STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

STATE OF FLORIDA, DEPARTMENT OF ) REVENUE, )

)

Petitioner, )

)

vs. ) CASE NO. 79-1668

) SOUTHERN PAVING COMPANY and ) TAFT ASPHALT COMPANY, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, James E. Bradwell, held a public hearing in this case on March 6, 1980, in Tallahassee, Florida. Pursuant to leave, the parties were allowed ten (10) days following receipt of the transcript of the hearing to file memoranda of law supportive of their respective positions. Said memoranda have been received and were considered by me in preparation of this Recommended Order.

APPEARANCES

For Petitioner: Cecil L. Davis, Jr., Esquire

Assistant Attorney General Department of Legal Affairs The Caitol, LL04 Tallahassee, Florida 32301

For Respondent: Daniel J. Wiser, Esquire

Roberts, Miller, Baggett, LaFace & Wiser

Post Office Drawer 1838 Tallahassee, Florida 32302

ISSUES

The issues posed for decision herein are:

1. Whether or not the Petitioner, Department of Revenue's use of fabricated costs in issuing sales tax assessments against Respondents, Southern Paving Company and Taft Asphalt Company, during the audit period April 1, 1976, through March 31, 1979, was proper. 1/

   
   

2. Whether Respondents are entitled to a credit for bad debts which resulted during the audit period.

FINDINGS OF FACT

1. Based upon my observation of the witnesses and their demeanor while testifying, the documentary evidence received and the entire record compiled herein, the following relevant facts are found.

   
   

2. Southern Paving Company (Southern) was formed during 1969 as a manufacturer of asphalt. In addition to manufacturing asphalt, Southern is engaged in the retail sale of asphalt and is also a paving contractor. Taft Asphalt Company (Taft) was formed during approximately 1972 and during the audit period was engaged in the manufacturing of asphalt. Separate books were maintained by both companies based on their "simple operations" which continued through approximately November of 1977 when the two companies merged. The then directors of Taft considered the manufacturing phase of its operations unprofitable and a stock exchange resulted in the demise of Taft. During the audit period, the usual formalities of a sale and purchase were observed when asphalt was transferred from Taft to Southern with resultant invoices prepared to reflect the sale of asphalt from Taft to Southern and book entries made to indicate the price paid by Southern to Taft.

   
   

3. Testimony of Taft's Comptroller, Jerry Leslie, opined that the invoiced amount for the asphalt purchased for Southern was only used to reflect inter- company transfers between the two entities and that taxes were paid on the fabricated cost for the price of asphalt based on known costs which were used to make up a ton of asphalt. The Department of Revenue (Department), on the other hand, through its Audit Supervisor, Max Anton, issued the proposed assessment for the two companies based on a fabricated cost based on figures reflected on the two entities' books and records with credits for those materials either already paid to the Department or not applicable to the fabrication of asphalt. (TR. 27, 28, 55 and 56.)

   
   

4. Another phase of the audit which is at issue herein is an assessment for the purchase of fuel oil by Taft Asphalt for use and consumption on which no sales tax was remitted to the Department. Comptroller Leslie admitted that the fuel was used by Taft to heat the liquid asphalt during the fabrication process to cause it to flow into the mix and to dry the asphalt. The fuel was consumed and dissipated in the fabricating process. According to Leslie, one fuel dealer collected the tax for certain fuel purchases while other dealers did not collect the tax.

   
   

5. As revised on July 23, 1979, the assessment issued against Taft reflects a total amount of $21,828.93. (Petitioner's Exhibit 2.) The proposed assessment against Southern Paving Company reflects a total amount of $7,145.98. (Petitioner's Exhibit 1.) The first item at issue in the assessment against Southern is again based on the purchase of fuel oil by Southern for self-use and consumption for which no tax was paid and which was consumed in the fabrication process of the asphalt, (TR. 48, 49, 58 and 59.) It is undisputed that the Respondent did not pay taxes for the fuels which are reflected on the assessment contained in Petitioner's Exhibit 1.

   
   

6. The remaining item at issue herein in the assessment against Southern which is based on the fabricated cost of asphalt which Southern used in the furtherance of its own paving business. The issue as to this fact stems from the parties' differing methodology in the formation of fabrication costs. Comptroller Leslie, on behalf of Respondents, utilized as previously stated, a fabrication cost methodology which was based on those items he considered to be known by the company for use in fabricating a ton of asphalt, whereas the

   Department used through its auditor, Max Anton, those items invoiced as per the amounts reflected in Respondents' books and records.

   
   

7. Auditor Anton reviewed Respondents' books and records for the period in question and formulated the tonage costs for asphalt on a month-by-month basis based on his notation that fuel costs and other materials utilized in the fabrication of asphalt were changing constantly. Auditor Anton allowed credits to Respondents when the costs of materials were rising and Respondents had tendered to the Department a higher tax based on what may be considered unrealistic costs and assessed a higher tax in those instances wherein the taxes remitted did not accurately reflect the cost of materials as reflected by Respondents' books and records. (TR. 61 through 64.)

   
   

8. Comptroller Leslie offered that the utilization of invoice records to determine fabrication costs results in an artificially high fabrication cost for asphalt since the invoiced amounts were merely used to prompt the directors and officials of the companies, particularly Taft Asphalt Company, to become profitable inasmuch as they (Taft) were sustaining heavy losses since they became operational in 1972. Mr. Leslie used a fabrication cost method resulting in an average based on beginning and the year end costs for materials used to fabricate asphalt. Comptroller Leslie also testified that the methodology used by him is based on the results of audits of Respondent companies by Petitioner's agents during 1971 and 1972.

