Could a related lessor buy arena equipment tax free for lease, and were attached items still tangible personal property?

Plain-English summary

Florida allowed the lessor to buy the listed arena property tax free for resale through a lease and required it to collect tax on the lessee's rental payments. The related parties represented that they would deal at arm's length and satisfy true-lease criteria rather than create a sale or financing arrangement.

The property included audiovisual, specialty lighting, furniture, electronic equipment, turnstiles, barricades, satellite equipment, signage, office equipment, portable staging and seating, sports surfaces and hoops, forklifts, ice equipment, and other arena operating assets.

Freestanding items were plainly tangible personal property. Attached items also remained personal property when attachment was temporary, the lease required removal while meaningful value and useful life remained, or the item was machinery, equipment, or a trade fixture. The items were not custom designed for the arena and did not require construction permits or building-trade licensing to install.

What this means for you

Related-party leasing needs economic substance and asset-level classification. Preserve proof of the lessor's at-risk investment, residual value, removal rights, useful life, and the reason each attached item is not a permanent fixture.

Common questions

Q: Did the lessor pay sales tax when buying the equipment? No, when purchased exclusively for the qualifying lease with a resale certificate.

Q: Were rental payments taxable? Yes.

Q: Did attachment to the arena automatically create real property? No.

Q: What if an item were a permanent real-property fixture? The contractor, rather than the lessor, would be the taxable consumer of installation materials under the analysis described.

Citations and references

• Fla. Stat. §§ 212.02(14)(a), (15), and (19) and 212.05(1) — retail sales, leases, and tangible personal property
• Fla. Stat. § 212.06(1) and (14) — contractor tax and fixtures
• Fla. Admin. Code r. 12A-1.051 — real-property contractors
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-076

Original ruling text

SUMMARY

QUESTION: Will purchases of certain items for lease to a
related entity for use in a sports/special events arena be
classified as purchases of tangible personal property for
purposes of leasing?

ANSWER - Based on Facts Below: Specific items for use in a
sports and special events arena will be treated for sales
tax purposes as tangible personal property purchased by a
lessor for the purpose of leasing to a related entity that
operates the arena. The related parties will deal at arm's
length and the terms of the lease will meet criteria for
classification as a lease rather than a sale or financing
arrangement under Internal Revenue Service guidelines. All
of the items involved are tangible personal property rather
than real property. Even those items that may be attached
to the arena structure are tangible personal property in
this case, because the attachment is not of a permanent
nature, the items are machinery or equipment, or the items
are trade fixtures. None of the items will be custom
designed or assembled, and installation of the items will
not require a construction permit or licensing under
statutes regulating the building trades.

Dec 16, 1999

Re: Technical Assistance Advisement (99A-076)
XXX ("Lessee")
XXX ("Lessor")
Sales and Use Tax -- Leases of Tangible Personal Property
Sections 212.05, 212.06, F.S.

Dear :

This is in response to your letter to the Florida Department of
Revenue dated September 24, 1999, in which you asked for a
technical assistance advisement indicating that leases of

certain items would be treated as leases of tangible personal
property for purposes of sales and use taxation. In several
conferences and correspondence with the Department that preceded
your letter, the letter itself, and subsequent telephone
conversations, information has been provided concerning the
proposed leasing of certain property to be used in the operation
of a sports and special event arena located in XXX.

Facts

Pursuant to a development agreement between XXX ("County") and
Lessee, Lessee is obligated to construct a sports and special
events arena on property owned by County. Lessee will pay all
the costs of construction, although County will hold title to
the arena. Lessee will operate and control the arena for a
period of 20-30 years under a long-term management agreement.
The development agreement provides that Lessee may lease rather
than purchase items if it is a common practice for operators of
similar sports arenas to lease such items. Lessee has
determined that it is permitted to and will lease numerous items
(the "Leased Property"). You have categorized and described the
items to be leased as follows:

Leased Property

Description of the Leased
Property

*Audio Visual Equipment

Televisions, video cassette

recorders, cameras and other
electronic equipment for the
courtside, suites, executive
suites, party suites, star box and
bar

*Lighting Equipment

Specialty lighting -- lights such

as follow spots or strobe lights,
put up only for special events, do
not remain installed on a regular
basis

Furniture

Team bench and chairs
Party suite furniture

Concession miscellaneous
furniture
Star box furniture
Lodge furniture
Suite furniture
Premium food & beverage furniture
Portable chairs
Press level tables and chairs
Table rounds -- round table tops,
as opposed to square table tops
Rubber mats
*Scorers table

*Electronic Equipment

Televisions

Video cassette recorders
DVDs
Stereo
Portable radios
Video display board
Video replay system
*Turnstiles and
Barricades

Not permanently mounted, put up and
taken down for traffic control
purposes, depending on the events

*Satellite Uplinks

Satellite dishes, receivers,
transmitters, and other electronic
equipment.

