STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

SUNDIAL ASSOCIATES, LTD., )

)

Petitioner, )

)

vs. ) CASE NO. 77-1658

) DEPARTMENT OF REVENUE, and )

GERALD A. LEWIS, Comptroller, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, an administrative hearing was held before Michael R.N. McDonnell, Hearing Officer for the Division of Administrative Hearings, at 9:00 a.m., on January 18, 1978, at the City Hall, Fourth Floor Conference Room, 2200 Second Street, Ft. Myers, Florida.

Petitioner was represented by Harold N. Hume, Jr., Esquire, Post Office Box 1480, Ft. Myers, Florida 33902. Respondents were represented by Cecil L. Davis, Jr., Esquire, Assistant Attorney General, Department of Legal Affairs, The Capitol, Tallahassee, Florida 32304.

Petitioner (hereafter Sundial) seeks a refund of monies paid for sales tax assessed by Respondent, Department of Revenue (hereafter DOR), contending that fees received by Sundial were for services rendered and were not subject to sales tax. Respondents contend, however, that such fee was 7 received for the rental of real property and, thereby, subject to a sales tax under Chapter 212, Florida Statutes.

FINDINGS OF FACT

1. Sundial is a limited partnership authorized to do business in the State of Florida and is a developer and builder of a condominium complex known as Sundial of Sanabel. In order to provide the purchasers of the condominium units with a means of renting their units when the units were not occupied by the owners, a second limited partnership was formed, Sundial Rental Partners Ltd., in which Sundial is the general partner and each of the condominium owners are limited partners.

   
   

2. On August 1, 1973, a management agreement was entered into between Sundial Rental Partners Ltd. (hereafter Rental Partners) and Sundial whereby Sundial agreed to provide management services in connection with the operation of the condominium units as rental accommodations. The terms of this agreement provided that Sundial would be compensated for its management services in the amount of five percent (5 percent) of the gross revenue of the rental partners.

   
   

3. On April 7, 1973, an Additional Facilities Lease Agreement was entered into between Sundial and Rental Partners. By this agreement, Sundial leased to Rental Partners additional facilities to be constructed by Sundial and used by

   the condominium unit owners, the persons who rent the condominium units from the Rental Partners and their guests. Compensation to Sundial is set forth in paragraph 3 of the agreement:

   
   

   Sundial Associates shall be paid an annual rental fee for the additional facilities equal to fifteen percent of the gross revenues of the Rental Partnership. Sun- dial Associates shall operate the additional facilities for its own account. All incom- ing profits shall inure to its benefit and the rental partnership shall have no interest in such incoming profits.

   
   

4. The limited partnership agreement between Sundial and Rental Partners was amended on August 6, 1974. Paragraph 5.1 of the Amended Agreement provides that a total of five percent (5 percent) of the gross revenues of the partnership shall be paid to Sundial for its management services and that fifteen percent (15 percent) of the gross revenues of the partnership shall be paid to Sundial as rental payments for those additional facilities to be constructed by Sundial Paragraph 6.1 provides for a management deed to be paid to Sundial in the amount of four percent (4 percent) of the gross revenues of the partnership and paragraph 6.4 provides that the partnership shall lease from Sundial the additional facilities at the rate of fifteen percent (15 percent) of the gross revenues of the partnership.

   
   

5. Paragraph 6.4 of the limited partnership agreement calls for the construction of additional facilities, the cost of which is to be some two million one hundred fifty thousand dollars ($2,150,000.00). During the tax period in question, the only facilities actually constructed were a lobby and registration area, the value of which is significantly less than the total value of the expected construction. Nonetheless, during the tax period in question, the Rental Partners have paid Sundial the full five percent (5 percent) management fee and the full fifteen percent (15 percent) rental payment.

   Sundial recorded receipt of these amounts in separate accounts in their financial records.

   
   

6. Sundial received as income during the tax period in question, certain tennis court admission fees which DOR did not intend to include in its computation of the sales tax due from rental proceeds. Yet, the record reflects that the total of fifteen percent (15 percent) of gross sales was three hundred seventeen thousand three hundred ninety-three dollars and ninety-four cents ($317,393.94) while the total from tennis court admission fees was eighteen thousand four hundred ninety-seven dollars and sixty-seven cents ($18,497.67). The sum of these two figures is three hundred thirty-five thousand eight hundred ninety-one dollars and sixty-one cents ($335,891.61) which, when multiplied by four percent (4 percent) equals thirteen thousand four hundred thirty-five dollars and sixty-six cents ($13,435.66). This is the exact amount of the tax assessed by DOR exclusive of interest and penalties. The assessment is in error to the extent that tennis court admission fees were included in the figure purporting to reflect gross receipts of rental fees.

   CONCLUSIONS OF LAW

7. Section 212.031, Florida Statutes (1975) , provides that every person is exercising a taxable

   privilege who engages in the business

   of renting, leasing, or letting any real property . . .

   Section 212.031(1)(c), Florida Statutes (1975), provides that for the exercise of such privilege

   a tax is levied in the amount equal to

   4 percent of and on the total rent charged for such real property by the person charging or collecting the rental.

