STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FIRST FEDERAL SAVINGS AND ) LOAN ASSOCIATION OF PUTNAM ) COUNTY, )

)

Petitioner, )

)

vs. ) CASE NO. 92-2763

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the above matter was heard before the Division of Administrative Hearings by its duly designated Hearing Officer, Donald R. Alexander, on December 10, 1992, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Patrick J. Phelan, Jr., Esquire

Post Office Box 669 Tallahassee, Florida 32302

For Respondent: Lealand L. McCharen, Esquire

Lisa M. Raleigh, Esquire Department of Legal Affairs The Capitol-Tax Section

Tallahassee, Florida 32399-1050 STATEMENT OF THE ISSUES

The issue is whether certain charges made to petitioner by a data processing company constitute a taxable sale of a "private communication service" as defined by Subsection 203.012(4)(a), Florida Statutes.

PRELIMINARY STATEMENT

This matter began after an audit was conducted by respondent, Department of Revenue (DOR), of the taxes paid by petitioner, First Federal Savings and Loan Association of Putnam County, during the period June 1, 1985, through December 31, 1989. Contending that certain data communication services purchased by petitioner from a data processing firm were "private communication services" or "telecommunication services" and thus were subject to the sales tax, DOR proposed an assessment on petitioner. After various informal appeals were unsuccessful, petitioner filed its petition for formal hearing challenging the proposed assessment. The parties have agreed that the total amount of taxes in dispute are $11,476.12 plus penalties and applicable interest.

The matter was referred by respondent to the Division of Administrative Hearings on May 6, 1992, with a request that a hearing officer be assigned to conduct a formal hearing. By notice of hearing dated May 31, 1992, a final hearing was scheduled on September 23 and 24, 1992, in Tallahassee, Florida. At the parties' request, the matter was rescheduled to November 5, 1992, and then again to December 10, 1992, at the same location.

At final hearing, petitioner presented the testimony of Michael E. Riddick, its chief financial officer, Linda E. Guttman and Ron Futrell, both employees of Florida Informanagement Services, Inc., Douglas S. Metcalf, also an employee of Florida Informanagement, Inc. and accepted as an expert, and Park Randall Miller, a former DOR executive director who was accepted as an expert. Also, it offered petitioner's exhibits 1-6. All exhibits were received in evidence.

Respondent presented the testimony of R. Clay Brower and James E. Silvey, DOR tax conferees. Also, it offered respondent's exhibits 1-7. All exhibits were received in evidence. Finally, and pursuant to petitioner's request, the undersigned took official notice of various statutes and administrative rules.

The transcript of hearing (two volumes) was filed on January 19, 1993.

Proposed findings of fact and conclusions of law were originally due on February 10, 1993. At the request of the parties, this time was extended to March 8, 1993, and proposed orders were timely filed that date. A ruling on each proposed finding has been made in the Appendix attached to this Recommended Order.

FINDINGS OF FACT

Based upon all of the evidence, the following findings of fact are determined:

1. Background

   
   

   1. Petitioner, First Federal Savings and Loan Association of Putnam County (petitioner or First Federal), owns and operates a full service savings and loan institution in the Palatka, Florida area. As a part of its regular business operations, petitioner utilizes the services of Florida Informanagement Services, Inc. (FIS), a data processing servicing firm which provides bookkeeping and data processing services. In performing these services, FIS collects financial data from computer terminals located at petitioner's offices and returns processed data in the form of financial statements, payrolls, tax reports, accounts receivable and payable statements, and related information to petitioner.

      
      

   2. Respondent, Department of Revenue (DOR), is the state agency charged with the responsibility of enforcing the Florida Revenue Act of 1949, as amended. Among other things, DOR performs audits on taxpayers to insure that all taxes due have been correctly paid. To this end, a routine audit was performed on petitioner covering the audit period from June 1, 1985, through December 31, 1989.

      
      

   3. After the results of the audit were obtained, and an initial assessment made, on September 13, 1991, DOR issued a notice of decision wherein it proposed to assess petitioner $43,204.91 in unpaid taxes. After a petition for reconsideration was filed, DOR issued its notice of reconsideration reducing the assessment to $37,805.92. The parties later reached an agreement as to all issues except an assessment of $11,476.12 for unpaid sales taxes plus applicable interest and penalties. The taxes relate to a charge on the monthly statement

      issued to First Federal by FIS and which is identified as "total data communications". The assessment concluded that the data communi-cations charge is a taxable sale of a private communication service or a telecommunication service within the meaning of Subsections 203.012(4)(a) and 203.012(5)(a), Florida Statutes (1989). Contending that the assessment should be withdrawn, petitioner initiated this proceeding.