Rotational Signage

Signage that is not permanently

affixed and is frequently changed
for sponsorship identification

*Office Equipment

Computers
Fax machines
Copiers
Printers

Portable Staging and
Barricades

Free standing, movable, not
permanently affixed

Portable Basketball Floor

Sectional flooring that is

installed on an as-needed basis
Ice Hockey Event
Equipment

Ice surfacing machine
Ice decking used to support ice
Ice edger -- a machine that is
used to smooth the ice surface
Ice rink -- includes chilling
equipment, rink sides and water
proofing, but does not include
structural plumbing

Basketball Event Equipment

Basketball hoops in main area,

portable, removed and stored when
scheduled events require
different set up of arena
Portable hoops used in other
areas

Tuggers, Forklifts

Motorized vehicles used to move
heavy items

Carts, Dollys and Pallets

Equipment used to move and store

furniture and other items

Pallet Jacks

Hydraulic equipment used to lift
and lower items

Floor Coverings

Coverings brought in when needed to
cover permanent floor and create
practice court

Miscellaneous Concert
Configuration

Equipment used to create specific
arena configurations for certain
performances

Food and Beverage
Specialty Carts

Rolling or portable kiosks

*POS System

Point of sale cash registers,
computers, and scanning equipment

Smallwares

Cooking utensils, pots and pans,
other reusable kitchen/food service
equipment

Seating systems

Variable rise seating system -retractable riser system
including seating configuration
used to increase seating capacity
for certain events
Removable primary seating for
arena, not cemented or bolted,
readily removable to permit
altering seating configuration

*Washers & Dryers

Free standing

*Board/Score System

Scoreboard that hangs from but is

not bolted to the ceiling

Rigging Equipment

Equipment that hangs from but is

not bolted to the ceiling

Flags and Banners

Self explanatory

Cable Crossover Ramps

Metal catwalks not permanently

affixed, used to assist with
lighting and staging for nonathletic events

Curtaining

Blackout curtains
House reduction curtains -- used
to reduce size of arena for
certain events

Lockers

In referee, home team, and visiting
team locker rooms

Event Staff Uniforms

Standard and uniform clothing and

similar items for use of employees
Garbage/Waste
Receptacles

Trash containers -- trash cans,

dumpsters, etc.
Concession waste receptacles -waste receptacles used in
concession area

Storage Racking

Racking system used for storage of
flooring and other portable
equipment, not permanently mounted

Chainlink Storage
Dividers

Used to separate and secure storage
of portable equipment, relocatable
to facilitate adapting size and
configuration of storage area as
needed

Hydraulic Platforms

Movable machines to permit access

to upper areas of arena for
maintenance, etc.

Family/Youth/Nursery

Tables, chairs, and similar items

Exterior Matrix Display

Exterior signage displaying name

and logo of American Airlines,
contract term is five years, after
which sign will change unless
contract is extended

*Indicates that the item excludes structural wiring and cabling

In your letter you state that the Leased Property is not
intended to be permanently attached, even if it is buried
underground or installed behind walls. In prior conferences
with the Department in which the Leased Property was discussed,
none of it was described as being buried or installed behind
walls. In fact, structural wiring and plumbing was excluded
from consideration as Leased Property because, as a result of
being buried or installed behind walls, the Department would
consider it to be permanently attached. You have subsequently
confirmed by telephone that none of the Leased Property is in
fact buried or behind walls. Your letter states that none of
the Leased Property is custom designed or assembled for this

particular arena. You also represent that those contracting to
install Leased Property are not required to be licensed under
statutes regulating the building trades.

Lessor has been formed for the purpose of purchasing the Leased
Property from third party suppliers and leasing it to Lessee.
Although Lessor is owned and controlled by the same parties who
own Lessee, you have represented that the two entities will deal
at arm's length and are bona fide separate entities. Lessor
will charge fair rental value to Lessee just as if Lessor were
leasing to an unrelated party. If there is any subsequent
merger, consolidation, liquidation, contribution to capital,
asset sale, lease assignment, or other transaction or series of
transactions pursuant to which title to the Leased Property
vests in Lessee or a successor entity to Lessee, the Department
will not view the transfer of the Leased Property as a casual or
isolated sales transaction. This advisement is explicitly based
upon the assumption that Lessor and Lessee will continue to
operate as described herein and in accordance with the terms of
their lease.

