STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PHILIP E. HANCOCK, d/b/a ACTION ) PLANTS, )

)

Petitioner, )

)

vs. )

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

Case No. 03-1341

)

RECOMMENDED ORDER

This case came before Administrative Law Judge John G. Van Laningham for final hearing by video teleconference on

September 25, 2003, at sites in Tallahassee and Fort Lauderdale, Florida.

APPEARANCES

For Petitioner: Scott Alan Salomon, Esquire

Salomon Law Center 2770 University Drive

Coral Springs, Florida 33065

For Respondent: Carrol Y. Cherry, Esquire

Office of the Attorney General The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The issue in this case is whether Petitioner performed nontaxable services as a decorating contractor, as he maintains,

or, rather, whether he leased tangible personal property and thereby incurred sales tax liability, as Respondent alleges.

PRELIMINARY STATEMENT

Following an audit that began in January 2001, Respondent Department of Revenue assessed Petitioner Philip E. Hancock, d/b/a Action Plants, for sales and use taxes totaling

$135,530.87, together with interest and penalties. This assessment was based on Respondent's determination that Petitioner had failed to collect and remit taxes on receipts from his plant rental business.

Petitioner timely protested the assessment and requested an administrative hearing. Respondent referred the matter to the Division of Administrative Hearings, where an administrative law judge was assigned to conduct the hearing.

The final hearing was held on September 25, 2003, as scheduled, with both parties present and represented by counsel. Petitioner testified on his own behalf and offered four exhibits, which were admitted into evidence.1 Respondent called three witnesses: its employees Peter Multach and Curt Horton plus Petitioner. Additionally, Respondent moved 24 exhibits, numbered 1-23 and 25, into evidence.

The two-volume final hearing transcript was filed on October 20, 2003. Respondent filed a proposed recommended order on December 4, 2003, the established deadline. Petitioner did not submit any additional written materials.

FINDINGS OF FACT

The Parties

1. At all relevant times, Petitioner Philip E. Hancock ("Hancock") was a sole proprietor doing business in and around Fort Lauderdale, Florida, under the names "Action Plant Rental" and "Action Plants."

2. Respondent Department of Revenue ("Department"), an agency of the State of Florida, is authorized to administer the state's tax laws.

   An Overview of Hancock's Businesses

   
   

3. In 1980, Hancock and his then-wife purchased a nursery and, as proprietors, started a business called "Landscape Concepts." Initially, the couple's business activities involved

   1. landscaping and (b) sales of plants and nursery stock at wholesale (mostly) and retail.

4. Sometime in 1983, Landscape Concepts began "renting" plants and trees for special events, such as weddings, banquets, and charity fundraisers.2 In time, this plant rental business eclipsed the original landscaping and sales operations, and by

   the late 1980's the ascendant enterprise was dubbed "Action Plant Rental."3

5. In 1990, having established Action Plant Rental, the Hancocks sold their nursery, whereupon Landscape Concepts stopped selling plants on a regular basis. The landscaping business, in contrast, tapered off gradually, continuing for several more years until being discontinued completely at the end of 1993. As of January 1994, plant rental was Petitioner's sole vocation.

   A Closer Look At the Plant Rental Business

   
   

6. The evidence concerning the details of how Hancock's plant rental business operated during the audit period is relatively sparse, consisting of little, if anything, other than Hancock's testimony, which is generally credible as far as it goes, but not comprehensive.

7. Hancock's clients, for the most part, were not the individuals who hosted or sponsored the events for which Action Plant Rental supplied "green décor" (to use Hancock's phrase), but rather were the event planners, designers, florists, and hotels (which frequently acted as planners in connection with events held on their premises) who had been hired by the hosts or sponsors to make their events happen. Thus, Hancock usually did not deal directly with, for example, the bride, but with the bride's wedding planner. In effect, he was a subcontractor.

8. Hancock did not enter into written contracts with his clients. When a client retained Hancock, the client informed Hancock when and where the event would be held, and told Hancock (or asked him for an opinion about) which plants would be appropriate. The evidence is ambiguous as to the degree of Hancock's input and discretion in selecting the particular plants to bring to a given event. While the undersigned is persuaded that Hancock had some involvement in choosing the plants at least some of the time, it cannot be found that this service, to the extent provided, added substantial value to the transaction——or was one for which clients specifically and knowingly paid.