      
      

2. The Services Provided by FIS

1. Established in 1968 by a group of savings and loan institutions, FIS is a data processing service bureau headquartered in Orlando, Florida, and which contracts with approximately one hundred clients, all savings and loan institutions, to provide comprehensive data processing and accounting-type services. Its sole purpose is to provide its clients with state of the art data processing services at an economical shared cost. The services being rendered here are commonly provided to banking institutions throughout the state by FIS and a number of similar data processing companies.

   
   

2. FIS utilizes a network of long distance telephone lines leased from various telephone companies located throughout the state to collect financial transaction data from each of its member clients, including petitioner. Keyboards are utilized by bank employees at each office to input financial transaction information (e. g., a deposit to or withdrawal from a checking account) to a "data line" or communication channel, which is a multi-link long distance communication pathway leased by FIS from a telephone company. This information is collected by a front end processor and transmitted through the data line to the computer system (mainframe) located at FIS headquarters in Orlando. The computer acknowledges receipt of the transaction, records and processes the transaction, and sends a response back through the data line to the sending terminal. This process is repeated hundreds of times each day for every terminal located at each bank office. At the end of each business day, FIS processes all of the transaction data collected during the day into comprehensive reports which summarize such activities as loan and account balances, bank department activities, automatic teller transactions, and similar information. These reports are then delivered to the banks by courier the next morning. It is noted that during the first two years of the audit period, First Federal had a single data line with twenty-six terminals. In 1987, a second data line was added due to an increase in terminals. Today, First Federal has four offices with a total of forty-eight terminals on two data lines.

   
   

3. FIS and its clients have entered into an information processing agreement which governs the provision of services and their price. This contractual relationship between FIS and First Federal began in 1974. Copies of the 1982, 1985 and 1987 agreements have been received in evidence as respondent's exhibits 6 and 7 and petitioner's exhibit 4, respectively. Paragraph 4.(c) of the first two agreements provides that "(t)elecommunications for on-line services will be provided by FIS as part of this agreement" while the 1985 agreement also provides that "(p)rice increases charged to FIS by telecommunications senders will be passed on to the institution". The copy of the 1987 agreement introduced into evidence is incomplete but the testimony suggests that except for the word "telecommunications" found in paragraph 4.(c) of the earlier agreements, the same provisions appear in the more recent agreements.

   1. The Data Communications Charge

      
      

4. FIS issues on a monthly basis an itemized statement for its services. Among the charges on the statement is one labeled "total data communications", which is based upon the total number and types of computer terminals which can access the FIS computer. The charge is not based on the actual cost of establishing and maintaining the communication pathway but rather is assessed equally upon all FIS clients as an identical monthly flat fee per terminal charge of $86. The same flat fee per terminal charge is assessed regardless of the number of computer terminals utilized by an institution, the number of transactions per terminal, the amount of telephone time consumed, or the geographic distance between the FIS mainframe computer and the customer's location. Thus, the same fee per terminal would be assessed on a bank in Orlando a few blocks from the mainframe computer as one located in Pensacola or the Florida Keys.

   
   

5. The data communications charge represents a number of cost elements including the establishment and maintenance of the FIS mainframe computer system, research and development, technical support, company overhead, and the cost of the leased telephone lines. However, the per terminal charge of $86 is neither a direct nor indirect pass-through by FIS of the actual cost of establishing and maintaining the communications link with any individual customer.

   
   

   1. Is the Transaction Taxable?

   
   

6. DOR acknowledges that the various data processing services that First Federal purchases from FIS, which is acting as a "service bureau" under Rule 12A-1.032(6), Florida Administrative Code, are "professional services" and are

   exempt from taxation under Subsection 212.08(7)(v)1., Florida Statutes. It also admits that as of the date of hearing, it had no "firm" policy on the issue presented herein and was still in the process of developing one. Even so, DOR contends that the services identified as "total data communications", which include the communication network through which FIS collects the raw financial data from its clients for processing, are taxable since these services constitute a private communication service as that term is defined in Subsection 203.012(4)(a), Florida Statutes (1989). There, the term is defined as a communication service that entitles a subscriber "to exclusive or priority use of a communication channel."

