STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

TERRY ERNST & DONNA ERNST, )

)

Petitioner, )

)

vs. ) CASE NO. 95-0907RU

) DEPARTMENT OF REVENUE, )

)

Respondent. )

)

FINAL ORDER

Pursuant to notice, the Division of Administrative Hearings, by its designated Hearing Officer, Joyous D. Parrish, held a formal hearing in the above-styled case on March 27, 1995, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Jonathan D. Gerber

Marvin A. Kirsner Shutts & Bowen

One Clearlake Centre, Suite 500

250 Australian Avenue

West Palm Beach, Florida 33401

For Respondent: Olivia P. Klein

Charles Catanzaro

Assistant Attorneys General Office of the Attorney General The Capitol-Tax Section Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

Whether the agency has an unpromulgated statement of general applicability that imposed a requirement not specifically required by statute or by an existing rule, and which has been utilized against Petitioners to their detriment.

PRELIMINARY STATEMENT

On February 28, 1995, the Petitioners filed a petition to invalidate agency statements pursuant to Section 120.535, Florida Statutes. Such petition alleged that Petitioners are officers and directors of HUSSH, Inc., a retail women's fashion business located in the Town of Palm Beach. Further, the petition claimed that pursuant to Rule 12A-1.064(1)(b)2., Florida Administrative Code, the Petitioners and their corporation have been audited by the Respondent, and that the agency asserts a tax liability assessment in the amount of $440,620.52 against the taxpayers.

The tax assessment set forth above is the subject of a Section 120.57(1), Florida Statutes, proceeding currently pending before the Division of Administrative Hearings (DOAH case nos. 94-2900 and 94-2901). In the instant case, Petitioners allege that the Respondent has

failed to identify a single statute or rule which describes the documentation required

to qualify for the Interstate Sales Exemption. Furthermore, Respondent has failed to identify a single statute or rule which describes the type of evidence required to prove that a

person has violated the Interstate Sales Exemption.

In essence, the Petitioners claim that the agency is applying an unpromulgated policy to determine that the documentation submitted by Petitioners is inadequate to support a sales tax exemption. And that, as a matter of law, Petitioners are entitled to know what documentation is required to be kept to support the exemption they claim.

The petition set forth the following disputed issues of fact:

1. Whether Petitioners are liable for a

   $440,620.52 penalty assessed against them by Respondent.

2. Whether Petitioners engaged in a scheme to avoid, evade or defeat the collection and payment of the State of Florida sales tax as officers of the Corporate Taxpayer.

3. Whether the Corporate Taxpayer's logs

   of out of state sales were "improperly documented."

4. Whether information exists from "multiple third party sources" that Petitioners "wilfully (sic) promoted a tax avoidance scheme on in store delivered items.

5. Whether a properly adopted statute or rule exists which describes the documentation required to qualify for the Interstate Sales Exemption.

6. Whether a properly adopted statute or rule exists which describes the type of evidence required to prove that a person has violated the Interstate Sales Exemption.

   
   

   The Respondent filed a motion in opposition to the petition to invalidate agency statements on March 16, 1995. Such motion alleged that Section 120.535, Florida Statutes, is inapplicable to this case as a matter of law. More specifically, the Respondent claimed that the agency has promulgated rules in connection with this case, and that such rules comport with the statutory authority afforded the agency. Because the agency has rules which have been promulgated within its statutory authority, the Department maintained, there can be no failure to adopt rules to support a Section 120.535 petition.

   
   

   After affording the parties an opportunity to offer oral argument, motions for summary final order (the Petitioners') and for dismissal of the petition (the Respondent's) were denied by order entered March 23, 1995. The order provided, in pertinent part:

   In this case, Petitioners have misstated the issues to be determined. Factual matters related to the tax assessment dispute are not at issue. The factual issues to be resolved by this case are as follows:

   1. Whether the agency has statements of general applicability not contemplated within the rule, and not promulgated in accordance with Section 120.54, Florida Statutes.

   2. If so, whether such unpromulgated state- ments have been applied to Petitioners.

   3. If so, whether such application has adversely affected Petitioners.

   4. If the foregoing questions are resolved in the affirmative, then whether rulemaking, pursuant to Section 120.54, Florida Statutes, is feasible and practicable must be determined.

Because this case alleges unpromulgated statements, the legal sufficiency of the existing rule is not at issue.

At the formal hearing on March 27, 1995, the parties stipulated to the admissibility of exhibits. Petitioners presented the testimony of Michael Hollander, a certified public accountant. Petitioners' exhibits, marked for identification as Petitioner's 1 through 12, have been received into evidence. Respondent offered the testimony of Peter Steffens, the revenue opportunity research administrator for the Department of Revenue. It sought and official recognition has been taken of the exhibits numbered 1 through 11.

The transcript of the proceeding was filed on April 11, 1995. The parties filed a stipulation for enlargement of time to submit proposed orders which provided the proposals would be due on or before May 1, 1995. Both parties timely filed proposed final orders. Specific rulings on the proposed findings of fact are included in the appendix at the conclusion of this order.

