STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ROBERT GAILEY, )

d/b/a K-9 of ORLANDO, )

)

Petitioner, )

)

vs. ) CASE NO. 77-1233

)

STATE OF FLORIDA, )

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings by its duly designated Hearing Officer K.N. Ayers held a public hearing in the above-styled case on October 25, 1977 at Winter Park, Florida.

APPEARANCES

For Petitioner: Lawrence E. Dolan, Esquire

Suite 1335 CNA Tower Orlando, Florida 32801

For Respondent: Joseph C. Mellichamp, Esquire

Assistant Attorney General The Capitol, Room LL04 Tallahassee, Florida 32304

By petition dated July 8, 1977 Robert Gailey d/b/a K-9 of Orlando (Petitioner), contests the proposed assessment by the Department of Revenue (Respondent) based upon an audit of Petitioner's business covering the period April 1, 1973 through March 31, 1976. Specifically Petitioner objects to the assessment of sales taxes upon the sale of dual personality dogs and upon the rent payments made by Petitioner for the premises occupied.

At the hearing two exhibits were admitted into evidence. Exhibit 1, the deposition of Robert Gailey, had attached thereto 14 exhibits, two of these being additionally described as Petitioner's exhibits 1 and 2. These exhibits will be referred to hereafter as 1-1, 1-2, etc. and Petitioner's Exhibits 1 and

1. Exhibit 2 is the worksheet from which the proposed assessments were derived. The parties have submitted a stipulation containing all material facts in this case, which stipulation comprises the findings of fact below.

   FINDINGS OF FACT

   
   

   1. Business History.

      
      

      1. Petitioner is the sole owner of Sentry Dogs, Inc., a Florida corporation, having its principal place of business at 7120 Cheney Highway, Orlando, Florida.

         
         

      2. Sentry Dogs, Inc. does business as K-9 of Orlando, a fictitious name.

         
         

      3. Petitioner originally acquired Sentry Dogs, Inc. by purchase in 1968 of the corporation's outstanding stock which was placed in escrow pending full payment of the purchase price. The obligation was discharged in 1970 and the stock was released from escrow to the Petitioner, at which time he became the sole owner of Sentry Dogs, Inc.

         
         

      4. In April, 1970 on behalf of the corporation Petitioner applied for a Certificate of Registration from the State of Florida, Department of Revenue, and was issued such a Certificate under sales tax number 58002626799. (Exhibit 1-1)

      
      

   2. Sales Tax Deficiencies.

      
      

      1. On April 14, 1976 the State of Florida, Department of Revenue, advised Petitioner that an audit of K-9 of Orlando was to be undertaken. (Exhibit 1-7)

         
         

      2. Such an audit was thereafter undertaken by the State of Florida, Department of Revenue, and the audit covered the period from April 1, 1973 through March 31, 1976.

         
         

      3. As a result of said audit, a first notice of assessment, dated April 29, 1976 was issued to Petitioner by the State of Florida, Department of Revenue. (Exhibit 1-8)

         
         

      4. Petitioner then requested and was granted an informal conference with the State of Florida, Department of Revenue, with respect to said first notice of assessment, after which a revised notice of assessment dated November 22, 1976 was issued. (Exhibit 1-9)

         
         

      5. An amended revised notice of assessment, dated June 2, 1977, was issued to Petitioner alleging a proposed deficiency of the Florida sales taxes, including penalties and interest in the total amount of $6,320.96 after further documentation was provided by Petitioner. (Exhibit 1-10)

         
         

      6. On July 8, 1977 Petitioner filed a Petition with the State of Florida, Department of Revenue, requesting that a formal proceeding be instituted in connection with the amended revised notice of proposed assessment dated June 2, 1977.

         
         

      7. With respect to said amended notice of proposed assessment, dated June 2, 1977, Petitioner alleged that the sale by Petitioner of dual personality command dogs is not subject to sales taxes and further alleges that a reasonable portion of the payments made by Petitioner under a lease Agreement dated November 18, 1971 are option payments and not subject to the imposition of a commercial rent tax.

      
      

   3. Business Activities Conducted by Petitioner.

      1. Petitioner engages in four types of business activities involving dogs:

         
         

         1. The obedience training of dogs brought to it by specific customers who own the dogs;

         2. The maintenance of boarding facilities for short term care and feeding of dogs owned by others;

         3. Bathing and dipping of dogs;

         4. The training and leasing of guard dogs; and

         5. The sale of dual personality command dogs.

            
            

   4. Sale of Dual personality Command Dogs.

      
      

      Under normal circumstances the following actions occur in the sale of dual personality command dogs.

