Gross sales in commercial leases is the total revenue a tenant generates from all transactions at the leased premises, measured before negotiated exclusions such as sales taxes, refunds, and inter-store transfers. That figure matters because it drives percentage rent: the additional rent a tenant owes once sales cross an agreed-upon threshold called the breakpoint. Every dollar that stays inside the gross sales definition increases what the landlord collects, so the inclusions and exclusions written into the lease can shift thousands of dollars between the parties each year.
What Counts Toward Gross Sales
Standard lease language sweeps in every dollar of revenue from goods sold or services performed at the premises, regardless of how the customer pays. Cash, credit cards, debit cards, mobile payments, financing arrangements, and layaway completions all count at their full transaction value. Orders taken at the physical location but shipped from a warehouse generally count too, because the sale originated on the premises.
Gift cards add a wrinkle that catches some tenants off guard. Most well-drafted leases exclude the initial sale of a gift card from gross sales because no merchandise changes hands at that point. The revenue is counted later, when the customer redeems the card for goods. Here is the part that surprises people: a gift card purchased at a different location but redeemed at your store typically does count toward your gross sales, even though your store never collected the original payment. The lease cares about where the merchandise leaves the shelf, not where the card was bought.
Revenue from vending machines, ATM commissions, on-site services, and other auxiliary sources operating within the leased space usually falls inside the gross sales definition as well. If money changes hands on the premises in connection with the tenant’s business, the default assumption is that it counts unless the lease says otherwise.
Online Sales and In-Store Pickup
E-commerce has turned the gross sales definition into one of the most heavily negotiated sections of a modern retail lease. The central question is whether a sale that touches the physical store at any point in the transaction belongs in the gross sales number.
Landlords generally argue that any online transaction connected to the physical store should count. If a customer orders online and picks up in the store, if an employee processes a return for an online order, or if the item ships from in-store inventory, the landlord’s position is that the store facilitated the sale. Tenants push back, arguing that internet sales driven by a national website and brand marketing have nothing to do with the specific retail location.
The compromise that shows up in many recent leases excludes online sales from gross sales only when all three of these conditions are met:
- The payment was processed online, not through the store’s point-of-sale system.
- The order was fulfilled from a distribution center or warehouse, not from in-store inventory.
- The customer did not place the order from inside the store using an in-store terminal or kiosk.
If any one of those conditions fails, the sale counts. For tenants operating a single retail location with no separate warehouse, this framework is tough to work around. Nearly every online order has some connection to the store when the store is the only place inventory exists. Tenants in that position sometimes negotiate a flat exclusion for orders placed and paid for entirely outside the premises, regardless of where the item ships from, but landlords resist giving that away without something in return.
Taxes and Government Fees That Do Not Count
Amounts a tenant collects on behalf of a government agency are standard exclusions. The tenant is acting as a collection agent for these funds, not earning revenue, so including them would inflate the percentage rent calculation beyond what the business actually earns.
State and local sales taxes are the most obvious example. Use taxes, which apply when a customer buys goods in one jurisdiction but uses them in another, fall in the same bucket. The key requirement in most leases is that the tax must be separately stated on the receipt and paid directly to the taxing authority. A tax baked into the sticker price without being broken out on the customer’s receipt may not qualify for exclusion, which is why clean accounting records matter.
Federal excise taxes on specific products also qualify for exclusion when they are collected from customers and remitted to the government. These cover a range of goods, including fuel, certain sporting equipment, heavy trucks and trailers, tires rated for highway use, indoor tanning services, and ozone-depleting chemicals. Environmental surcharges on electronics, batteries, or tires imposed by state or local governments follow the same logic. The tenant collects the fee, passes it through to the agency, and deducts it from gross sales.
Any government-imposed fee that the tenant collects and remits should be documented as a separate line item in the accounting system. Lumping these fees into the base price of merchandise makes them nearly impossible to back out later and can lead to overpaying percentage rent for years before anyone catches the mistake.
Operational Exclusions and Adjustments
Beyond taxes, a range of transactions that pass through the register do not represent real revenue for the business. These operational exclusions keep the gross sales figure aligned with what the tenant actually earns from retail operations at the premises.
Returns and Refunds
When a customer returns merchandise and gets a cash or credit refund, the original sale is effectively unwound. The refund amount comes out of gross sales, but only up to the original selling price. One important limitation in many leases: refunds for merchandise that was originally purchased online, through a catalog, or at a different location may not be deductible, even if the return happens at your store. The logic is that the original sale was never in your gross sales to begin with, so the return should not reduce them.
