vs. ) Case No. 00-4746
Respondent. )
Pursuant to notice, a formal hearing was held in this case on May 15, 2001, via video teleconference in Tallahassee and Tampa, Florida, before Lawrence P. Stevenson, a duly-designated Administrative Law Judge of the Division of Administrative
Hearings.
For Petitioner: James F. Gordon, President, pro se Purple Neon, Inc.
Carrol Y. Cherry, Esquire Office of the Attorney General The Capitol, Tax Section
Whether the Petitioner owes unpaid sales and use tax, interest and penalties for the period extending from
amount owed.
In a Notice of Proposed Assessment dated August 23, 2000, the Department of Revenue ("Department") notified Purple Neon, Inc. ("Purple Neon"), that it owed a balance of $84,207.36 in unpaid sales and use taxes, penalties, and interest to date, with interest to accrue at the rate of $14.05 per day from August 24, 2000, until the date of payment. On the same date, the Department also sent a Notice of Proposed Assessment notifying Purple Neon that it owed a balance of $14,034.73 in unpaid local government infrastructure surtaxes, penalties, and interest to date, with interest to accrue at the rate of $2.34 per day from August 24, 2000, until the date of payment.
James F. Gordon, president of Purple Neon, timely filed a Petition for Formal Proceeding, requesting an evidentiary hearing to contest the Department's assessment. The Department forwarded the matter to the Division of Administrative Hearings for assignment of an administrative law judge. The final hearing was originally scheduled for January 12, 2001, but, at the request of the parties, the hearing was twice continued.
The final hearing was held on May 15, 2001.
At the hearing, the Department presented the testimony of Judy L. Weber, a tax auditor from the Department's Sarasota
field office. Ms. Weber also testified in rebuttal. The Department's Exhibits 1 through 12, including Exhibit 3A, were offered and received into evidence. Purple Neon presented the testimony of Paul Kirbin, a part-owner and employee of Purple Neon; Bonnie Gordon, a part-owner and bookkeeper for Purple Neon; Lawrence H. Paoli, a certified public accountant who conducted a limited review of Purple Neon's financial records; and James F. Gordon, a part-owner and president of Purple Neon. Purple Neon's Exhibits 1 through 5 were offered and received into evidence.
On May 11, 2001, the Department filed a Motion for Sanctions, requesting an award of costs, expenses, and attorneys' fees related to a scheduled deposition of Mr. Gordon for which he did not appear. At the hearing, Mr. Gordon stated that he had not yet seen the motion. The undersigned withheld ruling on the motion to give Mr. Gordon an opportunity to file a written response. No response was filed by Mr. Gordon or anyone else on behalf of Purple Neon. The motion is GRANTED insofar as it requests $1,207.93 for the Department's costs and expenses.
The attorneys' fee portion of the motion is DENIED for lack of sufficient evidence to support the requested hourly rate.
A two-volume Transcript of the final hearing was filed with the Division of Administrative Hearings on May 31, 2001. The parties agreed that their proposed recommended orders would be
filed within thirty days of the filing of the transcript. The parties timely filed their proposals, which have been duly considered.
Based on the oral and documentary evidence presented at the final hearing and on the entire record of this proceeding, the following findings of fact are made:
Purple Neon is a Florida corporation with its home office and principal place of business in Venice. Purple Neon was incorporated in June 1995. Purple Neon owns and operates a restaurant and lounge called Purples, which opened for business in October 1995.
The Department is the agency of state government authorized to administer the tax laws of the State of Florida, pursuant to Section 213.05, Florida Statutes. The Department is authorized to prescribe the records to be kept by all persons subject to taxes under Chapter 212, Florida Statutes. Such persons have a duty to keep and preserve their records, which must be open to examination by the Department or its authorized agents at all reasonable hours, pursuant to Subsection 212.12(6), Florida Statutes.
The Department is authorized to conduct audits of taxpayers and to request information to ascertain any tax liability, pursuant to Section 213.34, Florida Statutes.
Between September 1999 and July 2000, the Department conducted an audit of Purple Neon to determine whether Purple Neon was properly collecting and remitting sales and use tax during the audit period, September 1, 1994 through August 31, 1999.
On September 17, 1999, the Department sent to Purple Neon its Form DR-840, Notice of Intent to Audit Books and Records.
