STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

TROYCORP, INC., d/b/a American ) Advertising Distributors of ) Central Florida, )

)

Petitioner, )

) CASE NO. 93-1365

vs. )

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

A formal hearing was conducted in this proceeding before Daniel Manry, a duly designated Hearing Officer of the Division of Administrative Hearings, on January 5, 1994, in Orlando, Florida.

APPEARANCES

For Petitioner: B. Theodore Troy, President

TROYCORP, INC.

101 Wymore, Suite 224

Altamonte Springs, Florida 32714

For Respondent: Olivia P. Klein, Esquire

Assistant Attorney General Department of Legal Affairs Tax Section, The Capitol

Tallahassee, Florida 32399-1050 STATEMENT OF THE ISSUES

The issues are whether Petitioner is liable for tax imposed on the use of direct mail advertising and, if so, whether any part of the tax, interest, or penalty should be compromised.

PRELIMINARY STATEMENT

Respondent assessed Petitioner for use tax in the amount of $76,035.60, including interest and penalty. Petitioner denied liability, asked that the assessment be compromised, and requested a formal hearing.

At the formal hearing, the parties stipulated to certain facts. Petitioner called two witnesses and submitted one exhibit. Respondent called one witness and submitted 20 exhibits. Testimony, exhibits, and rulings are reported in the transcript of the formal hearing filed on February 25, 1994.

Petitioner did not submit a proposed recommended order ("PRO"). Respondent timely filed its PRO on April 15, 1994. Respondent's proposed findings of fact are accepted in this Recommended Order, except those rejected for the reasons stated in paragraphs 32-38 and 73-82.

FINDINGS OF FACT

1. Stipulated Facts

   
   

   1. Respondent conducted an audit of Petitioner's business records for the period July 1, 1985, through June 30, 1990. Respondent determined a deficiency in sales tax of $174,823.96, including penalty and interest through August 22, 1990.

      
      

   2. Petitioner objected to the deficiency. Respondent reviewed the audit, and made audit changes that are the subject of this proceeding.

      
      

   3. The audit changes determined a deficiency in use tax of $76,035.60, including tax ($47,910.10), penalty ($11,977.68), and interest through March 12, 1991 ($16,147.60). Interest accrues daily in the amount of $15.75.

      
      

   4. A First Revised Notice Of Intent To Make Sales Tax Changes, for the reduced assessment of $76,035.60, was issued on March 21, 1991. A Notice Of Proposed Assessment was issued on July 2, 1991. The Notice Of Proposed Assessment became a Final Assessment on August 31, 1991.

      
      

   5. Respondent made a prima facie showing of the factual and legal basis for the use tax assessment. Section 120.575(2), Florida Statutes. 1/ The audit and assessment are procedurally correct. Tax, interest, and penalty are correctly computed.

      
      

2. Formation

   
   

   1. Petitioner was incorporated in Florida, in January, 1983, by Mr. B. Theodore Troy, president and sole shareholder. Petitioner's principal place of business is 101 Wymore Road, Suite 224, Altamonte Springs, Florida.

      
      

   2. Petitioner conducted business as American Advertising Distributors of Central Florida. Mr. Troy and his wife operated the business until liquidating Petitioner's assets in 1992.

   
   

3. Operation

   
   

   1. Petitioner sold direct mail advertising to Florida businesses. Petitioner operated pursuant to a franchise agreement with American Advertising Distributors, Inc., of Mesa, Arizona ("AAD"). AAD was Petitioner's franchisor until AAD filed for bankruptcy in 1990.

      
      

   2. Petitioner solicited orders from Florida businesses 2/ for advertising coupons designed and printed by AAD in Arizona. AAD mailed the advertising coupons to addressees in Florida who were potential customers for Florida businesses.

   3. Florida businesses placed orders with Petitioner on written contracts, or sales agreements, labeled "advertising orders." AAD was not a party to advertising orders. Advertising orders identified "AAD" as American Advertising Distributors of Central Florida, and were imprinted with the name and address of "AAD" in Central Florida.

      
      

   4. Advertising orders specified the total charges, color and stock of paper, number of addressees, and areas of distribution. Petitioner assisted businesses with rough layout for art work. The rough layout was forwarded to AAD.

      
      

   5. AAD prepared finished art work and sent copies back to Petitioner for approval by Florida businesses. AAD then printed, collated, and mailed advertising coupons to addressees in Florida, without charge to addressees.

