STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DRUM SERVICE COMPANY OF FLORIDA, )

)

Petitioner, )

)

vs. ) CASE NO. 92-1729

) FLORIDA DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its designated Hearing Officer, Joyous D. Parrish, held a formal hearing in the above-styled case on January 25, 1993, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Heidi E. Garwood

Cynthia S. Tunnicliff Carlton, Fields, Ward,

Emmanuel, Smith & Cutler, P.A. Post Office Drawer 190 Tallahassee, Florida 32302

For Respondent: C. Lynne Chapman

Assistant Attorney General Department of Legal Affairs Tax Section, The Capitol

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

The central issue in this case is whether the Petitioner is entitled to a tax exemption for resource recovery equipment.

PRELIMINARY STATEMENT

This case began on March 13, 1992, when the Petitioner, Drum Service Co. of Florida (Drum) filed a petition for formal administrative hearing with the Department of Revenue (Department) challenging the notice of proposed assessment dated June 4, 1990. The assessment sought sales and use tax for the audit period July 1, 1985, through August 31, 1989. On March 18, 1992, the matter was forwarded to the Division of Administrative Hearings for formal proceedings.

At the hearing, official recognition was taken of the matters addressed in the motion filed by the Department on January 15, 1993. In support of its case,

Drum presented the testimony of John Michael Murphy, owner and President of Drum. Petitioner's exhibits numbered 1, 2, 3, 4, and 6 were admitted into evidence.

The Department presented the testimony of Melton Harrison McKown, a tax audit specialist supervisor III employed by the Division of Technical Assistance, Bureau of Technical Assistance and Training. Its exhibits numbered 1, 2, 3, 4, 6, 7, and 8 were admitted into evidence.

FINDINGS OF FACT

1. The Department conducted a sales and use tax audit (audit number 8926102725-010) of Drum for the audit period July 1, 1985 through August 31, 1989. As a result of the audit, the Department issued a Notice of Proposed Assessment for delinquent sales and use tax, penalty and interest against Drum. [Joint Prehearing Statement, paragraph 1]

   
   

2. Drum timely protested the Notice of Proposed Assessment to the Department. On July 2, 1991, the Department issued a Notice of Decision upholding the proposed assessment. Drum timely petitioned the Department for reconsideration of the Notice of Decision. On January 15, 1992, the Department issued a Notice of Reconsideration denying the petition for reconsideration and upholding the Notice of Proposed Assessment. Drum timely filed a Petition for Formal Administrative Hearing with the Department protesting the proposed assessment. [Joint Prehearing Statement, paragraph 2]

   
   

3. After the initiation of this proceeding, the Department and Drum entered into a partial settlement on the issue of the purchase of propane gas by Drum. The parties filed an Agreed Settlement with the Division of Administrative Hearings; accordingly, this issue is no longer part of this proceeding. Drum has paid the Department the settlement amount related to the propane gas issue. [Joint Prehearing Statement, paragraph 3]

   
   

4. The amounts remaining in dispute are: $59,556.87 tax; $14,889.22 penalty; and $35,098.36 interest with interest continuing to accrue from 1/8/93 at the rate of $19.58 daily. [Joint Prehearing Statement, paragraph 4]

   
   

5. There is no dispute between the parties as to the calculation of the tax, penalty and interest. [Joint Prehearing Statement, paragraph 5]

   
   

6. During the audit period, Drum purchased certain resource recovery equipment ("equipment"). The equipment was certified by the Department of Environmental Regulation as resource recovery equipment pursuant to Section 403.715, Florida Statutes. Drum did not pay any sales tax on the equipment when it was purchased and Drum did not accrue any use tax on the equipment. [Joint Prehearing Statement, paragraph 6]

   
   

7. Drum is in the business of reconditioning steel drums. Drum takes 55 and 30 gallon steel drums which have been used and emptied and reconditions them. This process involves cleaning the drums, restoring them to their original shape, testing them for leaks, and painting or coating the outside of the drums.

   
   

8. As a secondary part of its business, Drum recycles drums that can no longer be reconditioned.

9. Drum receives drums from over 1,000 sources in the state of Florida including private businesses and governmental agencies. Drum sells drums to both private businesses and governmental agencies.

