Technical Assistance Advisement
Page 1 of 16
SUMMARY
QUESTION:
What portion of the Taxpayer’s rent payments will be subject to sales tax under section 212.031, Florida Statutes?
ANSWER:
Section 212.031(1)(b), F.S., and Rule 12A-1.070(14)(a), F.A.C., provide that the Department shall identify those portions of “rent” that are taxable and those that are tax-exempt. In reaching this determination, the Department must develop a case-by-case approach that is reasonable. There are several approaches that may be used to reach a reasonable determination. Which approach is most reasonable is a decision that must be made depending on the facts and circumstances of the individual taxpayer.
Under the facts provided in this request, the taxable portion was determined by dividing the total square footage of the premises that is used exclusively by the Lessee for its hotel related purposes, plus any other square footage used by the Lessee that is not guest rooms or common areas principally provided for use of the guests, and for which either, (a) the Lessee does not impose a charge for the use of such areas; or (b) the Lessee imposes a separate charge for the use of an area and that charge is subject to tax under a provision of Chapter 212, F.S., other than Section 212.031, F.S. (the numerator), by the entire leased space (the denominator).
QUESTION:
To what extent are the Taxpayer’s payments of ad valorem taxes, utility charges, insurance premiums, and capital improvement expenditures subject to sales tax?
ANSWER:
Sales tax will be due on the Taxpayer’s payments of ad valorem taxes to the extent of the portion that is attributable to leased areas that are not used by guests or leased to third parties.
The Tenant’s payment for utility charges would not be subject to tax, since the Tenant is making the payments directly to the utility provider.
Tenant’s payment for insurance premiums will not be subject to sales tax. However, as provided in Rule12A-1.070(12), F.A.C., “any portion of the premium which secures the protection of the landlord . . . which is separately stated or itemized is regarded as rental or license fee consideration and is taxable.”
The capital improvement expenditures are subject to sales tax to the extent of the portion that is attributable to leased areas that are not used by guests or leased to third parties.
November 7, 2007
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Re:Technical Assistance Advisement 07A-042
Taxable Portions of a Hotel Lease
Sales and Use Tax
Section 212.031, Florida Statutes (F.S.)
Rule 12A-1.070, Florida Administrative Code (F.A.C.)
XXX (“Taxpayer”)
Dear XXX
This is in response to your letter dated July 24, 2007, and other correspondence provided, 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., regarding the above referenced matter and party. An examination of your letter has established that you have complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby granting your request of a TAA.
ISSUE ONE
What portion of the Taxpayer’s rent payments will be subject to sales tax under section 212.031, Florida Statutes?
FACTS
Your letter provides the following in pertinent part:
Taxpayer intends to lease and operate the XXX (the “Hotel”) located in Florida. Taxpayer will lease the Hotel from an unrelated third party. The term of the lease is 30 years. The lease includes the hotel building, surrounding and underlying realty and all other improvements. The Hotel includes guest accommodations together with other amenities such as restaurants, gift shops, parking spaces, health cluband a pool. The total square footage of the hotel and adjacent realty is approximately [XXX-] square feet. . . .
In addition to recurring rent, Taxpayer will also be obligated under the lease to pay certain other amounts. Specifically, Taxpayer will be required to pay: ad valorem taxes on the hotel and improvements; all utility charges associated with the operation of the hotel; premiums for various types of insurance; and,
$XXX in capital improvements for the hotel, grounds and improvements.
. . . Guests are entitled without additional charge to the use of meeting rooms, ballrooms, health club, pool, beach area, business center, playground, garden areas, walkways, parking and driving areas and common areas. Restaurants located within the hotel are operated by Taxpayer. The hotel gift shop, beauty salonand golf shop are operated by third parties who sub-lease this space from Taxpayer.