Employee Discounts
Discounts given to employees as part of a benefits package are typically excluded, but not without limits. Many leases cap this exclusion at 2% of the year’s total gross sales. If employee discount sales exceed that cap, the excess stays in the gross sales number. This prevents a tenant from running an aggressive employee discount program that siphons sales out of the percentage rent calculation.
Inter-Store Transfers
Moving merchandise between store locations at cost is an internal logistics decision, not a sale to a customer. These transfers are excluded as long as they are made for the convenient operation of the business and not to avoid recording a sale that should have happened at the leased premises. That second condition matters. If a tenant takes an order at the leased location, then transfers the item to another store to complete the transaction there, the landlord has a legitimate argument that the sale belongs in the gross sales of the leased premises.
Bad Debts
When a customer buys on credit and never pays, some leases allow the tenant to deduct the uncollectible amount from gross sales. This is negotiated, not automatic. Landlords are often reluctant to grant this exclusion because it shifts the tenant’s credit risk onto the landlord’s percentage rent. Where the exclusion exists, the tenant typically must show that the debt was genuinely written off in accordance with standard accounting practices before the deduction applies.
Fixture and Equipment Sales
Selling old display cases, shelving, or used equipment is not a retail transaction in the ordinary course of business. These asset liquidations are excluded because they do not reflect the ongoing commercial activity the percentage rent clause was designed to capture. The exclusion generally does not apply if the tenant regularly buys and sells used equipment as part of its business model.
Low-Margin Pass-Through Items
Certain products a tenant sells on behalf of a third party, where the tenant earns only a small commission, receive special treatment. Lottery tickets are the classic example. Rather than counting the full face value of every ticket sold, the lease typically counts only the commission the tenant earns. The same principle can apply to postage stamps, transit passes, or prepaid phone cards sold at face value with minimal markup. Including the full ticket price would badly distort the tenant’s actual revenue from these transactions.
How Gross Sales Translate Into Percentage Rent
Percentage rent only kicks in after gross sales pass the breakpoint. Below that line, the tenant pays only base rent. Above it, the tenant pays a percentage of every additional dollar.
The natural breakpoint is calculated by dividing the annual base rent by the agreed percentage rate. A tenant paying $120,000 per year in base rent at a 6% rate has a natural breakpoint of $2,000,000. If gross sales reach $2,400,000, percentage rent is $24,000, which is 6% of the $400,000 above the breakpoint. An artificial breakpoint is a negotiated number that does not follow the formula. A tenant with strong bargaining power might push the artificial breakpoint higher than the natural one to reduce percentage rent exposure, usually in exchange for a higher rate or a bump in base rent.
One boundary worth flagging: a radius clause, which restricts a tenant from opening a competing store within a specified distance, can pull sales from that other location into your gross sales figure if it is violated. That is a separate mechanism from the ordinary inclusions and exclusions covered above, but it can dramatically change the number the percentage rent is calculated against.
Reporting and Recordkeeping
Once gross sales are calculated with all applicable exclusions, the tenant submits the results to the landlord. Most leases require monthly or quarterly sales reports with an annual reconciliation certified by a financial officer or independent accountant. Deadlines are strict, and late submissions can trigger financial penalties specified in the lease.
Tenants should keep sales tax collections, employee discounts, inter-store transfers, and returns in distinct accounting buckets. Most leases require the tenant to preserve these records for at least two to three years after the reporting period, and some require longer retention. Losing or discarding records before that window closes puts the tenant in a difficult position if the landlord exercises audit rights.
Audits and the Cost of Underreporting
Landlords almost always retain the right to audit the tenant’s books and records to verify reported gross sales. The audit window is typically two to three years after the reporting period. A designated representative or third-party auditor inspects financial records, point-of-sale data, tax returns, and bank statements.
Who pays for the audit depends on what it finds. If the auditor discovers that gross sales were underreported by more than a specified margin, commonly 3%, the tenant pays for the audit on top of the percentage rent shortfall plus interest. Below that threshold, the landlord absorbs the audit cost.
The consequences escalate from there. Some leases grant the landlord the right to terminate entirely if the understatement reaches a certain level, often around 3% or more, sometimes on as little as 15 days’ written notice. Repeated understatements across consecutive audit periods can trigger termination even where a first offense would not, and a lease might allow termination with no cure period after two consecutive audits show a shortfall. Intentional underreporting raises the stakes further, because deliberately manipulating sales records to reduce percentage rent is a breach of the lease and can also constitute fraud, exposing the tenant to damages beyond unpaid rent, including legal fees and consequential losses. Most tenants who end up in this situation did not set out to commit fraud. They made aggressive judgment calls about which transactions to exclude without clear lease language to support them. The fix is getting the exclusions nailed down during lease negotiations, not improvising interpretations later.