Administrative Law Judge (ALJ) Daniel Manry conducted the administrative hearing of this case on October 15, 2003, in Orlando, Florida, on behalf of the Division of Administrative Hearings (DOAH).
For Petitioner: Michael E. Ferguson, pro se
Control Design Engineering, Inc.
For Respondent: Carrol Y. Cherry, Esquire
Office of the Attorney General Revenue Litigation Section The Capitol, Plaza Level 01
The issues are whether Respondent properly conducted a sales and use tax audit of Petitioner's books and records; and,
if so, whether Petitioner is liable for tax and interest on its purchases of materials used for improvements to real property.
Respondent assessed Petitioner for sales and use tax, in the amount of $39,074.85, plus interest, for the period of October 1, 1995, through September 30, 2000 (audit period).
Petitioner denied liability and requested an administrative hearing.
At the hearing, Petitioner called one witness and submitted two exhibits for admission into evidence. Respondent called four witnesses and submitted 48 exhibits for admission into evidence. The identity of the witnesses and exhibits and any attendant rulings are reported in the Transcript of the hearing filed on November 3, 2003.
By Order Granting Extension, the ALJ granted Respondent's Unopposed Request for Extension of Time to File Proposed Recommended Order. Respondent timely filed its Proposed Recommended Orders (PROs) on December 3, 2003.
During the audit period, Petitioner was a Florida corporation with its principal place of business located at 7820 Professional Place, Suite 2, Tampa, Florida. Petitioner's Florida sales tax number was 39-00-154675-58, and Petitioner's federal employer identification number was 59-3089046. After
the audit period, the Florida Department of State administratively dissolved Petitioner for failure to file statutorily required annual reports and filing fees.
Petitioner engaged in the business of providing engineering services and fabricating control panels. Petitioner fabricated control panels in a shop Petitioner maintained on its business premises.
Petitioner sold some of the control panels in over-the- counter sales. Petitioner properly collected and remitted sales tax on the control panels that Petitioner sold over-the-counter.
Petitioner used other control panels in the performance of real property contracts by installing the panels as improvements to real property (contested panels). Petitioner was the ultimate consumer of the materials that Petitioner purchased and used to fabricate the contested panels. At the time that Petitioner installed the contested panels into real property, the contested panels became improvements to the real property.
Petitioner failed to pay sales tax at the time Petitioner purchased materials used to fabricate the contested panels. Petitioner provided vendors with Petitioner's resale certificate, in lieu of paying sales tax, when Petitioner purchased the materials used to fabricate the contested panels.
None of the purchase transactions for materials used to fabricate the contested panels were tax exempt.
The audit is procedurally correct. The amount of the assessment is accurate.
On October 23, 2000, Respondent issued a Notification of Intent to Audit Books and Records (form DR-840), for audit number A0027213470, for the period of October 1, 1995, through September 30, 2000.
During an opening interview, the parties discussed the audit procedures and sampling method to be employed and the records to be examined. Based upon the opening interview, Respondent prepared an Audit Agreement and presented it to an officer and owner of the taxpayer.
Respondent began the audit of Petitioner's books and records on January 22, 2001. On March 9, 2001, Respondent issued a Notice of Intent to Make Audit Changes (original Notice of Intent).
At Petitioner's request, Respondent conducted an audit conference with Petitioner. At the audit conference, Petitioner provided documentation that the assessed transactions involved improvements to real property.
At Petitioner's request, Respondent conducted a second audit conference with Petitioner's former legal counsel. Petitioner authorized its former legal counsel to act on its
behalf during the audit. At the second audit conference, the parties discussed audit procedures and sampling methods, Florida use tax, fabricated items, and fabrication costs. Respondent revised the audit findings based upon additional information from Petitioner that the assessed transactions involved fabricated items of tangible personal property that became improvements to real property.
Respondent assessed use tax on the materials used to fabricate control panels in those instances where Petitioner failed to document that Petitioner paid sales tax at the time of the purchase. Respondent also assessed use tax on fabrication costs including the direct labor and the overhead costs associated with the fabrication process, for the period of October 1, 1995, through June 30, 1999. Respondent eliminated use tax assessed on cleaning services in the original Notice of Intent because the amount of tax was de minimis.
