STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

KIMEX, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 77-644

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

This matter came on for hearing in Miami, Florida, before the Division of Administrative Hearings by its duly designated Hearing Officer, Robert T. Benton, II, on November 22, 1977. The parties were represented by counsel:

APPEARANCES

For Petitioner: Mr. Norman S. Segall, Esquire

Suite 607, 100 Biscayne Tower

100 North Biscayne Boulevard Miami, Florida 33132

Mr. Michael A. Rubin, Esquire

420 South Dixie Highway, Suite 4-B Coral Gables, Florida 33146

For Respondent: Mr. Edwin J. Stacker, Esquire

Assistant Attorney General The Capitol

Tallahassee, Florida 32304

By notice of proposed assessment dated January 12, 1977, joint exhibit No. 1, respondent alleged that petitioner owed taxes imposed by Chapter 212, Florida Statutes (1975), over the period January 1, 1974, to December 31, 1976, on account of revenues from aircraft leases and because of certain purchases for the aircraft on which sales tax was not paid.

FINDINGS OF FACT

1. From before January 1, 1974, until the time of the final hearing in this matter, petitioner owned a DC-6 airplane, During the calendar year 1974, this airplane was leased to Surinam Air Cargo for approximately a half dozen flights. Petitioner's employees, Messrs. Goodman, Davis and Williams, crewed the airplane back and forth between Miami and Surinam, in accordance with the unwritten agreement between petitioner and Surinam Air Cargo. On some or all of these flights, petitioner transported its own goods as well as Surinam Air Cargo's. The parties stipulated that the purchases listed in schedule B attached to joint exhibit No. 1 were made for the flights back and forth to Surinam.

2. In September of 1975, petitioner entered into agreements with Paul H. Jones & Co., Inc., to lease the DC-6 for approximately four flights, some of which were agreed upon orally; the others were the subject of written agreements. All of the agreements contemplated that petitioner would furnish the airplane crew and petitioner's employees, Messrs. Goodman, Davis and Wright, did in fact operate the DC-6 while it was leased to Paul H. Jones & Co., Inc.

   
   

3. Miami International Hatcheries, Inc. (MIH) deals in hatching eggs. CWT Farms of Gainesville, Georgia, is a principal supplier of eggs to MIH and has been for some time. Until the fall of 1975, MIH regularly shipped eggs it received from CWT Farms to Kingston, Jamaica, using the facilities of Pan American Airways or Air Jamaica, which are common carriers. On October 13, 1975, however, petitioner entered into a contract with CWT Farms, which was evidenced by two writings, joint exhibits Nos. 2 and 3. Joint exhibit No. 2 sets up a "proposed flight schedule every Monday and Thursday," requires petitioner "to arrange and pay for cargo insurance" and specifies the manner and amount of CWT Farms' payment to petitioner; payments (covering "all operational costs") vary with the weight of the cargo and are "due and payable at the completion of each flight." Joint exhibit No. 4 is a writing evidencing an extension of the original agreement to a date beyond December 31, 1976.

   
   

4. Joint exhibit 3 contains, inter alia, a provision which recites "that the person responsible for the operational control of this aircraft during the term of this lease shall be CWT Farms." The provisions of joint exhibits Nos. 3 and 4 notwithstanding, there was from the beginning a clear understanding between Mr. Goodman, on behalf of petitioner, and Raymond H. Burch, on behalf of CWT Farms, that petitioner would hire the crew and that it was petitioner's "responsibility to take care of the crew and to fly the plane." Petitioner's exhibit No. 5, p. 12. Petitioner's employees, ordinarily Messrs. Goodman, Davis and Wright, did in fact fly the DC-6 twice a week from Miami to Kingston, Jamaica, and back. These employees looked for payment of their salaries to petitioner rather than to CWT Farms or to any predecessor lessee. Occasionally, petitioner transported to Jamaica goods belonging to firms other than CWT Farms, but petitioner did not transport its own cargo on the flights to Jamaica.

