The Issue Petitioners' liability for corporate income tax deficiency under Chapter 220, Florida Statutes.
Findings Of Fact Petitioner is a Georgia Corporation doing business as a heavy electrical contractor in Georgia and eight other states including Florida. In 1972, Petitioner submitted a request to the Department of Revenue that it be allowed to use "separate accounting" as the method for determining the amount of its adjusted federal income that was subject to taxation by the State of Florida under Chapter 220,Florida Statutes. By letter of October 3, 1972, T.H. Swindal, Respondent's Chief of the Corporation Income Tax Bureau, denied Petitioner's request with the following language: "The economics of large scale interstate construction operations, as we understand them, necessitate maximum utilization of a company's resources. At particular times and in a particular locale or with respect to particular types of construction activity contracts may be initially or regularly bid upon and undertaken which, on an individual contract basis, will be minimally profitable, if at all. Nevertheless, because these contracts permit cost absorption, continuing use and charge for equipment, trained crews and know-how; permit maximum employment of the company's capital and credit accomo- dations; permit initial entry into a new field of construction activity or a new locale, these contracts indirectly but significantly add to the profitability of the enterprise as a whole. We recognize too, that separate accounting essentially serves management and that management must evaluate competitive tax implications. "Separate accounting" does not, in our view, measure the impact of these cir- cumstances. We are of the opinion that Florida's three factor formula does measure the impact of these circumstances upon profit and thus provides a fairer Florida tax base." (Complaint, Petitioner's Exhibit 1) Respondent however, pursuant to a request of Petitioner, permitted the latter to leave its 1972 return as filed, but instructed it to file in the future utilizing the "three-factor" formula. Accordingly, the Petitioner filed its 1973 and 1974 tax returns utilizing the "three-factor" formula" as directed by the Respondent, and paid the appropriate tax due. By letter, dated September 15, 1975, Mr. Swindal informed Petitioner that examination of its returns for the years 1972 thru 1974 had resulted in a net proposed deficiency of $12,417.60. An accompanying report showed that the primary basis for the deficiency was Respondent's determination that the Florida portion of adjusted federal income for the years 1973 and 1974 should have been increased by the amounts of $87,772.93 and $160,117.83, respectively, based on a "separate accounting" computation. The reason given for this determination was stated as follows in the report: "Florida Statute 214.73(1) says in part that if the apportionment methods of Florida Statute 214.71 and 214.72 do not fairly represent the extent of a taxpayer's base attributable to this state, the department may require separate accounting. The department has determined the taxpayer should use separate accounting in accordance with the above-mentioned, statute." (Complaint and exhibits thereto) Respondent had not notified Petitioner between 1972 and 1975 of its apparent change in position with respect to the required method of accounting. At a conference held on February 19, 1976, between Petitioner's representatives and Mr. William T. Lutschak who represented the Respondent, Petitioner protested the asserted deficiency and requested that the Respondent adhere to its former determination that the "three-factor method" be applied in computing the tax. Petitioner's protest was denied orally at the conference and such denial w-s confirmed by Mr. Swindal's letter of February 24, 1976, as follows in pertinent part: "Careful analysis of the taxpayer's Florida activity and the financial results of that activity clearly demonstrate that the amount of income set forth in the auditor's report for the years at issue are attributable to taxpayer's Florida business and that F.S. 214.73(1), rather than F.S. 214.71, fairly represents the extent of the taxpayer's tax base attributable to this state." (Comp. & Exh. thereto) Respondent's auditor of Petitioner's 1973 and 1974 tax returns found nothing unusual concerning the latter's business operations during the above tax periods and is of the opinion that based on formulary accounting Petitioner's returns "fulfill the letter of the law". He also acknowledged that Petitioner met the criteria of a "unitary business". He testified that he was unable to determine the amount of property used by Petitioner on its various jobs in and out of Florida while at the audit site at Petitioner's home office in Alabama and that without such information it would be impossible to determine Petitioner's tax liability under the "three-factor method" because property is one of the factors. The auditor, after making a request of Petitioner for such figures during his audit, which did not produce immediate results, did not pursue the matter because he "had to go back to Tallahassee". In fact, such information was available in Petitioner's records. Respondent changed its policy with respect to the method of accounting required of Petitioner after consideration of a textbook on the concept of separate accounting and a resulting determination that the contracting business in general is a unique industry warranting special tax treatment. (Testimony of Harnden, Puckett, Malone, Exhibit 1, Pleadings). The alleged deficiency of $12,417.60 is correctly computed and properly due and owing if "separate accounting" is validly required with respect to Petitioner's tax returns. (Stipulation).
