STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

GBR ENTERPRISES, INC.,

vs.

Petitioner,

Case Nos. 18-2772

DEPARTMENT OF REVENUE,

Respondent.

/

RECOMMENDED ORDER

This matter came before Administrative Law Judge Darren A. Schwartz of the Division of Administrative Hearings ("DOAH") for final hearing on October 26, 2018, by video teleconference with sites in Lauderdale Lakes and Tallahassee, Florida.

APPEARANCES

For Petitioner: Joseph C. Moffa, Esquire

Jonathan W. Taylor, Esquire Moffa, Sutton & Donnini, P.A. Trade Center South, Suite 930

100 West Cypress Creek Road Fort Lauderdale, Florida 33309

Rex D. Ware, Esquire

Moffa, Sutton, & Donnini, P.A. 3500 Financial Plaza, Suite 330

Tallahassee, Florida 32312

For Respondent: Randi Ellen Dincher, Esquire

Timothy Dennis, Esquire

Office of the Attorney General Revenue Litigation Bureau

The Capitol, Plaza Level-01 Tallahassee, Florida 32399

STATEMENT OF THE ISSUE

Whether Respondent, Department of Revenue's ("Department"), B03 assessment against Petitioner, GBR Enterprises, Inc. ("GBR"), for sales tax and interest is incorrect.

PRELIMINARY STATEMENT

On October 16, 2016, GBR filed a petition challenging the Department's Notice of Decision ("NOD") issued August 22, 2016, which assessed sales tax and interest against GBR in the amount of $298,977.10. On October 28, 2016, the Department referred the matter to DOAH to assign an administrative law judge to conduct the final hearing. The case was assigned to Judge Robert S. Cohen under DOAH Case No. 16-6331.

On November 3, 2016, the Department filed an Unopposed Motion to Relinquish Jurisdiction Without Prejudice to Reopen at a Later Date because the parties desired to explore the possibility of settlement. On that same date, Judge Cohen entered an Order Closing File and Relinquishing Jurisdiction.

On January 27, 2017, GBR filed its Amended Petition for Chapter 120 Hearing challenging the NOD. On May 30, 2018, the Department filed its unopposed Motion to Reopen Case. The matter was reopened under DOAH Case No. 18-2772 and reassigned to Judge Cohen.

On June 1, 2018, Judge Cohen entered an Order setting the final hearing for August 9, 2018. On July 10, 2018, the parties

filed a joint motion to continue the final hearing. On July 16, 2018, Judge Cohen entered an Order granting the motion and resetting the final hearing for September 18, 2018.

On August 23, 2018, GBR filed a Petition to Determine the Invalidity of Existing Rule 12A-1.044. The petition was assigned to Judge Cohen under DOAH Case No. 18-4475RX. That same date, GBR filed an unopposed motion for continuance based on its filing of the existing rule challenge under DOAH Case No. 18-4475RX and its intent to file another petition at DOAH challenging an agency statement as an unadopted rule. On August 24, 2018, Judge Cohen entered an Order granting the motion and resetting the final hearing for October 26, 2018. On August 27, 2018, Judge Cohen entered an Order consolidating DOAH Case Nos. 18-2772 and

18-4475RX.

On September 17, 2018, GBR filed its Petition to Determine the Invalidity of Agency Statement. The petition was assigned to Judge Cathy M. Sellers under DOAH Case No. 18-4992RU. On September 21, 2018, the case was transferred to Judge Cohen. On this same date, Judge Cohen entered an Order consolidating DOAH Case Nos. 18-2772, 18-4475RX, and 18-4992RU, and the three cases were transferred to the undersigned for all further proceedings. On October 8, 2018, the Department's Corrected Motion for Attorney's Fees Pursuant to Sections 57.105 and 120.595 was

filed, to which GBR responded on October 15, 2018. On

October 25, 2018, GBR filed a request for official recognition.

The final hearing was held in all three cases on October 26, 2018, with both parties present. At the hearing, the undersigned granted GBR's request for official recognition as to Florida Administrative Code Rules 6A-1.012, 12A-1.044, and 1-1.010.

However, the undersigned denied GBR's request for official recognition as to various purported school board policies. The undersigned also granted the Department's request for official recognition of rule 12A-1.44 (later transferred to rule 12A- 1.044) in effect October 7, 1968, through October 31, 2005.