On August 23, 2000, the Department sent to Purple Neon its Notice of Proposed Assessment showing that Purple Neon owed additional sales and use tax of $42,865.61, a penalty of
$21,432.88, and interest of $19,908.87 through August 23, 2000, making a total assessment of $84,207.36. The schedules and work papers from which the assessments were derived were attached to the notice.
On August 23, 2000, the Department sent to Purple Neon its Notice of Proposed Assessment showing that Purple Neon owed additional local government infrastructure surtax of $7,144.36, a penalty of $3,572.26, and interest of $3,318.11 through August 23, 2000, making a total assessment of $14,034.73. The assessment of the local government infrastructure surtax is derived from the sales and use tax assessment by a mathematical calculation. See Subsection 212.055(2), Florida Statutes.
A portion of the assessment was related to unpaid taxes on Purple Neon's commercial lease for its restaurant.
Subsequent to the Notice of Proposed Assessment, Purple Neon submitted documentation that caused the Department to withdraw the portion of the assessment relating to the commercial lease. At the hearing, the Department's auditor, Judy Weber, testified that the amount of the withdrawn portion of the assessment was approximately $2,900. With interest and penalty, the withdrawn amount approximated $4,800. Prior to entry of a final order in this matter, the Department will compute the precise amount of the withdrawn commercial rental assessment and deduct it from the total assessment.
On four separate occasions, Ms. Weber examined books and records made available to her at Purple Neon's business location. Ms. Weber also conducted two conferences with
Mr. Gordon at which he produced additional records.
During the audit, Ms. Weber found that Purple Neon collected tax but did not remit the proper amount of sales and use tax to the Department. Ms. Weber also found that Purple Neon had not kept adequate records as required by Subsection 212.12(6), Florida Statutes.
Ms. Weber followed standard audit procedure, comparing Purple Neon's federal tax return information with the best
available information provided to her by Purple Neon as to its state tax payments.
Ms. Weber testified that the records Purple Neon should have kept as required by law included general ledger accounts that connected financial statements with federal tax returns, documentation to corroborate and reconcile the gross sales figure on the federal tax return with the monthly sales tax returns, asset invoices, general ledger accounts, financial statements, and a detailed depreciation schedule. Purple Neon never provided these records to the Department.
Ms. Weber compared the restaurant's gross sales for 1998 and 1999 as reported on the state tax returns to the gross sales reported for each of those years on Purple Neon's federal tax returns. Ms. Weber found that the gross sales reported on the state returns did not match the gross sales reported on the federal return. Greater annual gross sales for the audit period were reported to the Internal Revenue Service than to the Department. This discrepancy led Ms. Weber to conclude that Purple Neon underreported gross taxable sales to the Department.
Because Purple Neon's records were inadequate,
Ms. Weber projected the amount of tax due based on a sampling of available records, pursuant to Subsection 212.12(6)(b), Florida Statutes. Ms. Weber found that Purple Neon's gross sales as reflected on its federal corporate income tax returns for the
years 1995, 1996 and 1997 were higher than the total gross sales as reported monthly to the Department.
Purple Neon indicated no adjusting entries made by its accountant. Purple Neon provided no other explanation for the gross sales discrepancy between its state sales tax returns and federal income tax returns. Ms. Weber was unable to reconcile the discrepancy through her review of the available records.
Ms. Weber found that Purple Neon did not file a detailed depreciation form, federal tax return Form 4562, with its federal tax returns to properly account for the company's capital assets.
The evidence established that Purple Neon made extensive improvements to its leasehold restaurant facility. Mr. Gordon and his partners essentially gutted the building,
formerly a Golden Corral restaurant, and completely remodeled it to achieve its current art deco style. Purple Neon also made two additions to the original building.
Based on available information, Ms. Weber attempted to determine whether Purple Neon's improvements remained part of the real property and therefore belonged to the landlord, or whether the improvements constituted taxable tangible personal property owned by Purple Neon, subject to removal if and when it vacated the premises.
Invoices that showed Purple Neon paid tax on some purchases which were determined to be tangible personal property rather than leasehold improvements or improvements to the real estate. However, Purple Neon did not have invoices for all of its purchases, nor did it have any records for many of those purchases sufficient to establish whether they were tangible personal property or improvements to the real estate.
