STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BUSINESS AND ) PROFESSIONAL REGULATION, ) DIVISION OF ALCOHOLIC BEVERAGES ) AND TOBACCO, )

)

Petitioner, )

)

vs. )

) DISCOUNT ZONE, INC., d/b/a ) LAKELAND DISCOUNT BEVERAGE, ) INC., )

)

Respondent. )

Case No. 10-9281

)

RECOMMENDED ORDER

Pursuant to notice to all parties, a final hearing was conducted in this case on February 2, 2011, in Tampa, Florida, before Administrative Law Judge R. Bruce McKibben of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Michael B. Golen, Esquire

Department of Business and Professional Regulation

1940 North Monroe Street, Suite 40

Tallahassee, Florida 32399-2022

For Respondent: Peter C. Pappas, Esquire

4798 New Broad Street, Suite 210

Orlando, Florida 32814

STATEMENT OF THE ISSUE

The issue in this case is whether Respondent failed to pay tax surcharges, penalties, and interest owed on the sale of cigarettes, and, if so, the amount that is currently due and owing.

PRELIMINARY STATEMENT

Petitioner, Department of Business and Professional Regulation, Division of Alcoholic Beverages and Tobacco (the "Department"), filed an Administrative Complaint against Respondent, Discount Zone, Inc., d/b/a Lakeland Discount Beverage, Inc., dated July 14, 2010, alleging failure to pay cigarette surcharges that were due and owing. Respondent requested a formal administrative hearing in response to the administrative action, and the request was forwarded to the Division of Administrative Hearings.

At the final hearing, Petitioner called the following witness: Julie Keenan, senior tax audit administrator for the Department. Petitioner offered ten exhibits into evidence, each of which was admitted.

Respondent called one witness: Salah Rabi. Respondent offered 11 exhibits into evidence, each of which was admitted. Exhibits 1, 5, 6, and 10 were admitted as demonstrative exhibits only.

A Transcript of the final hearing was ordered by the parties and filed at the Division of Administrative Hearings on March 30, 2011. By rule, parties were allowed ten days to submit proposed recommended orders. Each party timely submitted a Proposed Recommended Order which was duly considered in the preparation of this Recommended Order.

FINDINGS OF FACT

1. The Department is the state agency responsible for monitoring the sale of tobacco products and for assuring that all businesses selling such products pay the requisite surcharges on each pack of cigarettes sold.

2. Respondent is a convenience store which is licensed to sell tobacco products. The store also sells alcoholic beverages, food items, and miscellaneous other products. The sales tax associated with the sale of tobacco products (only) is at issue in this proceeding.

3. The 2009 Florida Legislature enacted legislation imposing a $1.00 per pack surcharge on each pack of cigarettes sold in this state beginning July 1, 2009. Retailers having a cigarette inventory and, as of that date, would be required to pay a "floor tax" of $1.00 per pack in their inventory.

4. In February 2010, the Department received a letter from an anonymous source (who identified himself as "A Good Civilian (Business Owner) (Who always pays tax)[sic]." The letter had a

   
   

   flyer attached to it which had been distributed by Respondent. The flyer identified a number of products for which buyers could realize "[t]he lowest prices in Polk County." Included in the list of products were various tobacco items, including cigarettes. The anonymous source's letter suggested that anyone who could sell the tobacco products at those prices must be doing something illegal.

5. Based on the allegations in the anonymous letter, the Department decided to investigate. A team was sent to one of Respondent's stores (hereinafter referred to as "Store 1") on February 18, 2010. The team did an inventory of tobacco products at Store 1. There were 2,855 packs of cigarettes at Store 1. Some of the cigarettes were in individual packs; some were still in cartons (which contain ten packs each). The cigarette packs had the requisite state stamp on them. However, most of the packs had a stamp which had been in existence prior to the change in law on July 1, 2009. The fact that most of Store 1's cigarette packs had the old stamp meant that the cigarettes had been around for a while.

6. The inventory eventually formed the basis for an audit performed on Respondent's other store ("Store 2"). Store 2 had just recently opened and was stocked with cigarettes brought over from Store 1. There were, therefore, no invoices available at Store 2 as to the purchase of the cigarettes it had on hand.

   
   

7. The audit process involved a determination of distributors from which Respondent purchased its cigarettes. The two primary distributors were Sam's Club and Dosal. The Department ascertained from those distributors how many packs of cigarettes Respondent had purchased over a given span of time. Sam's Club provided records seeming to indicate the purchase of 37,770 packs between February 1 and June 29, 2009; another 9,090

   packs were purchased between July 4, 2009, and January 29, 2010. Dosal said 65,490 packs had been purchased between March 3 and June 23, 2009; another 17,800 were purchased between July and December 2009.

