STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ALLIED MARINE GROUP, )

)

Petitioner, )

)

vs. ) CASE NO. 95-4527

) DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Administrative Law Judge, Susan B. Kirkland, held a formal hearing in this case on June 11 and 12, 1996 in Miami and on July 25, and August 6, 1996, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Craig D. Olmstead, Esquire

Jane W. McMillan, Esquire Kelley, Drye and Warren LLP

201 South Biscayne Boulevard 2400 Miami Center

Miami, Florida 33131

For Respondent: Albert J. Wollermann

Assistant Attorney General Mark T. Aliff

Assistant Attorney General Office of the Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32399-1050 STATEMENT OF THE ISSUES

Whether Petitioner is liable for use tax as a result of the entry and participation in a fishing tournament of one of its yachts held in inventory for resale.

PRELIMINARY STATEMENT

On January 18, 1994, Respondent, State of Florida Department of Revenue (Department) issued a Notice of Final Assessment for Tax, Penalty, and Interest Due on a Boat, to Petitioner, Allied Marine, Inc. (Allied). The Assessment was issued pursuant to Chapter 212, Florida Statutes, after an investigation confirmed that a vessel, held in inventory for resale by Allied, was used in a

fishing tournament. The Department assessed Allied for a total of $42,301.50, which reflects $27,000 in tax, $13,500 late filing penalty, and $1,801.50 in interest as of January 18, 1994.

Allied protested the Assessment in a Petition for Reconsideration, dated February 7, 1994, in which it alleged that the vessel was operated on behalf of Allied; that no use tax was due because the vessel was at all times part of Allied's inventory for resale to customers; that such use is consistent with the vessel being offered for resale and being maintained in inventory by Allied; and that Allied's entry of the vessel into the tournament was at all times solely for the purpose of promoting the sale of this and other vessels.

The Department upheld the Assessment in a Notice of Reconsideration, dated July 7, 1994 in which it concluded that the vessel was removed from inventory and used in an activity inconsistent with its being offered for resale. The Department also found that such "use" of the vessel fell within the statutory language of Section 212.02(20), Florida Statutes, and that the use of a vessel held in inventory for resale and used in the manner set forth in the facts of this case constitutes a taxable use.

The case was forwarded to the Division of Administrative Hearings on September 13, 1995. The final hearing was scheduled for February 9, 1996. On January 11, 1996, Respondent filed a Joint Motion for Continuance of Final Hearing. The final hearing was rescheduled for April 30, 1996. On April 11, 1996, Respondent filed a Motion for Continuance. The motion was granted and the final hearing was rescheduled for May 28 and 29, 1996. The parties made an ore tenus motion to again continue the case, and the case was rescheduled for June 11 and 12, 1996.

At the final hearing, Petitioner called the following witnesses: Steven C. Brown, L. Lamar Gay, Dudley Cunningham, Thomas Sanders, and Charles D. Smith.

Joint Exhibit 1, the parties' prehearing stipulation, was admitted in evidence. Petitioner's Exhibits 1-10, 13, 15-18 were admitted in evidence. Respondent did not call any witnesses. Respondent's Exhibits 1-8 were admitted in evidence.

Petitioner filed its proposed recommended order on August 19, 1996.

Respondent filed its proposed recommended order on August 22, 1996.

FINDINGS OF FACT

1. Petitioner, Allied Marine Group, Inc., d/b/a Stuart Hatteras, Ltd. (Allied), is the largest dealer in new and used yachts in Florida. Its Dealer Registration Number is 16-03-232. It has 175 employees and sells yachts that range in price from $100,000 to $9,000,000. In 1993 Allied sold in excess of

   300 yachts and realized gross sales of $60,000,000.

   
   

2. The yacht sales business is very competitive. Allied's sales and marketing departments target the well-to-do who can afford expensive yachts and enjoy fishing and pleasure cruising. The target group subscribes to yachting magazines, visits boat shows, attends cruising activities, and participates in fishing tournaments. To reach these individuals in these activities, Allied spent $585,000 advertising in magazines including publishing its own magazine, "Makin Wake," $166,000 participating in boat shows, and $155,000 participating in fishing tournaments and other promotions for the fiscal year ending October 31, 1993.

