STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA AMUSEMENT/VENDING ) ASSOCIATION, INC., a Florida )

Corporation, )

)

Petitioner, )

)

vs. ) CASE NO. 91-4079RE

) STATE OF FLORIDA, DEPARTMENT ) OF REVENUE, )

)

Respondent, )

)

FINAL ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, Don W. Davis, conducted a formal hearing in the above-styled cause on July 19, 1991, in Tallahassee, Florida. The following appearances were entered:

APPEARANCES

For Petitioner: Marie A. Mattox, Esquire

P.O. Box 1674

Tallahassee, Florida 32302-1674

For Respondent: James McAuley, Esquire

Ralph R. Jaeger, Esq. Office of Attorney General

Tax Section, Capitol Building Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

By stipulation of the parties, at issue is whether the definition of "amusement machine operator" in Emergency Rule 12AER91-2(1)(a), Florida Administrative Code, and the effective tax rate prescribed in Emergency Rule 12AER91-2(2), Florida Administrative Code, constitute invalid exercises of delegated authority.

PRELIMINARY STATEMENT

On July 3, 1991, Petitioner initiated these proceedings by filing an emergency petition for formal proceedings with the Division Of Administrative Hearings. The petition sought to challenge, as an invalid and un-promulgated rule, Respondent's notice to affected parties regarding application of certain newly enacted provisions of Florida Statutes governing the State of Florida sales and use tax.

Respondent subsequently filed a motion to dismiss the petition. Upon commencement of the formal hearing and in accordance with the stipulation of the parties, Respondent withdrew the motion to dismiss. By ore tenus amendment, Petitioner amended and restricted its challenge, pursuant to Section 120.56, Florida Statutes, to portions of Respondent's existing emergency rules, i.e., whether the definition of "amusement machine operator" in Emergency Rule

12AER91-2(1)(a), Florida Administrative Code, and the effective tax rate prescribed in Emergency Rule 12AER91-2(2), Florida Administrative Code, constitute invalid exercises of delegated authority.

At the final hearing, Petitioner presented the testimony of three witnesses. Petitioner also proffered the deposition of one witness, Larry Rosenquist, as testimony of an expert with regard to effective tax rates and as testimony of an expert with regard to the amusement and game industry.

Respondent had no objection to expert characterization of that deposition testimony, provided that the area of the witness' proffered expertise was restricted to the amusement and game industry.

Ruling on the areas of proffered expertise of the deposition testimony was reserved, pending review of the deposition by the hearing officer. Upon completion of that review, it is determined that Respondent's objection is well- taken. Rosenquist's testimony is elevated to the status of an expert only with regard to the amusement and game industry and not granted such status with regard to effective tax rates.

Respondent presented testimony of one witness and six evidentiary exhibits. The transcript of the final hearing was filed with the Division of

Administrative Hearings on August 5, 1991. Proposed final orders submitted by

the parties are addressed in the appendix to this Final Order.

FINDINGS OF FACT

1. Petitioner, the Florida Amusement Vending Association, Inc. (FAVA), is a Florida corporation comprised of members of the amusement, game and vending industry. FAVA is primarily composed of businesses operating in the State of Florida.

   
   

2. Respondent is the statutory entity with authority for administration of revenue laws of the State of Florida. General authority for that administration is set forth in Chapter 213, Florida Statutes. Section 213.05 of that Chapter provides specific authority for administration of the sales and use taxes at issue in this proceeding.

   
   

3. Pursuant to enactment of Chapter 91-112, Laws of Florida, a sales tax was imposed on charges for the use of coin- operated amusement machines, effective July 1, 1991. A new paragraph (j) was added to subsection 212.05(1), Florida Statutes, codifying the imposition of the sales tax at the statutory rate of 6 percent on each taxable transaction or incident related to use of coin-operated amusement machines.

   
   

4. Respondent adopted Emergency Rules 12AER91-2 and 12AER91-3, Florida Administrative Code, pursuant to authority in section 171 of Chapter 91-112, Laws of Florida. The emergency rules were filed with the Secretary of State by Respondent on June 27, 1991 and became effective July 1, 1991.