FINDINGS OF FACT

1. On March 24, 1994, the Department of Revenue (Department) issued a Notice of Reconsideration (NOR) that claimed the Petitioners, Terry and Donna Ernst, had willfully failed to collect sales tax. Petitioners' assertion of an exemption in connection with the sales tax assessment was denied.

   
   

2. The NOR provided that the Petitioners are the president and vice- president of Hussh, Inc., a retail apparel store in Palm Beach, Florida and that such company made sales to customers for delivery in the store and for shipment outside of the State of Florida. At issue were the alleged shipments to out of state destinations.

   
   

3. Pertinent to this case is the language in the NOR found at page two which provided:

   
   

   Due to the inadequacy and volume of Hussh's records, the auditor sampled the available records, and assessed Hussh for asserted out

   of state sales that were improperly documented. According to the auditor, many of the sales

   receipts or invoices of asserted out of state shipments were missing the top portion of the invoice. Significantly, this portion of the invoice would contain the names, addresses, and asserted export destination information on

   each sale. Other invoices were stamped, "out of state shipped," but no destination information was present on the invoice. [Emphasis added.]

   
   

4. The Petitioners maintain that the portions of the NOR emphasized in the foregoing paragraph constitute an agency statement of general applicability and is, therefore, an unpromulgated rule.

   
   

5. The Department does not have a rule which lists all documentation which might establish an exemption for sales tax assessment. Similarly, the Department does not have a rule that lists the type of documentation which would be inadequate to establish an exemption for sales taxes.

   
   

6. The Department's existing rule, Rule 12A-1.064, Florida Administrative Code, provides, in part:

   
   

   (1)(a) Sales tax is imposed on the sales price of each item or article of tangible personal property, unless otherwise exempt, when the property is delivered to the purchaser or his representative in this state. However, the tax does not apply to tangible personal

   property irrevocably committed to the exportation process at the time of sale, when such process has been continuous or unbroken.

   (b) Intent of the seller and the purchaser that the property will be exported is not sufficient to establish the exemption; nor does delivery of the property to a point in Florida for subsequent transportation outside Florida necessarily constitute placing the property irrevocably in the exportation process. Tangible personal property shall

   be deemed committed to the exportation process if:

   1. The dealer is required by the terms of the sale contract to deliver the goods outside

      this state using his own mode of transportation. The dealer must retain in his records trip tickets,

      truck log records, or other documentation reflecting the specific items and export destination;

   2. The dealer is required by the terms of the sale contract to deliver the goods to a common carrier for final and certain movement of such property to its out of state destination. Sales by a Florida dealer are exempt when the dealer

   delivers the merchandise to the transportation terminal for shipment outside this state and secures a dock or warehouse receipt and a copy of the bill of lading. On shipments to points outside the United States, a shipper's export declaration shall also be obtained;

   [Emphasis added.]

   
   

7. Rule 12A-1.093, Florida Administrative Code, requires taxpayers to maintain and preserve records. This rule provides, in part:

   
   

   (2) Each dealer defined in Chapter 212, F.S., each licensed wholesaler, and any other person subject to the tax imposed by Chapter 212, F.S., shall keep and preserve a complete record of all transactions, together with invoices, bills of lading, gross receipts from sales, RESALE CERTIFICATES, CONSUMER EXEMPTION CERTIFICATES and other pertinent records and papers as may

   be required by the Department of Revenue for the reasonable administration of Chapter 212, F.S., and such books of account as may be necessary to determine the amount of tax due thereunder.

   
   

8. The terms "bill of lading," "dock or warehouse receipt," and "invoice" are common terms used in the business community. Each connotes that, at the minimum, certain information will be retained on the face of the document. For example, according to Petitioners' witness, the minimum information expected on a bill of lading would be: the name of the person that the item is being shipped to, the item being shipped, the cost of the shipment, and the terms of the shipment with the value of the item being shipped.

   
   

9. Similarly, the minimum information which is expected on an "invoice" would be: a description of the item sold, the amount of the sale, and the name of the person to whom the item was sold.

   
   

10. The terms "bill of lading," "dock or warehouse receipt," and "invoice" are not defined by rule.

    
    

11. The Department determined whether an exemption was documented based upon the results of this audit.

    
    

    CONCLUSIONS OF LAW

    
    

12. The Division of Administrative Hearings has jurisdiction over the parties to, and the subject matter of, these proceedings.

    
    

13. Section 120.535, Florida Statutes, provides, in pertinent part:

    
    

    1. Rulemaking is not a matter of agency discretion. Each agency statement defined

       as a rule under s. 120.52(16) shall be adopted by the rulemaking procedure provided by s.

       120.54 as soon as feasible and practicable. Rulemaking shall be presumed feasible and practicable to the extent provided by this subsection unless one of the factors provided by this subsection is applicable.

       
       

14. Section 120.52(16), Florida Statutes, provides, in part:

    
    

    "Rule" means each agency statement of general applicability that implements, interprets, or prescribes law or policy or describes the organization, procedure, or practice require- ments of an agency and includes any form which imposes any requirement or solicits any infor- mation not specifically required by statute or by an existing rule. The term also includes the amendment or repeal of a rule. The term does not include:

    1. Internal management memoranda which do not affect either the private interests of any person or any plan or procedure important to the public and which have no application outside the agency issuing the memorandum.