9. When the time came for Hancock to perform the agreement, he delivered the plants and trees to the site and, at a time before the event was to begin, set them up in the hall or ballroom. Setting up the plants to create a pleasing and appropriate environment no doubt required decorating skill. It is undisputed, moreover, that Hancock commonly added decorating touches, such as lights and decorative containers, to his plants and trees, which made the display more attractive. What is less clear, however, is whether clients purchased Hancock's decorating expertise——or if, instead, Hancock executed the commands of someone else who decided how to arrange and present the plants. On this point, as others, it might have been

   helpful to hear from some clients. As it is, Hancock's own testimony is somewhat ambiguous. While the question is extremely close, the undersigned is persuaded, on the evidence presented, that Hancock usually operated under the direction of his client and had relatively little control over the design and arrangement of his plants and trees at the event site. Thus, the undersigned is unable to find that Hancock's decorating services provided the ultimate value to Hancock's clients.

10. Once the plants were set in place and Hancock was assured that the arrangement satisfied his client, Hancock left the event site. (This meant, of course, that someone——the client, the host, or even a guest——could have moved the plants around.4 The Department contends that Hancock's absence from the premises demonstrates decisively that possession and control of the plants was surrendered to his client. The undersigned has given this fact some weight, but not a great deal. For one thing, there is no persuasive evidence that the client typically remained on-site with the plants. Further, since the plants were generally set up in a "public" place (as opposed to a personal space such as an office) over which neither the client, nor the host, nor the guests had exclusive control,5 the undersigned is not persuaded that the client or others attending the event had possession and control of the plants in any meaningful sense. Indeed, under the Department's theory, the

    plants apparently would have been in the constructive possession, at least, of everyone present at the party——a conclusion that runs counter to common sense and ordinary experience. The opportunity to move a plant is not, in the undersigned’s mind, equivalent to having a possessory right or power over the plant.)

11. When the event was over, Hancock returned to the site to retrieve and remove his plants. Later, Hancock sent the client an invoice for his "services." As far as the evidence shows, Hancock did not bill his clients separately for delivery, set up, removal, or design, but rather he charged a lump sum for the plants, which price included these associated services as part of the total package.

    Petitioner's History As a Sales Tax-Paying Dealer

    
    

12. From at least 1985, and continuing through the middle of 1994, Landscape Concepts, as a registered dealer having identification number 16-03-109301-76, collected and remitted sales taxes on the revenues generated through retail plant sales and plant rentals, filing monthly sales tax returns as legally required.6 If a client gave Petitioner a resale certificate, however, Petitioner did not collect sales tax from that client. Because most of Petitioner's plant rental customers were other businesses (e.g. event planners, florists, and hotels) that

    provided resale certificates to Petitioner, a relatively small percentage of these transactions were taxed.

13. In mid-1994, while in one of the Department's regional offices attending to some since forgotten sales tax-related matter, Hancock was shown Rule 12A-1.071 of the Florida Administrative Code. This Rule then contained the following provision:

    (35)(a) A decorating contractor who uses materials and supplies such as bunting, streamers, colored paper, wreaths, pennants, lights, rope, etc., in fulfilling a contract which requires the furnishing of arrangements and decorations to, and their subsequent removal from, hotels, offices, public buildings, etc., is the consumer of such materials and supplies and shall pay tax on their acquisition. The

    contractor's charge under such contract is a service charge and is exempt.

    
    

    Fla. Admin. Code R. 12A-1.071(35)(a).7

    
    

14. Hancock concluded that he was entitled to the benefit of the foregoing "decorator's exemption." Hancock asked a local employee of the Department whether he could claim the exemption, and she advised him to write a letter to the Department's main office in Tallahassee. Hancock sent the Department a letter announcing his intent to stop filing monthly sales tax returns. Enclosed with this letter was Hancock's sales tax certificate, which Hancock purported to "relinquish." The Department did not

    respond to Hancock's letter. Hancock did not file another sales tax return.8

    The Audit and Protest

    
    

15. In January 2001, the Department commenced a sales and use tax audit of Hancock's plant rental business, initially concentrating on the five-year period from December 1, 1995 through November 30, 2000. The Department later enlarged the audit period to span 16 years, reaching all the way back to June 1, 1985, and continuing through June 30, 2001. This expansion was based on the Department's belief that Hancock had never filed any sales tax returns respecting his business——a belief that, as found above, would prove to be incorrect.