A requested copy of the Lease Agreement was provided on August 1, 2007. Accompanying the Lease Agreement was a cover letter that provided the following in part:
We wish to point out . . . that the Lease includes terms both for the lease of the hotel and related facilities and for the lease of a separate parcel. This separate parcel is referred to in the Lease as “Lot 4”. There is a purchase option available under the Lease for Lot 4 and Taxpayer has exercised this option. It is expected that the closing on Taxpayer’s purchase of Lot 4 will take place within the next two weeks [from the date of this letter]. At that point, Taxpayer’s obligation to pay rent to Lessor for Lot 4 will cease. Prior to this closing, Taxpayer has paid (or will pay) sales tax on one-hundred percent of the rent attributable to Lot 4. Given these circumstances, Taxpayer is not seeking technical advice concerning the application of sales tax to the Lot 4 rent. Rather, Taxpayer’s request is limited to the issues relating to the rent attributable to the hotel and related facilities.
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The Lease Agreement provides the following in pertinent part:
9.Payment of Impositions
(a) . . . Tenant shall pay and discharge when due: all taxes (including real and personal property, franchise, sales, use, gross receipts and rent taxes) imposed or assessed against all or any portion of the Premises during the Term . . . . Tenant shall pay all Impositions directly to the applicable Governmental Authority. Without limiting the foregoing, Tenant shall also pay to the applicable Governmental Authority all Florida sales tax on rents payable with respect to all Rent. . . .
10. Compliance with Legal Requirements and Environmental Matters
(a) . . . Tenant, at its expense, shall at all times comply with, and cause the Premises and any other Person occupying any part of the Premises to comply with, (i) all Legal Requirements (including, without limitation, all applicable Environmental Laws) in all material respects, and (ii) all Insurance Requirements. . . .
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12. Maintenance and Repair.
(a) Tenant, at its expense, shall take good care of the Premises and all of the Building Systems, Fixtures and Tenant’s Property located therein, and make all repairs and Alterations thereto as and when needed to preserve them in good working order, condition and appearance . . . . Any Alteration made by Tenant pursuant to this Paragraph 12 shall be made in conformity with the provisions of Paragraph 13. . . .
13.Alterations and Improvements.
(a) Tenant may, at its expense, make any Alterations, including any Major Alterations, or perform any other Work (including the construction of additional improvements) in and to the Premises without Landlord’s consent, provided that no Major Alteration may be made or performed by Tenant or on behalf of Tenant without Landlord’s prior consent at any time that an Event of Default has occurred and is continuing . . . . All Alterations [defined as: “all changes, additions, improvements or repairs to, all alterations, reconstructions, restorations, renewals, replacements or removals of and all substitutions for any of the Improvements, both interior and exterior, structural and non-structural, and ordinary and extraordinary.”] and Work [defined as: “any Alterations made to the Premises by or on behalf of Tenant.”] shall be the property of Landlord and shall be subject to this Lease . . . .
(b) During the first five (5) years of the Term, Tenant shall make repairs, replacements, and improvements to the Hotel, including the Improvements, Building Systems, Fixtures and Tenant’s Property (“Capital Improvements”), in compliance with the terms of Paragraph 13(a), and expend not less than
$XXX for the hard and soft costs (including, without limitation, design fees) of such Capital Improvements . . . .
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16.Insurance.
(a) Tenant, at its expense, shall obtain and keep in full force and effect during the Term:
(i) Property insurance insuring against all risk of physical loss or damage to the Improvements and Tenant’s Property . . . . The policy or policies required under this clause (i) shall . . . name Tenant as the insured, Landlord as an additional insured . . . .
(ii) Public liability insurance . . . . The policy or policies required under this clause (ii) shall . . . name Tenant as the insured and Landlord and each Lender as an additional insured . . . .
(iii) Worker’s compensation insurance . . . .
(iv) Comprehensive boiler and machinery/equipment breakdown insurance on the Building Systems . . . . The policy or policies required under this clause (iv) shall . . . name Tenant as the insured and Landlord as an additional insured . . . .
(v) Business interruption/extra expense insurance in an amount equal to the actual loss sustained . . . .
