STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

WESTERN ACCEPTANCE COMPANY, )

)

Petitioner, )

)

vs. ) CASE NO. 79-1151

) STATE OF FLORIDA, DEPARTMENT ) OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, James E. Bradwell, held a public hearing herein on October 12, 1979, in Orlando, Florida. Thereafter, the parties requested that proceedings herein be stayed such that the parties could explore the possibility of amicably resolving the dispute herein without the necessity of the rendition or a Recommended Order. The matter was held in abeyance until May 20, 1982, at which time the Respondent filed a motion to reopen the matter and for leave to allow the parties to file memoranda of law to apprise the undersigned Hearing Officer of subsequent changes in the law that occurred since October, 1979. By these acts, the parties effectively waived the thirty (30) day time requirement that a Recommended Order be entered within thirty days following the close of the hearing or receipt of the transcript. By Order dated May 26, 1982 by the undersigned Hearing Officer, said motion to reopen the record was granted over the opposition of the Petitioner's counsel. 1/

APPEARANCES

For Petitioner: David W. Roquemore, Jr., Esquire

Gurney, Gurney & Handley, P.A. Post Office Box 1273

Orlando, Florida 32802

For Respondent: Joseph C. Mellichamp III and

E. Wilson Crump, Esquires Department of Legal Affairs The Capitol, LL04 Tallahassee, Florida 32301

ISSUE

The issue posed for decision herein is whether or not the Petitioner is subject to the Florida corporate income tax for tax years 1972, 1973, 1974 and 1975 plus accrued penalties and interest since July 7, 1977, the date Petitioner was mailed a proposed notice, of deficiency by the Respondent, Department of Revenue.

FINDINGS OF FACT

Based on the evidence adduced at the hearing herein; the documentary evidence received; the Respondent's memorandum in support of the assessed deficiency; the Petitioner's memorandum in response thereto; and the entire record compiled herein, the following relevant facts are found.

BACKGROUND

1. On July 7, 1977, Respondent mailed Petitioner a proposed notice of deficiency and on September 5, 1977, Petitioner timely filed its protest to the proposed deficiency with the Respondent. Several informal conferences were held with the result being that by letter dated March 22, 1979, the agency denied Petitioner's amended protest and gave Petitioner final notice of the Respondent's position. By a petition for a Section 120.57(1), Florida Statutes hearing dated May 22, 1979, Petitioner requested the entry of an order determining that it is not subject to the Florida corporate income tax for the above-referred taxable years in question and that the proposed deficiency, including penalties, be rescinded.

   
   

2. Petitioner (Acceptance herein) is a Delaware corporation with its principal place of business in Kansas City, Kansas. Acceptance has not qualified to transact business in Florida, pursuant to Chapter 607, Florida Statutes. Acceptance is a wholly-owned subsidiary of Western Auto Supply Company ("Supply") (TR 7), and as such, is a separate legal entity apart from Supply. (TR 23) Acceptance has no property other than cash and receivables, and maintains no office in Florida. Likewise, Acceptance has no employees in the State of Florida. The books and records of Acceptance are maintained by Supply's employees in Kansas City, Missouri (TR 22). 1A/

   
   

3. Supply, the parent corporation of Acceptance, is authorized to transact business in Florida. (TR 7)

   
   

4. Supply has two types of retail stores in Florida: (1) independently owned dealer stores, and (2) company owned stores.

   
   

5. When a customer makes an installment purchase at an independently owned dealer store, a retail installment sales agreement (Dealer Retail Contract) is entered into between the dealer and the customer. (TR 12-13; Exhibit 9) In form, neither Supply nor Acceptance is a party to the Dealer Retail Contracts. (TR 15; Exhibit 9) The dealer is not obligated to, but may elect to, sell the Dealer Retail Contract to Supply under a purchase agreement between the dealer and Supply. (TR 13, 31; Exhibit 10) Acceptance is not directly a party to this agreement. (Exhibit 10) When the dealer elects to sell the Dealer Retail Contract to Supply, that Contract is sent to Supply's distribution center in Jacksonville, Florida for preliminary acceptance and thereafter to Supply's office in Kansas City, Kansas, for final approval of the purchase from the dealer. (TR 13, 27-28) In some cases, Dealer Retail Contracts are rejected at the Jacksonville distribution center. The sale of the Dealer Retail Contract to Supply, in form, takes place in Kansas City, Missouri. (TR 27-28; Exhibit 10) In substance, sale of Dealer Retail Contracts to supply takes place at the Jacksonville distribution center. (TR 13) Acceptance does not have to determine which Dealer Retail Contracts will or will not be purchased since this decision is made by Supply. (TR 28-29)

