Pursuant to Notice, a final hearing in this formal proceeding was conducted at Gainesville, Florida, on March 6, 1997, before P. Michael Ruff, Administrative Law Judge of the Division of Administrative Hearings. The appearances were as follows:
For Petitioner: Jefferson M. Braswell, Esquire
Scruggs and Carmichael, P.A. Post Office Box 23109
For Respondent: James F. McAuley, Esquire
It must be determined whether the placement of storage tanks, pumps, and appurtenant fueling equipment by Lewis Oil Company, Inc. (Lewis) at convenience stores constituted a license or lease of real property upon which that equipment was placed and, therefore, whether the commissions paid to the convenience stores for pumping and selling the Petitioner's fuel should have
been the subject of sales tax, or conversely, whether the placement of the pumping equipment and fuel at the stores was a bailment and a non-taxable transaction.
On or about October 10, 1994, the Department of Revenue (Department) concluded an audit of the Petitioner's, Lewis Oil Company, Inc. (Lewis), discretionary sales surtax and issued a Notice of Proposed Assessment requiring Lewis to pay additional tax, penalties and interest. The assessed taxes related to the sale of petroleum products from petroleum storage tanks that were installed by Lewis at several convenience stores pursuant to petroleum supply agreements entered into between Lewis and the convenience store operators. On August 18, 1995, in response to Lewis' protest letter, the Department concluded that Lewis was exercising a taxable privilege because the installation of the storage tanks was purportedly an agreement for the use of real property and was not, therefore, a bailment of property which would be exempt from taxation under Section 212.031, Florida Statues. On September 19, 1995, the Petitioner filed a petition with the Department for an administrative hearing in accordance with Sections 120.57(1) and 120.57(5), Florida Statutes. The issue presented by Lewis in its petition is whether the contracts between Lewis and convenience stores for the installation of and use of tangible personal property constitutes a bailment and therefore not the exercise of a taxable privilege under Section
212.103, F.S., relating to leases, licenses, or rentals of real property pursuant to Rule 12A-1.1070(22A), Florida Administrative Code.
The petition was sent to the Division of Administrative Hearings and assigned DOAH Case No. 95-4770. At the final hearing, Lewis, presented the testimony of Jarred Cail, Chief Financial Officer for Lewis Oil Company and John Deese, Director of Real Estate for Suwannee Swifty Food Stores, Inc. The Department presented the testimony of Donald E. Brim, Tax Auditor for the Florida Department of Revenue. Lewis introduced one exhibit into evidence, and the Department entered four exhibits into evidence.
Lewis is a jobber or wholesale distributor of gasoline, diesel fuel, and related petroleum products. As a method of distributing its fuel products, the Petitioner contracts with convenience stores that it will install petroleum fuel storage tanks and dispensing equipment on the convenience store's real property, and will furnish product on consignment to the convenience store, who sells the fuels to its customers.
Pursuant to the agreement between Lewis and the convenience stores, the equipment was owned by Lewis but Lewis relinquished exclusive possession and control of it to the convenience stores and their management.
Lewis agreed to furnish the gasoline equipment installed at each location, and keep it in good working order. The convenience stores agreed to sell gasoline on its premises supplied exclusively by Lewis and agreed to collect and account for all monies as the result of sales of gasoline.
The money associated with the sale of the gasoline was collected by the convenience stores. The amount collected was the entire cost of a gallon of gas to the consumer which would include the motor fuels tax. The convenience stores paid Lewis the full retail price of the sales less the agreed upon commissions and sales taxes. Lewis remitted the motor fuel tax to the State and paid the bills associated with the cost of fuel to the supplier, Chevron Oil Company.
The convenience stores were required to account for the monies collected by taking meter readings which were then recorded on forms and remitted to Lewis regularly.
Lewis was permitted to inspect the records, pumps and metering equipment for the purpose of verifying the accounting made by the convenience stores to determine whether or not Lewis was receiving an appropriate portion of the gross profit margin as agreed to in the commission agreement itself.
The metering equipment is located on the face of the dispenser, and a meter reading can be done by looking at the meter or by pushing a button. On most of the equipment at the convenience stores, it was not necessary to take the meter
readings from the actual equipment because the metering equipment was accessed on the inside of the stores on consoles.
The convenience stores were responsible for inspecting the underground tanks by "sticking" the tanks with a long stick to reconcile actual tank inventory with meter readings to determine the possible loss of inventory.
The convenience stores were responsible for the day to day maintenance of the pumps and islands such as sweeping and cleaning the equipment and inspecting the equipment for proper operations and damage.