You have provided a Master Lease Agreement with your letter. It
contains terms typical of commercial leases of tangible personal
property. Lessee does not obtain any right, title, or interest
in the Leased Property other than the right of possession and
use for the term of and subject to the conditions of the lease.
No portion of rentals paid give rise to an equity interest in
the Leased Property. At the end of the lease term, the Leased
Property must be returned. There is no provision that permits
Lessee to extend or renew the lease or to exercise a purchase
option as to any item of Leased Property. Specific terms as to
the identity, quantity, lease term, and rentals related to each
item of Leased Property are to be added later in a schedule to
the Master Lease. It appears from the manner in which the
schedule is set up, and it is assumed for purposes of this
advisement, that the periodic rental payment as to any
particular item of Leased Property is fixed and does not vary
throughout the term of the lease.

In conferences, Taxpayer represented that the leasing
arrangements would conform to Internal Revenue Service

guidelines for determining whether a transaction is a lease or
should be treated as a sale. In particular, Revenue Ruling 55540, 1955-2 CB 39, and Revenue Procedure 75-21, 1975-2 CB 715,
set forth numerous criteria. It is clear from the terms of the
Master Lease that many of those criteria have been met. Revenue
Procedure 75-21, however, sets forth several standards that
involve conditions outside the terms of the lease itself or
specifically related to terms that Lessee and Lessor will add at
a later date. It is assumed that the leasing arrangements
between Lessee and Lessor meet those standards as well, which
include the following requirements:

1. Lessor must at all times have a minimum unconditional "at
   risk" equity investment equal to 20% of the cost of Leased
   Property. This investment includes consideration actually
   paid by Lessor plus amounts for which Lessor is liable on a
   recourse basis. Lessor must have sufficient net worth to
   satisfy those amounts. The minimum investment is 20% of
   the cost of the Leased Property.

2. At the end of the lease term, the fair market value of a
   leased item should reasonably be expected to be at least
   20% of its cost and the remaining useful life of the item
   should reasonably be expected to be 20% of its original
   estimated useful life.

3. Lessee may not furnish any part of the cost of the Leased
   Property, either directly to the supplier or through loans
   to Lessor.

Requested Advisements

On behalf of Lessee and Lessor, advice is requested on the
following questions:

1. May Lessor purchase the Leased Property without paying
   sales tax if purchased exclusively for purposes of leasing
   it to Lessee?

2. Will the leased property be viewed as tangible personal
   property rather than real property for sales and use tax

purposes?

Applicable Law, Discussion and Analysis

Under section 212.05(1), F.S., sales tax is imposed on retail
sales of tangible personal property and on leases of tangible
personal property. As defined in section 212.02(14)(a), F.S.,
the term "retail sale" includes a sale of tangible personal
property to any person for any purpose other than for resale in
the form of tangible personal property or taxable services.
Pursuant to section 212.02(15), F.S., the term "sale" includes a
"transfer of title or possession, or both, exchange, barter,
license, lease, or rental, conditional or otherwise, in any
manner or by any means whatsoever, of tangible personal property
for a consideration." When Lessor acquires tangible personal
property exclusively for the purpose of leasing it, the sale to
Lessor is a sale for resale. Lessor is permitted to purchase the
tangible personal property on a tax-exempt basis by providing a
resale certificate. Lessor is also required to collect and
remit sales tax on the rental payments it receives in relation
to that tangible personal property (unless a lessee establishes
entitlement to an exemption). Based upon the facts,
representations, and assumptions set forth above, Lessor should
pay no sales tax upon acquiring tangible personal property for
purposes of leasing it to Lessee and should collect tax on the
rental income payable by Lessee under the lease.

Many of the items of Leased Property are clearly tangible
personal property covered by the foregoing guidelines. Pursuant
to section 212.02(19), F.S., "tangible personal property"
includes any personal property that is perceptible to the
senses. Free standing furniture, office equipment, forklifts,
and any other item that is not attached in any way to the arena
structure are clearly tangible personal property. Other items,
however, may be attached to the walls, floors, or ceilings.
Because of their attachment, these items raise the issue of
whether they should be treated as real property rather than
personal property.