   
   

6. A Dealer Retail Contract purchased by Supply is typically "sold" by Supply to Acceptance. (TR 28) Prior to December 1, 1973, the purchase price for

   the Contracts was the face amount of the Contracts less unaccrued finance charges. (TR 28) After November 30, 1973, the purchase price for the Contracts is the amount remaining to be paid on the Contract (including unearned finance charges). (TR 28; Exhibit 11) The "sale" of a Dealer Retail Contract from Supply to Acceptance takes place in Kansas City, Kansas. The purchased Contracts are held in Kansas City, Missouri. (TR 15) Supply is not legally obligated to sell Dealer Retail Contracts to Acceptance and vice versa. (TR 31, 43; Exhibit 11) In substance, Dealer Retail Contracts were "typically" always sold to Acceptance. (TR 29, 35, 36) The decision as to whether a Contract was "purchased" by Acceptance was made by Supply's employees.

   
   

7. The independent dealer is billed by Supply from Kansas City at the end of each month for all customer payments due on Dealer Retail Contracts which Supply has purchased from the dealer; and the dealer is required to make that payment to Supply whether or not the customer makes his payment on or before the 10th of the following month. (TR 14) Customer payments on the Contract are made at the independently owned dealer store in Florida and the customer payment records are maintained at that store. (TR 18) The dealer's monthly payment is sent to Supply's Jacksonville distribution center for deposit into a Jacksonville bank account in Supply's name. Those funds are later transmitted by Supply to Supply's Kansas City, Missouri bank. Thereafter, the appropriate amounts representing collections on Dealer Retail Contracts are paid by Supply to Acceptance at Kansas City, Missouri. (TR 28; Exhibit 11)

   
   

8. Prior to December 1, 1973, Acceptance paid Supply a monthly fee for services rendered by Supply in administering the collections upon Dealer Retail Contracts, on behalf of and as agent for Acceptance since Acceptance had no employees. (TR 29) Subsequent to November 30, 1973, Acceptance no longer paid a fee to Supply. Collection policy is established by Supply, since, without employees, Acceptance could not establish policies. (TR 29; Exhibit 11)

   
   

9. Beginning December 1, 1973, Supply also transferred to Acceptance: (i) retail installment sales agreements in connection with customer installment purchases at company owned stores in Florida ("Supply Installment Contracts") (TR 29; Exhibits 8 and 11); and (ii) revolving charge accounts in connection with retail sales at company owned stores in Florida ("Supply Revolving Accounts"). (TR 29-30; Exhibit 11) The purchase price for Supply Installment Contracts transferred by Supply to Acceptance was the amount remaining to be paid on the Contracts (including unearned finance charges). (TR 30; Exhibit 11) The transfer price for Supply Revolving Accounts was the amount remaining to be paid on the accounts. The transfer of Supply Installment Contracts and Supply Revolving Accounts (as well as Dealer Retail Contracts) took place at Kansas City, Missouri, after the end of the calendar month in which Supply made sales giving rise to these receivables. (TR 33, 34; Exhibit 11) Supply was not legally obligated to sell these receivables to Acceptance and vice versa. (TR 31; Exhibit 11) However, if a transfer of a receivable was beneficial to Supply, the transfer was normally made since the decision to transfer was made by Supply's employees. Supply Installment Contracts were held at the company owned store in Florida. (TR 15)

   
   

