vs. ) CASE NO. 89-0136
Respondent. )
This matter was heard by William R. Dorsey, Jr., the Hearing Officer designated by the Division of Administrative Hearings, on September 29, 1989, in Miami, Florida.
For Petitioner: Mark R. Vogel, Esquire
Lealand L. McCharen, Esquire Mark T. Aliff, Esquire Assistant Attorneys General Department of Legal Affairs Tax Section, The Capitol Tallahassee, FL 32399-1050
Whether Latin America Sales made unreported sales which became subject to sales tax because they went unreported?
Are purchases of inventory by Latin America Sales from overseas vendors subject to state use tax while temporarily warehoused in Miami and before export?
Are purchases of inventory of Latin America Sales subject to state use tax because of its failure to register as a dealer, although its purchases would be exempt had it registered?
Latin America Sales International, Inc., called four witnesses, Ricardo Miranda, Elsie Miranda, the owners of Latin America Sales, Eugene Drascher, the certified public accountant for the company and Jacqueline Randall, an auditor who prepared most of the Department's audit report. The Department called two witnesses, Trina Mungin, a tax auditor and Carmen Cordoba, an audit supervisor for Ms. Randall and Ms. Mungin. The following exhibits were entered into evidence:
Petitioner's tax returns for 1975, 1976, 1977, 1978, 1979 and a schedule of gross sales for a company known as Richards Sewing Machines Co. derived from State DR-15 sales and use tax forms.
The Department submitted its Revised Notice of Proposed Assessment for the period February 1, 1985 - June 30, 1987, a Revised Notice of Proposed Assessment for the period July 1, 1987 - January 31, 1988 and its audit report. The revision was made at the opening of the hearing. Petitioner's exhibit 7 - 10 were withdrawn at the hearing.
A transcript of the hearing was filed, and the parties submitted proposed recommended orders. Rulings on proposed findings of fact are made in the Appendix to this Recommended Order.
The Department of Revenue assessed sales and use tax against Latin America Sales International for the period February 1, 1985 to June 30, 1987, in the amount of $114,682.88, a penalty of $28,670.72, and interest of $19,704.39, for a total of $163,057.99.
It also assessed sales and use tax against the taxpayer for the period July 1, 1987 to January 31, 1988, in the amount of $72,374.71, a penalty of
$18,093.68, and interest of $4,655.37, for a total of $95,123.76.
These taxes were assessed for three reasons, failure to pay sales tax, failure to pay use tax and failure to pay tax due on rentals of space used to store sewing machine inventory in Florida.
Sales Tax
Latin America Sales International, Inc., is a Florida Corporation organized in 1975 by Cuban immigrants Ricardo and Elsie Miranda. It was formed to avail itself of a benefit created by the Internal Revenue Code for companies which qualified as western hemisphere trading corporations. Under 26 U.S.C. Section 921, a substantial tax reduction was available to United States corporations which made at least 95% of their sales to buyers outside of the United States, and within the western hemisphere.
Mr. and Mrs. Miranda and a Mr. Ricardo Gomez had been operating a business known as Richards Sewing Machines Company, which sold industrial sewing machines both domestically and in Central American countries such as Guatemala, El Salvador, the Dominican Republic, Haiti and in Jamaica. They bought the industrial sewing machines in Taiwan and Italy. To take advantage of the deduction available to a western hemisphere trading corporation, Mr. and Mrs. Miranda incorporated Latin America Sales International, Inc. (Latin America).
On its federal corporate income tax returns which were prepared by its certified public accountant, Eugene Drascher, Latin America obtained a deduction for its activities as a western hemisphere trading corporation for its fiscal years ending October 31, 1976, 1977, 1978, 1979 and 1980. Ultimately, this federal deduction was phased out.
Richards Sewing Machines had been registered properly with the Florida Department of Revenue as a dealer and a payor of sales and use taxes, but no similar registration was filed for Latin America when it was formed. Mr. Drascher advised Mr. and Mrs. Miranda that the sales by Latin America would be made outside the United States, and consequently Florida was not entitled to collect sales tax from the foreign buyer, and that Latin America was only involved in importing and exporting industrial sewing machine inventory for resale, so the corporation was not responsible to pay use tax to the State of Florida on those sewing machines in its inventory. In essence, the CPA advised Mr. and Mrs. Miranda that there were no reports concerning sales and use tax to be filed and no reportable sales or use tax due from Latin America. This advice about reports was erroneous, and the failure of Latin America to register as a dealer has serious financial consequences with respect to liability for use tax. To allow persons claiming to engage in tax exempt sales to file no returns or to avoid registration entirely would provide a means of tax evasion which could be easily abused. All vendors must register and file tax returns so the Department of Revenue will be aware the vendor is in business and so the Department can audit to verify claims that sales are made in a way which is tax exempt. Some accomodations are made for tax exempt export sales; for instance, vendors may apply to file their returns semi-annually or annually rather than monthly.
