STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

CO-OP OIL COMPANY, INC., )

)

Petitioner, )

)

vs. ) Case No. 97-0636

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing was conducted in this case on April 9, 1998, in St. Petersburg, Florida, before Lawrence P. Stevenson, a duly designated Administrative Law Judge of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: James E. Smith, President,

Co-Op Oil Company, Inc. 4911 8th Avenue South Gulfport, Florida 33707

For Respondent: John N. Upchurch, Esquire

Nicholas Bykowsky, Esquire Assistant Attorneys General Office of the Attorney General Tax Section

The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The issue presented for decision in this case is whether state and local option taxes may be imposed upon Petitioner,

Co-Op Oil Company, Inc. (“Co-Op Oil”), based upon the gallons of

fuel sold at retail stations that were not owned or operated by Co-Op Oil, and to which Co-Op Oil did not consign fuel, but that were voluntarily “linked” to Co-Op Oil for reporting purposes via Department of Revenue (“DOR”) Form DR-120.

PRELIMINARY STATEMENT

By a Notice of Decision dated December 12, 1996, DOR assessed Co-Op Oil the amount of $20,128.39, including tax, penalties and interest, in motor fuels taxes for the period

July 1, 1992 through January 31, 1996 (the “audit period”). The Notice of Decision was entered pursuant to Chapter 12-26, Florida Administrative Code, and constituted DOR’s response to a protest letter filed by Co-Op Oil on July 24, 1996. By letter to the DOR Office of General Counsel dated January 6, 1997, Co-Op Oil filed its request for a formal administrative proceeding to challenge the assessment.

By letter dated February 3, 1997, DOR forwarded the petition to the Division of Administrative Hearings for assignment of an Administrative Law Judge and the conduct of a formal administrative hearing, pursuant to Section 120.57(1), Florida Statutes.

The case was originally assigned to Judge Richard A. Hixson and scheduled for hearing on May 13, 1997. Upon agreed motion by DOR, the case was placed in abatement by order dated May 8, 1997. After the filing of a joint status report on August 1, 1997, the hearing was rescheduled for December 9, 1997. Due to scheduling

conflicts, the case was reassigned to the undersigned on or about November 3, 1997. The parties’ joint motion for continuance was granted and the hearing rescheduled for April 9, 1998.

At the final hearing, Co-Op Oil presented the testimony of James E. Smith, President of Co-Op Oil. DOR presented the testimony of Charles E. Pate, Senior Tax Specialist with DOR, and of Peter Steffens, Revenue Program Administrator with DOR.

Co-Op Oil offered no exhibits. DOR’s Exhibits 1-9 and 11-27 were admitted into evidence without objection.

A transcript of the final hearing was filed at the Division of Administrative Hearings on April 20, 1998. Co-Op Oil filed a Proposed Recommended Order on April 27, 1998. DOR filed a Proposed Recommended Order on May 5, 1998.

FINDINGS OF FACT

Based on the oral and documentary evidence adduced at the final hearing, and the entire record in this proceeding, the following findings of fact are made:

1. During the audit period, Co-Op Oil was a domestic corporation engaged in the business of wholesale and retail petroleum distribution, and held Florida motor fuel tax license No. 09000447. Since the audit period, Co-Op Oil has exited the retail portion of the petroleum distribution business.

2. DOR is an executive agency of the State of Florida. Among other duties, DOR is charged with administration and enforcement of Florida’s fuel tax laws, pursuant to Chapter 206,

   Florida Statutes.

   
   

3. During the audit period, Co-Op Oil was a wholesale petroleum distributor to marinas, commercial fishermen, construction companies, and other businesses not served by retail facilities.

4. Jim Smith, President of Co-Op Oil, testified that beginning in August, 1989, and continuing through December, 1994, Co-Op Oil requested that certain independent retailers to which Co-Op Oil supplied petroleum be “linked” to Co-Op Oil for retail tax reporting purposes. Mr. Smith testified that he made the decision to request linkage for those retail dealers that he believed incapable of correctly reporting the taxes on their own. His purpose was to ensure that all taxes owed to the state were actually reported and paid.

5. Mr. Smith testified that he understood “linkage” to require Co-Op Oil to report and remit all the fuel taxes that Co-Op Oil actually collected on the gallons of fuel it sold to the linked dealers. Essentially, Co-Op Oil collected and remitted taxes on the net gallons of fuel it delivered to the dealers. DOR does not dispute that Co-Op Oil remitted all the

   taxes that it actually collected on the net gallons delivered to the linked dealers.