   AMUSEMENT MACHINE OPERATOR

   
   

5. The term "operator" with regard to coin-operated amusement machines is defined in Section 171 of Chapter 91-112, Laws of Florida, and reads as follows:

   
   

   The term "operator" means any person who possesses a coin-operated amusement machine for the purpose of generating sales through that machine and who is responsible for removing the receipts from the machine.

   
   

6. Emergency Rule 12AER91-2(1)(a), defines the term "operator" in identical language, with exception of the words "amusement machine", as follows:

   
   

   The term "amusement machine operator" means any person who possesses a coin-operated amusement machine for the purpose of generating sales through that machine and who is responsible for removing the receipts from the machine.

   
   

7. Both statute and rule state that an "operator" means the person possessing the coin-operated amusement machine for the purpose of generating sales through the machine and empowered with responsibility for removal of receipts from the machine. While industry practices vary regarding the individual responsible for removal of receipts from these machines, the machine owner often retains a key and responsibility for removal of money from the machine.

   
   

   EFFECTIVE TAX RATE

   
   

8. The tax imposed on charges for the use of coin- operated amusement machines at the statutory rate of 6 percent is levied on each taxable transaction or incident related to use of coin-operated amusement machines. In Florida, and nationally, these machines are typically operated based upon payment of charges of 25 cents, 50 cents, 75 cents, and one dollar. Respondent's effective tax rate is based upon the prices typically charged for use of the machines.

   
   

9. Effective tax rates are prescribed in the case of businesses or industries where it is impractical to separately state the tax on each transaction. Brackets have been established by legislative enactment in Section 212.12(09), Florida Statutes, stating the tax due on charges due on other than even multiples of a dollar. The rates reported in Section 212.12(09) are for prices of less than one dollar and are stated in terms of amount or cents of tax, rather than percentages. For a transaction greater than nine cents, up to one dollar, the effective tax rate almost always exceeds the nominal rate of six percent. Sometimes that tax rate may be as high as 11.76 percent.

   
   

10. Emergency Rule 12AER91-2(2)(c), Florida Administrative Code, in pertinent part, states:

    
    

    Operators of coin-operated amusement machines into which money is inserted will be considered to be remitting tax at the rate prescribed by law if their remittances on the charges for the use of the machines do not

    fall below the effective tax rates established by this rule. These rates recognize the variations resulting from multiple charges.

    It is presumed that the charge for use of the coin-operated amusement machine was adjusted to include tax.

    
    

    The rule goes on to state the effective tax rates for counties with a nominal tax rate of 6 percent, 6.5 percent and seven percent. Where these tax rates are in effect, the effective tax rates are, respectively, 7.81 percent,

    8.38 percent and 8.46 percent. 1/

    
    

11. While a dealer or operator is considered to be remitting tax at the rate prescribed by law, he should be prepared to demonstrate, in the event an audit by Respondent reveals remittance at a lesser rate, that his remittance is correct.

    
    

12. As established by Section 212.12(9), Florida Statutes, a nominal 6 percent tax rate, for a transaction totalling 25 cents, presumes that the selling price was 23 cents with 2 cents tax (an effective tax rate of 8.7 percent). Likewise, the statute also establishes the presumption that a fifty cent transaction consists of a selling price was 47 cents, with 3 cents tax (an effective tax rate of 6.38 percent). If the transaction totals 75 cents, the statutory presumption is that 5 cents of the total is tax (an effective tax rate of 7.14 percent). Transactions totalling one dollar are statutorily presumed under Section 212.12(9), Florida Statutes, to include 6 cents tax within that total (an effective tax rate of 6.38 percent).

    
    

13. When Respondent exercises its statutory authority 2/ to establish effective tax rates for an industry, in the absence of documentation of transactions establishing the amount of tax in accordance with the statutory rates set forth in Section 212.12(9), Florida Statutes, a determination of financial and economic characteristics of the whole industry is made. In the amusement vending machine industry, price per play is known, but no data exists on the number of transactions occurring in Florida at a particular machine. As an example, a customer could put multiple quarters in a machine for multiple plays constituting one transaction, or many individuals could put one quarter each in a machine for many transactions.

