Percentage Rent Exclusions: What Gets Left Out of Gross Sales Calculations

Percentage rent is one of the most consequential — and most frequently disputed — clauses in retail commercial leases. The landlord earns a percentage of your gross sales above a "natural breakpoint," typically 1% to 8% depending on retail category. A grocery store might pay 1.5%; a jewelry store 6–7%.

The pivotal question: what counts as "gross sales"? Every dollar you can legitimately exclude from that definition is a dollar on which you pay zero percentage rent. Over a 10-year lease, the cumulative value of defensible exclusions can easily exceed $500,000 for a mid-volume retailer.

This guide walks through every major exclusion category, explains the economic logic behind each, provides dollar math, and gives you model definition language you can drop directly into lease negotiations.

How Percentage Rent Works: A Quick Foundation

Percentage rent has two components: the breakpoint (the sales threshold below which no percentage rent is owed) and the percentage rate (applied to sales above the breakpoint).

The "natural breakpoint" formula: Natural Breakpoint = Base Rent ÷ Percentage Rate

Example: Base rent is $120,000/year; percentage rate is 6%. Natural breakpoint = $120,000 ÷ 0.06 = $2,000,000. If your gross sales are $2,400,000, you owe percentage rent on $400,000 × 6% = $24,000.

Now consider what happens when gross sales are defined to include $200,000 of transactions that should be excluded. Your reportable gross sales drop from $2,400,000 to $2,200,000, reducing the overage from $400,000 to $200,000 — and your percentage rent from $24,000 to $12,000. One well-negotiated exclusion saves $12,000 per year, or $120,000 over a 10-year lease.

Exclusion #1: Online Sales

The Core Issue

E-commerce has fundamentally complicated percentage rent calculations. Traditional lease definitions of gross sales predate the internet and were designed for sales made face-to-face on the premises. Most modern leases have not caught up.

What Should Be Excluded

Sales made via your website, mobile app, or any third-party e-commerce platform where:

• The order was placed digitally by the customer
• The merchandise was fulfilled from a warehouse, distribution center, or drop-ship vendor (not the leased premises)
• No sales associate at the leased premises materially contributed to the sale

The BOPIS Problem

"Buy Online, Pick Up In Store" (BOPIS) orders sit in a gray zone. Landlords argue: the store facilitates the pickup; store staff retrieve the merchandise; the leased premises deliver real value. Tenants argue: the customer decision to buy happened online; no rent-generating "walk-in traffic" was created.

Best practice: negotiate BOPIS at 50% of order value included in gross sales, with the remainder excluded — reflecting the partial economic contribution of the physical location.

Dollar Math

A mid-size specialty retailer generating $3M in total sales: $600,000 (20%) online, $400,000 BOPIS. Without exclusions, gross sales = $3M. With full online + 50% BOPIS exclusion: gross sales = $3M − $600,000 − $200,000 = $2.2M. At 5% percentage rate above a $2M breakpoint: savings = ($3M − $2M) × 5% − ($2.2M − $2M) × 5% = $50,000 − $10,000 = $40,000/year saved.

Model Language

"Gross Sales shall exclude all sales made through Tenant's website, mobile application, or any third-party e-commerce platform, provided that such sales are fulfilled from a location other than the Premises. Sales fulfilled from the Premises (including 'buy online, pick up in store' orders where merchandise is retrieved from Premises inventory) shall be included in Gross Sales only to the extent of fifty percent (50%) of the transaction amount."

Exclusion #2: Delivery Platform Commissions (DoorDash, UberEats, Grubhub)

The Economic Reality

Third-party delivery platforms charge merchants 25–30% of order value as a commission. DoorDash standard rate: 25–27%. UberEats: 25–30%. Grubhub: 15–30% depending on tier. A $50 restaurant order through DoorDash nets the restaurant $35–37.50 — but without an exclusion, the tenant reports $50 as gross sales.

Why This Matters

For a restaurant generating $1.2M/year in sales, with 30% ($360,000) coming through delivery platforms at a 28% average commission:

• Actual delivery revenue retained: $360,000 × (1 − 0.28) = $259,200
• Commissions paid to platforms: $100,800
• Without exclusion: pay percentage rent on $100,800 of income you never received
• At 6% percentage rent rate: overpayment = $100,800 × 6% = $6,048/year

Two Negotiation Approaches

Approach A — Exclude commissions from gross sales: Report the full order amount, then deduct commissions as a line-item exclusion. This is administratively cleaner and more transparent.

