STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

CYCLE IVAN'S, INC., )

)

Petitioner, )

)

vs. ) Case No. 03-1249

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Robert E. Meale, Administrative Law Judge of the Division of Administrative Hearings, conducted the final hearing by videoconference in Tallahassee, Florida, on July 1, 2003. The parties, attorneys for the parties, witnesses, and court reporter participated by videoconference in West Palm Beach,

Florida.

APPEARANCES

For Petitioner: George B. Grosheim

Qualified Representative

Accounting Services of South Florida. 1210 Southeast 5th Street

Deerfield Beach, Florida 33441

For Respondent: Robert F. Langford, Jr.

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

STATEMENT OF THE ISSUE

The issue is whether Petitioner owes additional sales and use tax, interest, and penalties, pursuant to a Notice of Proposed Assessment.

PRELIMINARY STATEMENT

By Notice of Proposed Assessment dated October 23, 2002, Respondent advised Petitioner that, for the period from December 1, 1996, through November 30, 2001, it was assessing additional sales and use tax of $26,917.69, penalty of

$13,458.88, and interest of $9417.61 through October 23, 2002, for a total of $49,794.18. By letter filed February 24, 2003, Petitioner requested an administrative hearing.

At the hearing, Petitioner called one witness and offered into evidence two exhibits: Petitioner Exhibits 1-2.

Respondent called two witnesses and offered into evidence one exhibit: Respondent Exhibit 1. All exhibits were admitted.

The court reporter filed the transcript on July 30, 2003.

After receiving extensions of time within which to file proposed recommended orders, the parties filed their Proposed Recommended Orders on September 30, 2003.

FINDINGS OF FACT

1. Ivan Soberal is the president and sole owner of Petitioner. Mr. Soberal started the business of Cycle Ivan's 12

   years ago. At first, he operated as a sole proprietorship. He incorporated the business in 1997.

2. This case commenced with Respondent's issuance of a Notice of Proposed Assessment dated October 23, 2002. The Notice of Proposed Assessment proposes the assessment of

   $26,917.69 in additional sales tax, $13,458.88 in penalty, and

   
   

   $9,417.61 in interest through October 23, 2002, for a total of

   
   

   $49,794.18. The notice warns: "If you choose to request either an administrative hearing or judicial proceeding, your request must be filed no later than FEBRUARY 20, 2003 or 60 days from the date the assessment becomes a Final Assessment." The notice adds: "The petition for an administrative hearing must be filed with the Department." Petitioner requested an administrative hearing by letter dated February 20, 2003, and received by, and filed with, Respondent on February 24, 2003.

3. The audit period in this case is December 1, 1996, through November 30, 2001. During this time, Petitioner's business has been the sale and repair of motorcycles and scooters. Petitioner does not sell any new motorized vehicles with an engine displacement larger than 50 cc because doing so would require a dealer's license. Thus, most of the new motorized vehicles sold by Petitioner are small scooters manufactured in China or Japan. Petitioner sells used motorcycles on consignment. Over the years, Petitioner's

   business has transformed from primarily repairs to a greater emphasis on consignment sales to the present emphasis on part sales.

4. This is an inadequate-records case. For the most part, the auditor used federal income tax returns and corporate income statements to calculate Petitioner's tax liability. The auditor had no cash register receipts, no journal entries, and limited bank statements (none for 1996, 1997, 1998, and 2001 and only two months in 1999 and three months in 2000).

5. During the audit period, Petitioner used primarily repair orders to record sales of goods or services. After the audit period, Petitioner computerized its recordkeeping for inventory and sales, but, until then, the available records are extremely limited.

6. Respondent's auditor tried to use samplings of Petitioner's invoices to determine any sales tax deficiencies, but the records were poorly maintained. Taking a sample over the first six months of 2000, the auditor was unable to find invoices totaling thousands of dollars, thus making it appear that Petitioner over-reported taxable sales during these months. Obviously, Petitioner did not over-report taxable sales, but instead had removed invoices from the records that it had provided the auditor.

7. Recognizing the impossibility of reassembling Petitioner's actual taxable sales from its incomplete and nonexistent records, the auditor resorted to Petitioner's federal income tax returns and, for 2001, corporate income statements. By these means, Respondent's auditor determined Petitioner's gross sales, treated them entirely as taxable sales, and calculated the sales tax due on these gross sales. After having done so, the auditor subtracted the taxes actually remitted by Petitioner during the audit period, and the remainder is the sales tax deficiency in this case.

8. Petitioner's basic claim is that many of its sales during the audit period are exempt. However, Petitioner's manner of calculating exempt sales during the audit period was no better than its recordkeeping. Each month, Petitioner subtracted its taxable sales, or what it deemed to be its taxable sales, from its bank deposits, and the remainder was its exempt sales. This method, of course, results in potentially vast overstatements of exempt sales.

9. Petitioner lacks resale or consumer certificates of exemption to support its exemption claims. Mr. Soberal admitted at the hearing that he did not keep records of exempt sales. Exempt sales for Petitioner would also include parts sold to locations outside of the United States, but the nature of Petitioner's business suggests that this type of transaction

   would not produce significant sales. The only significant exemption in this case is service-only repairs, such as when parts are not required for the repair or the customer provides the parts.

