STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
KARSTEN ENTERPRISES FL, INC.
Petitioner,
vs.
DEPARTMENT OF REVENUE,
Respondent.
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) Case No. 10-2310
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RECOMMENDED ORDER
An administrative hearing was conducted in this case on August 10, 2010, in Tallahassee, Florida, before
James H. Peterson, III, Administrative Law Judge with the Division of Administrative Hearings.
APPEARANCES
For Petitioner: Joseph R. Copeland, President
Karsten Enterprises, FL, Inc. Post Office Box 1405
Dothan, Alabama 36302-1405
For Respondent: Jeffrey M. Dikman, Esquire
Kacee Johnson, Esquire
Office of the Attorney General The Capitol, Plaza Level 1 Revenue Litigation Bureau Tallahassee, Florida 32399-1050
STATEMENT OF THE ISSUE
Whether the Department of Revenue's final assessment of sales and use tax plus interest against Petitioner Karsten Enterprises FL, Inc., is correct.
PRELIMINARY STATEMENT
On January 26, 2009, the Department of Revenue (Department) issued a notice of decision memorializing its final assessment (Final Assessment or Department's assessment) of sales and use tax plus interest arising under Chapter 212, Florida Statutes, against Karsten Enterprises FL, Inc. (Petitioner). Petitioner timely filed a petition for formal administrative hearing contesting the Final Assessment.
The Final Assessment sustained the Department's earlier notice of proposed assessment following a tax audit. The proposed assessment determined that the balance of tax and interest due as of January 26, 2009, was $41,446.39, with interest accruing thereafter at $7.57 per day. No penalties were proposed or assessed. The Department’s tax audit identification number for this case is 20032673. The Petitioner’s assigned Business Partner Number is 0001030787.
Petitioner filed an original petition (original Petition), dated March 18, 2009, in the form of a one-paragraph letter from Petitioner's president, Joseph R. Copeland, to the Department.
It stated that “I do not feel this is a fair and just decision and would like to request a hearing.” The Department dismissed the original Petition as inadequate, with leave to amend.
Petitioner then filed an amended petition (Amended Petition)
with the Department consisting of a two-page letter from Petitioner's president, Joseph R. Copeland.
Paragraph 5(A), (B), and (C) of the Amended Petition alleges:
If I had added an "install home" cost to my invoices of the home from the factory as some other dealers are doing and I am doing now, there would be no taxes due. That one line "install home" does not changed one material fact of the sale. Because the factory would pay the same person to install the home that I do. I hope I have satisfactorily explained this issue as it is somewhat confusing yet pretty simple.
A site builder of a home pays sales tax only on the material to build that home (Which is the way we calculated our sales tax.) We should not pay on the labor to build the home. A few examples are running electrical wire, installing wall studs, shingles, plumbing, etc. According to your finding, I and my customer would pay sales tax on labor to install the material of that home, when a home next door didn't pay simply because of how the invoice for the home was treated.
My accountant was told by an employee of [the Department] to calculate the sales tax on [modular homes] the way we did them which would have resulted in us owing zero sales taxes.
The Amended Petition and original Petition were referred to the Division of Administrative Hearings (DOAH) on or about
May 1, 2009. DOAH Case No. 09-2335 was assigned. On May 7, 2009, the Department filed an unopposed motion to close DOAH's file, without prejudice to reopening the file at a later date,
to permit additional time for settlement discussions and discovery. The motion was granted and an order closing DOAH’s file, without prejudice, was entered on May 11, 2009.
On April 23, 2010, the Department moved to reopen DOAH's file, asserting that settlement had not been reached and that a hearing was necessary. The Department simultaneously served written discovery on Petitioner, consisting of the Department's First Requests for Admission with Interlocking Requests for Production, and accompanying Interrogatories. There were fourteen requests for admission served upon Petitioner by the Department. Five interrogatories were propounded, including the Department's request for disclosure of Petitioner’s witnesses and any expert witnesses.
On April 27, 2010, the undersigned entered an order reopening the case, which specified that a new case number would now reference the case as DOAH Case No. 10-2310.
By Order dated May 5, 2010, this matter was scheduled for a final hearing to be held on August 10, 2010. A separate Order of Prehearing Instructions was entered requiring the parties to disclose their witnesses, exchange a list of exhibits, and exchange copies of their exhibits, seven days prior to the final hearing.
On June 21, 2010, the Department served and filed a Motion to Declare that Requested Admissions have been Conclusively
Admitted; a Motion to Compel Interrogatories 1-3; and an Alternative Motion to Compel Discovery Compliance (collectively Department’s Discovery Motions). Petitioner did not file a written response to the Department’s Discovery Motions.
