STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

JOSEPH DELVECCHIO d/b/a MONTEREY ) GLASS AND MIRROR DISTRIBUTORS )

)

Petitioner, )

)

vs. ) CASE NO. 95-1450

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

An administrative hearing was conducted in this proceeding on November 7, 1996, in Fort Pierce, Florida, before Daniel Manry, Administrative Law Judge, Division of Administrative Hearings.

APPEARANCES

For Petitioner: Eugene Nail, Qualified Representative Post Office Box 442

Port Salerno, Florida 34992

For Respondent: Olivia P. Klein

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

STATEMENT OF THE ISSUE

The issue for determination is whether Petitioner owes sales tax of $15,230.15 plus interest from October 15, 1993.

PRELIMINARY STATEMENT

On January 20, 1995, Respondent issued a Notice of Decision sustaining an assessment of $15,230.15 in taxes, interest, and

penalties. Petitioner timely requested an administrative hearing.

At the hearing, Petitioner testified in his own behalf and submitted no exhibits for admission in evidence. Respondent presented the testimony of three witnesses and submitted eight exhibits for admission in evidence.

The identity of the witnesses and exhibits, and the rulings regarding each, are set forth in the transcript of the formal hearing filed on December 4, 1996. Petitioner timely filed his proposed recommended order ("PRO") on January 27, 1997 Respondent timely filed its PRO on January 24, 1997.

FINDINGS OF FACT

1. Petitioner is a sole proprietorship organized in this state and doing business at 851 Monterey Road, Stuart, Florida. Respondent is the governmental agency responsible for administering the state sales tax in accordance with Chapter 212, Florida Statutes.1

2. In 1992, other businesses located at Petitioner's address reported to Respondent that they paid rent to Petitioner.

   However, Petitioner did not collect and remit sales tax on the rental income and was not registered as a dealer.

3. On February 3, 1992, Respondent mailed a Notice of Intent to Audit Petitioner's books and records ("Notice of Intent to Audit") for the tax period February 1, 1987, through January 31, 1992. The Notice of Intent to Audit included a detailed list of the books and records needed for Respondent to conduct a

   detailed audit. The Notice also requested that Petitioner provide Respondent with a date on which it would be convenient to begin the audit.

4. On February 11, 1992, Respondent had not heard from Petitioner. The auditor contacted Petitioner to schedule a date on which the audit could begin. At that time, Petitioner stated that he would not provide the auditor with any books and records.

5. Petitioner refused to make available the books and records for 1990 through 1992 because Petitioner incorrectly suspected that Respondent maintained a secret "blacklist." Petitioner based his suspicion, in part, on the fact that he had refused to respond to a questionnaire Respondent had mailed to taxpayers throughout the state prior to the Notice of Intent to Audit.

6. Petitioner also based his suspicion on the erroneous assumption that Respondent's audit was part of a criminal investigation by the Internal Revenue Service ("IRS") into Petitioner's federal taxes for 1987 and 1988. Petitioner refused to make available the books and records for 1987 through 1989 because those records were in the possession of the IRS.

7. Petitioner maintained that the proposed audit was illegal. Respondent sent Petitioner copies of its statutory authority to audit Petitioner and made numerous attempts to arrange a mutually convenient time to begin the audit. Respondent did not commence the audit until March 10, 1993.

8. On March 10, 1993, the auditor and audit group

   supervisor met with Petitioner and Mr. Eugene Nail, Petitioner's paralegal. Petitioner stated that he did not have the books and records Respondent needed to conduct a detailed audit because the IRS had confiscated them in connection with the pending criminal case.

9. Respondent conducted the audit using the information Petitioner made available to the auditor. Petitioner made available: sales invoices for 1990 and 1991 and one month in 1992 grouped together by calendar month; sales and use tax return booklets; resale and exemption certificates; and commercial lease agreements. No journals and ledgers were available.

10. Respondent determined Petitioner's tax deficiency by sampling the available information. Pursuant to Petitioner's request, the auditor used a six month sample period.

11. The auditor explained to Petitioner that she would use Petitioner's invoices during the sample period to determine tax- exempt sales. She compared the invoices to resale certificates and calculated an error ratio based on discrepancies between the sales invoices and the resale certificates.

