The Issue The issue is whether Respondent's Certificate of Registration 46-8015920490-4 should be revoked for the reasons stated in an Administrative Complaint for Revocation of Certificate of Registration (Administrative Complaint) issued by the Department of Revenue (Department) on July 17, 2015.
Findings Of Fact The Department is the state agency charged with administering and enforcing the state revenue laws, including the laws related to the imposition and collection of sales and use taxes pursuant to chapter 212. Respondent is an active for-profit Florida corporation and a licensed motor vehicle dealer located at 613 Southwest Pine Island Road, Suite 14, Cape Coral, Florida. For purposes of collecting and remitting taxes, Respondent is a dealer as defined in section 212.06(2) and is required to comply with chapter 212. Annais German is the president and agent of the corporation. Respondent holds Certificate of Registration number 46- 8015920490-4. A certificate of registration is required in order to do business in the state and requires its holder to collect and remit sales tax pursuant to chapter 212. See § 212.05(1), Fla. Stat. A dealer must file with the Department sales tax returns and remit the tax collected on a monthly basis. See § 212.15(1), Fla. Stat. The Department is authorized to revoke a dealer's certificate of registration for failure to comply with state tax laws. See § 212.18(3)(e), Fla. Stat. Before revoking a certificate of registration, the Department must convene an informal conference that the dealer is required to attend. See § 213.692(1)(a), Fla. Stat. At the conference, the dealer may either present evidence to refute the Department's allegations of noncompliance or enter into a compliance agreement with the Department to resolve the dealer's failure to comply with chapter 212. Id. After a compliance agreement is executed by the dealer, the Department may revoke the certificate of registration if the dealer fails to comply with its terms and conditions. If a breach occurs, the entire amount is due and payable immediately. After Respondent failed to remit taxes that were due, the Department issued tax warrants and rendered judgment liens against Respondent in March, April, and December 2014 and April 2015. An informal conference was conducted with the taxpayer on April 7, 2015. Respondent was represented at the conference by Orlando German, who was given power of attorney by Annais German to represent the corporation. He signed an agreement, which required the entire balance to be paid by the end of the month. Two weeks later, Annais German requested that a new agreement be executed which allowed her to pay the delinquent taxes over a longer period of time. The Department agreed with her request. On April 23, 2015, Ms. German executed an Agreement reflecting that her corporation owes $7,297.52. See Pet'r Ex. 2, p. 1. The Agreement required Respondent to make a down payment of $2,500.00 on or before April 28, 2015, followed by ten monthly payments of 375.00 on the 28th of each month, and a final payment of $671.52 on April 28, 2016. Id. at p. 3. The Agreement required these payments to be made at the Fort Myers Service Center. Id. Payments required under a compliance agreement are always remitted to the local district office, rather than Tallahassee, to allow the Department to track the payment and ensure that it is being made in a timely fashion. The Agreement also required Respondent to "timely remit payment in full for all types of taxes, returns, and reports due from the Taxpayer for the duration of this agreement (and any extensions hereof) or for the next 12 months following the date of this agreement, whichever is longer." Id. at p. 1. In other words, besides making payments for past due taxes, interest, penalties, and fees, Respondent was required to timely file returns and pay current obligations as they became due during the life of the Agreement. The Agreement specifically provides that if the taxpayer fails to comply with the Agreement, revocation proceedings will be initiated without further notice. Respondent paid the $2,500.00 down payment one day late, but as of the date of the hearing in this case, no other payments for past or current obligations have been made. Returns for April and May 2015 were not timely filed. Respondent admits that in April 2015, at least three vehicles were sold, but its April return, when eventually filed, reported that no sales were made. Since filing its June and July 2015 returns, Respondent has filed no other returns. By failing to pay the monthly obligations required by the Agreement or any current obligations, Respondent has violated the Agreement.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order revoking Respondent's Certificate of Registration 46- 8015920490-4. DONE AND ENTERED this 25th day of February, 2016 in Tallahassee, Leon County, Florida. S D. R. ALEXANDER Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 25th day of February, 2016. COPIES FURNISHED: Stephen M. Masterson, Esquire Office of the Attorney General Revenue Litigation Bureau The Capitol, PL-01 Tallahassee, Florida 32399-1050 (eServed) Annais German World Champions Auto, Inc. 429 Northwest 38th Place Cape Coral, Florida 33993-5536 Annais German World Champions Auto, Inc. 613 Southwest Pine Island Road, Suite 14 Cape Coral, Florida 33991-1950 George C. Hamm, Acting General Counsel Department of Revenue Post Office Box 6668 Tallahassee, Florida 32314-6668 (eServed) Marshall C. Stranburg, Executive Director Department of Revenue Post Office Box 6668 Tallahassee, Florida 32314-6668 (eServed)
Findings Of Fact Coulter Electronics, Inc., Petitioner, is a manufacturer of machinery and instruments used primarily by medical and related professions. During fiscal years 1973 and 1974 the Department included in Coulter's apportionment formula certain inter-company sales of two of its subsidiary corporations, Coulter Diagnostics, Inc., (C.D.I.), and Blood Services, Inc., (B.S.I.). C.D.I. produces products which are used with the machinery and instruments to perform certain tests and B.S.I. produces certain materials which are used by C.D.I. to manufacture its products. Coulter is the parent corporation with C.D.I. being a 100 percent wholly-owned subsidiary and B.S.I. being an approximately 92 percent owned subsidiary. The central management group of Coulter selects and appoints management of both C.D.I. and B.S.I. with some overlap between the top management of the three corporations. During Petitioner's corporate fiscal years ending March 31, 1973, and March 31, 1974, Coulter, as the parent of an affiliated group of corporations, filed consolidated income tax returns for federal income tax purposes. Petitioner's subsidiaries also filed consolidated corporate income tax returns with the State for the fiscal years in question. As reflected on Petitioner's books, sales made to it in this State by its subsidiaries for the 1973 fiscal year total $13,875,153 and for the fiscal year ending 1974, the company sales total $13,961,516 (see Exhibit B to Petitioner's Complaint P.7). These inter- company sales were not included in either the denumerator or denominator of the Petitioner's apportionment formula in the original returns which are filed with the State of Florida. The department, pursuant to an audit by its corporate income tax bureau, included these, resulting in deficiencies of $39,436.00 for the 1973 tax year and $324.00 for the 1974 tax year. The Petitioner takes the position that the transactions in question do not constitute sales which are to be included in the sales factor of the apportionment formula, Section 214.71(3), F.S., because ownership, possession, control and right to direct the products in question at all times rested with the parent corporation and the operations of the subsidiary corporations were at all times totally under the direction and control of the parent corporation. Florida Statutes, Section 214.71(3), generally provides that: "The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the taxable year period and the denom- inator of which is the total sales of the taxpayer everywhere during the taxable year or period." The Petitioner urges that its inter-company transactions do not constitute "sales" because they do not include elements traditionally associated with the legal concept of a sale such as passage of title from the vendor to the vendee in payment of a direct consideration from the vendee to the vendor. However, the statutorily defined concept of a sale is very broad in Section 220.15(1), Florida Statutes. That section provides in pertinent part that: "The term 'sales' in paragraph 214.71(3)(a) shall mean all gross receipts of the tax- payer except interest, dividends, rents, royalties, and gross receipts from the sale, exchange, maturity, redemption, or other disposition of securities; except that: (a) Rental income shall be in- cluded in the term 'sales' whenever a significant portion of the taxpayer's business consists of leasing or renting real or tangible personal property; (b) Royalty income shall be included in the term 'sales' whenever a significant portion of the taxpayer's business con- sists of dealing in or with the production, exploration, or development of minerals." (Emphasis supplied) Therein the legislature extended the term "sales" to much more than is traditionally associated with the legal concept of sales for purpose of defining the sales factor or corporate income tax apportionment formula. It thus appears that the presence or absence of title and the method of payment, necessary elements of the traditional concept of the "sale", would not necessarily prevent these inter-company transactions as reflected on the Petitioner's books, from being considered "sales" within the contemplation of the sales factor in the apportionment formula when consideration is given to the above section. Petitioner's Comptroller specifically testified that the inter-company sales formed a part of its gross receipts. None of the transactions involved here fall within any of the statutory exceptions. Evidence also reveals that the inter-company transactions reflected a percentage of profits for the various subsidiaries. Case law in this state has previously recognized that book transactions between members of an affiliated group could be considered as transactions for Florida's tax purposes even where there was no actual transfer of funds. See for example Zero Food Storage Division of American Consumer Industries, Inc. v. Department of Revenue, 337 2d 765(1st DCA Florida 1976). Other state courts have also construed the "sales" factor in their apportionment formula broadly so as to include receipts by the taxpayer that clearly fall without the traditional concept of a sale. See Twentieth Century Fox Film Corporation v. Phillips, 47 S.E. 2d 183 (1948). The Petitioner raises, for the first time, in its brief that the inclusion of inter-company sales in the sales factor of the apportionment formula as originally enacted related only to financial organizations. Petitioner based this argument on its contention that the original legislative enactment of the tax administration act as embodied in Chapter 71-359, Law of Florida, contained the language relating to inter-company sales as part of a subsection pertaining only to financial organization. It argues further that when the State Laws were codified in the Florida Statutes from 1971, and all succeeding years, it was placed as a separate subsection applicable to all corporations. This codification was made by the Division of Statutory Revision. That division receives its authority from Florida Statutes, Section 11.242. My consideration of the various paragraphs of Section 11.242(5), F.S., persuades me to conclude that the change which was made clearly fell within the power of the division and that the legislature has met continuously, at least on an annual basis, since 1971 when the above referenced arrangement was enacted in Section 214.71(3), F.S., by the Division of Statutory Revision, and it is that branch which should have addressed any alleged erroneous placement by the Division of Statutory Revision so as to conform to legislative intent. In any event, argument in this regard should be addressed to this legislature. For these reasons, I conclude that the inter-company sales as evidenced by the testimony constituting a part of Petitioner's gross receipts are therefore a proper item for inclusion in the sales factor of the apportionment formula, as provided in Chapter 214.71(3), Florida Statutes. As such, to the extent that the Florida sales here in question include a profit element, they are includable in the denominator and in the numerator.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, I hereby recommend: That the Petitioner's challenge of the Department's determination of corporation tax due pursuant to Chapter 220, Florida Statutes, be denied, and that the Respondent's proposed corporate income tax deficiencies for Petitioner's corporate fiscal years ending March 31, 1973 and 1974 be sustained. DONE and ENTERED this 27th day of December, 1977, in Tallahassee, Florida. JAMES E. BRADWELL Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 COPIES FURNISHED: James R. McCachren, Jr., Esquire Ervin, Varn, Jacobs & Odom, Law Offices 305 South Gadsden Street Tallahassee, Florida E. Wilson Crump, II Assistant Attorney General Department of Legal Affairs Fletcher Building Tallahassee, Florida 32304
The Issue The issue for determination is whether Petitioner owes unpaid sales and use tax, interest, and penalties for the period of February 1, 1994 through June 30, 1998.
