable transactions or privileges, double taxation
does not occur". American Video Corp. v. Lewis, 389 So.2d
1059,1061 (Fla. 1DCA 1980).

Question 5. If the transaction described in Question 4 results
in a pyramiding of the tax, is it appropriate to issue a resale
certificate to the cleaning firm and collect any tax only on the
Additional Rent?

Department Response

As stated in response to Question 4., no prohibited pyramiding
or duplication of the tax imposed on the lease or license to use
real property has occurred. The cleaning portion of the
Additional Rent is merely an element in the total rent or
license fee charged the Tenant by the Petitioner in accordance
with a lease of real property. There is no resale of the
cleaning service by the Petitioner.

However, it is necessary to provide a more thorough response to
your inquiry whether it is appropriate to issue a resale
certificate to the cleaning service provider. Section
212.02(14)(a), F.S., defines the terms "retail sale" or "sale at
retail" as meaning a sale "... for any purpose other than for
resale in the form of tangible personal property or services
taxable under this chapter...."

Rule 12A-1.0161, F.A.C., interprets the statute as to the resale
of taxable services such as nonresidential cleaning services and
in paragraph (5)(a) enumerates the following conditions which

must be satisfied if a valid resale of such services is to
occur:

1. The service provides a direct and identifiable benefit
   to a single client or customer of the purchaser; and

2. The purchaser of the service buys the service pursuant
   to a written contract (or other evidence sufficient for
   audit purposes) with the seller which specially designates
   the client or customer on whose behalf the purchaser is
   buying the service; and

3. The purchaser of the service separately states the value
   of the service in the charge for the service when it is
   subsequently sold to the purchaser's client or customer;
   and

4. The selling dealer obtains a resale certificate from a
   purchasing dealer who is primarily engaged in the business
   of selling taxable services. In order to purchase a
   service tax exempt as a sale for resale, the purchaser's
   sales tax number must end in digits 92 or 93.

Among the conditions in paragraph (5)(a) is the requirement that
the "purchasing dealer," which in this instance is the
Petitioner, be "... primarily engaged in the business of selling
taxable services." Petitioner, on this basis alone, is not
qualified to purchase cleaning services for resale. And, as
noted above, the Petitioner is the consumer of the services, and
not a seller of such services.

Further, since the provision in Lease Section 6 (c), as to
janitorial service, is not optional, the cost of such service is
part of the taxable "sales price," meaning in this instance, the
lease payment required to be paid by the Tenant. See,
Department of Revenue v. B & L Concepts, Inc., 612 So.2d 720,
721 (Fla. 5DCA 1993).

You also ask, in a last question, for clarification of the
procedure for taking a credit for the sales tax that the
Petitioner has refunded to the Tenant, if, in Question 1, the

electricity and gas is not a part of the taxable lease payment.
The Department's reply is that the credit may be taken on line 6
of the sales tax return. As required by Rule 12A-1.014(3),
F.A.C., Petitioner should maintain records to substantiate both
the refund to the Tenant and the credit taken on the return.

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.

Sincerely,

Robert G. Parsons
Tax Law Specialist
Technical Assistance and Dispute Resolution

Ctrl. No. 37666