12. Respondent determined the actual deficiency in sales tax during the six month sample period based on actual invoices that did not have a resale certificate and for which no sales tax was remitted. Respondent estimated the additional deficiency in sales tax by applying the error ratio to the balance of the audit period. Respondent examined only those invoices provided by Petitioner and previous sales tax returns filed by Petitioner.

13. On April 9, 1993, the auditor conducted a meeting with Petitioner and discussed the audit procedures, results, applicable law, and abatement rules. On June 15, 1993, Respondent issued a Notice of Intent to Make Sales and Use Tax Changes in the amount of $45,469.05 ("Notice of Intent"). The Notice of Intent included a copy of all audit exhibits and workpapers.

14. On August 30, 1993, Petitioner provided additional invoices to Respondent in a meeting with the auditor and audit group supervisor. On October 15, 1993, the auditor adjusted certain items in the audit file, reduced the proposed assessment,

    and issued a Revised Notice of Intent to Make Sales and Use Tax Changes in the amount of $37,417.45 ("Revised Notice of Intent").

15. Petitioner requested additional time to provide more information, including additional resale certificates. However, Petitioner failed to provide the additional information.

16. By letter dated December 9, 1993, the audit group supervisor notified Petitioner that she was closing the case and sending it to the Tallahassee office as a contested case. On December 23, 1993, Respondent issued a Notice of Proposed Assessment to Petitioner assessing Petitioner for $37,417.45 in tax, penalty, and interest through October 15, 1993.

17. On February 21, 1994, Respondent received Petitioner's written protest dated February 10, 1994. Respondent revised the audit figures again. On January 20, 1995, Respondent issued its

    Notice of Decision reducing the assessment against Petitioner to

    $15,230.15.

18. The Notice of Decision assessed Petitioner for taxes of

$8,900.55, penalties of $2,225.14, and interest of $4,104.46 through October 15, 1993. Interest accrues at the per diem rate of $2.93 until paid. On March 16, 1995, Petitioner timely appealed the Notice of Decision by filing a Petition for Formal Hearing with Respondent.

1. Inadequate Records

   1. Petitioner failed to maintain adequate books and records within the meaning of Sections 212.12(6), 212.13(2), 212.35, and Florida Administrative Code Rules 12A-1.093(2) and (5).2 Petitioner failed to maintain adequate books and records for the five year audit period prescribed in Section 213.34(2).

   2. Petitioner failed to maintain general ledgers and journals for the five year audit period. The only records Petitioner maintained were sales invoices for 1990 and 1991 and one month in 1992.

   3. Petitioner was unable to produce adequate records for 1987 through 1989. Petitioner asserted that the IRS had those records and that Petitioner could not obtain the records required by Florida law.

   4. The federal tax case has been pending against Petitioner since 1990.3 During those seven years, Petitioner was unable to obtain copies of any records in the possession of the IRS.

   5. The journals and ledgers for 1987 and 1988 were maintained on computer floppy disks. Petitioner asserts that the floppy disks were lost.

   6. Petitioner asserts that his attorney kept the books and records for 1989 in an out-of-state location to avoid producing those records for the IRS. The journals and ledgers for 1990 though 1992 are in the possession of Petitioner's accountants. Petitioner did not produce those records during the audit or at the administrative hearing.

   7. Petitioner could have requested the journals and ledgers for 1989 through 1991 from his attorney and accountants, respectively, but chose not to do so. Petitioner made available to Respondent only sales invoices for 1990 and 1991 and one month in 1992.

   8. Without the general ledgers and cash journals to cross- reference the sales invoices, Respondent could not corroborate the financial records available for audit. Respondent was required by applicable law to conduct the audit by sampling Petitioner's available records.

2. Exempt Sales: Resale Certificates

   1. Certain exempt sales claimed by Petitioner during the six month sample period were not supported by resale certificates. Respondent disallowed the exempt sales that were not supported by resale certificates and allowed the invoices that were supported by resale certificates. For the six month sample period, Respondent assessed an actual sales tax deficiency

      for those sales that did not have a corresponding resale certificate.4

   2. Respondent prepared audit schedules for the six month sample period that listed the invoices with a sales tax deficiency due to the lack of a resale certificate. Based on the audit schedules, Respondent determined an error ratio and applied the error ratio over the five year audit period to determine the estimated tax deficiency.5

   3. Respondent conducted the audit in accordance with generally accepted audit procedures and with applicable state law. Disallowed exempt sales were listed individually by invoice, name of vendor, and the date and amount of the sale. Disallowed exempt sales were listed for each of the six months in the sample period.