   
   

10. Greater than 50 percent of Drum's suppliers and customers are private businesses.

    
    

11. Private customers and suppliers of Drum include the citrus industry, the motor oil industry, the painting industry, and the chemical industry. Among the governmental agencies who do business with Drum are: cities; state agencies, such as the Department of Transportation; counties; mosquito control divisions; and water control districts.

    
    

12. Drum is a private, for profit corporation. Prior to building its facility, it did not enter into any contract with a county or municipality to cooperatively build its reconditioning facility, and Drum does not share its profits with any governmental entity. There is no evidence that Drum gives its governmental customers any price discount or other preferred service. Drum maintains that it provides a valuable service to the community in that it processes and recycles drums which might otherwise burden local waste facilities.

    
    

13. Section 212.08(7)(p), Florida Statutes, provides a sales tax exemption on the purchase of resource recovery equipment "which is owned and operated by or on behalf of any county or municipality."

    
    

14. Under the tax exemption procedure, the Department of Environmental Regulation (DER) certifies that the equipment in question is "equipment or machinery exclusively and integrally used in the actual process of recovering material or energy resources from solid waste." The Department then determines whether or not the equipment is otherwise eligible for the tax exemption. In this case there is no dispute that the equipment utilized by Drum is, in fact, resource recovery equipment as defined by the statute.

    
    

15. Even though the equipment at issue is resource recovery equipment, the Department issued the sales tax assessment against Drum because the Department maintained that the equipment was not owned and operated by or on behalf of a county or municipality.

    
    

16. The Department in its Notice of Decision setting forth its reasoning for denying the exemption to Drum specifically found:

    
    

    [The equipment] must be owned or (sic) operated by or on behalf of a county or municipality. This critical requirement has not been met. The machine is owned and operated by and on behalf of Drum Services Company, Inc. The county may benefit indirectly, but Drums' motivation for the use of the equipment is to earn profits.

    
    

17. For purposes of determining whether or not an exemption is available, the Department developed a standard procedure in conjunction with DER for an owner or operator of a resource recovery facility to qualify for certification pursuant to Section 403.715, Florida Statutes, and to qualify for an exemption pursuant to Section 212.08(7)(p), Florida Statutes.

18. Under the procedure, the owner/operator would apply to DER for a preliminary examination of its equipment. DER would hold a meeting attended by a representative of the Department and representatives of the owner/operator. Generally, representatives of the owner/operator were the county, the county engineers, and the contractors.

    
    

19. Generally, the owner/operator would apply for certification of equipment that was going to be purchased for a ongoing county project. Examples of such projects include combustors, incinerators, and similar facilities.

    
    

20. As a result of the meeting, the Department normally would examine the contract between the county and the owner/operator. Usually the contract contained language that the facility would be owned and operated exclusively by or on behalf of a county or municipality.

    
    

21. Usually a sales tax exemption for a piece of resource recovery equipment was obtained by a contractor, subcontractor, owner/operator, or whoever actually purchased the equipment. Such entity registered for the special purpose of purchasing resource recovery equipment. The purchaser could then make the purchase without paying sales tax on the equipment.

    
    

22. The Department sent a letter to all contractors and subcontractors explaining the exemption procedure. At all times material to this case, Drum was aware of the sales tax exemption procedure, and that the Department expected the resource recovery equipment purchased in this manner would be used exclusively by or on behalf of a county or municipality.

    
    

23. Drum's president was aware of the Department's policy that the exemption was available only if the purchase were for equipment to be used exclusively by or on behalf of a county or municipality.

    
    

24. Under the typical scenario, when the project construction was finished, DER would issue a final certification that the equipment was resource recovery equipment and notify the Department of the final certification. The Department would then notify all necessary Divisions of the Department that the final certification was issued.

    
    

25. To verify that the project complied with the statute, the Department conducted audits. The audit would verify whether the equipment being reviewed was owned and operated exclusively by or on behalf of a county or municipality.

    
    

26. In 1983, Drum applied to the Department for a refund of sales tax it paid on the purchase of resource recovery equipment. At that time, the Department denied Drum's request for a refund because the Department found Drum did not own and operate the equipment by or on behalf of a county or municipality. Drum was aware that the Department interpreted Section 212.08(7)(p), Florida Statutes, to require that the equipment must be owned and operated "exclusively" by or on behalf of a county or municipality.

