STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

KLOSTERS REDERI A/S, d/b/a )

NORWEGIAN CARIBBEAN LINES, )

)

Petitioner, )

)

vs. ) CASE NO. 76-428

)

THE STATE OF FLORIDA )

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

This matter came before this division on the petition of Norwegian Caribbean Lines challenging a tax assessment asserted by the Department of Revenue. A hearing was held before the undersigned on June 23, 1976 at Miami, Florida.

For Petitioner: Daniel G. LaPorte, Esquire

150 Southeast Second Avenue Miami, Florida 33131

For Respondent: E. Wilson Crump II, Esquire

Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303

The Department of Revenue claims the Petitioner is obligated to pay use taxes on items which were purchased for use aboard Petitioner's cruise ships. Although the Petitioner has raised a number of grounds as a defense to the tax assessment presented in this case, they all need not be considered in this Recommended Order. Much of the discussion in this case was on the question of whether the articles purchased by the Respondent were "parts of the vessels". Specifically, Subsection 212.08(8), Florida Statutes, grants a partial exemption from taxation which is claimed by the Petitioner in this case.

"All vessels which are licensed as common carriers by the Interstate Commerce Commission and parts thereof used to trans- port persons or property in interstate or foreign commerce shall be subject to the taxes imposed in this chapter only to the extent provided herein."

The parties both agree that if the items in question are truly parts of a ship, then the normal use tax imposed under Florida Statutes 212.05 et seq. would not be applicable to these items upon which the Department of Revenue has levied a claim of tax due.

FINDINGS OF FACT

1. The claim imposed by the Department of Revenue stems from an audit conducted by Mr. George Thomas Lloyd, Jr., an employee of the Department of Revenue. Mr. Lloyd examined the books of the corporation and the receipts for items purchased and compiled a ledger of particular items which, in Mr. Lloyd's opinion, were not parts of the ship and upon which a use tax was due. At the hearing on this case this ledger was introduced as Joint Exhibit No. 1. It is a composite exhibit consisting of 157 pages. This ledger reflects purchases in the amount of $1,953,426.13 upon which the Department of Revenue claims tax is due. The total tax claimed by the Department of Revenue is $72,630.19 for taxes, penalties, and interest through February 16, 1976.

   
   

2. The Petitioner is a Norwegian corporation with principal offices located in Oslo, Norway, and an office in Miami at Biscayne Boulevard. Petitioner owns three cruise vessels of Norwegian ownership and registration which sail out of the port of Miami, Florida to ports in the Caribbean. These cruises last several days. The parties have agreed that the Petitioner is in the exclusive business of transporting passengers and goods in foreign commerce. Mr. Lloyd, who conducted the audit above mentioned, testified that he prepared Joint Exhibit No. 1 by evaluating the items described in the corporation's records and used his own independent judgment in a determination as to whether those items were, or were not, parts of a vessel. If he determined they in fact were not parts of the vessel, he concluded that a use tax was owed to the State on the purchase price of those items.

   
   

3. Mr. Lloyd stated that his determination as to whether a particular item was indeed a part of a ship was based on his independent judgment which was largely a question of whether the item was physically attached to the vessel. The individual items are far too numerous to describe in any detail herein, but they range from napkins, stirrers, postage meters, paper products, grinding wheels, coffee pots, towels, party favors, games, sandpaper, repairs to a shotgun, movie rentals, hardware items, batteries, flowers, bug spray.

   
   

4. The items in question were delivered to Petitioner's warehouse on Dodge Island, Miami, Florida for lading on board one of Petitioner's three cruise vessels. The cruise vessels tie up next to the warehouse where the goods are stored and from time to time these goods are brought aboard each of the vessels. The items in question are all used aboard each vessel during the vessels' passenger cruises. The only time the cruise vessels spend within the territorial limits of Florida are for a period of time on Saturday of each week for the purpose of embarking and disembarking passengers for each weekly cruise. These articles, somewhat above described, are all used in connection with the ship's operation which is the conduct of weekly pleasure cruises from Miami to the Caribbean.

   
   

5. The question of whether a particular item is a part of a vessel is one of definition and common sense. The auditor, Mr. Lloyd, appeared to accept a definition similar to what one would use in determining whether or not an item was a fixture in regard to realty.

