The Issue The issue is whether Petitioner owes the taxes, interest, and penalties assessed by the Department of Revenue based upon its audit of Petitioner for the period of August 1, 1996, through July 31, 2001.
Findings Of Fact Based upon the testimony and evidence received at the hearing, the following findings are made: Petitioner is a Florida corporation engaged in the business of selling and installing floor covering materials, such as carpet and tile. Petitioner's business is located in Hillsborough County, Tampa, Florida. Petitioner sales fall into two basic categories: "cash and carry sales" and "installation sales." The "cash and carry sales" are retail sales of floor covering materials to customers that come into Petitioner's store. These sales do not involve any installation work by Petitioner. The "installation sales" are sales in which Petitioner installs the floor covering material in the customer's home or business. These sales are performed pursuant to a lump-sum contract which incorporates the price of the installation and the price of the floor covering materials being installed. Petitioner purchases the floor covering materials from suppliers and distributors. Those purchases become part of the inventory from which Petitioner makes its "installation sales." Petitioner also makes general purchases of goods and services necessary for the day-to-day operation of its business. These purchases include items such as cleaning supplies and vehicle repairs. Petitioner made several fixed-assets purchases during the audit period for use in its business. It purchased a word processor in August 1996, and it purchased equipment and fixtures in December 1996. On those occasions that Petitioner collected sales tax from its customers on the "cash and carry sales" or paid sales tax on its inventory purchases and general purchases, it remitted or reported those amounts to the Department. However, as discussed below, Petitioner did not collect the full amount of sales tax due on each sale, nor did it pay the full amount of sales tax due on each purchase. The Department is the state agency responsible for administering Florida's sales tax laws. The Department is authorized to conduct audits of taxpayers to determine their compliance with the sales tax laws. By letter dated September 10, 2001, the Department notified Petitioner of its intent to conduct a sales tax audit of Petitioner's records for the period of August 1, 1996, through July 31, 2001. The audit was conducted by David Coleman, a tax auditor with seven years of experience with the Department. Petitioner designated its certified public accountant, P.J. Testa, as its representative for purposes of the Department's audit. That designation was memorialized through a power of attorney form executed by Petitioner on March 5, 2002. Mr. Coleman communicated with Mr. Testa throughout the course of the audit. Mr. Coleman conducted the audit using a sampling methodology agreed to by Mr. Testa on behalf of Petitioner. Pursuant to that methodology, Mr. Coleman conducted a comprehensive review of Petitioner's year-2000 purchase and sales invoices and extrapolated the results of that review to the other years in the audit period. The sampling methodology was used because of the volume of records and transactions during the audit period and because of the unavailability of all of the records for the audit period. The year 2000 was chosen as the sample period because Petitioner's records for the other years in the audit period were incomplete or unavailable. Mr. Coleman's audit of the year-2000 invoices focused on three broad types of transactions. First, he reviewed invoices of Petitioner's retail "cash and carry sales." Second, he reviewed the invoices through which Petitioner purchased the floor covering materials that it later sold as part of its "installation sales." Third, he reviewed the invoices through which Petitioner made general purchases of tangible personal property used in the day-to-day operation of its business. The sampling methodology was used for the audit of Petitioner's "cash and carry sales," the inventory purchases related to the "installation sales," and the general purchases. The methodology was not used for the audit of Petitioner's fixed-asset purchases; Mr. Coleman reviewed all of the available records for the fixed-asset purchases during each year of the audit period. Mr. Coleman's audit of Petitioner's retail "cash and carry sales" identified 29 invoices during year-2000 on which no sales tax or less than the full sales tax was paid by the customer. Those invoices amounted to $17,451.30, on which $1,178.11 in total sales tax was due, but only $552.97 was paid. As a result, Mr. Coleman's audit identified a sales tax deficiency of $625.14 for the retail sales during the sample period. Mr. Coleman's audit of Petitioner's purchases of floor covering that was later sold in the "installation sales" identified a considerable number of purchases during year-2000 on which no sales tax or less than the full sales tax was paid by Petitioner to the supplier or distributor of the materials. Those purchases amounted to $123,398.52, but only $123,397.80 of that amount was taxable. On the taxable amount, $8,330.07 in total sales tax was due, but only $6,810.68 was paid. As a result, Mr. Coleman's audit identified a sales tax deficiency of $1,519.41 for Petitioner's inventory purchases during the sample period. Mr. Coleman's audit of Petitioner's "general purchases" identified 10 sales during year-2000 on which sales tax was not paid. Those invoices amounted to $2,914.76, on which $196.77 in sales tax was due, but none of which was paid. As a result, Mr. Coleman's audit identified a sales tax deficiency of $196.77 for the general purchases during the sample period. Mr. Coleman's audit of Petitioner's fixed-asset purchases identified only two transactions during the entire audit period on which Petitioner did not pay the full sales tax. Those transactions amounted to $5,078.92, on which $330.14 in total sales tax was due, but none of which was paid. As a result, Mr. Coleman's audit identified a sales tax deficiency of $330.14 for the fixed-asset purchases during the audit period. The tax deficiencies calculated by Mr. Coleman for year-2000 for each category described above take into account any sales tax collected by Petitioner from its customers or paid by Petitioner to its vendors. After Mr. Coleman computed the tax deficiencies based upon his audit of the year-2000 records, he calculated a "percentage of error" for each category of sales/purchases. The percentage of error is the ratio used to extrapolate the results of the audit of the year-2000 records over the remainder of the audit period. No percentage of error was calculated for the fixed-asset purchases because Mr. Coleman reviewed the available records for those purchases over the entire audit period, not just year-2000. The percentage of error was calculated by dividing the sales tax deficiency identified in a particular category for the year-2000 by the total sales/purchases in that category for the year-2000. For the year-2000, Petitioner had retail sales of $1,143,182.45; general purchases of $21,254.88; and inventory purchases of $1,214,016.24. As a result, the applicable percentages of error were 0.000547 ($625.14 divided by $1,143,182.45) for the retail sales; 0.009258 ($196.77 divided by $21,254.88) for the general purchases; and 0.001252 ($1,519.41 divided by $1,214,016.24) for the inventory purchases. The percentages of error were then multiplied by the total sales in the applicable category for the entire audit period to calculate a total tax deficiency in each category. Petitioner's total retail sales over the audit period were $4,455,373.40. Therefore, the total tax deficiency calculated for that category was $2,437.12 (i.e., $4,455,373.40 multiplied by 0.000547). Petitioner's total general purchases over the audit period were $110,741.49. Therefore, the total tax deficiency calculated for that category was $1,025.25 (i.e., $110,741.49 multiplied by 0.009258). Petitioner's total inventory sales over the audit period were $3,130,882.10. Therefore, the total tax deficiency calculated for that category was $3,919.86 (i.e., $3,130,882.10 multiplied by 0.001252). Petitioner's total tax deficiency was computed by adding the deficiencies in each category, as follows: Retail Sales $2,437.12 General Purchases 1,025.25 Inventory Purchases 3,919.86 Fixed-asset purchases 330.14 TOTAL $7,712.37 Of that total, $6,863.02 reflects the state sales tax deficiency; $313.77 reflects the indigent care surtax deficiency; and $535.58 reflects the local government infrastructure surtax deficiency. The sales