The Issue Is the Respondent's assessment for corporate income tax and interest for the tax years ending 12/31/78, 12/31/79, and 12/31/80 appropriate, and may it be properly imposed upon Petitioner?
Findings Of Fact The instant dispute between the parties arose out of how the substantial business interests of Petitioner Murray Kramer Corp. are to be defined and by what accounting method its corporate income tax assessments are to be made. Milton P. Weiss, C.P.A., is Petitioner's accountant and qualified representative for purposes of this proceeding. He is neither an internal bookkeeper for the corporation nor a corporate officer thereof. At all times material, Petitioner was conducting business, deriving income, or existing within the State of Florida, pursuant to Chapter 220, F.S. Petitioner invests primarily through partnerships. Among Petitioner's holdings and investments is ownership of an orange grove in the State of Florida from which it derived income by way of the sales of citrus fruit grown in Florida during the taxable years at issue: 1978, 1979, and 1980. The orange grove constitutes real and tangible property in Florida for purposes of Florida's corporate income tax. Petitioner has consistently filed Florida corporate income tax returns on a "separate accounting" basis since the inception of Florida's Corporate Income Tax Law on January 1, 1972. Petitioner used this method for the years at issue: 1978, 1979, and 1980. It did so without petitioning the Respondent Department of Revenue for permission at or before the filing of the returns to use the "separate accounting" method to determine the Florida tax base. Accordingly, Petitioner did not receive prior written permission from the Department to use the "separate accounting" method for those years, and the Department did not require that the Petitioner use the "separate accounting" method in those years. Nonetheless, Petitioner asserts that its pattern of using the "separate accounting" method for six years put the Department on sufficient notice that the corporate taxpayer would continue to use that method indefinitely and further asserts that it was therefore entitled to use such a "separate accounting" method on the basis of its prior consistent usage. Petitioner's Florida corporate returns declare investment income from dividends, interest, gains from securities, partnership income, and income from its orange grove located in Florida. In each of the disputed tax years, Petitioner entered its federal taxable income on Line 1 of the Florida Corporation Income Tax Return, FORM F-1120. This amount is not at issue and is accepted as a "given" by both parties. However, in each of the disputed tax years, Petitioner did not complete the apportionment schedule on Page 3 of the respective returns. Instead of using the apportionment method, Petitioner computed what it characterized as "Florida Profit" or "Florida Income" on a schedule it attached, based totally on the profits it derived from the Florida orange grove and then inserted that amount on Line 6, Florida Portion of Adjusted Federal Income, of the "Computation of Florida Tax Liability" on the Florida return. This entry did not relate computationally to the amount of federal taxable income reported federally on Line 1. All gross receipts from the sale of citrus fruit by Petitioner were derived from sales made to Zellwood Fruit Distributors. This dollar amount is also undisputed. Petitioner received payment from its Florida orange grove operation in the form of checks drawn by Zellwood. Approximately June 20, 1983, Respondent Department of Revenue made an initial audit of Petitioner's books and records for the taxable years in question. Respondent's auditor assigned at that time had full and free access to Petitioner's books and records. He and his supervisor memorialized their view that the "separate accounting" method employed by Petitioner was proper, but this judgment call (by the auditor on June 29, 1983 and by his supervisor on July 1, 1983) was in the nature of free-form agency action and was neither accepted nor formalized by their superiors within the agency who ultimately determined that the Petitioner should have employed the "apportionment" method and that the burden was upon the Petitioner even under the apportionment method to establish that one hundred percent of its income was not derived in Florida. The Respondent Department therefore determined the tax owed by Petitioner upon the basis of 100% of Petitioner's income as opposed to the yearly percentages that Petitioner had unilaterally assigned to its orange grove, and issued its Revised Notice of Intent to Make Corporate Income Tax Audit Changes on November 7, 1983. Florida's apportionment formula is a three-factor function which takes selected business activities of the taxpayer and computes the portion of that activity attributable to Florida, divided by that activity everywhere. A composite of the subtotal of those three measures (payroll, sales, and property) of business activity are used to compute Florida's share of the "everywhere" base that would be available under the adjusted federal taxable income base. See, Section 214.71(1), F.S. The Department calculated the tax using the three statutorily recognized apportionment factors of payroll, sales, and property. Concerning the first apportionment factor, payroll, Petitioner had federally reported no amount of payroll, and therefore this factor was determined by the Department to be zero, and pursuant to Section 220.15, F.S., the payroll factor was eliminated and the other two factors were used exclusively. Concerning the sales factor, all gross receipts of the orange grove were considered to be derived within the State of Florida, and all gross income attributable to intangible personal property was excluded from the sales factor, pursuant to Section 220.15(1), F.S. Concerning the property factor, the Department determined that all real and tangible personal property was within the State of Florida. The situs of the intangible property was not established by the taxpayer. Therefore, because Section 214.71, F.S. limits the construction of the property factor to include only "real and tangible personal property," it was thus determined to exclude intangible property. The Respondent Department of Revenue issued its Notice of Proposed Assessment on November 16, 1983, showing a balance of $10,596.00 ($7308.00 tax, $275.00 penalty, and $3,013.00 interest computed through October 31, 1983, plus notice of daily interest of $2.40 per day from November 1, 1983 until paid.) Petitioner timely availed itself of informal protest procedures, and the Department issued its Notice of Decision on March 15, 1985. By its June 21, 1988 Notice of Reconsideration, the Department concluded its informal proceedings and denied Petitioner's assertion of the right to use a "separate accounting" method and further denied Petitioner's challenge to the Department's assessment by the "apportionment" method, which in this instance had not made any apportionment for "outside Florida" activities. The situs of intangible personal property was not sufficiently demonstrated by the Petitioner at formal hearing. The Petitioner also did not establish that it owns real or tangible personal property outside Florida. Zellwood Fruit Distributors provided Petitioner Murray Kramer with letters attesting that, based upon information received from Winter Gardens Citrus Products Cooperative, Winter Gardens' sales percentages in the State of Florida were as follows: 1979 1980 18.60% 21.07% Zellwood provided no such figures to Petitioner for the year 1978. Petitioner contends, on the basis of the after the fact Zellwood letters, that Zellwood was a member of Winter Gardens, a cooperative, and Murray Kramer was an associate grower of Zellwood. At formal hearing, no one from Zellwood or Winter Gardens testified; no contract between Petitioner Murray Kramer and either Zellwood or Winter Gardens was introduced to prove agency; no bills of lading, sales slips, corporate documents, or other connective link among the three entities was offered in evidence; nor was any primary, direct, non-hearsay evidence of sales amounts or situs of Winter Gardens' sales offered by Petitioner. Milton Weiss, Petitioner's accountant, asserted that if a straight "apportionment" (not "separate accounting") calculation had been made for the income derived in Florida by Petitioner, percentages would be: 1978 1979 1980 24.03% 15.31% 15.01% These percentages rely in part on what are clearly the out-of-court statements of Zellwood's correspondent, relaying further out-of-court statements from Winter Gardens Citrus. (See the immediately preceding Finding of Fact). Neither of these out-of-court hearsay statements is such as may be used to supplement or explain direct evidence, since no direct, primary source evidence of these sales or income has been presented before the undersigned in this de novo proceeding. See, Section 120.58(1), F.S. Petitioner has not directly paid wages during the tax years at issue. Petitioner has not produced any federal partnership tax returns nor other persuasive proof to account for the return on its investments through partnership channels. During the tax years at issue, Petitioner was not a member of a Florida cooperative, as that term, "cooperative," is used in Section 214.71(3)(a)2, F.S. (See Finding of Fact 15). Petitioner was unable, by evidence of a type commonly relied upon by reasonably prudent persons in the conduct of their affairs, to establish that all amounts other than the percentages of gross income Petitioner had assigned by either of the alternative accounting methods was generated outside of the State of Florida. In so finding, the undersigned specifically rejects Petitioner's assertion that the initial audit report of June 1983 could, by itself alone, legally or factually establish that only the orange grove income was Florida income, that Petitioner's Florida income was solely from the orange grove, that the interest, dividends, and gains on securities sales were not derived in Florida, that the Petitioner taxpayer received rent income from partnerships, that the partnership real estate which gave rise to the rent income was 100% outside Florida, or that the Respondent's initial audit "verified" the figures needed to compute the sales factor, the figures for the property factor, and the figures for the payroll factor of the "apportionment" method for the following reasons: In addition to the first auditor's report being free-form agency action which was ultimately rejected by the agency, and in addition to the failure of either the first auditor or his supervisor to testify in the instant Section 120.57(1) de novo proceeding as to the accuracy of the underlying primary documentation which Petitioner Murray Kramer claimed the first auditor had apparently reviewed, Petitioner did not offer in evidence at formal hearing any such direct evidence documentation which it claimed had been reviewed by the auditors. Further, Respondent's successive auditor, Mr. Siska, testified that it is auditor practice to only examine those books and records individual auditors believe to be necessary to complete the audit. This discretionary element eliminates any guarantee of what the initial auditor relied upon. For the same reasons, Petitioner's assertion that the Internal Revenue Service (IRS) audit of its books and records for the year 1979 "verifies" that the Petitioner's books and records accurately reflect the transactions that took place, is rejected. Petitioner Murray Kramer had admitted a letter (P-10) notifying the corporation that the IRS' "examination of ... tax returns for the above periods shows no change as required in the tax reported. The returns are accepted as filed." The tax period indicated on this exhibit is "7912", which is not helpful, and even if it means, as Mr. Weiss testified, that the 1979 federal tax return which is part of the Florida Corporate Tax Return is accurate under federal law, this IRS letter alone does not verify all the underlying documentation for all three years in question. Also, specifically with regard to investments made through other entities, Mr. Weiss' testimony suggests that the wages paid and partnership returns of these other entities never were in the possession of, nor accessible by, this Petitioner. Petitioner's reliance on its federal returns is apparently based, in part, at least, upon its assertion that it is a "financial institution" as defined in Sections 214.71(3)(b) and 220.15(2), F.S., but the presentation quality of evidence in this case does not permit of such a finding, either. Petitioner has paid no portion of the assessed taxes.
