Florida: Are your leasehold improvements subject to sales tax?
The Florida Department of Revenue (the “Department”) recently issued guidance on a topic that has been the subject of a longstanding debate and various litigation matters in Florida. That topic is whether leasehold improvements relating to commercial leases are subject to sales tax. For example, if your business leased vacant and unfinished commercial space, you might plan to finish such space to your specifications. One question you may have not considered is whether such leasehold improvements are subject to sales tax.
Introduction and BackgroundIn most commercial leases, there are provisions relating to leasehold improvements that will be made to the property in order to make it suitable for the tenant. These leasehold improvements generally revert back to the lessor at the end of the lease due to their inherent nature – such improvements either become part of the property or are treated as fixtures.
In many situations, the lessor is arguably enriched by the leasehold improvements to its property whether by design or happenstance. Nonetheless, there are many variations in the lease terms through which the landlord and tenant reach agreement on the topic of leasehold improvements. Often, the tenant is responsible for reimbursing the lessor for such leasehold improvements and the lessor may give the lessee a break on rent for such payments. In other situations, the tenant’s planned improvements would be unsuitable to another lessee (think about distinctive interior designs or specific uses of space) and are therefore, of little or no value to the lessor. While these motives may come into play, what is most important from a sales tax perspective is the substance of the negotiation and the terms of the lease.
Florida Statutes § 212.031(1)(a) and (c) impose a tax on the total rent or license fee charged for the renting, leasing, or letting of any real property. Furthermore, under Florida Statutes § 212.031, when the rental fee is paid by way of property or “other thing of value,” this is also a taxable element of rent. Under the Florida Administrative Code, all consideration due and payable by the tenant for the right or privilege required by the lease is “rent.” The full amount of such benefits flowing to the landlord is included for sales tax purposes. The landlord is responsible for collecting sales tax on any amount received that is determined to be “rent” from the tenant or will be personally responsible for such payment.
The problem many taxpayers have struggled with is when are leasehold improvements not subject to sales tax and how could the arrangements be structured to substantiate that the leasehold improvements are not subject to sales tax.
Fortunately, the Department has provided guidance on this issue.
Technical Assistance Advisement 13A-023
In the Department’s Technical Assistance Advisement 13A-023 (the “Advisement”), the taxpayer requested advice based on the following scenario:
Are a “tenant’s reimbursement of funds [to the landlord] expended on the tenant’s behalf . . . not subject to the tax imposed in section 212.031, F.S., when the funds are for improvements solely to make the premises suitable for the tenant’s intended operation, are not mandatory, and are not in lieu of rent[?]”
In support of its conclusion in the Advisement, the Department relied in part on the Florida First District Court of Appeals’ decision in Department of Revenue v. Ruehl No. 925, LLC, 76 So.3d 389 (Fla. 1st DCA 2011) (“Ruehl”). In Ruehl, the Court upheld the decision that certain improvements were not "rent" subject to sales on commercial rentals, notwithstanding the fact the improvements became the property of the landlord. Based on the Ruehl decision, the Department considered the following factors in making its determination of the whether leasehold improvements were not taxable as “rent”:
- The improvements are made in order to put the premises in a condition suitable for the operation of the tenant’s business;
- There is no requirement to spend a specific or minimum amount of money on the improvements;
- No credit is given against rental payments with respect to the amount of the improvements;
- The improvements are not explicitly classified as rent, additional rent, rent-in-kind, or in lieu of rent; and
- There is no evidence that there was an attempt to reclassify rental payments to avoid the tax.
The Department ultimately found in favor of the taxpayer in the Advisement after reviewing the lease agreement and the facts and circumstances surrounding the lease, holding that the leasehold improvements were not subject to sales tax. On a going forward basis, please note that any such determination by the Department will be heavily dependent on the particular facts and circumstances.
The Advisement demonstrates the importance of the express terms of the commercial lease, the facts surrounding the leasehold improvements, and the ultimate structure of the commercial lease. When the leasehold improvements are significant, professional guidance could potentially reduce the lessee’s sales tax burden significantly or at a minimum, ensure that the entire amount expended on such leasehold improvements is not subject to sales tax.
If you have questions pertaining to sales tax applicable to your commercial lease project, please feel free to contact us.
Ohio: Cleveland beats the Colts (well, a former Colt), at least for now; Cleveland “jock tax” upheld
Jeffrey Saturday was an NFL player for the Indianapolis Colts in 2008. On Nov. 30, 2008, the Colts played the Cleveland Browns. The City of Cleveland imposed its so-called “jock tax” on Mr. Saturday and taxed a portion of his salary. One minor problem – Mr. Saturday not only did not play during the game, he also was not in Cleveland. Mr. Saturday was injured and stayed in Indianapolis.Due in part to these circumstances, Mr. Saturday challenged Cleveland’s assessment of the “jock tax” against him and sought a refund. However, the tax administrator for the City of Cleveland denied his request for a refund. The administrator’s decision was affirmed by the Municipal Board of Appeal (MBOA).
In the MBOA decision, the board found that Mr. Saturday did not meet his burden of proof that the “games-played” allocation used by the City of Cleveland was unreasonable and that Mr. Saturday’s absence from the November 30 game was properly treated as a “sick day” and therefore, subject to tax.