tax rate in effect in Hillsborough County during the audit period was 6.75 percent. The state sales tax was six percent; the remaining 0.75 percent was for county surtaxes, namely the local government infrastructure surtax and the indigent care surtax. That rate was used by Mr. Coleman in calculating the tax deficiencies described above. On October 4, 2002, Mr. Coleman hand-delivered the Notice of Intent to Make Audit Change (NOI) to Petitioner. The NOI is the end-product of Mr. Coleman's audit. The NOI identified the total tax deficiency set forth above, as well as a penalty of $3,856.26, which is the standard 50 percent of the tax deficiency amount, and interest of $2,561.63, which is calculated at a statutory rate. The NOI included copies of Mr. Coleman's audit work- papers which showed how the taxes, penalties, and interest were calculated. The NOI also included a copy of the "Taxpayers' Bill of Rights" which informed Petitioner of the procedure by which it could protest the audit results reflected on the NOI. On October 29, 2002, the Department issued three NOPAs to Petitioner. A separate NOPA was issued for each type of tax -- i.e., sales tax, indigent care surtax, and local government infrastructure surtax. The cumulative amounts reflected on the NOPAs were the same as that reflected on the NOI, except that the interest due had been updated through the date of the NOPAs. Interest continues to accrue on assessed deficiencies at a cumulative statutory rate of $1.81 per day. The NOPAs were sent to Petitioner by certified mail, and were received by Petitioner on November 1, 2002. By letter dated November 5, 2002, Petitioner protested the full amount of the taxes assessed on the NOPAs and requested a formal administrative hearing. The letter was signed by Mr. Testa on Petitioner's behalf. The protest letter does not allege that the methodology used by Mr. Coleman was improper or that the results of the audit were factually or legally erroneous. Instead, the protest letter states that Petitioner was disputing the results of the audit because it was "following procedures set forth by an agent from a previous audit who established the manner in which [Petitioner was] to compute sales tax on the items being questioned by the current auditor." Mr. Testa made similar comments to Mr. Coleman during the audit. When Mr. Coleman requested documentation from Mr. Testa to corroborate those comments about the procedures allegedly established by the prior auditor, Mr. Testa was unable to provide any such documentation. The record of this proceeding is similarly devoid of evidence to support Petitioner's allegation on this point. The record does not contain any evidence to suggest that Petitioner ever modified or revoked Mr. Testa's authority to represent it in connection with the audit or this protest, which Mr. Testa initiated on Petitioner's behalf. Petitioner, through Mr. Testa, had due notice of the date, time, and location of the final hearing in these cases. Neither Mr. Testa, nor anyone else on Petitioner's behalf, appeared at the final hearing.
Recommendation Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the Department of Revenue issue a final order imposing the taxes, interest, and penalties against Petitioner in the full amounts set forth in the three Notices of Proposed Assessment dated October 28, 2002. DONE AND ENTERED this 30th day of December, 2003, in Tallahassee, Leon County, Florida. S T. KENT WETHERELL, II 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 30th day of December, 2003.
Findings Of Fact The parties stipulated to certain facts, legal issues, and their respective contentions, as follow: "1. At all times pertinent to this action, Petitioner Lawrence Nali Construction Company, Inc., was a Florida Corporation licensed and doing business in the State of Florida. At all times pertinent to this action, Respondent Department of Revenue, State of Florida, was an agency of the State of Florida exercising duties relating to the assessment and collection of sales and use taxes pursuant to Chapter 212, Florida Statutes. Respondent conducted an audit of tran- sactions involving Petitioner for the period November 1, 1972, through October 31, 1975. As a result of that audit, Respondent claims that as of September 17, 1976, the Petitioner had a balance due to the Depart- ment of Revenue of $17,383.58 in taxes, interest and penalties. The assessment indicating the above amount is attached as Exhibit A. Petitioner is in agreement that if the assessment is upheld, Petitioner owes to the Respondent the amount of $17,383.58 plus interest calculated to date of payment to Respondent. The tax assessment in this case is based upon two factual situations: Petitioner, manufactured and installed asphaltic concrete from raw material at a rate certain per ton determined by bid, as an improvement to the real property of political entities consisting of cities, towns, municipalities, counties, school boards, junior colleges and others. Petitioner also hauled the asphalt to the job cite (sic) at a fixed ton/mile rate determined by bid. Petitioner, as a subcontractor, manu- factured and installed asphaltic concrete from raw material at a rate certain per ton determined by bid, as an improvement to the real property of political entities above described. The general contractor contracted with the political entities in various fashions but the Petitioner's duties were always the same and included manufacture, installation and hauling of asphaltic concrete based on a rate certain per ton and per ton mile. The issue in this case is whether the Respondent is correct in contending that the Petitioner must pay a sales and use tax on the produced asphalt which it uses in the performance of the construction contract jobs described in paragraph 6. It is agreed by the parties that no sales or use tax was remitted, by the Petitioner on the produced asphalt. It is agreed by the parties that no sales or use tax was paid by the instant customers to the Petitioner. It is Respondent's contention that, pursuant to the above-cited rules, the Peti- tioner is required to pay sales or use tax on the produced asphalt which is used to construct real property pursuant to a con- tract described in Rule 12A-1.51(2)(a), F.A.C. It is Petitioner's contention that the above-cited rules do not apply in the instant case since the customers involved in the instant fact situations are political subdivision or because the transaction was of the type described by Rule 12A-1.51(2)(d), F.A.C. Petitioner is entitled to rely on the earlier 1967 audit by Respondent because neither Petitioner's method of doing business, nor the law, has changed materially since 1967. Respondent agrees that this is an issue but fails to agree that Petitioner is so entitled to rely." All purchase orders or invitations for bid received by petitioner from political subdivisions stated that the entity was exempt from federal and state sales taxes and that such taxes should not be included in the bid. Typical bid forms entitled "Specifications for Asphaltic Concrete" called for a lump-sum price per ton for delivery and placement of the material by the vendor plus a sum per ton per mile for transportation costs. No breakdown of amounts for the cost of materials and cost of installation is reflected in the bid documents. (Testimony of Cowan, Cook, Exhibits 3, 7 (late filed)) Respondent audited petitioner's operations in 1967 and, although it had had previous transactions with governmental entities prior to that date, no assessment for back taxes was issued for failure to pay sales tax on such transactions nor was petitioner advised to do so in the future by state officials. After 1967, petitioner did not seek information from respondent concerning the subject of sales tax. As a consequence of the 1967 audit, petitioner believed that it was unnecessary to charge or pay sales tax on such transactions with political subdivisions. (Testimony of Cowan, Cook) As of April 1, 1977, Brevard County had a population of over 250,000. Although it is a large county in terms of size, respondent has only two auditors in the sales tax division to cover the entire county. (Testimony of Alberto, Cowan, Exhibit 4)
Recommendation That the petitioner Lawrence Nali Construction Company, Inc. be held liable for sales tax, penalty, and interest under Chapter 212, Florida Statutes, as set forth in respondent's proposed assessment. DONE and ENTERED this 9th day of September, 1977, in Tallahassee, Florida. THOMAS C. OLDHAM Hearing Officer Division of Administrative Hearings 530 Carlton Building Tallahassee, Florida 32304 COPIES FURNISHED: Daniel Brown, Esquire Department of Legal Affairs The Capitol Tallahassee, Florida 32304 Andrew A. Graham, Esquire Post Office Box 1657 Cocoa, Florida 32922
Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following facts relevant to the issues in dispute are found: On March 8, 1981, the petitioner provided notice of the administrative hearing which commenced on March 25, 1981, by placing a notice on the doorknob of each resident of Century Village. Customers not residing within Century Village and commercial customers were mailed notice of the hearing on the same date. A newspaper notice of the March 25, 1981 hearing appeared on March 18, 1981. Quality of Service There are approximately 7,700 utility meters in Century Village and there has been minimal growth within the utility since the 1979 test year. Sixteen customers of the petitioner testified at the hearing. Their testimony included objections to the sufficiency of the notice they received of this rate case proceeding, the requested rate increases, the taste and smell of the water, the mineral deposits in the water, the odor from the sewage treatment plant, the billing procedures employed by the petitioner and the manner of petitioner's responses to customer inquiries and complaints. The petitioner's billing cycle is not constant. On some occasions, the bill covers a period of twenty-eight days and, on other occasions, a billing cycle of thirty-five days is used. Many customers have installed, at their own cost, water filters to alleviate the objectionable smell, taste and mineral deposits in their water. Some customers testified that their cooking pots and pans had become blackened and pitted from the mineral deposits and sediments in the water. Several customers also complained of low water pressure in their homes. None of the testifying witnesses had consulted the local health department as to the quality of the water received from petitioner. At the time of the hearing, there were no outstanding complaints against petitioner filed with the Public Service Commission's Consumer Affairs Department. Previous complaints had been resolved in a timely fashion. The petitioner's water and sewer operations presently comply with all applicable State regulatory standards for water and sewer service. There are no citations or corrective orders pending against the petitioner's water and sewer systems. Petitioner is operating under a negotiated consent order which requires it to connect its sewer system to the regional system when said system becomes available. There was evidence that this connection to the County system will result in an increased sewer charge. The County will send one monthly bill to the petitioner and the petitioner will then bill the individual customers. The bulk rate charge was speculative at the time of the hearing. Pursuant to an agreement between the County and the petitioner, the petitioner will be required to maintain its sewage treatment plant on a standby basis after it connects to the County system. Rate Base. I. Gross Plant in Service This being the petitioner's first rate increase application, no prior amount of utility plant in service for either the petitioner's water or sewer system has been established or approved by the PSC. The petitioner alleges that its utility plant in service is $2,401,436 for water and $2,711,697 for sewer, for a total gross plant in service of $5,113,133. An officer of petitioner who is a certified public accountant testified that this figure is supported by the books and records of the petitioner. The PSC staff engineer, Jim Shoptaw, attempted to verify the petitioner's alleged original cost of plant. Several methods of determining original cost are utilized by the PSC. Though not formalized by rule, the methods used to substantiate the original cost of a utility system, in order of PSC preference, are as follows: an engineer's original cost study, a review of the contracts let for individual utility construction projects and a review of invoices for materials purchased. The invoicing method of establishing original costs is considered least effective because there is no way to verify that the materials purchased were actually placed or used for the water and sewer systems. When these three methods are not available, as built drawings or plans can be utilized to determine the amount and type of materials in the ground and a unit cost study can then be performed. In this case, the petitioner did not have either an engineer's original cost study or copies of the construction contracts. The maps or prints submitted by petitioner to the PSC staff were not accurate or complete. Mr. Shoptaw thus made an on-site inspection, with advanced notice, and was provided several boxes of invoices which were not organized in a systematic manner. A review of invoices allowed Mr. Shoptaw to verify only 39 percent of what petitioner claimed in its application as the amount of plant in service. Petitioner was then requested to supply respondent with a unit cost breakdown and the amount of pipe placed in service each year. A given year was not provided by the petitioner. After calculating the length and cost of pipe utilized, Mr. Shoptaw "trended" the costs and eventually determined that the petitioner's application had overstated the water system plant by approximately $107,000 and the sewer system plant by some $147,000. The unit cost information supplied to Mr. Shoptaw by the petitioner was based upon data collected from water and sewer installations in single- family residential communities. This was a result of a misunderstanding by petitioner's employees as to what information Mr. Shoptaw desired. The "trending" and reasonableness study performed by Mr. Shoptaw was also based primarily upon a comparison with utilities serving single-family areas. There are major differences between the costs of constructing multiple-family and single-family utility distribution systems. High density housing requires larger pipes run for shorter distances and a greater number of valves, manholes, connections and other materials due to the greater number of connections per mile. There are also road and construction problems and expenses in a multifamily complex not found in an area with single-family dwellings. It is considerably more expensive per linear foot to build in a high density area such as Century Village than in an area containing single-family dwellings. Approximately three weeks prior to the commencement of the hearing in this case, the staff of the PSC was provided with additional boxes of invoices to further document the petitioner's gross plant in service. When combined with those already submitted, the additional invoices substantiated 58 percent of the claimed plant in service. Mr. Shoptaw felt that use of the invoices was not compatible with his then completed trending methodology, that the additional invoices arrived too close in time to the hearing to be of assistance and that 58 percent of documented costs was not a large enough sample from which to determine the original cost of the entire system. Mr. Shoptaw expended approximately 500 hours preparing his report in this proceeding. A reasonable amount of time to be spent on a utility of this size with good record-keeping practices would be approximately 200 hours. There is some confusion in the record as to whether the PSC staff twice removed the same items from the petitioner's claimed gross plant in service as a result of the different surveys performed by Mr. Shoptaw and the PSC's accounting staff. (T. 998-1000). This issue was never clarified during the hearing. Rate Base. II. Accumulated Depreciation. Through the end of the 1979 test year, the petitioner utilized an annual depreciation rate of approximately 6 percent on its gross water and sewer plants. During the course of preliminary discussions with the PSC staff, petitioner agreed to adopt a depreciation rate of 2.5 percent per annum for these assets. The 2.5 percent annual depreciation rate is based upon the premise that petitioner's water and sewer facilities have a service life of 40 years rather than the 16.7 year life originally applied. The issue in dispute regarding this stipulated change in the annual rate of depreciation is whether the 2.5 percent rate should be applied retroactively to the year of inception or whether it should be applied to the future only. The construction of the petitioner's water and sewer systems began in 1969. Neither the petitioner's original decision to fix the useful life of the water and sewer systems at 16.7 years nor the PSC staff's decision to fix their lives at 40 years was based upon an engineer's expert opinion after a physical inspection of the assets. There have been no significant physical changes in the assets since their