vs. ) Case No. 03-3675
Respondent. )
Pursuant to notice, a final hearing was held in this case on December 19, 2003, in Fort Lauderdale, Florida, before Errol
H. Powell, a designated Administrative Law Judge of the Division of Administrative Hearings.
For Petitioner: Gerald S. Schnitzer
GSS Advisory Services, Inc.
For Respondent: Carrol Y. Cherry, Esquire
Office of the Attorney General The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050
The issue for determination is whether Petitioner should be assessed sales and use tax for the audit period May 1, 1997 through April 30, 2002, per the Notice of Proposed Assessment dated July 3, 2003.
By Notice of Proposed Assessment (Notice), dated July 3, 2003, the Department of Revenue (Department) notified Wales Garage Corporation (Wales) that the Department was assessing Wales sales and use tax, including penalty and interest through July 3, 2003, in the amount of $31,978.86, for the audit period May 1, 1997 through April 30, 2002. Wales filed a protest of the assessment and requested an administrative hearing. On October 8, 2003, this matter was referred to the Division of Administrative Hearings.
At hearing, Wales presented the testimony of one witness and two rebuttal witnesses and entered eight exhibits (Petitioner’s Exhibits numbered 1-8) into evidence. The Department presented the testimony of two witnesses and entered
17 exhibits (Respondent's Exhibits numbered 1-17), two of which were deposition testimony, into evidence.
A transcript of the hearing was ordered. At the request of the parties, the time for filing post-hearing submissions was set for more than ten days following the filing of the transcript. The Transcript, consisting of one volume, was filed on March 1, 2004. Only the Department filed a post-hearing submission, which has been considered in the preparation of this Recommended Order.
Wales is a Florida S corporation. Its principal place of business is located at 2916 Southeast 6th Avenue, Fort Lauderdale, Florida.
Wales' federal employee identification number is 59- 1703273.
Wales' Florida sales and tax number is 16-03-095273- 26/1.
By letter dated June 6, 2002, the Department issued to Wales a Notice of Intent to Audit Books and Records (Notice of Intent). The Notice of Intent identified the audit number as A0205310975.
On July 10, 2002, the Department's auditor assigned to perform the audit conducted an initial interview with Wales. The auditor discussed, among other things, the audit and sample methods that would be employed during the audit.
On August 13, 2002, the auditor began examining Wales' books and records at Wales' business location.
Wales was cooperative during the audit. Wales provided all available books and records for the audit.
The sole shareholders of Wales are Stewart Levy and Diane Levy.
Wales leased its business location from Element Two Enterprises, Inc., ( Element Two) a related entity.
Stewart Levy and Diane Levy are also the sole officers of Element Two, president and secretary, respectively.
Element Two is the record owner of the improved real property located at 2916 Southeast 6th Avenue, Fort Lauderdale, Florida, (realty). The address for the realty is also the address for Wales' place of business.
Element Two mortgaged the realty leased by Wales.
Wales paid monthly monetary consideration to Element Two in lease payments, which directly correlated to the amount of the monthly mortgage payments.
Ad valorem taxes and property insurance were included in the monthly mortgage payments. Wales paid the ad valorem taxes and property insurance on the leased property.
The lease payments to Element Two by Wales included the amount of the ad valorem taxes, property insurance, and common areas of maintenance.
Wales did not pay sales tax on any of the lease payments to Element Two.
Element Two did not charge or remit sales tax to the Department on the lease payments by Wales. Element Two was not registered with the Department as a dealer. Only dealers that are registered can remit sales tax on lease payments. Consequently, Element Two could not remit sales tax on the lease payments by Wales.
Wales did not utilize all of the property it leased.
Wales sub-leased a portion of the leased property to an unrelated entity.
A prior sales and use tax audit was conducted of the sub-lessee, which included the period May 1997 through December 1998. The Department examined the sublease audit to determine whether Wales owed additional sales tax. The Department's examination of that audit revealed that the sales and use tax on the rent paid by the sub-lessee for the period May 1997 through September 1998 was assessed and paid by the sub-lessee. For the period May 1997 through December 1998, Wales had neither charged or collected sales tax nor remitted sales tax to the Department on the sub-lessee's payments.
No sales tax was charged or paid on the sublease payments for the period October 1998 through December 1998.
From January 1999 through April 2002, Wales charged, collected, and remitted sales tax on the sublease payments.