      
      

   6. Florida businesses paid non-refundable deposits when placing advertising orders. The remaining balance was paid upon approval of final art work.

      
      

   7. AAD did not submit invoices to Florida businesses. AAD submitted invoices to Petitioner for the amount due from Petitioner. 3/ Petitioner paid AAD 10 days before advertising coupons were mailed.

      
      

   8. Some advertising coupons were produced by Laberge Printers, Inc., in Orlando, Florida ("Laberge"). Coupons from Laberge were designed, printed, and distributed in the same manner as coupons from AAD.

      
      

   9. Two types of advertising coupons were provided by AAD and Laberge. The majority of coupons were distributed in coop mailings, or "bonus express" envelopes, containing coupons for up to 20 businesses. Bonus express envelopes were mailed approximately eight times a year.

      
      

   10. Advertising coupons were also distributed in "solo" mailings. A solo mailing was an individualized, custom printed coupon, or flyer, mailed to individual addressees.

       
       

   11. The total charges stated in advertising orders included the cost of services provided by Petitioner, AAD, and Laberge. Services included typesetting, art work, printing, inserting envelopes, and mailing.

       
       

   12. Florida imposed a tax on services, from July 1, 1987, through December 31, 1987. Petitioner collected and remitted tax imposed on the cost of services included in the total charges stated on advertising orders.

       
       

   13. Except for the services tax, neither Petitioner, AAD, nor Laberge collected and remitted sales or use tax to Florida or to Arizona. Petitioner never utilized resale certificates for any tax other than the tax on services.

   
   

4. Collectibility

   
   

   1. Petitioner was financially able to pay the use tax assessment during 1990 and 1991. No later than August 22, 1990, Mr. Troy knew of the sales tax deficiency of $174,823.96. By March 21, 1991, Mr. Troy knew of the reduced use tax assessment of $76,035.60. During 1990 and 1991, Petitioner made discretionary payments to Mr. Troy of $110,389.

   2. Petitioner reported federal taxable income of $58,279 in 1990 and 1991. 4/ In arriving at taxable income, Petitioner deducted payments to Mr. Troy of

      $59,430 for compensation to officers, management fees, and salary. 5/ From taxable income of $58,279, Petitioner paid approximately $50,959 to Mr. Troy in nondeductible shareholder loans. 6/ Discretionary payments of $110,389, 7/ made to Mr. Troy in 1990 and 1991, were more than adequate to pay the use tax assessment of $76,036.60.

      
      

   3. At the end of 1991, Petitioner reported fixed assets with a book value of $14,933, a customer list valued at $104,447.72, and retained earnings of

   $102,605. The book value of intangible assets was $82,943, comprised primarily of the franchise, valued at $35,000, and goodwill of $45,000.

   
   

5. Termination Of Operations But Continued Existence

   
   

   1. AAD petitioned for bankruptcy in 1990. Petitioner subsequently determined that its franchise and goodwill were worthless. In 1992, Petitioner reported a loss of $99,726 for federal tax purposes.

      
      

   2. All of Petitioner's assets, including its customer lists, were sold or transferred for $1,330 to Florida Mail, Inc. ("Florida Mail"). Florida Mail is a Florida corporation wholly owned by Mr. Troy. Florida Mail sells direct mail advertising; and shares Petitioner's principal place of business. Since 1992, Petitioner has been a shell corporation with $579 in assets.

      
      

      CONCLUSIONS OF LAW

      
      

   3. The Division of Administrative Hearings has jurisdiction over the subject matter and parties to this proceeding. Section 120.57(1). The parties were duly noticed for the formal hearing.

      
      

   4. Petitioner has the burden of proof in this proceeding. Pursuant to the stipulation of the parties, the assessment is presumed correct. Section 120.575(2). Petitioner must show by a preponderance of evidence that Respondent departed from the requirements of law or that the assessment was not supported by any reasonable hypothesis of legality. Cf. Straughn v. Tuck, 354 So.2d 368,

   371 (Fla. 1978)(involving property tax assessments under Chapter 193); Harris

   v. State, Department of Revenue, 563 So.2d 97, 99 (Fla. 1st DCA 1990)(citing Straughn for assessments under Chapter 212).

   
   

6. Tangible Personal Property

   
   

   1. Section 212.06(1)(a) imposes a tax, at the rate of six percent, on the use of tangible personal property in Florida (the "use tax"). Tangible personal property is personal property which may be seen, weighed, measured, or touched in any manner. Section 212.02(20). Advertising coupons printed by AAD and Laberge were tangible personal property. Section 212.02(20).