Recommendation That Petitioner be relieved from payment of the proposed assessment based on any tax deficiency produced by the requirement of separate accounting under Section 214.73, Florida Statutes. DONE and ENTERED 21st day of July, 1976, in Tallahassee, Florida. THOMAS C. OLDHAM Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: E. Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs Tax Division Northwood Mall Tallahassee, Florida 32303 James R. English, Esquire HENRY & BUCHANAN, P.A. P.O. Drawer 1049 Tallahassee, Florida 32302
The Issue The issue in this case is whether Petitioner is liable for certain taxes and, if so, how much.
Findings Of Fact Petitioner is a Florida corporation with its principal place of business in Manatee County, Florida. Petitioner is in the printing business. Specifically, Petitioner produces, manufactures, assembles, and publishes telephone directories for mobile home parks in Florida. All of Petitioner's work in connection with these directories takes place in Florida. The directories list the names, addresses, and telephone numbers of residents of the mobile home park for which the directory is prepared. The directories also contain advertisements, which Petitioner solicits from merchants seeking to sell goods or services to the mobile home park residents. Following the production of the directories, Petitioner distributes them to the mobile home park residents, who maintain possession of the directories. However, Petitioner retains ownership of each directory, even after it is distributed. Petitioner is solely responsible for the manufacture and distribution of the directories. Petitioner owns accounts receivable reflecting monies owned it by entities for which Petitioner has performed work. Petitioner owns treasury stock. Following an audit, Respondent issued its Intent to Make Sales and Use Tax Audit Changes. The proposed changes assessed additional sales and use taxes of $44,151.77, intangible tax of $1297.08, and $194,75 of health care tax. The bases of proposed liability for the sales and use tax were for the publication and distribution of directories for which no sales or use tax had been collected and for the sale of advertising during the period of the service tax from July 1, 1986, through December 31, 1986, for which no sales tax on advertising had been collected. The basis of proposed liability for the intangible tax was for the failure to pay intangible tax on accounts receivable and treasury stock. The basis of proposed liability for the health care tax was for the failure to pay the Hillsborough County Health Care Tax and Discretionary Sales Surtax. On February 11, 1991, Petitioner protested the proposed assessments. On April 24, 1992, Respondent issued its Notice of Decision sustaining the proposed sales and use tax and intangible tax, but eliminating the proposed health care tax. On May 12, 1992, Petitioner filed a Petition for Reconsideration concerning the proposed sales and use tax. On November 24, 1992, Respondent issued its Notice of Reconsideration sustaining the proposed sales and use tax. On January 21, 1993, Petitioner timely filed its petition for a formal administration hearing. Subject to the accuracy of its legal position, Respondent's assessment is factually accurate. Petitioner will pay the assessed amount of sales and use tax, plus interest, if its position is not sustained following the conclusion of this proceeding, including judicial review.
Recommendation Based on the foregoing, it is hereby RECOMMENDED that a final order be entered determining that, for each assessed period, Petitioner is liable for the assessed corporate intangible tax plus interest, the use tax on the cost price of the materials and other covered items plus interest, the sales tax on services on the advertising revenues, but not for any sales tax apart from the period covered by the sales tax on services. ENTERED on January 25, 1994, in Tallahassee, Florida. ROBERT E. MEALE 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 on January 25, 1994. COPIES FURNISHED: David M. Carr David Michael Carr, P.A. 600 East Madison Street Tampa, Florida 33602 Eric J. Taylor 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 204 Carlton Building Tallahassee, Florida 32399-0100
Findings Of Fact Harris Corporation is a large, multi-national corporation with headquarters in Melbourne, Florida. Harris Corporation conducts its business through several divisions, one of which is Harris Composition Systems Division ("the taxpayer"). The taxpayer is engaged in the business of manufacturing and selling computerized printing equipment. On January 28, 1977, the State of Florida, Department of Revenue ("the Department") mailed a letter to the taxpayer, advising that an audit of the taxpayer's books and records be made available. The audit was undertaken by agents of the Department and on June 25, 1979, two Notices of Proposed Assessment (the "notices") were mailed to the taxpayer by the Department. The period covered by the Notices is January 1, 1974 through June 30, 1978. No proposed or actual assessment of the sales and use taxes referred to in the Notices was made by the Department prior to the proposed assessment. After receipt of the Notices, the taxpayer's representatives attended an informal conference with representatives of the Department on September 25, 1979. As a result of that conference the Department issued two Revised Notices of Proposed Assessment. The Revised Notices eliminated January 1, 1974 through May 31, 1974 from the period covered by the Notices but retained the period June 1, 1974 through June 30, 1978. The portion of the sales and use tax assessment proposed in the Revised Notices that is in dispute in this case is the portion that is attributable to the June 1, 1974 through June 30, 1976 period. The tax in controversy is $49,934.01. The Department has developed a form to be signed by taxpayers in situations where the Department believes that the statute of limitations on assessment of sales and use taxes may expire before an assessent can be made. The Department did not request that the taxpayer in this case execute such a form, nor did the Department request in any other manner that the taxpayer waive or extend the statute of limitations applicable to sales and use tax assessments and the taxpayer did not do so. Neither the Department nor the taxpayer instituted any judicial or administrative proceedings for review of the assessment proposed in the Notices or in the Revised Notices prior to the filing of a petition by the taxpayer in this case on March 20, 1980. The Department contends that any delay in issuing the proposed notices of assessment was directly attributable to difficulties encountered in obtaining records in a timely fashion from the taxpayer's parent company, and that the taxpayer should, therefore, be estopped to raise the defense of violation of the statute of limitations. The record in this proceeding does not support such a conclusion. Although there appear to have been some delays in performing the tax audits, the taxpayer was by no means responsible for all of those delays. In fact, the longest such delay, from about December 1, 1977, through May 3, 1978, was occasioned by the Department's own budgetary problems relating to per diem and travel expenses for its auditing team. Although some delays were requested by the taxpayer, they were acquiesced in by the Department in the course of establishing its own priorities in conducting the audit of all of the divisions of Harris Corporation. The record is devoid of any indication that the Department at any point considered any failure of the taxpayer to furnish requested information of sufficient severity to invoke the remedies available to the Department under Section 212.13(1), Florida Statutes (mandatory injunction to require examination of books and records) or Section 212.14(1), Florida Statutes (issuance of estimated tax deficiency together with distress warrant for collection of such taxes).