8. An audit investigation was commenced at Store 2 on March 17, 2010. The auditors did not ascertain the actual number of packs of cigarettes on hand at the store on that date. The auditors talked with the owners of the stores (Salah Rabi and his brother, Mohammed Rabi) about their sales history. Pursuant to requests of the auditors, the owners also sent in some additional records reflecting their sale of cigarettes.

9. In order to calculate the number of cigarette packs sold by Store 2 during a four-month period, the auditors determined how much business the store had done in all products (including non-tobacco products) for that period. Respondent gave the Department a list of daily sales on all products sold and the taxes paid on those products for the period February

   
   

   2009 through January 2010. The average monthly sales amount for the store during the audit period was $25,000. However, the Department found the information provided by Respondent to be incomplete and, thus, unreliable.

10. The auditors then assumed that 80 percent of the store's sales were for cigarettes1/ and that the average price per pack was $4.50. Using this formula, the auditors found that approximately 4,444 packs of cigarettes were sold each month, which the auditors rounded up to 4,500. Thus, for the audit period, the auditors estimated that 18,000 packs of cigarettes were sold. Neither of the auditors testified at final hearing as to the reasonableness of the formula or as to their alleged conversations with the owners.

11. Based on their findings, the auditors concluded that Respondents owe a balance of $77,798.23. That figure was derived as follows:

    • Total packs purchased 3/09 - 6/09

      from Dosal 65,490

      from Sam's 37,770

    • Total purchases prior to 7/1/09 103,260

    • Estimated monthly sales at 4,500

      packs per month for four months 18,000

    • Total estimated inventory on 7/1/09 85,260

    • Floor tax due on estimated inventory $85,260

    • Floor tax paid $ 4,963,09

    • Unpaid floor tax $80,296.91

    • Overpayment on other tobacco product $(2,498.54)

    • Total cigarette floor tax due $77,798.37

    
    

12. Missing from the evidence presented was any statement by the Department as to whether, on March 17, 2010, or any other date, there were 80,000-plus packs of cigarettes visible at the store. It seems plausible that so many packs, even if in cartons of 10 packs apiece, would be easy to identify.

13. Respondent refutes the basic premise of the auditor's findings. Using cash register receipts (called Z Tapes) from March and May 2009 (two of the four months at issue), Respondent was able to establish a more accurate percentage of cigarette sales versus all products sold. The Z Tapes are printed out each day by way of turning a key on the cash register. The tapes print out a receipt showing the date, the number of packs of cigarettes sold, the number of food items sold, and the number of taxable items sold.

14. According to the Z Tapes, close to 90 percent2/ of Store 2's total sales for those months were cigarette sales, i.e., a much higher percentage than used by the auditors. The evidence presented by the owners is credible and persuasive.

15. Respondent also provided a calculation of its price per pack of cigarettes. The price depends, in part, on how much they pay the distributors for each pack or carton of cigarettes. Of its four best selling cigarettes, the following costs were determined for the period March through June 2009:

    
    

    
    

    Brand	Cost	Markup	Markup%	Price
    305's	2.93	.06	2	2.99
    Marlboro	4.66	.08	1.7	4.74
    Romy	2.75	.21	7.0	2.96
    Newport	4.45	.34	7.6	4.79

    
    

    Then, using the inventory of products on hand, a weighted average markup percentage was calculated as follows:

    Brand	Weighted Number	Weighted Cost	Weighted Price	Markup
    305's	5,900	17,287	$17,641
    Marlboro	1,957	9,394	9,276
    Romy	1,611	4,430	4,769
    Newport	108	454	517
    TOTAL		31,565	$32,203	2.02%

    
    

    Based on the foregoing calculation, the owners estimated an average price per pack of $3.00, i.e., much less than the $4.50 per pack figure utilized by the auditors.

16. The unrefuted testimony of the owners is credible and seems reasonable based upon the facts. Inasmuch as neither of the auditors was available to provide further justification for their price-per-pack estimation, the owners' calculation is accepted for use in this proceeding.

17. Respondent purchased 91,520 packs of cigarettes during the period of March 2009 through June 2009. Respondent sold

    
    

    55,634 packs of cigarettes during that same period. The average price per pack sold was $3.00 (three dollars). Based on the foregoing, Respondent had a floor inventory of 35,886 packs of cigarettes on July 1, 2009.