On August 29, 2001, Respondent issued a Revised Notice of Intent to Make Audit Changes (Revised Notice of Intent). On September 18, 2001, Petitioner executed a Consent to Extend the Time to Issue an Assessment to File a Claim for Refund until January 25, 2002.
On October 18, 2001, Petitioner executed a second Consent to Extend the Time to Issue an Assessment to File a Claim for Refund until April 25, 2002.
On February 6, 2002, Respondent issued a Notice of Proposed Assessment for additional sales and use tax, in the amount of $21,822.27; interest through February 6, 2002, in the amount of $10,774.64; penalty in the amount of $10,831.12; and additional interest that accrues at $6.97 per diem.
Petitioner exhausted the informal remedies available from Respondent. On April 29, 2002, Petitioner filed a formal written protest that, in substantial part, objected to the audit procedures and sampling method employed in the audit.
Respondent issued a Notice of Decision sustaining the assessment of tax, penalty, and interest. Respondent correctly determined that the audit procedures and sampling method employed in the audit were appropriate and consistent with Respondent's statutes and regulations. Respondent concluded that the assessment was correct based upon the best available information and that Petitioner failed to provide any documentation to refute the audit findings.
Petitioner filed a Petition for Reconsideration that did not provide any additional facts, arguments, or records to support its position. On May 16, 2003, Respondent issued a Notice of Reconsideration sustaining the assessment of tax and interest in full, but compromising all penalties based upon reasonable cause.
CONCLUSIONS OF LAW
DOAH has jurisdiction over the subject matter and parties to this proceeding. § 120.57(1), Fla. Stat. (2003). The parties were duly noticed for the administrative hearing.
The Department's initial burden of proof is limited to showing by a preponderance of the evidence that an assessment has been made against the taxpayer and the factual and legal grounds upon which the assessment was made. Department of Revenue v. Nu-Life Health & Fitness Ctr., 623 So. 2d 747, 751- 752 (Fla. 1st DCA 1992). Respondent satisfied its initial burden of proof.
Petitioner bears the burden of going forward with the proof to show by a preponderance of the evidence that the assessment is incorrect. Nu-Life, 623 So. 2d, at 751-752. Petitioner must show that Respondent departed from the requirements of law or that the assessment was not supported by any reasonable hypothesis of legality. Cf. Straughn v. Tuck,
354 So. 2d 368, 371 (Fla. 1977)(involving property tax assessments under Chapter 193); Harris v. State, Department of Revenue, 563 So. 2d 97, 99 (Fla. 1st DCA 1990) (citing Straughn, supra, for assessments under Chapter 212). Petitioner failed to satisfy the burden of going forward with the proof.
The Florida sales and use tax is an excise tax on the privilege of engaging in business in the state. §§ 212.05 and
212.06, Fla. Stat. (2003). Sales and use taxes are separate, but complementary taxes, although they are generally referred to as one tax. U.S. Gypsum Co. v. Green, 110 So. 2d 409, 412 (Fla. 1959). The two taxes provide a uniform tax on retail sales and the use of all "tangible personal property" in Florida. Fla.
Admin. Code R. 12A-1.091(4).
The ultimate consumer bears the economic burden of the sales and use tax. The seller bears the administrative burden of collecting and remitting the tax. Davis v. Ponte Vedra Club,
78 So. 2d 858, 859-860 (Fla. 1955) (concluded that a seller is an agent of the state who is charged with the duty to collect and remit the tax).
Any person who uses tangible personal property in Florida and cannot prove that taxes were paid at the time of sale is liable for the use tax. § 212.07(8), Fla. Stat. (2003). Petitioner used the contested panels and could not prove that Petitioner paid the sales tax at the time of sale.
Section 212.13, Florida Statutes (2003), authorizes Respondent to audit Petitioner's books and records and to request information to ascertain whether sales and use taxes have been paid. Petitioner had a statutory duty to maintain adequate books and records relating to sales and use taxes and to produce those books and records for audit. §§ 212.12(5), 212.12(6), 212.13, 213.34, and 213.35, Fla. Stat. (2003).
Respondent may sample Petitioner's books and records and project the audit findings over the entire audit period to determine the proportion that taxable retail sales bear to total retail sales or the proportion that taxable purchases bear to total purchases. § 212.12(6)(c), Fla. Stat. (2003). Respondent correctly sampled Petitioner's sales and purchase records.