10. Customer payments on Supply Installment Contracts were typically made to Supply at the company owned store in Florida and the customer payment records were maintained at that store. (TR 18) Collected payments were transmitted to Supply's Kansas City, Missouri bank. Thereafter the appropriate amounts representing collections on Supply Installment Contracts were transferred to Acceptance by Supply and paid by Supply to Acceptance at Kansas City, Missouri. (TR 33; Exhibit 11)

11. Revolving charge credit accounts were authorized by Supply in Kansas City, Missouri. Purchases charged to revolving accounts were made in Florida. The customer was billed monthly from Kansas City. (TR 30, 33-34) Approximately

    60 percent of customer payments on Supply Revolving Accounts were mailed by the customer from Florida to Kansas City and approximately 40 percent were brought in personally by the customer to the Supply retail store in Florida. (TR 34) Payments made at the retail store were transmitted to Supply's Kansas City, Missouri bank. (TR 34) Thereafter, the appropriate amounts representing collections on Supply Revolving Accounts were transferred to Acceptance from Supply and paid by Supply to Acceptance at Kansas City, Missouri. (TR 34; Exhibit 11)

    
    

12. Acceptance did not pay Supply a fee for services rendered on behalf of, and as agent for, Acceptance in administering the collections upon Supply Installment Contracts and Supply Revolving Accounts. (Exhibit 11) Supply was responsible for collecting the payments and establishing collection policies. (TR 30; Exhibit 11)

    
    

13. On December 15, 1974, Acceptance sold on the public market 1-1/2 percent debentures due December 15, 1979. (TR 38; Exhibit 11) About the time of the public offering of debentures, Supply and Acceptance entered into a Receivables Purchase Agreement dated December 9, 1974. (Exhibit 11) This Agreement formalized the procedures which had been in effect since December 1, 1973, pursuant to which Supply, in form, sold to Acceptance Dealer Retail Contracts, Supply Installment Contracts, and Supply Revolving Accounts. (TR 37) Prior to the execution of this Agreement, and due to the fact that all decisions were made for Acceptance by supply, the entities operated in the same manner as provided in the Agreement even though neither entity was legally required to do so.

    
    

14. Prior to December 1, 1973, because Acceptance "purchased" Dealer Retail Contracts from Supply at the face amount of the contracts less unaccrued finance charges, Acceptance had gross income in the nature of interest as payments were made to Acceptance by Supply with respect to those contracts. (TR 28; Exhibits 4 and 5) Commencing December 1, 1973, because Acceptance purchased Dealer Retail Contracts, Supply Installment Contracts and Supply Revolving Accounts from Supply at face amount, including unearned finance charges, Acceptance no longer had gross income as payments were made to Acceptance by Supply with respect to those receivables. (TR 28, 30; Exhibits 5, 6, 7 and 11) Instead, Supply paid Acceptance amounts necessary for Acceptance to continue to operate as a financing vehicle for Supply.

    
    

15. Commencing December 1, 1973, Supply paid Acceptance quarterly an "earnings maintenance fee" in an amount which produced for Acceptance, earnings available to meet interest charges and debt expenses of at least 1-1/2 times the sum of Acceptance's interest requirements on its debt and amortization of debt expense. (Exhibit 11) The earnings maintenance fee was paid to Acceptance by Supply from Supply's general corporate funds and was not directly related to the Dealer Retail Contracts, Supply Installment Contracts, or Supply Revolving Accounts transferred by Supply to Acceptance. (TR 44)

    
    

16. For taxable year 1972, Acceptance had gross income of $7,433,262.46. The nature of this gross income was in the form of "handling charges" or interest. (TR 24; Exhibit 4)

17. For the taxable year 1973, Acceptance had gross income of

    $8,433,262.46. The nature of this gross income was in the form of handling charges or interest of $7,869,111.00 and earnings maintenance fee of

    $564,151.46. (TR 25; Exhibit 5)

    
    

18. For taxable year 1974, Acceptance had grass income of $8,054,442.09. The nature of this gross income was in the form of earnings maintenance fees.

    
    

19. For taxable year 1975, Acceptance had gross income of $18,871,236.09. The nature of this gross income was in the form of earnings maintenance fee.