    
    

14. Effective tax rates will not give the same economic result for each taxpayer, e.g., the rate may be high or low for a particular taxpayer. However, the rate is calculated in such a manner that it is correct for the industry as a whole, i.e., the effective rate is set so that the industry as a whole remits taxes on gross receipts in the same manner as would occur if the industry remitted taxes on each individual transaction.

    
    

15. While no specific data applicable to the amusement game industry in Florida exists regarding number of transactions occurring at specific prices, Florida's amusement and game industry is not significantly different or atypical of the national industry. National data on the industry is available and was considered by Respondent in formulating the effective rates in the emergency rules challenged in this proceeding.

    
    

16. Data reported in the publication Vending Times is generally accepted by the amusement game industry within Florida and nationwide. Game revenues by type of game for the entire United States were published in 1989 in that publication. That data was adjusted by Respondent and used to predict 1991

    estimated sales in Florida and nationwide. Total game sales revenue estimated for Florida in 1991 by Respondent was $425,420,000. National sales revenue was predicted to be $9,529,890,000.

    
    

17. Data developed by Playmeter Magazine, a publication generally accepted in the national and local state industry, supports a conclusion that 44 percent of all operators of pinball machines have no plays costing more than 25 cents and 52 percent of all electronic games operate for only 25 cents. There is no data establishing the amount of national revenue generated by these machines.

    
    

18. Respondent's amusement game sales data study separated revenue by categories of amusement machine. The categories were derived from the census of the industry reported in Vending Times. Study data incorporated typical price points or sales prices used in the industry as well as the categories of coin- operated amusement games reported in the national survey.

    
    

19. Respondent's study derived an estimate of revenues by type of game by relying upon typical price points or sale prices in the industry, national survey results, and independent consultations with persons responsible for the national surveys. The estimate of the share of those revenues predicted to be generated in the State of Florida from the amusement vending machine industry was based upon Florida personal income and Florida population as a share of national personal income and national population.

    
    

20. After determining revenue estimates for the State of Florida, Respondent adjusted the estimates to reflect inflation; the State of Florida's general share of economic activity, as modified by retirees and transient population; and a minor adjustment reflecting that dart playing is notably weaker in Florida than in other states.

    
    

21. Respondent's estimate of revenues was necessary due to the lack of industry revenue data categorized by price and play volume. As previously noted, the machines typically operate upon payment of charges of 25 cents, 50 cents, 75 cents, and one dollar. Respondent estimated revenues at each of these price points for 1991 in order to establish effective industry wide tax rates for each price amount.

    
    

22. Respondent derived revenue estimates for each price point from projections of revenue expected to be received from each type of game. Adjustments for multiple 25 plays were made.

    
    

23. Respondent's industry average effective tax rate of 7.81 percent set forth in Rule 12AER91-2 is derived from a calculation of a weighted average of effective tax rates for typical sales prices within the industry.

    
    

24. Petitioner basically takes issue with Respondent's findings that the vast majority of industry revenue results from 25 cent transactions. While asserting that the data relied upon by Respondent in arriving at revenue estimates is out-dated, testimony presented by Petitioner that newer, higher revenue generating machines have taken the market in the State of Florida (thereby dictating application of a lower effective rate on the basis that most revenues now allegedly come from 50 cent or higher priced game play) was unsupported by any alternative documentation or research from any disinterested third party source and is not credited.

    
    

    CONCLUSIONS OF LAW

25. The Division of Administrative Hearings has jurisdiction over the parties and the subject matter. Section 120.56, Florida Statutes.

    
    

26. Pursuant to stipulation of the parties at the final hearing the issues for resolution in this proceeding are restricted to whether the definition of "amusement machine operator" in Emergency Rule 12AER91-2(1)(a), Florida Administrative Code, and the effective tax rate prescribed in Emergency Rule 12AER91-2(2), Florida Administrative Code, constitute invalid exercises of delegated authority. As part of the parties' stipulation, FAVA limited its challenge to these two issues.

    
    

27. As a result of the parties' stipulation at the final hearing and amendment at hearing by Petitioner of its petition to a Section 120.56 rule challenge, whether Respondent complied with applicable rule-making procedures in Section 120.54, Florida Statutes, is not at issue.

