Percentage rent: what counts as gross sales when the sale did not happen in the store

For percentage rent, gross sales means what the lease defines it to mean, and nothing else. The definition sits in the lease, the exclusions usually sit in a separate list, and the reporting obligation sits in a third clause. Read all three before calculating anything, because the retailer's own definition of a store's sales and the lease's definition are rarely the same number.

That was a clerical distinction when every sale was rung at a register in the store. It stopped being one about a decade ago.

Why the question got harder#

The omnichannel problem in percentage rent is not new, and the industry has been circling it for a while. Writing in 2015, John R. Pariseault of Hinckley Allen set out the scenarios that break the traditional definition: a customer ordering on a device inside the store for home delivery, a customer buying online and collecting in store, a customer examining the product in store and ordering later from home, and a pure online order that may or may not be filled from store stock. He noted that landlord language had already broadened to reach sales made "at, in or from the leased premises pursuant to internet or other technologies" and sales "originated at the leased premises," while the practical difficulty remained documenting what the physical store actually contributed (Hinckley Allen, March 2015).

Eleven years on, that is still the live question, and a large share of leases being administered today were signed without resolving it. The clause says gross sales. The retailer's order management system says something about fulfillment location. Nobody wrote down how those two connect.

The transaction types, and where each side lands#

This is the set worth working through before the next reporting cycle. The right-hand columns describe the positions each side typically takes, not a legal conclusion. What governs is your lease language.

The last row is worth noticing because it is where the cleanest disputes start. A returns exclusion drafted as "returns and refunds" reads differently from one drafted as "refunds on sales previously included in gross sales." Under the first, a retailer can deduct a return on an online order whose original sale was never counted, which reduces gross sales below what the store actually sold. Under the second it cannot. One clause, a real difference, and the sort of thing that surfaces in an audit three years later.

The exclusions that are almost always negotiated#

Separate from the definition, most retail leases carry a list of items backed out before the percentage is applied. The usual set:

• Returns, refunds and allowances, subject to the drafting point above
• Sales, use and gross receipts taxes collected from customers
• Employee discounts and staff purchases
• Gift card and gift certificate sales, counted at redemption instead
• Delivery, shipping and handling charges billed to the customer
• Transfers of merchandise between the tenant's own stores
• Sales of fixtures, equipment and other non-inventory property
• Insurance proceeds and casualty recoveries
• Bad debt and uncollected accounts, where permitted
• Vending, ATM and third-party concession revenue

Two things matter more than the list. First, whether each exclusion is actually in your lease, because none of them is automatic. Second, whether the same exclusions are being applied consistently across a portfolio, which is where large occupiers and large landlords both tend to leak. Applying an employee discount exclusion at four hundred stores where only three hundred and twenty leases permit it is a straightforward overstatement of the deduction, and it compounds annually. Accurate lease abstraction is what makes portfolio-level consistency checkable at all.

Origination or fulfilment, which is really the argument#

Strip the scenarios back and there are only two theories of what a store contributed to a sale.

The origination theory says the store earned the sale because the customer's decision happened there. It supports counting the in-store device order and, at its most aggressive, the browse-in-store-buy-later case. Its weakness is evidentiary: outside a logged-in session or an associate-attributed order, nothing in the record ties that purchase to that store.

The fulfilment theory says the store earned the sale because it supplied the goods or handed them over. It supports counting ship-from-store and pickup, and it has the advantage of leaving a trail, since inventory movement and pickup events are both recorded. Its weakness is that it credits the store for what is sometimes just logistics.

Most modern clauses lean toward fulfilment, because fulfilment can be proven. That is the practical reading of the point Pariseault made in 2015: reporting requirements have to be sophisticated enough to measure the store's role, or the definition is unenforceable no matter how broadly it is drafted. If your lease uses origination language and your systems cannot evidence origination, you have a clause that will not survive a challenge in either direction.

What to check before you report or accept a sales report#

1. 01Read three clauses, not one. The gross sales definition, the exclusions list, and the reporting and audit clause. They are usually in different parts of the lease and they frequently do not agree with each other.
2. 02Map your fulfilment flags to the lease's categories. Order management systems distinguish ship-from-store, pickup, and warehouse fulfilment. Leases distinguish "at," "in," "from" and "originated at." Write down the mapping once, per lease template, and reuse it.
3. 03Confirm the reporting period and the settlement basis. Monthly reporting with an annual reconciliation behaves differently from cumulative settlement, particularly for a seasonal location that crosses the breakpoint in one quarter.
4. 04Check which breakpoint applies. A natural breakpoint is derived from minimum rent divided by the percentage rate. An artificial breakpoint is a negotiated figure that can sit well below it. Do not derive one when the lease specifies the other.
5. 05Reconcile the reported figure to something auditable. Point of sale totals, the general ledger, and sales tax filings should tie. Where they do not, find out why before the number is certified.
6. 06Test exclusions against the specific lease, not against the portfolio's habit.
7. 07Know the audit window. Most retail leases limit the period in which either side can challenge a sales report, and it is usually shorter than people assume.
8. 08Write the interpretation down. Whatever position is taken on pickup orders, record it with the reasoning and apply it consistently. An inconsistent position across years is harder to defend than an aggressive one held consistently.

Doing this across a portfolio, every reporting period, against clauses that each read slightly differently, is what verifying percentage rent against actual sales is built to absorb: deriving the breakpoint from the lease, applying the exclusions each lease allows, and flagging sales reports that look inconsistent with a location's pattern. The same discipline applied to operating expenses is auditing pass-through charges, and the cost picture sits in financial operations.

What this does to the accounting#

Percentage rent based on sales is a variable payment that does not depend on an index or a rate, so it is excluded from lease payments when the lease liability is measured, and recognized when the underlying sales occur (Grant Thornton LLP, Leases: Navigating the Guidance in ASC 842, November 2022). The gross sales definition therefore drives expense timing and amount rather than the balance sheet.

The exception is worth knowing. Grant Thornton describes in-substance fixed payments as payments that "may, in form, appear to contain variability but are, in effect, unavoidable." A minimum percentage rent, or an alternative rent provision the tenant cannot realistically avoid, can fall into that category and belong in the lease payments after all. So the variable part stays out of the liability, and the floor underneath it may not. Confirm the treatment against your own accounting policy, and see closing ASC 842 without surprises for how this lands at period end.

For the underlying terms and the rest of the variables a percentage rent clause can turn on, the percentage rent definition entry is the short version.