   
   

7. DOR first relies upon the fact that during the audit period FIS and First Federal had entered into agreements for FIS to provide First Federal with "telecommunications" for its "on line" services. DOR construes this language in a literal sense to mean that FIS is "selling" a telecommunication service. In addition, the agreements allow FIS to increase the data communication charges based upon potential increased telephone costs to FIS. Again, DOR interprets this language as further evidence that FIS is merely reselling a telephone service to its clients. DOR also points out that First Federal has a reasonable certainty of getting its communication through on the communication channel and that no other communication can take place on the line while First Federal is transmitting or receiving a message. It considers irrelevant the fact that First Federal may not have priority or exclusive rights over any other FIS client having access to the FIS data collection system. Thus, DOR concludes that First Federal has "exclusive or priority use" of a communication channel within the meaning of the law. It further concludes that FIS is engaged in the sale of a private communication service (via the leased telephone lines) which gives First Federal access to FIS's computer.

8. The evidence shows that the computer terminals located at petitioner's offices are commonly referred to as "dumb" terminals whose sole function is data input, that is, to transmit data from the institution to the computer mainframe. They cannot be utilized to access the FIS mainframe to perform any type of individualized date processing or other analysis. Further, they cannot communicate with each other using the data lines nor can they communicate with any other financial institution or other computer system. In addition, the lines cannot be used for regular voice communication, and when the institution is closed, the lines cannot be used for any other purpose.

   
   

9. Over ninety percent of FIS member institutions share portions of one or more data lines with other FIS clients. Although during the audit period First Federal did not share its two lines with another institution, if one should open an office in the Palatka area and utilize FIS's services, its terminals would be placed on the unused portion of First Federal's lines, assuming such unused capacity is then available. In addition, all of the data collection and processing services are controlled directly by FIS. Thus, no FIS client has any priority in transmitting transaction information or obtaining data processing services over any other FIS customer, regardless of size or geographic location. Rather, the data is collected by FIS according to a pre- determined polling system controlled by a communication processor. Since a single data line can collect information from as many as thirty individual computer terminals, the polling system must "poll" each of those thirty terminals in numeric sequence to determine if the terminal has any data to transmit. Once the polling system has "polled" a particular terminal, the terminal is unable to transmit data until all other terminals have been polled. Further, while a message is being transmitted to or received from the computer mainframe, no other transmissions can take place on the data line, and there is no provision in the system to interrupt a transmission. Processed data is then returned to the institution according to the same numeric cycle. Therefore, no institution has "use" of a data line other than that which is directed by FIS, and the fact that a client can be reasonably assured that FIS will collect its data transmissions in a timely manner does not equate to a "priority use" of the communication pathway.

   
   

10. The overall cost of the telephone line "network" represents a substantial portion of the total data communication charges assessed to each customer. However, the terminal charge made to each FIS customer is not truly representative of the cost to FIS of obtaining and providing the actual communications link between FIS and an individual bank. As noted earlier, and by way of example, the cost of establishing and maintaining a telephone link between FIS and a small bank in the Florida Keys or the Panhandle would substantially exceed the data communications charge assessed to those institutions.

    
    

11. FIS receives telephone bills from every local and regional telephone company from which it leases telephone lines. During the audit period, it was not uncommon for FIS to receive between seven hundred and one thousand telephone bills per month for services to approximately eighty-four full service data processing clients. These bills included both sales and gross receipts taxes and were paid by FIS on a monthly basis. The FIS accounting department does not analyze the individual charges on the various statements to determine the monthly cost of a data line to an individual customer, nor are the charges made to FIS by the various telephone companies for each FIS client rebilled to any particular institution, either directly or indirectly. Rather, FIS absorbs the cost of the entire telephone network as a part of its normal business expense.

12. The earlier information processing agreements refer to "telecommunication services" being provided under the agreement. However, the agreements also refer to the existence of one or more third party providers (i.e., regulated telephone companies) of the actual telephone service, and FIS makes no charge for "telephone service". While the agreements allow FIS to increase the data communications charges based upon the potential increased telephone costs to FIS, the charges assessed to FIS customers are unrelated to the actual cost of providing the service between any particular institution and the computer. Indeed, the provision simply allows FIS, when deemed to be necessary, to increase the terminal fee based upon an increase in one of its many cost components. Even if this right is exercised, any increase in that charge would be equally assessed on all clients throughout the state, regardless of their size or location. However, it should be noted that FIS has experienced a substantial increase in costs in providing the telephone service in recent years, but has not raised the data communication charge to any client since 1986.

    
    

13. FIS has never charged First Federal for "telephone service". It is irrelevant to the institution how FIS establishes or designates its charges. If the data communication charge was deleted and the costs of the other tax exempt charges increased accordingly, First Federal would still continue to utilize FIS's services.