      
      

      1. A prospective customer of Petitioner orders a dual personality command dog. Such order is made on a written purchase order (Composite Exhibit 1-5) which includes among other things the date the order is placed, the amount of the order, the deposit to be made, the type of dog, the color, the sex, and the type of behavior the dog is to have (i.e., housebroken -- must not jump fences, as well as the dual personality of basic obedience and family protection). At the time of signing said purchase order the customer either pays the full purchase price or places a deposit which is generally one-half of the total purchase price.

         
         

      2. Petitioner then acquires a "raw" dog to be sold in accordance with the purchase order. Petitioner acquires approximately ninety-percent (90 percent) of all dogs to be sold by donation with the donor executing a specific donation form (Petitioner's Exhibit 2). The balance of the dogs acquired by Petitioner for sale are by purchase from the general public. The average purchase price of the animals is between $25.00 and $75.00 each.

         
         

      3. Under the purchase order a customer is given 5 days to cancel the order and any cancellation after such period results in any deposit to Petitioner being forfeited.

         
         

      4. Upon obtaining the "raw" dog, Petitioner undertakes the following steps in the training of such animal as a dual personality command dog:

         
         

         1. An evaluation is initially made by Petitioner to determine whether the dog acquired is suitable for training as a dual personality command dog. If it is determined it is not, then it is designated for training as a guard dog. Such evaluation takes from 3 to 7 days.

            
            

         2. Petitioner then undertakes the basic training of the dual personality dog which involves the training of the dog to heel, sit, stay, down and come. Such basic training also involves getting use to the leash and obeying verbal commands and hand signals and finally to work off the leash with commands. Such training requires the services of 2 to 4 trainers and takes approximately three weeks with specific training undertaken 6 to 8 times daily.

            
            

         3. The next state of the training process involves protection training in three specific categories -- personal protection, car protection and property protection. The animal is taught to be aggressive by training the dog

            to respond to a specific command which changes its personality. In addition, it is taught to be aggressive only upon command and not to be aggressive even when an attempt is made to provoke the dog without a command being given.

            
            

         4. The total training time by Petitioner of a dual personality command dog is approximately 8 to 12 weeks.

            
            

         5. The training is undertaken solely by Petitioner, but with the sole purpose of fulfilling the order of the customer for a particular dog without any direction from or advice by the customer and the Petitioner advises the customer of this. The training involves an understanding of the dog's psychology and its heredity and knowledge of socialization techniques in order for it to be trained successfully as a dual personality command dog.

            
            

         6. After completion of the training period as a dual personality command dog, it is then taken by Petitioner to a veterinarian who examines it and gives it the necessary shots.

            
            

         7. If at any time during the training process, the dog being trained dies, the Petitioner simply obtains another "raw" dog in an effort to fulfill the customers order, and begins the training of that dog. Likewise, the liability and responsibility for the actions of the dog from the time it is obtained to fill an order until the customer signs the Bill of Sale and takes physical possession of the dog is solely the Petitioner's.

            
            

         8. The dog is thereafter delivered to and picked up by the customer who signs a Bill of Sale (Exhibit 1-6) which indicates that the transaction is final and the customer is accepting the full ownership as of the date the Bill of Sale is signed. At the same time, Petitioner prepares a record of the dog which has been trained for the customer and confers with the customer with respect to how the dog is to be handled.

            
            

         9. The customer keeps the dog for a period of between 7 to 14 days. The customer then returns to Petitioner and is taught how to handle the dog by a professional trainer of Petitioner.

            
            

         10. The Petitioner will replace a dog for a customer, after execution of the Bill of Sale and possession by the customer, if it is finally determined that the customer can either not handle the dog or there is a personality conflict between the owner and the dog. Such replacement is made by Petitioner at no additional cost.

             
             

         11. The average purchase price during the audit period of a dual personality command dog sold by Petitioner was approximately $500.00. Of this amount Petitioner's cost was approximately $200.00 for obedience training and the balance was attributable to the cost in acquiring the dog originally if any, and the cost for the care and maintenance of the dog during the training period.

             
             

         12. A dog trained as a dual personality command dog requires a refresher course approximately every 6 to 8 months. Petitioner provides such refresher course to its customers and to other animals not originally sold by Petitioner for a price averaging between $85.00 and 125.00.

      
      

   5. Treatment of Payments made under Lease Agreement of November 18, 1971.

1. Petitioner's business is currently operated on premises known as 7120 Old Cheney Highway, Orlando, Florida.

2. Petitioner originally leased a portion of said property from Fred Ballard during 1968 or 1969. The initial rental payments for such premises was

   $75.00 and there was no written lease agreement.