10. The best way of accounting for service-only repairs is to calculate them from the auditor's workpapers for the six months in early 2000 that he sampled. These workpapers identify which invoices are for service only and which invoices include parts, accessories, or other tangible personal property. After calculating the total of service-only repairs, it is possible to derive a fraction with the numerator being the total price of the service-only repairs and the denominator being the total sales reported by Petitioner, which, for each month, was higher than the total gross sales shown on the invoices that Petitioner produced for the auditor. Because this fraction is based on sales during the first half of 2000, which is relatively late in the audit period, it probably represents a fair allocation of service versus sales. As noted above, service transactions predominated early in the audit period, but sales transactions (first of vehicles and later of parts) predominated later in the audit period. Thus, the reduction of total gross sales for the entire audit period by this fraction generated the most reliable estimate of taxable sales during the audit period from available

    records and still does not reward Petitioner for its failure to maintain records.

11. For January 2000, the service-only repairs total

    
    

    $1052.50 out of total reported sales of $8095.88. For February 2000, the service-only repairs total $1739.99 out of total reported sales of $10,311.55. For March 2000, the service-only repairs total $372.50 out of total reported sales of $11,654.93. For April 2000, the service-only repairs total

    $796.76 out of total reported sales of $8877.07. For June 2000, the service-only repairs total $595.50 out of total reported sales of $15,970.71. For July 2000, the service-only repairs total $409.95 out of total reported sales of $10,280.58. For these six months, service-only repairs total $4967.20 out of total reported sales of $65,190.72. The resulting reduction is

    7.6 percent.

    
    

12. Applying the reduction to the sales tax deficiency proposed in the Notice of Proposed Assessment, the resulting tax deficiency is reduced by $2045.74 to a new total of $24,871.95.

    CONCLUSIONS OF LAW

    
    

13. The Division of Administrative Hearings normally has jurisdiction over sales tax disputes, pursuant to Sections 72.011, 120.569, 120.57(1), and 120.80(14) Florida Statutes. (All references to Sections are to Florida Statutes (2003). All references to Rules are to the Florida Administrative Code.)

14. Petitioner filed its request for an administrative hearing 124 days after the date on which Respondent issued the Notice of Proposed Assessment. Under Rule 12-6.003(1)(b), a domestic taxpayer may protest a proposed assessment by postmarking or faxing a written protest within 60 days of the date of issuance of the notice of proposed assessment. Under Rule 12-6.003(1)(c), absent an extension of time from Respondent, the proposed assessment becomes final after 60 days, if the taxpayer fails to timely mail or fax a written protest. In this case, then, the Notice of Proposed Assessment, which was issued on October 23, 2002, became final on December 22, 2002, which was a Sunday. If the deadline were extended to the next business day, then the proposed assessment became final on December 23, 2002.

15. Section 72.011(2)(a) provides: "An action may not be brought to contest an assessment of any tax . . . assessed under

    . . . subsection (1) more than 60 days after the date the assessment becomes final." Sixty days after December 23, 2002, is February 21, 2003. As noted in the Notice of Proposed Assessment, this is a filing deadline. Petitioner thus appears to have filed its request for an administrative hearing three days late. Section 120.80(14)(b)3.b provides that the filing deadlines of Section 72.011(2) are "jurisdictional," so there appears to be no jurisdiction over this case.

16. Because Respondent may calculate these periods differently than suggested above, this Recommended Order will proceed to the merits of Petitioner's protest.

17. Section 212.05 imposes a sales tax upon persons engaged in the business of selling tangible personal property at retail in Florida. Section 212.05(1)(a)1.a imposes the sales tax at the rate of six percent of the "sales price." Section 212.02(16) defines "sales price" as the "total amount paid for tangible personal property, including any services that are part of the sale "

18. Section 212.12(6)(b) authorizes Respondent, "upon the basis of a test or sampling of a dealer's available records or other information relating to the sales . . . made by such dealer for a representative period, determine the proportion that taxable retail sales bear to total retail sales "

19. Section 120.80(14)(b)2 provides that Respondent's burden of proof "shall be limited to a showing that an assessment has been made against the taxpayer and the factual and legal grounds upon which [Respondent] made the assessment."

20. Respondent has proved that it made an assessment against Petitioner. The record adequately details the factual and legal grounds for the assessment, except for the failure of the assessment to exclude from taxable sales the sales price of service-only transactions. The corrected total of sales tax

deficiency is $24,871.95, on which Respondent may calculate the penalty and interest due.

RECOMMENDATION

It is

RECOMMENDED that the Department of Revenue enter a final order dismissing Petitioner's protest as untimely and sustaining the total amount set forth in the Notice of Proposed Assessment dated October 23, 2002, or, in the alternative, reducing the additional sales tax due to $24,871.95 and recalculating the penalty and interest accordingly.

DONE AND ENTERED this 14th day of November, 2003, in Tallahassee, Leon County, Florida.

S

ROBERT E. MEALE

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6847 www.doah.state.fl.us

Filed with the Clerk of the Division of Administrative Hearings this 14th day of November, 2003.

COPIES FURNISHED:

James Zingale, Executive Director Department of Revenue

104 Carlton Building Tallahassee, Florida 32399-0100

Bruce Hoffmann, General Counsel Department of Revenue

204 Carlton Building Tallahassee, Florida 32399-0100

George B. Grosheim Qualified Representative

Accounting Services of South Florida. 1210 Southeast 5th Street

Deerfield Beach, Florida 33441

Nicholas Bykowsky 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 must be filed with the agency that will issue the final order in this case.

Docket for Case No: 03-001249

Orders for Case No: 03-001249