Recommendation Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the Department of Revenue enter a Final Order which dismisses the Petition and affirms the assessment. DONE and ORDERED this 26th day of June, 1989, in Tallahassee, Leon County, Florida. ELLA JANE P. DAVIS 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 this 26th day of June, 1989. APPENDIX TO RECOMMENDED ORDER, CASE NO. 88-4100 The following constitute rulings, pursuant to Section 120.59(2), F.S. upon the parties' respective proposed findings of fact (PFOF). Petitioner's PFOF: 1, 6. Accepted. 2, 9, 10, 11, 17, 19. Rejected for the reasons set out in the Recommended Order. 3, 5, 7, 8, 12, 14, 16. Accepted but not dispositive of any material issue for the reasons set forth in the Recommended Order. With regard to item 8, specifically, this determination is non-binding in the de novo proceeding. 4. Rejected upon the citation given as not proved or applicable as stated. 13. Accepted in part and rejected in part as not proved or applicable as stated. See Conclusions of Law 11-12. 15, 18. Rejected as out of context and misleading upon the record as a whole, and as not dispositive of any material issue, and as subordinate and unnecessary to the facts as found. Respondent's PFOF: 1, 2, 3, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 18. Accepted. 4, 5. Accepted in part; what is not adopted is subordinate or unnecessary to the facts as found. 17. Accepted, but by itself is not dispositive of any material issue at bar, for the reasons set out in the Recommended Order. COPIES FURNISHED: Milton P. Weiss, C.P.A. 686 Hampstead Avenue West Hampstead, New York 11552 Jeffrey M. Dikman, Esquire Assistant Attorney General Tax Section Department of Legal Affairs The Capitol Tallahassee, Florida 32399-1050 Sharon A. Zahner, Esquire Assistant General Counsel Department of Revenue Room 204, Carlton Building Post Office Box 6668 Tallahassee, Florida 32314-6668 William D. Townsend, Esquire General Counsel 203 Carlton Building Tallahassee, Florida 32399 Katie D. Tucker, Executive Director Department of Revenue 102 Carlton Building Tallahassee, Florida 32399-0100 Milton P. Weiss, C.P.A. 3091 North Course Drive Pompano Beach, Florida 33069 =================================================================
The Issue The issue in this proceeding is whether the Florida Corporate Income Tax Code subjects to taxation items realized for federal income tax purposes prior to the effective date of the Code but recognized for federal purposes after the effective date of the Florida Code.
Findings Of Fact In a joint stipulation filed with the Hearing Officer, the parties stipulated to the relevant facts of this proceeding. Findings (1) through (6) listed below are quoted directly from that stipulation of facts. In 1965 MORRIS TRADING CORPORATION (whose name at that time was Morris Grain Corporation) exchanged certain property used in its trade or business with Continental Grain Company for six thousand seven hundred twenty three (6,723) acres of real estate located in Florida a description of which is attached hereto and made a part hereof as Exhibit 1 containing a layout of the ranch acreage acquired by MORRIS TRADING CORPORATION from Continental Grain Company, including the nine hundred fifty eight (958) acre parcel sold in the fiscal year ending in 1968, the one thousand (1,000) acre parcel sold in the fiscal year ending in 1969, and the remaining acreage sold in the fiscal year ending in 1973, as well as a small parcel of property retained by the Corporation. Although MORRIS TRADING CORPORATION realized income for federal tax purposes in 1965 when it exchanged a grain elevator and other property for real estate described on Exhibit 1, the Corporation did not recognize any income for federal tax purposes in 1965 pursuant to Section 1031 of the Internal Revenue Code of 1954 as amended. The real estate acquired in exchange for the property traded by MORRIS TRADING CORPORATION had a fair market value in 1965 of ONE MILLION SIX HUNDRED THIRTEEN THOUSAND FIVE HUNDRED TWENTY AND NO/100 DOLLARS ($1,613,520.00), or TWO HUNDRED FORTY AND NO/100 DOLLARS ($240.00) per acre. The tax cost basis of the property given up by MORRIS TRADING CORPORATION in the exchange was TWO HUNDRED SIXTY SEVEN THOUSAND EIGHT HUNDRED THIRTY TWO AND SIXTY SIX/100 DOLLARS ($267,832.66). MORRIS TRADING CORPORATION paid TWENTY THOUSAND FOUR HUNDRED FIFTY THREE AND FIFTY FIVE/100 DOLLARS ($20,453.55) in cash for the purchase of mineral rights to the four thousand six hundred five (4,605) acres sold during the fiscal year ending in 1973 and there were ONE HUNDRED SIXTY TWO THOUSAND FIVE HUNDRED TWENTY TWO AND FIFTY FIVE/100 DOLLARS ($162,522.55) of costs connected with the sale of the property consisting of commissions of ONE HUNDRED THIRTY THREE THREE HUNDRED AND NO/100 DOLLARS ($133,300.00), attorneys fees of EIGHTEEN THOUSAND AND NO/100 DOLLARS ($18,000.00), and documentary" stamps and miscellaneous expenses of ELEVEN THOU- SAND TWO HUNDRED TWENTY TWO AND FIFTY FIVE/100 DOLLARS ($11,222.55). MORRIS TRADING CORPORATION sold four thousand six hundred five (4,605) acres-of the property acquired in the exchange in 1965 during its fiscal year ending May 31, 1973, for a gross sales price of TWO MILLION NINE HUNDRED SIXTY ONE THOUSAND EIGHT HUNDRED SEVEN AND NINETY SIX/100 DOLLARS ($2,961,807.96). On its Florida corporate income tax return for the fiscal year ending May 31, 1973, Petitioner excluded income from the 1973 sale of the 4,605 acres, although this income was reported as recognized on its federal income tax return. The Respondent, Department of Revenue, issued its proposed deficiency for the 1973 fiscal year assessing Petitioner $121,389.33. This assessment was based upon the gain received by Petitioner for the 1973 transaction, said gain being measured by the difference between the original cost of the property exchanged in 1965 and the adjusted sales price of the property sold in 1973. The Petitioner filed a protest against the proposed deficiency. An informal conference failed to resolve the matter and the Petitioner thereafter filed its petition for an administrative hearing. On August 4, 1976, the parties entered into a joint motion for stay of proceedings pending the Florida Supreme Court's resolution of the case of Dept. of Revenue v. Leadership Housing, Inc. and Leadership Communities, Inc., 343 So.2d 611 (Fla. 1977). Thereafter, a prehearing conference was held to narrow and define the issues, briefs were filed and a hearing was held to receive oral argument on the legal issues involved.