Because Purple Neon failed to provide invoices for many of its purchases, Ms. Weber was unable to trace all of those assets to determine whether they were exempt from taxation. Ms. Weber testified that without taxpayer records, such as invoices, it is not possible to verify whether a fixture is nontaxable or whether tax has been remitted on its purchase. She stated that, without verifying invoices or other documentation, she is required to assess tax on the item.
Ms. Weber testified that she made every effort to give Purple Neon the benefit of the doubt on questionable items. She assessed no tax in relation to anyone who Mr. Gordon told her was a real property contractor. If she could determine from a company's name that it was a real property contractor, she assessed no tax. If a canceled check written by Purple Neon contained a notation such as "roofing," she assessed no tax. In short, Ms. Weber credited Purple Neon for any item that appeared to be a real property improvement, whether or not Purple Neon
provided the type of documentation that the Department ordinarily requires pursuant to Subsection 212.12(6)(b), Florida Statutes.
Because Purple Neon lacked financial statements and general ledgers, Ms. Weber used the lump sum amounts on the federal tax return to calculate the taxable amount of the assets. From those lump sums, she subtracted the totals from the invoices provided by Purple Neon to arrive at the taxable amount.
During the audit, Ms. Weber found that Purple Neon made payments to cleaning services for the restaurant. The invoices for these cleaning services did not separately state the amount of tax, contrary to the requirements of Subsection 212.05(1)(j), Florida Statutes (establishing that nonresidential cleaning services are subject to tax), and Subsection 212.07(2), Florida Statutes (establishing that invoices for taxable sales must separately state the amount of the tax).
Mr. Gordon testified that his oral agreement with the cleaning service established that tax was to be included in the amount Purple Neon would pay. Mr. Gordon's assertions as to his arrangement with the cleaning service were not supported by any testimony from the cleaning service or by any documentary evidence. Purple Neon did not have a written or other contract with its cleaning services vendor that expressly stated who
would pay sales tax on those transactions. Subsection 212.07(8), Florida Statutes, provides that the purchaser of services is directly liable to the state for use tax if the purchaser cannot prove that sales tax was paid to the vendor.
Because Purple Neon lacked adequate records with respect to the cleaning services, Ms. Weber used a three-month sample period to project the amount of tax due for the cleaning services for the audit period, under Subsections 212.12(6)(a) and (b), Florida Statutes.
Purple Neon presented the expert testimony of Lawrence H. Paoli, a certified public accountant from Venice.
Mr. Paoli was not the accountant responsible for Purple Neon's books or its tax returns. Mr. Paoli reviewed Purple Neon's 1995 tax returns and testified that the difference between the federal and state tax returns might have been due to an accountant's error. He noted that a common mistake made by accountants is to err on the side of including questionable items as income on the federal return, to ensure that the business pays all the federal taxes due. Specifically,
Mr. Paoli stated that he suspected Purple Neon's accountant had erroneously included Florida sales taxes paid as income on the federal return. Mr. Paoli testified that this error would have meant that Purple Neon's federal return overstated its income and that its state return was actually correct.
Mr. Paoli was not fully familiar with the documents in evidence and admitted that his testimony was speculative as to possible explanations for the discrepancy between Purple Neon's federal and state tax returns. Mr. Paoli testified that he had not calculated the figures to verify that his theory was the reason for the discrepancy. Purple Neon's accountant did not testify.
Ms. Weber testified that the possibility of the error suggested by Mr. Paoli had occurred to her during her audit of Purple Neon and that she had made the calculations necessary to assure her that this accounting error did not account for the discrepancy between the federal and state return.
Aside from Mr. Paoli's speculation, effectively rebutted by Ms. Weber, there was no credible evidence to show that errors made by Purple Neon's accountant explain the discrepancies between Purple Neon's state and federal tax returns.
In conducting the audit, the Department utilized the best records made available to it by the taxpayer, which were adequate to complete the audit and assess the taxpayer under Florida law. During the audit and protest periods in this case, Purple Neon's records were inadequate to show compliance with Florida sales and use tax law. Because of its inadequate record keeping, and lack of other evidence to support its contentions,
Purple Neon could not meet its burden to overcome the prima
facie correctness of the Department's assessment. The methodology used by the Department's auditor to calculate the assessment was proper under the circumstances, and the Department's assessment for sales and use tax for the audit period is reasonable. Purple Neon did not present any persuasive evidence to the contrary.