Findings Of Fact Based on the oral and documentary evidence presented at the final hearing and on the entire record of this proceeding, the following findings are made. Petitioner, Macfarlane, Ferguson, & McMullen, P.A., ("Macfarlane"), is a law firm located in Tampa, Florida. In May 1993, Macfarlane entered into a Copy Control Services Agreement ("1993 Contract") with Copy Control Center ("CCC"). The 1993 Contract, which was effective for three years, called for CCC to provide copying services within the physical confines of the MacFarlane law firm. CCC provided the personnel and MacFarlane provided the equipment and space for copying. The 1993 Contract called for a flat rate charge to Macfarlane. This stated flat rate charge covered a maximum number of copies each month. Pursuant to the terms of the 1993 Contract, so long as MacFarlane did not make more than 160,000 copies per month, it was charged a flat rate of $10,000 per month. Additional copy-related work over the flat rate charge for the maximum of 160,000 copies was at additional cost. An appendix to the 1993 Contract set forth the additional costs not covered by the flat monthly fee. If no copies were made under the contract, the base fee of the $10,000 would still have to be paid by Macfarlane. Paragraph 4 of the 1993 Contract required CCC to bill Macfarlane "monthly for the preceding month's copies." That paragraph of the 1993 Contract also provides that, "[i]ncluded with the invoice will be a detailed monthly usage report." The invoices issued under the 1993 Contract listed all costs for the month or preceding month. At the bottom of each invoice, CCC listed a total "sale amount" which consisted of the total of the copying facilities management charge and the additional charges. Between May 1993 and January 1994, Macfarlane paid sales tax on the total amount invoiced under the 1993 Contract (i.e. for all goods (copies) and services). In 1993 and 1994, the Department audited CCC. The audit was conducted by Elizabeth Sanchez, an auditor employed by the Department. Based on the 1993 and 1994 audit of CCC, the Department, through its auditor, Ms. Sanchez, alleged that CCC was not properly collecting sales tax from its clients, such as Macfarlane. Specifically, Ms. Sanchez determined that CCC should not have been taxing the entire cost of the 1993 Contract since a portion of the contract was related to services. Instead, the auditor represented that CCC should only tax the direct materials for the photocopy process (paper, toner, developer, and other supplies). Ultimately, CCC was assessed $16,000 in back taxes because it failed to pay sales tax on direct materials. During the aforementioned audit of CCC, Ms. Sanchez developed a formula which CCC could use in charging sales and use taxes to its clients. The formula was discussed with CCC personnel. CCC believed that the formula devised by Ms. Sanchez required or allowed the allocation of tax between nontaxable services and taxable photocopy consumables. Based on its understanding of the formula, CCC quit taxing Macfarlane for the entire amount of the monthly invoices issued under the 1993 Contract. Rather, consistent with its understanding of what was allowed under Ms. Sanchez's formula, CCC modified its billing to allocate tax between what CCC considered to be the facilities management services rendered under the 1993 Contract and the photocopy consumables used under that contract. The Department does not dispute that Ms. Sanchez developed a formula during the 1993 and 1994 audit of CCC. In fact, in the Department's Response to Petitioner's Request for Admissions, the Department admits that "Ms. Sanchez did audit Copy Control Center . . . and did develop a formula during that audit." However, the Department contends that the formula developed by Ms. Sanchez has no basis in law and fact and her actions are contrary to Rule 12A-1.0161(7)(a), Florida Administrative Code. According to the Department, that Rule requires both a statement of the actual cost of the taxable sales and the nontaxable services and the separation of taxable sales from non-taxable services in a contract or invoice for the service to be untaxed. In 1996, Macfarlane executed a new Copy Control Services Agreement with CCC (the "1996 Contract"). The 1996 Contract, dated May 22, 1996, was in effect from May 1996 through April 30, 2000. The 1996 Contract contained similar terms and conditions as the 1993 Contract, including a flat-rate charge and a maximum number of copies before additional charges were imposed. The flat-rate charge in the 1996 contract was $10,200 and the maximum number of copies before additional charges were imposed increased to 170,000. Additional copy- related work over the flat rate charge was at additional cost. The additional costs not covered by the flat monthly fee were set forth in an appendix to the 1996 Contract. Paragraph 6 of the 1996 Contract was entitled "Invoices." That section provides in pertinent part the following: A summary invoice for all Customer Locations shall be sent by Copy Control to the bill-to address and contact person of the Customer set forth hereinbelow, on a monthly basis. The monthly minimum base charge will be invoiced on the first day of each month. Additional charges for copies in excess of target volume or additional services from the previous month will be included with this invoice. In addition, Copy Control specifically agrees to provide to such Customer contact person, on a monthly in arrears basis, a summary report of the C.C.M. [Copy Control Management] Services transaction activity at, (A) all Customer Locations; and, (B) the Copy Control back-up facility, if any ("Summary Report"). Each Summary Report will contain, at a minimum, the following information: The total volume of Copies rendered; The number of Copies rendered per Customer location; The number of Copies above the Targeted Copy Volume, if any, and total Excess Copy Charge therefor by Customer Location and Copy Control back-up facility; The volume of Copies and associated dollar amount rendered at Copy Control's back-up facility, if any; The number of Copies "short" of Targeted Copy Volume; Additional Supplies procured, if any; Amount of overtime paid, if any, for Copy Control Personnel and dates therefor; A description of the Related Services, if any provided by Copy Control and the charge(s) therefore, if any; (emphasis supplied) Consistent with the terms of the 1996 Contract, CCC rendered an invoice to Macfarlane each month during the term of the contract and during the remainder of the audit period covered by that contract. Each invoice listed charges for making copies and off-site copies and other copy-related work and/or materials and products. Under the line for "Copying Facilities Mgt. Billing" were the additional charges made according to the appendix to the contract. The following invoice, dated June 30, 1995, is representative of the monthly invoices issued by CCC to Macfarlane during the period covered by the Department's audit of Macfarlane. That invoice provides in material part the following: COPY CONTROL CENTER INVOICE NO. 131611 3907 W. Osborne Avenue Tampa, Florida 33614 SOLD TO: MacFarlane Ausley & et al 23rd Floor LeeAnn Conley 111 E. Madison Street Tampa, Florida 33602 INVOICE DATE 6/30/95 QYT. ORDERED 1 QTY. SHIPPED 1 ITEM NO. COPIES DESCRIPTION COPIES UNIT PRICE 10000.00 Copying Facilities Mgt.Billing for June 23913 23913 Copies Copies Overage 0.04 1 1 TAX Tax on CCM Material 106.39 1 1 Copies Off Site Services 349.36 1 1 TONER 90 TONER 174.25 9 9 STOCK 8 1/2 x 11 White Paper 2.85 SALE AMOUNT 11612.17 MISC. CHARGES 6.500% SALES TAX 35.70 FREIGHT TOTAL 11647.87 For all the invoices generated under the 1996 Contract, CCC taxed Macfarlane in accordance with its understanding of the formula devised and recommended by Ms. Sanchez. Based on application of this formula, Macfarlane was charged and remitted only sales tax for the consumable goods portion of the contract. During the audit period which is the subject of this proceeding, February 1, 1994 through June 30, 1998, the sales tax was either 6.5 percent or 7 percent, whichever was in effect at the time of the invoice. The sales tax listed on the invoices do not reflect tax on the total amount of the invoice. A multiplication of the total amount by either 6.5 or 7 percent reveals that the amount of sales taxes paid by Macfarlane for the audit period in question, February 1, 1994 through June 30, 1998, was only on a small portion of the total invoice billing. The 1993 Contract and the 1996 Contract between Macfarlane and CCC do not address, contain language, or speak directly to any "facilities management services." Neither do the contracts define the terms "service," "related services," or "other related services." Although the terms listed in paragraph 22 above are not defined in the 1993 Contract and the 1996 Contract, Mr. Cayo, the regional operations manager of Lanier Professional Services (LPS), formerly CCC, testified that other services included facilities management services. According to Mr. Cayo, "facilities management" at Macfarlane included making deliveries and rounds, key-oping equipment, filing, supporting, and cleaning and setting up conference rooms. Diane Garner, an employee of CCC, was assigned to work at Macfarlane during the time of the audit period which is the subject of this proceeding. Ms. Garner testified that facilities management services or other services provided by CCC included providing coffee service, sorting mail, sending and delivering faxes, sending and delivering Federal Express packages, moving boxes, ordering and delivering office supplies, and making interoffice mail runs. If the above-described facilities management services were provided, none of the invoices sent by CCC to Macfarlane separately listed any charges to Macfarlane for those services. Moreover, CCC did not separately list on its invoices to Macfarlane a charge for "mail delivery," "filing," "charge-back accounting," or "clerical services," or any other such services. If these services were deemed "related services," the provisions of the 1996 Contract quoted in paragraph 16 required that a description of such services be provided on the invoice or summary report. No description of the foregoing services appears on any of the invoices prepared by CCC and issued to Macfarlane. No other contracts existed between CCC and Macfarlane during the audit periods which reflect that the services described in paragraphs 23 and 24 above would be offered or provided by CCC to Macfarlane. The Department audited Macfarlane in 1999. The audit was conducted by Darlene Bebbington, an auditor with the Department. During this audit, contrary to the position of Ms. Sanchez during the aforementioned audit of CCC, the Department stated that Macfarlane was required to pay tax on the full amount of the invoices. This conclusion was reached by Ms. Bebbington based on the information contained on each invoice. The invoices did not itemize or otherwise separately list or detail products, materials, and/or services that were exempt from tax. To address issues raised by Ms. Bebbington during the audit, Macfarlane sought information from CCC regarding the sales tax amounts that were listed on the invoices. In response, CCC provided two letters to Macfarlane, one dated April 29, 1999, and the second one dated September 22, 1999. In the April 29, 1999, letter to Macfarlane, Mr. Cayo explained how the company handled the sales tax issue for Facilities Management customers and the rationale for doing so. Mr. Cayo stated that during the Department's audit of CCC, Ms. Sanchez indicated that "Facilities Management" was a service and it "was not subject to be taxed." In the letter, Mr. Cayo also stated that all equipment and material used in the performance of these services needed to be taxed, but not the total "Facilities Management" charge. The September 22, 1999, letter was from Andrew Schutte, Finance Manager of LPS, formerly CCC, to Macfarlane and was in response to a specific inquiry from Macfarlane. In that letter, Mr. Schutte stated that the two full-time CCC employees working at the Macfarlane office assigned 87 percent of their collective time performing various facilities management services and spent approximately 13 percent of their collective time making photocopies. However, the letter did not indicate how Mr. Schutte arrived at the quoted percentages or the time period for which those percentages applied. Based on CCC's claim that the formula devised by Ms. Sanchez was used to calculate the amount of sales tax it should charge Macfarlane, Ms. Bebbington pulled CCC's audit file from the Department's records. The Department contends that any agreement to use a formula such as the one described in paragraph 10, should have, by Department policy, been in writing, signed by the auditor and the supervisors, and placed in the audit file. However, upon a review of the Department's records, no such written agreement or documentation was in the CCC audit file. In light of the Department's admission noted in paragraph 13 above, Ms. Sanchez devised a formula which was shared with CCC, but she apparently did not include this formula or her discussions with CCC in the audit file. After Ms. Bebbington completed the audit of Macfarlane and based on the results thereof, the Department notified Macfarlane that it intended to impose additional sales and use tax, interest, and penalties. After the audit report was issued Macfarlane objected to the findings and requested that the Department reconsider the assessment. On or about April 10, 2001, the Department issued a Notice of Reconsideration ("Notice") based on Macfarlane's protest of the Department's audit findings for the period of February 1, 1994 through June 30, 1998. The Notice showed that Macfarlane owed additional sales and use tax of $35,958.27, a penalty of $17,979.37, and interest through April 6, 2000, of $16,701.32, and additional interest through April 12, 2000, of $3,606.12. The notice also indicated that interest would continue to accrue at $9.72 per day from April 12, 2001. According to the Notice, Macfarlane made a payment of $6,407.65 to the Department on April 6, 2000, leaving an unpaid balance of $67,837.43. Macfarlane asserts that it should not have to pay sales and use tax on the full amount of the invoice because a portion of that amount is for services that are exempt from sales and use tax. Contrary to this assertion, the auditor found that the invoices and other documentary evidence provided to the Department did not provide substantial competent evidence that any portion of the invoice amounts were attributable to products, materials, or services that were exempt from tax. Accordingly, based on the information provided by Macfarlane, the Department properly concluded that the total amount of each invoice was subject to sales and use tax. Because there is no substantial competent written documentation evidencing what tax exempt services were performed by CCC for Macfarlane and what specified portion of the monthly costs invoiced to Macfarlane were for those "claimed" tax exempt services, Macfarlane is liable for the entire amount on the invoices for the audit period. There is nothing in the record to indicate that Macfarlane did not timely pay the total amount of the invoices, including the amount attributable by CCC to sales and use tax. But for CCC's changing the manner in which it calculated the sales and use tax for its customers in early 1994, Macfarlane would have continued paying the tax on all goods and services as it did prior to January 1994.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that a final order be entered sustaining the assessment for sales and use tax against Petitioner, but compromising the entire interest and penalty amount. DONE AND ENTERED this 6th day of March, 2002, in Tallahassee, Leon County, Florida. CAROLYN S. HOLIFIELD 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 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 6th day of February, 2002. COPIES FURNISHED: James W. Goodwin, Esquire MacFarlane, Ferguson & McMullen, P.A. 400 North Tampa Street, Suite 2300 Tampa, Florida 33602 Bruce Hoffman, General Counsel Department of Revenue 204 Carlton Building Tallahassee, Florida 32399-0100 James Zingale, Executive Director Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100 Jarrell L. Murchison, Esquire Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050 Eric J. Taylor, Esquire Office of the Attorney General Department of Legal Affairs The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050 David Adams, Esquire Charles Moore, Esquire Macfarlane, Ferguson & McMullen, P.A. 400 North Tampa Street, Suite 2300 Tampa, Florida 33602
The Issue Whether Petitioners are liable for sales and use tax, penalty, and interest as assessed by the Department of Revenue (the Department)?