Not satisfied with the MBOA’s decision, Mr. Saturday appealed the case to the Ohio Board of Tax Appeals (OBTA) in Saturday v. City of Cleveland Bd. of Review (Jan. 28, 2014), BTA No. 2011-4027, assigning the following errors:
- The MBOA erroneously characterized November 29 and 30, 2008 as “sick days” despite Mr. Saturday’s participation in rehabilitation activities in Indianapolis on those days;
- Cleveland did not have authority to tax Mr. Saturday’s income when he “did not travel to or perform any services in Cleveland in 2008,” because such taxation was in violation of the Ohio and US constitutions;
- The City of Cleveland’s use of a games-played formula results in the City of Cleveland imposing a tax on income that is not earned for work done or services performed in the City of Cleveland which violates both Ohio law and Cleveland ordinances;
- The MBOA erroneously concluded that appellants failed to supply facts demonstrating that the games-played allocation method is unreasonable;
- The MBOA erroneously found that Mr. Saturday failed to present sufficient evidence because it was presented by affidavit rather than by live testimony at the hearing; and
- “[T]he exclusion of professional athletes from the protection afforded by R.C. 718.011 *** violates the Equal Protection clauses of the United States and Ohio Constitutions.”
Unfortunately for Mr. Saturday, a very similar case was decided by the OBTA just weeks before the decision (Hillenmeyer v. City of Cleveland Bd. of Review (Jan. 14, 2014), BTA No. 2009, unreported). In Hillenmeyer, while the OBTA acknowledged the appellant’s constitutional claims, the Ohio Supreme Court has prohibited the OBTA from deciding such claims. Additionally, in Hillenmeyer, the OBTA found that the City of Cleveland “jock tax” ordinances “do not operate in contravention of any state statute regarding municipal income taxes or Ohio case precedent” and, therefore, the OBTA has no equity jurisdiction to render a “determination whether the Cleveland ordinances constitute a fair or reasonable method by which to apportion [Hillenmeyer’s] income for the subject years.”
However, the facts in Hillenmeyer differed from those in Mr. Saturday’s case. Contrary to the facts in Hillenmeyer, Mr. Saturday was never physically present in Cleveland. Nonetheless, the OBTA refused to find for Mr. Saturday and affirmed the decision of the MBOA, finding that: (1) Mr. Saturday did not carry his burden of proof to establish a right to the relief he requested; and (2) the relevant “jock tax” ordinance did not operate in contravention of any state statute or Ohio case and is a valid exercise of the city’s municipal power to tax.
While it is not presently clear, the Multistate Tax Update believes that the OBTA is unlikely the last stop on Mr. Saturday’s quest to seek a refund. Mr. Saturday’s case presents several interesting constitutional issues that may ultimately reach the Ohio Supreme Court. However, at least for now, the City of Cleveland wins this round.
Wisconsin: Legislature authorizes the transfer of economic development tax credits
The Wisconsin legislature has unanimously passed a bill (S.B. 449) which allows companies that receive economic development tax credits (“Recipient”) to transfer them to another company (“Transferee”) if the Recipient meets certain eligibility requirements.A manifest problem with providing tax credit incentives to start-up companies is that start-up companies usually are not able to take advantage of the tax credit for several years. Most start-up companies do not earn a profit in the first several years of operation and do not generate taxable income. However, taxable income is necessary in order to receive the benefit of these tax credits. As a solution, the Wisconsin legislature has decided to permit such tax credits to be transferred to a Transferee to allow the Recipient to receive a more immediate benefit from receiving such tax credits.
Eligibility to transfer tax credits
The Wisconsin Economic Development Corporation (WEDC) may approve the transfer of the economic development tax credits to a Transferee if the Recipient meets at least one of the following conditions:
- The Recipient is headquartered, or intends to be headquartered, in Wisconsin and employs at least 51 percent of its employees in Wisconsin;
- The Recipient intends to expand its operations in Wisconsin and will increase the number of full-time employees employed in Wisconsin by a number equal to at least 10 percent of its full-time employees in Wisconsin; or
- The Recipient intends to expand its operations in Wisconsin and make a significant capital investment in property located in Wisconsin as determined by the WEDC.
Consideration for transfer of tax credits
The tax credits may only be transferred by the Recipient to the Transferee in exchange for some consideration, other than money, and such consideration must be connected to the eligible activity for which the tax credits were initially awarded to the Recipient.
Revocation of tax credits
If the WEDC revokes the Recipient’s certification for tax credits and such Recipient has previously transferred those tax credits to a Transferee, then the Recipient is liable for the full value of the tax credit claimed by the Transferee and the Transferee may not claim any tax credits that were not claimed prior to the revocation.
Limitation on amount of transferred tax credits
The bill allows for the transfer of up to $15 million in tax credits over three years. After the expiration of such initial three-year period, if the WEDC determines that the continuation of the tax credit transfer program will promote significant economic development in Wisconsin, then the WEDC may continue to authorize the transfer of tax credits for up to an additional three years and may authorize the transfer of up to an additional $15 million in tax credits.
For additional information regarding these subjects or any other multistate tax issues, please contact:
Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.