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To determine the taxability of various uses of real estate, you need to know the difference between a lease or rental of real estate and a license to use real estate.

Leases or rentals of real estate are not subject to B&O tax or retail sales tax. However, income earned from providing a license to use real property are subject to B&O tax. But how do you tell them apart? Here are some general guidelines:

Rental or Lease

A rental or lease of real estate conveys an interest in a certain designated area of real property. For an activity to be an exempt rental of real estate, five elements must be present:

  • There must be a landlord/tenant relationship.
  • The lessee must have exclusive use of the rented space.
  • The rental period must be 30 days or longer.
  • The lessee must have the exclusive right of continuous possession.
  • The lessee must have dominion and control of the rented space.

License to use

A license to use real estate merely grants a right to use the real property. It does not confer exclusive dominion or control over the property. Under a license to use real estate, the owner typically controls such things as lighting, heating, cleaning, repairing, and opening and closing the premises.

Some licenses to use real estate are specifically taxed as retail sales (RCW 82.04.050). For example, sales of lodging by a hotel, rooming house, motel, trailer camp, and similar licenses to use real estate are subject to retailing B&O and retail sales tax. (However, if the agreement provides for occupancy of the real property for a continuous period of one month or more, it is presumed to be a nontaxable lease or rental of real estate.)

Also, charges by automobile parking and storage garage businesses are subject to retailing B&O and retail sales tax. (However, an agreement allowing exclusive use of a designated parking space for a continuous period of one month or more is considered a nontaxable lease or rental of real estate.)

Licenses to use real property for purposes other than lodging or automobile parking are subject to B&O tax under the service and other activities classification.

Example: Owners of coin-operated machines sometimes place their machines in business locations owned by others. In exchange, the business owner is typically entitled to a share of the machine’s receipts. This arrangement constitutes a license to use real property and the income received by the business owner is subject to B&O tax under the service and other activities classification.

B&O tax under the Service and other activities classification also applies to licenses granting use of a portion of a building owned by another to conduct a separate business.

Example: A barber or beautician might use a portion of a barber shop or beauty salon owned by another.  A lawyer might use an office in a building owned by another.  A food vendor might operate a lunch counter in a drug store owned by another.

There is no tax if the agreement between the barber, beautician, lawyer, or food vendor and the building owner is a lease or rental of real property as opposed to a mere license to use.  In this context, it is a little more difficult to make the distinction between a lease of rental and a license to use.  For one thing, the presumption regarding continuous occupancy for a period of one month or longer is inapplicable to these situations.  Instead, one must refer to the general guidelines mentioned above.

In one recent case, the Department of Revenue’s Appeals Division decided that the rental of space to a cosmetologist was a license to use real estate subject to B&O tax under the service and other activities classification. The cosmetologist could only use the space to conduct a cosmetology business, and had to allow other cosmetologists and their customers to leave or enter the premises. In other words, the element of exclusive possession and control was lacking.

In another case, the rental of an office in a suite of offices was held to be a non-taxable rental of real estate. Here, the renter met the requirement of exclusive possession and control. The renter had a separate entrance and was not dependent on the landlord for access to the office.