3. Allied's Vice President of Sales and Operations, Tom Sanders, and salesman Chris Cunningham actively market the sale of Allied's yachts by participating in fishing tournaments and boat shows because that is where the buyers are. Fishing tournaments and boat shows are "selling events" to Allied. Neither Mr. Sanders nor Mr. Cunningham was of the opinion that Allied could remain competitive in the yacht sales business by simply displaying vessels at showrooms and waiting for customers to come.

   
   

4. Most yacht sales are made to customers who have purchased yachts in the past. The selling of a yacht is a process that involves many contacts with a customer before the customer actually makes a purchase. Customers rarely buy million dollar vessels on the spot. Purchasers of fishing yachts like to purchase from dealers who are knowledgeable about fishing.

   
   

5. Participation in fishing tournaments and outfitting inventory boats for fishing is a way of showing a vessel's capabilities to potential purchasers and Allied's knowledge of fishing vessels. Allied often enters fishing tournaments to demonstrate the capabilities and amenities of its yachts to prospective purchasers for the ultimate purpose of selling the yacht entered and increasing overall sales. It outfits the vessel with elaborate decor and fishing equipment to attract customers. The salespersons participate in the fishing portion of the tournament in order to get access to the tournament functions where they can meet prospective purchasers at the captains' meetings, at the fish weigh-ins and other gatherings before and after each day's fishing, and at the awards ceremony at the end of the tournament.

   
   

6. In addition to promoting the sale of the vessel entered, Allied and other dealers enter and sponsor fishing tournaments to give their salespersons opportunities to meet with potential purchasers and to keep the name of their products, company and salespersons in the public eye. Salespersons sell yachts by networking, that is, developing and maintaining one-on-one contacts with prospective purchasers. Salespersons make and maintain contacts by referrals from other customers, by hosting parties and by frequenting boat shows, fishing tournaments and other events that boat enthusiasts attend.

   
   

7. There are different sizes and types of fishing tournaments, and a dealer's participation may vary depending on the tournament. Allied sometimes participates in fishing tournaments by providing a crew to actually fish. When a dealer enters a vessel in a fishing tournament, the fishing element is secondary to the opportunity the tournament presents for the dealer's salespeople to make contact with potential purchasers. The main reason Allied enters its yachts in fishing tournaments is to sell the yachts entered in the tournaments and to promote Allied as a dealer in vessels made for fishing. Yacht owners that see new models at fishing tournaments often trade up to that model or newer or larger vessels.

   
   

8. Allied promotes its yachts and its business at fishing tournaments in the same manner as it does at boat shows: by displaying its products and by sending its salespersons to mingle with the attendees, to pass out business cards, and to provide information about its products and services. Allied always stocks yachts participating in fishing tournaments with literature concerning the particular vessel and the dealership including brochures about its yachts, specification sheets for the particular yacht, and business cards of the salespersons.

   
   

9. Allied does not have any yachts, in inventory or otherwise, that are designated as demonstrators. Vessels that are outfitted and decorated to

   participate in particular boat shows or fishing tournaments are always for sale to customers during or after the event.

   
   

10. In October, 1992 Tiara Yachts delivered a 43 foot sport fishing vessel to Allied for resale. The yacht is described as a 4300 Tiara Convertible and was delivered to Allied's Fort Lauderdale marina. Between October, 1992 and May 27, 1993, Allied displayed the vessel (the Tiara) at its marina showrooms in Fort Lauderdale, Stuart, and West Palm Beach.

    
    

11. The Tiara was held by Allied as part of inventory for resale to customers and was so reflected on Allied's accounting books and records. The Tiara was floor plan financed, meaning the manufacturer loaned Allied 95 percent of the cost of purchasing the vessel and maintained a security interest in the vessel until its resale to a customer. The manufacturer made periodic and unannounced checks of Allied's inventory to verify that the vessel was actually in Allied's possession at one of its facilities and held for resale.

    
    

12. On May 14 and 15, 1993, the Arthur Smith, Kingfish, Wahoo and Dolphin Fishing Tournament (the Tournament) was held in Palm Beach County. It is a large tournament which draws about 600 participants. Allied paid the $300 Tournament entry fee, hired a crew, provided the Tiara, and paid for all supplies. These expenses were charged to Allied's "Tournament and Promotion" account on its general ledger.