Mr. Gordon alleged that Purple Neon was illegally targeted for audit in retaliation for a complaint he had made against a Department employee. Mr. Gordon presented no credible evidence to support this allegation.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter of this proceeding and of the parties thereto pursuant to Section 120.569 and Subsection 120.57(1), Florida Statutes.
Subsection 120.80(14)(b)2., Florida Statutes, provides that in any administrative proceeding in which a taxpayer contests the assessment of a tax, penalty, or interest, the Department's "burden of proof . . . shall be limited to a showing that an assessment has been made against the taxpayer and the factual and legal grounds upon which the applicable department made the assessment." Purple Neon, the taxpayer contesting the Department's assessment, has the burden of
proving by a preponderance of the evidence that the factual or legal basis for the assessment is unreasonable or incorrect.
Department of Revenue v. Nu-Life Health and Fitness Center, 623 So. 2d 747, 751-52 (Fla. 1st DCA 1992).
Section 213.34, Florida Statutes, provides, in pertinent part:
The Department of Revenue shall have the authority to audit and examine the accounts, books, or records of all persons who are subject to a revenue law made applicable to this chapter . . . for the purpose of ascertaining the correctness of any return which has been filed or payment which has been made, or for the purpose of making a return where none has been made.
The department, or its duly authorized agents, may inspect such books and records necessary to ascertain a taxpayer's compliance with the revenue laws of this state, provided that the department's power to make an assessment or grant a refund has not terminated under s. 95.091(3).
The department may correct by credit or refund any overpayment of tax, penalty, or interest revealed by an audit and shall make assessment of any deficiency in tax, penalty, or interest determined to be due.
Subsection 95.091(3)(a), Florida Statutes, provides, in pertinent part:
[T]he Department of Revenue may determine and assess the amount of any tax, penalty, or interest due under any tax enumerated in
s. 72.011 [which includes taxes levied pursuant to Chapter 212, Florida Statutes] which it has authority to administer . . . :
1.a. For taxes due before July 1, 1999, within 5 years after the date the tax is due, any return with respect to the tax is due, or such return is filed, whichever occurs later; and for taxes due on or after July 1, 1999, within 3 years after the date the tax is due, any return with respect to the tax is due, or such return is filed, whichever occurs later.
Section 213.35, Florida Statutes, provides:
Each person required by law to perform any act in the administration of any tax enumerated in s. 72.011 [including taxes levied pursuant to Chapter 212, Florida Statutes] shall keep suitable books and records relating to that tax, such as invoices, bills of lading, and other pertinent records and papers, and shall preserve such books and records until expiration of the time within which the department may make an assessment with respect to that tax pursuant to s.
95.091(3).
The Department properly and reasonably conducted an audit of Purple Neon's available books and records for a five-year tax period as permitted by Subsection 95.091(3)(a), Florida Statutes. During the course of its audit, the
Department discovered that the taxpayer did not keep sufficient records, in contravention of Section 213.35, Florida Statutes.
Section 212.12, Florida Statutes, provides in pertinent part:
(5)(a) The department is authorized to audit or inspect the records and accounts of dealers defined herein . . . and to correct by credit any overpayment of tax, and, in
the event of a deficiency, an assessment shall be made and collected. No administrative finding of fact is necessary prior to the assessment of any tax deficiency.
(b) In the event any dealer or other person charged herein fails or refuses to make his or her records available for inspection so that no audit or examination has been made of the books and records of such dealer or person, fails or refuses to register as a dealer, fails to make a report and pay the tax as provided by this chapter, makes a grossly incorrect report or makes a report that is false or fraudulent, then, in such event, it shall be the duty of the department to make an assessment from an estimate based upon the best information then available to it for the taxable period of retail sales of such dealer, the gross proceeds from rentals, the total admissions received, amounts received from leases of tangible personal property by such dealer, or of the cost price of all articles of tangible personal property imported by the dealer for use or consumption or distribution or storage to be used or consumed in this state, or of the sales or cost price of all services the sale or use of which is taxable under this chapter, together with interest, plus penalty, if such have accrued, as the case may be.