Recommendation Based upon the findings of fact and conclusions of law recited above, it is recommended that the proposed corporate income tax deficiency for the Petitioner's fiscal year ending in 1973 be held invalid. Said deficiency should be recomputed by subtracting from the gross, sales price of the real estate sold in 1973 the amount realized on Petitioner's federal return in 1965, the selling expenses and the purchase of additional mineral rights. Respectfully submitted and entered this 15th day of February, 1978, in Tallahassee, Florida. DIANE D. TREMOR, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Gerald T. Hart Thompson, Wadsworth, Messer, Turner and Rhodes Post Office Box 1876 Suite 701, Lewis State Bank Building Tallahassee, Florida 32302 E. Wilson Crump, II Assistent Attorney General Department of Legal Affairs Post Office Box 5377 Tallahassee, Florida 32301
Findings Of Fact The parties have stipulated to all facts in this proceeding. Those facts found relevant to a determination of the issue are as follows: Petitioner, American Telephone and Telegraph Company, is a New York corporation and is functionally divided into two divisions: the Long Lines Department and the General Department. Through its Long Lines Department, petitioner is a federally regulated public utility and common carrier which furnishes interstate and international telecommunications services. Long Lines is responsible generally for the construction, operation and maintenance of a nationwide system of interstate telecommunications facilities and related equipment which serve to interconnect the facilities of over 1700 operating telecommunications companies in the United States as well as telecommunications systems abroad. Some of these facilities extend into and through the State of Florida. In performing this interstate business, Long Lines operates, and thus has property or employees or both in 49 states, including Florida. Through its General Department, petitioner is the parent corporation of 21 operating telecommunications companies (known as "Associated Companies"), Western Electric Company, Inc. ("Western") and Bell Telephone Laboratories, Inc. ("Bell Labs"). The General Department holds and manages the stock owned in these subsidiaries and two minority owned companies, and provides capital. advice and assistance to them. It conducts these activities principally in New York and New Jersey and conducts no business and has no property or employees in Florida. The only business activities in the State of Florida during 1972, 1973 and 1974 were conducted through petitioner's Long Lines Department in connection with the operation of the interstate and international long distance telecommunications network. None of the Associated Companies is organized under the laws of Florida or has its headquarters in Florida. The Only Associated Company which conducts business or has property or employees within Florida is the Southern Bell Telephone and Telegraph Company (hereinafter "Southern Bell"), a wholly owned subsidiary of petitioner. Southern Bell files its own separate Florida income tax returns and during the period 1972-1974 paid approximately $10 million in income tax to Florida. The respondent concurs that petitioner is entitled to deduct 100 percent of the dividends paid by Southern Bell to petitioner. Western, also a wholly owned subsidiary of petitioner, is a manufacturing corporation with its own Board of Directors and officers, doing business in all 50 states. During the period 1972-1974 Western paid approximately $1.7 million in income tax to Florida. The respondent concurs that petitioner is entitled to deduct 100 percent of the dividends paid by Western to petitioner. For each of the 1972, 1973 and 1974 tax years, petitioner has filed a federal consolidated income tax return, and has made a valid election under Section 243 of the Internal Revenue Code for each of those years. That provision of the federal tax law permits a domestic corporation to deduct 100 percent of the dividends received from its wholly-owned domestic subsidiaries. Petitioner's federal income tax returns were audited by the Internal Revenue Service and the respective tax liabilities were determined and paid for each of the years in question. The Internal Revenue Service did not tax dividends received by petitioner from its affiliates. Petitioner timely filed its Florida corporate income tax returns for the years ending December 31, 1972, December 31, 1973 and December 31, 1974. Petitioner did not elect and was not required to file a Florida consolidated income tax return under Section 220.131, Florida Statutes. For each of the years in question, petitioner reported on line 1--"federal taxable income (line 30, Form 1120 or corresponding line on related form 1120 series, 990C or 990T)"- -of its Florida corporation income tax return (Form F-1120) its taxable income for federal income tax purposes computed as if petitioner had filed a separate federal income tax return for each of the years in question and for each preceding taxable year for which it was a member of an affiliated group. These amounts were: 1972 $ 94,020,281 1973 $213,364,165 1974 $110,770,402 On its Florida corporation income tax return for each of the years in question, petitioner made the additions and subtractions required by the form of the return in computing "adjusted federal income" and apportioned this amount by the prescribed three-factor formula to obtain "Florida net income." The Department of Revenue adjusted the amount of "federal taxable income" and hence "Florida net income" of petitioner for each of the years in question by adding thereto 15 percent of the dividends received from subsidiaries which were deductible for federal income tax purposes under Section 243 of the Internal Revenue Code. On April 10, 1978, the Department issued a notice of proposed deficiency for petitioner's tax years ended December 31, 1972, December 31, 1973 and December 31, 1974. The total amount of the proposed deficiency was $1,131,158, computed as follows: YEAR AUDITED TAX TAX AS FILED DEFICIENCY 1972 $426,468 $122,365 $304,103 1973 668,597 281,168 387,429 1974 594,300 154,674 439,626 Total $1,689,365 $558,207 $1,131,158 After a timely protest to the proposed deficiencies was filed by the petitioner, correspondence and an informal conference between the parties was had. Finally, on April 16, 1981, the Department issued a letter denying the protest and petitioner petitioned for an administrative hearing. Through correspondence and discussions with the petitioner, the Department of Revenue has taken the position that it would allow only an 85 percent dividend deduction for the dividends received by petitioner from those affiliates which were not subject to the Florida corporate income tax code. Petitioner is seeking to take a 100 percent deduction of all dividends which it received from its subsidiaries, as it did on its federal income tax returns. The dividends received by petitioner which the Department is attempting to subject to Florida tax by its proposed deficiency assessment are derived from its equity investment in its subsidiaries and they represent to petitioner a return on such investment. Since the actual capital, however, for that investment is furnished primarily by public investors, the principal use of the dividends received by petitioner is to meet its obligation to its shareholders and bondholders for the payment of dividends and interest. For example, in 1974 petitioner received dividends from the Associated Companies, Western and other affiliates in the amount of $2,538,443,000 and paid dividends to shareholders in the amount of $2,039,800,000 and interest on its long and intermediate term debt of $475,670,000. Petitioner, therefore, serves as the investor interface between the investing public and its subsidiary companies, whereby the purchase of petitioner's stock or debt issues actually represents an investment in the earnings of the Bell System. Petitioner, acting through its General Department, thus provides the avenue by which the subsidiaries pass their net earnings to the investing public. The income which the Department seeks to tax is derived from dividends received by petitioner primarily from earnings generated by the property and employees of the Associated Companies which are devoted to furnishing intrastate and interstate telecommunications services in their operating territories in states other than the State of Florida. These earnings are subject to income taxes in all states in which the Associated Companies provide telecommunications services that impose income taxes on corporations. The dividends received by petitioner do not contribute to the funding of Long Lines since (1) the pervasive regulation under which petitioner's subsidiaries operate limits their earnings to that amount sufficient for the needs of their own operations and effectively prevents those earnings from being available for use in other businesses and (2) earnings paid out as dividends by petitioner's subsidiaries are principally required to be passed to the public investors in the Bell System, through petitioner's General Department, in order to meet dividend and interest obligations to these outside shareholders and bondholders. During the tax years in question, the Department of Revenue had not promulgated any rule with respect to the disallowance of a deduction for 100 percent of dividends received as provided for under Section 243 of the Internal Revenue Code, and the Florida corporate income tax return forms did not require any such add-back or adjustment. During the 1980 legislative session, an amendment to Chapter 220, Florida Statutes, was proposed which would have changed the definition of "affiliated group of corporations." Such proposed legislation was not passed and did not become law.
Recommendation Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that that portion of the Department's proposed assessment of deficiencies for the 1972, 1973 and 1974 tax years as is based upon dividends received by the petitioner from its affiliates be withdrawn as being contrary to law and invalid. Respectfully submitted and entered this 28th day of April, 1982. 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 28th day of April, 1982.
The Issue Whether the Department of Revenue's ("Department") assessment for sales and use tax, penalty, and interest is valid, correct, and should be upheld.