The Department credited Wales for sales tax already paid on the subleased portion for the period May 1997 through September 1998 and January 1999 through April 2002.
On its general ledger, Wales posted the lease payments to Element Two as rent payments.
Element Two posted the lease payments to its general ledger as rent income.
On its federal income tax returns, Wales reported the lease payments to Element Two as rent expense.
Element Two reported the lease payments on its federal income tax returns as rent income.
On November 29, 2002, the Department issued to Wales a Notice of Intent to Make Audit Changes for audit number A0205310975.
Wales requested and the Department agreed to hold an audit conference to discuss the audit findings. Wales claimed that rent payments made were not subject to sales tax because both Wales and Element Two signed the mortgage and promissory note on the realty leased by Wales. However, only Element Two was reflected as the borrower on the loan and only Element Two was the signatory on the mortgage even though both Wales and Element Two signed the promissory note.
On January 10, 2003, Wales executed a Consent to Extend the Time to Issue an Assessment or to File a Claim for Refund (Consent). The Consent extended the statute of limitations for the period of time in which an assessment may be issued or a claim for refund may be filed to December 31, 2003.
On July 3, 2003, the Department issued, by certified mail, the Notice and an Addendum to Proposed Assessment for audit number A0205310975. The Notice provided, among other things, for the assessment of sales and use tax in the amount of
$17,481.73; penalty in the amount of $8,741.10; interest in the amount of $5,756.03, with additional daily interest being computed at the rate of $3.54 per day from July 3, 2003; and a total assessment in the amount $31,978.86.
On September 1, 2003, the Notice became a Final Assessment for audit number A0205310975.
Wales contested the Final Assessment and requested a hearing.
Wales is not contesting that part of the audit which found that Wales failed to pay sales tax on certain fixed assets purchased for use in its business.
At hearing, Wales contended that its federal income tax returns could be amended to reflect the payments to Element Two as mortgage payments instead of rent payments, which would, in turn, change the Department's audit to reflect the payments as mortgage not rent. To address this contention, the Department presented the testimony of an expert witness in the area of rental consideration and sales tax audits. The Department's expert testified that the consideration for rental or use of property is the payment between/to one who owns the real property and/from one who uses the property; and concluded that consideration, as rental, was provided to Wales by Element Two based on the Department's taxing statute, Section 212.031, Florida Statutes, and its rules and regulation, Florida
Administrative Code Rule 12A-1.070. The expert opined that the mortgage payments were consideration for a lease or license to use the real property and that, therefore, the monthly lease payment, which equaled the monthly mortgage payment, paid by Wales to Element Two was consideration for the lease or license to use the realty. The expert's testimony is found to be credible.
The evidence presented shows that the mathematical computations performed by the Department in its audit are correct. Further, the evidence shows that the mathematical computations as to tax, penalty, and interest assessed are correct.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter of this proceeding and the parties thereto pursuant to Sections 120.569 and 120.57(1), Florida Statutes (2003).
The Department is an agency of the State of Florida and is authorized to administer the tax laws of the State of Florida. §§ 20.21 and 213.05, Fla. Stat. (2003).
Section 120.80(14), Florida Statutes (2003), provides in pertinent part:
(b) Taxpayer contest proceedings.--
In any administrative proceeding brought pursuant to this chapter as authorized by s.
72.011(1), the taxpayer shall be designated the "petitioner" and the Department of Revenue shall be designated the "respondent," . . . .
In any such administrative proceeding, the applicable department's burden of proof, except as otherwise specifically provided by general law, shall be limited to a showing that an assessment has been made against the taxpayer and the factual and legal grounds upon which the applicable department made the assessment.
Initially, the Department has the burden to show that it made an assessment against Wales and that the assessment was based upon factual and legal grounds. IPC Sports, Inc. v. State, Department of Revenue, 829 So. 2d 330, 332 (Fla. 3d DCA 2002).
Once the Department meets this burden, the burden shifts to Wales to demonstrate by a preponderance of the evidence that the assessment is incorrect. Id., at 332.