    
    

14. During the audit period, FIS was not registered with DOR as a provider of private communication services. Indeed, its only business is providing data processing and accounting-type services. If it was reselling private communication services, as DOR suggests, it would have to register with DOR and pay a 1.5 percent gross receipts tax on the actual cost of operating the system. DOR recently concluded an eighteen month audit of FIS for the period 1985-1989 and determined that FIS was not liable for gross receipts tax on the sale of any alleged telecommunications services.

    
    

15. Finally, testimony by an expert who served as DOR executive director during most of the audit period established that when the law was amended effective July 1, 1984, to impose both sales and gross receipts taxes on the sale of private communication services, DOR interpreted the amendments to apply to those providers who were selling communication services which escaped taxation by bypassing the existing telephone companies or other regulated utilities. This included those who provided communications by microwaves, satellites, privately owned telephone lines and "smart buildings", which utilize a combination of both public and private communication systems. The expert further established that if the issue had been raised during his tenure, DOR would not have construed the activity here to be a taxable sale of a private communications service since neither FIS nor its clients were operating outside the existing telephone company pathways thereby escaping the sales and gross receipts taxes.

    
    

16. In summary, the evidence supports a finding that First Federal does not have exclusive or priority use of the data lines and accordingly the challenged service cannot be considered a private communication service. In addition, because FIS could not function as a data processing company without the data collection system, which is an integral part of its comprehensive data processing services, the collection of raw financial data must be construed as a tax exempt service. Therefore, the assessment against First Federal should be withdrawn.

    CONCLUSIONS OF LAW

    
    

17. The Division of Administrative Hearings has jurisdiction of the subject matter and the parties hereto pursuant to Sections 120.57 and 120.575, Florida Statutes (1991).

    
    

18. As provided for in Subsection 120.575(2), Florida Statutes (1991), the agency's "burden of proof...shall be limited to a showing that an assessment has been made against the taxpayer and the factual and legal grounds upon which the (agency) has made the assessment". See also, Department of Revenue v. Quotron Systems, Inc., 18 F.L.W. D692, D693 (Fla. 3d DCA, March 9, 1993). Once that showing is made, the burden shifts to the taxpayer to demonstrate by a preponderance of the evidence that the assessment is incorrect.

    
    

19. The DOR assessment is predicated on the premise that the service being offered by FIS to First Federal, namely, the furnishing of access to FIS's computer via a leased telephone line (data line), constitutes a sale of a private communication service as that term is defined in Subsection 203.012(4)(a), Florida Statutes. There, the term is defined as follows:

    
    

    1. The term "private communication service" means:

       1. A communication service furnished to a subscriber or user that entitles the subscriber or user to exclusive or priority use of a communication channel or groups of channels, or to the use of an inter- communication system for the subscriber's stations, regardless of whether such channel, groups of channels, or intercommunication system may be connected through switching with a service described in subsection (3), subsection (6), or subsection (7). (Emphasis added)

          * * *

          
          

          In construing the foregoing statute, the undersigned is obliged to honor the long established rule that taxing statutes are to be strictly construed against the taxing power and any ambiguity in the provisions of the statute should be resolved in favor of the taxpayer. See, e. g., Maas Brothers, Inc. v.

          Dickinson, 195 So.2d 193, 198 (Fla. 1967).

          
          

20. To sustain the assessment under the foregoing statute, it must be clearly established that the subscriber (petitioner) has "exclusive or priority use of a communication channel or group of channels." In the absense of an express statutory definition, "exclusive" and "priority" should be accorded their common and ordinary meanings. See, e. g., State, Department of Administration v. Moore, 524 So.2d 704, 707 (Fla. 1st DCA 1988). To have priority, one should have "precedence in time, order, (and) importance" while exclusive means "excluding all others (and) not shared or divided." Webster's New Twentieth Century Dictionary, Unabridged Second Edition (1979). At the same time, because a taxing statute governs this dispute, these terms should be strictly construed against the taxing power. Maas Brothers, Inc., supra. The evidence shows that the data lines are shared by all of FIS's clients as a group of subscribers rather than First Federal alone and that First Federal has no "priority" or "exclusive" use of the data line or mainframe computer over any other subscriber. In addition, all data collection services are controlled by

    FIS rather than the institutions, the sole function of the terminals is to transmit data from the institution to the FIS mainframe, and First Federal is only assured that FIS will collect its data transmissions in a timely manner and nothing more. Given this factual underpinning, it is concluded that First Federal does not have "exclusive or priority use of a communication channel or groups of channels" within the meaning of the law and therefore the services encompassed within the data communications charge do not constitute a private communication service. This conclusion is consistent with the testimony of petitioner's expert who established that after the enactment of the tax in 1984, DOR interpreted the new law to be applicable to those persons selling a private communication service which was otherwise escaping taxation through a "by-pass" of the regulated telephone system. Since FIS has been paying gross receipts and sales taxes on its telephone bills, and has not bypassed the regulated system, the service here was not intended to be subject to the tax in question.