On June 29, 2010, the Department served its list of witnesses and exhibits, together with copies of those exhibits. On that same day, the Department also served a notice of intent to rely upon data summaries of Petitioner’s own records.
On July 20, 2010, an order was entered requiring Petitioner to show cause why the Department’s Discovery Motions should not be granted. On July 28, 2010, Petitioner responded that it was acting pro se and needed an extension of time.
On August 3, 2010, the undersigned conducted a telephonic hearing on the Department’s Discovery Motions. Prior to the telephonic hearing, Petitioner's president, Joseph R. Copeland, served a response to the Requests for Admission, which response was mislabeled as a Response to Request for Interrogatories.
Petitioner’s response admitted ten of the fourteen factual matters and denied four of the matters, which the Department requested Petitioner to admit.1/
After a telephonic hearing on the Department's Discovery Motions, the undersigned entered an Order dated August 3, 2010, which denied the Department’s Motion to Declare Admissions Conclusively Admitted, except for those ten admissions which
Petitioner had already admitted in writing, granted the Department’s alternative motion to compel a response to outstanding discovery, and ordered Petitioner to provide copies of all of its exhibits to the Department, by close of the business on August 3, 2010. The Order further gave the Department an opportunity to obtain a continuance, which the Department chose not to act upon.
On August 3, 2010, Petitioner provided the Department a list of Petitioner’s six trial exhibits, together with copies of those exhibits. These were the only exhibits listed by Petitioner and the only exhibits provided by Petitioner prior to hearing.
Joseph R. Copeland, the principal and sole shareholder of Petitioner, was allowed to participate in the final hearing as Petitioner's qualified representative.
At the commencement of the hearing, the parties introduced
33 joint exhibits received into evidence as Joint Exhibits JE1 through JE32, and JE34. Petitioner introduced two exhibits received into evidence without objection as Petitioner's Exhibits P1 and P6. Petitioner’s Exhibit P2, consisting of an invoice that was outside the audit period, was received into evidence over the Department’s relevancy objection. In addition, Petitioner proffered an exhibit identified as Petitioner's Proffer A, consisting of three Technical Assistant
Advisements (TAAs) from the Department, numbered 92A-045, 97A- 023, and 00A-005, dated June 24, 1992, April 2, 1997, and February 14, 2000, respectively.2/ The Department presented the testimony of Drenea York and Tammy Miller. Petitioner presented the testimony of Douglas K. Uhler, CPA, and Joseph R. Copeland.
Neither party requested a transcript of the hearing. The parties jointly requested 20 days from the end of the hearing within which to submit proposed recommended orders. The Department and Petitioner timely filed their respective Proposed Recommended Orders on August 20, 2010, both of which have been considered in the preparation of this Recommended Order.
FINDINGS OF FACT
Petitioner is a corporation headquartered in Dothan, Alabama, doing business in Florida.
The Department is an agency of the State of Florida that has been delegated the responsibility to collect sales and use tax imposed by Chapter 212, Florida Statutes.
During the audit period in controversy, from October 1, 2004 through September 30, 2007, Petitioner was a dealer in manufactured or modular homes and did business at one or more Florida locations.
During the pertinent period, Petitioner entered into various contracts to provide manufactured or modular homes to its customers for delivery at locations in Florida.
At a Karsten Sales Center, models of residential factory-built buildings are displayed. These residential factory-built buildings are produced by manufacturers that Karsten uses for that purpose.
In most of the transactions during the audit period, Petitioner's customers would contract with Petitioner for the sale and installation of a factory built building on property owned by the customer. In the remainder of the contracts during the audit period, Petitioner would either purchase the property or enter into a contract for the sale of the property to the customer, and Petitioner would install a home that Petitioner had purchased from a manufacturer and then sell the home and land package to the customer.
The contract prices were a lump sum, which included not only the manufactured or modular home, but also installation of the home at a Florida location.
Petitioner’s contracts with its customers did not itemize individual components of the modular or manufactured homes, such as individual nuts, bolts, and shingles, but instead agreed to deliver the entire modular or manufactured home on an installed basis.
The contracts between Petitioner and its customers specify the type of home that the customer wanted to have erected or installed on the property. Upon selection of a floor
plan, options, and other customization, the customer would agree to order a specific home from a manufacturer.
Petitioner purchased the pre-fabricated manufactured or modular homes from various manufacturers. The manufacturer would produce the home upon receiving an order from Petitioner. The manufacturer shipped the completed home to Petitioner, delivering the home to the property where the home would ultimately be erected and installed.