Florida Administrative Code Rule 12A-1.051 governs the taxability of tangible personal property used by contractors and subcontractors who purchase, acquire, or manufacture materials for use in the performance of real property contracts.
The term "fabricated items" includes items that contractors manufacture, produce, process, compound, or fabricate for their own use in performing contracts for improvements to real property. § 212.06(1)(b), Fla. Stat. (2003); Fla. Admin. Code
R. 12A-1.051(2)(b). The contested panels are fabricated items for Petitioner's use in performing real property contracts.
The term "fabricated items" applies only to items the contractor manufactures, produces, processes, compounds, or fabricates at a plant or shop maintained by the contractor.
§ 212.06(1)(b), Fla. Stat. (2003); Fla. Admin. Code R. 12A- 1.051(2)(b). Petitioner fabricated the contested panels at a shop Petitioner maintained on its premises.
The term "improvement to real property" or "real property improvement" includes the activities of building,
erecting, constructing, altering, improving, repairing, or maintaining real property. § 212.06(14)(c), Fla. Stat. (2003); Fla. Admin. Code R. 12A-1.051(2)(d). Petitioner's installation of the contested panels into real property is an improvement to real property.
The term "real property contract" includes an oral or written agreement to furnish and install tangible personal property that becomes a part of or is directly wired or plumbed into a structure irrespective of whether the terms of the agreement call for payment by lump sum, time and materials, cost plus, guaranteed price, or any other method. Fla. Admin. Code
R. 12A-1.051(2)(h)1.c. Petitioner fabricated and installed the contested panels in the performance of real property contracts.
Contractors are the ultimate consumers of materials and supplies they use to perform real property contracts and must pay tax on the cost of materials and supplies, unless the contractor has entered into a "retail sale plus installation contract." Fla. Admin. Code R. 12A-1.051(4). Petitioner did not show that it entered into any retail sale plus installation contract for the contested panels.
Petitioner was the ultimate consumer of the materials used to fabricate the contested panels. Petitioner did not resell tangible personal property to the owner of real property,
but used the tangible personal property to provide completed real property improvements. Fla. Admin. Code R. 12A-1.051(4).
Petitioner was a "dual operator." Petitioner used materials in the performance of contracts and resold materials. Fla. Admin. Code R. 12A-1.051(9). Petitioner could have provided a copy of an Annual Resale Certificate (form DR-13) to vendors if Petitioner were not certain, at the time of purchase, whether materials purchased would be resold or used in the performance of a contract for improvements to real property. Fla. Admin. Code R. 12A-1.051(9). Petitioner would then have collected from its customers the sales tax due on the ultimate sale of the materials or would have accrued and remitted use tax due on materials used in the performance of real property contracts. §§ 212.07(1) and (8), Fla. Stat. (2003); Fla. Admin. Code R. 12A-1.051(9). Petitioner failed to accrue and remit use tax to Respondent on the use of the materials purchased and used to fabricate the contested panels.
Petitioner is liable for the tax due on the cost of the property fabricated without deduction for the cost of fabrication. § 212.06(1)(b), Fla. Stat. (2003); Fla. Admin. Code R. 12A-1.043(1)(a) and 12A-1.051(10). The term "fabricated cost" includes the cost to a real property contractor of fabricated items including direct materials, direct labor, and indirect fabricating costs attributable to fabricating an
article of tangible personal property for one's own use.
§ 212.06(1)(b), Fla. Stat. (2003); Fla. Admin. Code R. 12A- 1.051(2)(a) and 12A-1.043(1)(a) and (b) (1998). Petitioner is liable for use tax on the fabricated costs of the materials used to fabricate the contested panels. Petitioner became liable for use tax on the materials at the time Petitioner fabricated the control panels. Fla. Admin. Code R. 12A-1.043(1)(f).
RECOMMENDED that Respondent enter a Final Order denying Petitioner's request for relief and sustaining Respondent's assessment of taxes and interest in full.
DONE AND ENTERED this 10th day of December, 2003, in Tallahassee, Leon County, Florida.
Filed with the Clerk of the Division of Administrative Hearings this 10th day of December, 2003.
Carrol Y. Cherry, Esquire Office of the Attorney General Revenue Litigation Section The Capitol, Plaza Level 01
Michael E. Ferguson
Control Design Engineering, Inc.
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.