18. Respondent paid a cigarette surcharge floor tax of

    
    

    $4,963.09 on July 15, 2009. Respondent also overpaid its floor tax for other tobacco products by $2,948.54 for a total of

    $7,815.83 in payments to the Department. That amount should be credited against any tax liability determined in this proceeding.

19. The Department provided bank statements for Store 1 and Store 2 showing much larger monthly transactions than evidenced by the stores' sale of products. That fact raised a red flag justifying further investigation into Respondent's business. However, the discrepancy was explained by the fact that Respondent does a large amount of check-cashing business at its stores. The large bank transactions are not relevant to the issue in this proceeding.

    CONCLUSIONS OF LAW

    
    

20. The Division of Administrative Hearings has jurisdiction over the parties to and the subject matter of this proceeding pursuant to sections 120.569 and 120.57(1), Florida Statutes (2010).

    
    

21. The general rule is that the burden of proof is on the party asserting the affirmative of an issue before an administrative tribunal. See Balino v. Dep't of HRS, 348 So. 2d

    349 (Fla. 1st DCA 1977), citing Dep't of Agric. & Consumer Servs. v. Strickland, 262 So. 2d 893 (Fla. 1st DCA 1972). In the instant action, the Department has the burden of proof.

22. The standard of proof for proceedings seeking to impose penal sanctions is clear and convincing evidence. Ferris v. Turlington, 510 So. 2d 292 (Fla. 1987). Inasmuch as the Department is seeking to impose fines against Respondent, the clear and convincing standard applies.

23. Clear and convincing evidence is an intermediate standard of proof, which is more than the "preponderance of the evidence" standard used in most civil cases, but less than the "beyond a reasonable doubt" standard used in criminal cases. See State v. Graham, 240 So. 2d 486 (Fla. 2d DCA 1970). Clear and convincing evidence has been defined as evidence which:

    Requires that the evidence must be found to be credible; the facts to which the witnesses testify must be distinctly remembered; the testimony must be precise and explicit and the witnesses must be lacking in confusion as to the facts in issue. The evidence must be of such weight that it produces in the mind of the trier of fact a firm belief or conviction, without hesitancy, as to the truth of the allegations sought to be established.

    
    

    Slomowitz v. Walker, 429 So. 2d 797, 800 (Fla. 4th DCA 1983) (citations omitted).

24. Section 210.011, Florida Statutes (2010), provides the requirements for payment of the tax surcharge on tobacco products. Subsection (3)(b) sets a surcharge amount of $1.00 per pack for packages containing more than ten, but not more than 20 cigarettes.

25. The Department has not proven, by clear and convincing evidence, that its calculation of cigarette surcharges owed by Respondent is accurate. The projections made by the Department's auditors were not substantiated or proven beyond speculations by a senior auditor. By contrast, the evidence presented by Respondent was clear, convincing, and credible.

26. The evidence supports Respondent's calculation that as of July 1, 2009, it held 35,886 packs of cigarettes in inventory at its store.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is

RECOMMENDED that a final order be entered by Petitioner, Department of Business and Professional Regulation, Division of Alcoholic Beverages and Tobacco, imposing a cigarette surcharge in the amount of $35,886 (thirty-five thousand, eight hundred and eighty-six dollars) against Respondent, Discount Zone, Inc.,

d/b/a Lakeland Discount Beverage, Inc., minus $7,815.83 already paid.

DONE AND ENTERED this 12th day of May, 2011, in Tallahassee, Leon County, Florida.

S

R. BRUCE MCKIBBEN 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 12th day of May, 2011.

ENDNOTES

1/ The auditors did not testify. A supervisor was made aware that the auditors used 80 percent, but how they arrived at

80 percent is not known.

2/ Respondent said approximately 93 percent of sales were cigarettes; the Department said the Z Tapes reflect 86 or 87 percent.

COPIES FURNISHED:

John R. Powell, Director Division of Alcoholic Beverages

and Tobacco

Department of Business and Professional Regulation

1940 North Monroe Street, Suite 40

Tallahassee, Florida 32399

Layne Smith, General Counsel Department of Business and

Professional Regulation

1940 North Monroe Street, Suite 40

Tallahassee, Florida 32399-0792

Michael B. Golen, Esquire Department of Business and

Professional Regulation

1940 North Monroe Street, Suite 40

Tallahassee, Florida 32399

Peter C. Pappas, Esquire

4798 New Broad Street, Suite 210

Orlando, Florida 32814

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: 10-009281

Orders for Case No: 10-009281