The Department presented the testimony of Amit Biegun, Mary Gray, Carrie Bowyer, and Mark Zych. The Department's Exhibits 1 through 25 were received in evidence based on the stipulation of the parties. GBR did not present the testimony of any additional live witnesses. However, the deposition transcripts of Mary Gray and Mark Zych (GBR's Exhibits 22 and 23) were received in evidence.1/ GBR's Exhibits 1 through 7, 9, 10, 12, and

19 through 21 were also received in evidence based on the stipulation of the parties.

The one-volume final hearing Transcript was filed at DOAH on November 13, 2018. The parties timely filed proposed recommended orders, which were given consideration in the preparation of this Recommended Order.2/

Unless otherwise indicated, citations to statutes and administrative rules are to the 2018 versions of the Florida Statutes and Florida Administrative Code.

FINDINGS OF FACT

The Parties and Audit Period

1. GBR is a Florida corporation with its principal place of business in Miami, Florida. Gilda Rosenberg is the owner of GBR and a related entity, Gilly Vending, Inc. ("Gilly"). GBR and Gilly are in the vending machine business. At all times material hereto, Amit Biegun served as the chief financial officer of the two entities.

2. The Department is the state agency responsible for administering Florida's sales tax laws pursuant to chapter 212, Florida Statutes.

3. This case concerns the audit period of January 1, 2012, to December 31, 2014.

   GBR's Provision of Vending Machine Services

   
   

4. Prior to the audit period, the school boards of Broward and Palm Beach County issued written solicitations through competitive invitations to bid ("ITB"), seeking vendors to furnish, install, stock, and maintain vending machines on school property.

5. The bids required a "full turn-key operation." The stated objectives were to obtain the best vending service and

   
   

   
   

   percentage commission rates that will be most advantageous to the school boards, and to provide a contract that will be most profitable to the awarded vendor. The stated goal was that student choices from beverage and snack vending machines closely align with federal dietary guidelines.

6. GBR operates approximately 700 snack and beverage vending machines situated at 65 schools in Broward, Palm Beach, and Miami-Dade Counties. Of these 65 schools, 43 are in Broward County, 21 are in Palm Beach County, and one is in Miami-Dade County.

7. The snack vending machines are all owned by GBR. Beverage vending machines are owned by bottling companies, such as Coca-Cola and Pepsi. Of the 700 vending machines, approximately 60 percent of the machines are for beverages and the remaining 40 percent are for snacks.

8. GBR has written vending agreements with some schools.

   
   

   In these agreements, GBR is designated as a licensee, the school is designated as the licensor, and GBR is granted a license to install vending machines on school property in exchange for a commission. Furthermore, GBR is solely responsible to pay all federal, state, and local taxes in connection with the operation of the vending machines.

9. Ownership of the vending machines does not transfer to the schools. However, in some cases the schools have keys to the

   
   

   
   

   machines. In addition, designated school board employees have access to the inside of the machines in order to review the meter, monitor all transactions, and reconcile the revenue from the machines.

10. GBR places the vending machines on school property.

    
    

11. However, the schools control the locations of the vending machines.

12. The schools also require timers on the machines so that the schools can control the times during the day when the machines are operational and accessible to students.

13. The schools also control the types of products to be placed in the machines to ensure that the products closely align with the federal dietary guidelines.

14. The schools also control pricing strategies.

    
    

15. GBR stocks, maintains, and services the vending machines. However, Coca-Cola and Pepsi may repair the beverage machines they own. GBR is solely responsible for repairing the machines it owns.

16. The schools require that any vendor service workers seeking access to the vending machines during school hours pass background checks.

17. GBR route drivers collect the revenue from all of the vending machines and the revenues are deposited into GBR's bank accounts.

    
    

    
    

18. In exchange for GBR's services, the schools receive from GBR, as a commission, a percentage of the gross receipts. However, neither GBR nor the schools are guaranteed any revenue unless sales occur from the machines.

19. On its federal income tax returns, GBR reports all sales revenue from the vending machines.

20. For the tax year 2012, GBR's federal income tax return reflects gross receipts or sales of $5,952,270. Of this amount, GBR paid the schools $1,363,207, a percentage of the gross receipts which GBR characterized on the tax return and its general ledger as a commission and equipment space fee and cost of goods sold.