      
      

   2. Use of tangible personal property that is produced, fabricated, processed, or printed ("printed") is taxable. Florida Administrative Code Rule 12A-1.024(1). 8/ Advertising coupons printed by AAD and Laberge were tangible personal property subject to use tax. Section 212.06(1)(a); Rule 12A-1.024(1).

7. Property Printed In Arizona And Used In Florida

   
   

   1. Section 212.06(8) imposes tax on the use of tangible personal property that is:

      
      

      . . . imported or caused to be imported into this state for use, consumption, [or] distribution . . . in this state

      . . . . (emphasis supplied)

      
      

      The term "use" includes the use of:

      
      

      . . . all tangible advertising materials imported or caused to be imported into this state. Tangible advertising material includes displays, display containers, brochures, catalogs, price lists,

      point-of-sale advertising, and technical manuals or any tangible personal property which does not accompany the product to the ultimate consumer.

      
      

      Section 212.02(15)(b).

      
      

   2. Advertising coupons printed by AAD in Arizona were used in Florida within the meaning of Section 212.02(15)(b). That use was subject to tax pursuant to Sections 212.06(1)(a) and (8).

      
      

      1. User

         
         

   3. Respondent proposes that Petitioner was the ultimate user of advertising coupons. Respondent argues that Petitioner "purchased" the advertising coupons from AAD, pursuant to the terms of the franchise agreement, and was separately invoiced by AAD. Respondent recognizes the form of the legal agreements between Petitioner and AAD but disregards the economic substance of the underlying business transactions. Cf. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079 (1977)(the effect of a state tax is determined by economic substance, rather than legal formalism, because legal formalism has "no relationship to economic realities").

      
      

   4. Even if Petitioner was a purchaser under contract law, Petitioner did not use advertising coupons for purposes of the use tax. The term "use" means the exercise of a right or power incident to an ownership or other interest in tangible personal property. Section 212.02(21). Petitioner had no economic or legal interest in the coupons except for resale to Florida businesses. Compare, Section 212.02(15)(a)(defining a "retail sale" to exclude a sale made to one who purchases for resale).

      
      

   5. Petitioner did not exercise any independent power or control over advertising coupons. Petitioner did not determine the type or quantity of coupons, direct their distribution, or otherwise enjoy the benefits and burdens of the use of advertising coupons in Florida.

   6. Florida businesses exercised the right or power contemplated in Section 212.02(21). They prescribed the design and printing of advertising coupons, the type of mailing, and the distribution. Florida businesses enjoyed the benefit of the use of advertising coupons in Florida. The business purpose for their use was to increase sales for Florida businesses.

      
      

   7. Florida businesses purchased advertising coupons for purposes of the use tax. Payment for the advertising coupons was collected from Florida businesses before advertising coupons were mailed. The funds for Petitioner's payments to AAD came from Florida businesses. AAD was paid before the coupons were mailed.

      
      

   8. In D.H. Holmes Company, Ltd. v. McNamara, 486 U.S. 24, 108 S.Ct. 1619 (1988), Louisiana properly imposed use tax on an instate corporation that contracted with companies outside the state to design and print catalogues and mail them to addressees in Louisiana. The contention that the Louisiana company did not use catalogues delivered to Louisiana addressees was characterized by the Court as verging on "nonsensical." D.H. Holmes, 486 U.S. at 31, 108 S.Ct. at 1624.

      
      

   9. The economic burden of the use tax is imposed on purchasers. Section 212.07(2) requires use tax to be added to the purchase price and separately stated in the total charges shown on advertising orders. The tax due is a debt owed by Florida businesses to the dealer and to the state. Sections 212.07(2), (9); Rule 12A-1.091(13).

      
      

      1. Dealer

         
         

   10. A "dealer" is defined for use tax purposes to include "every" individual or corporation ("person") who imports tangible personal property from another state for use in this state. A dealer is also "every person" who causes tangible personal property to be imported from another state for use in this state. Sections 212.02(13) and 212.06(2)(b).

       
       

   11. Petitioner's business activities in Florida caused advertising coupons to be imported from Arizona for use in Florida within the meaning of Section 212.06(2)(b). Petitioner solicited orders for advertising coupons, assisted purchasers in choosing the type of mailing, color and stock of paper, number of addressees, area of distribution, and rough layout for artwork. Petitioner signed customers to sales agreements, collected payment for itself and AAD, and paid the printer in Arizona.