Findings Of Fact The undersigned makes the following findings of relevant and material fact: The Department is the agency responsible for administering Florida's revenue laws, including the imposition and collection of state sales and use taxes. §§ 20.21 and 213.05, Fla. Stat. Cellular is a Florida S-corporation, having a principal address and mailing address of 11050 Pembroke Road, Miramar, Florida 33025. Resp. Ex. 4, Bates stamped p. 031. Cellular is a "dealer" as defined under section 212.06(2), Florida Statutes, and is required to collect and remit sales and use taxes to the State. § 212.06(2), (3)(a), Fla. Stat. The Department notified Cellular of its intent to conduct an audit by written notice and the request for specific records mailed on or about October 3, 2014. Resp. Ex. 2. The audit period is September 1, 2011, to August 31, 2014. Resp. Ex. 2, Bates stamped p. 279. Cellular has several locations in Florida where it sells cellular phones, accessories, phone repair services, and minutes for international calling cards to its customers. Cellular also provides services such as money transfers and accepts payments on behalf of Metro PCS. Store locations are in neighborhood business centers and in malls. During the audit period, Cellular had 11 store locations operating in Florida. Resp. Ex. 4, Bates stamped p. 031. Julia Morales is a tax auditor for the Department. She has been employed with the Department for 11 years. Initially, Morales worked as a tax collector. She has held the position of tax auditor since 2011. Morales has a bachelor's degree in finance and also engages in ongoing training with the Department in order to stay current with Florida Statutes and Department rules. Morales performed the audit and prepared the assessment in this case. Early in the audit, Cellular informed the Department that most of its sales were exempt from Florida's sales tax. Morales explained that insufficient sales records were supplied by Cellular to enable the Department to establish the exempt nature of sales transactions, and, therefore, exempt sales were disallowed by the Department. Resp. Ex. 4, Bates stamped p. 033. On September 3, 2015, the Department issued an initial Notice of Intent to Make Audit Changes ("DR-1215") in the total sum due, as of that date, of $463,677.61 (i.e., $327,257.39 tax, $81,814.34 penalty, and $54,605.88 interest). After receiving the DR-1215, Cellular requested a conference with Morales to review the assessment. The conference was held on November 9, 2015. Resp. Ex. 1, Bates stamped pp. 007-008; Resp. Ex. 4, p. 030; Resp. Ex. 15, Bates stamped p. 131; Resp. Ex. 16, Bates stamped pp. 130-189. After the November 9, 2015, conference, Cellular provided Morales with sales invoices and detailed sales reports for the audit period. Morales explained that the supplemental records established that Cellular's reported tax exempt sales were properly exempt from sales tax, and, therefore, audit assessment Exhibits A01 to A11 were deactivated. Resp. Ex. 4, Bates stamped pp. 029-031; Resp. Ex. 18, Bates stamped pp. 058- 068. Audit assessment Exhibit A12 was also deactivated because Cellular provided records needed to reconcile the difference between gross sales reported on its 2012 federal tax return and gross sales reported on the sales and use tax returns for the same period. Resp. Ex. 18, Bates stamped p. 069. Among the supplemental records supplied by Cellular to establish the tax-exempt basis for some of its sales, its monthly Sales Transaction Detail reports showed that six of Cellular's 11 stores did not remit to the Department all the sales tax they collected during the audit period. Consequently, Morales added audit assessment Exhibits A13 through A18 to document the sales tax collected but not remitted, detailed by store. Resp. Ex. 4, Bates stamped pp. 029-030; Resp. Ex. 18, Bates stamped pp. 070- 110. Morales testified that one of Cellular's stores that under-remitted sales tax, namely the Northwest Store, was operating but not registered with the Department for the entire audit period. Morales discovered that the Northwest Store collected sales tax on its sales and did not start to remit collected tax to the Department until September 2014, which was after the audit period. Of the remaining five stores, Cellular remitted to the Department approximately 50 percent of the sales tax it collected from July 2012 to August 2014. Resp. Ex. 18, Bates stamped pp. 075, 082, 088, 095, 102, and 109. As to consumable purchases (audit assessment Exhibit B01) during the audit, Cellular failed to provide records to establish that it paid use tax on consumable purchases. The sums expensed in Cellular's federal tax returns, which could have a sales tax implication, were relied upon by the auditor to create Exhibit B01. Resp. Ex. 4, Bates stamped p. 034; Resp. Ex. 18, Bates stamped pp. 111-125. Based upon the supplemental records supplied after the November 2015 conference, on February 4, 2016, the Department issued a revised Notice of Intent to Make Audit Changes ("DR-1215"), reducing the total sum due, as of that date, to $277,211.42 (i.e., $194,346.98 tax, $48,586.76 penalty, and $34,277.68 interest). Resp. Ex. 18, Bates stamped p. 053. Penalty considerations were reviewed by the Department. Resp. Ex. 19. Due to Cellular's failure to remit to the State collected sales tax, penalty was not waived by the Department. In addition, accrued statutory interest was also imposed as required by section 213.235, Florida Statutes. Resp. Ex. 18, Bates stamped pp. 054-056; Resp. Ex. 29, Bates stamped p. 2. On February 15, 2016, the Department issued a Notice of Proposed Assessment ("NOPA") in the total sum due, as of that date, of $277,620.29 (i.e., $194,346.98 tax, $48,586.76 penalty, and $34,686.55 interest). Resp. Ex. 23. On March 18, 2016, Cellular submitted a timely protest letter to the Department's Technical Assistance and Dispute Resolution ("TADR"). Resp. Ex. 25. Martha Gregory also testified for the Department. She has been employed with the Department for 20 years. Gregory currently holds the position of taxpayer services process manager in TADR. Gregory holds a bachelor's degree in accounting and has also taken master's level courses. TADR manages an assessment after a taxpayer submits a protest of a NOPA with the Department. Gregory is familiar with TADR's involvement in Cellular's case. Gregory testified that despite repeated efforts by TADR during the protest period, Cellular submitted no new information to the Department for review. Consequently, on April 17, 2017, TADR issued a Notice of Decision ("NOD"), sustaining the assessment in its totality. Because of accruing interest, the total sum due, as of that date, increased to $293,353.77. Resp. Ex. 24. On June 16, 2017, Cellular timely filed its petition for a chapter 120, Florida Statutes, hearing. In its petition, Cellular contests all taxes, penalty, and interest that have been assessed. (See petition filed with the Division on December 5, 2017.) After receiving the petition, the Department made repeated attempts to obtain information from Cellular to support the claims raised in their petition. Resp. Ex. 28. Because no additional information was submitted by Cellular, the petition was referred to the Division on December 5, 2017. Prior to this final hearing of June 28, 2018, Cellular provided additional records relevant to the sales tax assessed on consumable purchases (audit assessment Exhibit B01). Based upon the newly supplied supplemental records, the Department also deactivated Exhibit B01 from the assessment and issued a revised reduced assessment. As a result, on June 12, 2018, the Department issued a revised assessment, which reduced the additional sales and use tax owed to $158,290.02, plus $39,572.50 for a penalty and $55,040.52 in interest, for a total sum owed, as of that date, of $252,903.04. Resp. Ex. 29, Bates stamped p. 2. Erica Torres appeared at the hearing as Cellular's corporate representative and testified on Cellular's behalf. Torres is employed by Cellular as a manager in charge of sales personnel, commissions, schedules, and bookkeeping. She has been employed by Cellular since 2001. Torres admitted that the reports relied upon by the Department in determining that Cellular collected and failed to remit sales tax were correct. Cellular introduced no credible or persuasive evidence to support that the assessment was incorrect. The undersigned finds that more credible and reliable evidence is in favor of the Department. Cellular failed to demonstrate by a preponderance of the evidence that the assessment or proposed penalty and interest proven by the Department are incorrect.