Findings Of Fact Salma is a Florida corporation with its principal place of business at 2231 Del Prado Boulevard, Cape Coral, Florida, 33990. Gausia is a Florida corporation with its principal place of business at 11571 Gladiolus Drive, Fort Myers, Florida, 33908. Petitioners are in the business of operating gas stations with convenience stores. The Department is an agency of the State of Florida and is authorized to administer the tax laws of the State of Florida. Petitioners were selected for audit because their reported gross sales were less than the total cost of items purchased (inventory) for the audit period. The Department issued Salma and Gausia each a Notice of Intent to Conduct a Limited Scope Audit or Self-Audit, dated April 26, 2013, for sales and use tax, for the period February 1, 2010, through January 31, 2013 (collectively referred to as the Notices). The Notices requested that Petitioners provide the Department: (a) a list of all their vendors for alcohol, tobacco, soda, chips, candy, etc.; (b) their total purchases of alcohol and tobacco, by vendor, for the period July 2010 to June 2011; (c) copies of their federal tax returns for the examination period; (d) purchase receipts for all purchases for the last complete calendar month; and (e) daily register (Z tapes) for the last complete calendar month. The Notices gave Petitioners 60 days to gather the requested documents before the audit was to commence. The Notices also requested that Petitioners complete an attached Questionnaire and Self Analysis Worksheet. In response to the Notices, Petitioners requested a 30- day extension of time until July 18, 2013, to provide the requested documents and to designate a Power of Attorney. Petitioners did not provide the Department any books and records for inspection, nor did they complete and return the questionnaire and self analysis worksheets. As a result, the Department's auditor determined the sales tax due based upon the best information available. To calculate an estimated assessment of sales tax, the Department used the purchase data of Petitioners' wholesalers and distributors of alcoholic beverages and tobacco, for July 1, 2010, through June 30, 2011; the 2010 National Association of Convenience Stores average markups and in-store sales percentages of alcoholic beverage and tobacco products; and historical audit data. After reviewing the purchase data for July 1, 2010, through June 30, 2011, and for July 1, 2011, through June 30, 2012, the Department's auditor determined that the data was missing a few vendors. As a result, the Department's auditor estimated the amount of Petitioners' cigarette purchases, based on historical audit data that shows that cigarette sales are generally 4.31 times more than beer sales. The Department's auditor and audit supervisor testified that the estimated gross sales seemed reasonable and consistent with the national averages and the purchase data for July 1, 2011, through June 30, 2012. The Department estimated gross sales (i.e., the retail sale value of the goods sold) by marking up the taxable sales and exempt sales reported on the sales and use tax returns submitted to the Department by Petitioners. For example, for July 1, 2010, through June 30, 2011, Salma purchased beer from its wholesalers and distributors for $148,826.15, and the Department marked up the purchase price by 27 percent for a retail value of $189,009.21. For July 1, 2010, through June 30, 2011, Gausia purchased beer from its wholesalers and distributors for $132,138.65, and the Department marked up the purchase price by 27 percent for a retail value of $167,816.09. The Department's markup on the alcoholic beverage and tobacco products is reasonable because the Department's auditor testified that he used a combination of 2010 National Association of Convenience Stores average markups and the competitive pricing and information from audits of other convenience stores. The Department determined that the exemption ratio reported on the sales and use tax returns submitted to the Department by Petitioners was extremely high for their industry. The Department used an exemption ratio of 15 percent, based on historical audit data for the industry, to calculate Petitioners' estimated taxable sales. A review of Petitioners' sales and use tax returns revealed that they did not apply the tax bracket system to their taxable sales transactions, as required under sections 212.12(9) and (10), Florida Statutes. Instead, Petitioners remitted sales tax on their taxable sales based on their gross receipts at a flat tax rate. The Department's auditor testified that this method of reporting tax is inappropriate and does not accurately reflect the sales activity of the business. The Department calculated the average effective tax rate of 6.0856 percent, based on historical audit data for the industry. To calculate the estimated tax due, the Department multiplied the effective tax rate by the estimated taxable sales and gave Petitioners credit for any tax remitted with their tax returns. The Department issued Salma a Notice of Intent to Make Audit Changes, dated August 8, 2013, for audit number 200149872. The Department issued Gausia a Notice of Intent to Make Audit Changes, dated August 8, 2013, for audit number 200149749. The Department assessed Petitioners sales tax on their sales of alcoholic beverages and tobacco. The Notice of Intent to Make Audit Changes gave Petitioners 30 days to request a conference with the auditor or audit supervisor, to dispute the proposed changes. Petitioners did not make such a request. The Department issued a Notice of Proposed Assessment (NOPA) to Salma on March 6, 2014, for tax in the sum of $159,282.26; for penalty in the sum of $39,820.57; and interest as of March 6, 2013, in the sum of $27,772.36. The Department issued a NOPA to Gausia on March 6, 2014, for tax in the sum of $213,754.46; for penalty in the sum of $53,438.62; and interest as of March 6, 2013, in the sum of $36,921.79. Additional interest accrues at $30.55 per day until the tax is paid. The NOPAs became final assessments on May 5, 2014. After filing a request for an administrative hearing, Petitioners completed the Questionnaire and Self Analysis Worksheet and produced the following documents to the Department: (a) a list of all of their vendors for alcohol, tobacco, soda, chips, candy, etc.; (b) a list of vendors for alcohol and tobacco, for the examination period of July 2010 to June 2011; (c) a summary of their taxable sales, for the period February 2010 through December 2012; (d) copies of their federal tax returns, for the tax years 2010 through 2013; (e) copies of its purchase receipts for the months of July 2013; and (f) copies of their daily register (Z-tapes) for the month of July 2013. The Department's auditor testified that aside from being untimely, the records and information provided by Petitioners during these proceedings were not reliable because Petitioners did not provide any source documents that would allow the Department to reconcile the reported figures and confirm the supplied information. In addition, the purchase receipts and Z- tapes were not relevant because they were from outside of the audit period. The Z-tapes are also unreliable because the manager of the convenience store testified at the final hearing that employees purposely and routinely entered taxable sales into the cash registers as tax exempt sales. Petitioners argue that the Department did not use the best information available when estimating the taxes due. Petitioners claim that because their businesses are combination gas station/convenience stores, the national data for standalone convenience stores is inapplicable. However, notably absent from Petitioners' testimony or evidence was any alternative data upon which the Department could have relied for more accurate estimates.2/
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order denying Petitioners' requests for relief and assessing, in full, the Department's assessments of sales tax, penalty, and interest against both Salma and Gausia. DONE AND ENTERED this 9th day of January, 2015, in Tallahassee, Leon County, Florida. S MARY LI CREASY Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 9th day of January, 2015.
The Issue The issue is whether a proposed sales tax assessment should become final agency action.