If any item of Leased Property is deemed to be real property
rather than tangible personal property, the taxation is

different. A person who contracts to provide a real property
improvement or fixture is not selling tangible personal property
used for that contract as such and cannot purchase it for
resale. The contractor is the ultimate user of the tangible
personal property incorporated into a real property job and is
taxable on the cost of acquiring or fabricating it. See section
212.06(1), F.S., and Rule 12A-1.051, F.A.C. Therefore, if any
item of Leased Property is real property rather than tangible
personal property, the contractor or subcontractors involved in
the installation would be required to pay tax on their
acquisition and fabrication costs. Lessor's resale certificate
would be irrelevant in determining the taxability of the
contractor on the acquisition of tangible personal property to
be incorporated into real property under a contract. As a
result, Lessor's costs would increase because of the taxes paid
by real property contractors and factored into the price of an
item to be leased.

Section 212.06(14), F.S., contains the following definitions to
be considered in determining whether a person is selling
tangible personal property or performing a real property
contract:

(a) "Real property" means the land and improvements thereto
and fixtures and is synonymous with the terms "realty" and
"real estate."

(b) "Fixtures" means items that are an accessory to a
building, other structure, or land and that do not lose
their identity as accessories when installed but that do
become permanently attached to realty. However, the term
does not include the following items, whether or not such
items are attached to real property in a permanent manner:
trade fixtures; property of a type that is required to be
registered, licensed, titled, or documented by this state or
by the United States Government, including, but not limited
to, mobile homes, except mobile homes assessed as real
property; or machinery or equipment. For an item to be
considered a fixture, it is not necessary that the owner of
the item also own the real property to which it is attached.

The key determination in this case is whether the items of
Leased Property that may be attached to the arena structure
would be considered fixtures. Attachment alone is not
sufficient to cause classification of an accessory to a building
as a fixture. The statute places several limitations on the
scope of the definition. The attachment must be permanent.
Items that are attached and removed on a regular basis to serve
varying needs would not be deemed to be permanently attached.
Examples of Leased Property falling into this classification are
specialty lighting, traffic control turnstiles and barricades,
rotational signage, removable seating, the portable basketball
floor, and portable hoops.

In this case, other factors also favor classification as
tangible personal property. The Leased Property is subject to a
lease that requires its removal and return to Lessor at the end
of the lease term, which under the Internal Revenue Service
guidelines will be at a point where it still retains 20% of its
original value and 20% of its original projected useful life.
There is no purchase option provision that would permit Lessee
to obtain title and enjoy the use of an item of Leased Property
for its entire useful life. The lease terms themselves
therefore support a conclusion that the Leased Property is not
permanently attached but is intended to be removed and returned
to Lessor while it still has residual value.

Certain classes of property are specifically excluded from
treatment as fixtures despite their attachment in a manner that
would otherwise be considered permanent. Machinery and
equipment is an excluded class. Machinery and equipment within
the meaning of the statute will always be considered tangible
personal property. This exclusion applies to items such as the
ice surfacing machine, chilling equipment, ice edger, tuggers,
forklifts, and pallet jacks.

Trade fixtures, regardless of the method of attachment, are also
excluded from treatment as real property by the statute. The
statute contains no definition of that term. The Department's
position is that the term includes items that are attached for
use in a particular commercial activity rather than serving
general building functions or being adaptable to use in other

types of activities. Certain items of Leased Property are
arguably tangible personal property because of their status as
trade fixtures.

Finally, certain other factors, while not sufficient in
themselves to support classification as tangible personal
property, do support that classification. None of the Leased
Property is custom designed or assembled for this particular
arena. Such customization is an indication of permanent
attachment since the items cannot be removed and used elsewhere
with the same ease as non-customized items. Similarly,
installation of the Leased Property can be performed without the
necessity of obtaining a construction permit or a license under
statutes regulating the building trades. Regulation under the
building trade licensing statutes or construction permit
ordinances is an indication of real property status.

Based on the foregoing authorities and discussion, the Leased
Property is tangible personal property. Many items are squarely
within the definition of tangible personal property without the
necessity of further analysis. Others, although attached to the
arena structure, are not real property fixtures because the
attachment is not permanent or because the items are machinery,
equipment, or trade fixtures excluded from classification as
real property.

Advisements

1. Lessor may purchase the Leased Property without paying
   sales tax if purchased exclusively for purposes of leasing
   it to Lessee.

2. The Leased Property will be viewed as tangible personal
   property for sales and use tax purposes.

Closing Statement

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
and assumptions 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,

Linda W. Bridges
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 922-9412

LWB/
Control #: 38977