Once shipped to the site, the factory-built buildings were placed on a foundation constructed for that purpose. Petitioner would either directly, through the manufacturer, or through subcontractors, construct the foundations, place the homes on the foundations, and connect the homes to required utilities. All of these activities were done as part of Petitioner's contracts with its customers for real property improvement.
In many instances, the manufacturer both delivered the homes to the sites and provided post-delivery services to the homes. Additional services provided by the manufacturer after it installed the homes on the foundations included trim work, repair work, and fit and finish work. Petitioner paid the manufactures directly for these post-delivery services.
During the audit period at issue, Petitioner sold, erected and installed approximately 30 residential modular or factory-built buildings in the state of Florida.
If the home was built by a Florida factory, the factory would include sales tax in its invoice to Petitioner, based upon the cost of materials, but not including labor, that the manufacturer used in the construction of the home prior to its delivery to the site. If an out-of-state manufacturer built the home, the manufacturer would not include a sales tax amount in its invoices to Petitioner. Rather, the out-of-state manufacturers indicated that the cost of materials for construction of the homes at the factory was approximately 60% of the purchase price Petitioner paid for the homes.
When Petitioner closed its contracts with its customers, if the manufacturer was an out-of-state manufacturer that had not previously included a sales or use tax in its invoice to Petitioner, Petitioner would remit a use tax directly to the Department, based upon 60% of Petitioner’s purchase price of the manufactured or modular homes.
In either case, whether paying sales tax directly to a Florida manufacturer based only on the Florida manufacturer's cost of materials, or remitting use tax on 60% of its purchase price of manufactured or modular homes from out-of-state manufacturers, rather than paying tax on 100% of the price it
paid for the homes, Petitioner did not pay sales or use tax on the manufacturer’s labor or fabrication costs.
In remitting use tax, or paying sales tax to the Florida manufacturers, Petitioner was seeking to pay tax only on the manufacturer’s cost of materials used in the manufacturing process.
There is no dispute concerning the Department’s math calculations. Rather, Petitioner disputes that the labor costs were taxable.
Petitioner has no proof that the Department has ever received payment of tax from any person on the manufacturer’s labor costs at issue in this proceeding.
Drenea York, who testified for the Department, is an accountant and auditor with twenty years of experience, all in sales and use taxation.
Tammy Miller, who testified for the Department, is an attorney who has worked with the Department for eight years within the Department's Technical Assistance and Dispute Resolution section (Department's Dispute Resolution Section). The Department's Dispute Resolution Section employs “Tax Conferees,” such as Ms. Miller, who hear informal taxpayer protests, issue the Department's notices of decisions regarding final assessments, and provide guidance to the public upon request. Her practice has focused principally upon sales and
use taxation, and she has handled several cases involving taxation of modular home contractors.
Tammy Miller signed the notice of decision regarding the Final Assessment at issue. She also wrote the article for the Florida Institute of Certified Public Accountants, which Petitioner introduced into evidence as P1. She testified as the Department’s corporate representative.
Douglas Uhler testified as a former employee of Petitioner and also as an expert witness for the Petitioner. He is a CPA with some tax experience, who was not shown to be a specialist in taxation or in Florida sales and use taxation. He practices in Birmingham, Alabama, where he is licensed. He has knowledge and expertise in valuation and other areas, but was not qualified as an expert to testify as to the tax determinations at issue in this controversy.
Neither Petitioner nor Mr. Uhler applied for a TAA.
Mr. Uhler was permitted to testify, over the Department’s hearsay and relevancy objections, that he relied on an oral statement from an alleged Department employee, concerning how Florida sales and use tax law is applied in the manufactured and modular home industry. During his testimony, however, Mr. Uhler did not know the name of the person to whom he allegedly spoke and he was not sure that the person he spoke to was an employee of the Department of Revenue. Therefore, no
weight was given to his testimony regarding his recollection of a conversation with an alleged Department employee on the issue of how Florida sales and use tax law is applied in the manufactured and modular home industry.
During the audit period at issue, the Department made four revisions to its original audit report in response to additional information provided by the Petitioner. During this period, the Petitioner paid the uncontested portion of the Department's assessment, leaving only one issue in dispute: whether additional tax and interest is due on Petitioner’s purchase of the modular homes.
The Department’s audit and resulting tax assessment considered Petitioner, and not the manufacturer, to be the “real property contractor” responsible for the payment of the tax, within the meaning of the aforementioned rule provisions.