installation. Under generally accepted accounting principles, different treatment is prescribed for the "correction of an error in previously issued financial statements" and a "change in accounting estimate." The "correction of an error" treatment requires a restatement or a retroactive application. This treatment is accorded errors resulting from "mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial state- ments were prepared." A "change in accounting estimate" does not require a restatement or retroactive treatment and results from "new information or subsequent developments and accordingly from better insight or improved judgment." APB Opinion No. 20, paragraph .13. The service life or salvage value of a depreciable asset is an example of the estimate required in the preparation of a financial statement. APB Opinion No. 20, paragraph .10. Were petitioner permitted to retroactively apply the new 2.5 percent depreciation rate to 1969, the date construction of the water and sewer systems began, a possible result would be the utility's double recovery of depreciation expense through its rates. The impact upon the utility of not making a retroactive adjustment of the 2.5 percent depreciation rate would be to reduce rate base by some one million dollars per year and thus substantially reduce the petitioner's cash flow. Rate Base. III. Contributions-in-aid-of-construction (CIAC) Petitioner's water and sewer tariffs on file with and approved by the PSC in 1970 include copies of a schedule of tapping fees and three developer agreements. The developer agreement between petitioner and Century Village, Inc. entered into on November 1, 1968, defines CIAC and denotes the developer's responsibility to pay CIAC for the petitioner's water and sewer systems. Other developer agreements between Century Village, Inc. and secondary developers were also discovered which make reference to the agreement between petitioner and Century Village, Inc. The PSC staff seeks to impute as CIAC over two million dollars as a result of the developer agreements and the tapping fee schedule. If this amount were imputed as CIAC, the petitioner would have a zero rate base and recover through its rates only operation and maintenance expenses and taxes. According to petitioner's president, neither the tapping fees on file with the PSC nor CIAC pursuant to the developer agreements were collected by the petitioner since he assumed the presidency in 1970. The amounts which are claimed as CIAC by the petitioner were collected prior to the time Mr. Christopher became the petitioner's president. Those portions of the developer agreements regarding CIAC were not carried out because petitioner desired to build a rate base. The petitioner's overall policy of not accepting CIAC was reflected in a letter dated May 8, 1972 by petitioner to the PSC in response to PSC Order No. 5403 which required petitioner and other regulated utilities to file a service availability policy with the PSC. Other than this May 8, 1972 letter, petitioner has made no other attempt to revise the tariffs filed with the PSC with respect to the developer agreements or the tapping fees. Auditors from the PSC staff were unable to find any evidence from the books, records or tax returns of the petitioner that tapping fees or other CIAC were ever collected by petitioner other than as reported by petitioner in this case. No significant investments were written off as cost of goods sold for tax purposes. Capital Structure and Rate of Return During the test year, petitioner's actual capital structure was comprised of 85 percent debt due to outstanding loans held by affiliated companies. The capital structure of the parent company, Cenvill Communities, Inc., during the test year was approximately 41 percent common equity, 55 percent long-term debt and 4 percent deferred taxes. For this rate application, the respondent PSC used the capital structure of the parent company in its cost of capital calculations. Subsequent to filing the rate increase application, the petitioner recapitalized its capital structure so that its debt-equity ratio approximately matched the debt-equity ratio of the parent company. Utilizing various methodologies, including an analysis of average bond yields, a discounted cash flow study, a trend line analysis and an added risk premium, petitioner has computed a range of fair return on equity at between 18.96 percent and 21.13 percent, for an average fair return of 20 percent. Using a ten-year time period, a discounted cash flow methodology and a regression analysis, the PSC staff computed a cost of equity of 16.25 percent, with a range of between 15.25 percent and 17.25 percent. Petitioner originally requested an overall rate of return of 12.83 percent. This figure was changed during the hearing to 10.38 percent. The PSC staff has computed an overall rate of return of 12.11 percent. Income Taxes Petitioner has elected to participate in the consolidated income tax return filed by its parent, Cenvill Communities, Inc. The parent routinely assesses a 46 percent rate on all its subsidiaries having a positive taxable income for the tax year. The petitioner and the PSC staff are in agreement that an appropriate federal income tax rate for petitioner is 46 percent, and an appropriate state income tax rate is 2.7 percent. The Office of Public Counsel presented testimony to the effect that a 46 percent federal income tax rate is excessive because it reflects a greater percentage tax rate than the actual consolidated tax rate. It was argued that the effective tax rate for petitioner during the 1979 test year was 21.06 percent. Unusual capital gain transactions did occur during the test year. Other Operating Expenses and Undisputed Items Petitioner had a contract which called for a meter-reading payment of 25 or 30 cents per meter. The average meter reading expense, including transportation, for the South Florida area is 17 cents per meter. Meters may be read very quickly in Century Village because of its high population density. With each building having approximately 25 meters, one could easily read 75 to 100 meters an hour. A witness presented by the intervenor Ruchlis examined petitioner's books and concluded that there was insufficient data and supporting documents to validate some of the salary and operating expenses claimed by the petitioner. The PSC staff apparently recognized this deficiency and interviewed some of the employees to determine how much of their time was actually allocated to the petitioner. It was agreed between petitioner and the PSC staff that $25,000 should be deducted from petitioner's claimed salary expenses. For the purposes of this proceeding, petitioner's working capital needs are zero. The total amount of rate case expenses for this proceeding is $35,000, to be amortized over a five year period and allocated on a 50-50 basis between the water and sewer operations. The base facility charge concept is fair to all customers and should be employed as petitioner's rate structure.
Recommendation Based upon the findings of fact and conclusions of law recited above, it is RECOMMENDED that the issues in dispute in this proceeding be resolved as follows: that the quality of water and sewer service provided by petitioner to its customers be found satisfactory; that the trending methodology utilized by Mr. Shoptaw in determining the petitioner's original cost investment in plant in service be approved, with the condition that a determination first be made as to whether certain items were deducted twice from petitioner's claimed amount of gross plant in service; that the 6 percent accumulated depreciation rate be applied from 1969 through the 1979 test year and the 2.5 percent rate be applied from that date forward; that the claimed amounts of $111,612 for the water system and $554,813 for the sewer system be approved as the appropriate amounts of contributions-in- aid-of-construction; that the appropriate capital structure for petitioner include a 40 percent equity ratio; that a fair rate of return on equity capital is 16.25 percent; that an appropriate federal income tax rate for petitioner is 46 percent; that a meter reading expense of 17 cents per meter is reasonable and appropriate; by petitioner be reduced by $25,000; that petitioner's working capital needs are zero; that an appropriate amount of rate case expense is $35,000 to be amortized over a five-year period and allocated equally between the water and sewer operations; and that petitioner's rate structure utilize the base facility charge concept. Respectfully submitted and entered this 16th day of November, 1981. DIANE D. TREMOR Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 16th day of November, 1981.