Then the department shall proceed to collect such taxes, interest, and penalty on the basis of such assessment which shall be considered prima facie correct, and the burden to show the contrary shall rest upon the dealer, seller, owner, or lessor, as the case may be.
(6)(a) The department is given the power to prescribe the records to be kept by all persons subject to taxes imposed by this chapter. It shall be the duty of every person required to make a report and pay any tax under this chapter, every person
receiving rentals or license fees, and owners of places of admission, to keep and preserve suitable records of the sales, leases, rentals, license fees, admissions, or purchases, as the case may be, taxable under this chapter; such other books of account as may be necessary to determine the amount of the tax due hereunder; and other information as may be required by the department. It shall be the duty of every such person so charged with such duty, moreover, to keep and preserve as long as required by s. 213.35 all invoices and other records of goods, wares, and merchandise; records of admissions, leases, license fees and rentals; and records of all other subjects of taxation under this chapter.
All such books, invoices, and other records shall be open to examination at all reasonable hours to the department or any of its duly authorized agents.
(b) For the purpose of this subsection, if a dealer does not have adequate records of his or her retail sales or purchases, the department may, upon the basis of a test or sampling of the dealer's available records or other information relating to the sales or purchases made by such dealer for a representative period, determine the proportion that taxable retail sales bear to total retail sales or the proportion that taxable purchases bear to total purchases. This subsection does not affect the duty of the dealer to collect, or the liability of any consumer to pay, any tax imposed by or pursuant to this chapter.
Purple Neon does not dispute that it was a "dealer" as that term is defined in Subsection 212.06(2), Florida Statutes, or that it was a person subject to the Florida sales and use tax imposed by Chapter 212, Florida Statutes, during the audit period.
The court in Nu-Life, 623 So. 2d at 751-752,
recognized that the Department's assessment is presumed correct under Section 212.12, Florida Statutes. The burden is on the taxpayer to show that the Department's assessment is incorrect or unreasonable. Subsection 212.12(5)(b), Florida Statutes.
When a person or dealer such as Purple Neon does not present adequate records for purposes of an audit, the Department is not required to produce an assessment with absolute precision. Rather, the Department may make an assessment "upon the basis of a test or sampling of the dealer's available records or other information relating to the sales or purchases made by such dealer . . ." Subsection 212.12(6)(b), Florida Statutes. It is the Department's duty to make an estimated tax assessment on the best information available, and in this case the Department fulfilled this duty.
The Department's initial burden is limited to a showing that an assessment has been made against the taxpayer and the factual and legal grounds upon which it was made.
Nu-Life, 623 So. 2d at 751-752. The Department met this burden through its exhibits and the testimony of Ms. Weber. The burden then shifted to Purple Neon to demonstrate by a preponderance of the evidence that the assessment was incorrect or unreasonable.
Purple Neon failed to carry the burden of demonstrating that the Department's assessment was incorrect or
unreasonable. Purple Neon did not provide any persuasive evidence to support its assertion that the tax has been paid on the assets in dispute in this case. Its expert offered a theory as to the discrepancy between the federal and state tax returns, but the expert admitted that he did not perform the calculations necessary to prove his theory. Ms. Weber did perform the calculations and found that they did not support the theory.
Purple Neon owes sales and use tax on tangible property purchased for use in its business, as well as on the cleaning services it purchased for the restaurant.
Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order upholding its assessment against Purple Neon, Inc., in full, including all taxes, penalties, and interest statutorily due until the date of payment of the sales and use tax, and the local government infrastructure surtax, with the exception of withdrawn assessment for Purple Neon's commercial rental. The Department is also entitled to $1,207.93 for its costs and expenses related to the scheduled deposition for which James F. Gordon did not appear.
DONE AND ENTERED this 8th day of August, 2001, in Tallahassee, Leon County, Florida.
LAWRENCE P. STEVENSON
Filed with the Clerk of the Division of Administrative Hearings this 8th day of August, 2001.
James F. Gordon, President Purple Neon, Inc.
Nicholas Bykowsky, Esquire Carrol Y. Cherry, Esquire Office of the Attorney General The Capitol, Tax Section
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.