   
   

3. After 1969 and prior to 1971, Petitioner leased additional property adjacent to the original leased premises from Fred Ballard. Such premises had situated thereon a home which Petitioner thereafter used as an office. Total rental payments after the additional rental was approximately $175.00 a month. There was no written lease agreement.

   
   

4. During 1971, a kennel adjacent to the premises and owned bay Fred Ballard leased by Petitioner was destroyed by fire. Petitioner offered to rebuild and to rent the premises upon which the destroyed kennels were located.

   
   

5. Mr. Ballard in connection with such adjacent premises offered to Petitioner three (3) propositions relative to such adjacent premises and the other property already leased by Petitioner:

   
   

   1. Petitioner could rent such adjacent premises outright and the rent would be something less than $695.00 per month;

   2. Petitioner could purchase the adjacent property for a down payment of $30,000.00; or

   3. Petitioner could rent the adjacent property with a portion of each monthly payment due being charged against an option to purchase the property by Petitioner during the term of the prospective lease agreement.

      
      

6. Petitioner and Mr. Ballard agreed that a portion of each monthly payment to be paid by Petitioner to Mr. Ballard covering the property originally leased under oral agreement and the property to be acquired from Mr. Ballard adjacent to the same would be applied to the option to purchase if Petitioner were to exercise the option to purchase with respect to the leased property. Said option was exercisable for a period of eight (8) years.

   
   

7. However, prior to the exercise of the option contained in the lease agreement all payments received under the lease agreement by Mr. Ballard from Mr. Galley were specifically understood and considered rent not subject to any forfeiture in the event of default or termination of the lease agreement.

   
   

8. Mr. Ballard then either prepared or had prepared outside the State of Florida, a lease agreement providing for the rental of Petitioner's business premises located at 7120 Old Cheney Highway, Orlando, Florida, which included the property to be leased as discussed above in 5. In addition the lease agreement under Paragraph 2 contained an option under which the Petitioner could elect to purchase all of the leased premises for a total purchase price of

   $75,000.00 with credit being given against the purchase price upon exercise of the option for "rentals paid hereunder less interest computed at 7 1/2 percent per annum upon the foresaid purchase price." The balance of the purchase price, if any, after electing the option would be paid by a $45,000.00 mortgage and cash upon closing.

   
   

9. At the time Petitioner was provided with the lease agreement he was also provided by Mr. Ballard with an amortization schedule (Petitioner's Exhibit

   1) which indicated a breakdown of the allocation of monthly payments toward the

   amount to be credited toward the purchase price of the property if the option were elected over the eight (8) year period, less the 7 1/2 percent interest factor.

   
   

10. The lease agreement was entered into between Petitioner and his wife, Ardys Rae Gailey, as lessees, and Fred B. Ballard and Betty A. Ballard, his wife, on November 18, 1971. (Exhibit 1-2)

    
    

11. Though Petitioner entered in said lease agreement he has made the rental payment through his corporation Sentry Dogs, Inc., d/b/a K-9 of Orlando, and since entering into the lease agreement (Exhibit 1-2) the Petitioner has paid $695.27 monthly rent, as provided in paragraph (1) of the lease.

    
    

12. On the profit and loss statements of K-9 of Orlando for the audit period involved, all payments made under the lease agreement of November 18, 1971 are reflected as "rent" payments. (Exhibits 1-11 and 1-12)

    
    

13. There are no other subsequently written documents or agreements with respect to the lease of said premises by Petitioner nor has Petitioner elected to exercise the option and purchase the demised premises under the lease agreement.

    
    

    CONCLUSIONS OF LAW

    
    

14. Transactions subject to sales taxes are contained in Ch.212, F.S. Section 212.02(1)(a) defines "sale" to include:

    
    

    "Any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever of tangible personal property for a consideration "

15. Section 212.02(4), F.S., provides in pertinent part: "'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 . . . 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."

    
    

16. Section 212.05, F.S., provides in pertinent part:

    
    

    "It is hereby declared to be the legislative intent that every person that is exercising a taxable privilege who engages in the business of selling at retail in this state, or who rents or furnishes any of the things or services taxable under this chapter . . .

    For the exercise of said privilege a tax is levied on each taxable transaction or inci- dent and shall be due and payable at

    the rate of 4 percent of the sale price of

    each item or article of tangible personal property and sold at retail in this state .

    . . ."

