Sales tax on commercial leases of real property: a refresher on the issues involving Florida sales tax and commercial leases.

• Author: Wigdor, Jordan S.
• Position: Tax Law

Regardless of the size or complexity of a commercial lease transaction, the state of Florida requires sales tax to be paid on certain lease-related charges. This article is designed to serve as a refresher on the issues surrounding the taxability of various charges associated with commercial leases. In addition, this article makes recommendations on how to draft certain lease provisions relating to the payment of sales tax.

Background

Florida imposes a sales tax of six percent on the "total rent" charged under a lease. (1) In specific situations, counties are authorized to levy an additional discretionary sales surtax on the charges subject to sales tax. (2) Particular payments made by a tenant may be classified as rental consideration and subject to sales tax, including not only base rent, but additional rent and common area maintenance charges as well. (3)

F.S. [section] 212.031 addresses sales tax on leases and generally provides that the rental or lease of real property is subject to sales tax. Florida's Department of Revenue (DOR) interprets the provisions of [section] 212.031 in Florida Administrative Code Rule 12A-1.070, which sets forth in greater detail the rules relating to the taxing of specific lease charges and lease-related items.

The legislative intent underlying [section] 212.031, as specifically stated in the statute, is that anyone engaging in the business of renting, leasing, letting, or granting a license for the use of real property is exercising a taxable privilege, unless such property is specifically exempt from tax. (4) Sales tax of six percent is imposed on the "total rent or license fee" charged for the real property and includes payments made for the privilege to use or occupy real property for any purpose. (5)

While [section] 212.031 provides the law for sales tax on leases of real property, Rule 12A-1.070 implements and administers [section] 212.031 and defines the taxability of certain lease charges. Rule 12A-1.070 covers a broad spectrum of lease-related charges, many of which are potentially subject to tax, including insurance premiums and ad valorem taxes. The DOR generally considers any payment required to be paid as a condition of occupancy under a commercial lease to be taxable as rent. (6)

Although [section] 212.031 and Rule 12A-1.070 have not received a significant amount of attention in the Florida courts, the issues surrounding commercial leases and sales tax have been addressed by the DOR in the form of various technical assistance advisements. (7) The determinations rendered by the DOR further interpret and clarify the provisions of [section] 212.031 and Rule 12A-1.070.

Lease Charges

Generally speaking, all payments made by a tenant for the right to occupy or use leased premises are taxable as rent. (8) These include charges paid by a tenant in the nature of typical pass-through operating expenses associated with a landlord owning, operating, and maintaining real property. Commonly referred to as common area maintenance charges (CAM), CAM is paid by tenants to landlords for the privilege or right to use or occupy leased premises and is taxable. (9) There is no "standard" set of charges that are deemed to constitute CAM; simply, if CAM charges are required to be paid under a lease, they are taxable.

The cost of utilities servicing the common areas of a property are generally considered a component of CAM. As stated above, CAM charges are subject to sales tax. (10) In addition to utility charges for common areas, sales tax is typically due on utilities paid for leased premises. (11) Where commercial premises are served by a master meter and the proportionate share of the utility costs are passed through to a tenant, the utility costs are generally considered a taxable element for renting the real property. (12) However, despite the general rule requiring sales tax to be paid, in certain instances, as set forth below, utility charges are exempt from sales tax.

First, no sales tax is due if 1) the landlord pays sales tax on the purchase of utilities; 2) the landlord's invoice to tenant for CAM separately states the utility charges; and 3) the landlord's charge to tenant for utilities is equal or less than the amount billed by the utility provider to the landlord. (13) This exemption prevents payment of double sales tax on utilities, i.e., a landlord paying sales tax on the purchase of utilities from the utility company and again when remitting the same taxes to the state following reimbursement by the tenant. (14)

In addition, when utility charges for leased premises are paid directly to the utility provider by a tenant, sales tax is not due. (15) In this instance, because the...