    
    

20. The Florida Department of Revenue claims that Acceptance is subject to the Florida corporate income tax and has assessed deficiencies as follows:

    
    

    (a) 1972	$ 5,682.00
    (b) 1973	7,085.00
    (c) 1974	6,939.00
    (d) 1975	12,370.00

    
    

    Respondent's Position

    
    

21. The Respondent takes the position that although Acceptance was not "qualified to do business" in Florida pursuant to Chapter 607, Florida Statutes, during the tax years in question, Acceptance was actually doing business in Florida through its parent corporation, Western Auto Supply Company. Respondent points to the fact that Acceptance had no offices or employees in or out of the State of Florida, but instead relied upon, and utilized, the office, property and employees of Supply for the conduct of all of its business activities both in and out of the State. Respondent concludes that while in form Acceptance constituted a separate and distinct entity, in substance all of its (Acceptance's) business activities were conducted by Supply and were a direct result of Supply's activities. See for example River Park Joint Venture v. Dickinson, 303 So.2d 654 (1st DCA Fla., 1974). Respondent takes the position that where activities are being performed on behalf of, or in relation to, business being conducted in a particular state (here in Florida) and such activities establish a continuing valuable contractual relationship to the conduct of such business operation in the state (Florida) a minimum connection exists with the privileges of protection afforded by such taxing state (Florida). See Reader's Digest Ass'n. v. State ex rel. Conner, 251 So.2d 552 (1st DCA Fla., 1971). 2/ Respondent urges that income earned by Acceptance during the taxable years in question constitutes "sales of a financial organization. Finally, Respondent's position is that Petitioner's argument, as to its unawareness of the need to file tax returns for the subject years in question, is not an excusable reason for not filing and/or taking other action as set forth in the report of the Respondent's examining office.

    
    

    Petitioner's Position

    
    

22. The Petitioner takes the position that under the express language of the Florida corporate income tax code, it is not subject to the tax and penalties here imposed since it was not qualified to do business in Florida during the tax years in question. An offshoot of that position, as contended by Petitioner, is that any basis for taxation by its would depend on a finding that it was "actually doing business" in Florida during the years in question. Petitioner contends that it was a separate and distinct legal entity apart from Supply and for the years in question had no offices; did not own or lease real or tangible property; and did not hold any indebtedness secured by Florida real

    property. Petitioner contends further that it was not party to the creation of contracts at company owned stores or to the acquisition by Supply of contracts created at Dealer stores; had no obligation to acquire receivables from Supply; and had no obligation to sell receivables to itself (Petitioner). Petitioner points to the fact that Supply acted only as its agent for collection purposes and collection activities do not constitute "actually doing business" in Florida. Petitioner contends that Respondent is confusing the concepts of "doing business" and "nexus" or "minimum contacts" which are different tests upon which jurisdiction may rest. Petitioner urges that based on Florida's election to use the "doing business" test in its corporate income tax code, it is not authorized to here use the "nexus" or "minimum contacts" theories as a basis for state tax jurisdiction.

    
    

    CONCLUSIONS OF LAW

    
    

23. The Division of Administrative Hearings has jurisdiction over the subject matter and the parties to this action. Section 120.57(1), Florida Statutes.

    
    

24. The parties were duly noticed pursuant to the notice provisions of Chapter 120, Florida Statutes.

    
    

25. The authority of the Respondent is derived from Chapter 120, Florida Statutes, and Rule Chapter 12C-1, Florida Administrative Coda.

1. Section 220.11(1), Florida Statutes, imposes Florida corporate income tax on "every taxpayer. . .for the privilege of conducting business, earning or receiving income in this state, or being a resident or citizen of this state. .

   ." Section 220.03(1)(b), Florida Statutes, defines the term "taxpayer" to mean "any corporation subject to the tax imposed by this code. . ."

   
   

2. The term "corporation" is defined by Section 220.03(1)(d), Florida Statutes, to include "foreign corporations qualified to do business in this State or actually doing business in this State;. . ." (Emphasis added) Based upon the above-referred portions of Chapter 220, Florida Statutes, a non-Florida corporation is subject to Florida's corporate income tax if it is qualified to do business in Florida or is actually doing business in Florida.