       
       

   12. It is unnecessary to determine if AAD's business activities in Arizona also caused advertising coupons to be imported for use in Florida. The definition of a dealer in Section 212.06(2)(b) does not require Petitioner to be the exclusive cause of importation but includes "every person" who causes advertising coupons to be imported from Arizona for use in Florida. Petitioner is a dealer within the meaning of Section 212.06(2)(b).

       
       

   13. A "dealer" is also defined for use tax purposes to include any person who sells tangible personal property in Florida and can not prove that the applicable tax has been paid. Section 212.06(2)(d). Petitioner sold advertising coupons in Florida pursuant to sales agreements. AAD was not a party to those sales agreements. Sales agreements were executed in Florida, and the advertising coupons were delivered in Florida.

   14. Petitioner did not collect and remit sales tax on sales of advertising coupons in Florida. The use tax applies to sales of tangible personal property in Florida when applicable sales tax is not collected and remitted by the seller. Gore Newspaper Company v. Department Of Revenue, 398 So.2d 945, 946 (Fla. 4th DCA 1981). Florida purchasers did not pay applicable use tax. Petitioner is a dealer for purposes of the use tax. Section 212.06(2)(d).

       
       

   15. Even if sales of advertising coupons are deemed to have occurred in Arizona, Petitioner is a representative or solicitor for an out-of-state principal who refused to register as a dealer in Florida. 9/ As a representative or solicitor, Petitioner is a dealer for purposes of the use tax. Section 212.06(2)(h).

       
       

       1. Dealer Liability

          
          

   16. Section 212.07(2) requires a dealer to collect and remit sales and use taxes. See also, Sections 212.05(2), 212.06(3) and (4). A dealer who fails to collect and remit use tax must pay the tax to the state. Sections 212.07(2) and (3).

       
       

   17. The sole burden on Petitioner is the administrative burden of collecting and remitting the applicable tax. Cf. National Geographic Society v. California Board Of Equalization, 430 U.S. 551, 558, 97 S.Ct. 1386, 1391 (1977)(concerning an out-of-state dealer). Petitioner becomes liable for use tax by failing or refusing to collect it from resident purchasers. Id.

       
       

   18. While the economic burden of the use tax is imposed on purchasers, the administrative burden of collecting and remitting the tax is placed on dealers. Compliance with that administrative burden is enforced by making non-complying dealers liable for unpaid tax. Sections 212.07(2) and (3).

       
       

       1. Commerce Clause

       
       

   19. Petitioner challenges the constitutionality of applicable statutes in Chapter 212. The undersigned has no jurisdiction to determine that a statute is unconstitutional. However, the undersigned is required to construe applicable statutes in a manner that effectuates their legislative intent and, whenever possible, preserves their constitutionality. Cf. Myers v. Hawkins, 362 So.2d 926, 930 (Fla. 1978); State v. McDonald, 357 So.2d 405, 407 (Fla. 1978); Novo v. Scott, 438 So.2d 477, 478 (Fla. 3d DCA 1983)(a statute should be construed in a manner that effectuates legislative intent, and all doubts should be resolved in favor of its constitutionality).

       
       

       7.04(a) Economic Substance, Legal Form, And Tax Reporting

       
       

   20. The commerce clause prohibits a state from discriminating against interstate commerce but does not relieve persons engaged in interstate commerce from their just share of a state's tax burden. U.S. Constitution, Article I, Section 8, Clause 3; D.H. Holmes, 486 U.S. at 31; 108 S.Ct. at 1623. The issue of whether a state tax unlawfully discriminates against interstate commerce is determined by economic reality, or economic substance, rather than by legal formalism. Complete Auto Transit, 430 U.S. at 279-289, 97 S.Ct. at 1079-1084.

       
       

   21. Unlike the taxpayer in D.H. Holmes, Florida businesses that used advertising coupons in Florida contracted with an instate company. However, economic reality reveals that Petitioner had neither the economic nor technical capability to design, print, and deliver advertising coupons. 10/

   22. Petitioner denies dealer status as a seller in Florida, as defined in Section 212.06(2)(d). Petitioner disregards the legal form of its separate corporate existence and its separate contracts with Florida businesses. Petitioner treats itself and AAD, in economic substance, as acting in the capacity of a single integrated business unit within the meaning of Section 212.02(13). Petitioner treats its sales in Florida, in economic substance, as occurring in Arizona in an integrated transaction between Florida businesses and AAD.