(vi) During any period in which any construction or any Alteration repair or Restoration of any Improvements is being performed, Builder’s Risk “All Risk” insurance in an amount equal to not less than the full completed value . . . . The policy or policies required under this clause (vi) shall . . . name Tenant as the insured [and] Landlord as an additional insured . . . .
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22.Events of Default.
(a) The occurrence of any one or more of the following shall, at the sole option of Landlord, constitute an “Event of Default” under this Lease:
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(iii) Tenant shall fail to perform or observe, or shall violate or breach, any other non-monetary term, covenant or condition of this Lease to be observed or performed by Tenant not specifically mentioned in any other clause of this Paragraph 22 . . . .
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(v) Tenant shall fail to obtain and/or maintain the insurance coverage required under Paragraph 16.
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23.Remedies and Damages Upon Default
(a) If an Event of Default shall have occurred and be continuing, then Landlord shall have the right, at its sole option, to exercise its remedies and to collect damages from Tenant in accordance with this Paragraph 23 . . . .
(i) Landlord may give Tenant written notice of Landlord’s intention to terminate this Lease on a date specified in such notice. Upon such termination date, this Lease, the estate hereby granted and all rights of Tenant hereunder . . . shall expire and terminate. Upon such termination, Tenant shall immediately surrender and deliver possession of the Premises to Landlord in accordance with provisions of [this Lease]. . . .
(ii) Landlord may terminate Tenant’s right of possession (but not this Lease) and may re-enter and repossess the Premises or any part thereof . . . and remove Tenant . . . from the Premises, without terminating this Lease or releasing Tenant from any liability hereunder. After repossession of all or any portion of the Premises pursuant hereto, Landlord shall have the right to relet all or such portion of the Premises to such tenant or tenants, for such term or terms, for such rent, on such conditions and for such uses as Landlord in its sole discretion may determine, and collect and receive any rents payable by reason of such reletting. . . .
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On September 21, 2007, additionalinformation was requested regarding parking spaces, the recreational facilities, and the meeting rooms and ballrooms. On October 9,2007 the following response was provided:
1) Parking.
All of the parking areas referenced in the schedules provided are for guest use. Hotel employees park in a separate area that is not included within the lease that is the subject of the TAA request. . . . Thus all of the parking areas in this case should be treated as non-taxable space.
2) Recreational Facilities.
The use of hotel recreational facilities (such as the health club, pool, beach area and other recreational areas) is limited to hotel guests (and their guests). Third parties are not allowed to use these facilities and there are no circumstances where third parties are allowed to use the facilities for a charge or fee.
3) Meeting Rooms and Ballrooms.
In the TAA request, we stated that guests were allowed to use the meeting rooms and ballrooms without charge. Upon further review of the practices at this hotel, we have discovered that this statement was incorrect. [The] policy of this hotel is to charge a rental fee for the use of the meeting rooms and ballrooms. This is true for both guests and third parties. In some circumstances, no separate room rental is charged where the person or group will be incurring a sufficient amount of food and beverage charges in conjunction with their use of the room. In such cases, the hotel’s view is that the room use charges are part of the food and beverage charges. In either case, the hotel collects and remits sales tax on charges made for the use of these rooms. As a result, we believe that the meeting rooms and ballrooms should be treated as non- taxable space just . . . that is rented by the hotel. . . .
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REQUESTED RULING
Taxpayer requests that the Department issue an advisement ruling as follows:
Taxpayer’s rent payments will be subject to sales tax under section 212.031, Florida Statutes, only to the extent of the portion ([11.37%]) that is attributable to leased areas that are not used by guests or leased to third parties.
TAXPAYER POSITION
Your letter, of July 24, 2007, provides the following discussion in part:
The sales tax on rentals and leases imposed under section 21[2].031, Florida Statutes, does not apply to property which is “used exclusively as dwelling units[.”] Section 212.031(1)(a)2., Florida Statutes. . . . [T]he leased property at issue is a hotel which means that a portion of the property is exempt for the lease tax as property used as dwelling units. However, there are portions of the property which are not used as dwelling units and these portions would be subject to the lease tax. . . .