    
    

21. In reaching the above conclusions, the undersigned has considered DOR's contention that because the earlier FIS-First Federal agreements referred to the furnishing by FIS of a "telecommunications" service, this strongly suggests the resale of a telephone line. However, the use of the word "telecommunications" does not subject the service to taxation if it otherwise does not meet the statutory definition of a private communication service. The undersigned has also considered a similar contention by DOR that the provision in the agreements which allows FIS to increase the data communications charge due to potential increased telephone costs provides further evidence that a resale of telephone service has occurred. However, this language simply confirms the right of FIS, when necessary, to pass on one of many cost components that make up the terminal fee. In addition, on those few rare occasions when terminal fees have been raised, there is no relationship between the increase and the telephone tariff rates.

    
    

22. In summary, it is concluded that the communication services in issue here do not constitute a private communication service. Rather, the collection of financial transaction information through the data lines is a part of the tax exempt professional services rendered by FIS as a service bureau and is a non- taxable transaction.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent enter a final order withdrawing (rescinding)

the assessment against petitioner.

DONE AND ENTERED this 5th day of April, 1993, in Tallahassee, Leon County, Florida.

DONALD R. ALEXANDER

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 5th day of April, 1993.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-2763

Petitioner:

1. Partially accepted in finding of fact 1.

2. Partially accepted in findings of fact 2 and 3.

3. Partially accepted in findings of fact 4 and 6. 4-8. Partially accepted in finding of fact 5.

9. Partially accepted in finding of fact 7. 10-12. Partially accepted in finding of fact 9.

1. Rejected as being unnecessary.

2. Partially accepted in finding of fact 10.

15-16. Partially accepted in findings of fact 7 and 10. 17-18. Partially accepted in finding of fact 8.

19-20. Partially accepted in finding of fact 13. 21-23. Partially accepted in finding of fact 14.

24. Partially accepted in finding of fact 16. 25-27. Partially accepted in finding of fact 15.

28. Partially accepted in findings of fact 11 and 12. 29-30. Partially accepted in finding of fact 11.

31-35. Partially accepted in finding of fact 12.

36. Partially accepted in finding of fact 5. 37-39. Partially accepted in finding of fact 18.

1. Rejected as being unnecessary.

2. Partially accepted in finding of fact 17.

3. Partially accepted in findings of fact 3 and 4.

Respondent:

9. Rejected as being contrary to more credible and persuasive evidence.

10-13. Partially accepted in finding of fact 12.

Note - Where a proposed finding has been partially accepted, the remainder has been rejected as being irrelevant, unnecessary, subordinate, not supported by the evidence, or a conclusion of law.

COPIES FURNISHED:

Mr. Larry Fuchs Executive Director Department of Revenue

104 Carlton Building Tallahassee, FL 32399-0100

Linda Lettera, Esquire General Counsel Department of Revenue

204 Carlton Building Tallahassee, FL 32399-0100

Patrick J. Phelan, Jr., Esquire

P. O. Box 669 Tallahassee, FL 32302

Lealand L. McCharen, Esquire Department of Legal Affairs The Capitol-Tax Section Tallahassee, FL 32399-1050

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

ALL PARTIES HAVE THE RIGHT TO SUBMIT TO THE DEPARTMENT OF REVENUE WRITTEN EXCEPTIONS TO THIS RECOMMENDED ORDER. ALL AGENCIES ALLOW EACH PARTY AT LEAST TEN DAYS IN WHICH TO SUBMIT WRITTEN EXCEPTIONS. SOME AGENCIES ALLOW A LARGER PERIOD WITHIN WHICH TO SUBMIT WRITTEN EXCEPTIONS. YOU SHOULD CONSULT WITH THE DEPARTMENT OF REVENUE CONCERNING ITS RULES ON THE DEADLINE FOR FILING EXCEPTIONS TO THIS RECOMMENDED ORDER.

Docket for Case No: 92-002763

Orders for Case No: 92-002763