       
       

   23. Arguably, Florida could not have compelled AAD to collect and remit use tax if advertising coupons were sold by AAD in Arizona and AAD's only activity in Florida was by mail. See, e.g., National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753, 87 S.Ct. 1389 (1967). But see, Section 212.0596 (taxing mail order sales). In Bellas Hess, Illinois was unable to compel an out-of-state company to collect and remit use tax on goods mailed to Illinois residents. The out-of-state company had no office, representatives, or solicitors in Illinois, and the only contact with Illinois residents was by mail. Bellas Hess, 386 U.S. at 758, 87 S.Ct. at 1392.

       
       

   24. Petitioner denies that AAD had any contact with Florida residents except by mail. Petitioner treats itself and AAD as separate business units; not as a single integrated business unit. Petitioner disregards economic substance and relies on the legal form of Petitioner's separate corporate existence and its separate contracts with Florida businesses.

       
       

   25. Petitioner also denies dealer status as a representative or solicitor for AAD within the meaning of Section 212.06(2)(h). Petitioner again disregards economic substance and relies on the legal form of its separate corporate existence and its separate contracts with Florida businesses.

       
       

   26. Petitioner's tax reporting position, at best, is inconsistent. Petitioner relies on economic substance to disregard the legal form of its business activities in Florida and invoke the aegis of Bellas Hess. Petitioner then relies on legal form to deny that Petitioner, in economic substance, was a representative or solicitor for an unregistered out-state-principal. Petitioner would both eat its cake and have it. 11/

       
       

   27. Petitioner's solicitation of orders for advertising coupons is analogous to the solicitation of orders in Scripto, Inc. v. Carson, 362 U.S. 207, 80 S.Ct. 619, (1960). In Scripto, a Georgia company shipped mechanical advertising instruments directly to Florida residents. The company's only business activity in Florida consisted of the solicitation of orders by independent contractors, wholesalers, jobbers, or salesmen. The Court held that Florida could compel the Georgia company to collect and remit use tax under Section 212.06. Scripto, 362 U.S. at 212-213, 80 S.Ct. at 622-623.

       
       

   28. The holding in Scripto is not obviated by the form in which an independent contractor or salesman conducts the business of soliciting orders. Petitioner does not avoid Scripto by soliciting orders as a corporation pursuant to a franchise agreement; rather than as an individual pursuant to an independent contract or employment agreement.

   29. Whether Petitioner determines its tax liability on the basis of economic substance or legal form, Petitioner is either: a representative or solicitor for an unregistered out-of-state principal; or a separate Florida corporation that sold advertising coupons in Florida. Sections 212.06(2)(d) and (h). As either dealer, Petitioner is liable for use tax it failed to collect and remit to Florida. 12/

       
       

       7.04(b) Fairly Related

       
       

   30. A tax reporting position based on inconsistent applications of substance and form does not reflect the economic reality of business activities for state tax purposes. Nor is such a tax reporting position fairly related to benefits Florida provided for Petitioner's business activities in the state. Complete Auto Transit, 430 U.S. at 279, 97 S.Ct. at 1079. 13/

       
       

   31. In Complete Auto Transit, a Mississippi sales tax required motor carriers to collect and remit tax on automobiles manufactured outside of Mississippi but delivered by motor carrier to purchasers inside the state. The Court upheld the Mississippi sales tax, in part, because the motor carrier failed to show the tax was not fairly related to benefits provided to the carrier by the taxing state. Complete Auto Transit, 430 U.S. at 277, 97 S.Ct. at 1078.

       
       

   32. Florida bestowed powers, privileges, and benefits that enabled Petitioner to conduct business activities in the state, own and transfer property, secure sales agreements, collect payment, and seek redress in Florida courts. Florida is justified in asking a fair and reasonable return for the powers, privileges, and benefits it provides. Complete Auto Transit, 430 U.S. at 287, 97 S.Ct. at 1083 (quoting from Colonial Pipeline Co. v. Traigle, 421 U.S. 100, 113-114, 95 S.Ct. 1538, 1546 (1975)). See, D.H. Holmes, 486 U.S. at 32, 108 S.Ct. at 1624 (a state provides fire and police protection, public roads, and other services that benefit the company and its customers).