   
   

6. However, there are all types of vessels and it appears to this Hearing Officer that what may be a part of one type of vessel would have no function on another. There is really no relationship between what may be considered a part of real estate and what may be considered a part of a ship. There also appears to be no logic behind a definition which limits "parts of a ship" to those items

   which are physically attached to the vessel. Most would agree that pumps are parts of a ship; even though they may not be attached and can be easily removed, they are necessary in keeping a vessel afloat. Similarly, a compass and other navigational equipment may be removed, but that would hardly make them any less a part of a ship. As the Petitioner points out in its Memorandum, the most logical approach to a finding as what is truly a part of a vessel must ultimately hinge on the nature of the vessel, and a broad definition of seaworthiness. What are clearly parts of some ships have no purpose on others. A cargo freighter would need hoists and cranes which are not required on a tug. Each type of vessel uses equipment suited to that ship's purpose and type of cargo. While a tanker may be in the business of transporting oil, a very specialized cargo, a cruise ship is in business of transporting people and catering to their needs and entertainment. Therefore the equipment of a cruise ship would appear more frivolous to those accustomed to ships transporting basic raw materials. Both vessels, however, are in the shipping business.

   
   

7. Since the parts of a ship must be defined as those items which serve a useful purpose to the operation of the ship, the decision then depends not on the nature of the item, but of the vessel. An oil tanker might conceivably have equipment or parts which are so specialized that they could serve no other useful purpose except aboard that type of vessel. The cruise ships in question in this case, however, use equipment which are apparently commonplace and equally useful on land as on sea. What items may properly be considered parts of a cruise ship depend on how those items relate to the operation of the vessel. While the equipment of an oil tanker would hardly be expected to be directed toward mirth; likewise, it is unreasonable for the equipment of a cruise ship to be limited to the bare necessities of a spartan voyage. As the testimony on behalf of Petitioner indicated, all the items listed on Joint Exhibit No. 1 do serve a purpose aboard the vessel and all items were purchased for use aboard the company's three vessels. It is therefore concluded that all the items listed on that schedule are in fact parts of the vessels owned by the Petitioner.

   
   

8. The Petitioner has raised several other issues in its defense to tax assessment of the Department of Revenue. Among other things the Petitioner claims that the items in question are not stored for use in Florida. The facts above indicated that the items were purchased by the corporation and no sales or use tax has yet been paid upon them. The items are stored at the Dodge Island Warehouse owned by the Petitioner and are from time to time placed aboard vessels operated by the Petitioner corporation. From the facts presented at this hearing, the ships only spend several hours in the port of Miami each Saturday of every week. The items, therefore, are principally used while the vessels in question are on the high seas or in foreign ports. Except for this period of time on each Saturday when the vessels are in port, these items are used while the vessels are in engaged in foreign commerce.

   
   

   CONCLUSIONS OF LAW

9. A use tax is imposed under Section 212.05, F.S., which states: "It is hereby declared to be the legislative

   intent that every person is exercising a taxable privilege who . . . stores for use or consumption in this state any item or article of tangible personal property as

   defined herein . . . For the exercise of said privilege a tax is levied on each taxable

   transaction or indicent and shall be due and payable according to the bracket set forth in Section 212.12(10) as follows:

   (2) at the rate of 4 percent of the cost 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."

   
   

10. Florida Statutes 212.06(6) discloses further legislative intent as follows:

    
    

    "It is however, the intention of this chapter to levy a tax on . . . the use, the con- sumption, the distribution, and the storage to be used or consumed in this state of tangible personal property after it has come to rest in this state and has become a mass of the property of this state."

11. Furthermore, paragraph 8 of the same Section 212.06 states: "Use tax will apply and be due on tangible

    personal property imported or caused to be

    imported into this state for use, consump- tion, distribution or storage to be used or consumed in this state. "

    
    

12. Assuming that the items in question are not parts of the vessels, to be taxable under the above statutes it must be decided that the items are used or consumed in the state of Florida.