6. However, in reporting taxes for the linked facilities, Co-Op Oil did not report “gains” for those facilities. The concept of “gains” is based on the principle that the volume of a

   volatile substance such as gasoline changes with the temperature. In the petroleum industry, a “net gallon” is based on the volume of a gallon of fuel at 60 degrees. The industry has developed a formula to account for the difference in volume caused by temperatures above or below 60 degrees. Under the adjustments made pursuant to the formula, a “gallon” of gasoline stored at a temperature below 60 degrees is worth more than a gallon stored at a temperature higher than 60 degrees because of its greater compression.

7. The linked facilities in question were located in and around Pinellas County, where the year-round temperature in their underground tanks is significantly greater than 60 degrees, meaning that gasoline stored therein would reasonably be expected to expand after delivery by Co-Op Oil. This expansion would result in the retail facilities being able to sell marginally more gallons of fuel to the ultimate consumers than the net gallons purchased from Co-Op Oil at the wholesale level.

8. This phenomenon of “gains” at the retail level, along with alleged abuses by dealers, led DOR to successfully persuade the Legislature in 1992 to adopt a statutory requirement that retailers who were not also wholesalers or refiners must collect and remit tax on the additional gallons of fuel sold at the retail level. Section 206.41(1)(b), Florida Statutes (1995), imposing the constitutional gas tax, contained the typical language:

   If any licensee owns or operates retail stations or has fuel on consignment at retail stations and has sold more fuel than was purchased tax-paid when the fuel was removed from the rack or than was reported to the state when first purchased or removed from storage tax-free, the licensee must report the additional gallons sold and pay the additional tax, due for the month, on his or her local option gasoline tax return or a return designated by the department.

   The “rack” is that part of a terminal facility by which petroleum products are loaded into tanker trucks or rail cars. Section 206.01(16), Florida Statutes (1995). In practice, the “rack” also refers to bulk plant facilities operated by wholesalers such as Co-Op Oil.

9. Similar language requiring the reporting and payment of “gains” was included in Section 206.60(1)(b), Florida Statutes (1995)(county gas tax); Section 206.605(1)(b), Florida Statutes (1995)(municipal gas tax); Section 336.021(2)(b), Florida Statutes (1995)(county nine cent gas tax); Section 336.025(2)(b), Florida Statutes (1995)(local option gas tax); and 336.026(2)(a), Florida Statutes (1995)(State Comprehensive Enhanced Transportation System Tax). The cited sections from Chapter 336, Florida Statutes (1995) also provided that refiners, importers, wholesalers, and jobbers were to be considered as retail dealers when electing to remit the subject taxes on behalf of retail stations they owned or operated, or where they had fuel on consignment.

10. Administratively, DOR accomplished the collection of

    the tax on “gains” by requiring dealers to base their tax returns on “metered gallons,” i.e., the reading of gallons at the gas pumps used by retail customers. Petitioner conceded at hearing that retail facilities, when filing their own tax returns, were required to calculate the taxes based on metered gallons.

11. A Florida form DR-120 is the form upon which a motor fuel dealer reports the amount of motor fuel sold and the amount of local county option taxes due.

12. On a monthly basis during the audit period, the Petitioner filed form DR-120 with the Respondent. All taxes reported by Co-Op Oil on these forms during the audit period were calculated based on net gallons sold by Co-Op Oil to the linked dealers.

13. A Florida form DR-119 is the form upon which a motor fuel dealer reports the amount of fuel sold and the amount of state taxes due.

14. On a monthly basis during the audit period, the Petitioner filed form DR-119 with the Respondent. All taxes reported by Co-Op Oil on these forms during the audit period were calculated based on net gallons sold by Co-Op Oil to the linked dealers.

15. During the audit period, DOR had in place no formal mechanism by which a wholesaler such as Co-Op Oil could “link” its tax return to that of a retailer that it neither owned nor operated nor to which it consigned fuel. Mr. Smith credibly

    testified that in 1989 he was instructed by a DOR employee named Mary Ann Moye that such linkage could be accomplished by written notification to DOR and the actual reporting and collection of taxes by the wholesaler on behalf of the retailer.

16. Peter Steffens, a 22-year DOR employee intimately familiar with the evolution and application of the fuel taxes at issue in this proceeding, testified that while “linkage” did not formally exist in statute or rule, DOR in fact treated “linked” retailers as consigned retailers. In other words, when a wholesaler such as Co-Op Oil linked a retailer’s return to its DR-120, the wholesaler would be treated as if it were consigning fuel to that retailer, whether it was collecting tax at the time of delivery or at the time of retail sale.