       
       

       7.04(c) Nexus

       
       

   33. In Bellas Hess and Scripto the Court determined whether adequate nexus existed between the business activities of an out-of-state company and a taxing state to compel the company to collect and remit use tax. 14/ In National Geographic, California required an out-of-state magazine publisher to collect and remit use tax on advertising that was printed outside the state, purchased by California businesses, and mailed to addressees in California. The printer's only business activity in the taxing state was the solicitation and sale of advertising by employees in two offices. The Court found that there was adequate nexus to require the printer to collect use tax from California businesses. The Court held that the out-of-state dealer:

       
       

       . . . becomes liable for the tax only by failing or refusing to collect the tax from [the] resident consumer. Thus, the sole burden imposed upon the out-of-state seller

       . . . is the administrative one of collecting it. . . .

       
       

       National Geographic, 430 U.S. at 558, 97 S.Ct. at 1391.

   34. The holding in National Geographic is even more compelling for an instate company that qualifies as a dealer and fails to collect and remit use tax. Petitioner was organized under Florida law and carried on its business activities entirely in Florida. Petitioner's business activities had independent economic significance for Petitioner and for Florida. Cf. National Geographic, 430 U.S. at 558, 97 S.Ct. at 1391(concerning the business activities of an out-of-state dealer).

       
       

   35. The purpose of the commerce clause is not to relieve those engaged in interstate commerce from their just share of a state's tax burden. Complete Auto Transit, 430 U.S. at 288, 97 S.Ct. at 1083. Accordingly, a taxpayer engaged in both intrastate and interstate commerce is subject to tax on the privilege of carrying on its business activities in the taxing state. Complete Auto Transit, 430 U.S. at 283, 97 S.Ct. at 1081. See also, Sections 212.05 (introductory paragraph) and 212.06(1)(a)(Florida imposes tax on the exercise of the privilege of selling or using tangible personal property).

       
       

   36. Even if advertising coupons were ordered directly from AAD, sold in Arizona, and Petitioner was not a representative or solicitor for AAD, the use of advertising coupons in Florida is subject to use tax. Rule 12A-1.091(2)(a) imposes use tax on the use in this state of:

       
       

       . . . tangible personal property purchased outside Florida which would have been subject to the sales tax if purchased from a Florida dealer. . . .

       
       

       Sales for the printing of tangible personal property are subject to sales tax in Florida. Rule 12A-1.027(1).

       
       

   37. Petitioner's business activities in Florida caused advertising coupons, arguably sold in Arizona, to be imported from Arizona for use in Florida. Petitioner is an instate dealer within the meaning of Section 212.06(2)(b). Petitioner failed to collect and remit use tax from Florida businesses. Petitioner is liable for the unpaid tax. Sections 212.07(2) and (3). Cf. National Geographic, 430 U.S. at 558, 97 S.Ct. at 1391 (compelling an out-of- state dealer to collect and remit tax.)

   
   

8. Property Printed Inside Florida

   
   

   1. Section 212.05(1)(a) imposes a tax, at the rate of six percent, on the sale of tangible personal property in Florida (the "sales tax"). The printing of tangible personal property is subject to sales tax. Rules 12A-1.024(1) and 12A-1.027(1).

      
      

   2. The use tax applies to sales of tangible personal property in Florida when the purchaser can not prove that sales tax was collected and remitted by the seller. Gore Newspaper Company, 398 So.2d at 946. Neither Petitioner nor Laberge collected and remitted tax on advertising coupons printed in Florida. Florida businesses did not pay use tax on advertising coupons printed in Florida (other than the services tax). As a dealer, Petitioner is liable for use tax that it failed to collect from Florida businesses. Respondent may assess any of the dealers that Florida law makes liable for unpaid use tax.

9. Tax Base

   
   

   1. Use tax is imposed on the cost price of each item of tangible personal property without deduction for the cost of labor, service, transportation, or similar services. Sections 212.02(4) and 212.06(1)(a). The total charges stated in advertising orders included the cost of services provided by Petitioner, AAD, and Laberge. The cost of those services was properly included in the applicable tax base.

      
      

   2. Giving advertising coupons to addressees free of charge does not avoid use tax. See, e.g., D.H. Holmes, 486 U.S. at 26, 108 S.Ct. at 1621; United States Gypsum Company v. Green, 110 So.2d 409, 412 (Fla. 1959). Use tax is imposed on the use of advertising coupons by Florida businesses. Petitioner is liable as a dealer for the unpaid tax.