    
    

13. This Hearing Officer has no doubt that the items are taxable by the State of Florida, for there is a sufficient taxing nexus to the State for the impost of an appropriate tax. United Airlines v. Mahin, 410 U.S. 623 (1973), Eastern Air Transport, Inc. v. South Carolina Tax Comm., 285 U.S. 147 (1932). However, the State has not yet imposed this tax for the use tax statute applies only to items stored for use or consumption within this state. Florida has the power and the right to tax the items described in this case; it has not yet done so. It has only passed a use tax on items stored for use or consumption within the state. The items in question are not used or consumed in Florida; that occurs almost exclusively out of the state's territorial limits. Counsel for the Department of Revenue recognizes the limitations of Florida's taxing statutes, but maintains that the use of these items:

    
    

    ". . . may be said to occur at the time the items are placed on board the vessels, regardless of the fact that various of the items in question may be used or consumed on the high seas. "

    
    

14. It would be an unusual construction to say that the usage of these items occurs when they are placed aboard ship. A more reasonable conclusion is that the items are almost exclusively used while the ship is on the high seas and in foreign ports for that is where the Petitioner's ships spend the bulk of their time. Placing equipment on board the ship could not, by any stretch of the imagination, be called using the above items. For example, batteries, which

are among the items sought to be taxed by the Department of Revenue, are not being used merely by being placed aboard ship. They are used when they are put in the electrical apparatus for which they were purchased. According to the testimony the use of these items cannot be realistically said to take place within the state of Florida.

RECOMMENDATION

For reasons that the items in question are parts of the vessels and that they are used and consumed outside the state of Florida the tax assessed by the Department of Revenue should be disallowed.

ENTERED this 20th day of October, 1976, in Tallahassee, Florida.

KENNETH G. OERTEL, Director

Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304

(904) 488-9675

COPIES FURNISHED:

Daniel G. LaPorte, Esquire

150 Southeast Second Avenue Miami, Florida 33131

E. Wilson Crump II, Esquire Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303

1. Ed Straughn, Executive Director Department of Revenue

   Carlton Building Tallahassee, Florida 32304

   
   

   ================================================================= AGENCY FINAL ORDER

   =================================================================

   STATE OF FLORIDA DEPARTMENT OF REVENUE

   
   

   KLOSTERS REDERI A/S, d/b/a NORWEGIAN CARIBBEAN LINES,

   
   

   Petitioner,

   
   

   vs. CASE NO. 76-428

   
   

   DEPARTMENT OF REVENUE OF THE STATE OF FLORIDA,

   
   

   Respondent.

   /

   
   

   FINAL ORDER

   
   

   The Petitioner Klosters Rederi A/S, d/b/a Norwegian Caribbean Lines filed its petition for an administrative hearing with the Respondent Department of Revenue. The petition was forwarded by the Department of Revenue to the Division of Administrative Hearings. The Petitioner is challenging a tax assessment by the Respondent. The Department of Revenue claims that the Petitioner is obligated to pay use taxes on certain items which were purchased for use aboard Petitioner's cruise ships. A hearing was held in Miami, Florida, on June 23, 1976, before Kenneth G. Oertel, the Director of the Division of Administrative Hearings. Both parties called witnesses. Following the hearing, the parties submitted memoranda of law. On October 20, 1976, the hearing officer rendered his Recommended Order. The Department of Revenue filed Exceptions to the Recommended Order on November 1, 1976.

   
   

   FINDINGS OF FACT

   
   

   1. The claim imposed by the Department of Revenue stems from an audit conducted by Mr. George Thomas Lloyd, Jr., an employee of the Department of Revenue. Mr. Lloyd examined the books of the corporation and the receipts for items purchased and compiled a ledger of particular items which, in Mr. Lloyd's opinion, were not parts of the ship, and upon which a sales or use tax had not been paid, rendering a use tax due the State of Florida. At the hearing on this case, this ledger was introduced as Joint Exhibit No. 1. It is a composite exhibit consisting of 157 pages. This ledger reflects purchases in the amount of $1,953,426.13 upon which the Department of Revenue claims tax is due. The total tax claimed by the Department of Revenue is $72,630.19 for taxes, penalties and interest through February 16, 1976.