    
    

13. Allied listed the Tiara on the Tournament entry form as the vessel to be used in the Tournament. The participants listed were Edward Sweigart, Chris Cunningham, Monty Braune, Jim Neill, Bob Wimmer, and Kimberly Kern. Allied's address in West Palm Beach was listed as the address for each participant; however, Allied's name was not referenced on the entry form.

    
    

14. Allied did not obtain advertising in any medium prior to, during, or after the Tournament to announce the vessel's participation in the Tournament. Allied was not a Tournament sponsor and did not donate any prizes to the Tournament. No banners, flags, or pennants with Allied's name were displayed either on land or on the Tiara during the Tournament.

    
    

15. The transom of the Tiara was marked with the vessel's make-and-model number, which read, "4300 Tiara Convertible."

    
    

16. All rods and reels used on the vessel during the Tournament were the personal property of Allied's salesman Chris Cunningham.

    
    

17. At no time was there a known prospective buyer present, either on land or upon the vessel, during or after the vessel's participation in the Tournament.

    
    

18. Participation in the Tournament included fishing from the vessel by various participants. The participants on May 14 included Allied employees: Chris Cunningham, salesman; Monty Braune, yard worker; Edward Sweigart, boat washer; as well as non-employees; Ed Steffes; and Sweigart's girlfriend, Kimberly Kern.

    
    

19. The participants on May 15 included Allied employees, Sweigart, Braune, and David McGee, service manager; as well as non-employees Steffes, Michael McGee and Bobby Wimmer.

20. The attire of the May 14 participants was, in part, as follows: Sweigart wore a polo shirt bearing the "Tiara" logo; Cunningham and Kern wore "Palm Beach Hatteras" t-shirts; Steffes and Braune wore t-shirts without logos.

    
    

21. The attire of the May 15 participants was in part, as follows: Sweigart wore a polo shirt bearing the "Tiara" logo; Braune wore a "Stuart Hatteras" shirt; David McGee, Michael McGee and Steffes wore shirts with no logo and Wimmer wore a "Hatteras of Palm Beach" t-shirt.

    
    

22. At the Tournament, the weigh-in location for the larger boats (including the Tiara) was at a park where there were no facilities to dock the Tiara for display either before or after the day's fishing. Tournament participants weighing their fish at the park were required to pull up to the dock, off-load their catches and depart so that other participants could come to weigh their fish. Mr. Cunningham got off the Tiara at the weigh-in location and remained there to mingle with prospective purchasers while the captain and crew returned the Tiara to Soveral Marina where it was available for boarding by prospective purchasers. Soveral Marina was located approximately ten minutes or five miles away from the weigh-in location. Allied would have preferred to dock the Tiara at the Tournament location for easier access by prospective purchasers. Because this was not possible, displaying the Tiara at nearby Soveral Marina was a good alternative for making the yacht available to potential customers.

    
    

23. Mr. Cunningham knew that some of his customers would be attending the Tournament and might be interested in the Tiara. He attended the Tournament's captains' meetings, weigh-ins and other gatherings and the awards ceremony at the end of the Tournament. During the Tournament gatherings Mr. Cunningham handed out business cards and brochures describing the Tiara.

    
    

24. For catching the largest dolphin, Edward Sweigart was awarded a prize which consisted of cash, a boat, an outboard motor, and a boat trailer.

    
    

25. The following participants were on stage during the May 16 awards presentation after Mr. Sweigart caught the biggest dolphin of the tournament: Mr. Sweigart, wearing a "Tiara" logo shirt; Mr. Cunningham, wearing a "Palm Beach Hatteras" shirt; and Ms. Kern, wearing a "Palm Beach Hatteras" shirt.

    
    

26. Immediately after the Tournament, Mr. Sweigart took the prize boat and a dispute arose between Allied and Mr. Sweigart over who was entitled to the prize which culminated in a lawsuit by Allied against Mr. Sweigart. A newspaper article was published criticizing Allied for trying to recover the prize from Mr. Sweigart. The negative publicity surrounding Allied's participation in the Tournament caused Allied to downplay its participation in the event. As a result of the newspaper article, Steve C. Brown, Senior Tax Specialist with the Department of Revenue's (Department) Boat Enforcement Unit, conducted an investigation into Allied's entry and participation in the Tournament.