Findings Of Fact Modern Tool and Die, (MTD), is a privately held corporation engaged in manufacturing equipment. In 1965 they started the manufacture of bumper guards which required electroplating. They entered into agreements with MPC pursuant to which MTD erected two buildings adjacent to their plant which they leased to MPC in which to do the electroplating of the bumper guards. MPC is also a privately held corporation and there is no common ownership of these two companies. The two buildings built for MPC's occupancy were partitioned, compartmented and wired as desired by MPC and at its expense. Florida Power Corporation supplied electricity to the complex through the main transformer of MTD. In 1965 and to a lesser extent now, electricity rates per kilowatt-hour (kwh) were lowered with increased usage of electricity. Since both MTD and MPC are large users of electricity they obtain a cheaper rate if all electricity used is billed from the master meter serving MTD. Accordingly, and at the recommendation of the power company, additional transformers and meters were placed at the two buildings occupied by MPC and read monthly at or about the same time the master meter is read by the power company. The kw used at the two buildings is forwarded by MPC to MTD each month. The latter, upon receipt of the power company bill, computes the cost of the power per kwh and in turn bills MPC for its portion of the bill based upon the usage forwarded by MPC to MTD. Upon the commencement of this working agreement between these two companies in 1965 MPC, pursuant to an oral lease, has paid rent to MTD monthly at the rate of approximately $2,400 per month. It has also paid to MTD its pro rata cost for the electricity used each month. The rent is invoiced each month on the first of the month as in Exhibit 3 and paid by the 10th by MPC. Sales tax is added to the rent and remitted to DOR. Electricity usage is also invoiced by MTD to MPC on or about the 20th of the month and paid by MPC on or about the first of the following month. (Exhibit 4). Sales tax on the electricity used is paid by MTD to Florida Power Company who presumably remits this to DOR. During the 15 years these two companies have shared the cost of electric power they have been audited numerous times; the arrangement was made known to the auditors; and no auditor, prior to the present, suggested that the cost of electricity was part of the rent paid by MPC upon which sales tax was due. Notice of Proposed Assessment (Exhibit 1) in the amount of $9,747.34 is based upon the cost of electricity billed to MPC during the period of the audit December 1, 1976 through November 30, 1979 multiplied by 4 percent sales tax plus penalties and interest. The parties stipulated to the accuracy of this amount. They differ only as to whether the tax is owed.
The Issue The issues for determination are whether Petitioner paid sales and use tax on rental income from transient housing in Osceola and Polk counties, and whether Petitioner paid sales and use tax on the purchase of fixed assets in accordance with the requirements of Sections 212.03 and 212.06, Florida Statutes (1995). (Statutory references are to Florida Statutes (1995) unless otherwise stated.)
Findings Of Fact Petitioner is a Florida corporation with its principal place of business located at 3501 West Vine Street, Suite 387, Kissimmee, Florida. Petitioner primarily engages in the business of renting and managing transient property in the Orlando-Disney World area for absentee owners. Respondent is the state agency responsible for the administration of the Florida sales and use tax pursuant to Section 213.05. Respondent selected Petitioner for audit because Petitioner filed several sales and use tax returns reporting no taxable income (zero returns). Zero returns are unusual for a tourist-based business in the Orlando-Disney area. Osceola County, Florida (Osceola), also audited Petitioner for the period December 1994 through December 1999. Osceola is a political subdivision of the state and is responsible for administering and assessing the Tourist Development Tax authorized in Section 212.03 and Section 13-16, Osceola County Code of Ordinances (Code). Osceola audited Petitioner because Petitioner failed to file any tax returns with Osceola. Osceola correctly assessed Petitioner $394,378.39 for tax, penalty, and interest. The mathematical computations in the Osceola audit are correct. Osceola conducted its audit in accordance with generally accepted auditing principals. The Osceola audit revealed that Petitioner began doing business on January 1, 1995, but reported that it began doing business on both November 16, 1999, and March 12, 1998. The Osceola audit revealed that Petitioner failed to maintain required tax records, including guest registration forms; cash receipts; a general ledger; and documents necessary to verify amounts reported in tax returns. Petitioner did not reconcile its bank statements and did not maintain records necessary to verify that all receipts from guest registrations were properly entered into Petitioner's computer system of record keeping. Respondent began its audit on January 8, 2001. However, Respondent was unable to examine most of Petitioner's books and records due to a lack of cooperation from Petitioner. Respondent made several attempts to obtain Petitioner's books and records, but Petitioner provided Respondent with only consumable purchase invoices. Respondent and Osceola have an agreement to share information. Respondent relied on information obtained by Osceola in the course of the Osceola audit. Osceola provided Respondent with copies of Osceola's work papers including a spreadsheet of undeclared revenue compiled from Petitioner's books and records. Osceola also provided Respondent with a list of 102 properties managed by Petitioner during the audit period. Approximately 61 properties are located in Osceola County and 41 are located in Polk County. Respondent bases its assessment on an estimate derived from the Osceola assessment, records, and work papers. Respondent conducted its audit in accordance with applicable law. The mathematical computations in Respondent's audit are correct. Petitioner owes sales and use tax in the respective amounts of $218,152.88 and $125,680.72, due on rentals derived from transient housing in Osceola and Polk counties. Petitioner also owes sales and use tax in the amount of $2,100 from the sale of fixed assets. Interest accrues at the daily rate of $98.13.
Recommendation Based upon the findings of fact and the conclusions of law, it is RECOMMENDED that Respondent enter a Final Order assessing Petitioner for tax, penalty, and accrued interest. DONE AND ENTERED this 11th day of July, 2003, 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 11th day of July, 2003. COPIES FURNISHED: Carrol Y. Cherry, Esquire Office of the Attorney General, Tax Section The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050 Martha F. Barrera, Esquire Office of the Attorney General, Tax Section The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050 A.C.E. Property Management of Orlando, Inc. 3501 West Vine Street, Suite 387 Kissimmee, Florida 34741 Bruce Hoffmann, General Counsel Department of Revenue 204 Carlton Building Tallahassee, Florida 32399-0100 James Zingale, Executive Director Department of Revenue 204 Carlton Building Tallahassee, Florida 32399-0100
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 is whether Petitioner is liable for proposed assessments of sales tax, interest, and penalty in the total amount of $38,739.48, through June 3, 1994, and local government infrastructure surtax, interest, and penalty in the total amount of $524.67, through June 3, 1994.