16. After concluding that Hancock's tax records were "adequate but voluminous," the Department used a sampling method to calculate the amount of tax allegedly owed.9 To determine the total amount of revenue subject to sales tax, the Department used as a starting point the gross receipts figures as reported on Hancock's federal income tax returns for the years 1995 through 2000, inclusive.10 From these figures, the Department calculated the average monthly receipts for each of the six years in question (by dividing 12 into each respective year's gross sales revenue). It also computed an average annual gross sales figure (by dividing 6 into the sum of the known annual gross receipts), along with an average average-monthly sales

    amount (by dividing 6 into the sum of the average monthly

    
    

    receipts). Year	Here	are the relevant Gross Sales	numbers: Avg. Monthly Sales
    1995		$ 99,045	$ 8,253.75
    1996		$113,973	$ 9,497.75
    1997		$171,721	$14,310.08
    1998		$169,961	$14,163.42
    1999		$126,306	$10,525.50
    2000		$154,253	$12,854.42

    
    

    Average Annual Gross Sales: $139,210.00 Average Average-Monthly Sales: $ 11,600.82

    
    

17. The Department apparently acquired more specific information regarding monthly receipts for the 11-month period from January through November 2000. During this period, Hancock's gross receipts totaled $113,661.00.11 The Department determined, based on these figures, that the total tax due for this particular period was $6,861.41. Dividing 113,661 into 6,861.41, the Department derived a "percentage of error" of

    .060367. This "percentage of error" was effectively the tax rate because, as we have seen, the Department believed that Hancock had paid no taxes whatsoever. The "percentage of error" slightly exceeded 6 percent (the present state sales tax rate) due to the inclusion of some county taxes.12

18. The Department computed the total sales tax allegedly due and owing as follows. To determine the tax due per month for the 121 months comprising the periods from (a) June 1985

    through December 1994 and (b) January through June 2001, for which there were no "known-sales" numbers, the Department applied the "percentage of error" (=tax rate) against the average average-monthly sales figure of $11,600.82. To determine the tax due per month for the years 1995 through 2000, the Department applied the "percentage of error" against each respective year's average monthly sales figure. The sum of these monthly figures equaled the total alleged tax liability.

    Here are the numbers:

    
    

    Period		Average Monthly Sales	Tax Rate	Tax Due Per Month	Tax Due For Period
    Jun 1985 — Dec 1994 (115 months)		11,600.82	0.060367	700.31	80,535.65
    Jan (12	— Dec 1995 months)	8,253.75	0.060367	498.25	5,979.00
    Jan (12	— Dec 1996 months)	9,497.7613	0.060367	573.35	6,880.20
    Jan (12	— Dec 1997 months)	14,310.08	0.060367	863.86	10,366.32
    Jan (12	— Dec 1998 months)	14,163.42	0.060367	855.00	10,260.00
    Jan (12	— Dec 1999 months)	10,525.50	0.060367	635.39	7,624.68
    Jan (12	— Dec 2000 months)	12,854.4314	0.060367	775.98	9,311.76
    Jan — Jun 2001 (6 months)		$11,600.82	0.060367	700.31	4,201.86
    					135,159.47

    
    

    In sum, the Department found that Hancock was liable for

    
    

    $134,337.17 in state sales taxes and $822.30 in County Taxes,

    see endnote 12, which amounts, when added together, equaled

    
    

    $135,159.47.

    
    

19. Additionally, the Department found that Hancock owed small amounts of state use taxes in connection with several fixed assets. This aspect of the case received little attention, if any, at final hearing and accordingly will not be examined in great detail here. The following table summarizes the amounts that the Department claims are due and owing:

    Asset	Transaction Date	Tax Due
    Computer	September 1995	229.12
    Office refrigerator	April 1997	24.00
    Computer	October 1998	72.00
    Office Furniture	December 1998	21.62
    Printer	May 1999	24.66
    		371.40

    
    

20. In January 2002, the Department notified Hancock that it intended to collect the alleged tax deficiencies just described, in the total principal amount of $135,530.87. In addition, the Department claimed $135,666.86 in interest through January 2, 2002, together with a total of $52,359.05 in penalties, making a grand total of $323,556.78. Hancock disputed the assessments and timely requested a formal administrative hearing.

    Ultimate Factual Determinations

    
    

21. The factual question whether Hancock performed nontaxable services as a decorating contractor, as he maintains, or leased tangible personal property and thereby incurred sales tax liability, as the Department contends, is very close, at least based on the evidence presented. On a better record it might have been possible to answer this question with greater confidence——and, indeed, to obtain a different result. On this relatively limited record, however, the undersigned finds that the weight of the evidence tips ever so slightly in the Department's favor, primarily because it appears more likely than not that Hancock's clients were given a meaningful right to direct the use of the material personal property involved, namely the live plants and trees. Thus, while reasonable minds could differ, the undersigned finds that Hancock was engaging in the taxable business activity of leasing personal property.

