A recent discussion among colleagues regarding whether the SBA imposes a 'minimum' rent requirement under the Eligible Passive Company (EPC) Rule prompted this article. In pondering the question, a situation came to mind where a borrower had contacted me regarding an audit by the Florida Department of Revenue that resulted in the imposition of back taxes and a hefty fine for failure to collect and remit sales tax (also commonly known as use tax) on the imputed rent from a wholly owned subsidiary. The separation of ownership for liability planning purposes carefully crafted by the borrower and his counsel resulted in an unexpected, substantial tax obligation. You see, Florida is the only state in the nation that imposes a sales or use tax on commercial rent directly at the state level.
Section 212.031(1)(a) and (c) of the Florida Statutes imposes a sales or use tax on the total rent or fee charged for the renting, leasing, or letting of any commercial real property. Under this statute, and rules promulgated pursuant to this statute, Florida takes the position that "all consideration" due and payable by every "person" for the right or privilege to use leased space is "rent." Fla. Admin. Code Rule 12A-1.070. Rentals, leases, and licenses to use or occupy real property by related "persons" are also subject to sales tax. Examples include the typical EPC structure where a parent corporation leases to a subsidiary or affiliate or an individual/principal leases to a corporation, commonly referred to as the Operating Company (OC).
In addition to actual rent payments, "rent" also includes insurance premiums, property taxes and common area maintenance for services such as landscaping, janitorial and building repair. In situations involving real estate collateralized loans, debt service payments are also characterized as "rent." See generally, Technical Assistance Advisement 09A-048. In short, regardless of the manner or description attached to funds or benefits received by a landlord, indirectly or directly, from those using the real estate, it is "rent" and the landowner is required to remit sales tax. Id.
The tax payable to the state is calculated at the rate of 6% plus any discretionary surtax imposed by certain counties. On average, the rate charged on rent throughout the state ranges from 6% to 7%. To understand the financial impact on a borrower take by way of an example a typical $1 million real estate secured SBA loan. Loan payments at an interest rate of 5% will be approximately $6,000 plus prorated insurance, maintenance and real estate taxes of $2,000 will result in a total, monthly "rent" payment of $8,000 to the EPC. On top of that, assuming sales tax is due at the rate of 7%, the OC would be obligated to pay an additional $560 monthly, or $6,720 annually, as part of their rent. The EPC would in turn remit to the state the sales tax collected.
Failure to collect and pay sales or use tax can result in severe penalties. For instance, a landlord who collects sales tax from tenants, but who knowingly fails to remit such sales tax to the Florida Department of Revenue, may be held criminally liable for committing up to a first degree felony. In addition to criminal sanctions, the Florida Department of Revenue is empowered to issue warrants for the full amount of the tax due, or estimated to be due, with interest, penalties, and cost of collection. Because Florida tax audits generally cover periods of 3 years, monetary penalties can result in a considerable financial obligation.
In our practice, we see transactions involving EPC/OC structures daily. It is incumbent on lenders to be aware of the sales tax implications associated with these structures and to take them into consideration when underwriting their loans. Lenders should also require their borrowers to register with the Florida Department of Revenue as a dealer to collect and remit their sales taxes. For more information regarding Florida sales and use tax and its impact on SBA loans, please contact Victor at [email protected] or at 407-667-8811.
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* As an aside, while it is clear the SOP and regulations impose a 'maximum' amount of rent that can be charged by a passive business to an Operating Company (OC), there is no stated, explicit 'minimum.'
* Florida collects approximately $1.4 billion in sales or use tax from rental income annually. Multiple, recent attempts by the Florida Legislature to eliminate the tax, or to reduce the rate, have been unsuccessful.