21. For the tax year 2013, GBR's federal income tax return reflects gross receipts or sales of $6,535,362. Of this amount, GBR paid directly to the schools $1,122,211, a percentage of the gross receipts which GBR characterized on the tax return and its general ledger as a commission and equipment space fee and cost of goods sold.

22. For the tax year 2014, GBR's federal income tax return reflects gross receipts or sales of $6,076,255. Of this amount, GBR paid directly to the schools $1,279,682, a percentage of the gross receipts which GBR characterized on the tax return and its general ledger as a commission and equipment space fee and cost of goods sold.

    
    

    
    

23. Thus, for the audit period, and according to the federal tax returns and general ledgers, GBR's gross receipts or sales were $18,563,887. Of this amount, GBR paid directly to the schools $3,765,100, as a commission and equipment space fee and cost of goods sold.

    The Department's Audit and Assessment

    
    

24. On January 27, 2015, the Department, through its tax auditor, Mary Gray, sent written notice to GBR of its intent to conduct the audit. This was Ms. Gray's first audit involving vending machines at schools.

25. Thereafter, GBR provided Ms. Gray with its general ledger, federal returns, and bid documents.

26. On October 28, 2015, Ms. Gray issued a draft assessment to GBR. The email transmittal by Ms. Gray to GBR's representative states that "[t]he case is being forwarded for supervisory review." In the draft, Ms. Gray determined that GBR owed additional tax in the amount of $28,589.65, but there was no mention of any purported tax on the monies paid by GBR to the schools as a license fee to use real property.

27. However, very close to the end of the audit, within one week after issuing the draft, and after Ms. Gray did further

    research and conferred with her supervisor, Ms. Gray's supervisor advised her to issue the B03 assessment pursuant to section

    
    

    
    

    212.031 and rule 12A-1.044, and tax the monies paid by GBR to the schools as a license fee to use real property.

28. Thus, according to the Department, GBR was now responsible for tax in the amount of $246,230.93, plus applicable interest. Of this alleged amount, $1,218.48 was for additional sales tax (A01), $4,181.41 was for purchase expenses (B02),

    $13,790 was for untaxed rent (B02), and $227,041.04 was for the purported license to use real property (B03).

29. Ms. Gray then prepared a Standard Audit Report detailing her position of the audit and forwarded the report to the Department's dispute resolution division.

30. On January 19, 2016, the Department issued the Notice of Proposed Assessment ("NOPA") against GBR for additional tax and interest due of $288,993.31. The Department does not seek a penalty against GBR.

31. At hearing, Ms. Gray acknowledged that she and her supervisor "struggled" with understanding GBR's reference to commissions and equipment expense fees in the tax returns and general ledgers and the Department's decision to ultimately issue the B03 assessment.

32. At hearing, the Department's representative, Mr. Zych, acknowledged that a proper analysis as to whether a particular arrangement constitutes a license to use real property involves a

    
    

    
    

    consideration of issues of control, such as control over access to and placement of the machines, products, and money.

33. In the instant case, the schools controlled significant aspects of the parties' arrangement, including placement of and access to the machines, pricing strategies, and the type of products that could be placed and sold from the machines. The vending machines were placed at the schools and under significant control by the schools so that the schools would be in compliance with federal dietary guidelines.

34. GBR provided an important service to the schools in order that the schools meet federal dietary guidelines. GBR was able to provide the service only because of a competitive ITB process. The goal of the bids was to obtain a vendor service for the sale of products to students in conformity with federal dietary guidelines, not to enter into a license for the use of real property.

35. Although GBR characterized the payouts to the schools on its tax returns and general ledgers as "commissions" and "equivalent space fees," and GBR controls some aspects of the arrangements, the facts adduced at hearing demonstrate that the substance of the arrangement is in the nature of a service contract. In sum, given the totality of the circumstances and under the unique facts of this case, the undersigned concludes as an issue of fact, that the arrangement between GBR and the

    
    

    
    

    schools boards and schools is in the nature of a service, and not a license to use real property.

    CONCLUSIONS OF LAW

    
    

36. DOAH has jurisdiction over the subject matter and parties pursuant to sections 120.569, 120.57(1), and 120.80(14), Florida Statutes.