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 Cellular's requests for relief and sustaining the assessment in its entirety. DONE AND ENTERED this 22nd day of August, 2018, in Tallahassee, Leon County, Florida. S ROBERT L. KILBRIDE 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 22nd day of August, 2018. COPIES FURNISHED: Mark S. Hamilton, General Counsel Department of Revenue Post Office Box 6668 Tallahassee, Florida 32314-6668 (eServed) Randi Ellen Dincher, Esquire Office of the Attorney General Revenue Litigation Bureau The Capitol, Plaza Level 01 Tallahassee, Florida 32399 (eServed) Carlos M. Samlut, CPA Samlut and Company 550 Biltmore Way, Suite 200 Coral Gables, Florida 33134 (eServed) Leon M. Biegalski, Executive Director Department of Revenue Post Office Box 6668 Tallahassee, Florida 32314-6668 (eServed)
Findings Of Fact On January 31, 1984, the subject vessel, a 1969 sixty-five foot Hargrave Halmatic motor yacht, was purchased by Nelson Gross as President and principal of the corporation, Binghamton Too, Inc., for $457,500 in Houston Texas. It was financed through a Connecticut bank. The closing was held in Mr. Gross' New Jersey office. No sales or use tax has been paid on the yacht in Florida or in any other state. Mr. Gross' initial intent was to operate his new purchase as a commercial charter boat in conjunction with the "Binghamton," a ferryboat permanently moored and operating in Edgewater, New Jersey, as a floating restaurant. To get the new motor yacht there, Mr. Gross directed that it be brought to New Jersey around the Florida coast under its own power. The motor yacht reached Florida on February 17, 1984, but en route from Texas an unexpected vibration had arisen which required emergency repairs. These repairs were commissioned at Bradford Marine, Ft. Lauderdale, Florida, where the motor yacht remained, except for sea trials in connection with the vibration problem, until the first week in April, 1984. A cracked strut was diagnosed as the cause of the vibration problem. Repair costs of this emergency problem totalled $5,975. The balance of charges incurred at Bradford Marine, Ft. Lauderdale, was $21,729, including dockage. Many more of the repairs catalogued by Respondent's Exhibit 5, the Bradford Marine records for this period, were clearly voluntary, discretionary, and cosmetic in nature. The majority were of a non-emergency nature. The vessel, by then relettered "Binghamton Too," left Florida waters approximately April 20, 1984. "Binghamton Too" next spent approximately three weeks at Thunderbolt Marine Industries in Georgia at an approximate cost of $12,000. There, a strap was fabricated to hold the strut and the yacht proceeded on to New Jersey. The "Binghamton Too" began its charter business as part of the "Binghamton" operation in Edgewater, New Jersey on May 5, 1984. Seventy-five to eighty charters were accomplished between May, 1984 and October, 1984 under New Jersey state and local chartering, transit liquor, and environmental licenses and under U.S. Corps of Engineers permits. "Binghamton Too" returned to Florida waters sometime on or before October 25, 1984, when it was sighted at the Indian River Causeway Bridge. On October 26, 1984, it was sighted at Flagler Bridge in West Palm Beach. Thereafter, it went on to the Lantana Boat Works Marina, Lantana, Florida, for repairs. Lantana is the location of the yacht's original builder, whose equipment and expertise were preferable to that of other boatyards for certain strut repairs due to the peculiar nature of this type of yacht. After those repairs, the yacht was anchored in Palm Beach from January 1985 to April 1985. Although Mr. Gross testified that the strut repairs of necessity had to be done in the Lantana boatyard, his view is not necessarily conclusive of this issue because he admitted "Binghamton Too" was the first yacht he had ever purchased, because he was vague about equating desirability and necessity without any supporting direct expert testimony, and because of the facts found infra. The Lantana repair records from October 29 to December 31, 1984 show $42,521.82 in repairs, of which only $2,500 pertain to fabrication of a strut. Again, the majority of repairs was to refurbish and paint the vessel. Mr. Gross spent approximately October 1984 to April 1985, October 1985 to April 1986, and October 1986 to April 1987 in his father's home in West Palm Beach, Florida. By his own testimony, he confirmed that he established the "technical" office for his "Binghamton Too" business there. He applied, in early December 1984, for a Florida sales tax registration to operate a charter business, representing Palm Beach as his place of business. The account was established January 1, 1985 with the account number of 60-22-080051-61. The captain and mate of the "Binghamton Too" also wintered in Florida each of these years. On December 6, 1984, Mr. Gross wrote the State of New Jersey's Division of Taxation that the yacht's "principal location and headquarters are in West Palm Beach, Florida where it maintains an office and full-time employees," thus successfully arguing that the "Binghamton Too" should be exempt from New Jersey's registration requirements for any vessel residing in that state in excess of 180 days. This correspondence was in connection with a tax problem of the mother ship "Binghamton," still moored in New Jersey. Mr. Gross further represented that Florida was "Binghamton Too's" primary location with trips to the Bahamas." For most of the period from late December, 1984 to early April, 1985, the yacht was in Palm Harbor Marina, West Palm Beach, Florida, the first time not in repairs, and clearly could have returned to New Jersey under its own power had Mr. Gross chosen to do so. From January 24 to March 26, 1985, the boat was in operation, as sighted at the Pompano Beach and Fort Lauderdale bridges. From April 1985 until October of 1985, the yacht was operated as part of Petitioner's commercial charter operation in New Jersey, which included over 100 charters during this time period. Nonetheless, on June 10, 1985, Mr. Gross purchased a boat slip at Ocean Reef Club in Key Largo, Florida. This slip was later sold. Upon the foregoing Findings of Fact 6-12, which clearly establish a pattern of wintering the yacht in Florida waters, it is inferred that, despite Mr. Gross' testimony that it was "necessary" to have "Binghamton Too's" strut repaired in late 1984 by the original Florida manufacturer of the yacht, its presence in Florida from October 1984 until April, 1985 was primarily and substantially due to the preference of Mr. Gross, Petitioner's President, and not due to necessity or emergency. In October of 1985, the yacht returned to Florida where it remained until April of 1986. During this time, the boat underwent further repairs, including the complete repainting of the hull, the need for which Mr. Gross attributed to the old paint being cracked and shaken off by the vibration of the yacht. From April 1986 until October of 1986, the yacht was operated as part of Petitioner's commercial charter operation in New Jersey, which included over 100 charters during this time period. The yacht returned to Florida in October, 1986, and again remained in Florida until early April, 1987, when it left for New Jersey. In late October 1987, the yacht returned to Florida where it was traded in as part of the consideration for a larger yacht in November of 1987. The closing date was December 30, 1987. The cash equivalent received by Petitioner as credit on the trade-in was $100,000. In all, Petitioner asserts that over $200,000 was spent by the corporation on the "Binghamton Too" before it was traded. Shortly after buying the "Binghamton Too", Petitioner had begun trying to sell it for the highest price obtainable. These sales efforts included large ads in national yachting publications and listings with active yacht brokers. The highest outright offer received by Petitioner was $75,000. However, this was Mr. Gross' first sales effort of this kind, and his opinion testimony that the "Binghamton Too" was not bought from the Petitioner outright and at a good price because of latent defects and cost of repair is neither credible nor persuasive since his opinion does not possess the reliability of an expert in assessing whether it was the condition of the yacht, its unusual "Halmatic" type, or some other factor which made the "Binghamton Too" undesirable to potential purchasers. The Florida Department of Revenue issued a Notice of Delinquent Tax January 30, 1987, of five-percent use tax upon the purchase price plus 25 percent penalty. Interest was figured at 12 percent per annum. Petitioner timely protested. The agency conceded that the purchase price on the original notice was mistakenly listed at $475,000, that the assessment appropriately should have been on $457,500 (see Finding of Fact No. 1) and that the State presently claims only the tax amount of 5% of Petitioner's initial $457,500 purchase price at $22,875, the 25 percent penalty at $5,719, and interest on the tax from February 18, 1984, to June 18, 1989 at $14,650. (Interest accrues at $7.52 daily.) The total assessment through June 18, 1989 is $43,234.