   
   

10. Exemptions

    
    

    71. The advertising coupons printed in Arizona and Florida are not exempt from use tax under any of the exemptions in Section 212.08, including the exemption in Section 212.08(7)(w) for newspapers, shoppers, and community newspapers. Furthermore, the coupons are not promotional materials for the sale or subscription of publications imported into the state for later export. Section 212.06(11). A tax equal to or greater than the Florida use tax was not paid in another state. Section 212.06(7). The advertising coupons were not religious materials within the meaning of Section 212.06(9). Finally, the advertising coupons were not sold to a nonresident print purchaser within the meaning of Section 212.06(5)(c).

    
    

11. Compromise

1. Taxes And Interest

   
   

   1. Section 213.21(3) provides that Petitioner's liability for taxes and interest:

      
      

      . . . may be compromised . . . upon the grounds of doubt as to liability for or collectibility of such tax or interest.

      
      

      There is no doubt as to Petitioner's liability for use tax and interest. Petitioner was financially capable of paying tax and interest at the time it was assessed.

      
      

2. Penalty

1. Section 213.21(3) provides that Petitioner's liability for penalties:

   
   

   . . . may be settled or compromised if it is determined . . . that the noncompliance is due to reasonable cause and not to willful negligence, willful neglect, or fraud. . . .

   
   

2. The issue of whether a state can tax interstate commerce within its borders is a frequent source of conflict and dilemma. D.H. Holmes, 486 U.S. at 30, 108 S.Ct. at 1623. It is no less a source of conflict and dilemma in this proceeding.

3. In form, Florida's use tax is imposed on the use of advertising coupons in Florida. In substance, however, the use tax burdens interstate commerce.

   
   

4. Florida does not apportion use tax to avoid discrimination against interstate commerce. Florida provides a credit for tax paid in another state up to the amount of the Florida tax. Section 212.06(7); Cf. D.H. Holmes, 486 U.S. at 32, 108 S.Ct. at 1624(approving a similar credit system in Louisiana). 15/

   
   

5. Petitioner's tax reporting position, in effect, apportions use taxes. Petitioner and AAD are treated as a single integrated business unit. Section 212.02(13). The cost price of advertising coupons is apportioned entirely to goods and services provided in Arizona and no use tax is collected in Florida.

   
   

6. The apportionment of use taxes in Florida has precedent in the services tax. An apportionment formula was formerly applied to determine what portion of a service purchased outside of Florida, by a member of an affiliated group, or by a multi-state business, was used inside the state. See, Sections 212.059(1)(b), (2), 212.0591(9)(b)4., 212.02(2) and (17) (1987).

   
   

7. Mr. Troy believed that the cost price for advertising coupons was attributable entirely to services. Petitioner did not collect and remit tax before or after the services tax. Similarly, Mr. Troy did not believe that Petitioner was liable for tax that Laberge was required to collect and remit on advertising coupons printed in Florida.

   
   

8. Petitioner's tax reporting position is consistent with its business practice. Except for the services tax, Petitioner never collected and remitted tax. Even Petitioner's payments to Mr. Troy in 1990 and 1991 reflect Mr. Troy's good faith belief that Petitioner had no tax liability other than the services tax.

   
   

9. The error in Petitioner's tax reporting position is due to the conflict and dilemma inherent in state taxation of interstate commerce. See, e.g., D.H. Holmes, 486 U.S. at 30. It is not due to willful negligence or fraud. Section 213.21(3).

   
   

10. However misguided Mr. Troy may have been, he was not guided by willful negligence or fraud. Section 213.21(3). His testimony was credible and persuasive. It was consistent with Petitioner's long standing business practice and tax reporting position. Conversely, Respondent presented no evidence that Petitioner's noncompliance was willful or fraudulent.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Respondent enter a Final Order upholding the assessment of

tax and interest and waive all of the penalty included in the assessment.

DONE AND ENTERED in Tallahassee, Leon County, Florida, this 2nd day of June, 1994.

DANIEL MANRY

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 2nd day of June, 1994.

ENDNOTES

1/ All section and chapter references are to Florida Statutes (1993) unless otherwise stated.

2/ Petitioner's exclusive marketing territory under the franchise agreement was restricted to counties in the central Florida area including Orange, Seminole, Osceola, and Volusia counties. See, Respondent's Exhibit 3, Franchise Agreement, Schedule A, Exclusive Marketing Territory. See also, Respondent's Exhibit 2, Agreement For Purchase And Sale Of Franchise.

3/ Invoices were mailed to "AAD Of Central Florida" and Mr. Troy at Petitioner's address. They were prepared by AAD and imprinted with the name and address of AAD in Arizona. Throughout the tax audit period, Petitioner paid royalty fees to AAD and fees for finished art work, printing, mailing, and postage. Petitioner never paid sales or use taxes to AAD.

