vs. ) Case No. 01-3755
Respondent. )
Robert E. Meale, Administrative Law Judge of the Division of Administrative Hearings, conducted the final hearing by teleconference in Tallahassee and Miami, Florida, on February 5, 2002.
For Petitioner: Gary J. Bell, Qualified Representative
Bell & Son Fence Company, Inc. 6600 Northwest 27th Avenue Miami, Florida 33147
Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050
The issue is whether Petitioner is liable for tax, interest, and penalty, as claimed in the proposed assessment.
By Notice of Proposed Assessment dated April 30, 2001, Respondent informed Petitioner of Respondent's assessment of
$227,610 in tax, $113,805 in penalty, and $98,583.19 in interest through April 30, 2001, for a total of $439,998.19. The Notice of Proposed Assessment warns that the proposed assessment will become final unless Petitioner files an informal protest by
June 29, 2001, or Petitioner commences a judicial action or administrative proceeding by August 28, 2001, or 60 days after the assessment becomes final.
By Formal Protest Under the Administrative Procedures Act, Chapter 120, Florida Statute, dated August 27, 2001, Petitioner commenced this administrative proceeding. The protest claims that Respondent did not base its proposed assessment on an audit of Petitioner's records. The protest also states that Petitioner "installs and repairs fences mainly for the Florida Department of Transportation, on land owned by the state.
Installation and similar charges for work done on real estate is not subject to sales taxes, neither are sales to a state or a political Subdivision of the state."
At the hearing, Petitioner called two witnesses and offered into evidence one exhibit: Petitioner Exhibit 1. Respondent called one witness and offered into evidence six exhibits: Respondent Exhibits A-F. All exhibits were admitted.
The court reporter filed the transcript on February 18, 2002.
Gary J. Bell (Mr. Bell) and his father Sidney Bell formed Petitioner in 1992. Until Mr. Sidney Bell left the company in his son's sole control in 2001, they were the sole shareholders and officers of the company, which had two other employees. Mr. Bell and his father estimated and checked jobs. Not fabricating fences itself, Petitioner obtained finished fences from suppliers and installed them, primarily at private residences.
The audit period in this case extends from May 1, 1995, through November 30, 1999 (Audit Period). By 1995, Petitioner had four employees: one in the office and three laborers. The nature of Petitioner's business had changed from entirely residential to about half commercial, mostly consisting of sales to the State of Florida. The size and nature of Petitioner's business did not change significantly during the remainder of the audit period, although the percentage of sales to the State of Florida increased somewhat. Without referring to any records, Mr. Bell estimates that Petitioner's gross sales during the 55-month audit period totaled $1.2 to $1.4 million.
Jose Rouco, a tax auditor of Respondent, sent a notice in May 2000 to Mr. Bell informing him of Respondent's intention
to examine Petitioner's records. Due to a change of address, Mr. Rouco sent the form a second time. When he received no response to the form, in September 2000, Mr. Rouco visited the address that he had found for the company. Speaking to someone at a nearby business, Mr. Rouco learned that the fencing business had recently moved from the second address.
On November 22, 2000, Mr. Rouco spoke to Mr. Bell on the telephone and learned that the records required for the audit were at Petitioner's present business address. Mr. Rouco directed Mr. Bell to send him copies of these records. When Mr. Bell failed to do so, Mr. Rouco sent a demand letter on December 12, 2000, warning that the failure to provide the requested records by December 27 would result in the issuance of a Formal Notice of Demand to Produce Certain Records.
On December 28, 2000, after Mr. Bell had failed to respond by the deadline stated in the December 12 letter,
Mr. Rouco issued a Formal Notice of Demand to Produce Certain Records for the Audit Period by 10:00 a.m. on January 9, 2001. The form warns: "Failure to produce [the records] may result in the immediate issuance of a distress warrant or a jeopardy assessment in the amount of an estimated assessment of all taxes, interest, and penalties due and payable to the State of Florida."
When Mr. Bell failed to produce the records by January 9, 2001, Mr. Rouco proceeded to estimate taxes that Petitioner owed. A couple of weeks later, he received as unclaimed the December 12 letter and December 28 notice, which he had sent certified mail, return receipt requested, to Petitioner's correct address. The record does not disclose why Mr. Bell never took delivery of this mail.