Recommendation Upon the foregoing findings of fact and conclusions of law, it is recommended that the Department of Revenue enter a Final Order affirming the assessment of $22,875, with 25% penalty and interest at $7.52 per day from February 18, 1984 until paid. DONE and RECOMMENDED this 11th day of August, 1989, in Tallahassee, Leon County, Florida. ELLA JANE P. DAVIS Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 11th day of August, 1989. APPENDIX TO RECOMMENDED ORDER Upon consideration of Section 120.59(2) Florida Statutes the following rulings are made upon the parties' respective proposed findings of fact (PFOF). Petitioner's PFOF: 1, 2,3, 5, 10, 11, 13, 14, 15, 17, 18, 19, 21, 22: Accepted except to the degree not proven. 4: Rejected as stated because not supported by the greater weight of the evidence as a whole. 6, 12: Rejected in part as not proven, in part as subordinate and unnecessary, and in part as to the conclusion-if law as "latent." 7, 8, 9: Accepted except as subordinate and unnecessary to the facts as found. 16: Accepted that Mr. Gross testified to this amount, however, the evidence does not support the amount precisely nor that it all went to "repairs." 20: Accepted as modified to better express the record as a whole. Respondent's PFOF: 1: Accepted, but as a Conclusion of Law. 2, 3, 4, 9, 10, 12, 13, 14, 15, 16, 17, 19, 20, 21, 22, 23: Accepted. 5: Accepted in substance; what is not adopted is either mere recitation/characterization of testimony, is cumulative, or is subordinate to the facts as found. 6: Accepted but subordinate and unnecessary to the facts as found. 7: Sentence 1 is accepted. The remainder is rejected as mere legal argument or subordinate to the facts as found. 8, 11: Accepted as modified to conform to the record as a whole. Mr. Gross testified to a May 5, 1984 date for No. 8. 18: Except for mere legal argument, accepted. 24: Accepted upon the terms set forth in the Recommended Order. 25: Except as subordinate and unnecessary, accepted. COPIES FURNISHED: Gene D. Brown, Esquire 3836 Killearn Court Tallahassee, Florida 32308 Linda G. Miklowitz, Esquire Department of Legal Affairs Tax Section, The Capitol Tallahassee, Florida 32399-1050 William D. Moore, General Counsel Department of Revenue 203 Carlton Building Tallahassee, Florida 32399-0100 Katie D. Tucker Executive Director Department of Revenue 102 Carlton Building Tallahassee, Florida 32399-0100
Findings Of Fact Having considered the pleadings, evidence and legal arguments presented in this cause, the following facts are found: Petitioner is a corporation duly organized under the laws of the State of New Jersey and qualified to do business is one State of Florida. Two of the subsidiaries of Petitioner are Island Properties, Inc., formerly known as Heftler International, Inc., and Island Land Corporation, formerly known as Heftler Construction Company of Puerto Rico, Inc. These corporations are organized under the laws of the State of Florida and the State of New Jersey respectively and maintain principal places of business in Puerto Rico. For the fiscal years ending July 31, 1972 and July 31, 1973, petitioners properly included losses from the operations of the Puerto Rico corporations in their consolidated income tax returns filed with the Internal Revenue Service. For the fiscal years ending July 31, 1972, and July 31, 1973, petitioners timely filed with the respondent consolidated income tax returns including therein the operations of the Puerto Rico corporations. After a timely audit, the respondent excluded, for the purposes of computing adjusted federal income as defined by 220.13, the losses sustained by the Puerto Rico corporations. The respondent also excluded from the computation of the apportionment factors defined in F.S. s. 214.71 and 220.15 the value of the property, payroll and sales utilized in the operations of the Puerto Rico corporations. The respondent cited F.S. ss. 220.13(1)(b)2.b, 220.15(3) and 214.71 as its authority. The adjustments made by the respondent results in a net proposed deficiency of $75,076.46 for the two fiscal years in question. After attempts by the parties to resolve the issues by informal means failed, the petitioner requested a formal hearing and the respondent requested the Division of Administrative Hearings to conduct the hearing.
Recommendation Based upon the above findings of fact and conclusions of law, it is recommended that there is no basis for affording petitioners any relief from the proposed deficiency and that said deficiency in the amount of $75,076.46 be sustained. Respectfully submitted and entered this 20th day of November, 1975, in Tallahassee, Florida. DIANE D. TREMOR, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Lewis M. Kanner, Esquire WILLIAMS, SALOMON, KANNER DAMIAN 1003 du Pont Building Miami, Florida 33131 E. Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303 Mr. J. Ed Straughn Executive Director Department of Revenue Tallahassee, Florida 32304
The Issue Whether the Department of Revenue (DOR) has properly issued an assessment against Petitioner for sales and use tax, interest, and penalty.
Findings Of Fact Petitioner is a Florida resident. In 1996, Petitioner began doing business as a sole proprietor under the name of "Duraline Industries" and registered with DOR as a sales tax dealer. Later, this entity was called "Dura Steel." Petitioner also operated as a corporation, Steel Engineered Design Systems, Inc. Petitioner's Florida sales tax numbers are 42-11-009271-63 and 40-00-003416- For purposes of these consolidated cases, Petitioner has been audited and charged individually as "Charles R. Bielinski," because the audit revealed that no checks were made out to the corporation(s) and that the monies received were received by Mr. Bielinski as a sole proprietor in one or more "doing business as" categories. Petitioner engaged in the business of fabricating items of tangible personal property, i.e., prefabricated steel buildings, many of which later became improvements to real property in Florida. Petitioner used some of the steel buildings in the performance of real property contracts by installing the buildings as improvements to real property. Petitioner also engaged in the business of selling buildings and steel component parts such as sheets and trim in Florida. Petitioner sold buildings and component parts in over- the-counter retail sales, also. On October 7, 2002, DOR issued Petitioner a Notification of Intent to Audit Books and Records for the period of September 1, 1999 through August 31, 2002. This audit was assigned number AO226920428. In 2002, Petitioner provided DOR's auditor with his sales activity records, such as contracts and job information. A telephone conversation/interview of Petitioner was conducted by the auditor. Over a period of several months, the auditor attempted to get Petitioner to provide additional records, but none were forthcoming. DOR deemed the contracts and job information provided by Petitioner to be an incomplete record of his sales activity for the audit period. Petitioner claimed that most of his sales activity records had been lost or destroyed. Due to the absence of complete records, DOR sampled Petitioner's available records and other information related to his sales in order to conduct and complete its audit. Petitioner purchased materials used to fabricate his steel buildings. Petitioner sometimes would erect the buildings on real property. Petitioner fabricated main frames for smaller buildings at a shop that he maintained at the Bonifay Airport. Otherwise, Petitioner subcontracted with like companies to fabricate main frames for larger buildings. Petitioner made some sales to exempt buyers, such as religious institutions and government entities. When he purchased the materials he used to fabricate the buildings, Petitioner occasionally provided his vendors with his resale certificate, in lieu of paying sales tax. Petitioner did not pay sales tax on the materials he purchased to fabricate buildings when such buildings were being fabricated for exempt buyers such as churches and governmental entities. On June 23, 2003, DOR issued Petitioner a Notice of Intent to Make Audit Changes (Form DR-840), for audit number AO226920428, covering the period of November 1, 1997 through August 31, 2002. DOR has assessed Petitioner sales tax on the buildings, sheets, and trim he sold over-the-counter in Florida. DOR has assessed Petitioner use tax on sales of the materials used in performing real property contracts in Florida. The auditor calculated a method of estimating taxes based on the limited documentation that had been provided by Petitioner. She used a sampling method based on Petitioner's contract numbering system; isolated the Florida contracts; and divided the Florida contracts between the actual sale of tangible property (sale of just the buildings themselves) and real property contracts (where Petitioner not only provided the building but also provided installation or erection services). The auditor scheduled the real property contracts and assessed only the material amounts as taxable in Florida. Since she had only 19 out of 47 probable contracts, or 40 percent, she projected up to what the taxable amount should be and applied the sales tax and surtax at the rate of seven percent, as provided by law. She then divided that tax for the entire audit period by the 58 months in the audit period, to arrive at a monthly tax amount. This monthly tax amount was broken out into sales and discretionary sales tax. Florida levies a six percent State sales tax. Each county has the discretion to levy a discretionary sales tax. Counties have similar discretion as to a surtax. The auditor determined that Petitioner collected roughly $22,000.00 dollars in tax from one of his sales tax registrations which had not been remitted to DOR. During the five-year audit period, Petitioner only remitted tax in May 1998. DOR gave Petitioner credit for the taxes he did remit to DOR during the audit period. The foregoing audit processes resulted in the initial assessment(s) of August 28, 2003, which are set out in Findings of Fact 25-31, infra. On August 28, 2003, DOR issued Petitioner a Notice of Proposed Assessment (Form DR-832/833), for additional discretionary surtax, in the sum of $2,582.19; interest through August 28, 2003, in the sum of $782.55; and penalty, in the sum of $1,289.91; plus additional interest that accrues at $0.50 per day. (DOAH Case No. 04-0008) On August 28, 2003, DOR issued Petitioner a Notice of Proposed Assessment (Form DR 832/833), for additional sales and use tax in the sum of $154,653.32; interest through August 28, 2003, in the sum of $50,500.06; and penalty, in the sum of $77,324.54, plus additional interest that accrues at $31.54 per day. (DOAH Case No. 04-0009) On August 28, 2003, DOR issued Petitioner a Notice of Proposed Assessment (Form DR 832/833), for additional local governmental infrastructure surtax, in the sum of $7,001.82; interest through August 28, 2003, in the sum of $2,352.09; and penalty in the sum of $3,497.35; plus additional interest that accrues at $1.45 per day. (DOAH Case No. 04-0010) On August 28, 2003, DOR issued Petitioner a Notice of Proposed Assessment (Form DR 832/833), for additional indigent care surtax, in the sum of $513.08; interest through August 28, 2003, in the sum of $156.33; and penalty, in