D. MOODY & SONS, INC., )
vs. ) CASE NO. 77-304
Respondent. )
This matter came on for hearing in Jacksonville, Florida, before the Division of Administrative Hearings by its duly designated Hearing Officer, Robert T. Benton, II, on June 8, 1977. The proceedings have been transcribed and a transcript was filed with the Division of Administrative Hearings on August 15, 1977. At the final hearing, the parties were represented by counsel:
For Petitioner: Mr. Daniel S. Dearing, Esquire
For Respondent: Ms. Patricia S. Turner, Esquire
By notices of assessment dated September 8, 1976, which came in evidence as part of petitioner's composite exhibit No. 4, respondent notified petitioner of sales taxes, penalties and interest respondent claimed petitioner owed on account of sales occurring during the period November 1, 1972, to June 30, 1976. Petitioner remitted certain uncontested portions of these assessments on December 9, 1976. The contested portions of these assessments are the subject of the petition for administrative hearing which began the present proceedings. The petition alleges that "[petitioner has been assessed for sales tax on interest payments made to Petitioner by its customers [because respondent] arbitrarily elected to treat such interest payments as part of the sales price of" merchandise petitioner sold. Petitioner called nine witnesses at the final hearing. Before the taking of testimony began, there was a view of some of the machinery petitioner had for sale on its premises in Jacksonville, Florida.
Petitioner is a dealer in heavy construction equipment and has been since its incorporation on August 1, 1946. Among petitioner's competitors are Dewind Machinery Company, Florida Equipment Company of Jacksonville, Florida-
Georgia Tractor Company, Inc., Great Southern Equipment Company, Inc., Pilot Equipment Company, Inc., Ring Power Corporation and Joseph L. Rozier Machinery Company. Like its competitors, petitioner frequently leases equipment to its customers, giving them an option to purchase, rather than selling them the equipment outright.
Petitioner's exhibit No. 1 reflects one such transaction. On April 19, 1973, petitioner quoted Houdaille Duval Wright Company (Houdaille) a purchase price of twenty-two thousand dollars ($22,000.00) plus sale's tax, and monthly rent of fourteen hundred dollars ($1,400.00) plus sales tax on a diesel powered, self-propelled vibratory roller. After negotiations between petitioner and Houdaille, the purchase price dropped to seventeen thousand dollars ($17,000.00), but the monthly rental remained unchanged. Houdaille agreed to lease the vibratory roller from petitioner on these terms. With respect to its option to purchase, Houdaille specified that:
100 percent of all rentals to apply towards purchase price of $17,000.00 less 10 percent discount on remaining outstanding balance at time of purchase.
Interest to accrue at a rate 7 1/2 percent simple.
Houdaille made lease payments for nine months, totaling twelve thousand six hundred dollars ($12,600.00), before electing to exercise its option to purchase.
In calculating the amount of money Houdaille was to pay to close out the transaction, petitioner began by treating the payments Houdaille had made under the lease as if they had been payments made in repayment of a loan, outstanding for the period of the lease, in the amount of seventeen thousand dollars ($17,000.00), at 7 1/2 percent per annum. Petitioner allocated portions of each lease payment to principal and to interest, calculated on the declining principal balance, aggregating eleven thousand nine hundred ten dollars and fifty-four cents ($11,910.54) to principal, and six hundred eighty-nine dollars and fourty-six cents ($689.46) to interest. Petitioner then calculated the 10 percent discount by multiplying one tenth times the difference between the original price ($17,000.00) and the amount aggregated to principal ($11,910.54), which yielded five hundred eight dollars and ninety-five cents ($508.95). This figure was subtracted from the original contract price ($17,000.00) to ascertain the' discounted price ($16,491.05) against which the lease payments were credited in their entirety ($12,600.00), yielding the figure three thousand eight hundred ninety-one dollars and five cents ($3,891.05), on which petitioner calculated 4 percent sales tax. In addition, petitioner required Houdaille, in exercising its option to purchase, to pay six hundred eighty-nine dollars and forty-six cents ($689.46), the aggregate amount of lease payments petitioner had allocated to interest.
In every respect pertinent to the dispute between petitioner and respondent, this transaction between petitioner and Houdaille is typical of the transactions on which contested portions of the tax assessments were based. The same is true of petitioner's lease and sale of a truck crane to Poston Bridge & Iron, Inc. (Poston), the transaction reflected in exhibit No. 2 (although petitioner's agreement with Poston did not involve a discount.) The terms of the lease purchase agreement, as stated on respondent's exhibit No. 2, were:
Option Price $124,855.00 with 100 percent of paid rentals to apply to purchase price less interest at 8.5 percent simple.
After making lease payments totalling twenty-six thousand dollars ($26,000.00), Poston exercised its option to purchase. At this point the lease payments were recast as installment sales payments, portions being allocated to principal and interest accordingly. Respondent collected sales tax on the amount of money Poston paid in exchange for title, after electing to purchase, less the aggregate amount of lease payments petitioner had allocated to interest.
Petitioner has been entering into lease purchase agreements of this kind with various customers since 1946 or 1947, and, when customers exercised purchase options, petitioner ordinarily calculated sales tax in the manner it employed in connection with the sale of the vibratory roller to Houdaille, and the truck crane to Poston. In at least one instance, however, petitioner calculated sales tax as 4 percent of all the money a customer, Misener Marine Construction, Inc., paid when exercising its option to purchase a truck crane, including portions of lease payments petitioner had allocated to interest. On the lease payments themselves, petitioner regularly collected 4 percent sales tax which it regularly remitted to respondent.
For federal income tax purposes, petitioner treated payments from customers under a lease purchase agreement as lease payments for every tax year in which the option to purchase was not exercised. For the tax year in which the option to purchase was exercised, the lease payments were treated as payments under an installment sale contract, for federal income tax purposes.