      
      

   2. The Petitioner is a Norwegian corporation with principal offices located in Oslo, Norway, and an office in Miami at Biscayne Boulevard. The Petitioner owns three cruise vessels of Norwegian ownership and registration which sail out of the port of Miami, Florida to ports in the Caribbean. The cruises last several days. The parties have agreed that the Petitioner is in the exclusive business of transporting passengers and goods in foreign commerce. Mr. Lloyd, who conducted the audit above mentioned, testified that he prepared Joint Exhibit No. 1 by evaluating the items described in the corporation's records and used his own independent judgment in a determination as to whether these items were, or were not parts of a vessel. If he determined they in fact

      were not parts of the vessel, he concluded that a use tax was owed to the State of Florida on the purchase price of those items.

      
      

   3. Mr. Lloyd stated that his determination as to whether a particular item was indeed a part of a ship was based on his independent judgment which was largely a question of whether the item was physically attached to the vessel. The individual items are far too numerous to describe in any detail herein, but they range from napkins, stirrers, postage meters, paper products, grinding wheels, coffee pots, towels, party favors, games, sandpaper, repairs to a shotgun, movie rentals, hardware items, batteries, flowers, bug spray, etc.

      
      

   4. The items in question were delivered to Petitioner's warehouse on Dodge Island, Miami, Florida for lading on board one of Petitioner's three cruise vessels. The cruise vessels tie up next to the warehouse where the goods are stored and from time to time these goods are brought aboard each of the vessels. The items in question are all used aboard each vessel during the vessel's passenger cruises. The only times the cruise vessels spend within the territorial limits of Florida are for a period of time on Saturday of each week for the purpose of embarking and disembarking passengers for each weekly cruise. These articles, somewhat above described, are all used in connection with the ship's operation which is the conduct of weekly pleasure cruises from Miami to the Caribbean.

      
      

      CONCLUSIONS OF LAW

      
      

   5. A use tax is imposed under Section 212.05, Florida Statutes, which states:

      
      

      "It is hereby declared to be the legislative intent that every person is exercising a tax- able privilege who... stores for use or con- sumption in this state any item or article of tangible personal property as defined herein For the exercise of said privilege a tax

      is levied on each taxable transaction or incident and shall be due and payable according to the bracket set forth in Section 212.12(10) as follows:

      
      

      (2) at the rate of 4 percent of the cost 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."

      
      

   6. Florida Statutes, Section 212.06(6) discloses further legislative intent as follows:

      
      

      "It is however, the intention of this chapter to levy a tax on...the use, the consumption, the distribution, and the storage to be used or consumed in this state of tangible per- sonal property after it has come to rest in this state and has become a part of the mass property of this state."

      
      

   7. Furthermore, Paragraph (8) of the same Section 212.06 states:

      "Use tax will apply and be due on tangible personal property imported or caused to be imported into this state for use, consump- tion, distribution or storage to be used or consumed in this state "

      
      

   8. Petitioner raises several grounds upon which it urges it is not subject to the use tax set forth above. The one stressed most heavily by Petitioner is its contention that all of the items in question are parts of its vessels. Florida Statutes, Section 212.08(8) grants a partial exemption from taxation for parts of vessels used to transport persons or property in interstate or foreign commerce. In relevant part, that statute reads:

      
      

      "All vessels which are licensed as common carriers by the Interstate Commerce Commission and parts thereof used to transport persons or property in interstate or foreign commerce shall be subject to the taxes imposed in this chapter only to the extent provided herein."

      
      

      The term "parts thereof" is not defined in the statutes. It is the Petitioner's contention that this phrase should embrace all items placed on board a ship or vessel to facilitate the purpose of the voyage. Although the Department of Revenue's regulations do not attempt a complete definition of the term "parts thereof" they do nevertheless construe the phrase sufficiently to cover the items in question and preclude an application of the definition contended for by Petitioner. Florida Administrative Code, Section 12A-1.64(5)(b) provides:

      
      

      "Groceries, medicine and other items specifi- cally exempted by other section of the statute are also exempt when sold for use on said vessels. The sale of other tangible personal property not specifically exempted by other sections of the statutes are taxable when sold for use on vessels operating in interstate or foreign commerce."