Approach B — Report net proceeds only: Report only the net amount deposited by the platform. This is simpler but requires platforms to provide net deposit statements, which they do (1099-K reporting).

Model Language

"Gross Sales shall exclude all commissions, service fees, and transaction charges paid to or retained by third-party delivery platforms (including but not limited to DoorDash, UberEats, Grubhub, and Instacart) in connection with sales originated through such platforms. Tenant shall document applicable commission rates in each annual Gross Sales statement."

Exclusion #3: Gift Cards — Issuance vs. Redemption

The Double-Counting Risk

Gift cards create a timing problem. When a customer buys a $100 gift card, you receive $100 cash. When they redeem it for $100 of merchandise, you deliver $100 of goods. If both events are counted as gross sales, you've double-counted $100 of economic activity.

The Correct Treatment

• Gift card issuance: EXCLUDE. No merchandise or service delivered; you're holding the customer's cash as a liability.
• Gift card redemption: INCLUDE. The sale of merchandise occurs at redemption; this is when the economic event that percentage rent is designed to capture actually takes place.
• Unredeemed gift cards (breakage): EXCLUDE. You retain the cash but never delivered goods; including breakage in gross sales would mean paying rent on phantom revenue.

Dollar Math

A retailer sells $500,000 in gift cards annually. Redemption rate: 92%. Breakage: $40,000. If issuance (incorrectly) included in gross sales alongside redemption: $500,000 + $460,000 = $960,000 vs. correct $460,000. At 5% on overage above $4M breakpoint — adds $25,000 in inflated gross sales to overage calculation = $1,250 annual overcharge. Small per year; over a 10-year lease with growing gift card programs, it compounds.

Model Language

"Gross Sales shall exclude (i) the face value of gift certificates, gift cards, and stored-value instruments at the time of issuance; (ii) any amounts attributable to unredeemed gift cards or gift certificates retained as income by Tenant. Gift card and gift certificate redemptions shall be included in Gross Sales at the time goods or services are provided in exchange therefor."

Exclusion #4: Sales Tax and Other Government-Mandated Taxes

The Agency Argument

Sales tax is collected by the merchant as a government agent. You collect it, hold it briefly, and remit it — you never own it as income. Every state that imposes sales tax would agree: it's not your revenue. Yet absent an explicit exclusion, some gross sales definitions could sweep in the tax-inclusive total.

Magnitude of the Issue

State sales tax rates range from 0% (Oregon, Montana, New Hampshire, Delaware) to 9.55% (Tennessee combined rate). In Tennessee, a $1M gross sales figure includes $87,200 in sales tax (at 9.55% of pre-tax sales). Without an exclusion, you pay percentage rent on $87,200 of tax you collected for the state.

At 6% percentage rent, that's $5,232/year in percentage rent paid on taxes you remitted to the government.

Taxes Covered by This Exclusion

• State and local sales tax
• Use tax collected from customers
• Excise tax (alcohol, tobacco, fuel)
• VAT or GST (for international stores)
• Any tax separately stated on the customer receipt and collected for a government authority

Model Language

"Gross Sales shall exclude all taxes imposed by any governmental authority on the sale of merchandise or services, including without limitation sales tax, use tax, and excise tax, to the extent separately stated on the sales receipt and collected from customers for remittance to the applicable taxing authority."

Exclusion #5: Employee Discounts and Employee Purchases

The Issue

Employees commonly receive 10–30% discounts on merchandise. Without careful drafting, "gross sales" could include either (a) the actual employee sale price, (b) the retail price including the discount given, or (c) some blended figure.

Correct Treatment

Employee purchases should be included in gross sales only at the actual sales price paid — not at retail value, not grossed up for the discount. The economic rationale: the employee discount is a compensation benefit, not a revenue-generating sale. You captured the actual cash received; that's the only number relevant to percentage rent.

Dollar Math

A 50-person retail team. Average employee purchase: $800/year. Average discount: 25%. Without exclusion of discount value: gross sales include $800 × 50 = $40,000. With proper treatment (actual price paid): gross sales include $600 × 50 = $30,000. Delta: $10,000/year. At 5% percentage rent: $500/year saved. Small, but it signals to landlords that you've read the lease carefully.

Model Language

"Gross Sales shall be calculated based on the actual cash consideration received from sales, and shall not be grossed up or adjusted to reflect the retail price of merchandise sold to employees at a discount. Employee discount programs shall be documented in Tenant's annual Gross Sales statement, identifying the aggregate discount value provided during the lease year."