    
    

27. Drum knew of the Department's position that resource recovery equipment purchased by Drum was taxable, but chose to ignore this position and purchase equipment during the audit period without paying sales tax.

    
    

28. Since its inception Section 212.08(7)(p), Florida Statutes, has been interpreted by the Department to mean equipment must be used "exclusively" by or on behalf of any county or municipality. By "exclusively" the Department means

    that a facility must operate for one county with which it has an agreement in the form of a contract. The facility cannot operate partially for a county and partially for itself or another entity. The Department based this interpretation on the plain meaning of the statute. The Department considers this statutory interpretation apparent from the words of the statute, and maintains that the addition of the word "exclusively" was not necessary to support this interpretation.

    
    

29. Rule 12A-1.001(23)(a), Florida Administrative Code, effective January 2, 1989, states, in pertinent part:

    
    

    Resource recovery equipment and machinery used in a facility owned and operated exclusively by or on behalf of any county or municipality is exempt.

    
    

30. Prior to January 2, 1989, this rule did not contain the word "exclusively." The addition of the word was a clarification of the Department's long-standing interpretation of Section 212.08(7)(p), Florida Statutes, and not a change in policy.

    
    

31. Despite being aware of the rule and the policy, Drum did not challenge the rule. Additionally, no evidence was presented to establish Drum has continued its efforts to seek a refund of the sales tax amounts paid in the period prior to this audit. The amounts at issue in this case deal only with those items set forth in paragraph 4.

    
    

    CONCLUSIONS OF LAW

    
    

32. The Division of Administrative Hearings has jurisdiction over the parties to, and the subject matter of, these proceedings.

    
    

33. Section 212.08(7)(p), Florida Statutes, provides:

    
    

    212.08 Sales, rental, use, consumption, distribution, and storage tax; specified exemptions.

    The sale at retail, the rental, the use, the consumption, the distribution, and the storage to be used or consumed in this state of the following are hereby specifically exempt from the tax imposed by this part.

    * * *

    (7) MISCELLANEOUS EXEMPTIONS.

    * * *

    (p) Resource recovery equipment. Also exempt is resource recovery equipment which is owned and operated by or on behalf of any county or municipality, certified by the Department of Environmental Regulation under the provisions of s. 403.715.

34. Rule 12A-1.001(23)(a), Florida Administrative Code, provides: (23)(a) Resource recovery equipment and machinery used

    in a facility owned and operated exclusively by or on behalf of any county or municipality is exempt. To qualify for exemption, such equipment and machinery must:

    1. be certified as resource recovery equipment or

       ;machinery by the Department of Environmental Regulation

       under Section 403.715, Florida Statutes;

    2. be owned or operated by or on behalf of a county or municipality.

       
       

35. In this case, the taxpayer argues that because it does business with numerous governmental customers, and it offers a valuable service to the community by recycling drums, Drum is entitled to the exemption set forth in the statute. Under the Petitioner's theory any entity utilizing resource recovery equipment for, or for the benefit of, at least one county or municipality must be afforded the exemption. The Petitioner acknowledges that it does business on behalf of itself in that it is a private, for profit enterprise and has other private customers. To resolve this conflict, the taxpayer has chosen to contest the assessment imposed by the Department pursuant to Section 120.57(1), Florida Statutes (see Petition for Formal Administrative Hearing filed with agency March 13, 1992).

    
    

36. While the petition does allege that the agency's interpretation of the applicable statute, and the rule later promulgated, are arbitrary and constitute an invalid exercise of legislative authority, the petition does not, pursuant to Section 120.56, Florida Statutes, challenge the subject rule. In essence, the parties argue that the plain meaning of the statute must be viewed in their favor.

    
    

37. Generally, tax exemptions are to be strictly construed against the taxpayer. Asphalt Pavers, Inc. v. Department of Revenue, 584 So.2d 55 (Fla. 1st DCA 1991). Accordingly, if an exemption is claimed, the language of the statute must clearly provide the taxpayer with the relief sought.

    
    

38. In the absence of an express statutory definition, language utilized in a statute must be accorded its common and ordinary meaning. Humana Inc. v. Department of Banking and Finance, 603 So.2d 672 (Fla. 1st DCA 1992). Therefore, the language of Section 212.08(7)(p), Florida Statutes, must be afforded its ordinary meaning and cannot be construed in a manner which would lead to extraordinary results.