Section 212.02, Florida Statutes (2000), provides definitions and provides in pertinent part:
(2) "Business" means any activity engaged in by any person, or caused to be engaged in by him or her, with the object of private or public gain, benefit, or advantage, either direct or indirect. Except for the sales of any aircraft, boat, mobile home, or motor vehicle, the term "business" shall not be construed in this chapter to include occasional or isolated sales or transactions involving tangible personal property or services by a person who does not hold himself or herself out as engaged in business, but includes other charges for the sale or rental of tangible personal property, . . . all rentals of or licenses in real property . . . The term "business"
shall not be construed in this chapter to include the leasing, subleasing, or licensing of real property by one corporation to another if all of the stock of both such corporations is owned, directly or through one or more wholly owned subsidiaries, by a common parent corporation
. . . .
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(10) "Lease," "let," or "rental" means . . .:
* * *
"Lease," "let," or "rental" also means 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 . . . .
"Real property" means the surface land, improvements thereto, and fixtures, and is synonymous with "realty" and "real estate."
"License," as used in this chapter with reference to the use of real property, means the granting of a privilege to use or occupy a building or a parcel of real property for any purpose.
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(12) "Person" includes any individual, firm, copartnership, joint adventure, association, corporation, estate, trust, business trust, receiver, syndicate, or other group or combination acting as a unit and also includes any political subdivision, municipality, state agency, bureau, or department and includes the plural as well as the singular number.
Wales and Element Two are persons as defined in Section 212.02(12), Florida Statutes (2000).
The Department is authorized to conduct audits, relating to the tax laws of Florida, of a taxpayer and to request information to ascertain the taxpayer's liability, if any. § 212.13, Fla. Stat. (2000).
The Department is authorized to prescribe the books and records to be maintained by all dealers that are subject to taxes imposed by Chapter 212, Florida Statutes. § 212.12(6)(a), Fla. Stat. (2000). Further, the Department is authorized to audit or inspect the books and records of dealers
and, if a deficiency exists, to make an assessment and collect it. § 212.12(5)(a), Fla. Stat. (2000).
Wales does not claim that it is a dealer as defined by Chapter 212, Florida Statutes.
Wales was required to keep suitable books and records relating to sales tax and to preserve those books and records.
§§ 212.12(6)(a), 212.13, and 213.35, Fla. Stat. (2002).
For conducting an audit, only records and information available when the audit commences are deemed acceptable.
§ 212.13(5), Fla. Stat. (2000).
The legislative intent is that "every person is exercising a taxable privilege who engages in the business of
renting, leasing, letting, or granting a license for the use of any real property." § 212.031(1)(a), Fla. Stat. (2000).
Wales does not claim that it qualifies for one of the exemptions at Sections 212.031(1)(a) and 212.08, Florida Statutes (2000).
Florida Administrative Code Rule 12A-1.070, provides in pertinent part:
(1)(a) Every person who rents or leases any real property or who grants a license to use, occupy, or enter upon any real property is exercising a taxable privilege . . . .
* * *
"Real property" means the surface land, improvements thereto, and fixtures, and is synonymous with "realty" and "real estate.
"License," with reference to the use of real property, means the granting of a privilege to use or occupy a building or parcel of real property for any
purpose. . . .
* * *
(4)(a) The tenant or person actually occupying, using, or entitled to use any real property from which rental or license fee is subject to taxation under s. 212.031, F.S., and shall pay the tax to his immediate landlord or other person granting the right to such tenant or person to occupy or use such real property.
The tax shall be paid at the rate of 5 percent prior to February 1, 1988, and 6 percent on or after February 1, 1988, on all considerations due and payable by the tenant or other person actually occupying, using, or entitled to use any real property to his landlord or other person for the privilege
of use, occupancy, or the right to use or occupy any real property for any purpose.
Ad valorem taxes paid by the tenant or other person actually occupying, using, or entitled to use any real property to the lessor or any other person on behalf of the lessor, including transactions between affiliated entities, are taxable.
Common area maintenance charges paid by a tenant to the lessor for the privilege or right to use or occupy real property are taxable.
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(f) The tax shall be due and payable at the time of the receipt of the rental or license fee payment by the lessor or other person who receives the rental or payment. The owner, lessor, or person receiving the rent or license fee shall remit the tax to the Department at the times and in the manner provided in Rule 12A-1.056, F.A.C.
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(5) Only one tax on the rental or license fee payable from the occupancy or use of any real property from which the rental or license fee is subject to taxation under s. 212.031, F.S., shall be collected, and the tax shall not be pyramided by a progression of transactions; however, the amount of tax due the State of Florida shall not be decreased by any such progression of transactions.