    
    

17. Section 212.08, F.S., provides for exemptions from sales taxes for certain property and subsection (7)(e)(1) thereof provides:

    
    

    "Also exempted are professional, insurance or personal service transactions which involve sales as inconsequential elements for which no separate charges are made."

    
    

18. With respect to Petitioner's business, the sales taxes here in dispute involve the sale of trained dual personality dogs. Dogs are tangible personal property. Petitioner contends that he is selling his services in training the dog and the dog is an inconsequential element of the transaction.

    
    

19. Although the customer contracts for the purchase of a trained dual personality dog of a specified breed, sex, and other characteristics, the sale is not consummated until the finished product is delivered. What the customer is buying is not a "raw" dog to be trained but the finished product. Petitioner retains all attributes of ownership until title to the animal is transferred after the training is completed. If the dog dies or otherwise becomes unavailable for transfer to the customer, Petitioner procures another animal in which he inculcates the attributes wanted by the customer. The training, which constitutes Petitioner's professional services, goes into the animal before title is transferred and the animal is certainly not an inconsequential element of the finished product. The animal is the finished product and it is a finished product that is sold.

    
    

20. This is similar to a protrait which an artist may produce for a customer or even the product a cabinet maker may produce. In neither case is the personal property (canvas, paint and wood) used an inconsequential element of the finished product. The dog used by Petitioner becomes the finished product and pursuant to the provisions of the statute above quoted, the taxable sales price is the amount paid for the trained dog without any deduction there from on account of the labor and services that go into the training of the animal. Accordingly, the sales tax is due on the total price paid by the customer for the trained animal.

    
    

21. Sales taxes on rental of real property is provided for in Section 212.031(1), F.S., which provides in pertinent part:

    
    

    "(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, or letting any real property unless such property is:

    1. Assessed as agricultural property under s. 193.461.

    2. Used exclusively as dwelling units.

    3. Property subject to tax on parking, docking or storage spaces under s. 212.03(6).

    * * *

    (c) For the exercise of such privilege a tax is levied in the amount equal equal to

    4 percent of and on the total rent charged

    for such real property by the person chargeing or collecting the rental."

    
    

22. Petitioner does not claim to come under any of the above-listed exceptions but contends that the payments he is making pursuant to the lease are not rent but comprise only principal and interest payments on the option purchase price of $75,000.

    
    

23. But for the form of the instrument (Exhibit 1-2), there would be merit to Petitioner's argument. Lessee pays all taxes and insurance on the property; the payments made are those required to amortize the $75,000 option price in 15 years and not on the market lease value of the property; the lease runs for 8 years at the expiration of which Petitioner would have accrued an "equity" of

    $30,000 with which to make the required down payment; lessor agreed to assume a

    7 year mortgage in an amount not to exceed $45,000 when lessee exercises the option; and this mortgage would amortize at the same monthly payments lessee is currently making during the 7 year term of the mortgage.

    
    

24. Liability for taxes is determined by the form and face of the instrument and cannot be affected by proof of extrinsic facts. Lee v. Keenan 78F 2d 425 (CCA 1935) Cert den. 56 S.Ct. 170; Department of Revenue v. McCoy Motel, Inc. 302 So 2d 440 (Fla. App 1974). Here the parties entered into a lease agreement, the payments are designated as rent, and until such time as lessee exercises his option to purchase the property he has no right of redemption for any of the payments he has made. While he may have been exempt from sales taxes on the monthly payments had the document taken the form of a contract for deed, unfortunately for Petitioner the document provided solely for rental payments. Not coming under one of the exemptions, the rental payments are subject to sales tax pursuant to Section 212.031(1)(a), F.S., above quoted.

    
    

25. From the foregoing it is concluded that the sale of dual personality dogs trained by Petitioner and the rental payments made pursuant to his lease agreement are subject to sales taxes by the provisions of Chapter 212, Florida Statutes above quoted. It is there fore

    
    

26. Recommended that Petitioner's claim for relief for the assessed deficiency of the Florida sales taxes, including penalties and interest in the amount of $6,320.96, be denied.

Done and entered this 18th day of November, 1977, in Tallahassee, Florida.

K.N. AYERS Hearing Officer

Division of Administrative Hearings

530 Carlton Building Tallahassee, Florida 32304

COPIES FURNISHED:

Lawrence E. Dolan, Esquire Suite 1335 CNA Tower Orlando, Florida 32801

Joseph C. Mellichamp, Esquire Assistant Attorney General The Capitol, Room LL04 Tallahassee, Florida 32304

Docket for Case No: 77-001233

Orders for Case No: 77-001233