After the tax deduction available to western hemisphere trading corporations was phased out, Mr. and Mrs. Miranda continued to use Latin America to make foreign sales because the corporation had made a name for itself in the export market. In essence, Latin America had built up good will with its foreign customers. Latin America continued to engage only in export sales; it made no domestic sales within the United States or the State of Florida, except sales to other exporters. On those few occasions, Latin America obtained an appropriate resale certificate from the buyer/exporter.
Latin America never filed any returns with the Florida Department of Revenue with respect to its inventory purchased from overseas vendors in Taiwan or Italy. Even if exempt, these purchases should have been reported as property held for export on schedule B of an annual sales tax return, under a dealer registration number Latin America should have obtained. (Tr. 118)
Latin America received shipments of containers of sewing machines at the Miami free port, but because rent there was so expensive, Latin America transferred the inventory to a warehouse in Miami, after a customs broker paid the applicable federal customs duties on behalf of Latin America. Latin America never registered as an exporter with the State of Florida. Latin America never filed any returns with respect to gross sales made of its inventory stored in Miami which it exported to customers in the Caribbean or Central America. These
sales should have been reported to the Department of Revenue under a dealer registration number as exempt sales. (Tr. 118)
Richards Sewing Machines Company, which handled domestic sales and which was appropriately registered with the Department of Revenue, made proper and timely filings of all Florida Department of Revenue sales tax returns, Forms DR-15.
The Department of Revenue initially audited the sales tax payments of Richards Sewing Machines, and the results of that audit are not at issue here directly.
The Mirandas maintained their invoices in alphabetical order by vendor, so that invoices for Richards Sewing Machines and Latin America were physically located in the same file cabinet, although it would be obvious to the Mirandas from the face of the invoice whether the sale was one made by Richards Sewing Machine (a domestic sale), or Latin America (an export sale).1
Similarly, a single journal was used by Ms. Miranda to record the dollar amount of sales by both corporations. Each entry contained the purchaser, the sale date, the invoice number, the total amount of the sale, and if tax were collected on that sale, the amount of tax. Mrs. Miranda then used that journal to file on Form DR-15 with the Department of Revenue the gross amount of sales, taxable sales, and remit the tax collected by Richards Sewing Machines. No such filings were made by Latin America because the Mirandas had been advised by their accountant that no sales tax was due on export sales and none had been collected. Actually, returns showing that all sales were exempt should have been filed. See, Finding 7, above.
In performing the audit of Richards Sewing Machines, the Department's auditors used that corporation's United States Corporate Income Tax Return, IRS Form 1120, for the applicable years, and compared the gross sales reported on those forms to the federal government with the amount of gross sales Richards Sewing Machines had reported monthly to the State of Florida on its Florida Sales and Use Tax Form, Form DR-15.
The gross sales shown on the federal returns, Form 1120, for Richards Sewing Machines were 7.49 million dollars over the three years of the audit (1984, 1985 and 1986). Over the same period, Richards Sewing Machines had shown gross sales on Florida Department of Revenue Forms DR-15 of 7.46 million dollars. There was a $33,000 discrepancy, amounting to less than 1/2 of one percent.
The Department's auditor never found any evidence that any sales made by Latin America failed to have attached a resale certificate, or a bill of lading showing that the machinery or parts sold were shipped outside the United States (Tr. 45, 110-11, 126, 129-30). The actual invoices, resale certificates and bills of lading have been destroyed. After the completion of the audit on Richards Sewing Machines, the auditor told Mrs. Miranda there was no further need to keep those records, and relying on that advice, Mrs. Miranda disposed of the records (Tr. 84-5). The Department never contested that this advice was given to Mrs. Miranda.
Due to the commingling of the invoices and the sales journal for Richards Sewing Machines and Latin America, the auditor for the Florida Department of Revenue decided to audit Latin America, and received authorization to do so. The auditor believed that the total sales tax owed by these two separate legal entities had been combined and reported together on one Florida
Department of Revenue Form DR-15, but separate Federal Income Tax Returns, Form 1120, had been filed for each of the two companies. She believed that the total gross sales for both companies on the federal tax returns should have equalled the amount shown on the DR-15s filed with Florida by Richards Sewing Machines.