Findings Of Fact Respondent is the agency responsible for administering the state sales tax imposed in Chapter 212, Florida Statutes (2001).1 From May 1, 2002, through April 30, 2005 (the audit period), Petitioner was a dealer, defined in Subsection 212.06(2), and was required to collect and remit sales tax to the state. Petitioner is a closely held Florida corporation located at 2802 Thomasson Drive, Naples, Florida 34112. Petitioner is engaged in the business of retail sales, including the sale of tangible personal property such as food, beer, beverages, and fishing bait (goods). Petitioner uses the accrual method of accounting. Petitioner elects, under Subchapter S of the Internal Revenue Code, to report income and deductions for purpose of the federal income tax on form 1120S. Sometime in June 2005, Respondent sent Petitioner a Notification of Intent to Audit Books and Records identified in the record by audit number A200015450. Upon completion of the audit, Respondent concluded that Petitioner had not reported all of the gross sales that occurred during the audit period (unreported sales) and assessed tax, penalty, and interest, through July 13, 2006, in the amount of $163,914.16. During the audit period, it is undisputed that Petitioner did not maintain cash register receipts identified in the record as Z-tapes (Z-tapes).2 Respondent claims the absence of Z-tapes deprives Respondent of adequate records to determine the amount of a tax deficiency, if any. Respondent defines adequate records in Florida Administrative Code Rule (Rule) 12-3.0012(3). The definition of adequate records does not include a requirement for Z-tapes. The trier of fact finds the evidence from Petitioner concerning the adequacy of its records to be credible and persuasive. Petitioner maintained adequate records within the meaning of Rule 12-3.0012(3). The records include books, accounts, and other records that are sufficient for Respondent's auditors (the auditors) to reliably determine a tax deficiency. The available records are accurate within the meaning of Rule 12-3.0012(3)(a)1. The records are adequate for the auditors to reconcile differences between gross sales reported for federal and state tax purposes. The available records are inclusive within the meaning of Rule 12-3.0012(3)(a)2. The records capture the transactions necessary to determine a tax deficiency. The available records include a breakdown of individual suppliers for all products that Petitioner sold during the audit period. The amount charged by each vendor ties into the total claimed for federal tax purposes on Petitioner's 1120S tax returns. The available records are authentic within the meaning of Rule 12-3.0012(a)3. It is undisputed that the available records are authentic. The available records are systematic within the meaning of Rule 12-3.0012(a)4. Available records include: daily summary tapes for each shift, spread sheets, and quarterly summaries, each of which is maintained by Petitioner, and journals and general ledgers, which are maintained by Petitioner's accountants. During the audit period, each shift operator manually prepared a worksheet for daily sales and reconciled those numbers with the corresponding bank deposit. Petitioner maintained working papers supported by summary tapes. The summary tapes document totals for each day's operations. Each summary tape is proofed against two of three tapes prepared by different employees. The daily totals are entered on a monthly spreadsheet and submitted to Petitioner's accountants quarterly for preparation of sales tax returns. The auditors were not satisfied with the records Petitioner maintained during the audit period. The cost of goods sold exceeded gross sales (operating losses) for two federal tax years during the three-year audit period (operating loss years).3 The auditors regarded the operating loss years as evidence of unreported sales. As Respondent explains: The controversy regarding the true amount of total sales made by Petitioner arose because [Respondent] could not accept as correct Petitioner's assertion that for two of the three years under audit, Petitioner's reported costs of goods sold were greater than its reported gross receipts [operating losses]. . . . The question puzzling the . . . auditors was - how could a business continue to operate if its costs were greater than its revenue? [Respondent] concluded unreported sales were indicated. . . . Respondent's PRO, paragraph 8, page 6. Respondent knew, or should have known, that unusual facts and circumstances existed during the audit period which answered the auditor's questions concerning the operating loss years. During a substantial part of the audit period, the road fronting the store, which provided virtually all practical access to the store, was closed for construction by the county government. The road closure depressed sales substantially and required Petitioner to sell some goods for less than cost and to offer customer incentives and promotions in an effort to maintain the customer base. The owner and her mother financed the operating losses with annual shareholder loans of approximately $200,000 for each of the two operating loss years. Petitioner provided the auditors with material information, including documentation of the road construction and shareholder loans. That information concerned the nature of the taxpayer's business and included information authorized in Rule 12-3.00112(3) such as third-party confirmations, corroborating evidence, and related supporting documentation. The auditors were not satisfied. They concluded that available records were not adequate. When records are inadequate, Respondent has statutory authority to conduct an audit on the basis of: 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. (Emphasis supplied) § 212.12(6)(b). Subsection 212.12(6)(b) is the statutory basis for the proposed agency action. The Notice of Decision, in relevant part, cites Subsection 212.12(6)(b) as statutory authority for the proposed assessment. The available records were adequate for the auditors to use sampling authorized in Subsection 212.12(6)(b) based on Petitioner's federal tax information.4 For example, the auditors could have used the gross profit percentage reported for the federal tax year during the audit period in which Petitioner reported a profit (the profit year) to increase either: the cost of goods sold reported for federal tax purposes during the operating loss years, or the undisputed purchase invoice costs that Petitioner provided to Respondent. Respondent does not assert in its PRO that the proposed assessment is authorized by Subsection 212.12(6)(b). Rather, Respondent reasons at paragraph 23, page 9, of the PRO that the proposed assessment is based on an estimate authorized in Subsection 212.12(5)(b). Subsection 212.12(5)(b) would have authorized Respondent to "make an assessment" against Petitioner "based on an estimate from the best information then available" (emphasis supplied) if it were shown that Petitioner failed or refused to make records available, Respondent suspected fraud, or any of the other statutory prerequisites for an estimate existed. However, it is undisputed that none of the statutory prerequisites for an estimate authorized in Subsection 212.12(5)(b) exist in this proceeding. The Notice of Decision does not reference Subsection 212.12(5)(b), much less cite Subsection 212.12(5)(b) as authority for the proposed assessment. Nevertheless, the auditors estimated unreported gross sales for state tax purposes (unreported sales) based on three field visits to the store.5 In the first field visit, an auditor walked through the store with one of Petitioner's employees and compared the sale price marked on selected goods with costs recorded in the purchase invoices for those goods. The auditor estimated that Petitioner marked up purchase invoice costs for all goods by 50 percent (the 50 percent markup). The auditor estimated sales tax due on unreported sales in four steps. First, the auditor estimated gross sales by marking up the cost of goods sold on Petitioner's federal tax returns by 50 percent. Second, the auditor multiplied the estimated gross sales by 33.33 percent; a percentage derived from the ratio of taxable sales to gross sales (taxable sales ratio) reported by Petitioner. The auditor used the mathematical product of that calculation as the estimated taxable sales. In the third step, the auditor multiplied estimated taxable sales by the effective tax rate to estimate the total tax. Finally, the auditor estimated that the tax due on unreported sales was equal to the difference between the estimated total tax and the amount of taxes paid. The auditors were not satisfied. The auditors believed the taxable sales ratio reported by Petitioner was lower than the actual taxable sales ratio. The parties reached an audit agreement during a meeting conducted on December 8, 2005, subject to Petitioner's objection to an assessment based on any sampling or estimate. Each party determined a taxable sales ratio based on Z-tapes that were available from July 16 through November 2005 (the representative period) and applied the taxable sales ratio back over the entire audit period. Prior to the representative period, an auditor made a second field visit and identified certain goods, including potato chips, which he believed employees were incorrectly selling as non-taxable items. The auditor asked the employees to keep register tapes for the representative period in accordance with his instructions. After the second visit to the store, store employees kept Z-tapes during 141 shifts. The Z-tapes for the 141 shifts provide a "sample . . . for a representative period" within the meaning of Subsection 212.12(6)(b). Respondent determined the applicable taxable sales ratio to be 55.2 percent.6 A certified public accountant (CPA) retained by Petitioner determined that the taxable sales ratio during the representative period was 43 percent. The auditors were not satisfied. They conducted a third "field visit" to the store prior to March 1, 2006. In the third field visit, auditors again viewed goods for sale on store shelves. The auditors estimated the taxable sales ratio to be 75 percent and retained the 50 percent markup. Based on selected goods the auditors viewed on store shelves, the proposed assessment incorrectly estimates unreported sales using a taxable sales ratio and markup of 75 and 50 percent.7 The 50 percent markup lacks economic reality. The markup is necessarily limited to selected items and does not accurately reflect actual markup for all goods sold. Nor does the markup accurately reflect the impact of construction on Petitioner's business within the meaning of Rule 12-.0012(3)(b). Petitioner presented credible and persuasive testimony that the correct markup is 23 percent. That testimony is consistent with evidence sanctioned in Rule 12-3.0012(3)(b) that the industry operates on a markup of only 20 percent. A taxable sales ratio of 55.2 percent is reasonable and accurately reflects economic reality. The taxable sales ratio of 55.2 percent was correctly determined by a sampling method authorized in Subsection 212.12(6)(b). The sampling method used to determine a taxable sales ratio of 55.2 percent is consistent with the legislative description of sampling in Subsection 212.12(6)(c) that the Legislature authorizes when available records are adequate but voluminous.8 If the proposed assessment were correct, Respondent should not assess any penalties against Petitioner. It is undisputed that an alleged failure to maintain adequate records was unintentional and that Petitioner fully cooperated in the audit. On July 10, 2007, Petitioner paid Respondent an additional $47,727.41; comprised of additional tax totaling $35,589 and accrued interest of $12,138.41.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Respondent enter a final order assessing sales tax based on the available records maintained by Petitioner, and, if sampling is authorized, using a taxable sales ratio and markup that do not exceed 55.2 and 23 percent, respectively. DONE AND ENTERED this 4th day of March 2008, in Tallahassee, Leon County, Florida. S DANIEL MANRY 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 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 4th day of March, 2008.
The Issue The issue for determination is whether Respondent committed the offenses set forth in the Administrative Complaint for Revocation of Certificate of Registration issued on November 16, 2009, and, if so, what action should be taken.
Findings Of Fact There is no dispute that the Department is the state agency charged with the responsibility of regulating, controlling, and administering the revenue laws of the State of Florida, including the laws relating to the imposition and collection of the state's sales and use tax pursuant to chapter 212, Florida Statutes. There is no dispute that Abkey is a Florida corporation whose principal address is 7800 Southwest 104th Street, Miami, Florida 33156. Abkey is a restaurant. At the time of hearing, Abkey had 33 employees and was operating at a deficit. There is no dispute that, at all times material hereto, Abkey possessed Florida sales tax certificate of registration number 23-8012096448-9, issued by the Department on April 18, 1994. There is no dispute that Abkey is a dealer as defined in section 212.06(2), Florida Statutes, and has been a dealer at all times material hereto. For the month of June 2009, Abkey failed to file a sales tax return. As a result of this failure, the Department assessed Abkey an estimated sales tax due in the amount of $9,500.00. For 2005, Abkey failed to remit its self-reported sales tax liability to the Department for the months of July, September, October, November, and December. Abkey self-reported its tax liability, by filing sales tax returns, for the said months. For 2006, Abkey failed to remit its self-reported sales tax liability to the Department for the months of January and May. Abkey self-reported its tax liability, by filing sales tax returns, for the said months. Also, for 2006, Abkey failed to timely remit its sales tax liability for the month of October for which the Department assessed a penalty and an administrative/collection/processing fee. For 2007, Abkey failed to remit its self-reported sales tax liability to the Department for the months of February and August. Abkey self-reported its tax liability, by filing sales tax returns, for the said months. Also, for 2007, Abkey failed to timely remit its sales tax liability for the month of October, for which the Department assessed a penalty and an administrative/collection/processing fee. In total, for 2005, 2006, and 2007, Abkey self- reported sales tax due and failed to remit to the Department sales tax reportedly due in the amount of $122,355.36. As a result of Abkey's failure to file the sales tax return, to remit the $122,355.36 in sales tax, and to remit timely sales tax, the Department assessed Abkey, as of October 29, 2009, $16,287.59 in interest, $4,891.73 in penalties, and $13,845.10 in administrative/collection/ processing fees. Additionally, for the month of February 2007, Abkey issued to the Department a dishonored check (electronic funds transfer) on March 23, 2007, in the amount of $18,254.00. The Department assessed a $150.00 return check fee for the dishonored check. Shortly after being notified of the dishonored check by the Department, Abkey paid the $18,254.00. Abkey has a significant history of delinquency in remitting payments to the Department. The Department made several attempts, unsuccessfully, to collect the delinquent tax liabilities, including issuing Tax Warrants. In January 2007, the Department sought to revoke Abkey's Certificate of Registration for delinquent returns and outstanding liability and engaged in an informal conference with Abkey. As a result of the informal conference, Abkey and the Department entered into a Compliance Agreement executed on February 15, 2010. The Compliance Agreement required Abkey, among other things, to remit all past due payments; for 12 months (January through December 2007), to timely file tax returns and to timely remit all sales tax due; and to make a down payment of $45,000.00 (in three monthly installments but no later than April 1, 2007), 11 monthly payments of $5,000.00 (beginning May 1, 2007), and a balloon payment of $141,982.43 on April 1, 2008. Further, regarding the balloon payment of $141,982.43, the Compliance Agreement provided that the balloon payment might be negotiated for another 12 months. However, in order for Abkey to take advantage of this provision, Abkey was required to be compliant with the terms of the Compliance Agreement and its account was required to be in good standing with the Department. In accordance with the Compliance Agreement, Abkey paid the down payment of $45,000.00 (in three monthly installments) and the 11 payments of $5,000.00 although the 11 payments were late. Additionally, for the period of January through December 2007, Abkey was late filing tax returns and remitting sales tax. Abkey requested a renewal of the Compliance Agreement. Despite the late payments, the Department approved the renewal of the Compliance Agreement. A Compliance Agreement Renewal was executed on May 1, 2008. It required Abkey, among other things, to remit all past due payments and to timely file tax returns and timely remit all sales tax due for the next 12 months (May 1, 2008 through April 30, 2009); and to make 11 monthly payments of $5,000.00 (beginning May 1, 2008), and a balloon payment of $120,749.14 on April 1, 2009. Furthermore, regarding the balloon payment of $120,749.14, the Compliance Agreement Renewal provided that the balloon payment might be negotiated for another 12 months. However, in order for Abkey to take advantage of this provision, Abkey was required to be compliant with the terms of the Compliance Agreement Renewal and its account was required to be in good standing with the Department. Under the Compliance Agreement Renewal, Abkey made four payments of $5,000.00 but the payments were late. Abkey requested a reduction in the amount of the monthly payments from $5,000.00 to $2,000.00. The Department granted Abkey's request. Abkey made 12 payments of $2,000.00 but the payments were late. Additionally, for the period of May 1, 2008 through April 30, 2009, Abkey was late filing tax returns and remitting sales tax. Further, Abkey failed to make the balloon payment of $120,749.14 that was due on April 1, 2009. Abkey did not request a renegotiation of the balloon payment. At that time, Abkey did not request another Compliance Agreement. As of September 28, 2010, Abkey owed the Department $122,355.36 in actual sales tax (per Abkey's sales tax returns), $9,500.00 in estimated tax, $4,419.73 in penalty2, $14,572.80 in administrative/collection/processing fees3, $25,032.28 in interest, and $20.00 in warrant fees; totaling $175,900.17. The Department seeks to revoke Abkey's Certificate of Registration.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order revoking the Certificate of Registration issued to and held by Abkey No. 1 Limited. DONE AND ENTERED this 18th day of February, 2011, in Tallahassee, Leon County, Florida. S ERROL H. POWELL 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 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 18th day of February, 2011.