The Department’s determination that Petitioner was the responsible “real property contractor” is consistent with the fact that the real property improvement contracts at issue were entered directly between Petitioner and its customers, and not between the manufacturer and Petitioner’s customers.
In its contracts with its customers, Petitioner directly arranged installation work, either providing the installation itself or through the manufacturer or a subcontractor on behalf of Petitioner's customers. The issue of
whether Petitioner or the manufacturer performed the installation work, however, was not considered by the Department to be a determinative factor, in and of itself, in making the Final Assessment.
According to the Department, it would not consider a manufacturer to be the responsible “real property contractor” unless the contracts for real property improvement were directly between the manufacturer and Petitioner’s customers. The evidence does not support a finding that Petitioner's customers had direct contracts for real property improvements with the manufacturers of the homes.
The Department also considered Petitioner to be the “end user” under Chapter 212, Florida Statutes, and Florida Administrative Code Rule 12A-1.051(3) and (4), which, according to the Department, imposes tax on the “end user.” The Department considered Petitioner, as opposed to Petitioner's customers, to be the end user based upon the reasoning that Petitioner was the last party to purchase the modular units as “tangible personal property,” before the modular homes became affixed to real property.
Ms. York and Ms. Miller explained that the Department did not consider Petitioner’s customers to be the “end users” because Petitioner's customers did not purchase resold items of “tangible personal property,” itemized in detail under Florida
Administrative Code Rule 12A-1.051(3)(d). Rather, they explained that Petitioner’s customers, who purchased under lump- sum contracts, were considered to have purchased an improvement to real property, and improvements to real property fall outside the scope of the Florida sales and use tax chapter.
In its audit, the Department examined Petitioner’s contracts with its customers solely to determine that the Petitioner was the end user or the “real property contractor.” The Department’s assessment did not seek to impose tax or interest liability on Petitioner’s transactions with its customers. Instead, the Department taxed Petitioner on Petitioner’s “cost price” of purchasing modular homes, giving Petitioner full credit for any partial tax that Petitioner had paid.
As noted above, during the audit period, when it was dealing with a Florida manufacturer, Petitioner generally remitted sales or use tax directly to the manufacturer, at the time of purchase. More often, however, Petitioner paid sales or use tax on a monthly basis, by direct accrual or remittance to the Department on approximately 60% of the amount Petitioner paid for homes manufactured by out-of-state manufacturers.
The invoices to Petitioner frequently included other itemized charges, which the Department did not consider part of Petitioner’s “cost price” of the purchased modular units. For
example, if an invoice included sales or use tax, the Department excluded charges for tax when calculating Petitioner’s “cost price,” so as to avoid imposing tax on the itemized tax.
Likewise, no charges for installation of the modular units onto real property were included in the Department’s calculation of “cost price.” The Department instead determined “cost price” by adding up the “Base Price” for purchasing the modular homes, together with itemized home “Options,” as they appeared on the manufacturer's invoices to Petitioner for the modular homes.
Examples of several “Options” would be such things as better carpeting, a sliding glass door, or a plywood floor. The combined total of “Base Price” and “Options” were used by the Department in determining Petitioner’s “cost price” of purchasing the units as items of tangible personal property from the manufacturer’s factory. Petitioner's "cost price" as determined by the Department reflected the seller’s (in this case the manufacturer’s) material and labor costs. The Department's Final Assessment, however, did not include costs related to the installation of the modular homes onto real property, as those were considered by the Department as costs arising subsequent to the sale of the product as tangible personal property. The Final Assessment only sought tax on Petitioner’s purchase cost of the modular homes as tangible personal property leaving the factory.
Because Petitioner had already paid tax on approximately 60% of its cost price, the Department’s assessment sought to capture the 40% of sales and use tax that Petitioner never paid.
The Department's assessment determined that Petitioner owed tax on its own “cost price” as invoiced by the manufacturer. The Department determined that the Petitioner’s “cost price” was a different “cost price” than the manufacturer’s “cost price.” According to the Department, the manufacturer’s cost price excluded labor on its factory floor but Petitioner’s “cost price” included all materials and labor costs that were necessarily a component of Petitioner's actual purchase price.
The Department’s auditor gave Petitioner full credit for all taxes paid, whether Petitioner had paid the tax by direct remittance or at the time that it paid an invoice, with one exception: credit was generally not given for payments made by Petitioner to a company named Cavalier because during the audit period at issue, Petitioner remitted certain amounts of sales tax to a manufacturer named Cavalier, but Cavalier refunded these amounts to Petitioner.3/
The Department’s audit and assessment did not treat Petitioner as a “manufacturer” nor give Petitioner the benefit of the special exemption, under Section 212.06(1)(b), Florida
Statutes, which is available to manufacturers of a “factory- built building.” This is because the Department did not consider Petitioner to be a manufacturer.