    
    

27. Twelve days after the Tournament, on May 27, 1993, the vessel was sold to Mr. Arthur Levitan for the sum of $506,727.80. Mr. Levitan was not at the Tournament nor did he know the vessel had been in the Tournament. Six percent sales tax of $26,727.30 along with a luxury tax of $34,504.50 was collected from Mr. Levitan. The sales tax was paid to the Department of Revenue.

    
    

28. As a result of Mr. Brown's investigation, the Department issued a Notice of Final Assessment for Tax, Penalty, and Interest Due on a Boat, dated

    January 18, 1994, for use tax in the amount of $27,000, plus a late filing penalty of $13,500 and interest as of January 18, 1994 of $1,801.50, which totaled $42,301.50.

    
    

29. Allied protested the Assessment in a Petition for Reconsideration, dated February 7, 1994, in which it alleged: that the vessel was operated on behalf of Allied as part of its promotional activities and to expose the vessel to potential buyers. Allied further alleged that no use tax was due because the vessel was at all times part of Allied's inventory for sale to customers; that such use is consistent with the vessel being offered for resale and being maintained in inventory and that entry of the vessel into the tournament was at all times solely for the purpose of promoting the sale of this vessel, Tiara Yachts, and Allied. It was also alleged that there are no rules or statutes that support the Department's assessment of use tax for vessels for resale.

    
    

30. The Department rejected the facts and arguments in the Petition and upheld the Assessment in a Notice of Reconsideration, dated July 7, 1994, in which it concluded that the vessel was: removed from inventory and used in an activity inconsistent with it being offered for resale; that such "use" of the vessel fell within the statutory language of Section 212.02(20), Florida Statutes; that the use of a vessel held in inventory for resale and used in the manner set forth in the facts of this case constitute a taxable use, as there is no rule or statute that allows a dealer an exemption for such use.

    
    

31. The Department's Special Programs Unit is charged with collection and enforcement of sales and use tax, especially with respect to boats. The Special Programs Unit was created by L. Lamar Gay in 1983 and was headed by Mr. Gay from its creation through June, 1989. Mr. Gay developed the policy for the unit and was responsible for hiring Steve Brown in November of 1980.

    
    

32. From the inception of the Special Programs Unit through Mr. Gay's tenure as an assistant bureau chief and head of that unit, the Department's interpretation of the term "use" for use tax purposes was that it did not include participation of an inventory vessel in a fishing tournament.

    
    

33. According to Brown, it is presently the policy of the Department that the promotion of vessels at boat shows by dealers is not a taxable use. The Department has not issued use tax assessments to dealers participating in boat shows.

    
    

    CONCLUSIONS OF LAW

    
    

34. The Division of Administrative Hearings has jurisdiction over the parties to and the subject matter of this proceeding. Section 120.57(1), Florida Statutes.

    
    

35. Section 212.06(6), Florida Statutes, states:

    
    

    It is however, the intention of this chapter to levy a tax on the sale at retail, the use, the consumption, the distribution, and the storage to be used or consumed in this state of tangible personal property after it has come to rest in this state and has become a part of the mass property of this state.

36. Section 212.05(1)(b), Florida Statutes, imposes a tax of six percent of the cost price of each item or article of tangible personal property when "the same is not sold but is used, consumed, distributed, or stored for use or consumption in this state."

    
    

37. Section 212.06(1), Florida Statutes, provides that dealers shall collect a use tax at the rate of six percent of the cost price of the tangible personal property at the time when the property is commingled with the general mass of property in Florida upon the use of the tangible personal property in Florida.

    
    

38. Rule 12A-1.091, provides:

    
    

    1. The Florida Sales and Use Tax Act imposes a tax on the use ... and storage for use ... in this state of tangible personal property purchased in such manner that the sales tax would not be applicable at the time of purchase.

       * * *

       (7) Under Section 212.06(1), F.S., use tax is imposed upon the cost of tangible personal property imported into this state for use ... in this state, after it has come to rest and has become a part of the general mass of property in this state . . . .