Exclusion #6: Returns and Refunds

The Revenue Reversal

When a customer returns merchandise and receives a full or partial refund, the sale is partially or fully reversed. Including returned merchandise in gross sales — without a corresponding deduction for refunds — overstates revenue.

Return Rate Context

Retail return rates: apparel 20–30%, electronics 15–20%, footwear 10–15%, home goods 10%. A $2M apparel store with a 25% return rate processes $500,000 in returns. If $400,000 of returned merchandise is re-sold (restocked), and $100,000 is written off, only the net re-sold amount should generate gross sales credit.

Dollar Math

Gross sales before returns: $2,000,000. Returns resulting in cash refunds: $480,000. Net gross sales: $1,520,000. At 5% percentage rent above $1.4M breakpoint: correct overage = ($1,520,000 − $1,400,000) × 5% = $6,000. Without return deductions: ($2,000,000 − $1,400,000) × 5% = $30,000. Savings: $24,000/year.

Model Language

"Gross Sales shall be reduced by the amount of all bona fide refunds and credits given to customers for returned merchandise, provided that: (i) the return is documented in Tenant's point-of-sale system; (ii) a refund of cash or credit to the customer's original payment method is issued; and (iii) the original sale was included in Gross Sales when reported. Exchanges for merchandise of equal or lesser value shall not be deducted."

Exclusion #7: Intercompany Transfers

What Intercompany Transfers Are

Multi-location retailers routinely transfer inventory between stores, from store to warehouse, and between affiliated entities. These movements are logistics transactions — not sales to third-party customers — and should never generate percentage rent obligations.

Categories of Intercompany Transfers

• Store-to-store inventory transfers: Shipping excess inventory from your Midtown location to your Downtown location.
• Store-to-warehouse returns: Sending unsold seasonal merchandise back to your distribution center.
• Affiliate transfers: Moving merchandise from your retail entity to your wholesale entity at cost.
• Franchise-to-franchisor transfers: Royalty payments and merchandise purchases from franchisor that flow through a store's accounts.

The Audit Risk

Landlords conducting percentage rent audits often flag intercompany transactions as understated gross sales — arguing that transfers at below-market prices are a mechanism to deflate reportable sales. Counter this by maintaining contemporaneous transfer documentation at cost (purchase invoices, cost-of-goods records) and requiring that transfers above $50,000 be reported on a separate intercompany schedule attached to the annual gross sales statement.

Model Language

"Gross Sales shall exclude transfers of merchandise between Tenant's locations or to Tenant's affiliated entities, provided that such transfers are made at Tenant's cost and are documented in contemporaneous inventory transfer records. 'Affiliated entity' means any entity controlling, controlled by, or under common control with Tenant. Tenant shall provide a schedule of intercompany transfers with each annual Gross Sales statement."

Other Exclusions Worth Negotiating

Charitable Donations

Merchandise donated to qualified charitable organizations at no charge should be excluded. You received no consideration; there is no "sale." Document donation receipts from the charity to support the exclusion during audits.

Damaged or Stolen Merchandise Insurance Proceeds

Insurance proceeds for damaged or stolen inventory are not sales revenue — they're loss reimbursements. They should be expressly excluded from gross sales. Without this exclusion, a $200,000 insurance payout after a flood could generate $200,000 of percentage rent exposure at your applicable rate.

Finance Charges and Late Payment Fees

Interest charged on customer credit accounts, late payment fees on store credit, and similar financing revenue are not merchandise sales. Exclude them explicitly, particularly if you operate a branded store credit program.

Lottery and Tobacco Commissions

Convenience stores and pharmacies often sell lottery tickets and tobacco on a commission basis. Only the commission — not the face value of the ticket or the wholesale cost of tobacco — should be included in gross sales. The pass-through portion belongs to the lottery authority or tobacco manufacturer.

Vending and ATM Revenue

Revenue from vending machines, ATMs, and other third-party equipment operated within the leased space creates a contested inclusion. If you don't own the vending machine, argue that revenue belongs to the vending operator; only your commission portion is your "sale." If you own the machine, the revenue may properly be includable — but fight to include only the net margin, not gross vend proceeds.