    2. Legal memoranda or opinions issued to an agency by the Attorney General or agency

    legal opinions prior to their use in connection with an agency action.

    * * *

    
    

15. Rule 12A-1.064, Florida Administrative Code, outlines when the taxpayer is entitled to an interstate sales exemption. The rule utilizes language which is common in the business community, and which adequately identifies the types of information which can establish the exemption. Petitioners cannot claim ignorance of the meaning of commonly used terms to justify a challenge to the existing rule. In fact, the Petitioners have not challenged the rule.

    
    

16. The Department's explanation of how Petitioners failed to document the exemption claimed is not a statement of general applicability, but is merely an attempt to state the minimum information contemplated by the existing rule.

    
    

17. The Petitioners have not proven that the language complained of has been applied in other circumstances or to other taxpayers or that the terms used in the existing rule are so vague or uncertain that the language constitutes a statement of general applicability to clarify the rule. In terms of the language complained of, only these taxpayers are affected by the NOR. Its attempt to explain why the exemption was not allowed does not necessarily apply to the facts or circumstances of another audit.

    
    

18. In this case, the Petitioners have failed to establish that the language of the Notice of Reconsideration is a statement of general applicability. The statement in the Petitioners' Notice advised them of information that was lacking with regard to the establishment of the exemption. There has been no showing that the agency applies the information given in the notice to all taxpayers or in any manner requires that all taxpayers retain and submit specified information to establish the exemption. The information requested from Petitioners would have aided in the audit process and is within

    the discretion of the agency to request. The existing rules, however, merely require that the dealer "keep and preserve a complete record of all transactions, together with invoices, bills of lading, gross receipts from sales, RESALE CERTIFICATES, CONSUMER EXEMPTION CERTIFICATES and other pertinent records and papers." And, that

    
    

    the terms of the sale contract to deliver the goods to a common carrier for final and certain movement of such property to its out of state destination. Sales by a Florida dealer are exempt when the dealer delivers the merchandise to the transportation terminal for shipment outside this state and secures a dock or ware- house receipt and a copy of the bill of lading.

    
    

19. The taxpayer may, in his discretion, retain the documentation as will show the necessary information. Therefore, the language of the NOR was within the existing rules.

    
    

20. Petitioners' argument also fails because if correct, the Department would face the onerous task of listing and defining all of the types of business records which could be acceptable. Neither the authorizing statutes nor Section 120.535, Florida Statutes, places that burden on the agency. Under the existing rules, taxpayers have the freedom to establish the exemption by the business records they choose. The minimum information which must be retained must establish the item purchased was exported, the dealer is on full notice of the necessary documentation necessary to establish the exemption.

ORDER

Based on the foregoing, it is, hereby, ORDERED:

Petitioners' challenge is hereby dismissed.

DONE AND ENTERED this 16th day of May, 1995, in Tallahassee, Leon County, Florida.

JOYOUS D. PARRISH

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 16th day of May, 1995.

APPENDIX TO FINAL ORDER, CASE NO. 95-0907RU

Rulings on the proposed findings of fact submitted by the Petitioners:

1. Paragraphs 1, 4, 5, 8, 9, 10, and 11 are accepted.

2. Paragraphs 2 and 3 are rejected as contrary to the weight of the credible evidence.

3. Paragraphs 6 and 7 are accepted but are not relevant.

4. Paragraphs 12, 13, 14, 15, 17, and 18 are rejected as irrelevant or argument.

5. Paragraph 16 is rejected as an incomplete statement of fact which in its part is contrary to the weight of all credible evidence. It is not feasible to define all business terms of all business documents which dealers may choose to use to document an exempted transaction. Dealers are given the flexibility to select the documentation as they may choose so long as the information is there to establish the exemption. The terms in the rule are commonly known, everyday terms which persons in the business community use.

Rulings on the proposed findings of fact submitted by the Respondent:

1. Paragraphs 1, 2, 3, 4 (emphasis supplied by party), 5, 6, 7, 9, 10, 11, 12, 13, 18, and 19 are accepted.

2. Paragraph 8 is rejected as argument or conclusion of law.

3. Paragraphs 14 through 17 are rejected as irrelevant to this case.

COPIES FURNISHED:

Jonathan D. Gerber Marvin A. Kirsner Shutts & Bowen

One Clearlake Centre, Suite 500

250 Australian Avenue

West Palm Beach, Florida 33401

Olivia P. Klein Charles Catanzaro

Assistant Attorneys General Office of the Attorney General The Capitol-Tax Section Tallahassee, Florida 32399-1050

Larry Fuchs Executive Director

104 Carlton Building Tallahassee, Florida 32399-0100

Linda Lettera General Counsel

204 Carlton Building Tallahassee, Florida 32399-0100

NOTICE OF RIGHT TO JUDICIAL REVIEW

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 a 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: 95-000907RU

Orders for Case No: 95-000907RU