* * *
(7)(a) Where a tenant or person occupying, using, or entitled to use any real property which is subject to tax sublets or assigns and collects rentals or license fees on a taxable portion of the leased or licensed premises, such tenant or other person shall be required to register as a dealer and
collect and remit the tax on all such sub- rentals or assignments.
* * *
(12) When a tenant or other person pays insurance for his own protection, the premium is not regarded as rental or license fee consideration, even though the landlord or other person granting the right to occupy or use such real property is also protected by the coverage. However, any portion of the premium which secures the protection of the landlord or person granting the right to occupy or use such real property and which is separately stated or itemized is regarded as rental or license fee consideration and is taxable.
* * *
(16) Any person who has leased, occupied, or used or was entitled to use any real property and cannot prove that the tax has been paid to his lessor or other person shall be directly liable to the State for any tax, interest, or penalty due on any such taxable transaction.
* * *
(19)(a) The lease or rental of real property or a license fee arrangement to use or occupy real property between related "persons," as defined in s. 212.02(12), F.S., in the capacity of lessor/lessee, is subject to tax.
The total consideration, whether direct or indirect, payments or credits, or other consideration in kind, furnished by the lessee to the lessor is subject to tax despite any relationship between the lessor and the lessee.
The total consideration furnished by the lessee to a related lessor for the occupation of real property or the use or entitlement to the use of real property
owned by the related lessor is subject to tax, even though the amount of the consideration is equal to the amount of the consideration legally necessary to amortize a debt owned by the related lessor and secured by the real property occupied, or used, and even though the consideration is ultimately used to pay that debt.
The relationship between Wales and Element Two, as represented by the books, records, and information provided by Wales for the audit, was one of lessee (Wales) and lessor (Element Two). Wales' rent payments to Element Two were posted on Wales' general ledger as rent payments and were reported on Wales' federal income tax returns as rent expense. Further, Wales' books and records reflected that Wales did not treat the realty as an asset.
Similarly, Element Two's books, records, and information indicated that its relationship to Wales was one of lessor (Element Two) and lessee (Wales). Element Two posted the rent payments on its general ledger as rent income and the rent payments were reported on its federal income tax returns as rent income. Additionally, Elements Two's books and records reflected that Element Two treated the realty as an asset.
As a result, Element Two engaged in the business of renting, leasing, letting or otherwise granting a license to use its realty. Consequently, such action by Element Two is a taxable privilege.
The person responsible for paying the tax is the tenant or person actually occupying, using, or entitled to use any real property from which rental or a license fee is subject to taxation under Section 212.031, Florida Statutes. Further, the tax must be paid to such person's immediate landlord or other person granting the right to the responsible-person to occupy or use the real property.
Accordingly, the payments made by Wales to Element Two were for the rental or lease or license to use the realty.
A tax is levied for the privilege of engaging in the business of renting, leasing, or letting, or granting a license for the use of any real property. Section 212.031(1), Florida Statutes (2000), provides in pertinent part:
(c) For the exercise of such privilege, a tax is levied in an amount equal to 6 percent of and on the total rent or license fee charged for such real property by the person charging or collecting the rental or license fee. The total rent or license fee charged for such real property shall include payments for the granting of a privilege to use or occupy real property for any purpose and shall include base rent, percentage rents, or similar charges. Such charges shall be included in the total rent or license fee subject to tax under this section whether or not they can be attributed to the ability of the lessor's or licensor's property as used or operated to attract customers. Payments for intrinsically valuable personal property such as franchises, trademarks, service marks, logos, or patents are not subject to tax under this section. In the case of a
contractual arrangement that provides for both payments taxable as total rent or license fee and payments not subject to tax, the tax shall be based on a reasonable allocation of such payments and shall not apply to that portion which is for the nontaxable payments.
The tenant or other person actually occupying, using, or entitled to use any real property is responsible for paying the six percent tax to the landlord or other person for the privilege of use, occupancy, or the right to use or occupy any real property for any purpose. Fla. Admin. Code R. 12A- 1.070(4)(b).
Wales was responsible for paying the six percent sales tax on the rent payments made to Element Two.
The rent payments made by Wales to Element Two included expenses for ad valorem taxes, property insurance, and common area maintenance. The ad valorem taxes were subject to the sales tax. Fla. Admin. Code R. 12A-1.070(4)(c). The property insurance premiums were subject to the sales tax. Fla. Admin. Code R. 12A-1.070(12). The common area maintenance charges were subject to the sales tax. Fla. Admin. Code R. 12A- 1.070(4)(d).