Recommendation Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED: That a Final Order be entered by the State of Florida, Department of Revenue, assessing sales and use taxes against Respondent in the amount of $49,934.01, together with the applicable amount of interest through the date of entry of said Final Order. DONE AND ORDERED in Tallahassee, Leon County, Florida, this 14th day of January, 1981. WILLIAM E. WILLIAMS Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 14th day of January, 1981. COPIES FURNISHED: Linda C. Procta, Esquire Assistant Attorney General The Capitol, Room LL04 Tallahassee, Florida 32304 Brian C. Ellis, Esquire 620 Twiggs Street Tampa, Florida 33602 ================================================================= AGENCY FINAL ORDER =================================================================
Findings Of Fact Based upon all of the evidence, the following findings of fact are determined. Background Petitioner, Gator Coin Machine Company, Inc. (petitioner or Gator), is a Florida corporation engaged in the vending machine business throughout the northern part of the State extending from Leon County eastward to Duval County. Gator places coin-operated cigarette vending machines in various business locations, such as lounges, package stores, motels and restaurants. In return for allowing the machines to be placed on the premises, the location owner receives a fee for each pack of cigarettes sold from the machine. This fee is paid to the location owner and is considered a commission or rent for allowing Gator to "lease" the real property on which the machines are placed. All such commissions are subject to the sales tax, which rate may vary depending on the sales tax rate in a particular county. The sales tax is included with the commission (rent) paid to the location owner, and the location owner then has the obligation of remitting the tax to the state. However, the burden of showing that the tax has been paid to the location owner rests upon the vending machine owner. Respondent, Department of Revenue (DOR), is the state agency charged with the responsibility of enforcing the Florida Revenue Act of 1949, as amended. Among other things, DOR performs audits on taxpayers to insure that all taxes due have been correctly paid. To this end, in 1990 a routine audit was performed on Gator covering the audit period from June 1, 1985, through April 30, 1989. After the results of the audit were obtained and an initial assessment made, on January 22, 1991, DOR issued a revised notice of intent to make sales and use tax audit changes wherein it proposed to assess Gator $35,561.67 in unpaid sales taxes, $8,887.82 in delinquent penalties, and $12,934.34 in accrued interest on the unpaid taxes through the date of the revised notice, or a total of $57,383.83. The unpaid taxes related to taxes allegedly due on commissions paid to location owners during the audit period and were assessed against Gator on the grounds the taxpayer had not separately stated the tax on its evidence of sale and failed to provide internal documentation to verify that the taxes had actually been paid. On April 19, 1991, a third revision of the proposed assessment was issued which decreased slightly the unpaid taxes and corresponding penalties but increased the size of the assessment to $57,945.10 due to the continuing accrual of interest. On July 1, 1991, Gator was offered the opportunity to informally contest the assessment. A letter of protest was filed on July 29, 1991, wherein Gator generally contended that (a) its records conformed with the industry practice and that an adequate audit trail existed to substantiate the payment of taxes, and (b) the responsibility for payment of the taxes ultimately rested with the location owner rather than Gator. On February 10, 1992, DOR issued its notice of decision rejecting Gator's position but offering to reduce the penalty on the unpaid sales taxes to 5%. At the same time, and although Gator had not challenged the auditor's method of computing the amount of sales tax, DOR upheld the auditor's determination on that point. After a petition for reconsideration was filed by Gator on March 10, 1992, in which Gator raised for the first time a claim that it was due a refund of $11,015 for overpayment of taxes on cigarette sales during the audit period, DOR issued its notice of reconsideration on June 12, 1992, denying the petition and offering Gator a point of entry on these issues. Such a request was timely filed and this proceeding ensued. The Tax The tax for which petitioner has been assessed became effective on July 1, 1986, and is found in Section 212.031, Florida Statutes. On an undisclosed date, DOR mailed each vending machine company in the state a flier which summarized the new changes in the tax law. The flier noted that the sales tax would be levied on each "license to use or occupy property" and specifically included "an agreement by the owner of real property granting one permission to install and maintain full-service coin-operated vending machines on the premises." Because the vending machine owner is considered to have been granted a license to use the real property of the location owner, the fee (rent) paid by the vending machine owner to the location owner was thus subject to the new sales tax. The notice further provided that the tax "must be collected by the person granting the privilege to use or occupy