The Issue The issues for determination are whether Respondent should assess tax, interest, and penalty on gross sales that Petitioner reported in Petitioner's federal income tax returns, but not in Petitioner's state sales tax returns; and on gross sales of services in transactions that also involved sales of tangible personal property.
Findings Of Fact Petitioner was a Florida corporation from May 1, 1995, through April 30, 2000 (the audit period). Petitioner maintained its principal place of business at 153 East Morse Boulevard, Winter Park, Florida 32789, and engaged in the business of providing services for interior design and decorating and selling tangible personal property used in the design and decoration of properties. On October 10, 2004, the Department of State, Division of Corporations, administratively dissolved Petitioner for failure to file Petitioner's annual report. Petitioner's federal employer identification number during the audit period was 59-2706005. Petitioner reported income and deductions for purposes of the federal income tax using the cash method of accounting. During the audit period, Petitioner was a registered dealer and filed a monthly Sales and Use Tax Return (DR-15) with Respondent. On June 2, 2000, Respondent sent Petitioner a Notification of Intent to Audit Books and Records (Form DR-840) bearing audit number A9933414838. Respondent and Petitioner agreed that a sampling method would be the most effective, expedient, and adequate method in which to audit Petitioner's books and records. Respondent examined and sampled the available books and records to determine whether Petitioner properly collected and remitted sales and use tax in compliance with Chapter 212, Florida Statutes (1993). For 1996, 1997, and 1999, Petitioner reported fewer gross sales on the DR-15s used for the purpose of the state sales tax than Petitioner reported on its Form 1120S federal income tax return. Respondent determined that the difference between gross sales reported for purposes of the state and federal taxes constituted unreported sales on which Respondent was statutorily required to assess sales tax, penalty, and interest. Respondent's auditor divided the yearly differences in the amounts reported on the Form 1120S and the DR-15s to determine a monthly difference for each month from 1996 through 1997. The auditor then scheduled the monthly difference and assessed the tax appropriately. The auditor also assessed tax for the value of design services that Petitioner provided to customers when Petitioner sold the customers design services and tangible personal property as a part of the same transaction. Pursuant to an agreement between Petitioner and Respondent's auditor, the sample included the entire year in 1999. Petitioner collected sales tax on all sales of tangible personal property, but did not collect sales tax on fees charged for decorator and design services provided in the same transactions. Respondent is authorized by rule to assess sales tax on the value of services provided in the same transaction in which Petitioner sold tangible personal property. The auditor correctly divided the total taxable design fees invoiced for 1999 by the total invoiced amount per sales by customer detail. The resulting quotient of .0752 percent was the applicable percentage of the design fees that were taxable in 1999. The auditor multiplied the applicable percentage by the gross sales that Petitioner reported on its federal tax returns for 1997, 1998, and 1999 to determine the total amount of design fees that were taxable. The auditor then properly scheduled and assessed the taxable interior design fees. On May 1, 2001, Respondent issued a Notice of Intent to Make Audit Changes (form DR-1215). The Notice provided that Petitioner owed $77,249.72 in taxes; $38,625.02 in penalties; and $29,471.12 in interest, for a total deficiency of $145,345.86. Interest continued to accrue on the unpaid assessment. On August 15, 2001, Respondent issued its Notice of Proposed Assessment. The Notice provided that Petitioner owed: $77,249.72 in taxes; $38,625.02 in penalties; and $32,145.15 in interest, for a total of $148,019.89 through August 15, 2001.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Respondent enter a final order assessing Petitioner for $148,019.89 in tax, penalty, and interest, plus the amount of interest that accrues from August 15, 2001, through the date of payment. DONE AND ENTERED this 4th day of February, 2005, in Tallahassee, Leon County, Florida. S DANIEL MANRY 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 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 4th day of February, 2005. COPIES FURNISHED: W. Scott Carter Carter Wolf Interiors, Inc. 153 East Morse Boulevard Winter Park, Florida 32789-7400 J. Bruce Hoffmann, General Counsel Department of Revenue 204 Carlton Building Post Office Box 6668 Tallahassee, Florida 32314-6668 W. Scott Carter 1700 Briercliff Drive Orlando, Florida 32806-2408 James O. Jett, Esquire Office of the Attorney General The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050 James Zingale, Executive Director Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100
The Issue The issue to be determined is whether Petitioner is liable for the sales and use tax, penalties, and interest assessed by the Department of Revenue and if so, what amount?
Findings Of Fact Petitioner, Rowe's Supermarkets, LLC ("Petitioner" or "Rowe's"), is a Florida limited liability company. Robert Rowe was the president and primary shareholder in Rowe's. Respondent, Department of Revenue ("DOR" or "Respondent"), is an agency of the State of Florida authorized to administer the tax laws of the State of Florida. §§ 20.21 and 213.51, Fla. Stat. (2011) During the audit giving rise to this proceeding, Rowe's had its principal address at 5435 Blanding Boulevard, Jacksonville, Florida. Currently, Rowe's is located at 1431 Riverplace Boulevard, Jacksonville, Florida. Rowe's organized in Florida on May 4, 2005. Rowe's was a sales and use tax dealer registered with the Department to conduct business in this state. It was in business approximately four years. Rowe's acquired several former Albertson's grocery retail stores, including the adjacent liquor stores, in Jacksonville, St. Augustine, and Orange Park, Florida. During the audit period, Rowe's sold five stores with the adjacent liquor stores. Soon after beginning operation, Rowe's experienced significant financial difficulties which ultimately led to its demise. Its secured lender forced Rowe's to liquidate assets whenever possible, and all proceeds from the sale of the stores were paid directly into a locked account to Rowe's lender, Textron Financial. On October 29, 2008, the Department issued to Rowe's a Notification to Audit Books and Records, Form DR-840, bearing audit number 200048409, for sales and use tax, for the audit period beginning October 1, 2005, and ending September 30, 2008. On August 14, 2009, the Department issued to Rowe's a Notice of Intent to Make Audit Changes, form DR-1215, for sales and use taxes, penalties and interest totaling $321,191.45, with additional interest accruing at $53.71 per day. On August 20, 2009, Rowe's canceled its sales and use tax Certificate of Registration. In a letter dated September 11, 2009, Rowe's requested an audit conference. The requested audit conference was held November 19, 2009. On January 8, 2010, the Department issued the taxpayer a Notice of Intent to Make Audit Changes, form DR-1215, Revision #1, for sales and use tax, penalty and interest totaling $180,435.61, with additional interest accruing at $25.32 per day. On March 10, 2010, the Department issued a NOPA, which indicated Rowe's owed $137,225.27 in sales and use tax; $44,755.99 in interest through March 10, 2010; and $59.70 in penalties, with additional interest accruing at $26.32 per day. Prior to issuance of the NOPA, the Department compromised $34,246.663 in penalties, based upon reasonable cause. By letter dated May 6, 2010, Rowe's filed a protest to dispute the proposed assessment. The letter stated: I am submitting this informal protest on behalf of Rowe's Supermarkets, LLC (RS) as its past President. RS is no longer in business and has not assets. Before this audit began RS was unable to pay its bills. Also, its line of credit, which was secured by all of RS's assets, was in default and had been called by the lender. RS was unable to refinance the loan because of its poor financial condition. As a result, it sold all of its assets to a new company which was able to obtain financing and used the proceeds of that sale to repay its secured loan. RS not only has no assets but also is subject to an unsatisfied judgment lien against it in the amount of $324,936.33, which has been accruing interest at 8% per year from August 25, 2009, the date the judgment was entered by the Circuit Court here in Jacksonville. Even if Supermarkets was still in business and could pay its bills, we don't think it should be assessed with these taxes on the basis of the audit that was conducted. The auditor's lack of communication skills made it difficult for us to understand what information she needed. To the extent we understood her requests, we made every effort to provide her with the relevant information. But because most of the stores RS operated had already been closed, the only repository for obtaining accurate information was RS's general ledger, which she declined to review. She never explained why she made the proposed adjustments. We still don't know. We did our best when RS was operating to properly collect all sales taxes, we reflected all of the sale tax collections in the general ledger and we timely turned over all of the those taxes to the department of revenue, as is clear in the general ledger. We request that the proposed assessment be dropped. The Department issued a Notice of Decision on October 14, 2010, which sustained the assessment in full. In issuing its Notice of Decision, the Department did not review any issues related to the assessment other than doubt as to collectability. With respect to this issue, the Department stated, "[b]ased on our evaluation of all the factors of this case, including the financial information, we have concluded that it is not in the best interest of the State to accept your offer." Petitioner's challenge to the assessment presents five issues: 1) whether it was entitled to an exemption in section 212.12(14) for those additional taxes assessed for "rounding" up to the whole cent as opposed to using the bracket system in section 212.12(9); 2) whether the Department's assessment of additional taxes for expenses was erroneous where it was based on a sampling plan not presented to or agreed to by the taxpayer; 3) whether the additional tax on liquor sales was based on an incorrect application of Florida Administrative Code Rule 12A- 1.057(3)(a); 4) whether the Department violated the Taxpayer's Bill of Rights; and whether the Department was correct in determining that compromise of the assessment based on collectability was not in the best interest of the state. Each issue is treated separately below. The Exemption pursuant to section 212.12(14) Section 212.12(9) and (10), Florida Statutes, requires that sales taxes be paid on a "bracket system," and prescribes the amount of tax due for each portion of a dollar. Subsection (9) provides the tax brackets for those counties, such as St. Johns, which do not have a discretionary sales surtax and for which the tax rate is 6 percent. Subsection (10) provides the brackets for those counties, such as Duval and Clay, where a discretionary sales surtax of one percent has been adopted, making the sales-tax rate 7 percent. Section 212.12(14) provides a "safe harbor" from additional assessment of taxes for those dealers who fail to apply the tax brackets required by section 212.12. The taxpayer is not assessed additional taxes, penalty, and interest based on the failure to apply the bracket system if it meets three requirements: that it acted in a good faith belief that rounding was the proper method of determining the amount of tax due; if it timely reported and remitted all taxes collected on each taxable transaction; and if the taxpayer agrees in writing to future compliance with the law and rules concerning brackets applicable to the dealer's transactions. It is undisputed that Rowe's was not using the bracket system to calculate and collect sales taxes. The point-of-sale cash register system Rowe's purchased when opening its business was represented to Petitioner as compliant with Florida requirements when in fact it was not. The Department's auditor, Delaine Arrington, determined that assessment of additional taxes was appropriate because she believed that Rowe's had not timely reported and remitted all taxes collected on each taxable transaction, and that Rowe's had not agreed in writing to future compliance with respect to the bracketing system. The sales tax records for Rowe's were based upon the meshing of three different computer systems. First, there was a point-of-sale system at each cash register which collected the data, such as sales amounts, taxable sales, and sales tax collected, for each individual transaction. A software system called BR Data would then "pull" the sales data from the individual cash registers to create the cumulative sales register reports for each store. The cumulative data from BR Data was then automatically imported into Petitioner's accounting software, MAS 90, to populate the figures in Rowe's general ledger. Taxes collected were recorded in the general ledger under the credit column. The data in this column was transmitted from BR Data. It could not be adjusted manually, although other columns in the general ledger could be. There were sometimes problems with the transmission of information from BR Data, which generally occurred where there was a power surge or a thunderstorm that would affect the communication of information. As a result of these communication problems, there were times that the sales figure transmitted would be double or triple the actual sales for that day. When such an error was discovered, Rowe's staff would contact BR Data and have the report rebuilt, and the general ledger entry would be corrected. Rowe's informed Ms. Arrington that there had been numerous problems with the exporting process and the resulting need to correct journal entries. Ms. Arrington acknowledged at hearing that she had been advised that due to these problems, the sales figures were sometimes doubled or tripled. Ms. Arrington reviewed the general sales ledger, the cumulative sales register reports, and the sales and use tax returns for the audit period. According to her review, there were three days in August 2006 where the amount of collected tax reflected in the cumulative sales register was higher than what was reflected in the general ledger. Based upon this review, she assessed $1,193.98 in additional sales