   
   

8. The terms of the various agreements unmistakably reveal the parties' expressed intent to provide Sundial with payments in the amount of five percent (5 percent) of gross revenues for its managerial services and fifteen (15 percent) of gross revenues as a rental fee for the additional facilities Sundial is contractually bound to construct. DOR has assessed sales tax against the fifteen percent (15 percent) of gross revenues paid Sundial on the ground that it is a rental fee for the lease of the additional facilities. However, Sundial argues that the fifteen percent (15 percent) of gross revenues is not rent but compensation for management services, and therefore, is not subject to taxability under Chapter 212, Florida Statutes. Sundial grounds its argument on an implied understanding between the parties that both the five percent (5 percent) and fifteen percent (15 percent) of gross revenues paid Sundial was and is for management services.

   
   

9. The obligation to pay the rental payments in the amount of fifteen percent (15 percent) of gross revenues, upon which the disputed sales tax was assessed, does not arise from any implied agreement. The obligation of Rental Partners to pay the fifteen percent (15 percent) of gross revenues for the additional facilities arises exclusively from the express language of the above agreements and it is that obligation to pay which results in the payments upon which the sales tax in question was assessed. Those payments are expressly stated in the various agreements to be rent. Furthermore, testimony given at the hearing in this case revealed that separate checks were paid to Sundial for the five percent (5 percent) of gross revenue payments and the fifteen percent (15 percent) of gross revenue payments required under the various mentioned agreements, and that separate bookkeeping entries were made.

   
   

10. Regardless of whether the parties to the above agreements could have entered into more equitable agreements or agreements that would have reflected their implied understandings, the fact remains that each of the parties bound himself to the terms of the agreements actually reduced to writing. Rental Partners is obligated to pay Sundial fifteen percent (15 percent) of gross revenues of the Partnership for the lease of additional facilities and Sundial is obligated to construct and lease to Rental Partners those additional facilities which it deems necessary to make the development a complete rental or resort facility. The payments upon which the sales taxes in question have been levied are required by the written agreements, are designated for the additional facilities which Sundial is bound to construct and not for management services, and are classified by the parties as rent. Sundial contends that the "lease" designation was one of convenience for purposes related to Federal SEC

    requirements. However, this fact does nothing to detract from the nature of the agreement. Rather, it is further evidence that the parties intended the lease to be just that. They cannot have their cake and eat it too.

    
    

11. The First District Court of Appeals of Florida had occasion to rule on similar circumstances in the case of Stapling Machines Co. v. Kirk, 298 So.2d

    564 (1st DCA Fla. 1974). The Court was presented with the question of the proper computation of sales and use taxes with respect to monies received by the Plaintiff, Stapling Machines Co., from various lessees of machines owned by Stapling and leased to various manufacturers of boxes. The questioned leases provided that Stapling would deliver machines ordered by the lessees and the lessees agreed to pay, upon delivery of the machines, a sum to be fixed by Stapling not to exceed the reasonable cost of production of such machines, as well as specified percentages of their gross sales. In arguing against the Revenue Commission's sales tax assessment upon the full amount that became due and payable to Stapling under these leases, Stapling contended that the assessment was improper because a large percentage of the monies paid by the lessees to Stapling was not rent but compensation for services, based on an implied understanding between the parties. The Court responded to this argument as follows:

    
    

    However this may be, the obligation

    to pay the rentals being taxed does not arise from any implied agreement. The obligation of the lessees to pay arises exclusively from the express language of the leases, and it is that obligation to pay which results in the payments the tax upon which is the subject of this litiga- tion. These payments are expressly stated in the agreement to be rent, and they are clearly rent within the terms of the tax- ing statute . . . . 298 So.2d 564, 566.

    
    

12. Sundial contends further that since all the additional facilities called for in the partnership agreement have not yet been constructed, the tax should be prorated according to the value that the present facilities bear to the projected capital outlay. However, the Additional Facilities Lease Agreement calls for the payment of the full rental without regard to the state of completion of the additional facilities. Accordingly, Sundial's proration argument is rejected.

    
    

13. Sundial also says that the sales tax it is challenging constitutes illegal pyramiding prohibited by Subsections 212.031(2)(a) and (b), Florida Statutes. Sundial argues that when a person rents one of the rental pool apartments, that person pays sales tax on the amount of the rental. Since those renters have the use of the areas upon which the additional facilities are to be built, the additional facilities areas are being rented along with the apartments. Sundial concludes that since there is to be a tax upon the underlying lease of the additional facilities, it is impermissible to condone a second tax. The cart is before the horse, however, for even if it were assumed arguendo that pyramiding exists, the attack should be brought against that tax paid by the renter of the unit and not the underlying tax paid by Rental Partners to Sundial. It is concluded that pyramiding does not exist under the circumstances of this case.

14. Finally, Sundial urges that relief be granted for that portion of the sales tax assessed against tennis court admission fees. Since such fees do not constitute rental of real property and, since DOR stated that it did not intend to include such income in its calculation of the sales tax due, the portion of the tax, interest and penalty attributable to the tennis court fees should be refunded. It is, therefore,

RECOMMENDED that Sundial's application for refund of monies paid for sales tax assessed by the Department of Revenue be denied with the exception of such sales tax assessed on tennis court admission fees, together with interest and penalties.

DONE and ENTERED this 24th day of April, 1978, in Tallahassee, Florida.

MICHAEL R. N. MCDONNELL

Hearing Officer

Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304

(904) 488-9675

COPIES FURNISHED:

Harold N. Hume, Jr., Esquire Post Office Box 1480

Ft. Myers, Florida 33902

Cecil L. Davis, Jr., Esquire Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32304

The Honorable Gerald A. Lewis Comptroller

The Capitol

Tallahassee, Florida 32304

Docket for Case No: 77-001658

Orders for Case No: 77-001658