   
   

5. In aviation jargon, a dry lease is an agreement, analogous to a bareboat charter in maritime law, under which the lessee of aircraft undertakes to furnish the crew and gasoline, takes responsibility for maintenance and pays a pro-rata fee for engine time. A wet lease, in contrast, is an agreement under which the lessor furnishes the crew and gasoline and takes responsibility for maintenance; there is no provision for engine time and no penalty for a failed engine. The Federal Aviation Administration imposes more stringent safety regulations on wet lessors of aircraft than on dry lessors. In February of 1977, the Federal Aviation Administration began an investigation of petitioner which resulted in the filing of a complaint against petitioner and others on April 15, 1977, in the United States District Court for the Southern District of Florida. United States of America v. Kimex, Inc., et al., No. 77-1267-CIV-JE. This proceeding eventuated in a stipulation of dismissal in which petitioner agreed to a civil penalty (partially suspended) of thirty thousand dollars ($30,000.00) and admitted that, under the agreement with CWT Farms, it had "engaged in the carriage of property for compensation or hire in air commerce as a private carrier" and that the leases to CWT Farms "were 'wet leases'."

   
   

6. During the period of the lease between petitioner and CWT Farms, MIH was normally in debt to CWT Farms because MIH did not pay in advance for the eggs it received from CWT Farms. At CWT Farms' behest, MIH paid petitioner

   moneys due petitioner from CWT Farms, in partial discharge of MIH's own obligations to CWT Farms. A practice developed under which MIH drew and delivered four checks to petitioner's employees before each flight, which, in the aggregate, constituted CWT Farms' payment to petitioner for the preceding flight. H. Goodman was the payee on one check, in the amount of one hundred seventy-five dollars ($175.00), C. Wright was the payee on one check in the amount of one hundred fifty dollars ($150.00), R. Davis was the payee on one check, in the amount of one hundred twenty-five dollars ($125.00). These checks also operated to discharge part of petitioner's salary obligations to these employees. Kimex, Inc. was the payee on the fourth check, the amount of which varied, depending on the weight of the cargo petitioner had transported on the previous flight.

   
   

7. In calculating the amount of the fourth check, the amount CWT Farms owed petitioner was first computed, and four hundred fifty dollars ($450.00) was then subtracted. Before each flight, MIH delivered eggs in cases, which weighed fifty-two (52) pounds each, to a freight loading company at Miami International Airport. Because MIH kept track of the number of cases it delivered, it was a simple matter to compute CWT Farms' obligation to petitioner, as specified in the lease, viz., "16 per pound for the minimum weight of 26,000 pounds to 30,000 pounds and 15 per pound from 30,001 pounds to 32,000 pounds." Joint exhibit 2. From this figure was subtracted the sum of the checks drawn in favor of petitioner's employees. This procedure obtained until some time after December 31, 1976. By the time of the hearing, however, petitioner's employees were paid with weekly pay checks which petitioner itself drew in their favor; and petitioner received lease payment checks which were not reduced by four hundred fifty dollars ($450.00).

   
   

8. Before the change to the practice in effect at the time of the hearing, MIH caused Internal Revenue Service Forms 1099 to be prepared to reflect the total MIH payments to petitioner's employees for each year involved. Petitioner prepared W-2 Forms to reflect the salary moneys it paid to its employees directly for each year involved.

   
   

   CONCLUSIONS OF LAW

   
   

9. Section 212.05, Florida Statutes (1975), levies a tax "[a]t the rate of

   4 percent of the cost price of each item or article of tangible personal property when the same is not sold but is used . . ." Section 212.05(2), Florida Statutes (1975). Use is defined as any use other than "the sale at retail of that property in the regular course of business." Section 212.02(8), Florida Statutes (1975). The term "sale" includes any rental. Section 212.02(2), Florida Statutes (1975).

   
   

10. Pursuant to Rule 12A-1.07(5), F.A.C., "[p]arts and materials used to maintain . . . aircraft, which are used exclusively for rental purposes are exempt where tax is charged on the rental of the vehicles." In the present case, the parties stipulated that the articles itemized on schedule B were used for the maintenance of petitioner's DC-6 while it was leased to Surinam Air Cargo. No sales tax was collected on these lease payments, and the airplane was used simultaneously by the lessor for its own needs. Because Rule 12A-1.07(5), F.A.C., makes parts and materials "subject to the tax when the owner-lessor is not required to charge tax on the rentals of the motor vehicles," the parts and materials listed on schedule B are subject to the sales tax.