The convenience stores were responsible for the hiring, firing and management of employees associated with managing the gasoline tanks and pumps.
If the tanks needed repairs, the convenience store operator was responsible for notifying Lewis of the necessary repairs, and Lewis would see that the repairs were made and would pay for the repairs.
All repairs required the permission and cooperation of the convenience store operator who required that the repairs be coordinated so as not to interfere with store operations. The repairs required the cooperation of the convenience stores.
Lewis set the price of the gasoline for the consumer, and the meters were physically changed by the employees at the convenience stores.
Lewis agreed not to set the price of the gas at a price that would provide less than 1.5 cents per gallon commission except on consent of the convenience stores. The stores were responsible for advertising materials to display the price set.
If for any reason Lewis was unable to supply gas for sale to the convenience store's customers, the stores’ management was free to obtain gas from other petroleum suppliers. It was only required to pay Lewis a 2-cent fee in this eventuality.
Lewis did not have the right under the contract with the convenience stores to interfere with the stores’ possession by physically locking up the pumps or removing the tanks from the ground or blocking sales of the fuel. Under the terms of the contract, Lewis did not have the right to remove any of the gasoline.
Upon expiration or termination of the agreement, Lewis would re-possess all equipment, inventory and merchandise from the convenience stores, and Lewis was required to return the ground to its original condition. Lewis would reuse the equipment if it still met environmental standards.
Lewis carried insurance for property damage, environmental damage and the liability associated with the operation of the petroleum systems, and the convenience stores agreed to indemnify and insure against any losses or liabilities that arose out of their own negligence.
The Florida Department of Environmental Protection lists Lewis as the owner of the petroleum tanks and lists the convenience store as the operator on its Petroleum Liability Insurance and Restoration Program forms.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction in this proceeding pursuant to Sections 120.57(1) and 120.57(5), F.S.
The Courts view it as fundamental that the Petitioner carries the ultimate burden of persuasion. The Department merely has the burden of showing that an assessment has been made and the factual and legal grounds upon which it is based. The taxpayor must then show by a preponderance of the evidence that the assessment is improper Department of Revenue v. Nu-Life Health and Fitness Center, 623 So. 2d 747, 751-752 (Fla. 1st DCA 1992).
Rule 12A-1.070, F.A.C., pertains to the tax liability of the use of real property. Subsection (22) of that Rule provides, in part:
(22)(a) When tangible personal property is left upon another's premises under a contract of bailment, the bailee is not exercising a privilege taxable under the provisions of Section 212.031, F.S., relating to leases, licenses, or rentals of real property.
(b) A bailment is a contractual agreement, oral or written, whereby a person (the bailer) delivers tangible personal property to another (the bailee) and the bailor for the duration of the relationship relinquishes his exclusive possession, control, and
dominion over the property, so that the bailee can exclude, within the limits of the agreement, the possession of the property to all others. If there is no such delivery in relinquishment of exclusive possession, and the owner's control and dominion over the property is not dependent upon the cooperation of the person on whose premises the property is left, and his access thereto is in no wise subject to the latter's control, it would generally be held that such person is a tenant, lessee, or licensee of the space upon the premises where the property is left . . .
The issue presented by Lewis is whether Lewis relinquished exclusive possession, control, and dominion over the petroleum systems. Under the terms of the contract between Lewis and the various convenience stores, Lewis retained the right to "inspect such records and all pumps and metering equipment at all reasonable times." Lewis presented testimony that this right of inspection for was for the limited purpose of determining whether Lewis was receiving an appropriate portion of the gross profit margin as agreed. In order to determine the above stated issue, it must be determined whether the limited right of Lewis to inspect the pumps and metering equipment for accounting purposes is of such a nature as to mean that Lewis maintained some level of possession, control and dominion over the property which violates the terms of Rule 12A-1.070, F.A.C. The rule does not require that all possession, dominion and control be relinquished to the bailee. The rule expressly states that the bailee must be able to exclude the possession of the property to all others, “within the limits of the agreement.” The parties can agree to
some sharing of possessory rights without defeating a bailment. That is the essence of a bailment for mutual benefit.
Lewis argues that the nature of the right to inspect relates more to the control and dominion over the monies that are collected after the sale of the gasoline that it does to actual control of the gasoline equipment or the inventory in the tanks.