3. Additional Taxable Sales

   1. Sales invoices for the six month sample period showed that Petitioner collected more sales tax than he reported to Respondent on his monthly sales tax returns. Respondent treated the collected, but unremitted, sales tax as "additional taxable sales" rather than as an unremitted sales tax.

   2. Respondent assessed Petitioner for the sales tax paid on Petitioner's invoices but not remitted to Respondent by Petitioner. The deficiency existed for May and June, 1990, and for January and February, 1991.

4. Taxable Rent

   1. Respondent reviewed lease agreements relating to property rented by Petitioner at his business address.

      Respondent determined that Petitioner failed to collect and remit sales tax on the rental of his property.

   2. Respondent assessed Petitioner for sales tax Petitioner failed to collect and remit on taxable rent. Petitioner does not contest that portion of the assessment.

      CONCLUSIONS OF LAW

   3. The Division of Administrative Hearings has jurisdiction over the subject matter and parties in this proceeding. The parties were duly noticed for the formal hearing.

   4. The ultimate burden of proof is on Petitioner. Department of Revenue v. Nu-Life Health and Fitness Center, 623 So.2d 747, 751-752 (Fla. 1st DCA 1992). Respondent must first make a prima facie showing that an assessment was made and the factual and legal grounds supporting the assessment. Section 120.575(2). Petitioner must then show by a preponderance of the evidence that: the audit was illegal; he maintained adequate books and records; he is entitled to the sales tax exemption he claims for resale certificates; and he should not be taxed for additional taxable sales. Petitioner failed to satisfy his burden of proof.

5. Audit Authority

   36. Respondent properly conducted an audit of Petitioner's available records for the five year audit period. Respondent is statutorily authorized to conduct an audit within five years after the later of: the date the tax is due; or the date the tax return is filed. Sections 95.091(3); 213.34(2); Rule 12A- 1.093(7)(a)2.a. Respondent is also statutorily authorized to audit and examine the accounts, books, or records of all persons who are subject to the revenue law. Section 213.34(1).

6. Inadequate Records

   37. Petitioner is statutorily required to maintain adequate books and records relating to the tax at issue and to preserve such books and records until the expiration of the time within which Respondent may make an assessment with respect to the tax.

   Sections 95.091(3); 213.35; 212.12(6); 212.13(2); Rule 12A-

   1.093(2) and (5). Petitioner failed to comply with the statutory requirement to maintain adequate records.

7. Audit By Sample

   1. Petitioner failed or refused to make adequate records available for audit. In such cases, Respondent is statutorily required to assess taxes using an estimate based on the best information available. Section 212.12(5)(b). Such an assessment is considered prima facie correct, and Petitioner has the burden of showing that the assessment is incorrect. Id.

   2. The records provided by Petitioner were inadequate to conduct a detailed audit for the entire audit period. In such

   cases, Respondent is statutorily authorized to determine Petitioner's sales tax deficiency by sampling Petitioner's available records for a representative period and by applying an error ratio to the entire audit period. Section 212.12(6)(b).

   Respondent conducted the audit in accordance with applicable law.

8. Exempt Sales: Resale Certificates

1. Tax exemptions are matters of legislative grace. They must be strictly construed against the taxpayer and in favor of the state. State Department of Revenue v. Anderson, 403 So.2d 397, 399 (Fla. 1981); Green v. Pederson, 99 So.2d 292, 296 (Fla. 1957); Asphalt Pavers, Inc. v. Department of Revenue, 584 So.2d 55, 57 (Fla. 1st DCA 1991).

2. A resale certificate exempts the dealer from remitting sales tax to Respondent. Section 212.02(14)(a), 212.07(1)(b). Applicable law requires strict compliance with the requirements for a resale certificate exemption. Section 212.07(1)(b).

3. A dealer, such as Petitioner, who can not produce a resale certificate during an audit is liable for the tax. Section 212.07(1)(b); Rules 12A-1.038(3)(a) and 12A-1.093(8)(a).