   
   

3. Chapter 607, Florida Statutes, provides guidance as to whether a foreign corporation must qualify to do business in Florida. Even though a foreign corporation is not required to qualify to do business in Florida pursuant to Chapter 607, Florida Statutes, it may be actually conducting business in Florida directly through its own employees or its agents. Evidence herein reveals that although Petitioner was not "qualified to do business" in Florida pursuant to Chapter 607, Florida Statutes, during the tax years in question, Petitioner was actually doing business in Florida through its parent corporation, Western Auto Supply Company. In this regard, record evidence reveals that Petitioner neither owned nor leased any property other than cash and receivables and had no offices or employees in or out of the State of Florida. Instead, Petitioner relied upon and utilized the offices, property and employees of its parent corporation, Western Auto Supply Company (Supply) to conduct all of its business activities both in and out of the State of Florida. In substance therefore, all of Petitioner's business activities were conducted by Supply, and were the direct result of supply's activities. But for Supply's activities on behalf of the Petitioner, both in and out of the State of Florida, Petitioner would not have conducted any business or earned any income. See River Park Joint Venture v. Dickinson, supra. Further, pursuant to the

   provision of the Receivables Purchase Agreement entered into by and between Petitioner and Supply, Supply contractually agreed to, and acted as Petitioner's agent in the State of Florida. (Exhibit 11, Paragraph 8a of the Receivables Purchase Agreement dated December 9, 1974.) Based thereon, it is concluded as a matter of law that Petitioner's activities as recited hereinabove are sufficient for it to be considered in actuality, doing business in the State of Florida, and therefore is a taxpayer within the meaning of Section 220.03(1)(b), Florida Statutes. See Footnote 2, supra.

   
   

4. Respondent, through the persons of its auditor, determined that Petitioner's income attributable to its Florida activities, was equal to the percentage of its total receivables which constituted Florida receivables. In this regard, Section 214.71(3)(b), Florida Statutes, provides in relevant part as follows:

   
   

   Sales of a financial organization, including, but not limited to, banking and savings institutions, investment companies, real estate investment trusts, and brokerage companies, shall be in this state if derived from:

   1. Fees, commissions, or other compensation for financial services rendered within this state;

   2. Gross profits from trading in stocks, bonds or other securities managed within this state;

   3. Interest and dividends received within this state;

   4. Interest charged to customers at places of business maintained within this state for carrying debit balances of margin accounts, without deduction of any costs incurred in carrying such accounts; and

   5. Any other gross income resulting from the operation as a financial organization within this state.

      
      

      Based thereon, adequate basis exists to conclude, and it is hereby concluded that Petitioner's income during the tax years in question constituted sales of a financial organization as defined by Section 220.15(2), Florida Statutes.

      Record evidence herein supports a further conclusion that Petitioner constituted a sales finance company and therefore is a financial organization within the meaning of Section 220.15(2), Florida Statutes.

      
      

5. Concluding, prior to December 1, 1973, the nature of the income earned by Petitioner constituted "interest. . .received within the state" within the meaning of Section 214.71(3)(b), Florida Statutes. Subsequent to November 30, 1973, the income earned by Petitioner constituted "other gross income resulting from the operation as a financial organization within this state" and therefore, constituted sales of a financial organization pursuant to Section 214.71(3)(b) 5, Florida Statutes.

   
   

6. In determining whether interest is received within this state within the meaning of Section 214.73(3)(b) 3, Florida Statutes, Rule Chapter 12C- 1.15(3)(c), Florida Administrative Code, provides guidance. That section provides in pertinent part:

   Subsection 3 of Section 214.71(3)(b) states that "interest and dividends received within the State" are included in the numerator.

   However, any such income must, in accordance with subsection 5, be earned (not simply received) in this state. Consequently, interest and dividends generated from the following activities will be considered Florida sales and will be included in the numerator of the sales factor:

   1. Interest received on loans secured by real property located in this state, irrespective of place of receipt;

   2. Interest received on unsecured loans or loans secured by personal property which are made from offices located in this state, irrespective of place of receipt;

   3. Other interest and dividends received by offices located in this state.

   
   

   Therefore, prior to December 1, 1973, the portion of Petitioner's income attributable to Florida activities constituted interest received on loans secured by personal property which were made from offices located in Florida or amounts to interest received by offices located in Florida.