taxes. For August 1, 2006, the general ledger indicated that $263.48 in sales tax was collected. The cumulative sales report reflected that $790.44 in sales tax was collected. This second number in the cumulative sales report is exactly three times the amount reflected in the general ledger. The difference between the cumulative sales report amount and the general ledger amount is $526.96. For August 2, 2006, the general ledger indicated that $277.04 was collected. The cumulative sales report reflected that $554.08 in sales tax was collected, an amount exactly twice the amount recorded in the general ledger. The difference between the two documents is $277.04. For August 11, 2006, the general ledger indicated that $389.98 in sales tax was collected. The cumulative sales report reflected that $779.96 was collected, an amount exactly twice the amount recorded in the general ledger. The difference between the two documents is $389.98. The difference in the amounts reflected in the general ledger (which Rowe's claims is the more accurate document), and the cumulative sales register (which Ms. Arrington relied upon), is $1,193.98, the amount of additional tax assessed for this item. Ms. Arrington acknowledged at hearing that she credited the cumulative sales register numbers over Rowe's general ledger documents, and that she knew during the audit that there were issues relating to BR Data that occurred during the audit period. The only document upon which she relied was the cumulative sales register. Given the credible testimony by Robert Rowe and Neil Newman regarding the process and the problems encountered with the interface of data, and the fact that in each instance, the difference was an exact multiple of the amount reflected in the general ledger, the greater weight of the evidence presented at hearing supports the finding that the general ledger represents the amount of sales tax actually collected and paid by Rowe's. This finding means that not only is the assessment of additional sales tax for August 2006, in error, but also that means that Rowe's met the second requirement for avoiding the assessment of additional taxes under section 212.12(14) for failing to use the bracket system. Ms. Arrington also found that Rowe's had not agreed in writing to future compliance with the bracket system. On or about November 19, 2009, in conjunction with the Audit Conference, Ms. Arrington prepared an Agreement for Future Compliance (Agreement) and provided it to Mr. Rowe for signature. The text of the Agreement, which is on DOR letterhead and specifically references the Sales and Use Tax Audit number for Rowe's, states: The following dealer had demonstrated the proper actions required by Section 212.12(14),(a) and (b), F.S. (see attachment), and agree [sic] to sign the following suggested form to compliance with the laws concerning brackets applicable to the dealer's transactions in the future. Rowe's Supermarkets, LLC - BP#2134130, succeeded by Rowe's IGA, LLC - 3082649 agrees to future compliance with the laws and rules concerning the proper application of the tax bracket system to the dealer's transactions. Mr. Rowe did not sign the Agreement at the Audit Conference because he wanted to be able to confirm that the point of sale system his store operated could be properly programmed to comply with the bracket system before signing a document stating he would comply. After discussions with both the vendor and Ms. Arrington, and making sure the system was in fact operating in compliance with the requirement, Mr. Rowe signed the Agreement on December 7, 2009, and returned it to the Department. Ms. Arrington did not recall receiving the Agreement, but also admitted she had no specific memory as to whether she received it. Her Case Activity Record indicates that on December 3, 2009, she spoke with Mr. Rowe about whether he was able to input the brackets in his point-of-sale system, and that he indicated he was able to do so. The greater weight of the evidence supports the finding that Mr. Rowe executed and returned the Agreement, and it is so found. The Use Tax Assessment Based on a Sampling Plan Section 212.12 allows the Department to use a sample from the taxpayer's records and project audit findings from the sample to the entire audit period where the records of the taxpayer are "adequate but voluminous in nature and substance." The statute, which is discussed in more detail in the Conclusions of Law, contemplates the use of a sampling plan agreed to by the taxpayer, and in the absence of an agreement, the taxpayer's right to have a review by the Department's Executive Director. The work papers to the Notice of Intent to Make Audit Changes dated January 8, 2010, include a sampling plan that runs from January 1, 2006, to December 31, 2006 for the calculation of use tax for purchases by Rowe's where sales tax was not collected by the vendor. Ms. Arrington reviewed Rowe's' records for expense purchases for 2006 to determine the total amount of additional tax due for that period. She then took the total additional tax on expenses for that period, i.e., $14,981.26, and divided it by 12 to obtain a monthly average additional tax of $1,248.44. She then applied that number to the entire 36-month audit period to determine a total assessment of additional tax for expense purchases of $44,943.84. Ms. Arrington testified that at the initial audit conference, she discussed different audit techniques in terms of sampling. However, a specific sampling plan was not discussed with Mr. Rowe and no Sampling Agreement was presented to him. No sampling plan was reviewed by the Executive Director. Ms. Arrington did not tell Mr. Rowe that 2006 would be the year used as the sample. Mr. Rowe never would have agreed to the use of 2006 as a sampling plan, because it would not be representative of the expenses incurred during the audit period. Using 2006 as a sampling period did not take into account the store closures during the audit period, and the concomitant reduction in expenses. Rowe's closed two grocery stores by March 2006, and operated only four stores for the remaining three quarters of the year. A third store was closed in January 2007, a fourth in May 2007 and a fifth in 2008, leaving only one store open for the entire audit period. All of the liquor stores were also closed during the audit period, the last one being sold in May 2008. Ms. Arrington knew that Rowe's had closed almost all of its stores during the audit period, and included information regarding the closings in her Standard Audit Report. She acknowledged at hearing that as the stores decreased, the expenses related to those stores would also most likely decrease. For the 12 months of 2006, the Department determined that an additional tax of $14,981.26 would be due, based on purchases of $253,637.22. There has been no evidence presented to rebut the accuracy of the tax assessment for these 2006 purchases. Petitioner presented evidence establishing that, for the 21 months of the audit period following 2006, Rowe's made purchases from the same vendors reflected in the 2006 sample of only $51,073.72, which would result in additional taxes of $3,575.16. No evidence was presented by either party as to whether there were any other purchases from other vendors for which taxes had not been paid. The difference between the use tax assessed against Rowe's by using the sampling plan and taxes due based on the actual purchases demonstrated at hearing is $22,642.08. In addition, there was one vendor, Advo, Inc. (Advo), which accounted for a significant percentage of the tax due based on the sampling plan. While the audit sample period was for twelve months, payments to Advo for a seven-month period accounted for approximately 58% of the total additional taxes due for expenses. There were no purchases from Advo after July 2006 because of Rowe's shrinking assets and inability to pay for direct advertising. Further, 15 of the 23 vendors reflected in the sample period from whom purchases were made had no sales to Rowe's from January 2007 through September 2008. The Department's work papers indicate that, within the sample year, the purchases tapered off significantly as the year progressed. Given the known closure of five grocery stores and six liquor stores during the audit period, using a time period where the most stores were open is not representative of the expenses experienced by Petitioner, and use of the sampling plan to which the taxpayer had not agreed was inappropriate, and led to an inflated assessment of additional taxes. The Effective Tax Rate at the Liquor Stores During the audit period, Rowe's operated package liquor stores adjacent to the grocery stores. By the time the audit commenced, Rowe's no longer owned any of the liquor stores, and no longer had the cash register tapes from the liquor stores. Because of the lack of cash register tapes, the auditor was unable to determine the effective tax rate Rowe's was collecting. She did not, however, ask Rowe's what rate was collected. A review of the sales tax returns indicates that it remitted a flat rate of 6 or 7 percent, depending on the county. These rates were consistent with what Rowe's was collecting for the grocery store sales, and cash register tapes were available from the grocery store. Ms. Arrington applied the tax rates identified in Florida Administrative Code Rules 12A-1.057(3)(a) and 12A- 15.012(2)(a), both of which identify the rate that should be collected where the dealer sells package goods but does not sell mixed drinks; does not separately itemize the sales price and the tax; and does not put the public on notice that tax is included in the total charge. The work papers paraphrase but do not quote the rules. With respect to the liquor store in St. Johns County, the work papers state: "[a]ccording to Rule 12A-1.057(3)(a), F.A.C., when the dealer is located in a county with no surtax and the public has not been put on notice through the posting of price lists or signs prominently displayed throughout the establishment that the tax is included in the total charge, package stores which sell no mixed drinks shall remit tax at the effective rate of .0635." With respect to the liquor stores in Clay and Duval Counties, the work papers state: "[a]ccording to Rule 12A- 15.012(2)(a)1., F.A.C., when a dealer, located in a county imposing a 1% surtax, sells package goods but does not sell mixed drinks and does not put the public on notice that tax is included in the total charge, the dealer is required to remit tax at the effective tax rate of .0730." The Department's auditor made the assumption that tax was not separately itemized for package store sales and assessed the additional tax accordingly. She did not ask the taxpayer whether this was the case and did not ask about signage in the package stores that were no longer owned by Rowe's. Mr. Rowe testified that the same point-of-sale program was used for the liquor stores as were used for the adjacent grocery stores. That program separately identified the tax due. His testimony is unrebutted and is credited. The Taxpayer's Bill of Rights At hearing, Petitioner took the position that the Department violated the Taxpayer's Bill of Rights as stated in section 213.015(5), by its failure to provide Petitioner with a "narrative description which explains the basis of audit changes, proposed assessments, assessments." In its Proposed Recommended Order, however, Petitioner candidly acknowledged that the evidence did not support a finding consistent with Petitioner's position. In light of this concession, no further findings of fact are necessary with respect to this issue. Collectibility Rowe's asserted in its challenge that it was unable to pay any taxes assessed because it was no longer in business and no longer had any assets. The Department declined to exercise its discretion to compromise the tax assessment based on collectability. While not specifically stated in its Notice of Decision, this position was apparently based upon the belief that the taxes could be paid by Rowe's IGA, LLC, to whom the assets of Rowe's was sold, and which shares the same managing member, Robert Rowe. The two companies share a managing member and one common location, which Rowe's sold to Rowe's IGA. However, no evidence was presented regarding the specifics of the assets sold to Rowe's IGA, and the only evidence presented indicates that any proceeds from the sale went to pay the secured lender for Rowe's, Textron Financial. Other than the involvement of Robert Rowe, no connection between the companies was established. Rowe's provided to the Department the copy of a judgment against it for $324,963.33, which bears interest at a rate of 8% annually. The Department did not identify any assets from which either the assessment or the judgment could be paid.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a Final Order that: Reduces the Department's assessment for additional taxes, penalties, and interest by any amounts attributable to the failure to comply with the sales bracket system at Petitioner's grocery stores; Reduces the Department's assessment for additional use taxes, penalties, and interest by any amounts attributable to the failure to remit all taxes due for the month of August 2006; Reduces the Department's assessment for additional use taxes, penalties, and interest by any amounts attributable to expense purchases for the period January 2007 through September 2008; Sustains the assessment for additional use tax, penalties, and interest for expense purchases in calendar year 2006; Reduces the Department's assessment for additional use taxes, penalties, and interest by any amounts attributable to the asserted basis that Petitioner should have collected tax at a higher effective tax rate at its liquor stores based upon the application of rules 12A-1.057(3)(a) or 12A-15.012(2)(a); Sustains the Department's assessment for additional sales tax, penalties, and interest against Petitioner for failure to pay tax on certain capital asset purchases identified in the audit; Sustains the Department's assessment for additional sales tax, penalties, and interest against Petitioner for failure to pay sales tax on commercial rent payments under certain of Petitioner's store leases identified in the audit; and Sustains the Department's assessment for additional sales tax, penalties, and interest against Petitioner for failure to pay sales tax on Petitioner's payment of ad valorem taxes under certain of Petitioner's store leases identified in the audit. In addition, it is Recommended that the Department reconsider its decision as to whether the remaining assessment is collectible, and whether it is in the best interest of the state to compromise the assessment, based on the record contained in this proceeding. DONE AND ENTERED this 31st day of July, 2012, in Tallahassee, Leon County, Florida. S LISA SHEARER NELSON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 31st day of July, 2012.