   Petitioner has the burden of establishing the exempt status of any sale. Rule 12A-1.038(1).

4. Petitioner had adequate time to produce the books and records that Respondent needed to conduct a detailed audit for the entire audit period. More than a year elapsed between the Notice of Intent to Audit and the commencement of the audit. Subsequent to the audit, Petitioner had numerous opportunities,

   in internal conferences and appeals with Respondent, to produce the records Respondent needed to conduct a detailed audit.

5. Federal rules of criminal procedure entitle Petitioner to obtain copies of documents in the possession of the IRS.6 Petitioner did not produce the books and records needed to support his position in the administrative hearing.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of Law, it is

RECOMMENDED that Respondent enter a Final Order and therein UPHOLD Respondent's assessment of $15,230.15 plus interest statutorily due from October 15, 1993, until paid.

RECOMMENDED this 17th day of February, 1997, in Tallahassee, Florida.

DANIEL MANRY

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(904) 488-9675 SUNCOM 278-9675

Fax Filing (904) 921-6847

Filed with the Clerk of the Division of Administrative Hearings this 17th day of February, 1997.

ENDNOTES

1/ All statutory references to chapters and sections are to Florida Statutes (1995) unless otherwise stated.

2/ All references to rules are to rules promulgated in the Florida Administrative Code as of the date of this Recommended Order.

3/ A criminal indictment was issued in the federal tax case in 1993.

4/ Respondent did not assess sales tax for those invoices that showed sales tax collected or showed that a resale certificate was provided.

5/ R.F. Crim P. 16(a)(1)(c) provides:

(C) DOCUMENTS AND TANGIBLE OBJECTS. Upon request of the defendant the government shall permit the defendant to inspect and copy or photograph books, papers, documents, photographs, tangible objects, buildings or places, or copies or portions thereof which are within the possession, custody or control of the government and which are material to the preparation of evidence in chief at the trial, or were obtained from or belong to the defendant.

COPIES FURNISHED:

Larry Fuchs, Executive Director Department of Revenue

104 Carlton Building Tallahassee, Florida 32399-0010

Linda Lettera, General Counsel Department of Revenue

204 Carlton Building Tallahassee, Florida 32399-0010

Joseph DelVecchio d/b/a Monterey Glass

and Mirror Distributors 851 Monerey Road

Stuart, Florida 34994

Eugene Mail, Qualified Representative Post Office Box 442

Port Salerno, Florida 34992

Olivia P. Klein

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

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15 days from the date of this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue a final order in this case.

1/ All statutory references to chapters and sections are to Florida Statutes (1995) unless otherwise stated.

2/ All references to rules are to rules promulgated in the Florida Administrative Code as of the date of this Recommended Order.

3/ A criminal indictment was issued in the federal tax case in 1993.

4/ Respondent did not assess sales tax for those invoices that showed sales tax collected or showed that a resale certificate was provided.

5/ The audit file includes a detailed description of how the error ratio was calculated and applied. Petitioner’s claim that Respondent did not maintain an adequate “audit trail” is not supported by competent and substantial evidence.

6/ F.R. Crim P. 16(a)(1)(c) provides:

(C) DOCUMENTS AND TANGIBLE OBJECTS. Upon request of the defendant the government shall permit the defendant to inspect and copy or photograph books, papers, documents, photographs, tangible objects, buildings or places, or copies or portions thereof which are within the possession, custody or control of the government and which are material to the preparation of defendant’s defense or are intended for use by the government as evidence in chief at the trial, or were obtained from or belong to the defendant.

COPIES FURNISHED:

Larry Fuchs, Executive Director Department of Revenue

104 Carlton Building Tallahassee, Florida 32399-0100

Linda Lettera, General Counsel Department of Revenue

204 Carlton Building Tallahassee, Florida 32399-0100

Joseph DelVecchio d/b/a Monterey Glass

and Mirror Distributors 851 Monterey Road

Stuart, Florida 34994

Eugene Nail, Qualified Representative Post Office Box 442

Port Salerno, Florida 34992

Olivia P. Klein

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

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15 days from the date of this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

15

Docket for Case No: 95-001450

Orders for Case No: 95-001450