    
    

28. Petitioner's burden of demonstrating that Respondent established effective tax rates and a definition of the term "operator" through arbitrary and capricious action or the abuse of administrative discretion is a stringent one. Agrico Chemical Co. v. State Department of Environmental Regulation, 365 So.2d 759 (Fla. 1st DCA 1979), cert. den. 376 So.2d 74.

    
    

    Definition of "Operator"

    
    

29. As noted in the facts set forth above, the term "operator" with regard to coin-operated amusement machines in Section 171 of Chapter 91-112, Laws of Florida, reads as follows:

    
    

    The term "operator" means any person who possesses a coin-operated amusement machine for the purpose of generating sales through that machine and who is responsible for removing the receipts from the machine.

    
    

30. Likewise, Emergency Rule 12AER91-2(1)(a), defines the term "operator" in identical language, with exception of the words "amusement machine", as follows:

    
    

    The term "amusement machine operator" means any person who possesses a coin-operated amusement machine for the purpose of generating sales through that machine and who is responsible for removing the receipts from the machine.

    
    

31. Comparison of these two definitions amply demonstrates that the same language is employed in each definition. Petitioner has not shown that the term "operator" is defined in the rule in arbitrary and capricious fashion or in a manner inappropriate to the purpose specified by the legislative act.

    
    

32. As urged by Respondent, the agency's advantage with regard to this definition is a statutory matter and as observed of the Court in Humana, Inc.,

    v. Dept. of Health, 469 So.2d 889 at 890 (Fla. 1st DCA 1985), "remedied, if at all, by the legislature."

    Effective Tax Rates

    
    

33. Section 212.07(2), Florida Statutes, contains authority for Respondent to promulgate a rule containing an effective tax rate, and reads in pertinent part as follows:

    
    

    Where it is impracticable, due to the nature of the business practices within an industry, to separately state Florida tax on any charge ticket, sales slip, invoice, or other tangible evidence of sale, the department may establish an effective tax rate for such industry. The department may also amend this effective tax rate as the industry's pricing or practices change.

    
    

34. As established through the evidence presented at hearing, it is impractical to tax each transaction involving coin- operated amusement vending machines in the absence of records maintained by the industry on this basis. Nonetheless, Chapter 91- 112, Laws of Florida, mandates collection of a tax on each transaction. An effective tax rate is a practical necessity which resolves this dilemma and is also reasonably related to the purpose of the enabling legislation.

    
    

35. Whether the specific rate in Rule 12AER91-2 of 7.81 percent is arbitrary and capricious requires a showing by Petitioner with regard to the rate's application to the industry as a whole. Petitioner presented no credible evidence with regard to the industry on either a state-wide or nation-wide basis which demonstrated that Respondent's effective tax rate fails to achieve the same economic results for the entire industry as would be achieved were a tax to be collected on each transaction.

    
    

36. By contrast, national data considered by Respondent indicates the rate used was appropriate. Further, the evidence establishes that the Florida amusement game industry is not atypical of the national industry, thereby permitting the reasonable conclusion that the national data is applicable in this instance.

    
    

37. While Respondent's un-promulgated policy of permitting taxpayers to justify application of a lower effective rate on a case by case basis is not at issue in this proceeding, provision of such an opportunity to taxpayers to demonstrate circumstances justifying a different tax rate further supports a finding that the rule is not arbitrary and capricious. See, Humana, Inc., supra at 891.

    
    

38. Challenges to the validity of statutes on constitutional equal protection grounds are reviewed in accordance with the rational basis standard. The same standard is applicable to administrative rule challenges. Florida League of Cities, Inc. v. Dept. of Environmental Reg., 16 F.L.W. D1933 (Fla. 1st DCA 1991) A challenger must show that the statute, or in this case a rule, is unsupported on any reasonable basis or that it is arbitrary and unreasonable.

    
    

39. The national data studied by Respondent and applied to the Florida amusement game industry appears to reasonably support the projected 1991 Florida amusement game revenues and sales. The effective tax rate chosen by Respondent is 7.81 percent. This rate represents a weighted average of several effective rates for different price points used by the Florida industry. Although the

    rate may be low or high for a particular amusement game operator, the use of such an effective tax rate appears to be within the possible range of reasonable choices.

