As a general rule, Florida taxes the periodic payment of commercial rent. However, the Department of Revenue has a long-standing position of asserting that the construction of leasehold improvements by commercial tenants is also subject to the Florida sales and use tax. In the Department’s view, the value of constructed leasehold improvements represents rent “in-kind” paid to the landlord because under most lease contracts such improvements become property of the landlord on completion. Consistent with its long-standing view, the Department has taken a hard line. On audit, the Department will assert – almost by reflex – that build-out expenses by a commercial tenant are subject to Florida sales and use tax.

The Department’s basis for its long-standing position is found in Department of Revenue, State of Florida v. Seminole Clubs, Inc., 745 So.2d 473 (November 19, 1999). In Seminole Clubs, the court addressed the taxation of tenant leasehold improvements made to a golf course. In order to maintain possession of the property, the tenant was required by the lease agreement to (1) pay a cash rent based on annual gross revenues, (2) debit a carry forward balance a percentage of gross annual revenues or (3) expend a fixed percentage of annual gross revenues on capital improvements. The court concluded under these facts that the amount spent on the leasehold improvements was rent “in-kind” subject to Florida sales and use tax since the payments were clearly made in lieu of cash rent.