For operating businesses that own real estate–office space, warehouses, etc.–common advice is to put ownership of the property in a separate company.  The goal is to shield the property from judgment creditors of the operating business.  This isn’t bad advice, but as with everything in life, there are costs.  Obviously, there are the costs of maintaining multiple companies (annual state fees, bookkeeping, return preparation, etc.).  Less obviously, the Florida Department of Revenue is determined to charge sales tax on the imputed rent from the operating business company to the property-holding company.

The Florida Department of Revenue has signalled that it will find taxable rent in every situation where an operating business company uses property owned by a related holding company, whether or not rent is actually paid.  This signal comes in the form of Technical Assisstance Advisements (TAAs) 09A-048 (Sept. 8, 2009) and 07A-11 (April 11, 2007).  Prior to these TAAs, the Department of Revenue seemed to at least allow for the possibility that zero rent could be paid between related companies.  For instance, in TAA 04A-057 (Sept. 23, 2004), the Department of Revenue said:

“[T]here may be situations wherein ‘income’ or ‘profits’ flowing between related entities … would not be ‘rental consideration.  [] The Department would look to the By-Laws or other controlling documents to ascertain: (1) that distributions do not coincide with the time at which the property’s expense obligations are due; (2) the amount of distributions does not coincide with the amount of the property’s expense obligations; and (3) the distributions are based on a true reflect ion of income or profit and not on the amount ofthe property’s expense obligations.”

The Department of Revenue seems unlikely to apply this standard in the future.  In TAA 07A-011, the Department stated:

“[T]he main business purpose of creating a separate legal entity to purchase and hold title to the real property [] was to segregate liability that may arise from the use of the real peropty from the [operating] business.  The parties here have made a business decision to organize their relationship(s) in a way to maximize certain advantages (namely, risk control).  This in itself is an economic benefit which indicates not only a landlord and tenant relationship, but also the existence of “rental consideration.”

So, what does this mean?  There is an added cost to business liability protection through separate companies–namely, sales tax on imputed rent.  Business owners should consider whether this is a cost worth paying.  Here are some questions to ask:  What are you protecting–is there equity in the property, or is it all subject to a mortgage anyways?  What is the relative cost of other means of business liability protection–commercial liability insurance or an equity line on the property?  It might be that sales tax is a relatively high price to pay for the protection you are getting.