Based on Mr. Rouco's work, Respondent issued on
April 30, 2001, a Notice of Proposed Assessment, which claimed, for the Audit Period, taxes of $227,610, a penalty of $113,805, and interest of $98,583.19 through April 30, 2001, and $74.83 daily after April 30, for a total of $439,998.19. The notice warns that the proposed assessment would become a final assessment if Petitioner did not file an informal protest by June 29, 2001, and that Petitioner must commence a judicial action or administrative proceeding by August 28, 2001.
By letter dated August 10, 2001, Willie Barnett, a certified public accountant, informed Respondent that he was Petitioner's accountant, and he was responding to Respondent's tax notice dated July 25, 2001. The record does not contain any documents from Respondent dated July 25, 2001. However,
Mr. Barnett's letter states that Petitioner "is in the business of installing fences, not retail sale. In those instances where the company purchases the fencing materials, the sales taxes are
paid at the point of purchase." The letter concludes that Petitioner is therefore not liable for sales taxes. Mr. Bell asserts that Petitioner has paid all taxes lawfully due, but that Petitioner is not required to collect any tax on its sales to consumers because these are sales pursuant to real property contracts.
Respondent's file already contained the information that Mr. Barnett supplied. By Audit Assignment Request received January 11, 1999, by Respondent's Case Selection Division,
L. David Mills, evidently an employee of Respondent, wrote: "Taxpayer sells and installs real property. Potential for recovery on purchases and fabrication labor and overhead. Taxpayer does not appear to be registered."
By a file memorandum dated October 25, 2000, Joan C. Rietze, also evidently an employee of Respondent, wrote: "Talked to Gary Bell. . . . He also stated that he pays tax on all of the purchases he makes. He requested that his tax number be cancelled in December of last year. The sales tax number was cancelled in October, 2000."
In estimating Petitioner's tax liability in January 2001, Mr. Rouco identified four areas: taxable sales, taxable purchases, taxable acquisition of fixed assets, and taxable rent. Mr. Rouco's estimates were $207,900 for uncollected taxes on sales, $6270 for unpaid taxes on purchases of items other
than fixed assets, $6840 for unpaid taxes on fixed assets, and
$6600 for unpaid taxes on warehouse rent.
Without much explanation, Mr. Rouco selected a "small construction company" as the source of gross monthly sales of
$63,000, as well as other relevant business activity. However, this choice produces $3.465 million of gross sales during the Audit Period, which is almost three times Mr. Bell's estimate.
Factually, the record offers scant support for
Mr. Rouco's selection of the "small construction company" as a comparable to Petitioner's business. Petitioner's business was not construction; it purchased already-fabricated fences and installed them.
Coupled with the problem with the comparable, the record does not support Mr. Rouco's estimate of Petitioner's tax due on purchase amounts of fixed assets, and Petitioner has proved that it does not owe additional taxes on such purchases. Petitioner's labor-intensive services, coupled with its itinerant nature during the Audit Period, suggest strongly few, if any, such purchases.
Coupled with the problem with the comparable, the record does not support Mr. Rouco's estimate of Petitioner's tax due on warehouse rent, and Petitioner has proved that it does not owe additional taxes on such rent payments. The estimate concerning unpaid warehouse rent sales tax requires the
presumption that Petitioner's several lessor's found some reason not to collect and remit sales tax based on the lease payments. Any dealer-like activities by Petitioner involving sales for resales would not impact its liability to pay this tax, so misuse of a dealer registration is unlikely here. Nor has Respondent suggested such widespread noncompliance with this component of the sales tax as to justify a presumption of noncompliance among Petitioner's lessors, even assuming that Mr. Rouco generated a gross rent that is factually supported by the record.
Notwithstanding the problem with the comparable, the factual record supports Mr. Rouco's estimate of Petitioner's tax due on purchases of items other than fixed assets, and Petitioner has failed to prove that it does not owe additional taxes on such purchases. For much, if not all, of the Audit Period, Petitioner appears to have been a registered dealer. Mr. Bell's unprofessional handling of this matter while
Mr. Rouco attempted to perform a routine audit inspires little confidence that Mr. Bell would not misuse a dealer registration and resale certificate. Thus, although the use of the "small construction company" as a comparable is questionable, there is factual support for the assessment of $6270 in unpaid taxes on these purchases over the Audit Period.