22. The evidence does not establish, however, and hence the undersigned does not find, that Hancock filed a grossly false or substantially incorrect return or made a substantial underpayment of tax. Likewise, Hancock did not file any fraudulent returns. Rather, Hancock properly filed returns through mid-1994, paying all of the sales and use taxes then due and owing. What Hancock failed to do was make all required tax payments after May 1994——a significant default, to be sure, but

    one that leaves him less liable, in fact, for back-taxes than the Department has contended. Hancock's decision to stop collecting and remitting sales taxes, moreover, was based not upon an intent to defraud but upon an honest, if mistaken, belief that the business of Action Plant Rental fell within the "decorator's exemption."15

23. Apart from any question of liability, the Department's assessment of the amount of state sales taxes and County Taxes allegedly due and owing for the period from June 1985 through December 1993 is clearly erroneous, for at least three reasons. First, the state sales tax was not six percent during that entire period, yet the Department has computed Hancock's alleged tax liability as if it were.16 Second, the Department did not make any adjustments to account for the time-value of money when it projected sales figures from 1995-2000 back as many as 15 years. It is commonly known, however, that dollars earned in the year 2000, for example, had less purchasing power than, say, 1985 dollars; thus, sales figures from 2000 must be discounted if a fair and reasonable comparison to 1985 is to be made. The Department's failure to reduce recent earnings to the then- present value of income derived from plant rentals in the earlier years of the audit period is tantamount to charging interest——which, of course, the Department has also assessed, separately. Finally, the Department's calculation assumed,

    incorrectly, that (a) Hancock's business had not changed during the entire 16-year audit period and (b) Hancock had never paid any sales taxes. In fact, until the end of 1993, Hancock derived income not only from his plant rental business but also from landscaping and plant sales; not only that, he paid sales taxes on the receipts from these activities, through May 1994. In sum, then, even if Hancock were liable for the taxes that allegedly accrued before 1994, the Department's figures for that period of the audit are simply too unreliable to be credited.

    Period	Average Monthly Sales	Tax Rate	Tax Due Per Month	Tax Due For Period
    Jun 1994 — Dec 1994 (7 months)	11,600.82	0.060367	700.31	4,902.17
    Jan — Dec 1995 (12 months)	8,253.75	0.060367	498.25	5,979.00
    Jan — Dec 1996 (12 months)	9,497.7617	0.060367	573.35	6,880.20
    Jan — Dec 1997 (12 months)	14,310.08	0.060367	863.86	10,366.32
    Jan — Dec 1998 (12 months)	14,163.42	0.060367	855.00	10,260.00
    Jan — Dec 1999 (12 months)	10,525.50	0.060367	635.39	7,624.68
    Jan — Dec 2000 (12 months)	12,854.4318	0.060367	775.98	9,311.76
    Jan — Jun 2001 (6 months)	$11,600.82	0.060367	700.31	4,201.86
    				59,525.99

24. It is found, therefore, that Hancock owes state sales taxes and County Taxes in the following sums:

    Additionally Hancock must pay use taxes amounting to $371.40, bringing to $59,897.39 the total principal amount of taxes

    proved to be due.

    
    

    CONCLUSIONS OF LAW

    
    

25. The Division of Administrative Hearings has personal and subject matter jurisdiction in this proceeding pursuant to Sections 72.011(1)(a), 120.569, 120.57(1), and 120.80(14)(b), Florida Statutes (2003).19

    The Parties' Respective Burdens of Proof

    
    

26. Although designated the "Respondent," the Department has the initial burden to prove, by a preponderance of the evidence, not only "that an assessment has been made against the taxpayer [but also] the factual and legal grounds upon which the

    . . . department made the assessment." § 120.80(14)(b)2., Fla. Stat. If the Department meets its burden, then the taxpayer must establish, also by the greater weight of the evidence, that the assessment is incorrect. See IPC Sports, Inc. v. State Dept. of Revenue, 829 So. 2d 330, 332 (Fla. 3d DCA 2002).20

    The Statute of Limitations

    
    

27. The statute of limitations applicable in actions to collect taxes provides in pertinent part:

    (3)(a) With the exception of taxes levied under chapter 198 and tax adjustments made pursuant to s. 220.23, the Department of Revenue may determine and assess the amount of any tax, penalty, or interest due under

    any tax enumerated in s. 72.011 which it has authority to administer and the Department of Business and Professional Regulation may determine and assess the amount of any tax, penalty, or interest due under any tax enumerated in s. 72.011 which it has authority to administer:

    1.a. For taxes due before July 1, 1999, within 5 years after the date the tax is due, any return with respect to the tax is due, or such return is filed, whichever occurs later; and for taxes due on or after July 1, 1999, within 3 years after the date the tax is due, any return with respect to the tax is due, or such return is filed, whichever occurs later;

    b. Effective July 1, 2002, notwithstanding sub-subparagraph a., within 3 years after the date the tax is due, any return with respect to the tax is due, or such return is filed, whichever occurs later;

    1. For taxes due before July 1, 1999, within 6 years after the date the taxpayer either makes a substantial underpayment of tax, or files a substantially incorrect return;

    2. At any time while the right to a refund or credit of the tax is available to the taxpayer;

    3. For taxes due before July 1, 1999, at any time after the taxpayer has filed a grossly false return; [or]

    4. At any time after the taxpayer has failed to make any required payment of the tax, has failed to file a required return, or has filed a fraudulent return, except that for taxes due on or after July 1, 1999, the limitation prescribed in subparagraph 1. applies if the taxpayer has disclosed in writing the tax liability to the department before the department has contacted the taxpayer[.]