Although Petitioner argued that it qualified for the special exemption under Section 212.06(1)(b), Florida Statutes, under the theory that it was a "manufacturer," Petitioner failed to show that it is a “manufacturer” entitled to such exemption.
In accordance with Petitioner's Application for Registration with the Department, Petitioner was registered as a “Manufactured (Mobile) Home Dealer” rather than as a manufacturer.
In response to audit interview questions, Petitioner advised the auditor that it was in the business of “Retail Sale” of “Mobile and Modular Homes.”
Petitioner made this same representation again in its response to a Pre-Audit Questionnaire and Request for Information.
The first time that Petitioner ever asserted that it was a "manufacturer" was after Petitioner received the Department’s Notice of Intent to make Audit Changes, and became aware that, as a “real property contractor,” it would be assessed tax on 100% of its “cost price.” Petitioner then changed its self-description of its business model, asserting that it was a “manufacturer.”
When Petitioner protested the Department’s assessment, however, it abandoned, at least at the informal protest stage, the argument that it was a manufacturer. Petitioner instead argued that it should be treated like a real property contractor engaged in the business of stick built homes.
According to Tammy Miller, Petitioner's president, Mr. Copeland, told Ms. Miller during the informal protest process, that Petitioner was not a manufacturer. The Final Assessment corroborates Tammy Miller’s recollection because it addressed Petitioner’s various legal arguments but did not address Petitioner’s argument that it is a manufacturer, because that argument apparently was not made during the informal protest.
The Amended Petition does not allege that Petitioner was a manufacturer or that it should be treated like one. Petitioner instead asserts that it is a modular home dealer who purchases from “the factory” and that it should be treated like a stick-built contractor.
Petitioner stipulated that it is a modular home “dealer” and that it purchased the pre-fabricated manufactured or modular homes from various manufacturers.
No evidence was introduced that Petitioner owns or operates factories or an assembly line. Rather, the evidence
showed that Petitioner operated out of an office building in Alabama.
No evidence was presented that Petitioner has been licensed or certified as a “manufacturer” by the Department of Community Affairs, which is the agency that regulates manufacturers of factory-built buildings. See Fla. Admin. Code R. 9B-1.002(15) and 1.007(1).
Petitioner’s representative repeatedly referred to Petitioner, throughout opening statement, argument and testimony, as a dealer purchasing from the factory.
The Department’s witnesses testified that the sales and use tax applies to “real property contractors” in a way that taxes all real property contractors (stick-built or modular) on their full “cost price” of purchased materials, regardless of whether the purchased materials are lumber, shingles, nails, finished kitchen cabinetry, or assembled modular home modules. The Department's witnesses explained that the cost price of each item purchased will vary because the item purchased in each instance is different and some items will include greater material and labor costs than others.
The Final Assessment reflects the unpaid balance assessed, after all revisions and payments made, and provides a per diem amount so that accrued interest may be readily calculated.
The Final Assessment determined that the unpaid balance of tax and interest for the audit period (after crediting Petitioner with all payments made) was as follows:
$41,446.31 combined tax and interest through 1/26/09, with $7.57 per day for each day thereafter until the postmark date of payment.
The Final Assessment waived all penalties.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and the subject matter of this cause, pursuant to Sections 72.011(1), 120.569, 120.57(1), and 120.80, Florida Statutes(2010). Section 120.80(14)(b)(2), Florida Statutes, provides that the Department’s evidentiary burden in taxpayer-contest proceedings, as in this case, is “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.”
The Department met its burden of showing that a tax assessment was made by introducing the Final Assessment into evidence. In addition, through testimony, documentary evidence, and applicable law, the Department adequately explained the "factual and legal" basis for the assessment as required by Section 120.80(14)(b)(2), Florida Statutes.
The burden of proof therefore shifted to the Petitioner to demonstrate, by a preponderance of the evidence, that the Final Assessment was wrong. Cf. Department of Revenue v. Nu-Life Health and Fitness Center, 623 So. 2d. 747, 751-752 (Fla. 1st DCA 1992) (“[T]ax assessments such as the one at issue must be considered prima facie correct, with the burden of showing the contrary on the party against whom the assessment is made.”).
Section 212.05, Florida Statutes, imposes a sales, storage, and use tax, and provides in pertinent 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.
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.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.