The Issue Whether the Respondent, Holiday Inn Oceanside/Cleveland Caribbean, Inc., is liable for the payment of $10,176.18, together with a penalty of 5 percent and interest accruing daily as claimed in the audit by the Petitioner, State of Florida, Department of Revenue, for the period September 1, 1975, through August 31, 1970.
Findings Of Fact This cause comes on for consideration based upon the Respondent, Holiday Inn Oceanside/Cleveland Caribbean, Inc.`s challenge to the tax audit conducted by the Petitioner, State of Florida, Department of Revenue, covering the period September 1, 1975, through August 31, 1978. The claim of the audit is for sales tax due pursuant to Chapter 212, Florida Statutes, and its supporting rules found in the Florida Administrative Code. The audit document showing the Proposed Notice of Assessment of Tax, Penalties and Interest may be found as the Petitioner's Exhibit A admitted into evidence. Although the audit document originally claimed tax in the amount of $29,600.37, at the commencement of the hearing the amount remaining in dispute was $15,288.75, together with a penalty of 5 percent and interest accruing until date of payment. During the hearing, a stipulation was entered into between the parties to the effect that, of the remaining disputed tax, penalty and interest, $5,112.57, together with the applicable penalty and interest was acknowledged to be owed by the Respondent. Therefore, there remains in dispute the amount of $10,176.18, with a 5 percent penalty and interest accruing until date of payment. This amount of tax, penalty and interest claimed represents the difference between the tax rate which the Petitioner has applied in this assessment process and the tax rate that the Respondent claims to be applicable. The Petitioner claims that a tax rate of 4.5 percent against total receipts, in keeping with the authority of Rule 12A-1.57(3), Florida Administrative Code. The Respondent counters that position by offering its own formula arrived at in view of the nature of its prices charged its customers, and that tax rate is 4.1666667 percent. The sales in question during the audit period pertain to sales of alcoholic and malt beverage in the lounges of the Respondent's licensed premises located in Dade County, Florida. The facts reveal that the sale of all alcoholic beverages in the time period at issue were made in increments of a quarter dollar ($.25). These quarter-dollar increments included the imposition of sales tax. As example: SALES PRICE TAX TOTAL $ .48 $.02 $ .50 .72 .03 .75 .96 .04 1.00 1.20 .05 1.25 1.44 .06 1.50 1.68 .07 1.75 Although the tax was computed on the sales price and this system was made known to the public by prominently displaying the price list, which list indicated that the beverage prices included tax; the Respondent did not separate the increment of the total price into categories of sales price and tax at the time of each transaction. Consequently, the books audited in the process of making the claim for assessment only demonstrated the total sales price of a given day's alcoholic beverage sales as an aggregate and did not reflect the tax as a separate item from the sales price. To this aggregate amount the Respondent applied its tax rate formula of 4.166667 by taking the amount of total receipts for the day and dividing by 1.04666667 to get gross sales. The gross sales were then subtracted from the amount of total receipts to obtain the figure for tax collected. This method was rounded off to the nearest penny on each day of computation. The Petitioner, as stated before, relies on Rule 12A-1.57(3), Florida Administrative Code, as a basis for its claim that the rate of tax should be 4.5 percent. That provision states: (3) Dealers in alcoholic and malt beverages are required to remit the actual tax collected to the State. In some instances, however, it may be impractical for such dealers to separately record the sales price of the beverage and the tax collected thereon. In such cases, dealers may elect to report tax on the following basis. Package stores who sell no mixed drinks should remit the tax at 4.3 percent of total receipts and dealers who sell mixed drinks or a combination of mixed drinks and packaged goods should remit the tax at the rate of 4.5 percent of total receipts. In those instances where the sales price and the tax have not been separately recorded but where it can be demonstrated that the public has been put on notice by means of price lists posted prominently throughout the establishment that the total charge includes tax, the dealer may deduct the tax from the total receipts to arrive at the appropriate tax and gross sales figures using the method shown below: Total receipts divided by the tax rate = gross sales. For example, a package store which sells no mixed drinks and whose total receipts are $2,000 would compute sales as follows: $2,000 divided by 1.043 percent = gross sales $1,917.54 tax collected 82.46 A dealer who sells drinks or a combination of drinks and package goods and whose total receipts are $2,000 would compute sales as follows: $2,000 divided by 1.045 percent = gross sales $1,913.87 tax collected 86.12 When the public has hot been put on notice through the posting of price lists that tax is included in the total charge, tax shall be computed by multiplying total receipts by the applicable rates referred to in this rule. In the mind of the Petitioner, by failing to segregate the total amounts collected into the categories of sales price and tax and then to remit the tax collected as a separate item, the Respondent is relegated to the utilization of Rule 12A-1.57(3), Florida Administrative Code, in remitting its tax. Under its theory, the Petitioner has taken the total receipts recorded in the Respondent's work sheets and divided those total receipts by the formula 1.045 percent to get gross sales and then subtracted the gross sales from the amount of total receipts to get the amount of tax that should have been collected, and then made a further subtraction of the tax which the Respondent remitted, from the tax formula which the Petitioner claims to be due on the transactions to arrive at the tax presently outstanding. This amount being the figure referenced above. From that computation, the amount of penalty and interest has been claimed. (By its position the Petitioner does not seem to question the fact that the public has been put on notice by price lists posted throughout the establishment that the total charge reflected on the price lists includes tax, as referred to in the subject Rule 12A-1.57(3), Florida Administrative Code.) According to the Respondent, the reason for the utilization of the rate of 4.1666667 percent was the fact that all beverages having a break in price increments of a quarter-dollar ($.25), it is mathematically impossible for the proper effective rate being charged on all beverages sold in the lounges to vary from their tax rate of 4.1666667 percent because each increment of increase has the same ratio of sales price to tax. The Respondent argues that to claim a rate of 4.5 percent causes the collection in excess of the amount allowed by Chapter 212, Florida Statutes. After considering the position of the parties, the Respondent is found to be correct in its position. The overall scheme of Chapter 212, Florida Statutes, calls for the taxation of sales of tangible personal property at a rate of 4 percent, see Section 212.05, Florida Statutes. A further refinement of that theory is found in Subsection 212.12(10), Florida Statutes, which creates a bracketing system for sales representing the various fractions of a dollar in amount. This bracketing system thereby causes imposition of a sales tax greater than 4 percent in some transactions. The Petitioner is granted further authority to refine the system of taxation by those provisions of Subsections 212.17(6) and 212.18(2), Florida Statutes, which state in turn: 212.17(6) The department shall have the power to make, prescribe and publish reasonable rules and regulations not inconsistent with this chapter, or the other laws, or the constitution of this state, or the United States, for the enforcement of the provisions of this chapter and the collection of revenue hereunder, and such rules and regulations shall when enforced be deemed to be reasonable and just. 212.18(2) The department shall administer and enforce the assessment and collection of the taxes, interest, and penalties imposed by this chapter. It is authorized to make and publish such rules and regulations not inconsistent with this chapter, as it may deem necessary in enforcing its provisions in order that there shall not be collected on the average more than the rate levied herein. The department is authorized to and it shall provide by rule and regulation a method for accomplishing this end. It shall prepare instructions to all persons required by this chapter to collect and remit the tax to guide such persons in the proper collection and remission of such tax and to instruct such persons in the practices that may be necessary for the purpose of enforcement of this chapter and the collection of the tax imposed hereby. The use of tokens in the collection of this tax is hereby expressly forbidden and prohibited. It can be seen that the Petitioner has the authority to promulgate the necessary rules for the accomplishment of the purpose of Chapter 212, Florida Statutes, but is restricted in this task by being prohibited from making rules and regulations which are inconsistent with this chapter or other statutes within the laws of the State of Florida or the Constitution of the United States or the Constitution of the State of Florida and it is further restricted from imposing rules or regulations which cause the tax to be collected on the average more than the rate levied in Chapter 212, Florida Statutes. While it is clear that the legislature intended to keep the effective rate of tax as near the 4 percent level as possible, it is also evident that the system contemplated a segregation of the amount collected in a sale as sales price, and the amount of tax applied to the sale at the point of the transaction. This is a means of accountability that helps insure that the proper remittance of tax due on each and every retail sales occurs. However, the preeminent charge to the Petitioner is the duty to collect the tax at a rate which most closely approximates the 4 percent called for, without abandoning responsibility or the close monitoring of the records of a given taxpayer. When considered in the overall context of the purpose of Chapter 212, Florida Statutes, the method which the Respondent used to collect and remit tax, does not violate the conditions of Chapter 212, Florida Statutes, nor the rules designed to enforce that chapter. The tax rate of 4.1666667 percent has been proven to be correct, in the sense of more closely approximating the 4 percent tax rate called for than the application of a tax rate of 4.5 percent. The correctness is established because the increments charged for alcoholic beverages are always in the amount of a quarter-dollar ($.25) and each increment of increase carries the same tax rate. This fact, when considered with the additional fact that the break-out of the tax in the price structure as established by the Respondent, is in keeping with the tables of the bracket system found in Subsection 212.12(10), Florida Statutes, is sufficiently convincing to demonstrate the propriety of the Respondent's position. Nonetheless, a further examination of the Petitioner's argument is indicated. The focus of the Petitioner's position is Rule 12A-1.57(3), Florida Administrative Code, and a detailed reading of this rule reveals that dealers who have properly put the public on notice that their sales prices include tax, "may" elect to remit tax by using the formula of the rate of 4.5 percent of total receipts as the tax due. The use of the word "may" in this instance creates an option on the part of the Respondent, an option which it has elected not to proceed under and by the facts of this case, the alternate method which the Respondent used in computing this tax, i.e., the rate 4.1666667 percent is efficacious. Finally, the Petitioner has advanced the argument that the formula found in Rule 12A-1.57(3), Florida Administrative Code, is unique to that rule and may not be utilized unless the prerequisite factors are shown and unless the tax rate factor 4.5 percent is part of the formula. Even though the formula as expressed in Rule 12A-1.57(3), Florida Administrative Code, may have legitimate application to some cases, it is not preemptive in its scope and it would not prohibit the Respondent in this case from using the formula and substituting the rate of tax of 4.1666667 percent for the rate of 4.5 percent in that part of the formula. In summary, the Petitioner has failed to demonstrate its entitlement to the tax, penalty and interest under its claim founded on Rule 12A-1.57(3), Florida Administrative Code. (Petitioner in this cause had submitted Proposed Findings of Fact, Conclusions of Law and a Recommendation in the case styled, Holiday Inn Oceanside/Cleveland Caribbean, Inc., Petitioner, vs. State of Florida, Department of Revenue, Respondent, D.O.A.H. Case No. 70-1003R, and in doing so made reference to matters which have been considered in the present case. Therefore, to the extent that those matters are not inconsistent with this Recommended Order they have been utilized. To the extent that those proposals are inconsistent with this Recommended Order they are specifically rejected. The Respondent has also submitted Proposed Findings of Fact, Conclusions of Law and a Recommended Order and to the extent that those matters are not inconsistent with this Recommended Order they have been utilized. To the extent that those proposals are inconsistent with this Recommended Order they are specifically rejected.)