When respondent audited petitioner's rentals for the period May 1, 1970, to April 30, 1973, and earlier when respondent performed a general audit of petitioner's books for the period July 1, 1959, to February 28, 1962, no mention was mace of petitioner's sales tax treatment of lease purchase agreements under which lessees had exercised purchase options. Before the audit which eventuated in the assessments now in controversy, however, the auditors were given a copy of a letter from L. N. Hansen to Thomas D. Aitken dated December 9, 1974. Mr. Hansen was formerly director of respondent's sales and use tax division. In the fall of 1974, he was one of a group or "board" of respondent's employees who considered questions arising under the tax laws and formulated policy for respondent. His letter to Mr. Aitken, which came in evidence as, petitioner's exhibit No. 5, was written on behalf of respondent after its substance was discussed at a meeting of respondent's policy group. It pertains to lease purchase agreements entered into by Joseph L. Rozier Machinery Co. (Rozier). Mr. Hansen's letter stated that Rozier was "not correct in reducing the taxable sales price by the rental payments and thereafter adding an interest charge which, if it was incurred at all, was incurred prior to the time of sale." Petitioner's exhibit No. 5, p. 1.
The foregoing findings of fact should be read in conjunction with the statement required by Stucky's of Eastman, Georgia vs. Department of
Transportation, 340 So.2d 119 (Fla. 1st DCA 1976), which appears as an appendix to the order.
CONCLUSIONS OF LAW
Section 212.05, Florida Statutes (1975), levies a 4 percent sales tax on taxpayers like petitioner M. D. Moody & Sons, Inc., who are "in the business of selling tangible personal property at retail." Petitioner "sells" tangible personal property for sales tax purposes not only in the sense of simultaneously transferring title and possession of heavy equipment to a customer, but also whenever it leases its heavy equipment. Section'212.02(2)(a), Florida Statutes (1975), defines a sale for purposes of the sales tax laws as "[a]ny transfer of title or possession or both, exchange, barter, lease or rental for a consideration."
Implementing these statutory provisions, Rule 12A-1.17, F.A.C., provides with respect to finance charges on installment sales:
The amount paid by any purchaser as interest or as a finance charge is taxable unless
such interest or finance charge is separately stated from the consideration received for the tangible personal property transferred
in a retail sale. For example, where articles are sold in a taxable transaction under an installment payment arrangement, retail title contract or purchase money mortgage for a stated amount payable in in- stallments at intervals over a period of time, the entire amount is taxable. If, on the other hand, a cash selling price is stated and interest and carrying charges are added the re to as separate and distinct items, only the cash selling price is taxable.
Rule 12A-1.71(6), F.A.C., provides, with respect to lease purchase agreements:
Each rental payment under a lease purchase or similar agreement covering tangible personal property is taxable. when title to the property passes to the lessee- purchaser, no tax is due on the part of the purchase price upon which rental tax has
been paid. Only the balance of the purchase price is taxable.
Respondent's policy with respect to finance charges and lease purchase agreements is set forth in Mr. Hansen's letter to Mr. Aitken, petitioner's exhibit No. 5. While respondent may bind its own employees by an informal directive, the policy enunciated in petitioner's exhibit No. 5 has no legal force and effect on taxpayers, since it has not been adopted as a rule.
As respondent's counsel skillfully demonstrated, petitioner does not reduce the purchase price of the machinery it sells by the full amount of rental payments it has collected under lease purchase agreements. When a customer exercises the purchase option, petitioner credits against the agreed purchase
price only those portions of lease payments which it allocates to principal. It follows that the portions of lease payments which petitioner allocates to interest are not "part of the purchase price upon which rental tax has been paid." Rule 12A-1.71(6), F.A.C.
Instead, the portions of lease payments which petitioner allocates to interest constitute a finance charge, which was separately stated at the time the lease purchase agreement was entered into. The gist of Rule 12A1.17, F.A.C., is that installment payments in themselves give rise to no presumption that credit has been extended. But the lease purchase agreements petitioner enters into with its customers expressly contemplate the extension of credit and specify the rate of interest. Rule 12A-1.17, F.A.C., which provides that separately stated finance charges are exempt from sales tax, evinces no intent to exclude installment sales involving lease options from its coverage. Because petitioner's customers who exercised their purchase options had already paid sales tax on the portions of lease payments petitioner allocated to interest, they were entitled to the offsetting credits they received when the transactions were closed out.
Pursuant to Rule 12A-1.17, F.A.C., interest is not subject to sales tax in situations where "a cash selling price is stated and interest . . . [is] added thereto." This is the equivalent of a situation where the rate of interest at which credits against a cash selling price are to be reduced is stated, as in petitioner's contract with Poston.
The ambiguity inherent in a lease purchase agreement resolves itself only when the option to purchase expires, whether by being exercised or upon termination of the lease. Pursuant to Rule 12A-1.71(6), F.A.C., sales taxes are paid on the entire amount of periodic "payments under a lease purchase . . . agreement." Because such payments are ordinary rental payments in the event the lessee does not exercise the option to purchase, this results in equal treatment of lessees without regard to whether their leases contain purchase options. If the option to purchase is exercised, rendering the transaction an installment sale, the installment buyer need not forfeit sales tax paid on finance charges, if those charges have been separately stated. Rule 12A-1.17, F.A.C. This results in equal treatment of instal lment buyers without regard to whether their intallment sales contracts contain lease options.
Rules providing for special treatment, for sales tax purposes, of finance charges in lease purchase agreements might be compatible with the pertinent statutory provisions, but the rules respondent has in fact adopted do not single out finance charges incurred under lease purchase agreements for taxation even when stated separately from the cash price of the tangible personal property financed.