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At the rate of 6 percent of the cost price of each item or article of tangible personal property when the same is not sold but is used, consumed, distributed, or stored for use or consumption in this state; however, for tangible property originally purchased exempt from tax for use exclusively for lease and which is converted to the owner's own use, tax may be paid on the fair market value of the property at the time of conversion. If the fair market value of the property cannot be determined, use tax at the time of conversion shall be based on the owner's acquisition cost. Under no circumstances may the aggregate amount of sales tax from leasing the property and use tax due at the time of conversion be less than the total sales tax that would have been due on the original acquisition cost paid by the owner.
(Emphasis added).
“Sales price” and “cost price” are two sides of the same transaction. When tangible personal property, such as modular housing units, are sold by a seller (the manufacturer) and then purchased by a buyer (Petitioner), the transaction has both a “sales price” to the seller and a “cost price” to the buyer. The “sales price” to the manufacturer/seller and the “cost price” to the Petitioner/buyer would be the same amounts, but the nomenclature is different based on the party to whom reference is made.
Subsections 212.02(4) and (16), Florida Statutes, define the mirror image terms “Sales price” and “cost price” as follows, in pertinent part:
“Cost price” means the actual cost of articles of tangible personal property without any deductions therefrom on account of the cost of materials used, labor or service costs, transportation charges, or any expenses whatsoever.
(16) “Sales price” means the total amount paid for tangible personal property, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser by the seller, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service cost, interest charged, losses, or any other expense whatsoever.
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(Emphasis added)
During the audit period, Petitioner, as a licensed dealer registered with the Department, either paid sales/use tax to the seller or provided the seller with its dealer registration number and then directly remitted use tax to the Department. Petitioner is liable for tax due that was neither paid to the seller nor to the Department, pursuant to Section 212.07(8), Florida Statutes. That statute provides:
Any person who has purchased at retail, used, consumed, distributed, or stored for use or consumption in this state tangible personal property, admissions, communication or other services taxable under this chapter, or leased tangible personal property, or who has leased, occupied, or used or was entitled to use any real property, space or spaces in parking lots or garages for motor vehicles, docking or
storage space or spaces for boats in boat docks or marinas, and cannot prove that the tax levied by this chapter has been paid to his or her vendor, lessor, or other person is directly liable to the state for any tax, interest, or penalty due on any such taxable transactions.
Petitioner should not have deducted a third-party manufacturer’s labor costs from the price Petitioner paid to purchase modular homes. A plain reading of Subsections 212.02(4) and (16), Florida Statutes, quoted in paragraph 63, above, makes it clear that such labor costs are not deductable from either “cost price” or “sales price.”
Florida Administrative Code Rule 12A-1.007(11)(g) provides that a “modular” home, not yet affixed to realty, constitutes “tangible personal property.”
(g)1. Any prefabricated or modular housing unit or portion thereof which is not manufactured upon a chassis or undercarriage as an integral part thereof is not a mobile home. Any such unit not affixed to realty is subject to the tax as tangible personal property when sold or repaired. When affixed to realty, the sale, repair, alteration, or improvement of any such unit is governed by Rule 12A-1.051, F.A.C.
In the instances of a modular home or prefabricated housing unit or manufactured building, the term "affixed to realty" shall mean a condition whereby the unit or building is either served by utility service other than electricity or is in place on land or on a foundation, or is on, attached to, or incorporated in another structure by any means other than by its own weight.
The sale, use, or rental of a modular home, prefabricated building, or
manufactured building before such unit is affixed to realty is taxable as tangible personal property.
4.a. The terms "modular home" or "prefabricated housing unit" mean and include structures which are designed to be used as dwellings when connected to the required utilities including the plumbing, heating, air-conditioning, and electrical systems contained therein, but which are not built on an integral chassis and which are not designed to be transported on their own wheeled assembly.
b. The term "manufactured building" means and includes a closed structure, building assembly, or system of assemblies, which may include structural, electrical, plumbing, heating, ventilating, or other service systems manufactured in manufacturing facilities for installation or erection, with or without other specified components, as a finished building or as part of a finished building, which shall include, but not be limited to commercial, institutional, storage, and industrial structures.
(Emphasis added).
Florida Administrative Code Rule 12A-1.051(3), (4),
and (6) explains who is to pay the tax on a modular home that is to be affixed to realty and when the tax is to be paid. These pertinent portions of the rule provide:
Classification of contracts by pricing. The taxability of purchases and sales by real property contractors is determined by the pricing arrangement in the contract. Contracts generally fall into one of the following categories:
Lump sum contracts. These are contracts in which a contractor or subcontractor agrees to furnish materials and supplies and necessary services for a single stated lump sum price.