37. The Department bears the initial burden to demonstrate that the assessment has been made against the taxpayer, and the factual and legal grounds upon which the Department made the assessment. The burden then shifts to the taxpayer to demonstrate by a preponderance of the evidence that the assessment is incorrect. § 120.80(14)(b)(2.), Fla. Stat.; IPC

    Sports, Inc. v. Dep't of Rev., 829 So. 2d 330, 333 (Fla. 3d DCA 2002).

38. It is well-settled that tax statutes should be construed narrowly, not broadly, and strongly in favor of the taxpayer and against the Department, with all ambiguities resolved in favor of the taxpayer. Brandy's Prods. v. Dep't of Bus. & Prof'l Reg., 188 So. 3d 130, 132-133 (Fla. 1st DCA 2016);

    Grabba-Leaf, LLC v. Dep't of Bus. & Prof'l Reg., 2018 Fla. App. LEXIS 15780, at *10 n.5 (Fla. 1st DCA 2018); Lloyd Enters., Inc.

    v. Dep't of Rev., 651 So. 2d 735, 739 (Fla. 5th DCA 1995). "This is because 'the duty to pay taxes, while necessary to the business of the sovereign, is still a duty of pure statutory

    
    

    
    

    creation and taxes may be collected only within the clear definite boundaries recited by the statute.'" Brandy's Prods., 188 So. 3d at 132-133.

39. Applying the foregoing legal principles to the instant case, the Department issued the B03 assessment pursuant to section 212.031 and rule 12A-1.044(6)(a),3/ concluding that the amounts paid to the schools by GBR are subject to sales tax as a license to use real property. The Department therefore established its purported legal and factual basis for the assessment.4/

40. GBR thereafter demonstrated by a preponderance of the evidence that the B03 assessment is incorrect. The Department's B03 assessment is based on the allegation that GBR has been granted a license to use real property.

41. Section 212.031 provides in pertinent part as follows:

    
    

    212.031 Tax on rental or license fee for use of real property

    
    

    (1)(a) It is declared to be the legislative intent 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 . . . .

    
    

42. For the exercise of a privilege of granting a license to use real property, a tax is levied in the amount of six percent of the total license fee paid. § 212.031(1)(c), Fla. Stat.

    
    

    
    

43. In Lloyd Enterprises v. Department of Revenue, 651 So.

    
    

    2d 735 (Fla. 5th DCA 1995), the court considered whether a business's payment of a beach concessionaire fee to the county in exchange for the business's right to occupy a concession spot on the beach for the rental of motorcycles to the general public was taxable by the Department as a license to use real property under section 212.031. The court held that the fee was not taxable as a license to use real property under section 212.031 because the county was not in the business of granting a license to use real property.

44. In reaching this conclusion, the court found that the concession fee was based on a local ordinance under which the county exercised its authority to regulate the sale of concessions on the beach. The ordinance served a public purpose of ensuring the public's enjoyment of the beach. The fee paid by concessionaire to the county was based on the concessionaire's gross sales, and the county designated a particular concession spot and regulated the concessionaire's hours of operation.

45. Similarly, in the instant case, the school boards exercised their authority to engage in the competitive bidding process through invitations to bid to solicit contractual vendor services and regulate the sale of food and beverage items.

    Rule 6A-1.012(1)(b) provides that an invitation to bid is used when school boards are "capable of specifically defining the

    
    

    
    

    scope of work for which a contractual service is required or when the district school board is capable of establishing precise specifications defining the actual commodity or group of commodities required."

46. As detailed above, the goal of the bids was to obtain a vendor service for the sale of products to students in conformity with federal dietary guidelines, not to enter into a license for the use of real property. The schools control significant aspects of the arrangement, including the location and hours of operation of the vending machines, who can access the machines, and the type and pricing of products that can be sold in the machines. The arrangement between GBR and the school board and schools is in the nature of a service, and not a license to use real property. Accordingly, the payments by GBR to the schools are not taxable as a license fee for the use of real property.

47. In support of its position, the Department relies on S&W Air Vac Systems v. Department of Revenue, 697 So. 2d 1313

    (Fla. 5th DCA 1997). However, that case is distinguishable from the instant case. The arrangement in S&W Air Vac was between

    purely private parties for the placement of coin-operated "air- vac" machines at commercial properties (gas stations and convenience stores). The arrangement did not involve an essential service--providing food to students at public schools in accordance with federal dietary guidelines. Moreover, unlike

    
    

    
    

    the instant case, S&W employees were authorized to enter the properties at any time to collect monies or perform maintenance and repairs.