    
    

40. An agency's interpretation of a statute need not be the sole possible interpretation, or even the most desirable one. It need only be within the range of possible interpretations. Florida League of Cities, Inc. v. Dept. of Environmental Reg., supra--quoting Dept. of Professional Regulation, Board of Medical Examiners v. Durrani, 455 So.2d 515, 517 (Fla. 1st DCA 1984).

    
    

41. In this instance, the use of the effective tax rate appearing in Respondent's rule is required by Florida law and the rate falls within the range of possible interpretations.

Based on the foregoing, it is hereby

ORDERED that the emergency rules at issue in this proceeding represent a valid exercise of legislative authority and Petitioner's challenge to the rules is dismissed.

DONE AND ORDERED this 4th day of September, 1991, in Tallahassee, Leon County, Florida.

DON W.DAVIS

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Fl 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 4th day of September, 1990.

APPENDIX FINAL ORDER

The following constitutes my specific rulings, in accordance with Section 120.59, Florida Statutes, on proposed findings of fact submitted by the parties.

Proposed Findings of Petitioner.

1.-8. Adopted in substance, though not verbatim.

1. Addressed, however it should be noted that Respondent's policy of permitting taxpayers to seek a lower rate is not at issue in this 120.56 proceeding.

2. Adopted in substance.

3. Rejected, not supported by weight of the evidence.

4. Adopted in substance, though not verbatim.

5. Rejected with regard to vast changes over the preceding three years as argumentative and unsupported by greater weight of the evidence.

14.-20. Rejected as not supported by the greater weight of the evidence.

1. Rejected, argumentative. Testimony supports that national data was adjusted for the demographic variances peculiar to Florida.

2. Rejected, unnecessary, not supported by weight of evidence as regards national evidence modified to reflect Florida activity.

3. Rejected, credibility, not supported by greater weight of the evidence. 24.-26. Rejected, legal conclusion, argumentative, not supported by weight of the evidence.

Proposed Findings of Respondent 1.-17. Adopted in substance.

18. Rejected as stated, unnecessary. 1 212.07(2), Fla. Stat. provides

Respondent with authority to adopt effective tax rates where it is impracticable to separately state the amount of tax on the charge ticket or other documentary evidence of the sales transaction.2 212.07(2), Fla. Stat.

COPIES FURNISHED:

Marie A. Mattox, Esq.

P.O. Box 1674

Tallahassee, FL 32302-1674

James McAuley, Esq. Ralph R. Jaeger, Esq.

Office of Attorney General Tax Section, Capitol Building Tallahassee, FL 32399-1050

J. Thomas Herndon Executive Director Department of Revenue

104 Carlton Building Tallahassee, FL 32399-0100

Vicki Weber General Counsel

Department of Revenue

204 Carlton Building Tallahassee, FL 32399-0100

Liz Cloud, Chief

Bureau of Administrative Code The Capitol, Room 1802 Tallahassee, Florida

Carroll Webb, Executive Director Administrative Procedures Committee Holland Building, Room 120 Tallahassee, FL 32399-0250

A PARTY WHO IS ADVERSELY AFFECTED BY THIS FINAL ORDER IS ENTITLED TO JUDICIAL REVIEW PURSUANT TO SECTION 120.68, FLORIDA STATUTES. REVIEW PROCEEDINGS ARE GOVERNED BY THE FLORIDA RULES OF APPELLATE PROCEDURE. SUCH PROCEEDINGS ARE COMMENCED BY FILING ONE COPY OF THE NOTICE OF APPEAL WITH THE AGENCY CLERK OF THE DIVISION OF ADMINISTRATIVE HEARINGS AND A SECOND COPY, ACCOMPANIED BY FILING FEES PRESCRIBED BY LAW, WITH THE DISTRICT COURT OF APPEAL, FIRST DISTRICT, OR WITH THE DISTRICT COURT OF APPEAL IN THE APPELLATE DISTRICT WHERE THE PARTY

RESIDES. THE NOTICE OF APPEAL MUST BE FILED WITHIN 30 DAYS OF RENDITION OF THE ORDER TO BE REVIEWED.

Docket for Case No: 91-004079RE

Orders for Case No: 91-004079RE