Findings Of Fact Petitioner purchases chemicals from manufacturers and resells the chemicals at retail. Among the chemicals that Petitioner purchases and resells are certain ozone-depleting chemicals (ODCs) that are subject to two different federal taxes. One federal tax is found in Section 4681(a)(1) of the Internal Revenue Code of 1986, as amended (IRC). IRC Section 4681(a)(1) imposes a tax on "any ozone-depleting chemical sold or used by the manufacturer, producer, or importer . . .." This is referred to as the "ODC tax." As interpreted by the Department of Treasury in regulations and rulings and applied by the Internal Revenue Service, IRC Section 4681(a)(1) imposes the ODC tax at the time of the sale or use of an ODC by the manufacturer, producer, or importer. As interpreted and applied by these federal agencies, the ODC tax is a liability exclusively of the manufacturer, producer, or importer; a purchaser from any of these entities is not liable to pay the ODC tax to the federal government. The federal government may not attach a lien on the ODCs, after they have been sold or used, if the manufacturer, producer, or importer has failed to pay the ODC tax. In this case, the ODC tax is imposed on the chemical manufacturer that sold the ODCs to Petitioner, and the tax is imposed at the time of the sale from the manufacturer to Petitioner. It is irrelevant that the manufacturer separately stated the ODC tax on invoices to Petitioner. The manufacturer could have separately stated other items of the cost of goods sold or general administration and overhead, such as the federal gasoline taxes that it paid in transporting the ODCs to Petitioner. The manufacturer's invoice has no bearing on the exclusive legal liability of the manufacturer, under IRC Section 4681(a)(1), to pay this federal excise tax. The other federal tax involved in this case is found in IRC Section 4682(h), which imposes a floor stocks tax on persons-other than the manufacturer, producer, or importer-holding ODCs for use in further manufacture or sale. Imposed after the payment of the ODC tax, this tax ensures that the ODC tax, which has increased over time, is not partially avoided by a retailer holding ODCs in inventory for a considerable period of time following their purchase from the manufacturer. Following an audit, Respondent issued on June 3, 1994, a Notice of Intent to Make Audit Changes of Tax, Penalties, and Interest under Chapter 212. The amount of sales tax due was $24,469.73 with a penalty of $8289.52 and interest through June 3 of $5980.23 and accruing at a daily rate of $8.04. Respondent issued on June 3, 1994, a Notice of Intent to Make Local Government Infrastructure Surtax Audit Changes under Section 212.054. The amount of surtax due was $351.43 with a penalty of $87.86 and interest through June 3 of $85.38 and accruing at a daily rate of $0.12. Respondent issued the proposed assessments because, in calculating sales tax and surtax on ODCs sold at retail, Petitioner reduced the actual sales price by the amount of federal ODC tax paid by the manufacturer and floor stocks tax paid by Petitioner. As noted above, though, federal law required Petitioner to pay, as a tax, only the floor stocks tax. Petitioner's payments to the manufacturer of an amount equal to the ODC tax paid by the manufacturer reflected only an agreement between Petitioner and the manufacturer as to how to characterize part of the purchase price. The sales price of the ODCs should have included the ODC tax, but not the floor stocks tax. The floor stocks tax is a legal obligation imposed on Petitioner and is based on its inventory of ODCs. As discussed in the following section, Petitioner is permitted by Respondent's rules to exclude these payments from the sales price of the ODCs. The record is not especially clear as to the amount of sales tax and surtax relief to which Petitioner is entitled on account of the floor stocks tax that it has paid. Petitioner paid approximately $21,500 in federal floor stocks tax in two forms: $20,418.80 in regular tax payments and about $1000 in tax payments following an audit. The record contains adequate proof of the $20,418.80 payment, but not of the $1000 additional payment following an audit. The $1000 represented Mr. Simmons' best estimate of the additional floor stocks tax that his company paid. Mr. Simmons retired from Dow Corning Chemical after a 37-year career in the chemical industry. He began Petitioner as a hobby, and he and his wife take obvious pride in the success of this business. Mr. Simmons is a careful reader of provisions of federal and state tax law. But without expert guidance from one of Petitioner's witnesses, who is one of a small number of IRS Revenue Agents specially trained in ODC taxes, IRC Section 4681(a)(1) lends itself to multiple interpretations. In good faith, Mr. Simmons tried to interpret the ODC tax through a careful reading of the statute and consideration of its placement in the IRC under Chapter 38, which is titled "Environmental Taxes," rather than Chapter 32, which is titled "Manufacturers Excise Taxes." As discussed below, ambiguous language in Respondent's rule may have furthered Mr. Simmons' understandable confusion on this point.
Recommendation It is RECOMMENDED that the Department of Revenue enter a final order finding that Petitioner owes the amounts assessed in the Notice of Intent to Make Audit Changes of Tax, Penalties, and Interest dated June 3, 1994, and Notice of Intent to Make Local Government Infrastructure Surtax Audit Changes dated June 3, 1994; provided, however, that the final assessments shall be reduced by the amount of the assessed penalties and shall be further reduced to reflect a reduction in total sales price of $21,418.80 with a corresponding reduction in interest. ENTERED on August 16, 1996, in Tallahassee, Florida. ROBERT E. MEALE Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings on August 16, 1996. APPENDIX Rulings on Petitioner's Proposed Findings 1: adopted or adopted in substance. The tax, surtax, and penalties are accurate. The interest figures appear accurate. However, these are not the Notices of Intent that were admitted into evidence in this case. 2: adopted or adopted in substance. 3: rejected as unsupported by the weight of the evidence and incorrect legally. 4: adopted. 5: rejected as unsupported by the weight of the evidence. 6: (first sentence): adopted. 6: (remainder): rejected as unsupported by the weight of the evidence and incorrect legally. 7-9: rejected as irrelevant. 10-12: adopted. 13-20: rejected as irrelevant. 21: rejected as unsupported by the weight of the evidence. Petitioner's counsel states in this proposed finding: "The Instructions to Internal Revenue Service Form 6627 state that the entity which holds the subject Ozone-Depleting Chemicals for sale can be held responsible for the filing of said Form 6627." At best, this statement reflects a poor understanding of the multi-purpose Form 6627 and related instructions. Taxpayers use this form to report several taxes, including the ODC excise tax and floor stocks tax. Nothing whatsoever in Form 6627 or the instructions imposes any liability on Petitioner for the ODC excise tax. The only liability imposed on Petitioner in Form 6627 or the instructions is for the floor stocks tax. 22: rejected as repetitious. 23: adopted or adopted in substance. 24 (first sentence): adopted. 24 (remainder)-25: rejected as unsupported by the weight of the evidence and incorrect legal argument. Rulings on Respondent's Proposed Findings 1-11: adopted or adopted in substance. 12-17: rejected as subordinate, irrelevant, and recitation of testimony. 18-20: adopted or adopted in substance. 21: rejected as recitation of testimony. 22: Adopted. 23: rejected as recitation of evidence. 24: rejected as subordinate. 25-26: adopted or adopted in substance. 27-29: rejected as subordinate and recitation of testimony. 30-44: adopted or adopted in substance. COPIES FURNISHED: Peter W. Simmons, President Simmons Chemical Corporation 311 Sarasota Center Boulevard Sarasota, Florida 34240 Bradley D. Magee Abel Band 240 South Pineapple Avenue Sarasota, Florida 34236 Olivia P. Klein Assistant Attorney General Office of the Attorney General The Capitol-Tax Section Tallahassee, Florida 32399-1050 Larry Fuchs, Executive Director Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100 Linda Lettera, General Counsel Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100
The Issue Whether respondent's proposed rule 10N-5.0605 is an invalid exercise of delegated legislative authority?