The auditor then determined that a percentage of sales should be computed for each year in order to prorate the sales reported on the DR-15s for each company, Richards Sewing Machines and Latin America. The methodology used was that the total sales reported on the Federal Forms 1120 filed by Richard Sewing Machines and Latin America for each of their fiscal years was prorated to a calendar year, to derive a monthly average gross sales for each entity. (Richards and Latin America had different fiscal years). The average was then multiplied by the applicable number of months in each calendar year to arrive at the annual sales total for each company. The estimated sales for each company were then divided by the total sales for both companies to obtain the percentage of sales for each company. Latin America's percentage was then applied to the gross sales report of the monthly DR-15s to determine its estimated gross sales for each month. (Department Exhibit 1, Audit Report, Page 9.) The monthly average of gross sales derived from Latin America's IRS Form 1120, was compared with its estimated monthly gross sales reported on the DR-15. For each month Latin America reported higher gross sales based on its IRS form, the difference was treated as unreported Florida sales and taxed at 5%.
There is no logical reason for the Department to have engaged in its proration calculations. There is no credible evidence that any sales by Latin America to its export customers were subject to sales tax in Florida. Mrs. Miranda had prepared a list for the auditor which separated all invoices to demonstrate that all sales by Latin America were export sales. Appropriate bills of lading or certificates of resale for sales by Latin America were in the files.
There is no reasonable basis to accept the Department's contention that State Form DR-15s filed by Richards Sewing Machines reflect combined sales figures for both Latin America and Richards Sewing Machines. The Department makes its argument because using the sales journal kept by Mrs. Miranda, the amount of sales tax due according to the journal is the same amount recorded on the DR-15s, but Richards Sewing Machines reported $33,000 more in sales to the federal government. From that the Department's witnesses somehow infer that the DR-15s reflected sales from both companies. The more reasonable inference here, however, is that the figures in the sales journal and DR-15 forms match because all sales by Latin America were foreign sales on which no tax was due, no tax was collected, and no tax was carried on the sales journal. When the amount of sales tax collected was computed from the sales journal, and reported by Mrs. Miranda on the State DR-15, that figure dealt solely with sales by Richards Sewing Machines. To the extent there is any discrepancy in the total sales Richards Sewing Machines reported to the State of Florida and to the Federal Government on Federal Form 1120, that discrepancy is due to a bookkeeping error. A small amount of additional tax was due on sales by Richards Sewing Machines in the years 1984 to 1986 ($33,000 times 5% or about $1,500). The evidence does not support an inference that taxable sales from both corporations were combined in the sales journal kept by Mrs. Miranda, and were then reported as a lump sum figure on the DR-15 filed by Richards Sewing Machines.
The Department argues that its proration process did not tax Latin America for sales which were reported, because the Department agreed to recognize proper bills of lading or certificates of resale from customers of Latin America as justification for not collecting sales tax. It does, however,
believe that tax should be assessed against Latin America for unreported sales, i.e., on the gross sales derived from its IRS Form 1120. Because the evidence is persuasive that Latin America made no sales which were taxable in Florida, the Department's argument is rejected as lacking a factual basis. All sales by Latin America were to exporters who gave a resale certificate to Latin America, or to foreign purchasers who provided an appropriate bill of lading showing that the material was exported from the State of Florida.
It is true, however, that Latin America was required to file information returns reporting all of its sales, both gross and exempt. Its report would have shown all sales were exempt, and no tax was due. The mere failure to have filed the report does not make those export sales taxable.
Use Tax
Use tax is due for two reasons. Latin America made purchases of sewing machines and equipment from foreign manufacturers in Taiwan and Italy.
It imported those machines and parts into the United States to an airport free zone. The machines and parts then cleared customs and were moved to a warehouse in Miami at 2303 Northwest 2nd Avenue, which interrupted the export process.
Secondly, the failure of Latin America to have registered as a dealer has an important affect on its liability for use tax. Because it was never registered as a dealer during the audit period, it was impossible for Latin America to execute and deliver a certificate of resale to its Taiwanese and Italian suppliers of the industrial sewing machines it received and warehoused in Miami.
Latin America introduced no proof that it was already contractually obligated to sell its inventory overseas at the time it was delivered to the free zone, or when it was removed from the free zone. Therefore, when Latin America removed the industrial sewing machines or parts from the airport free zone and stored them in its warehouse at 2303 Northwest 2nd Avenue in Miami, it engaged in a taxable event. The bills of lading showing eventual export of its inventory are insufficient to avoid the use tax, for "tax will apply if the property is diverted in transit to the purchaser," Rule 12A-1.064(1)(c), Florida Administrative Code. Under use tax law, removing those sewing machines from the stream of international commerce subjected them to use tax, even though Latin America may have harbored a subjective intent of ultimately reselling them to foreign purchasers in the Caribbean and Central America.