Cost plus or fixed fee contracts. These are contracts in which the contractor or subcontractor agrees to furnish the materials and supplies and necessary services in exchange for reimbursement of costs plus a fee that is fixed in advance or calculated as a percentage of the costs.
Upset or guaranteed price contracts. These are contracts in which the contractor or subcontractor agrees to furnish materials and supplies and necessary services based on costs plus fees but with an upset or guaranteed maximum price which may not be exceeded.
Retail sale plus installation contracts. These are contracts for improvements to real property in which the contractor or subcontractor agrees to sell specifically described and itemized materials and supplies at an agreed price or at the regular retail price and to complete the work either for an additional agreed price or on the basis of time consumed. In order for a contract to fit in this category, all the materials that will be incorporated into the work must be itemized and priced in the contract before work begins. If a contract itemizes some materials but does not itemize other materials that will be incorporated into the work, the contract is not included in this category. Because the sale of the materials is a separable transaction from the installation, the purchaser must assume title to and risk of loss of the materials and supplies as they are delivered, rather than accepting title only to the completed work. The contractor may remain liable for negligence in handling and installing the items.
Time and materials contracts. These are contracts in which the contractor or subcontractor agrees to furnish materials and
supplies and necessary services for a price that will be calculated as the sum of the contractor's cost or a marked up cost for materials to be used plus an amount for services to be based on the time spent performing the contract. These contracts are similar to cost plus or fixed fee contracts, because the final price to the property holder will be determined based on the cost of performance. A time and materials contract may or may not also have a guaranteed or upset price clause. Time and materials contracts differ from contracts described in paragraph (d), because the materials are not completely identified, itemized, and priced in the contract in advance and because the property owner is contracting for a finished job rather than the purchase of materials.
General rule of taxability of real property contractors. Contractors are the ultimate consumers of materials and supplies they use to perform real property contracts and must pay tax on their costs of those materials and supplies, unless the contractor has entered a retail sale plus installation contract. Contractors performing only contracts described in paragraph (3)(a), (b), (c), or (e) do not resell the tangible personal property used to the real property owner but instead use the property themselves to provide the completed real property improvement. Such contractors should pay tax to their suppliers on all purchases. They should also pay tax on all materials they fabricate for their own use in performing such contracts, as discussed in subsection (10). They should charge no tax to their customers, regardless of whether they itemize charges for materials and labor in their proposals or invoices, because they are not engaged in selling tangible personal property. Such contractors should not register as dealers unless they are required to remit tax on the fabricated cost of items
they fabricate to use in performing contracts.
Rule for (3)(d) contractors. Contractors who perform retail sale plus installation contracts described in paragraph (3)(d) do sell tangible personal property.
They should register as dealers and provide a copy of their Annual Resale Certificate (Form DR-13) to the selling dealer to purchase tax exempt materials that are itemized and resold under paragraph (3)(d) contracts. They should not provide the certificate to purchase tax exempt items that they use themselves rather than reselling, such as hand tools, shop equipment, or office supplies. They must charge their customers tax on the price paid for tangible personal property but not on the charges for installation labor. See Rule 12A-1.038, F.A.C., for tax exempt sales made to entities that hold a valid Consumer’s Certificate of Exemption.
Sales of tangible personal property. Contractors, manufacturers, or dealers who sell and install items of tangible personal property, including those enumerated in Rule 12A-1.016, F.A.C., must collect tax on the full selling price, including any installation or other charges, even though such charges may be separately stated. The items listed in Rule 12A-1.016, F.A.C., are tangible personal property even after installation, and their sale with installation is not classified as a real property contract. Contractors, manufacturers, or dealers who sell property over-the-counter without performing installation services must collect tax on the full sales price of such items, even though those items will become improvements to real property upon installation by the purchaser. At the point at which they are sold in over-
the-counter transactions, those items are tangible personal property.
(Emphasis added).
Because Petitioner did business as a lump-sum contractor, it was the “ultimate consumer” or “end user” responsible for the payment of the sales tax. See Fla. Admin. Code R. 12A-1.051(3) and (4)(quoted above).
There is no statutory authority for Petitioner to pay only 60% of tax on its own “cost price.”
For Petitioner to pay 60% of the sales tax on the theory that a portion of the cost was labor would be analogous to a purchaser of a cabinet, or of an automobile, trying to back-out the manufacturer’s labor component and paying tax on less than the full sales price. This is directly contrary to the definition of “sales price” which expressly provides that these types of costs may not be deducted. See § 212.02(4) and (16), Fla. Stat. (quoted above).