Findings Of Fact The respondent Health Care Cost Containment Board (HCCCB) published proposed Rule 10N-5.0605, "Fine for Exceeding Approved Gross Revenue per Adjusted Admission," in the Florida Administrative Weekly, Vol. 16, No. 49, on December 7, 1990.The proposed rule reads: 10N-5.0605 Fine For Exceeding Approved Gross Revenue Per Adjusted Admission. For each hospital subject to the provisions of Section 407.50, Florida Statutes, the Board shall annually compare the audited actual experience of each hospital to its approved budget gross revenue per adjusted admission for purposes of levying an administrative fine in accordance with Section 407.06, Florida Statutes. Determination of Potential Excess. For a hospital with a budget letter approved in accordance with Section 407.502(2), and Rule 10N-5.014 for the year at issue, the Board shall subtract the gross revenue per adjusted admission certified in that budget letter from the gross revenue per adjusted admission contained in its audited actual report for the year at issue. If the result is a positive integer, a potential excess for this rule exists. For a hospital with a Board approved budget, the Board shall subtract the gross revenue per adjusted admission contained in that budget from the gross revenue per adjusted admission contained in its audited actual report for the year at issue. If the result is a positive integer, a potential excess for this rule exists. In no case shall the provisions of section , below, create a potential excess when the application of (2)(a) or (2)(b), above, has determined that a potential excess does not exist. Adjusting the Excess. The Board shall adjust the potential excess by demonstrated changes in a hospital's case mix and outlier experience. The Board shall consider changes in case mix in levying a fine. A hospital must demonstrate any changes in its case mix, to the Board's satisfaction based on case mix data, which shall include, but not be limited to, reports filed pursuant to Sections 407.02(1) and 407.50, F.S., and rules promulgated thereunder. Demonstration of changes in case mix must be based upon case mix data reported as required in the FHURS Manual. A consistent set of DRG weights shall be used for all periods of data submitted, and shall correspond to the weight set used as published by the Health Care Finance Administration. The amount determined in paragraph (2) for budget letters or Board-approved budgets for which changes in case-mix or average length of stay for psychiatric hospitals was not used to justify cost increases, shall be adjusted for case mix as follows: For acute care hospitals, the Board shall adjust the potential excess in the following manner. The percentage increase, or decrease, in the case mix score between the year prior to the year at issue and the year at issue less the case mix, threshold as established in Rule 10N-5.020, shall be multiplied by the gross revenue per adjusted admission as reported in the hospital's budget letter or Board approved budget for the year at issue. The total adjustment will then be subtracted from the potential excess in determining the adjusted excess. For psychiatric hospitals, demonstration of changes in average length of stay shall be based upon data available to the Board for acute and intensive care patients, except for hospitals treating sub-acute patients, exclusively, for which demonstration of changes in average length of stay shall be based upon data available to the Board for all patients. The Board shall multiply the percentage increase, or decrease, in average length of stay from the year prior to the year at issue to the year at issue, by the gross revenue per adjusted admission reported in the hospital's budget letter or Board approved budget for the year at issue. This total adjustment will then be subtracted from the potential excess in determining the adjusted excess. The amount determined in paragraph (2)(b) for a hospital with a Board approved budget for which changes in case-mix or average length of stay were used to justify cost increases, shall be adjusted for case mix as follows: For acute care hospitals, the year at issue actual case mix score will be compared to the entire case mix score used in calculating the approved budget for the year at issue. The same grouper will be utilized in computing the entire year's case mix score as was used in the budget. The percentage increase, or decrease, without applying the threshold adjustment, will be multiplied by the Board-approved gross revenue per adjusted admission to determine the case mix, adjustment. This total adjustment will then be subtracted from the potential excess in determining the adjusted excess. For psychiatric hospitals, demonstration of changes in average length of stay shall be based upon data available to the Board for acute and intensive care patients, except for hospitals treating sub-acute patients, exclusively, for which demonstration of changes in average length of stay shall be based upon data available to the Board for all patients. The year at issue actual length of stay will be compared to the length of stay used in calculating the approved budget for the length of stay used in calculating the approved budget for the year at issue. The Board shall multiply the percentage increase, or decrease, in average length of stay, by the Board approved gross revenue per adjusted admission. This total adjustment will then be subtracted from the potential excess in determining the adjusted excess. The Board shall consider in levying a fine, changes in patient intensity and severity of illness documented by quantifiable evidence of changes in the hospital's actual proportion of outlier cases to total cases and dollar increases in outlier cases' average charges per case. An outlier case is defined as those inpatient cases in a DRG which exceed the threshold established for each DRG. The base year is the year prior to the year at issue. The threshold is established by multiplying the hospital's actual gross revenue per adjusted admission (GRAA) for the base year by the HCFA weight for the DRG and multiplying the result by the mean variance factor (MVF), 2.11. The HCFA weight shall be from the same set of DRG weights used by the hospital in calculating the case mix score submitted in (3)(a) above. The thresholds for the year at issue are established by multiplying the hospital's approved GRAA for the year at issue by the HFCA weight for each DRG and multiplying the result by the MFV of 2.11. Hospitals requesting a case mix outlier adjustment shall submit detailed documentation of actual outlier cases, providing an auditable record ID number sufficient to protect the confidentiality of patient identity, DRG, date of discharge and gross charges for each outlier case for all DRGs on the Outlier Detail Worksheet and Summary Outlier Report described in FHURS Chapter V-G. A consistent grouper shall be used for all data submitted. The grouper used shall be that used in calculating case mix scores submitted in (3)(a) above. Proportional Outlier Adjustment Determine the average actual inpatient revenue per admission for the base year by dividing total inpatient revenue by total admissions. Calculate an outlier adjusted revenue per admission in the year at issue by: Multiplying the year at issue outlier discharges by the average gross revenue per outlier discharge for the base year. Multiplying the year at issue inlier discharges (defined as report admissions for the period minus outlier discharges, which do not include the discharges for outliers occurring in DRGs 390 and 391) by the average gross revenue per inlier discharge for the base year (gross revenue per inlier discharge is defined as inpatient revenue for the period minus outlier revenue, which does include the revenue generated by outliers in DRGs 390 and 391). Sum the products in i. and ii. and divide by the total admissions in the year at issue. Calculate the percent change between the result obtained in (3)(b)3.a. and the result obtained in (3)(b)3.b. This percent change is the proportional outlier adjustment. Outlier Dollar Increase (Decrease) Adjustment Calculate the increased (decreased) outlier revenue due to the increase (decrease) in average outlier charges per case by multiplying these average increase (decrease) in gross revenue per outlier discharge between the base period and the year at issue by the number of outlier discharges for the year at issue. Divide the product achieved in (3)(b)4.a. above by the total admissions for the actual period and calculate the percent it represents of the amount determined in (3)(b)3.a. This percent change is the dollar increase (decrease) outlier adjustment. The total outlier charge adjustment is the sum of the proportional outlier adjustment percentage described in (3)(b)3.c. above and the outlier dollar increase (decrease) adjustment percentage described in (3)(b)4.c. above. The percentage computed in (3)(b)5. above shall be reduced by the outlier adjustment percentage applied in the Board approved budget for the year at issue. The result, will be multiplied by the Board approved or budget letter gross revenue per adjusted admission for the year at issue to determine the outlier adjustment. This total adjustment will then be subtracted from the potential excess in determining the adjusted