      
      

      Subsection (17) reads in relevant part:

      
      

      "Casserole dishes and creamers, china, glass and silverware used in providing meals aboard aircrafts, ships and vessels, and trains are taxable at 4 percent and do not qualify for the pro ration under Paragraph (5) of this rule."

      
      

      Subsection (19) of that portion of the regulations reads:

      
      

      "Materials and supplies such as sandpaper, blasting sand, sanding discs, masking tape, rags, minerals, spirits, tools, etc., used in the repair and maintenance of ships, including ships of foreign registry while they are docked in Florida, are taxable at

      4 percent."

      It would appear that all of the items in question are embraced by the sentence of subsection (5)(b) noted above. Certain of them also fall within sections

      (17) and (19) thus, it would appear that under Department of Revenue's regulations, the items in question are not subject to the exemptions afforded to parts of vessels in foreign commerce. In the case of State ex rel Szabo Food Service Inc. of N. C. v. Dickinson, 286 So.2d 529, 531 (Fla. 1974), the Florida Supreme Court held that courts of this state would not depart the administrative rules interpretating the sales and use tax statutes unless they were clearly erroneous or unauthorized. This construction is also consistent with the rule that sales and use tax exemptions are to be strictly construed against the claimant. See e.g. Wanda Marine Corp. v. State Department of Revenue, 305 So.2d 65 (1 D.C.A. Fla. 1975).

      
      

   9. Petitioner also contends that the use and consumption of the items in question occurs outside of the State of Florida and hence, that under the fact pattern with which it does business, it does not fall within the language of the use tax statute. Petitioner's contentions in this regard cannot stand. Within the preview of use tax statutes, "use" means or includes the exercise of any right or power over tangible personal property incident to the ownership of that property. United Airlines v. Mahin, 410 U.S. 623, 93 S.Ct. 1186, 35 L.Ed.2d 545 (1973); Avco Mfg. Corp. v. Conneloy, 145 Conn. 161, 140 A.2d 479; American Can Co. v. Department of Revenue, 47 Ill.2d 531, 267 N.E.2d 657; Interstate Nurseries, Inc. v. Iowa Department of Revenue, 164 N.W.2d 858 (Iowa). In the Florida case of Fred McGilvrey, Inc. v. Askew, et al., So.2d) (Fla. 1976), Case No. 48,754 opinion filed December 9, 1976, the Florida Supreme Court reviewed the liability for use tax of certain items purchased both within and without the State of Florida for use on construction projects in the Bahamas, where the items were first stored and loaded onto barges in the State of Florida. The opinion recited that all items eventually wound up in the Bahamas. The Florida Supreme Court held that where the items in question could not be shown to be for export under a statutory; exemption, they were taxable under the provisions of Florida Statutes, Section 212.06(6) because they

      
      

      "'[came] to rest in this state and [became] a part of the mass property of this state.'"

      
      

   10. Petitioner's contention that items in question are for export cannot square with the exemption provisions of Florida Statutes, Section 212.06(5). Fred McGilvrey, Inc. v. Askew, supra.; Shell Oil Co. v. State Board of Equalization, 51 Cal. Rptr. 524, 414. p.2d 820, 64 C.2d 713 (1966).

       
       

   11. The State of Florida also has the constitutional authority to tax the items in question. United Airlines v. Mahlin, supra.; Eastern Air Transport, Inc. v. South Carolina Tax Comm., 285 U.S. 147, 52 S.Ct. 340, 76 L.Ed. 673 (1932).

WHEREFORE, based on the foregoing Findings of Fact and Conclusions of Law it is ordered as follows:

1. That the proposed tax assessments pursuant to Chapter 212, Florida Statutes, issued by the Respondent against Petitioner is affirmed.

CERTIFICATION

I certify that the foregoing is the Final Order of the Department of Revenue adopted by the Governor and Cabinet on January 6, 1977.

J. Ed Straughn, Executive Director State of Florida

Department of Revenue

Room 102, Carlton Building Tallahassee, Florida 32304

Dated this 10th day of January, 1977.

Docket for Case No: 76-000428

Orders for Case No: 76-000428