The record is well established that once Lewis placed the tanks in the ground and the inventory in the tanks that it did not possess the right to interfere with the sale of the gasoline or the management of the equipment. The essence of the agreement and the instrument of all of the profit was the gasoline in the tanks, and it is undisputed that Lewis was not responsible and had no right to the inspection of that gasoline inventory. All inventory readings were conducted by employees of the convenience stores who were employed and trained by the convenience store operators. When repairs were necessary or when deliveries were made, they were conducted by Lewis, but at the direction and convenience of the convenience stores. Lewis could not interfere with the operation of the tanks or the store’s operations by making repairs or deliveries without the cooperation of the convenience stores’ management.
The testimony presented by Lewis indicates that the
actual inspections conducted by Lewis did not even require a visit to the equipment. Under most circumstances the metering equipment was inside the stores. When the metering equipment was
contained on the face of the equipment, it was possible to simply read the meter. At the most, it required the pushing of a button of the side of the dispenser. This activity relates to the accounting of the monies collected and has no impact on the custody or control of the petroleum equipment. The management and day to day maintenance of the equipment were exclusively in the control of the convenience store operator. Lewis maintained no right to control how or when the equipment was used. The stores could even buy fuel from another supplier and sell it from this equipment, if Lewis failed to deliver. As in any bailment, the agreement called for the reasonable care of the equipment, and at the termination of the agreement, Lewis would repossess the equipment.
The issue presented in the instant case is similar to
issue presented in V.T. Leasing v. Dept. of Revenue, DOAH Case No. 95-0021, DOR Case No. 96-28-FOF (Final Order dated October 29, 1996), although the facts are clearly distinguishable. In V.T. Leasing, the petroleum supplier agreed to furnish, install and maintain the fuel-pumping equipment. The supplier was responsible for insuring an adequate inventory of fuel, collecting all monies and credit card vouchers, and determining the amount of commission owed to the seller. The supplier maintained the express right to ingress and egress at all times for all essential purposes such as servicing the equipment or, if necessary, the removal of the equipment. Unlike the terms of the
Lewis agreement, at the termination of the V.T. Leasing agreement, the equipment became the property of the seller. Although Lewis did maintain the ownership of the equipment for the life of the equipment as was the case in V.T. Leasing, this single fact is not inconsistent with the nature of a bailment as defined under Rule 12A-1.070, F.A.C. which does not require the relinquishment of title in order to qualify for the tax exemption. In fact, retention of title in the bailor is typical of bailment, otherwise it would be a sale or gift. The above referenced facts in the V.T. Leasing case were the determining factors in the Department's Final Order which found that there was the exercise of a taxable privilege. In the instant case, Lewis did not have the right to check the inventory in the tanks, did not have the right for unfettered ingress and egress for the purpose of repairing, removing or locking equipment, and did not have responsibility for determining the commission of sales.
Lewis only had the right to account for the fuel sold to make
sure it was getting the monies owed to it. Because the facts of the instant case are so clearly distinguishable from V.T. Leasing, the determination that Lewis was not exercising a taxable privilege is not inconsistent with that previous case.
The instant case is nearly identical to the facts recited in Fort Pierce Gas Company v. Toombs, 193 So. 2d 669 (Fla. 4th DCA 1966) which was cited by the Hearing Officer in V.T. Leasing as an example of a typical bailment and adopted by
the agency in the Final Order. In V.T. Leasing, the Hearing Officer recites as the determining facts in establishing the bailment relationship:
. . . when a propane gas storage tank was delivered and located at the residence of a homeowner, in order to facilitate the gas company being able to sell and distribute a supply of gas to the homeowner for use in his home gas appliances, the relationship between the gas company and the homeowner, with reference to the possession and use of the tank was held to be that of bailor and bailee, the bailment being for the mutual benefit of the parties. The homeowner received the benefit of having a supply of gas to operate his home appliances, for which he paid the gas company, and the gas company received the benefit of having the facility available to the homeowner so that the gas company could sell its gas for profit. (emphasis supplied).
This mimics the relationship between Lewis and the convenience stores where the agreement provided for the mutual benefit of both parties. Lewis got a marketplace to sell its gasoline as well as the personnel to maintain the equipment, manage inventory and collect monies. The convenience stores attracted additional customers and received a portion of the sales. The relationship between Lewis and the convenience stores is one of bailor and bailee and is nearly identical to facts of the Fort Pierce Gas Company case previously adopted as exemplary by the Department in the V.T. Leasing Final Order.