excess. Calculating the Fine. If the adjusted excess computed in (3) above results in a negative integer, no fine will be imposed pursuant to this rule. If the integer is positive, it will be multiplied by the actual admissions for the year at issue to compute excess gross revenue. The budgeted gross revenue per adjusted admission for the year at issue will be multiplied by the actual adjusted admissions for the year at issue to compute approved total gross operating revenue. The excess gross revenue shall be divided by the approved total gross operating revenue for the year at issue to compute the excess revenue percentage. The excess gross revenue calculated in above shall be multiplied by the excess revenue percentage calculated in (4) above to compute the base fine amount. The base fine amount calculated in (4)(a) shall be multiplied by the applicable occurrence factor to compute the cash fine. For the first occurrence within in a 5-year period, the applicable occurrence factor shall be 0.25; For the second occurrence within the 5-year period following the first occurrence as set forth in paragraph 1., the applicable occurrence factor shall be 0.55. For the third occurrence within the 5-year period following the first occurrence as set forth in paragraph 1, the applicable occurrence factor shall be 1.0. The cash fine calculated pursuant to section (4) shall not exceed $365,000. Within thirty days after the Board's action to impose a fine pursuant to this rule, the hospital shall pay any fine imposed. However, if the hospital has been assessed a cash fine in accordance with the provisions of Rule 10N-5.062 for the same period in which a cash fine was imposed pursuant to this rule, the hospital shall pay the greater of the two cash fines. The remaining cash fine amount shall not be imposed, but shall be considered an occurrence. Special Provisions. A hospital with a fiscal year ending during calendar year 1992 shall not be subject to the provisions of this rule if the amount determined in paragraph (2)(a) or (2)(b), as appropriate is less than or equal to the result of multiplying its approved budget gross revenue per adjusted admission for the year at issue by 10%. A hospital with a fiscal year ending during calendar year 1993 shall not be subject to the provisions of this rule if the amount determined in paragraph (2)(a) or (2)(b), as appropriate, is less than or equal to the result of multiplying its approved budget gross revenue per adjusted admission for the year at issue by 5%. A hospital in its initial year of licensure shall not be subject to the provisions of this rule. For purposes of this rule, a "hospital in its initial year of licensure" shall mean a "new hospital", and shall not include any facility which has been in existence as a licensed hospital, regardless of ownership, for over one year. For a "new hospital" in its second year of operation, the provisions of (7)(a), above, shall apply. For a "new hospital" in its third year of operation, the provisions of (7)(b), above, shall apply. The Board may reduce any excess or fine determined pursuant to this rule, based upon additional data that the hospital may present directly to the Board, or if the imposition of such a fine would have a severe adverse effect which would jeopardize the continued existence of an otherwise economically viable hospital. This rule shall be in effect for fiscal years ending after January 1, 1992. As law implemented, the notice published in the Florida Administrative Weekly lists Sections 407.002, 407.003, 407.02, 407.03, 407.06 and 407.50, Florida Statutes (1989 and 1990 Supp.) The parties stipulated to the following findings of fact, set out in paragraphs 2 through 21. The petitioner, Florida League of Hospitals is a non-profit corporation which is organized and maintained for the benefit of the 83 investor-owned hospitals which comprise its membership. One of the primary purposes of FLH is to act on behalf of its members by representing their common interests before the various governmental entities of the state, including the HCCCB. The Florida League of Hospitals has standing to appear in this matter. The petitioner, Florida Hospital Association is a non-profit corporation which is organized and maintained for the benefit of the hospitals which comprise its membership. One of the primary purposes of FHA is to act on behalf of its members by representing their common interests before the various governmental entities of this state, including the HCCCB. The FHA has standing to participate in this matter. The petitioner, Association of Voluntary Hospitals of Florida, Inc., is a Florida not-for-profit corporation, which is organized and maintained for the benefit of the 91 public and non-profit Florida hospitals which comprise its membership. One of the primary purposes of AVHF is to act on behalf of its members by representing their common interests before the various governmental entities of the State of Florida, including the Health Care Cost Containment Board. The AVHF has standing to sue in this matter. The intervenor is charged under Sections 407.54 and 350.061-350.0614, Florida Statutes, with representing the interest of the general public in any proceeding before the HCCB conducted pursuant to Section 120.57, Florida Statutes, as are provided in Sections 350.061-350.0614, Florida Statutes. Such powers include the capacity to initiate proceedings by petition in order to urge any position which is deemed by the Public Counsel to be in the public interest. Pursuant to the powers and duties as provided in Sections 407.54 and 350.061-350.0614, Florida Statutes, the Public Counsel has standing to participate in the challenge to proposed Rule 10N-5.0605. Both gross and net revenues are included in any hospital budget, where: gross revenues represent all charges for hospital services (as well as certain other operating revenues); and net revenues represent dollars actually received for the provision of hospital services, i.e., gross revenues less certain deductions from revenues resulting from an inability to collect payment of charges. Gross and net revenues are not the same thing nor is there necessarily a fixed relationship between these two measures. It is possible for a hospital to exceed its Board-approved or hospital certified GRAA while its NRAA is at or below its budget. Hospital budgets and amended budgets are approved or certified for a specified future time period. The GRAA contained in a hospital budget or amended budget is a calculated average which is based upon projected data for a specified future time period. A hospital's experience for GRAA can vary from day to day during a fiscal year. Generally, a hospital's fiscal year is 365 days. In fiscal year 1987, 154 out of 215 general acute care hospitals had gross revenues per adjusted admissions that averaged 4.4% over their Board approved budgets for a total excess of $506 million. In fiscal year 1988, 148 out of 205 general acute care hospitals had gross revenues per adjusted admissions that averaged 5.1% over Board approved budget for a total excess of $682 million. In fiscal year 1989, 154 out of 205 general acute care hospitals had gross revenues per adjusted admissions that averaged 7.3% over Board approved budget for a total of $1.1 billion in excess gross revenues. The numbers referred to in paragraphs 13, 14, and 15 are not case mix and outlier adjusted. General acute care hospitals' actual experience compared to prior year for GRAA increased 13.8% in 1987, 13.5% in 1988, and 16.6% in 1989. Hospital input prices -- a measure of hospital inflation -- increased 3.8% in 1987, 5.0% in 1988, and 5.1% in 1989. The Board has estimated, based upon calculations from survey results based on FY 1989 data that the charges for approximately 50% of Florida hospital patients are the responsibility of private payors and approximately 46.4% of those patients or 345,000, paid based upon a discount from charges. There is some currently undetermined number of patients in Florida who pay full charges. Hospitals generally exercise direct control over charges and charge structures. Hospitals influence, but do not directly control utilization of facilities, goods and services, and mix of patients treated. Hospitals do not generally directly control case mix or outliers. Hospitals influence, but do not directly control physician practice or admission patterns. Fifty-five out of 282 hospitals submitted budgets for fiscal year 1989 in which the approved GRAA was less than the hospital's 1988 actual GRAA experience.
The Issue The issues are whether Respondent violated Chapter 212, Florida Statutes, by failing to pay sales tax and local government infrastructure surtax, and if so, what penalty should be imposed.
Recommendation Based upon the findings of fact and conclusions of law, it is RECOMMENDED: That Respondent enter a Final Order upholding its assessment against Petitioner in full, including all taxes, penalties, and interest statutorily due until date of payment for both the sales and use tax and the local government infrastructure. DONE AND ENTERED this 29th day of September, 1998, in Tallahassee, Leon County, Florida. SUZANNE F. HOOD Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 Filed with the Clerk of the Division of Administrative Hearings this 29th day of September, 1998.