       
       

       * * *

       
       

       1. For the purpose of this paragraph, a tax return filed before the last day

       prescribed by law, including any extension thereof, shall be deemed to have been filed on such last day, and payments made prior to the last day prescribed by law shall be deemed to have been paid on such last day.

       (4) If administrative or judicial proceedings for review of the tax assessment or collection are initiated by a taxpayer within the period of limitation prescribed in this section, the running of the period shall be tolled during the pendency of the proceeding. Administrative proceedings shall include taxpayer protest proceedings initiated under s. 213.21 and department rules.

       
       

       § 95.091, Fla. Stat.

       
       

28. Hancock did not raise the statute of limitations as an affirmative defense at any point in this proceeding and thus arguably waived the issue. The Department, however, urged the undersigned to make specific findings concerning the alleged propriety of the Department's enlarging the audit period to include 16 years. See Resp.'s Prop. Rec. Order at 16-18. In so doing, the Department effectively invited the undersigned to find and conclude that the statute of limitations has not expired with regard to a substantial portion of the assessments at issue.

29. Had the Department not pursued the issue, the undersigned probably would have declined to discuss the statute of limitations. Cf. Smith v. Rheaume, 623 So. 2d 625, 626 (Fla. 5th DCA 1993)(improper for trial court to raise limitations defense sua sponte). But, because the agency requested a

    ruling, the undersigned has made findings of fact relevant to whether some aspects of the Department's case are time-barred. Based on these findings, the undersigned concludes that the statute of limitations has run as to taxes allegedly due before June 1994, when Hancock stopped making any required tax payments.

30. It is not necessary to decide this case based solely on the statute of limitations, however, because the evidence shows that Hancock is not liable for the taxes alleged to have come due before June 1994. In other words, the outcome is the same, even when the merits are reached.

    Other Relevant Statutes and Rules

    
    

31. The state sales and use tax is levied pursuant to Section 212.05, Florida Statutes, which provides in relevant

    part:

    
    

    It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who engages in the business of selling tangible personal property at retail in this state, including the business of making mail order sales, or who rents or furnishes any of the things or services taxable under this chapter, or who stores for use or consumption in this state any item or article of tangible personal property as defined herein and who leases or rents such property within the state.

    
    

    1. For the exercise of such privilege, a tax is levied on each taxable transaction or incident, which tax is due and payable as follows:

       
       

       1. 1.a. At the rate of 6 percent of the sales price of each item or article of tangible personal property when sold at retail in this state, computed on each taxable sale for the purpose of remitting the amount of tax due the state, and including each and every retail sale.

          
          

          * * *

          
          

          (d) At the rate of 6 percent of the lease or rental price paid by a lessee or rentee, or contracted or agreed to be paid by a lessee or rentee, to the owner of the tangible personal property.

          
          

32. A "retail sale" is "a sale to a consumer or to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter . . . ." § 212.02(14)(a), Fla. Stat. (The Department has not taken the position that Hancock provided taxable services to any of his customers or clients.)

33. The lease of tangible personal property is considered the sale of tangible personal property for purposes of Florida's sales tax. § 212.02(15), Fla. Stat. ("'Sale' means and includes: (a) Any transfer of title or possession, or both, exchange, barter, license, lease, or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration.").

34. A "lease" is defined in pertinent part in

    
    

    Section 212.02(10)(g), Florida Statutes, as "the leasing or

    rental of tangible personal property and the possession or use thereof by the lessee or rentee for a consideration, without transfer of the title of such property[.]"

35. The term "use" "means and includes 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." § 212.02(20), Fla. Stat.

36. Florida Administrative Code Rule 12A-1.071 provides as follows:

    (1)(a) For the purpose of this rule, the term "lease" includes any rental or license to use tangible personal property, unless a different meaning is clearly indicated by the context in which it is used. The term refers to all transactions that are not bailments in which there is a transfer of possession of tangible personal property, without regard to limitations upon the use, for a consideration, without a transfer of title to the property. It is not essential for a transfer of possession of tangible personal property to include the right to move the tangible personal property. It includes a transaction under which a person secures for a consideration the temporary use of tangible personal property which, although not on his premises, is operated by or under the direction or control of the person or his employees. All leases of tangible personal property other than conditional-sale type leases as described in paragraph (1)(d) of this rule, are operating leases. Whether a transaction is a "sale" or a "rental, lease, or license to use" shall be determined in accordance with the provisions of the agreement.