the sum of $256.24; plus additional interest that accrues at $0.10 per day. (DOAH Case No. 04-0011) On August 28, 2003, DOR issued Petitioner a Notice of Proposed Assessment (Form DR 832/833), for additional school capital outlay surtax in the sum of $3,084.49; interest through August 28, 2003, in the sum of $922.23; and penalty, in the sum of $1,540.98; plus additional interest that accrues at $0.60 per day. (DOAH Case No. 04-0012) On August 28, 2003, DOR issued Petitioner a Notice of Proposed Assessment (Form DR 832/833), for additional charter transit system surtax, in the sum of $2,049.22; interest through August 28, 2003, in the sum of $766.07; and penalty, in the sum of $1,023.27; plus additional interest that accrues at $0.46 per day. (DOAH Case No. 04-0013) On August 28, 2003, DOR issued Petitioner a Notice of Proposed Assessment (Form DR 832/833), additional small county surtax, in the sum of $10,544.51; interest through August 28, 2003, in the sum of $3,437.85; and penalty in the sum of $5,282.30; plus additional interest that accrues at $2.15 per day. (DOAH Case No. 04-0014) However, the auditor testified at the May 13, 2004, hearing that she attended Petitioner's deposition on March 18, 2004. At that time, Petitioner provided additional documentation which permitted the auditor to recalculate the amount of tax due. The auditor further testified that she separated out the contracts newly provided at that time and any information which clarified the prior contracts she had received. She then isolated the contracts that would affect the Florida taxes due. Despite some of the new information increasing the tax on some of Petitioner's individual Florida contracts, the result of the auditor's new review was that overall, the contracts, now totaling 33, resulted in a reduction in total tax due from Petitioner. These changes were recorded in Revision No. 1 which was attached to the old June 23, 2003, Notice of Intent to Make Audit Changes, which was sent by certified mail to Petitioner. The certified mail receipt was returned to DOR as unclaimed. The auditor's calculations reducing Petitioner's overall tax are set out in Respondent's Exhibit 16 (Revision No. 1). That exhibit appears to now show that taxes are owed by Petitioner as follows in Findings of Fact 34-40 infra. For DOAH Case No. 04-0008, discretionary surtax (tax code 013), Petitioner only owes in the amount of $1,937.37, plus penalties and interest to run on a daily basis as provided by law. For DOAH Case No. 04-0009, sales and use tax (tax code 010), Petitioner only owes in the amount of $111,811.04, plus penalties and interest to run on a daily basis as provided by law. For DOAH Case No. 04-0010, local governmental infrastructure surtax (tax code 016), Petitioner only owes in the amount of $5,211.00, plus penalties and interest to run on a daily basis as provided by law. For DOAH Case No. 04-0011, indigent care surtax (tax code 230), Petitioner only owes in the amount of $317.39, plus penalties and interest to run on a daily basis as provided by law. For DOAH Case No. 04-0012, school capital outlay tax (tax code 530), Petitioner only owes in the amount of $2,398.68, plus penalties and interest to run on a daily basis as provided by law. For DOAH Case No. 04-0013, charter transit system surtax (tax code 015), Petitioner only owes in the amount of $1,558.66, plus penalties and interest to run on a daily basis as provided by law. For DOAH Case No. 04-0014, small county surtax (tax code 270), Petitioner only owes in the amount of $7,211.83, plus penalties and interest to run on a daily basis as provided by law.
Recommendation Based on the foregoing Findings of Facts and Conclusions of Law set forth above, it is RECOMMENDED that the Department of Revenue enter a final order upholding the amount of tax calculated against Petitioner in its June 21, 2003, Notice of Intent to Make Audit Changes, Revision No. 1, in the principal amounts as set forth in Findings of Fact Nos. 34-40, plus interest and penalty accruing per day as provided by law, until such time as the tax is paid. DONE AND ENTERED this 14th day of July, 2004, in Tallahassee, Leon County, Florida. S ELLA JANE P. DAVIS 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 14th day of July, 2004.
The Issue Whether Petitioner ("DEPARTMENT") is entitled to assess sales or use taxes, penalties, and interest against Respondent ("VOLPE") pursuant to Chapter 212, Florida Statutes, as set out in its Notice of Proposed Assessment dated March 20, 1980.
Findings Of Fact During 1975-1977, VOLPE was a general contractor engaged in the construction of a United States Post Office and Vehicle Maintenance Facility at Miami, Florida. In connection with that construction project, VOLPE purchased materials from numerous subcontractors, including Hardware Lighting and Emporium, and Jemco, Inc. (Testimony of Alford, Danca; P.E. 2, 3) On March 8, 1979, after audit of VOLPE's records, the DEPARTMENT proposed to assess VOLPE for delinquent sales and use tax, together with interest and penalties thereon, which it claimed were due from VOLPE's purchase of materials from various subcontractors. The DEPARTMENT's proposed assessment was based on its inability to verify, to its satisfaction, that sales and use tax due from those sales transactions was paid by VOLPE to the vendors, and subsequently remitted to the DEPARTMENT. (Testimony of Alford, P.E. 3.) With the DEPARTMENT's encouragement, VOLPE then wrote its vendors in the various sales transactions requesting proof that the requisite Florida sales or use tax had been remitted to the DEPARTMENT. In response, two vendors, Ohio Medical Products and Power Wash, remitted tax vendors, (collected from VOLPE at time of sale) to the DEPARTMENT, in the amounts of $10,070 and $1,635.50, respectively. In addition, VOLPE discovered that it had not paid the requisite tax to a vendor in one transaction and remitted a payment to the DEPARTMENT in the amount of $1,442.53. (Testimony of Danca, Alford, P.E. 1.) These late tax payments made by Ohio Medical Products, Power Wash, and VOLPE in partial satisfaction of the DEPARTMENT's March 8, 1979, proposed assessment consisted only of the tax due on the individual sales, including interest thereon. No penalty payments were made because Salvatore Danca, VOLPE's comptroller involved in collecting the sales tax from the various vendors, reasonably and in good faith believed that the DEPARTMENT would waive penalties if late tax payments were promptly submitted. Although Louis A. Crocco, the DEPARTMENT's representative, by affidavit denies making such a representation, he admits that the possibility of adjusting the penalties, otherwise due, was discussed with Danca. In the absence of more explicit evidence from the DEPARTMENT concerning those discussions, or attacking the credibility of Danca's testimony, it is determined that, based on discussions with DEPARTMENT representatives, Danca reasonably and in good faith believed penalties would be waived. (Testimony of Danca; P.E. 1, 6, R.E. 2, 3, 4, 5, 6.) As a result of partial payments and adjustments made to the DEPARTMENT's proposed sales and use tax assessment, the DEPARTMENT issued a fourth revision of the proposed assessment on March 20, 1980. By that revision, the DEPARTMENT asserts VOLPE, as of March 20, 1980, is liable for payment of tax, interest, and penalties as follows: Sales Transaction Sales And Use Tax Due Interest Penalties (25 Percent) Jemco, Inc., sale of mechanization equipment to VOLPE, per agreement dated December 5, 1975. $16,229.53 $4,047.88 Hardware, Lighting and Emporium, sale of finished hardware and accessories to VOLPE per VOLPE Purchase Order dated October 2, 1975. 1,556.10 389.02 Ohio Medical Products' Power Wash's, and unidenti- fied vendor's sale to VOLPE for which late payments of tax due and interest have been made. -0- 2,737.43 TOTAL: $17,856.10 $5,779.42 $7,174.33 (Testimony of Alford, Danca, 3.) Stipulation of Counsel; P.E. 1, 2, [AS TO JEMCO, INC./VOLPE TRANSACTION] By its standard Agreement dated December 5, 1975, VOLPE agreed to purchase from Jemco, Inc., of Fort Worth, Texas, post office mechanization equipment for the contract price of $347,900. Subsequent change orders resulted in an adjustment to $405,689.70. In order to minimize on-site installation problems, Jemco, Inc., was required to maximize assembly of the mechanization equipment at its out-of-state plant prior to shipping to the Miami job site. (Testimony of Danca; P.E. 2, R.E. 1.) The written sales Agreement, including attachments, between Jemco, Inc., and VOLPE expressly states, in three separate places, that the total contract sales price includes Florida sales tax. The DEPARTMENT admits that VOLPE has paid all monies due Jemco, Inc., under the contract. By virtue of its full payment of the contract price which expressly included sales tax, it must be concluded that VOLPE paid the requisite sales or use tax to Jemco, Inc. (Stipulation of Counsel; P.E. 2.) VOLPE's standard form, entitled "Subcontractor's Application for Payment" was used as a basis to make incremental payments to Jemco, Inc., pursuant to the Agreement. That form required the subcontractor to certify that, among other things, it had complied with state tax laws applicable to performance of the Agreement. (Testimony of Danca; R.E. 11.) VOLPE's actions in connection with the Jemco, Inc., sales transaction were consistent with its standard practice when entering contracts with vendors or subcontractors. That practice is to require that the sales price include the payment of necessary sales tax, the vendor or subcontractor is required to remit the required tax to the appropriate government entity. After performance of the contract, the subcontractor is required to certify that these requirements have been satisfied. The certification is in the form of a General Release which discharges VOLPE from all claims, debts and liabilities which the subcontractor may have against VOLPE because of the contract. In this case, Jemco, Inc., executed such a General Release in favor of VOLPE. (Testimony of Danca; R.E. 1.) The DEPARTMENT has not audited Jemco, Inc.'s records, thus, it does not know whether the tax it seeks to assess against VOLPE has already been remitted by Jemco, Inc. (Testimony of Alford.) The DEPARTMENT offered no affirmative evidence to contravene VOLPE's assertion that it had paid the requisite sales or use tax to Jemco, Inc. Its claim rests solely on the fact that VOLPE's evidence of payment does not contain a sales invoice or other documentation which itemizes, or separately states the amount of sales tax due from VOLPE. [AS TO HARDWARE AND LIGHTING EMPORIUM TRANSACTION] By purchase agreement dated October 2, 1975, VOLPE agreed to purchase finished hardware from Hardware and Lighting Emporium of Miami, Florida, for the contract price of $23,877, which expressly included Florida state sales tax. Each billing invoice issued by Hardware and Lighting Emporium separately itemizes and states the Florida sales tax due. In applying for payment under the agreement, Hardware and Lighting Emporium completed the VOLPE "Subcontractor's Application for Payment" forms certifying compliance with state sales tax laws in performing the agreement. VOLPE has fully satisfied its payment obligations under the purchase agreement. (Testimony of Danca; P.E. 3, R.E. 9, 10.)