    
    

11. Section 212.05, Florida Statutes (1975), levies a tax "[a]t the rate of 4 percent of the gross proceeds derived from the lease or rental of tangible

    personal property, as defined herein . . ." Section 212.05(3), Florida Statutes (1975). Rules implementing this provision include Rule 12A-1.71, F.A.C., which provides in pertinent part:

    
    

    (8)(a) When the owner of equipment furnishes the operator and all operating supplies, and contracts for their use to perform certain

    work under his direction and according to his customer's specifications, and the customer does not take possession or have any direc- tion or control over the physical operation, the contract constitutes a service transac- tion and not the rental of tangible personal property, and the charge therefor is exempt. (emphasis supplied)

    * * *

    1. When a vessel is chartered with crew furnished, for the purpose of transportation from pane point to another and the charterer does not have any direction or control over its operation, the contract constitutes a service transaction and not the rental of tangible personal property and is exempt.

    2. When a vessel is leased or rented on a "bare boat" basis, the sales tax applies to the gross proceeds derived from the lease

or rental. The lease or rental is considered to be on a "bare boat" basis when:

1. The lessor does not provide a crew;

2. The lessor does provide a crew but it is hired by the lessee under a separate employment contract. (Under such circum- stances the employment contract cost is not a part of the gross proceeds derived from the lease or rental and is not taxable.)

Petitioner qualifies for the exemption from tax set forth in Rule 12A-171(8)(a), F.A.C., and comes within the language of Rule 12A-1.71(15), F.A.C. Because petitioner provided its own crew, Rule 12A-171(16)(a), F.A.C., does not apply; subsection (b) of that rule does not apply because no separate employment contract existed, as evidenced by the fact that "direct" payments to the crew were subtracted from the contract price agreed upon by petitioner and CWT Farms.

RECOMMENDATION

Upon consideration of the foregoing, it is RECOMMENDED:

That respondent reduce its proposed assessment to four percent of the total dollar cost of the items listed on schedule B attached to the notice of proposed assessment, together with applicable penalties and interest, if any.

DONE and ENTERED this 22nd day of December, 1977, in Tallahassee, Florida.

ROBERT T. BENTON, II

Hearing Officer

Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304

(904) 488-9675

APPENDIX

Paragraphs one, two, four through thirteen, fifteen and sixteen of petitioner's proposed findings of fact have been adopted, in substance.

Paragraph three of petitioner's proposed findings of fact recites that petitioner's lease to Jones & Co. was oral whereas the evidence was that the agreements with Jones & Co. with respect to some of the flights were reduced to writing.

Paragraph fourteen of petitioner's proposed findings of fact has been adopted, in substance, assuming that "direction or control" is intended to mean responsibility or authority for navigation of the aircraft.

Paragraph one of respondent's proposed findings of fact has been rejected as unsupported by or contrary to the evidence. Petitioner employs Messrs.

Goodman, Davis and Wright, Miss Goodman and several mechanics. Mr. Goodman, Mr. Davis and Miss Goodman are petitioner's corporate officers. Petitioner's stockholders are Mr. Davis, Mr. and Mrs. Goodman. The evidence did not establish who petitioner's directors are. Although the evidence showed that petitioner owned a DC-6 airplane based in Miami, it was not proven that petitioner had no other assets.

Paragraph two of respondent's proposed findings of fact has been adopted in substance, insofar as relevant, except that there was no evidence that petitioner was exporting its own goods on the flights made pursuant to its agreements with Paul H. Jones & Co.

Paragraphs three, four, five and six of respondent's proposed findings of fact have been adopted in substance, insofar as relevant.

The final paragraph of respondent's proposed findings of fact lacks support in the evidence. For a given flight, CWT Farms would owe petitioner at least the agreed price for shipping 26,000 pounds of eggs, regardless of how few eggs were in fact shipped. On a given flight, CWT Farms could ship up to 32,000 pounds, but, if CWT Farms shipped less, petitioner sometimes transported eggs for other firms. The semiweekly flight schedule was set by mutual agreement between petitioner and CWT Farms.

COPIES FURNISHED:

Mr. Norman S. Segall, Esquire Suite 607, 100 Biscayne Tower

100 North Biscayne Boulevard Miami, Florida 33132

Mr. Michael A. Rubin, Esquire Suite 4-B

420 South Dixie Highway Coral Gables, Florida 33146

Mr. Edwin J. Stacker, Esquire Assistant Attorney General The Capitol

Tallahassee, Florida 32304

Docket for Case No: 77-000644

Orders for Case No: 77-000644