4/ Taxable income reported on form 1120, for federal tax purposes, was $31,232 in 1991 and $27,047 in 1990.

5/ On form 1120, Petitioner deducted: $19,249 as compensation to officers in 1991 and $4,656 in 1990; management fees of $6,500 in 1991 and $8,000 in 1990; and salary to Mr. Troy and his wife of $10,200 in 1991 and $10,825 in 1990.

6/ Loan payments of $50,959 were part of $168,156 paid to Mr. Troy in connection with various shareholder loans between January, 1986, and December 31, 1991. From 1983 through December, 1985, Mr. Troy loaned Petitioner approximately $127,000. By December 31, 1989, the balance due Mr. Troy had been reduced to $9,803. On December 31, 1990, the remaining loan balance of $9,803 had been paid off, and Mr. Troy owed Petitioner $14,705. By December 31, 1991, Mr. Troy owed Petitioner $41,156 in shareholder loans. At the end of 1992, Petitioner eliminated Mr. Troy's loan obligation by converting it to an item of deferred compensation.

7/ The aggregate amount of $110,389 is comprised of loan payments ($50,959), compensation to officers ($23,905), management fees ($14,500), and salary ($21,025).

8/ All references to rules are to rules published in the Florida Administrative Code on the date this Recommended Order is entered.

9/ A franchise is a license from the owner of a trademark or trade name permitting another to sell a product or service under that trademark or trade name. The franchisee typically must conduct its business in accordance with methods and procedures prescribed by the franchisor. See, Black's Law Dictionary Fifth Edition (West 1979), at 592.

10/ Petitioner had fixed assets of $14,933 and was owned by one shareholder who operated the business with the help of his wife. The franchise agreement states that one of the purposes for entering into the agreement is that the franchisor has the capability of designing, printing, and mailing the coupons. See, Respondent's Exhibit 3, Franchise Agreement, Recitals and para. 5.1.

11/ "Would ye both eat your cake and have your cake?" J. Heywood, Proverbs (1546); "Wouldst thou both eat thy cake and have it?" G. Herbert, The Size (1633). See, J. Bartlett, Familiar Quotations at 185b (14th ed. 1968).

12/ "To do two things at once is to do neither." Publiliu Syrus, Maxim 7 (1st Cent. B.C.). See, J. Bartlett, Familiar Quotations at 125a (14th ed. 1968).

Petitioner's attempt to determine its tax liability by applying two conflicting standards at once does not make Petitioner "neither dealer." Petitioner is "either dealer." Petitioner is not "neither dealer."

13/ The "fairly related" requirement is one element in a four part test formulated in Complete Auto Transit. First, the activities of an out-of-state company must have a substantial nexus with the taxing state. In addition, the tax must be fairly apportioned, must not discriminate against interstate commerce, and must be fairly related to benefits provided by the state.

Complete Auto Transit, 430 U.S. at 279, 97 S.Ct. at 1079.

14/ The requirement for nexus between the business activities of a company and a state seeking to tax the sale or use of goods within its borders is one requirement in the four part test formulated in Complete Auto Transit, 430 U.S.

274. It is unnecessary to determine whether solicitation of orders for advertising coupons by an instate franchisee, such as Petitioner, establishes an adequate nexus for Respondent to compel Petitioner's out-of-state franchisor to collect use tax on purchases inside Florida. Respondent is not compelling Petitioner's out-of-state franchisor to collect and remit use tax. Respondent is compelling Petitioner, an instate corporation, to collect and remit use tax on advertising coupons that Petitioner caused to be imported into Florida within the meaning of Section 212.06(2)(b).

15/ A state tax can burden interstate commerce if the tax is fairly apportioned and does not otherwise discriminate against interstate commerce. Complete Auto Transit, 430 U.S. at 279, 97 S.Ct. at 1079.

COPIES FURNISHED:

Linda Lettera, Esquire General Counsel Department of Revenue

104 Carlton Building Tallahassee, FL 32399-0100

Larry Fuchs, Executive Director Department of Revenue

104 Carlton Building Tallahassee, FL 32399-0100

Olivia P. Klein, Esquire Asst. Attorney General Dept. of Legal Affairs The Capitol-Tax Section

Tallahassee, FL 32399-1050

Theodore Troy, President TROYCORP, Inc.

101 Wymore, Ste . 224 Altamonte Springs, FL 32714

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 93-001365

Orders for Case No: 93-001365