12-Point Percentage Rent Exclusions Checklist

The Model Gross Sales Definition

Use this comprehensive definition as a starting framework — adjust for your retail category and business model:

"Gross Sales" means the total amount of all sales of merchandise and services made from or attributable to the Premises, whether for cash, credit, or otherwise, EXCLUDING:

(a) all sales taxes, use taxes, and excise taxes separately stated and collected for remittance to a government authority;

(b) all returns and allowances for which refunds or credits have been given to customers;

(c) sales through Tenant's e-commerce channels fulfilled from locations other than the Premises; 'buy online, pick up in store' transactions are included at fifty percent (50%) of order value;

(d) commissions paid to or retained by third-party delivery platforms;

(e) gift card and gift certificate proceeds at issuance, and any unredeemed gift card amounts recognized as income (breakage);

(f) sales to employees at actual prices paid (not grossed up for discounts);

(g) transfers of merchandise to Tenant's affiliated locations or entities at cost;

(h) proceeds from insurance, condemnation, or financing not related to merchandise sales;

(i) charitable donations of merchandise for which no consideration is received.

Audit Rights and Recordkeeping

Even the best-drafted exclusions are worthless if you can't prove them. Structure your recordkeeping around the exclusions you've negotiated:

• POS system configuration: Set up separate transaction codes for excluded sale types. Returns, employee sales, and gift card redemptions should be separately coded at the point of sale.
• Monthly reconciliation: Prepare a monthly gross sales reconciliation that starts with total POS revenue and walks down to reportable gross sales via each exclusion category.
• Delivery platform statements: Retain monthly platform payouts (DoorDash, UberEats) that show gross order volume vs. net payout — the difference is your excluded commission.
• Annual gross sales statement: Submit an annual statement that includes a signed certification and supporting schedule for each material exclusion category. Proactively providing this documentation reduces audit triggers.

Negotiating Leverage

Landlords will resist some of these exclusions, particularly online sales (especially BOPIS) and delivery commissions. Here's how to frame the negotiation:

Economic fairness argument: Percentage rent compensates the landlord for providing the foot-traffic-generating environment of the shopping center. Online sales generated from the landlord's real estate investment? That's a reasonable argument for inclusion. Delivery sales where the customer never visits the premises? The landlord's shopping center contributed nothing to that transaction.

Alternative: separate percentage rate for delivery sales. If the landlord insists on including delivery sales, counter-propose a separate, lower percentage rent rate (e.g., 1–2%) applicable to delivery sales only — reflecting the lower value of the landlord's contribution to those transactions.

Natural breakpoint alignment: If you include more categories in gross sales, push hard to raise the natural breakpoint proportionally, so the effective economic impact on percentage rent owed is neutralized.

Frequently Asked Questions

Are online sales excluded from percentage rent gross sales?

It depends entirely on the lease definition. Online sales made from a separate website and fulfilled from a warehouse are almost universally excluded. But 'buy online, pick up in store' (BOPIS) orders are contested — landlords argue the store generates the sale; tenants argue no rent-generating activity occurred on-premises. Always negotiate an explicit BOPIS carve-out capped at the actual store-picked-up percentage of online orders.

How do DoorDash and UberEats commissions affect percentage rent?

Delivery platform commissions typically run 25–30% of the order value. Without an exclusion, you pay percentage rent on the full order amount but only net 70–75 cents on the dollar. Best practice is to exclude delivery commissions from gross sales or, alternatively, report only net proceeds (order price minus commission) as gross sales for delivery orders.

Are gift card sales included in percentage rent gross sales?

Gift card issuance (initial sale) should be excluded from gross sales — no merchandise or service has been provided yet. Gift card redemptions (when spent in-store) are includable. This prevents double-counting. Unredeemed gift cards (breakage) should also be excluded since no goods were delivered.

Is sales tax included in gross sales for percentage rent purposes?

Taxes collected for the account of a government authority (sales tax, VAT, GST) should always be excluded from gross sales. You're merely acting as a tax collector — you remit those funds immediately to the tax authority and never benefit from them. Failing to exclude sales tax in a state with 8–10% sales tax can increase your percentage rent by 8–10% on affected sales.

What employee discounts are excludable from gross sales?

Employee purchases made at a discount should be excluded from gross sales based on the actual sale price, not the retail price. Additionally, the discount itself (the difference between retail and employee price) should not be deemed gross sales at all. Limit the exclusion to bona fide employees and set a maximum monthly discount amount to prevent abuse.

How are intercompany transfers handled in gross sales?

Transfers of merchandise between your stores, from store to warehouse, or to affiliated entities at cost or below retail should be excluded from gross sales. These are inventory movements, not revenue-generating transactions. Require that intercompany transfers be documented at cost (invoice value) and reported separately in annual gross sales statements to avoid landlord disputes during percentage rent audits.