39. Rule 12A-1.007(1)(a), Florida Administrative Code, provides: (1)(a) . . . the use . . . in this state of

    any ... boats ... of a class or type required to be registered, licensed, titled, or documented in this state . . . is taxable on the full sales price . . . .

    
    

40. The Department has the burden to establish that the entry and participation of an inventory vessel in a fishing tournament constitutes a "use" as defined in Section 212.02(20), Florida Statutes, which provides that a "use" is

    
    

    ... the exercise of any right or power over tangible personal property incident to the ownership thereof, or interest therein, except that it does not include the sale at retail of that property in the regular course of business.

    
    

41. In HMY New Yacht Sales, Inc. v. Department of Revenue, 676 So.2d 1385 (Fla. 1st DCA 1996), the First District Court of Appeal approved the Department's interpretation of "use" as defined in Section 212.02(20), Florida Statutes.

    
    

    We also approve the agency's interpretation of the statutory definition of 'use' with respect to demonstration and promotional activities, i.e., that such activities related solely to resale of the vessel do

    not constitute a taxable 'use,' but that when such activities are also related to the sale of other vessels or to the general

    promotion of the dealer's business or another business, they constitute a taxable 'use' of the vessel.

    
    

    Id. at 1389, 1390.

    
    

42. In HMY New Yacht Sales, the Court held that the conversion of a yacht from an inventory item to a capital asset on the books of the dealer was a use and therefore a taxable event. The Court went on to say that the Hearing Officer had not made a finding of fact that the yacht had been used for more than to aid in its own resale because she had erroneously concluded that such a finding was not central to the issue of whether the dealer was liable for use tax; therefore the Department was without authority to make such a finding of fact and could not base a tax assessment only on the physical use of the yacht in that case.

    
    

43. In the instant case, the entry and participation of the Tiara in the fishing tournament was a promotional activity. The issue then becomes whether the activity was to aid solely in the resale of the Tiara or whether the activity was also to sell other yachts and promote the business of Allied.

    
    

44. Allied did not use the Tiara as a demonstrator, per se. However, the testimony did establish that part of the reason that Allied entered the Tiara in the Tournament was to promote Allied's sales in general, including the sale of other vessels. There was no pre-tournament advertising that the Tiara would be participating in the fishing tournament. Allied did not specifically decorate the vessel to encourage potential buyers to buy the Tiara as it had done for vessels it used in other fishing tournaments. There were no known potential buyers for the Tiara in attendance at the fishing tournament. Although Allied argues that the promotion of its business in general is an incidental benefit of entering the tournament, the testimony does not support a finding that the sole reason for entering the Tiara in the Tournament was to promote the sale of the Tiara.

    
    

45. The entry and participation of the Tiara in the Tournament was a taxable event pursuant to Section 216.06, Florida Statutes, and Rule 12A- 1.091(7) and 12A-1.007, Florida Administrative Code.

    
    

46. Section 213.21(3), Florida Statutes, gives the Department wide discretion to assess penalties. There has been no showing that the failure of Allied to timely pay the use tax was a result of willful negligence, willful neglect or fraud. At the time that Allied entered the Tiara in the Tournament, it did not have the benefit of the guidance set forth in HMY New Yacht Sales.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a Final Order be entered assesing Allied Marine Group,

Inc., for payment of use tax in the amount of $27,000 plus interest incurred as a result of the participation of one of its inventoried vessels in the Arthur Smith, Kingfish, Dolphin and Wahoo Fishing Tournament of May 14-15, 1993.

DONE AND ENTERED this 19th day of November, 1996, in Tallahassee, Leon County, Florida.

SUSAN B. KIRKLAND

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 19th day of November, 1996.

COPIES FURNISHED:

Albert J. Wollermann, Esquire Mark T. Aliff, Esquire

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

Craig D. Olmstead, Esquire Jane W. McMillan, Esquire Kelley, Drye and Warren

201 South Biscayne Boulevard, Suite 2400 Miami, Florida 33131

Linda Lettera, General Counsel Department of Revenue

204 Carlton Building Tallahassee, Florida 32399-0100

Larry Fuchs, Executive Director Department of Revenue

104 Carlton Building Tallahassee, Florida 32399-0100

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.

Docket for Case No: 95-004527

Orders for Case No: 95-004527