    (b) Transfer of possession with respect to an operating lease means that one of the following attributes of tangible personal property ownership has been transferred:

    1. Custody or possession of the property, actual or constructive;

    2. The right to custody or possession of the property; or,

    3. The right to use and control or direct the use of the property.

    
    

    (Emphasis added.)

    
    

37. The Department also mentions Rule 12A-1.048(2)(b), which states that the "rental of ornamental nursery stock, such as plants, shrubs, or trees, is subject to the tax, including the rental by the producer of the ornamental nursery stock."

38. As reported in the Findings of Fact, Hancock relied upon the "decorator's exemption" that was, at all relevant times, set forth in Florida Administrative Code Rule 12A- 1.071(35)(a).

    Analysis

    
    

39. If Hancock were only renting plants, and doing nothing more, then the transactions clearly would be taxable, as leases of tangible personal property. If, conversely, he were being hired only to decorate with plants, and to do nothing else, then, almost as certainly, he would be providing a nontaxable service, for the taxing statute does not specifically include decorating services.21 The question presented in the case is a close one precisely because Hancock's business involved the

    rental of plants for the purpose of decorating with the plants; it thus combined elements that, standing alone, would have been, respectively, taxable and nontaxable.

40. Looking for guidance in the cases, the undersigned located two decisions of the Fourth District Court of Appeal that are interesting enough to mention. The first is Warning

    Safety Lights of Georgia, Inc. v. State Dept. of Revenue, 678 So. 2d 1377 (Fla. 4th DCA 1996). There, the court held that the taxpayer's contract with the Department of Transportation ("DOT") was a nontaxable service agreement, not lease. The agreement at issue (actually a subcontract) obligated the taxpayer, using its own personnel, to furnish, maintain, and repair temporary and permanent traffic control devices, such as barricades, traffic signs, and warning lights, at DOT construction sites. Id. at 1377-78. The taxpayer's equipment was under the taxpayer's "continuous control and supervision," and the prime contractor neither performed, nor directed, nor controlled the taxpayer's work. Id. at 1378. When the project was completed, the taxpayer removed its temporary traffic control devices. Id.

41. In a declaratory statement issued at the taxpayer's request, the Department found that the subcontract was a lease, making the transaction taxable. The Department based its decision largely on the premises that (a) the barricades

    "possess[ed] a value independent of the completed project" and

    
    

    1. the prime contractor and the taxpayer would have "joint possession" of the tangible property in question because the prime contactor, which presumably would have actual control over the construction site, would accordingly be in constructive possession, at least, of the traffic control devices. Id. at 1380. Reversing the Department's declaration, the court rejected these premises, reasoning as follows:

    Although the barricades are not unusable in and of themselves, it is [the taxpayer]'s service of setting up and maintaining the temporary traffic control pattern which provides the ultimate value to the DOT and the prime contractor to facilitate the completion of the road construction project.

    
    

    * * *

    
    

    There is no basis for holding that the prime contractor has control over the construction site and, therefore, is in "joint possession" of the equipment in question.

    If the prime contractor is in "joint possession" of the equipment of [the taxpayer], then it should be in "joint possession" with all subcontractors who provide equipment to the construction site, i.e., subcontractors who provide cranes, bulldozers, road graders and so forth. In such a situation these subcontractors would also be subject to the tax[, a result that would violate an existing administrative rule].

    
    

    Id. at 1380-81.

    
    

42. Some aspects of Warning Safety Lights appear to support Hancock's position. Like the court in that case, the

    undersigned does not accept the Department's claim that the lessee was meaningfully in possession of the subject personal property; if anything, in fact, that claim is even weaker here, because there is no persuasive evidence that the lessees generally had actual control over the event sites.

    Additionally, it could be argued, and might even be the case, that Hancock's setting up and arranging his plants at the event sites provided the "ultimate value" to his clients——but this possibility was not proved. Warning Safety Lights is distinguishable, however, because the taxpayer there continuously controlled and supervised its property and, even more important, the prime contractor did not direct or control the taxpayer's work. Here, the evidence shows, in contrast, that Hancock's clients did direct and control his work.