Element Two is the owner of the realty. Element Two mortgaged the realty. The monthly rent payment made by Wales to Element Two was equal to the amortized mortgage debt owed by Element Two on the realty; the realty secured the mortgage debt;
and the rental payment was ultimately used to pay the mortgage debt.
Neither party pointed to a statutory or rule provision which defined consideration. The undersigned finds Cascella v. Canaveral Port Authority, 827 So. 2d 308 (Fla. 5th DCA 2002), both instructive and persuasive. Pertinent hereto, one of the issues raised in Cascella was whether the payment of ad valorem taxes by the lessee was part of the rent or a rent covenant, where the lease made the payment of ad valorem taxes as part of the rent. Crucial to the issue was whether the payment of ad valorem taxes constituted consideration. The court considered the definition of rent found in Black's Law Dictionary 1299 (7th ed. 1999), which defined rent as "consideration paid, usually periodically, for use or occupation of property." Id., at 310. The court held, among other things, that "Clearly, [the] obligation to pay ad valorem taxes constituted consideration to use or occupy the property." Id. The undersigned also finds persuasive the opinion of the Department's expert that the monthly lease payment by Wales, which equaled the monthly mortgage payment on the realty, was consideration for a lease or license to use the realty. The rental payments made by Wales to Element Two constitute consideration in that Element Two, the owner of the real property/mortgagor, is otherwise obligated to make the mortgage payments itself.
Wales was required to pay sales tax on the total consideration paid to Element Two. The total consideration paid by Wales to Element Two is subject to sales tax regardless of their relationship. Fla. Admin. Code R. 12A-1.070(19)(b).
In the case at hand, which involves a related lessor/lessee, the total consideration is subject to sales tax. Fla. Admin. Code R. 12A-1.070(19)(b). Therefore, the rent payments paid by Wales to Element Two are subject to sales tax.
Wales, a lessee of the realty, subleased a portion of the realty, which was subject to sales tax, to an unrelated entity. The sublease period was from May 1997 through December 1998. Wales was required to collect and remit the sales tax on the sublease payments. Fla. Admin. Code R. 12A-1.070(7)(a). Consequently, Wales was liable for the sales tax on the sublease payments for the period of May 1997 through December 1998.
The sub-lessee paid the sales tax to the Department for the period May 1997 through September 1998. Only one sales tax can be collected and no pyramiding by a progression of transactions is permitted, but the amount due cannot be decreased by any such progression of transactions. Fla. Admin. Code R. 12A-1.070(5). Accordingly, the Department credited Wales for the sales tax already paid by the sub-lessee.
Wales failed to demonstrate that the sales tax on its rent payments to Element Two was collected and remitted to the
Department. Wales is directly liable to the Department for the sales tax on the rent payments to Element Two. Fla. Admin. Code R. 12A-1.070(16).
The fact that Wales and Element Two are related entities has no effect on and is immaterial to the rental of the realty being subject to sales tax. The business arrangement of a lease of realty between related persons is subject to sales tax. Fla. Admin. Code R. 12A-1.070(19)(a).
The Department met its burden and demonstrated that an assessment against Wales was made and that a factual and legal basis existed for the assessment. Wales demonstrated that the assessment was made in accordance with the requirements of law.
Wales failed to meet its burden by failing to demonstrate that the assessment was incorrect.
Regarding penalty, no persuasive argument was made to suggest that a penalty should not be assessed and that the penalty is unreasonable.
The assessment, including sales tax, interest, and penalty, is correct and valid.
RECOMMENDED that the Department of Revenue's assessment of sales tax, interest, and penalty against Wales Garage
Corporation be sustained and that the Department of Revenue enter a final order assessing sales tax, interest, and penalty against Wales Garage Corporation for the period May 1, 1997 through April 30, 2002, consistent herewith.
DONE AND ENTERED this 27th day of May, 2004, in Tallahassee, Leon County, Florida.
ERROL H. POWELL
Filed with the Clerk of the Division of Administrative Hearings this 27th day of May, 2004.
Gerald S. Schnitzer
GSS Advisory Services, Inc.
Carrol Y. Cherry, Esquire Office of the Attorney General The Capitol, Plaza Level 01
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.