17. DOR took the position that a wholesaler such as Co-Op Oil steps into the shoes of its linked retailers, and remains in those shoes after it delivers fuel to the retailers. To avoid the loss of taxes that are unquestionably owed, DOR places upon linked wholesalers a continuing responsibility to see that all taxes are reported and paid even after the fuel is physically delivered to the retailers. Given that DOR did not impose linkage on the wholesalers, but only allowed it at the written request of the wholesalers, this was a reasonable requirement.

18. Because the statutes provided that a consignor must pay tax on “gains,” DOR took the position in its audit that Co-Op Oil was also required to pay “gains” for the stations it linked on

    its DR-119 and DR-120 tax returns for the audit period.

    
    

19. Mr. Smith took the position that Co-Op Oil was required to pay tax only on those net gallons it sold to its retailers because, unlike a consignor, Co-Op Oil itself realized no profit from the “gains” of its retail dealer.

20. Mr. Smith questioned the validity of the entire concept of “gains,” but was well aware of DOR’s position on the issue, having litigated an administrative tax assessment proceeding against DOR in 1993 in which “gains” was a central issue. See

    Co-Op Oil Company, Inc. v. Department of Revenue, Division of Administrative Hearings Case No. 93-2019 (Recommended Order, Sept. 22, 1993).

21. Mr. Smith acknowledged that the tax on “gains” might be owed by the retail dealers, but took the position that DOR should seek payment of that tax directly from the retailers. Mr. Smith testified that he assumed that once the dealers were linked to

    Co-Op Oil, they would be treated as ultimate consumers for his reporting purposes. Mr. Smith admitted that his assumption was based on his reading of the statutes, not on any guidance he had received from DOR.

22. DOR made initial inquiry to Mr. Smith as to the taxes being reported and paid by Co-Op Oil during telephone conversations in December, 1995. By follow-up letter dated January 4, 1996, Charles E. Pate, Senior Tax Specialist with DOR, wrote to Mr. Smith as follows, in pertinent part:

    It is not intended that the method of reporting you have chosen should reduce the tax liability that would result if each retail dealer were reporting individually on form DR-121. It is necessary that each dealer you are selling to reconstruct the difference between net and gross gallons for the period 7/92 through the present. All applicable state and local taxes will be assessed on the calculated adjustment.

23. Mr. Pate testified that he made several subsequent requests to Mr. Smith for the information regarding the unreported “gains” of the retailers in question. Mr. Pate stated that, despite Mr. Smith's promises, the requested information was never provided by Co-Op Oil. It was undisputed that sales agreements with its retailers gave Co-Op Oil a contractual right to collect from the retailers any additional fuel tax that might become due.

24. Mr. Smith acknowledged that he never supplied the “gains” information to Mr. Pate, but could not recall ever promising to do so, stating that his understanding of Mr. Pate’s letter was that DOR needed to require each dealer to reconstruct their sales for the audit period. Mr. Smith stated that all but three of the retailers in question were out of business, and that he did not attempt to obtain the information from the others.

25. Mr. Smith’s testimony established that he is very knowledgeable as to fuel tax law. In addition to calculating and paying the taxes for his business since at least 1989, he has attended seminars on the subject, served on a task force made up of DOR and industry representatives that drafted changes to the

    fuel tax laws, and has acted as a legislative lobbyist on tax issues on behalf of his company and the Florida Petroleum Marketers Association. Given his knowledge, it was unreasonable for him to assume that a tax on “gains” otherwise owed by his retailers need not be paid simply because their tax returns were administratively linked with those of Co-Op Oil.

26. DOR did not attempt directly to force the retailers to reconstruct their records. Mr. Pate did inform Mr. Smith that if Co-Op Oil would produce the records, then DOR would pursue the individual dealers. However, no dealer records were ever produced by Co-Op Oil.

27. Mr. Pate was thus forced to assess the tax based on an estimate. He arrived at this estimate by assuming a one percent “gain” on the net gallons reported by Co-Op Oil for the linked retailers. This was a reasonable and conservative assumption, consistent with the industry standards for calculation of “gains.”

    CONCLUSIONS OF LAW

    
    

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

29. In this taxpayer contest proceeding, DOR’s burden of proof is limited to a showing that an assessment has been made against the taxpayer and the factual and legal grounds upon which the department made the assessment. Section 120.80(14)(b)2., Florida Statutes. If the Department makes that showing, then the burden shifts to the taxpayer to demonstrate by a preponderance of the evidence that the assessment is incorrect.