Recommendation It is recommended that the Respondent, Holiday Inn Oceanside/Cleveland Caribbean, Inc., be relieved from further responsibility to pay the amount of tax, $10,176.18 and the 5 percent penalty and interest accruing on that amount of tax. DONE AND ENTERED this 29th day of June, 1979, in Tallahassee, Florida. CHARLES C. ADAMS, Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675 COPIES FURNISHED: Martha J. Cook, Esquire Department of Revenue Room 422, Fletcher Building Tallahassee, Florida 32301 Richard Watson, Esquire c/o Spieth, Bell, McCurdy & Newell 1190 Union Commerce Building Cleveland, Ohio 44115 Mark J. Wolff, Esquire and Howard E. Roskin, Esquire First Federal Building, 30th Floor One Southeast Third Avenue Miami, Florida 33131
The Issue Whether the Department of Revenue's ("Department") assessment of tax, penalty, and interest against American Import Car Sales, Inc., is valid and correct.
Findings Of Fact The Department is the agency responsible for administering the revenue laws of the State of Florida, including the imposition and collection of the state's sales and use taxes. Petitioner, American Import Car Sales, Inc., is a Florida S-corporation with its principle place of business and mailing address in Hollywood, Florida. Petitioner, during the period of June 1, 2007, through May 31, 2010 ("assessment period"), was in the business of selling and financing new and used motor vehicles. On June 29, 2010, the Department issued to Petitioner a Notice of Intent to Audit Books and Records (form DR-840) for sales and use tax for the assessment period. Said notice informed Petitioner that the audit would begin on or around 60 days from the date of the notice and included an attachment identifying the records and information that would be reviewed and should be available when the audit commenced. Specifically, the Sales and Use Tax Information Checklist attachment requested the following: chart of accounts, general ledgers, cash receipts journals, cash disbursement journals, federal income tax returns, county tangible property returns, Florida Sales and Use Tax returns, sales journals, sales tax exemption certificates (resale certificates), sales invoices, purchase invoices, purchase journals, lease agreements for real or tangible property, depreciation schedules, bank and financial statements, detail of fixed asset purchases, and other documents as needed. On the same date, in addition to the Notice of Intent, the Department issued to Petitioner, inter alia, an Electronic Audit Survey, and a Pre-Audit Questionnaire and Request for Information. On September 17, 2010, the auditor requested the following records to review by October 4, 2010: (1) general ledger for the assessment period; (2) federal returns for 2007, 2008, and 2009; (3) lease agreement for the business location; (4) deal folders for the assessment period; (5) all expense purchase invoices for the assessment period; (6) all purchase invoices relating to assets added to the Depreciation Schedule during the assessment period; (7) resale/exemption certificates, shipping documents, and any other exempt sales documentation to support exempt sales during the assessment period; (8) bank statements for the assessment periods; and (9) all worksheets used to prepare monthly sales tax returns for the assessment period. On October 5, 2010, the auditor met with Petitioner's President Joe Levy, Petitioner's Secretary Joanne Clements, and Petitioner's Certified Public Accountant, Steve Levy. At that time, Petitioner provided a hard copy of the 2007 and 2008 general ledger and profit and loss statements. At that time, the auditor again advised Petitioner that the Department needed the federal returns, as well as the completed electronic audit survey and pre-audit questionnaire. On October 5, 2010, the Department and Petitioner signed a Consent to Extend the Time to Issue an Assessment or to File a Claim for Refund (form DR-872). The consent provided that assessments or claims for refunds may be filed at any time on or before the extended statute of limitations, December 31, 2011. On October 18, 2010, Petitioner provided the Department with the completed electronic audit survey and pre-audit questionnaire. Thereafter, Petitioner provided the Department with the following books and records: (1) 2009 "deal folders;" Petitioner's general ledger in Excel format for June 1, 2007, through December 31, 2010; (3) January 2009 through May 2010 bank statements; (4) a listing of exempt sales; and (5) lease agreements with attendant invoices. On August 25, 2011, the Department issued its assessment, entitled a Notice of Intent to Make Audit Changes (form DR-1215)("NOI"). Said notice provided that Respondent owed $2,324,298.42 in tax, $581,074.61 in penalties, and $515,117.04 in interest through August 25, 2011. The NOI addressed Petitioner's alleged failure to collect and remit tax on: (1) certain vehicle sales (audit Exhibit A01-Sales Tax Collected and Not Remitted)1/; (2) vehicle sales with no documentation regarding its exempt status (audit Exhibit A02-Disallowed Exempt Sales)2/; (3) motor vehicle sales where no discretionary tax was assessed (audit Exhibit A03- Discretionary Surtax)3/; and (4) unreported sales (audit Exhibit A04-Unreported Sales). The assessment also related to Petitioner's alleged failure to pay/accrue tax on: (1) taxable purchases (audit Exhibit B01-Taxable Purchases); (2) fixed assets (audit Exhibit B02-Fixed Assets); and (3) commercial rent (Exhibit B03-Commercial Realty). At hearing, Petitioner stipulated that the only component of the NOI remaining at issue pertains to audit Exhibit A04-Unreported Sales, as Petitioner has conceded A01, A02, A03, and all fee schedules. An understanding of audit Exhibit A04, and the assessment methodology employed by the auditor, is articulated in the Department's Exhibit MM, entitled Explanation of Items, which is set forth, in pertinent part, as follows: Reason for Exhibit: The records received for the audit were inadequate. The taxpayer provided bank statements for the period of January 2009 through May 2010. This period was deemed the test period for unreported sales. A review of the bank statements for the test period revealed that sales were underreported. This exhibit was created to assess for sales tax on unreported sales. Source of Information: Sales tax returns and Bank of America bank statements for the test period of January 2009 through May 2010; The Department of Motor Vehicles (DMV) [sic] was acquired for the period of June 2007 through May 2010. Description of Mathematical Adjustments: The bank statements were reviewed for the period of January 2009 through May 2010. Taxable Sales on sales tax returns, sales tax on sales tax returns, taxable sales on Exhibit on [sic] Exhibit A01, sales tax Exhibit A01 and Exempt Sales on Exhibit A02 was subtracted from Bank Deposits to arrive at unreported sales. See calculations on page 53. Unreported sales for the period of January 2009 through May 2010 were scheduled into this exhibit. A rate analysis of the DMV database resulted in an effective tax rate of 6.2689. Scheduled transactions were multiplied by the effective tax rate of 6.2689 to determine the tax due on the test period. A percentage of error was calculated by dividing the tax due by the taxable sales for each test period. The percentage of error was applied to taxable sales for each month of the audit period which resulted in additional tax due. The auditor's analysis of the test period, applied to the entire assessment period, resulted in a determination that Petitioner owed $1,599,056.23 in tax for unreported sales. On August 25, 2011, the auditor met with Joe and Steve Levy to discuss and present the NOI. At that time, Joe and Steve Levy were advised that Petitioner had 30 days to provide additional documents to revise the NOI. On September 28, 2011, the Department issued correspondence to Petitioner advising that since a response to the NOI had not been received, the case was being forwarded to Tallahassee for issuance of the Notice of Proposed Assessment ("NOPA")(form DR-831). On October 7, 2011, the Department issued the NOPA, which identified the deficiency resulting from an audit of Petitioner's books and records for the assessment period. Pursuant to the NOPA, Petitioner was assessed $2,324,298.42 in tax, $31,332.46 in penalty, and $534,284.54 in interest through October 7, 2011. The NOPA provided Petitioner with its rights to an informal written protest, an administrative hearing, or a judicial proceeding. On December 5, 2011, Petitioner filed its Informal Written Protest to the October 7, 2011, NOPA. The protest noted that the NOPA was "not correct and substantially overstated." The protest raised several issues: (1) that the calculation was primarily based upon bank statement deposits; (2) not all deposits are sales and sources of income; and (3) a substantial amount of the deposits were exempt sales and loans. The protest further requested a personal conference with a Department specialist. On January 10, 2013, Martha Gregory, a tax law specialist and technical assistance dispute resolution employee of the Department, issued correspondence to Petitioner. The documented purpose of the correspondence was to request additional information regarding Petitioner's protest of the NOPA. Among other items, Ms. Gregory requested Petitioner provide the following: [D]ocumentation and explanations regarding the source of income—vehicle sales, loan payments, etc.—for each deposit. For vehicle sales deposits, provide the customer name, vehicle identification number and amount; for loan payments, provide proof of an existing loan and the amount received from the borrower; and for any other deposits, provide documentation of the source of this income. A conference was held with Petitioner on February 7, 2013. At the conference, Ms. Gregory discussed the January 10, 2013, correspondence including the request for information. The Department did not receive the requested information. Following the conference, the Department provided the Petitioner an additional 105 days to provide documentation to support the protest. Again, Petitioner failed to provide the information requested. On June 14, 2013, the Department issued its Notice of Decision ("NOD"). The NOD concluded that Petitioner had failed to demonstrate that it was not liable for the tax, plus penalty and interest, on unreported sales as scheduled in audit Exhibit A04, Unreported Sales, as assessed within the compliance audit for the assessment period. Accordingly, the protested assessment was sustained. On July 15, 2013, Petitioner filed a Petition for Reconsideration to appeal the Notice of Decision ("POR"). The POR advanced the following issues: (1) the records examined were not the books and records of Petitioner; (2) the audit should be reduced because the auditor's methodology was incorrect; and the Petitioner should be allowed a credit for bad debts taken during the audit period. At Petitioner's request, on October 22, 2013, Petitioner and Ms. Gregory participated in a conference regarding the POR. At the conference, Petitioner requested a 30-day extension to provide documentation in support of Petitioner's POR. No additional documentation was subsequently provided by Petitioner. On April 29, 2014, the Department issued its Notice of Reconsideration ("NOR"). The NOR sustained the protested assessment. Petitioner, on June 30, 2014, filed its Petition for Chapter 120 Hearing to contest the NOR. Petitioner did not file its federal tax returns for the years 2008, 2009, and 2010 until after the Department issued the NOR. Indeed, the federal returns were not filed until June 3, 2014.4/ Ms. Kruse conceded that the auditor's assessment utilized Petitioner's bank statements to determine unreported sales; however, the auditor did not make any adjustments for "unusual items that would have been on the face of the bank statements." Ms. Kruse further acknowledged that the auditor's assessment does not reference Petitioner's general ledger information. Ms. Kruse acknowledged that, for several representative months, the general ledger accurately reported the deposits for the bank statements provided. When presented with a limited comparison of the bank statement and the general ledger, Ms. Kruse further agreed that, on several occasions, deposits noted on the bank statements were probably not taxable transactions; however, the same were included as taxable sales in the auditor's analysis. Ms. Kruse credibly testified that the same appeared to be transfers of funds from one account into another; however, because the Department only possessed the bank statements from one account, and never received the requested "back up information" concerning the other account, the Department could not discern the original source of the funds.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that The Department conduct a new assessment of Petitioner's sales and use tax based on a test or sampling of Petitioner's available records or other information relating to the sales or purchases made by Petitioner for a representative period, giving due consideration to Petitioner's available records, including Petitioner's general ledger, to determine the proportion that taxable retail sales bear to total retail sales. DONE AND ENTERED this 17th day of April, 2015, in Tallahassee, Leon County, Florida. S TODD P. RESAVAGE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 17th day of April, 2015.