    
    

39. Finally, it is well-settled that the expression of one thing within a statute must exclude or forbid those matters not expressed. Sun Coast International, Inc. v. Department of Business Regulation, Division of Florida Land Sales, Condominiums, and Mobile Homes, 596 So.2d 1118 (Fla. 1st DCA 1992). Thus, in this case, it must be presumed that the legislature intended to exclude from the exemption any entity that did not meet the statutory scheme.

    
    

40. In this case there is no issue that a county or municipality does not own or operate the resource recovery facility. Therefore, the sole issue is whether or not the Drum facility is operated on behalf of a county or municipality. It is not. Drum operates the facility on behalf of itself. Its customers include counties and municipalities but it in no way seeks to benefit a county or municipality over its own interests. To argue it serves or benefits counties by recycling drums, and thereby is entitled to an exemption, is without merit. All citizens of the state are encouraged to recycle. That Drum has chosen a line of business to promote that activity does not give it favored tax status.

41. The plain and ordinary meaning of the statute must be considered. To accept Drum's argument broadens the exemption beyond the language given. To operate on behalf of a county or municipality excludes an entity that operates otherwise. That is, an entity which operates on behalf of anyone other than a county or municipality is not entitled to the exemption. Had the legislature chosen to prorate the tax, issue a partial tax exemption or provide other relief to encourage resource recovery vendors, it clearly could have done so. In this case, however, the exemption is available on an "all or nothing" basis as only a company doing business on behalf of a county or municipality may claim the exemption. Such an exemption obviously allows the private enterprise to enjoy the same tax status as the agency had it made the purchase, thereby facilitating cooperative efforts in this enterprise.

RECOMMENDATION

Based on the foregoing, it is, hereby, RECOMMENDED:

That the Department of Revenue enter a final order confirming the sales and use tax owed by the Petitioner

DONE AND RECOMMENDED this 30th day of July, 1993, in Tallahassee, Leon County, Florida.

JOYOUS D. PARRISH

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 30th day of July, 1993.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-1729

Rulings on the proposed findings of fact submitted by the Petitioner: 1. Paragraphs 1-4, 17, 19, 20, 22, 23, 24, 27, 28, and 29 are accepted.

1. The first sentence of paragraph 5 is accepted; the remainder rejected as irrelevant.

2. Paragraphs 6 through 13 are rejected as irrelevant. In drafting the statute the legislature determined that facilities (regardless of the cost of construction) would be exempt only if operated on behalf of a county or municipality.

3. Paragraph 14 is rejected as contrary to the weight of the credible evidence or unsupported by credible evidence.

4. Paragraphs 15 and 16 are rejected as irrelevant as such arguments are outside the scope of the plain and ordinary language of the statute.

5. Paragraph 18 is rejected as irrelevant.

6. Paragraph 21 is rejected as irrelevant. No evidence was presented as to the status of Drum's suit for refund, if any, was filed.

7. With the deletion of the word "only" paragraph 25 is accepted.

8. Paragraph 26 is rejected as argument.

9. Paragraph 30 is rejected as hearsay or not supported by credible evidence.

10. Paragraph 31 is rejected as argument. 12.Paragraph 32 is rejected as argument. 13.Paragraph 33 is rejected as irrelevant.

14.Paragraphs 34 through 37 are rejected as irrelevant.

Rulings on the proposed findings of fact submitted by the Respondent:

1. Paragraphs 1 through 23, and 25 through 29 are accepted.

2. Paragraph 24 is rejected as not supported by the record cited or irrelevant.

COPIES FURNISHED:

Larry Fuchs Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399-0100

Linda Lettera General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399-0100

Cynthia S. Tunnicliff David P. Burke

Heidi E. Garwood Carlton, Fields, Ward,

Emmanuel, Smith & Cutler, P.A.

P.O. Drawer 190

Tallahassee, Florida 32302

Lealand L. McCharen

C. Lynne Chapman

Assistant Attorneys General Department of Legal Affairs Tax Section, The Capitol

Tallahassee, Florida 32399-1050

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

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.

Docket for Case No: 92-001729

Orders for Case No: 92-001729