30. Section 206.41(1)(a), Florida Statutes (1995), provides in pertinent part:

    An excise or license tax of 2 cents per gallon is imposed upon the first sale or first removal from storage, after importation into this state, or motor fuel upon which such tax has not been paid or the payment thereof has not been lawfully assumed by some person handling the same in the state. . . .

    
    

31. Section 206.41(1)(b), Florida Statutes (1995), provided:

    If any licensee owns or operates retail stations or has fuel on consignment at retail stations and has sold more fuel than was purchased tax-paid when the fuel was removed from the rack or than was reported to the state when first purchased or removed from storage tax-free, the licensee must report the additional gallons sold and pay the additional tax, due for the month, on his local option gasoline tax return or a return designated by the department. (emphasis added)

32. As noted in the findings of fact above, the language quoted from Section 206.41(1)(b), Florida Statutes (1995), is typical of fuel tax statutes as they existed during the audit period.

33. The statutory language expressly applies only to those licensees who own or operate retail stations or have fuel on consignment at retail stations. No statute or DOR rule treats of the situation presented here, where a wholesale supplier voluntarily “links” its tax return to that of a retailer that it neither owns or operates nor to which it consigns fuel.

34. DOR’s witnesses admitted that the agency permitted licensees to link such retailers to their tax returns without a statutory directive. Co-Op Oil does not challenge DOR’s authority to permit such linkage, and could not fairly do so, having been a beneficiary of the agency’s relaxed standard. Having requested and accepted a linkage that Mr. Smith knew was not expressly allowed by the statutes, Co-Op Oil cannot now stand on a literal reading of those statutes.

35. No challenge having been raised to DOR’s apparent lack of authority to permit linkage in the first instance, the issue becomes whether DOR’s treatment of Co-Op Oil as a “linked” wholesaler was reasonable under the circumstances.

36. Based on the facts enumerated above, it is concluded that DOR’s actions after allowing Co-Op Oil to link the retailers to its tax return were reasonable. It was unreasonable for

    Mr. Smith to assume that by allowing Co-Op Oil the administrative convenience of linking its tax return with those of its retail purchasers, DOR intended to exempt them from paying taxes paid by every other similar retailer in the state.

37. It was also unreasonable for Co-Op Oil to accept the administrative responsibility for reporting taxes owed by its linked retailers, but expect DOR to assume responsibility for assessing and collecting the unpaid taxes from the retailers. It was proper for DOR to look to Co-Op Oil for payment of the taxes, particularly when DOR had offered to seek payment from the linked retailers if Co-Op Oil would provide the needed information.

38. DOR complied with the requirements of Section 95.091(3)(a), Florida Statutes, in conducting its audit of the records available from Co-Op Oil for the audit period.

39. Co-Op Oil was required by statute to keep suitable books and records relating to its fuel tax liability and to preserve such records until expiration of the time within which DOR could make an assessment with respect to that tax. Sections 206.12(1) and 213.35, Florida Statutes (1995).

40. Co-Op Oil failed to maintain adequate records relating to the number of metered gallons sold by the linked retailers as required by Section 213.35, Florida Statutes (1995).

41. When a person or dealer such as Co-Op Oil fails to keep adequate records for purposes of audit by the Respondent, it is the duty of DOR to make an assessment from an estimate based upon

    the best information then available to it for the taxable period. Sections 206.12(2) and 212.12(5)(b), Florida Statutes (1995).

42. DOR’s assessment of Co-Op Oil based upon the estimate described in the above findings of fact was reasonable and consistent with its statutory duties.

43. DOR has met its burden of proof in this case. The burden thus shifted to Co-Op Oil to demonstrate that DOR’s assessment was incorrect. Co-Op Oil has failed to carry that burden.

RECOMMENDATION

Upon the foregoing findings of fact and conclusions of law, it is recommended that the Department of Revenue enter a final order sustaining the assessment of additional tax, penalties, and interest against Co-Op Oil.

DONE AND ENTERED this 30th day of July, 1998, in Tallahassee, Leon County, Florida.

LAWRENCE P. STEVENSON

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6847

Filed with the Clerk of the Division of Administrative Hearings this 30th day of July, 1998.

COPIES FURNISHED:

James E. Smith, President, Co-Op Oil Company, Inc.

4911 8th Avenue South Gulfport, Florida 33707

John N. Upchurch, Esquire Nicholas Bykowsky, Esquire Assistant Attorneys General Office of the Attorney General Tax Section

The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050

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

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15 days from the date of 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: 97-000636

Orders for Case No: 97-000636