Seattle Rule 5-132

Leased departments.

(1) Definition. "Leased departments" mean spacewithin a store that is leased to another business in such a way that apurchaser would not necessarily know that the merchandise is from a businessother than the store owner or operator. An example of this is that a meatdepartment in a grocery store could be a leased department and operated by abusiness other than the grocery store owner, and under the grocery stores name.

(2) Reporting. Any person who leases departments or spacewithin their store or business to another business entity may include in itstax returns the gross receipts or gross sales made by the lessee where suchlessor keeps the books for the lessee and makes collection on the latter'saccount; provided however, that each lessee must apply for and obtain from theDepartment a business license tax certificate. The lessee will remain liablefor its tax liability if the lessor fails to make the proper return or fails topay taxes due.

(3) Business license tax. Any taxpayer making tax returnsfor any such lessee shall report the lessee's total gross income under theapplicable business license tax classification. The lessee in such case is notentitled to the taxable minimum provided in SMC 5.55.040.

(a) Where the lessor receives a flat monthly rental or apercentage of sales as compensation for a leased department or leased space,such income is presumed to be from the rental of real estate and is nottaxable. In determining whether an occupancy is a rental of real estate, allthe facts and circumstances of the agreement or arrangement, including theactual relationship of the parties, shall be considered (See Seattle Rule5-530). Written agreements, while not required, are preferred and are givenconsiderable weight in deciding the nature of the occupancy. A writtenagreement characterizing the occupancy as a "lease" is not sufficientby itself as proof of the rental of real estate. The following conditions mustbe met to establish a rental of real estate:

(i) The occupant is granted exclusive possession andcontrol of the space;

(ii) The occupancy is for a time certain, which is morethan 30 days, i.e. month to month, yearly, etc.; and

(iii) The parties are required to notify each other inthe event of termination of the occupancy.

(b) If the lessor provides any clerical, credit,accounting, janitorial, or other services to the lessee, the lessor must reportthe income from these services under the service and other activitiesclassification. The amounts for providing these services must be segregatedfrom the amounts received from the rental of real estate. In the absence of areasonable segregation, it will be presumed that the entire income is forproviding these services.

(3) Examples. The following examples identify a number offacts and then state a conclusion as to whether the situation is a rental ofreal estate (non-taxable), or a license to use real estate (taxable). Theseexamples should be used only as a general guide. The tax status of each circumstancemust be determined after a review of the agreement and all of the facts andcircumstances.

(a) A retailer enters into a written occupancy agreementfor space within a mall for a one year term. The agreement can be terminatedupon 30 days written notice of either party, subject to some penalty provisionsfor early termination. The agreement provides that the retailer can decoratethe store and arrange the inventory in any manner desired by the retailer solong as the facility does not create a safety hazard to the mall or othertenants, and is consistent with the overall decor of the mall. The mall ownermay enter the premises of the retailer during non-business hours only with theconsent of the retailer except for emergencies where physical property is atrisk. The retailer's area is separated from other lessees by walls with theexception of the front area which is open to the mall common area and is usedas the entrance by potential customers and the retailer. The retailer has amovable partition that can be locked and is used to close off the entrance fromthe mall common area. The agreement calls for the retailer to be open forbusiness at all times during the hours stipulated by the mall.

This is a rental of real estate with the rental term beingfor a fixed period. The agreement and the facts and circumstances haveestablished a rental of real estate. The retailer has exclusive possession andcontrol over a specific area as indicated by the control the retailer has overthe premises, even to the exclusion of the mall owner. The restriction whichrequires the retailer to maintain the same business hours as other lessees doesnot make this a license to use real estate. The lessor can exclude from thebusiness license tax that portion of the income which is from the rental of thereal estate. The lessor must identify and pay a business license tax on theportion of the income which is from providing services such as security,janitorial, or accounting.

(b) A hairdresser enters into an oral agreement with theoperator of a hair salon for the use of a work station. The hairdresser has useof a specific work station during specific hours of every day. A particularwork station may be used by more than one hairdresser during a particular monthor even during a given day. This work station can not be closed off from otherareas within the shop. The hairdresser must obtain advance permission from theowner to make any changes to the work area. This hairdresser also shares asink, telephone, and other facilities with others in the shop.

This occupancy is not a rental of real estate. Thehairdresser does not have exclusive possession and control over the premises tothe exclusion of others as is indicated by the requirement that the hairdressermust obtain approval for any changes in the work area. This is furtherindicated by hairdressers' use of a specific work station only during specifichours of every day with multiple users of the same work station. The workstation could not be closed off from other areas of the shop, but this initself is not determinative of whether this is a rental of real estate or alicense to use. The presence of walls or the lack of walls is not controlling.The fact that the agreement uses the term "lease" is also not controlling.This is a "license to use" taxable under the service and otheractivities classification.

(c) Department store agrees to sell household paint for apaint supplier. The paint supplier checks on the inventory on a monthly basisand provides additional paint as needed. The department store handles stockingof shelves and all aspects of the sale. The department store makes a charge tothe paint supplier based on the space required to maintain the inventory. Byagreement of the parties, the department store agrees to report the retailingtax on paint sales.

This is not a leased department, a leased space, or arental of real estate. The income is merely tied to the amount of space beingused. However, the income is a commission from the sale of merchandise for thepaint supplier and held on consignment. The retailing tax is the liability ofthe paint supplier and is paid by the department store only by agreement. Thecommission is taxable under the service business license tax classification.See Seattle Rule 5-803.

DIRECTOR'S CERTIFICATION

I, Glen M. Lee, Finance Director of the City ofSeattle, do hereby certify

under penalty of perjury of law, that the within andforegoing is a true and

correct copy as adopted by the City of Seattle,Department of Finance and

Administrative Services.

     DATED this ______ day of July 2016.

                              CITY OF SEATTLE,

                              a Washingtonmunicipality

                         By:     ____________________________________

                                Glen M. Lee, FinanceDirector

                                Department ofFinance and Administrative Services

Effectivedate: July 14, 2016