For leased hotels, the Department has on many occasions applied or approved an allocation method that is based upon a comparison of the square footage of the space used for taxable purposes to the total square footage of the space subject to the lease. . . . Under this method, the Department generally treats space used by or accessible to the hotel guests as non-taxable whereas space used exclusively by the hotel operator is treated as taxable. In addition, the Department treats space that is rented to third parties as non-taxable. Although this rented space is not viewed as exempt under the “dwelling unit” exemption, it is treated as non- taxable space in order to avoid an unlawful pyramiding of sales tax. . . .
Along with your request, you provided schedules regarding square footage allocation of the spaces you assert to be taxable and non-taxable. The original schedules provided contained some incorrect figures. On September 13, 2007, you provided corrected schedules to replace the schedules submitted with the request. The corrected schedules provide the following in part:
Schedule 1: Hotel Lease Sales Tax Square Footage Allocation – Summary
Total Square Footage of Lease XXX
Total Nontaxable Square Footage XXX
Total Taxable Square Footage XXX
Total Taxable Percentage XXX
Schedule 2: Nontaxable Square Footage:
Total Atrium and Lobby 19,660
Total Guest Rooms and Associated 452,139
Total Meeting Space & Associated 68,539
Total Outdoor Meeting 6,937
Total Sublet Retail & Associated 4,518
Total Misc. Guest Areas 9,655
Total Public Restrooms 2,942
Total Guest Parking 385,533
Total Pool and Beach Areas 94,213
Total Gardens, Walkways and Driveways 583,393
Nontaxable Grand Total 1,627,529
Schedule 3: Taxable Square Footage:
Total Non-Guest Stairwells and Misc 21,961
Total Restaurants and Bars 33,371
Total “Back of House” 123,221
Total Non-Guest Elevators and Driveways 30,326
Taxable Grand Total 208,879
Based on these figures you provide the proposed taxable percentage of 11.37%
APPLICABLE STATUTES AND RULES
Section 212.031, F.S., provides in part:
(1)(a) It is declared to be the legislative intent 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 unless such property is:
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2. Used exclusively as dwelling units.
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(b) When a lease involves multiple use of real property wherein a part of the real property is subject to the tax herein, and a part of the property would be excluded from the tax under subparagraph (a)1., subparagraph (a)2., subparagraph (a)3., or subparagraph (a)5., the department shall determine, from the lease or license and such other information as may be available, that portion of the total rental charge which is exempt from the tax imposed by this section. . . .
(c) For the exercise of such privilege, a tax is levied in an amount equal to 6 percent of and on the total rent or license fee charged for such real property by the person charging or collecting the rental or license fee. The total rent or license fee charged for such real property shall include payments for the granting of a privilege to use or occupy real property for any purpose and shall include base rent, percentage rents, or similar charges. . . . In the case of a contractual arrangement that provides for both payments taxable as total rent or license fee and payments not subject to tax, the tax shall be based on a reasonable allocation of such payments and shall not apply to that portion which is for the nontaxable payments.
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(2)(b) It is the further intent of this Legislature that only one tax be collected on the rental or license fee payable for the occupancy or use of any such property, that the tax so collected shall not be pyramided by a progression of transactions, and that the amount of the tax due the state shall not be decreased by any such progression of transactions.
Rule 12A-1.070, F.A.C., provides in part:
(14)(a) When a rental, lease, or license to use or occupy real property involves multiple use of such real property wherein a part of the real property is subject to tax, and a part of the property is excluded from the tax, the Executive Director or the Executive Director's designee in the responsible program shall determine from the lease or license and such other information as may be available, that portion of the total rental charge or license fee which is exempt from the tax. When, in the judgment of the Executive Director or the Executive Director's designee in the responsible program, the amount of rent or license fee stated in the lease or license arrangement for the taxable portion of the real property does not represent true value, the Executive Director or the Executive Director's designee in the responsible program shall make a determination of the proper amount of rent or license fee applicable thereto for the purpose of determining the amount of tax due from such other information as is available.