43. The other case of interest is New Sea Escape Cruises, Ltd. v. Florida Dept. of Revenue, 823 So. 2d 161 (Fla. 4th DCA 2002), rev. granted, 845 So. 2d 889 (Fla. 2003). In that case, the taxpayer, a cruise ship operator, contested an assessment of sales and use taxes that the Department had levied against, among other things, a food and beverage concession agreement. Pursuant to this contract, which the Department deemed a lease or license, the taxpayer had paid a caterer, on a per capita basis, to purchase, prepare, and serve food to the ship's passengers and crew, as well as to provide housekeeping

    services. Id. at 165. The court reversed the assessment on the food and beverages, on the following rationale:

    
    

    Id.

    The Department's position is that the amount paid by [the taxpayer,] Sea Escape[,] to the caterer was a payment for the purchase of food, which would be taxable. Sea Escape argues that the payments made to the caterer were not for the purchase of food, which was the personal property being taxed. The food, it contends, did not go from the possession of the caterer to the possession of Sea Escape. We agree with Sea Escape, because the caterer supplied prepared meals directly to passengers and crew for a charge per person. This was a service agreement, not a lease.

    
    

44. It is somewhat tempting to conclude that if providing fully prepared meals to persons aboard a cruise ship was a service because the food was delivered directly to the diners for consumption and not to the putative lessee, then providing live plants for the purpose of decorating an event site is also a service, for the plants are delivered, not into the possession of the lessee, but to a hall or ballroom for the benefit of the attendees (who are arguably analogous to the passengers in New

    Sea Escape). That, however, would read too much into the Fourth DCA's decision, which, given the court's cursory explanation of its holding, should be limited to the specific facts at issue.

45. The undersigned's ultimate factual determination that Hancock transferred possession of his plants in the regular

course of business——and thus "rented" the plants in taxable transactions——is largely driven by the finding that Hancock's clients were given (or retained) the right to direct the use of Hancock's property. See Fla. Admin. Code R. 12A-1.071(1)(b)3. On this record, the greater weight of the evidence shows that Hancock was not a decorating contractor, but instead a vendor who works for (or with) decorating contractors.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department enter a final order directing Hancock to pay state sales taxes and County Taxes in the total amount of $59,525.99, plus state use taxes in the amount of $371.40, bringing to $59,897.39 the principal sum of back-taxes due and owing. In addition, Hancock should be ordered to pay interest and penalties on the unpaid taxes, in amounts to be determined by the Department in accordance with the methodologies reflected in the audit work papers that are included in the evidentiary record of this case.

DONE AND ENTERED this 7th day of January, 2004, in Tallahassee, Leon County, Florida.

S

JOHN G. VAN LANINGHAM

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 7th day of January, 2004.

ENDNOTES

1/ Petitioner also sought to introduce a letter from Respondent's counsel to Petitioner's counsel dated September 23, 2003. This letter clearly communicated an offer of settlement, however, and was rejected on that basis. See § 90.408, Fla.

Stat.; Atwater v. Gulf Maintenance and Supply, Inc., 424 So. 2d 135, 136 (Fla. 1st DCA 1982). Petitioner was afforded, but did not take advantage of, the opportunity to submit a post-hearing memorandum urging that the letter be admitted.

2/ This aspect of Petitioner's business will be referred to as "plant rental" not for polemical purposes but simply for convenience——that is, without meaning to imply that the subject transactions entailed "leases."

3/ Although Hancock considered "Action Plant Rental" to be a "subsidiary" of Landscape Concepts, it was actually never more than a fictitious name.

4/ Hancock's clients were not contractually prohibited from rearranging the plants after Hancock had left the premises. Hancock discouraged his clients from moving the plants, however, and the undersigned accepts his testimony that this happened infrequently.

5/ This finding is an inference reasonably drawn from the established basic facts regarding the special events in question.

6/ This finding is based on Hancock's testimony, which was corroborated not only by canceled checks reflecting payments to the Department between April 1986 and April 1994 but also several notices from the Department to Petitioner concerning late-filed returns in the years 1989-91 and 1993. While it is true, as the Department points out, that no sales tax returns or additional supporting documents were produced, the absence of such evidence does not demonstrate that Hancock lied on the witness stand——especially not when (a) all the available documentary evidence is consistent with his testimony and (b) the Department has failed to show that Petitioner was under a legal obligation to retain records for as many as 15 years. (Indeed, no particularly satisfying explanation was put forward regarding the Department's inability to locate any record of Petitioner's sales tax payment history.) On the instant record as a whole, the undersigned fact-finder has chosen to credit Hancock's uncontradicted testimony that sales tax returns covering the transactions of Landscape Concepts/Action Plant Rental were duly filed until mid-1994, when Hancock indisputably ceased filing such returns.

7/ This "decorator's exemption" was repealed, effective August 1, 2002.

8/ Hancock has not argued, based on these facts, that waiver or estoppel should apply to preclude the Department from recovering back-taxes. Thus, the merits, or lack of merit, of these affirmative defenses will not be discussed.