48. Finally, for the reasons stated in the Final Order on GBR's challenge to the validity of rule 12A-1.044 (Case No. 18- 4475RX), the rule upon which the B03 assessment is based is an invalid exercise of delegated legislative authority. Because the rule is invalid, the Department's reliance on the rule is incorrect.

49. Even if the rule were valid, however, the Department's assessment was based on the incorrect premise that GBR owned all of the vending machines. The evidence adduced at hearing demonstrates that GBR did not own the beverage machines, which constitutes 60 percent of the machines. Given that GBR did not own those machines, rule 12A-1.044 would be inapplicable to

60 percent of the monies ultimately taxed as a license for the use of real property.5/

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order rescinding the B03 assessment in its entirety.

DONE AND ENTERED this 14th day of January, 2019, in Tallahassee, Leon County, Florida.

S

DARREN A. SCHWARTZ

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 14th day of January, 2019.

ENDNOTES

1/ Ms. Gray and Mr. Zych are party representatives of the Department.

2/ The NOD assessed sales tax against GBR in the amount of

$246,230.93, plus interest, for a total assessment of

$298,977.10. Of this amount, $1,218.48 was for additional sales (Exhibit A01), $4,181.41 was for purchase expenses (Exhibit B02),

$13,790.00 was for untaxed rent (Exhibit B02), and $227,041.04 was for a license to use real property (Exhibit B03). GBR paid sales tax on the sale of the revenue items sold from the vending machines, which was subject to sales tax on the products sold.

The only remaining issue in this proceeding (Case No. 18-2772)is whether GBR is liable for $227,041.04 as a tax on a license to use real property, plus applicable interest. On this issue, the undersigned has recommended order authority. The challenges in Case Nos. 18-4475RX and 18-4992RU are being addressed in a separate Final Order because the undersigned has final order authority in Case Nos. 18-4475RX and 18-4992RU.

3/ Subsection (6)(a) is now (5)(a).

4/ Schools are exempt from sales tax under section 212.08(7)(o). Sales tax on the gross revenues from products sold from the vending machines was already collected by the Department from GBR

pursuant to section 212.05. In this proceeding, the Department seeks to collect an additional sales tax on the monies paid by GBR to the schools as a license to use real property (the B03 assessment). The purported sales tax which is the subject of the B03 assessment and the sales tax on the gross revenues from products sold from the machines are two different types of taxes, which would not constitute pyramiding or duplication of tax, provided, of course, that the B03 assessment was correct, which it is not. Ryder Truck Rental, Inc. v. Bryant, 170 So. 2d 822, 825 (Fla. 1964).

5/ Rule 12A-1.044, entitled Vending Machines, was amended in January 2018. The current version of the rule provides, in pertinent part, as follows:

1. Lease or license to use real property; direct pay authority.

   
   

   1. If the machine owner is also the operator and the operator places the machine at another person’s location, the arrangement between the machine operator and location owner is a lease or license to use real property. The location owner shall collect the tax from the machine operator on the amount the location owner receives for the lease or license to use the real property. The tax must be separately stated from the amount of the lease or license payment.

COPIES FURNISHED:

Jonathan W. Taylor, Esquire Moffa, Sutton & Donnini, P.A. Trade Center South, Suite 930

100 West Cypress Creek Road Fort Lauderdale, Florida 33309 (eServed)

Randi Ellen Dincher, Esquire Timothy Dennis, Esquire

Office of the Attorney General Revenue Litigation Bureau

The Capitol, Plaza Level-01 Tallahassee, Florida 32399 (eServed)

Joseph C. Moffa, Esquire Moffa, Sutton & Donnini, P.A.

100 West Cypress Creek Road, Suite 930 Fort Lauderdale, Florida 33309 (eServed)

Rex D. Ware, Esquire

Moffa, Sutton, & Donnini, P.A. 3500 Financial Plaza, Suite 330

Tallahassee, Florida 32312 (eServed)

Mark S. Hamilton, General Counsel Department of Revenue

Post Office Box 6668 Tallahassee, Florida 32314-6668 (eServed)

Leon M. Biegalski, Executive Director Department of Revenue

Post Office Box 6668 Tallahassee, Florida 32314-6668 (eServed)

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: 18-002772

Orders for Case No: 18-002772