While Petitioner argued that it might have structured the transactions differently to avoid assessment on the full purchase price of the modular homes, taxpayers are taxed based upon how they structure their affairs, not upon how their affairs could have been structured. Cf. North American Co. v.
Green, 120 So. 2d 603, 610 (Fla. 1959)("We are not privileged to make the taxability of a transaction dependent upon any
consideration of some alternative procedure which might not have been taxable.").
Petitioner is not entitled to the exemption contained within Section 212.06(1)(b), Florida Statutes, which provides in pertinent part:
A person who manufactures factory-built buildings for his or her own use in the performance of contracts for the construction or improvement of real property shall pay a tax only upon the person's cost price of items used in the manufacture of such buildings.
(Emphasis added)
"Exemptions to taxing statutes are special favors granted by the Legislature and are to be strictly construed against the taxpayer." State ex rel. Szabo Food Service of North Carolina v. Dickinson, 286 So. 2d 529, 530-531 (Fla. 1973). Further, "[i]t is well settled that he who would shelter himself under an exemption clause in a tax statute must show clearly that he is entitled under the law to exemption "
Green v. Pederson, 99 So. 2d 292, 296 (Fla. 1957).
The exemption contained within Section 212.06(1)(b), Florida Statutes, plainly and unambiguously provides that it inures solely to the benefit of a “manufacturer.” Petitioner, however, failed to demonstrate that it was a manufacturer or that it was entitled to claim the benefit of the exemption. See Findings of Fact 42 through 53, supra.
Petitioner also argued that the manufacturer should be treated as Petitioner’s sub-contractor for purposes of the manufacturer’s exemption. The evidence regarding the purchases at issue, however, indicated a vendor-vendee relationship between Petitioner and the manufacturers of the modular homes, not a subcontractor relationship. In addition, Petitioner's argument would constitute an expansion rather than narrow construction of the exemption, which plainly applies only to manufacturers, and not to those merely contracting with manufacturers.
74. In sum, the Final Assessment was accurate.
Based on the foregoing Findings of Facts and Conclusions of Law, it is
RECOMMENDED that, consistent with the Final Assessment and this Recommended Order, the Department of Revenue enter a final order finding that Petitioner owes tax and interest due as of January 26, 2009, in the amount of $41,446.39, with interest thereafter accruing at $7.57 per day, without penalties.
DONE AND ENTERED this 1st day of October, 2010, in Tallahassee, Leon County, Florida.
S
JAMES H. PETERSON, III
Administrative Law Judge
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-3060
(850) 488-9675
Fax Filing (850) 921-6847 www.doah.state.fl.us
Filed with the Clerk of the Division of Administrative Hearings this 1st day of October, 2010.
ENDNOTES
1/ The Department’s Requests for Admissions, and the Petitioner’s mislabeled written responses thereto, were later introduced into evidence at the final hearing as a composite exhibit marked Joint Exhibit 34.
2/ While the undersigned reviewed the subject TAAs, they were not persuasive on the issues asserted by Petitioner in this proceeding. In addition, the subject TAAs were not issued to Petitioner. TAAs are only binding to the person to whom they are issued, and do not constitute precedent. See § 213.22(1), Fla. Stat. (2009). Unless otherwise indicated, all references to Florida Statutes are to the 2009 version.
3/ The unrebutted testimony of the Department’s auditor, Drenea York, established that she made an error that was favorable to the Petitioner, by giving Petitioner credit for some of the payments, which Petitioner had made to Cavalier, even though Cavalier had refunded those payments. The Department does not seek to increase the amount of the assessment to correct this error, as the error was discovered shortly before final hearing, and the amount of the error was never quantified.
COPIES FURNISHED:
Joseph R. Copeland, President Karsten Enterprises, FL, Inc. Post Office Box 1405
Dothan, Alabama 36302-1405
Jeffrey M. Dikman, Esq.
Office of the Attorney General Revenue Litigation Bureau
The Capitol, Plaza Level 1 Tallahassee, Florida 32399-1050
Lisa Echeverri, Executive Director Department of Revenue
The Carlton Building, Room 104
501 South Calhoun Street Tallahassee, Florida 32399-0100
Marshall Stranburg, General Counsel Department of Revenue
The Carlton Building, Room 204
501 South Calhoun Street 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.
| Issue Date | Document | Summary |
|---|---|---|
| Nov. 08, 2010 | Agency Final Order | |
| Oct. 01, 2010 | Recommended Order | Modular home dealer not entitled to deduct the manufacturer's labor costs, but rather must pay sales/use tax on full purchase price of modular homes as the "end user." |