Other legal sources have concluded that bailments have certain characteristics which, although not without exception, may serve as a guide in the instant case in establishing the
relationship between Lewis and the convenience stores as a bailment. In a bailment, possession of the property bailed is severed from the ownership, the bailer retaining general ownership and the bailee receiving lawful possession or custody for the specific purpose of the bailment. Furthermore, a bailment contemplates return of the property. Volume 5, Fla.
Jur. 2d, Section 2.
The element of compensation is essential in every bailment for mutual benefit of the parties which is the essence of the Lewis agreements. Id. As is the case with Lewis, a bailee is required to re-deliver the property entrusted to him in good condition. Id. Consistent with the instant case, where a bailment is for mutual benefit and there is no express agreement to the contrary, the bailee is held to the exercise of ordinary care and diligence in safeguarding the bailer's property and is answerable for loss or injury resulting from his own negligence. Id.
The rule appears well-settled that in the absence of statute or express contract, a bailee is not an insurer of the property delivered This makes sense because ownership remains with the bailor along with the ultimate right to recovery of possession. Except where the contract is violated, the bailee should not be liable for the loss of, or injury to, the thing bailed. Volume 5, Fla. Jur. 2d, Section 10. A bailee will not be liable if the property bailed is damaged or lost by accident,
or by some other means wholly without the fault of the bailee, and in the absence of some special stipulation in the bailment contract such damage or loss falls on the bailor. Id. This is completely consistent with the fact that Lewis carried property, environmental and liability insurance on the storage tanks and is in no way indicative of control and dominion over the equipment. The night and duty to insure the property runs as an indicia of ownership and is not dependent on retention of possession and control (auto insurance is an apt example). The fact that Lewis was responsible for the repairs due to internal decay or a defect in the equipment, the negligence of a third person, or other causes over which the bailee had no control, such as disaster, is also consistent with general principles defining a bailment relationship. Volume 5, Fla. Jur. 2d, Section 10; Peacock Motor Co. v. Eubanks, 145 So. 2d 498 (Fla. 1st Dist. 1962).
Moreover, it is logical that it perform repair because it
presumable has expertise with such equipment as an integral part of its business. That does not mean that the bailee, by agreeing that Lewis could repair the equipment was allowing control and possession to lie with Lewis.
The Department relies on Section 212.02(2), F.S. containing the definition of “business” “. . . any activity engaged in by any person . . . with the object of public or private gain . . . either direct or indirect.” It contends this broad definition of “business” includes the activity at issue.
It also relies on Section 212.031, F.S. which imposes sales tax on the privilege of engaging in the “business” of leasing renting or licensing the use of real property, Regal Kitchens, Inc. v.
Dept. of Revenue, 641 So. 2d 158, 162 (Fla. 1st DCA 1994). It seeks to apply this concept of business to the agreement and practice at issue. That principle and comparison is inopposite. Clearly the agreement at issue and the proven intent and operations of the parties shows that neither contemplated engaging in the business or renting, leasing or licensing real property. Lewis simply bailed its property to Suwannee Swifty so that they both could engage in the business of selling gasoline at a shared profit, as a joint venture. Neither intended, nor specified in the agreement, that their transaction and arrangement was to be a lease or rental of real property, nor did they intend that the commissions were property rent.
The terms of the contract between Lewis and the various convenience stores establishes that the relationship between the parties was one of bailor and bailee. The limited right to read the meters to determine the accuracy of the accounting provided by the convenience stores is insufficient to prove that Lewis maintained any measure of possession, control, and dominion over the equipment. The record supports the conclusion that the convenience store operators could have excluded Lewis from taking possession of the property to the extent that it could not service, shut down or remove the equipment without the
cooperation of the store operators. The single right to take meter readings was the only method provided under the contract for Lewis to make certain that it received its share of the profits as provided by the agreement. This related to the control and dominion of the monies collected and not to the control and dominion of the fueling equipment. Lewis has maintained its burden of proof in establishing that the contractual agreement at issue is a bailment as contemplated under Rule 12A-1.070, F.A.C. The rule does not require delivery of exclusive possession and control but relinquishment of exclusive possession and control by the owner.
That the Department enter a Final Order determining that Lewis was not exercising a taxable privilege under Sections 212.103, F.S.
Filed with the Clerk of the Division of Administrative Hearings this 11th day of June, 1997.
Jefferson M. Braswell, Esquire Scruggs and Carmichael, P.A. Post Office Box 23109 Gainesville, FL 32602
James F. McAuley, Esquire John Upchurch, Esquire Office of Attorney General The Capitol - Tax Section Tallahassee, FL 32399-1050
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