Conclusions Conclusions: VOLPE established by a preponderance of evidence that it previously paid to its several vendors the sales and use tax which the DEPARTMENT now seeks. Accordingly, the proposed tax assessment, with penalties and interest thereon, cannot be sustained. Recommendation: That the DEPARTMENT's Notice of Proposed Assessment of Tax, Penalties, and Interest, under Chapter 212, Florida Statutes, dated March 20, 1980, be DISMISSED. Background By written notice issued on March 20, 1980, Petitioner ("DEPARTMENT") proposed to assess Respondent ("VOLPE") taxes, penalties, and interest allegedly due pursuant to Chapter 212, Florida Statutes. In response, VOLPE claimed that it had previously paid the tax in question, and requested an opportunity to submit proof at a formal hearing. On April 17, 1980, the DEPARTMENT forwarded VOLPE's request to the Division of Administrative Hearings, and asked that the requested hearing be conducted by a hearing officer. On May 15, 1980, final hearing was set for July 18, 1980. On June 17, 1980, the DEPARTMENT filed a motion to realign the parties. As grounds, it stated that VOLPE had the burden of proof, and the duty to present a prima facie case at hearing since VOLPE requested the hearing and was the party seeking relief. At the DEPARTMENT's request, ruling on its motion was withheld until presentation of arguments at final hearing. At hearing, the DEPARTMENT's motion was denied for the reasons stated in the Conclusions of Law below. In support of its proposed assessment against VOLPE, the DEPARTMENT called Marvin P. Alford, a tax examiner, as its only witness, and offered Petitioner's Exhibits 1/ 1 through 6, inclusive, each of which was received into evidence. VOLPE called Salvatore Danca, its comptroller, and Harold G. Gregory, its branch manager, as its witnesses, and offered Respondent's Exhibits 1 through 11, inclusive, each of which was received. At the conclusion of hearing, the parties were granted the opportunity to submit proposed findings of fact, conclusions of law, and memoranda within ten (10) days after filing of the transcript of hearing. The post-hearing submittals were filed by August 21, 1980. Based on the evidence submitted at hearing, the following facts are determined:
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, RECOMMENDED: That the DEPARTMENT's Notice of Proposed Assessment of Tax, Penalties, and Interest, Under Chapter 212, Florida Statutes, dated March 20, 1980, be DISMISSED. RECOMMENDED this 25th day of September, 1980, in Tallahassee, Florida. R. L. CALEEN, JR. Hearing Officer Division of Administrative Hearings Room 101 Collins Building Tallahassee, Florida 32301 (904) 488-9675 Filed with Clerk of the Division of Administrative Hearings this 25th day of September, 1980.
Findings Of Fact The parties have agreed that there are no issues of fact to be determined in this matter, and that the relevant facts are set out in Paragraphs 3 and 4 of the Petition which was received in evidence at the hearing as Hearing Officer's Exhibit 1. This matter involves a determination for Florida corporate income tax purposes of the net income derived by the Petitioner in connection with the purchase, development, and sale of certain property in Dade County, Florida. Petitioner purchased the property prior to January 1, 1972, the date upon which the Florida Income Tax Code became effective. Petitioner expended, through a subsidiary corporation, $369,058 in developing the property. These expenditures also occurred prior to January 1, 1972. For Federal income tax purposes the Petitioner had deducted these expenditures as business expenses during the years that they were incurred. Petitioner sold the property during 1972. Because the Petitioner had deducted the expenditures as business expenses, the expenditures could not properly have been included in the base price of the property for Federal income tax purposes, and the net income for Federal tax purposes was computed by subtracting the original purchase price from the sale price. Since the Florida Income Tax Code was not in effect at the time the expenditures were made, the Petitioner received no Florida tax benefit for the expenditures. In computing the net income for Florida tax purposes derived from the sale, the Petitioner included the expenditures in the base price of the property, and calculated its net income by subtracting the sum of the purchase price of the property and the expenditures from the sale price. The Department, contending that the $369,058 should not have been included in the base price of the property, issued a deficiency assessment which reflected the net income from the sale of property as the difference between the sale price and the purchase price. Petitioner originally contended that it was entitled to add the amount that the property appreciated prior to January 1, 1972 to the base price of the property. Petitioner is no longer contesting the deficiency assessment based upon a disallowance of that addition to the base price of the property. The Department was originally contending that it was entitled to interest at 12 percent per annum calculated retrospectively from the due date of the alleged deficiency. The Department has agreed to abandon its effort to impose that rate of interest. The issue raised in this case is whether the development expenses incurred by the Petitioner and deducted for Federal income tax purposes as business expenses prior to 1972 can be subtracted from Federal taxable income for the purpose of determining taxable income derived from the sale for Florida tax purposes.
Findings Of Fact Frank O. Sherrill is the sole stockholder of Oceania Charters, Inc. and is a resident of North Carolina from where he directs the operations of Oceania Charters, Inc. The principal, if not sole, asset of Oceania Charters, Inc. is the 101 foot motor yacht Captiva II. The Captiva II was built in Amsterdam, the Netherlands, pursuant to contract between the shipbuilder and Oceania Charters, Inc. and/or Frank Sherrill entered into in 1972. Sherrill purchased the vessel for the intended purpose that it be used as a charter vessel hired to various charterers for short or longer-term cruises. This is the fourth or fifth vessel that Respondent has owned and used in the charter business. The evidence was uncontradicted that the purpose of acquiring the Captiva II was to place it in charter service. The vessel was originally scheduled for completion in the summer of 1973 and it was intended to have the Captiva II proceed from Amsterdam to North Carolina under her own power. The vessel was not completed until late fall or early winter and the insurers would not insure the Captiva II if it proceeded across the North Atlantic under her own power at that time of year. Arrangements were made to ship the Captiva II from Amsterdam to Bermuda via freighter to off-load the Captiva II there and proceed under her own power to Wilmington, North Carolina for custom clearance and documentation. While loading the Captiva II damage was done to one stabilizer and to the hull. Upon arrival of the ship carrying the Captiva II at Bermuda, excess costs involved in off-loading and repairing there were weighed against the carrier's offer to off- load the Captiva II at the next port of call, Miami, and facilities at the latter port. It was then decided that the Captiva II should stay aboard for the voyage from Bermuda to Miami and there be off-loaded and repaired. This was done and upon arrival in Miami the Captiva II was off-loaded, repaired and fitted out for charter operations. Berthing arrangements were made and, except for charter trips, trips to Palm Beach soliciting charters, and sea trials the Captiva II has been moored at Miami. Mr. and Mrs. Sherrill stayed on board the Captiva II during the period she was being outfitted for charter operations and on several of the sea trials the vessel underwent. They were not on board during any of the charter trips and did not use the Captiva II for cruises themselves or make her available for use by their friends unless pursuant to a charter party. These facts were undisputed.