As noted below, the main problem with Mr. Rouco's estimate of Petitioner's tax due on sales to consumers is legal, not factual. As for the main factual aspect of this issue, the record offers no support that Petitioner sold to consumers using a retail sale plus installation contract, as opposed to a simple lump sum contract. Nothing in Petitioner's operation, as reflected on this record, suggests that it would be more inclined to use the more sophisticated contract.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter. Section 120.57(1), Florida Statutes. (All references to Sections are to Florida Statutes. All references to Rules are to the Florida Administrative Code.)
Section 120.80(14)(b)2 provides:
In any such administrative proceeding, the applicable department's burden of proof, except as otherwise specifically provided by general law, 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.
Section 212.12(5)(b) authorizes Respondent
to assess a noncompliant dealer by an "estimate based upon the best information then available" to Respondent. The assessment
shall be considered "prima facie correct, and the burden to show the contrary shall rest upon the dealer "
If Section 212.12(5)(b) does not relieve Respondent of its responsibility under Section 120.80(14)(b)2 to show the factual and legal grounds of the assessment, Respondent has failed to show adequate factual support for the assessment of taxes due on Petitioner's purchase of fixed assets and payment of warehouse rent. If Section 212.12(5)(b) relieves Respondent of its responsibility under Section 120.80(14)(b)2 to show the factual and legal grounds of the assessment, Petitioner has proved that it owes no additional taxes for Petitioner's purchase of fixed assets and payment of warehouse rent.
Respondent has not shown adequate legal support for the assessment of taxes due on Petitioner's sales to consumers, and Petitioner has proved that it owes no taxes on sales to consumers.
Rule 12A-1.051(4) provides:
General rule of taxability of real property contractors. Contractors are the ultimate consumers of materials and supplies they use to perform real property contracts and must pay tax on their costs of those materials and supplies, unless the contractor has entered a retail sale plus installation contract. Contractors performing only contracts described in paragraphs (3)(a), (b), (c), or (e) do not resell the tangible personal property used to the real property owner but instead use the property themselves to provide the completed real
property improvement. Such contractors should pay tax to their suppliers on all purchases. They should also pay tax on all materials they fabricate for their own use in performing such contracts, as discussed in subsection (10). They should charge no tax to their customers, regardless of whether they itemize charges for materials and labor in their proposals or invoices, because they are not engaged in selling tangible personal property. Such contractors should not register as dealers unless they are required to remit tax on the fabricated cost of items they fabricate to use in performing contracts.
As already noted, the factual record offers no support for the finding that Petitioner used retail sale plus installation contracts, which are described in Rule
12A-1.051(3)(d), as opposed to simple lump sum contracts, which are described in Rule 12A-1.051(3)(a). Therefore, Petitioner would not be required to collect sales tax on its sales to consumers, if its contracts constituted "real property contracts," which they are under Rule 12a-1.051(17)(o).
Respondent has shown adequate factual and legal support for the assessment of taxes due on Petitioner's purchase of items other than fixed assets, and Petitioner has failed to prove that it does not owe additional taxes on such purchases. Although the estimate for purchases of items other than fixed assets may be high due to the use of the "small construction company" comparable, Mr. Bell has only himself to blame for this situation, as he failed to take advantage of several
opportunities to timely resolve this matter in a businesslike fashion.
Section 212.12(2)(a) authorizes the imposition of a penalty of not more than 50 percent of the tax liability for the failure to file a return or pay a tax. Mr. Bell's irresponsible and cavalier behavior also supports, legally and factually, the imposition of the penalty for the component of the assessment that has been sustained.
RECOMMENDED that Department enter a final order adjusting the assessment against Petitioner to reflect unpaid sales tax of
$6270, a penalty of $3135, and interest at the lawful rate.
DONE AND ENTERED this 26th day of February, 2002, in Tallahassee, Leon County, Florida.
ROBERT E. MEALE
Filed with the Clerk of the Division of Administrative Hearings this 26th day of February, 2002.
Gary J. Bell, Qualified Representative Bell & Son Fence Company, Inc.
15 days from the date of this recommended order. Any exceptions to this recommended order must be filed with the agency that will issue the final order in this case.