9/ The undersigned is not persuaded that Hancock's records really were voluminous——if anything, in fact, the documents that Hancock produced seemed rather sparse——but the Department clearly thought they were adequate and voluminous and acted accordingly, relying consistently on Section 212.12(6)(c), Florida Statutes, as the authority for sampling Hancock's

records. See, e.g., Dept. of Rev.'s Unilateral Prehearing Stipulation at 10-11; Final Hearing Transcript at 62.

10/ Hancock's year 2000 federal income tax return is not in evidence; the others are.

11/ There is nothing in the record that explains how Hancock's year-to-date receipts jumped from $113,661 in November 2000 to

$154,253 by year's end. It is possible, the undersigned supposes, that holiday events could have accounted for Hancock's very productive December. At any rate, Hancock did not challenge any of these figures, and so the undersigned has accepted them as accurate.

12/ The county taxes at issue, together with the amounts claimed to be due therefor, are: the school capital outlay tax, $1.02; the indigent care surtax, $33.96; the local government infrastructure surtax, $4.70; and the discretionary (pooled) surtax, $782.62. In the aggregate, these county taxes (hereafter, collectively, "County Taxes") totaled $822.30.

13/ The number shown in the table is the number that the Department used in determining Hancock's alleged tax liability. The figure actually should be 9,497.75; the one-penny discrepancy does not materially affect the computation.

14/ The number shown in the table is the number that the Department used in determining Hancock's alleged tax liability. The figure actually should be 12,854.42; the one-penny discrepancy does not materially affect the computation.

15/ Nevertheless, that Hancock elected to implement this decision without first securing a formal ruling from the Department was imprudent, to say the least.

16/ The rate was only five percent in 1987, for example. See § 212.05, Fla. Stat. (1987).

17/ The number shown in the table is the number that the Department used in determining Hancock's alleged tax liability. The figure actually should be 9,497.75; the one-penny discrepancy does not materially affect the computation.

18/ The number shown in the table is the number that the Department used in determining Hancock's alleged

tax liability. The figure actually should be 12,854.42; the one-penny discrepancy does not materially affect the computation.

19/ Unless otherwise indicated, citations to the Florida Statutes refer to the 2003 Florida Statutes.

20/ Relying upon Straughn v. Tuck, 354 So. 2d 368, 371 (Fla. 1977), and Harris v. State Dept. of Revenue, 563 So. 2d 97, 99 (Fla. 1st DCA), rev. denied, 574 So. 2d 141 (Fla. 1990), overruled on other grounds, Florida Dept. of Revenue v. Herre, 634 So. 2d 618 (Fla. 1994), the Department asserts that the taxpayer must prove the Department departed from the law’s requirements or that the assessment was not supported by any reasonable hypothesis of legality. Straughn and Harris are distinguishable and inapposite, however, for the reasons set forth in Dunhill Intern. List Co. v. Department of Revenue, DOAH Case No. 02-3614, 2003 WL 21248898, *4 (Fla.Div.Admin.Hrgs.

2003). In this proceeding, the Department's assessment is not presumed to be correct or incorrect; the taxpayer's burden of proof is accurately stated in the text.

21/ For this reason, the "decorator's exemption" ultimately is of little moment. While it existed, Rule 12A-1.071(35)(a) was helpful insofar as it provided examples of services that fall outside the reach of the taxing statute. However, unless and until the legislature explicitly subjects decorating services to the sales tax, which it has not yet done, such services are not taxable even in the absence of the "decorator's exemption." (Indeed, because decorating services are not taxable in the first instance, the "decorator's exemption" really was not an "exemption.") Consequently, the fact that the Rule failed specifically to mention plants and trees is not especially significant. In the end, the important question is not whether the taxpayer decorated with Rule-recognized materials and supplies, but whether the taxpayer was, in fact, a decorating contractor whose business was providing decorating services.

The Rule gives some guidance in this regard, but not much. By the same token, Rule 12A-1.048(2)(b) is not terribly instructive either because, as written, it is basically tautologous; of course the rental of tangible personal property such as ornamental nursery stock is taxable——the statute makes that clear. The important fact question, in this case, is whether the taxpayer was renting the plants or rather, as a decorating contractor, was working with the plants the way a painter works

with oils, as a medium of artistic expression. Rule 12A- 1.048(2)(b) provides no guidance on that issue.

COPIES FURNISHED:

Scott Alan Salomon, Esquire Salomon Law Center

2770 University Drive

Coral Springs, Florida 33065

Carrol Y. Cherry, Esquire Office of the Attorney General The Capitol, Plaza Level 01

Tallahassee, Florida 32399-1050

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

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: 03-001341

Orders for Case No: 03-001341