   
   

9. Mr. Anton's methodology in arriving at fabrication costs appears to more accurately reflect the true cost for the fabrication of asphalt.

   Noteworthy was the fact that in arriving at his fabrication cost, Mr. Anton made his computations on a monthly basis based on the available documentation maintained by Respondents in their general ledger and other books and records which were available for inspection during the audit. Mr. Anton allowed credits in those instances where the tax remittances by Respondents were excessive in the sense that the fabrication cost methodology used (by Respondents) failed to accurately reflect the true costs for the materials. On the other hand, Mr.

   Anton issued an additional assessment in those instances wherein the books and records failed to substantiate the fabricated cost utilized by the Respondents based on available data in its records. Mr. Anton deleted the fuel oil used by Southern in his computation of the fabricated cost. Respondent did not offer any documentary evidence to create any doubt as to the reliability of the proposed assessment and the substantiating documents submitted by Mr. Anton. (Petitioner's Exhibits 1 and 2.) Based on the foregoing, I shall recommend that the Petitioner's proposed assessments contained in Petitioner's Exhibits 1 and 2 be upheld.

   
   

10. The remaining issue centers around Respondent's contention that it is entitled to a credit for bad debts which were allegedly incurred by Respondent during the audit period but not claimed when they were realized.

    
    

11. To support its contention that it was entitled to a credit for bad debts during the audit period, Comptroller Leslie testified that the two companies incurred bad debts of approximately $54,200.82 which were applicable during the audit period and which had been deducted by the Respondents on their Federal income tax returns. No records were introduced by Respondents to substantiate the bad debts claim.

    
    

12. Prior to May 8, 1978, a taxpayer was required to submit any credit claim for bad debts on sales tax returns for the period in which the bad debts were found to be worthless and actually charged off for Federal income tax

    purposes. Subsequent to the 1978 amendment, a taxpayer is allowed to claim a credit for bad debts within the twelve months following the month in which the bad debt has been charged off for Federal income tax purposes. (Section

    212.17(3), Florida Statutes.) The evidence introduced herein reveals that the Respondents have not filed a claim for credit for the bad debts within the allowable period pursuant to the requirements of Section 212.17(3), Florida Statutes. I shall, therefore, recommend that the claim (credit) for bad debts be denied.

    
    

    CONCLUSIONS OF LAW

    
    

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

    
    

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

    
    

15. The authority of the Petitioner is derived from Chapter 212, Florida Statutes, and Chapter 12A-1, Florida Administrative Code.

    
    

16. The sales of asphalt from Taft to Southern are subject to tax under Chapter 212, Florida Statutes, at the rate of our percent (4 percent) of the sales price of each item or article utilized in the fabrication of asphalt. Section 212.02(2)(a) and Section 212.05(1)(a), Florida Statutes.

    
    

17. The purchase of fuel oil by Southern and Taft for self-use and consumption is subject to sales tax under Section 212.02(3)(c), Florida Statutes, and Rules 12A-1.15 and 12A-1,63(1)(b), Florida Administrative Code, based on the record evidence reflecting that the fuel in question was used by the Respondents, Taft Asphalt Company and Southern Paving Company, to heat the liquid asphalt during the fabrication process, causing it to flow and dry the asphalt, which fuel was consumed and dissipated in the fabrication process. Section 12A-1.15(2), Florida Administrative Code.

    
    

18. Competent and substantial evidence was offered by the Petitioner to establish that its fabricated cost determination of the asphalt produced by Respondents, Taft Asphalt Company and Southern Paving Company, was correct and in keeping with the guides of Section 212.06(1)(b), and Section 212.02(5), Florida Statutes, and Rule Sections 12a-1.51(5); 12a-1.24(1) and 12a-1.43(1), Florida Administrative Code.

    
    

19. Competent and substantial evidence was offered to establish that the Petitioner properly denied Respondents' claim for a credit for bad debts allegedly occurring during the audit period inasmuch as such credits were not claimed within the allowable period as provided in Section 212.17(3), Florida Statutes.

RECOMMENDATION

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

RECOMMENDED:

1. The Department of Revenue's assessment herein for sales tax and interest be UPHELD.

2. That the Department withdraw its penalty assessment herein based on evidence which indicates that the assessment stems from honest and differing opinions by the parties as to the fabricated costs; the fact that the Comptroller testified credibly that the fabrication methodology utilized by him in remitting the taxes here involved was based on methodology utilized by a former audit of the Respondent companies by Petitioner during the taxing periods 1971 and 1972; the absence of any evidence of fraud or other unfair dealing by the Respondents and the general discretionary authority vested in Petitioner pursuant to Section 212.12(2), Florida Statutes.

RECOMMENDED this 26th day of June, 1980, in Tallahassee, Florida.

JAMES E. BRADWELL

Hearing Officer

Division of Administrative Hearings

101 Collins Building Tallahassee, Florida 32301 (904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 26th day of June, 1980.

ENDNOTE

1/ The audit period for Taft Asphalt Company covers the period April 1, 1976, through November 30, 1977. This audit closing date is the approximate date that Taft Asphalt Company ceased doing business due to a merger with Southern Paving Company.

COPIES FURNISHED:

Robert A. Pierce, Esquire General Counsel Department of Revenue

Room 104, Carlton Building Tallahassee, Florida 32301

Cecil L. Davis, Jr., Esquire Assistant Attorney General Department of Legal Affairs The Capitol, LL04 Tallahassee, Florida 32301

Daniel J. Wiser, Esquire Roberts, Miller, Baggett,

LaFace & Wiser

Post Office Drawer 1838 Tallahassee, Florida 32302

Docket for Case No: 79-001668

Orders for Case No: 79-001668