   
   

7. Interest received by Supply on behalf of Petitioner from independently owned retail dealers located in Florida, also constituted interest received on loans secured by personal property which were made from offices situated in Florida. Record evidence reveals that all obligations acquired by Supply on behalf of Petitioner from independently owned retailers were sent to Supply's Jacksonville distribution center where they were approved or disapproved by Supply. Evidence also reveals that typically any receivable acquired by Supply from independently owned retailers was transferred to Petitioner. In view thereof, and connected with the fact that any decision as to whether a receivable would be transferred to Petitioner was made by employees of Supply, Supply's acceptance or rejection of receivables in its Jacksonville distribution center constituted the making of a loan from an office located in this state on behalf of Petitioner. Further, if receivables obtained from independently owned retailers may arguably not be considered receivables for loans made within the state, the result is inescapable that all interest received on these obligations is interest received by offices located within the state. Therefore, such interest is interest received by offices located in this state on behalf of Petitioner. 3/ The amounts received by Petitioner after November 30, 1973 did not constitute interest inasmuch as the amount paid to the Petitioner by Supply as income was not based on the amount of interest received by Supply on its receivables arising at its stores or upon the amount of interest paid on receivables at purchase from independently owned dealers. Specifically, the income received by Petitioner was determined solely by the amount of cash necessary for Petitioner to meet its financial obligations. The facts also establish that Petitioner, through its express and implied agency relationship with Supply, was operating as a financial organization within the state. Thus, the income received by Petitioner constituted other gross income from its operation as a financial organization in Florida, and therefore constituted Florida "sales" under Section 214.71, Florida Statutes.

8. Competent and substantial evidence was offered herein to support an exaction of the penalties and interest imposed herein pursuant to Sections

214.40 and 214.41, Florida Statutes. Petitioner, as was its burden, failed to establish its entitlement to a waiver of the penalty provisions.

RECOMMENDATION

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

RECOMMENDED:

That the Respondent enter a Final Order herein denying Petitioner's protest of the proposed deficiency and penalties as set forth hereinabove.

RECOMMENDED this 14th day of March, 1983, in Tallahassee, Florida.

JAMES E. BRADWELL, Hearing Officer Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 14th day of March, 1983.

ENDNOTES

1/ The Respondent has submitted a memorandum of law supportive of its position herein which was considered by me in preparation of this Recommended Order.

Petitioner's counsel has filed a reply to Respondent's memorandum which has also been considered. To the extent that the parties' proposed findings, conclusions, etc. are not contained in this Recommended Order, said findings etc. were deemed either irrelevant, immaterial or not otherwise supported by record evidence.

1A/ The parties stipulated that Petitioner is a Delaware corporation and has its principal place of business in Kansas City, Missouri. The facts also reveal that Petitioner, through Supply, has ties with both Kansas City, Kansas and Kansas City, Missouri. (TR 23)

2/ In this regard, but for the income derived by and through Petitioner's agents in Florida, it derived no income. These facts certainly form sufficient basis to satisfy the "minimum contact" to establish that Petitioner was actually doing business in Florida. As noted in Reader's Digest, it would be difficult to imagine a situation bringing a foreign corporation into closer contact with Florida without the actual presence of its officers in the state.

3/ Subsection (iii) of Rule 12C-1.15(3)(c), Florida Administrative Code.

COPIES FURNISHED:

David W. Roquemore, Jr., Esquire Gurney, Gurney & Handley, P.A. Post Office Box 1273

Orlando, Florida 32802

Joseph C. Mellichamp, III, Esquire Department of Legal Affairs

The Capitol (Suite LL04) Tallahassee, Florida 32301

Mr. Randy Miller Executive Director Department of Revenue Carlton Building

Tallahassee, Florida 32301

Docket for Case No: 79-001151

Orders for Case No: 79-001151