Tenant Must Pay Owner’s Excise Tax

Facts: After a tenant signed a lease for space it used as a convenience store, the property was sold and the lease was assigned to a new owner. The owner demanded that the tenant pay the owner’s 2009 Tennessee excise tax—a tax “on the privilege of doing business in Tennessee in the corporate form.” The tenant denied liability for the excise tax, and the owner sued the tenant for breach of contract and a declaratory judgment (a judgment of a court that determines the rights of parties without ordering anything to be done or awarding damages)that the tenant was liable for its 2009 Tennessee excise tax and all future excise taxes.

The tenant and owner each asked the trial court for a ruling in its favor without a trial. The trial court ruled in favor of the owner, finding the tenant liable for the taxes. The tenant appealed.

Decision: A Tennessee appeals court upheld the trial court’s decision.

Reasoning: On appeal, the tenant argued that the trial court erred in interpreting the lease agreement to require it to pay the owner’s excise tax. For purposes of the excise tax, “doing business in Tennessee” is defined as “any activity purposefully engaged in within Tennessee, by a person with the object of gain, benefit, or advantage,” noted the appeals court. Entering into a commercial lease falls within the definition, it said. In this case, the amount of the owner’s excise tax was based upon the rental income from its lease to the tenant, the appeals court pointed out.

The lease provisions stated that the lease was completely “net lease” and that the owner “is not responsible for any costs, charges, expenses, and outlays of any nature whatsoever arising from or relating to the Premises.” (A net lease is a lease in which the tenant pays rent plus property expenses, such as taxes and insurance). In this completely net lease, the tenant was to pay “all charges, impositions, costs, and expenses of every nature and kind relating to the Premises arising or accruing prior to or during the Term of this Lease, except as herein expressly provided to the contrary.” The phrases “arising from the Premises” and “relating to the Premises” encompass a broad range of expenses, the appeals court stressed. With respect to the owner’s excise tax, the taxed earnings originated from the owner’s business activity of entering into a commercial lease with the tenant. Such a tax arises from and/or is related to the rented premises, and thus falls within the parameters of the net lease provisions, concluded the appeals court.

In fact, the lease required the tenant to pay “all taxes, assessments, license fees, costs incurred pursuant to covenants and restrictions affecting the Premises...” the appeals court stated. “Given these broad provisions, we must conclude that the tenant is liable under the lease for the owner’s excise taxes,” it determined. The appeals court also concluded that the tenant’s failure to pay the owner’s excise taxes qualified as an event of default under the lease.

• J-Star Holdings, LLC v. The Pantry, Inc., January 2013