Moreover, by failing to file as a dealer, Latin America also failed to report its purchases from its Taiwanese and Italian suppliers as exempt sales for which use tax was not due on schedule B of an annual return. It should have filed as a dealer engaged in resale. That failure to file a return is not the reason use tax is due, however. Latin America may be assessed use tax because it was not a registered dealer, took possessions of the sewing machines in Florida, and was unable to give a valid dealer's certificate of resale to its Taiwanese and Italian suppliers because it had never registered as a dealer.
The tax is due at the rate of 5% on purchases made from its suppliers beginning February 1, 1985 to January 31, 1988, plus interest. See audit report, page 16-
17, Schedule B.
Penalty
There is no reason to assess any penalty on the use tax due in this case. The tax payer's failure to register as a dealer or to file information returns was based on the advice of a CPA, and that advice was facially reasonable. The Department is not required to impose a penalty if the
applicable penalty, here 25% of the tax due, "would be too severe or unjust." Rule 12A-1.056(9)(a), Florida Administrative Code. Had Latin America registered as a dealer and given its suppliers a certificate of resale, no tax at all may have been due. There is no indication of some intent to evade a tax. Rather, laxness of the tax payer has rendered a transaction otherwise tax free fully taxable. Payment of the tax and interest is penalty enough.
Commercial Rental
Latin America offered no evidence with respect to the assessment the Department made for taxes due on commercial rentals. The amount involved is small, for the period November 1985 through June 1987, the tax due is $184.16.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over this matter. Sections 120.57(1) and 120.575, Florida Statutes.
Sales Tax
Latin America was required by Section 212.18(3), Florida Statutes (1985) to file an application for certificate of registration as a dealer. The registration is simple, and the fee is nominal, $5.00. In addition, Rule 12A- 1.60(1)(b), Florida Administrative Code (1985) required a person desiring to engage in business as an importer to apply to the Department of Revenue for a dealer certificate of registration. A sale of property may be exempted statutorily from sales tax as an export, but in that case the goods must be delivered to a licensed exporter or common carrier for shipment outside Florida. Section 212.06(5)(a), Florida Statutes (1985). If not, the seller bears the burden of proving that the sale was for export on a case by case basis. The mere intention of the seller and purchaser that the property be exported is not sufficient to establish the exemption. Rule 12A-1.064(1)(b), Florida Administrative Code. According to both Mrs. Miranda and the witnesses for the Department, there were valid certificates of resale given to Latin America by purchasers of those industrial sewing machines, or Latin America received valid bills of lading. Section 212.06(5)(b)2., Florida Statutes (1985) specifically allocates the burden of proof to the seller to retain proper documentation to support the tax exemption of a sale, which is subject to verification by the Department. The Department did verify those documents during the course of the audit, even though they no longer exist and could not be placed into evidence at the hearing. On this matter the tax payer has met its burden. Thus, all sales made by Latin America were for export and are not subject to sales tax.
The Department relies on Section 212.12(6)(b), Florida Statutes (1985) for the proposition that if a dealer does not have adequate records of retail sales the Department may, upon the basis of sampling of the dealer's available records or other information relating to sales made by the dealer, determine the proportion that taxable retail sales bears to total retail sales. The sales by Latin America were all for export; there was a sales journal which listed all sales by Richards Sewing Machines as taxable; that journal was used to file Department form DR-15 for Richards Sewing Machines, and the appropriate taxes were paid. There is simply no reason for the Department to engage in any reconstruction under Section 212.12(6)(b), Florida Statutes, to determine a taxable percentage of retail sales for Latin America. No tax was due.
Commercial Rentals
Latin America presented no evidence to refute that part of the assessment pertaining to commercial rentals (exhibit B-2 of the audit report). No argument about it is found in Latin America's proposed order. The entire amount of the tax and interest should stand, for an uncontroverted assessment is, by statute, presumed correct. Section 120.575(2), Florida Statutes (1985).
Use Tax
Sales and use tax attaches at the moment of purchase or at the moment of commingling property with the general mass of property in this state. The industrial sewing machines settled into the mass of property in Florida because they were diverted into the domestic market when they were removed from the airport free zone to Latin America's Miami warehouse at 2303 Northwest 2nd Avenue. Section 212.06(1)(a), Florida Statutes (1985); Rule 12A-1.091(7), Florida Administrative Code; Great Lakes Dredge and Dock Company v. Department of Revenue, 381 So.2d 1078 (Fla. 1st DCA) cert denied, 381 So.2d 765 (Fla. 1979). The tax applies to the retail sale, the use, the consumption, the distribution and storage for use or consumption in Florida. Section 212.06(1)(a), Florida Statutes (1985). Latin America exercised control over the industrial sewing machines and parts by placing them in storage in its own Miami warehouse. "Use" is defined to include any exercise of a right or power over tangible property incident to the ownership thereof by Section 212.02(8), Florida Statutes (1985). There is no proof here, as there was in Great Lake Dredge, that the tax payer was under a subsisting contractual obligation to export the tangible property from Florida at the time it was imported into Florida. Great Lakes, supra, at 1079-80. The evidence fails to establish that from the time the machines left Italy or Taiwan until exported to Central America they already were in a continuing process of export. They became part of Latin America's Florida inventory held for resale.
All tangible personal property imported into Florida from foreign countries is subject to the payment of Florida use tax "the same as if such articles had been sold at retail for use or consumption in this state." Section 212.06(4), Florida Statutes (1985). There is a statutory presumption made in the final sentence of Section 212.06(5)(a), Florida Statutes (1985), that retail sales made to persons who are physically present in Florida at the time of sale have been delivered in Florida, and are thereby subject to tax. An exemption from use tax is available, however, for tangible personal property when the taxpayer can demonstrate that the property was "irrevocably committed to the exportation process at the time of importation and that the exportation process was continuous and unbroken while such property was within this state." Rule 12A-1.064(1)(b)5, Florida Administrative Code. The process of exportation was broken when Latin America removed the goods from the airport free zone. Those goods were not irrevocably committed in any objective way to exportation, for nothing in the evidence shows they could not have been sold domestically or that Latin America was already under a contract duty to sell them to foreign customers. Thus, for all property which Latin America received in its Miami warehouse and subsequently sold and exported in the audit period of February 1985 to January 1988, it was required to pay Florida use tax. The amounts due are found in schedule B of the audit report, and are derived from Latin America's U.S. Corporate Income Tax Return. 2/ Had Latin America left the property in the free port, it would have had some objective proof that the goods were irrevocably committed to the exportation process when received in Miami, when coupled with later bills of lading to foreign ports. Its evidence would be
even stronger if it could show contracts to deliver the machines in Central America were already in hand when the machines arrived in Miami.
Most significantly, Latin America also had failed to register as a dealer with the Department. It could not provide to its Taiwanese or Italian suppliers of sewing machinery a dealer's resale certificate exempting that sale to Latin America from tax. If Latin America was not a dealer purchasing those goods for resale, the acquisition was one at retail, on which use tax was due, and Latin America would become the dealer responsible to pay the tax under Section 212.06(2)(d), Florida Statutes (1985). Purchases for resale must be done in strict compliance with statutes and rules, and any sale for resale which fails to comply with the law strictly is taxable. State Department of Revenue
v. Anderson, 403 So.2d 397 (Fla. 1981); Section 212.02(3)(a), Florida Statutes (1985); 1 Florida State and Local Taxes, Paragraph 14.04 [2][a] (The Florida Bar 1984). The applicable law is Rule 12A-1.038, Florida Administrative Code, (formerly Rule 12A-1.38). It requires that the entity buying for resale have a dealer's certificate of registration, that the effective date of the resale certificate "shall be the postmark date of the Application for Registration" and that "[a]ny purchases made prior to the effective date of the certificate are subject to tax" Id, at (1) and (2).
Conclusion
The Department's finding of "unreported" sales by Latin America which are subject to sales tax is erroneous. All sales taxes due were paid by the sister corporation, Richards Sewing Machines. None were due from Latin America. With respect to use tax, however, Latin America is liable for the payment of use tax, computed based upon the cost of the sewing machines and other parts it imported, as derived from its U.S. Corporation Income Tax Returns in the audit report, without penalty but with interest. The full amount of the assessment for commercial rentals must also be paid.
Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a Final Order be entered assessing use tax on inventory
imported into Florida, plus interest and for tax due on commercial rentals, with interest.
WILLIAM R. DORSEY, JR.
APPENDIX TO RECOMMENDED ORDER DOAH CASE NO. 89-0136
Mark R. Vogel, Esquire
Linda Miklowitz, Esquire Lealand L. McCharen, Esquire Mark T. Aliff, Esquire Assistant Attorneys General Department of Legal Affairs Tax Section, The Capitol Tallahassee, FL 32399-1050
William D. Moore, General Counsel Department of Revenue
J. Thomas Herndon, Executive Director Department of Revenue
All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.