any real property from the person paying the license fee and is due and payable at the time of receipt." This flier constituted the only notice by DOR concerning the imposition of the new tax. There was no notice to the vending machine owners that they must separately state the sales tax from the commission when paying the commission to the location owner. This was because the flier's main purpose was to put the taxpayers on notice that they were subject to the new tax. Sometime after the tax became effective, DOR developed a rule to implement the new law. Specifically, it amended Rule 12A-1.044, Florida Adminstrative Code, to provide guidance to taxpayers in the coin-operated industry as to who had the taxpaying and collecting responsibility. However, the rule simply stated that the owner of the vending machine was responsible for paying the tax on the rental fee paid to the location owner and did not state how this payment was to be documented or recorded by the lessee. In the absence of any guidance from DOR, the Florida Amusement Association, of which Gator is a member, held meetings around the state to inform the members of their responsibilities under the new law. One method thought to be acceptable to establish payment of the sales tax was to keep internal documentation as to commission rate and tax paid to the various locations. As will be discussed hereinafter, Gator and other vending machine owners began following this practice. On May 11, 1992, or three years after the audit period had ended, and almost six years after the imposition of the tax, DOR adopted an amendment to rule 12A-1.044(10) to provide that "the tax must be separately stated from the amount of the lease or license payment." This constituted the first notice to vending machine owners that they were required to state separately on the check remitted to their locations each month the commission plus tax. It should also be noted that DOR has never specified the exact type of documentation required by this rule or the format in which the information should be submitted. The Industry Practice Petitioner is one of many coin-operated vending machine companies doing business in the state of Florida. The evidence shows that of some twenty representative companies doing business in the state, including Gator, all operate in the same manner. Generally, the vending machine owner has a low investment in equipment which is easily relocated from one place of business to another. Because it is not unusual for the businesses in which equipment is placed to frequently change ownership, and often times the location owner can shop around and obtain a better commission from another vending machine company, it is fairly common to have machines placed in a location for as few as six or seven months. Therefore, it is a common practice in the industry to do business on a handshake and without a formal written agreement. In other words, the agreement to allow the machines to be placed on the premises and the amount of commission (rent) to be paid for leasing that space is based largely on a handshake between the two owners. This accounts in part for the lack of documentation such as a charge ticket, sales slip or invoice between the two owners concerning the amount of sales tax associated with the rent since such documents or evidence of sale are not practicable. The lack of documentation is also attributable to the fact that until May 1992 DOR never advised the vending machine companies that some type of "evidence of sale" was needed. In determining the commission rate to be paid to the various locations, the vending machine owner must first ascertain what the market will bear in terms of selling a pack of cigarettes in the machine. After calculating his overhead, the vending machine owner then bargains with the location owner as to how much of the remaining difference between the cost of cigarettes and overhead and the selling price should be paid to the location owner. This amount of money agreed upon by the vending machine and location owners, and expressed in a per pack rate, is commonly known as the commission expense and includes the total sum of rent plus sales tax. For example, if the total commission is twenty cents per pack of cigarettes sold from each machine, the rent would be approximately 18.2 cents while the sales tax would make up the remainder of that amount. All vending machine owners, including Gator, made it explicitly clear to the location owner that the commission check was tax inclusive. During the audit period, it was standard industry practice for the vending machine owner to write a tax inclusive check to the location owner each month. In other words, a check for the amount due the location owner, including rent and tax, is paid to the location owner each month without any notation on the check as to what portion represents the rent and what portion represents the tax. In the case of Gator, its checks carried only the stamped notation "CIG- COM", which represented the words "cigarette commissions." The record shows that except for one small company with relatively few clients, all representative vending machine companies operated in this manner. Gator's Recordkeeping Like other vending machine companies, Gator's records consisted only of hand-written records on index cards. Indeed, Gator kept no computerized records at the time of the audit. More specifically, all calcuations as to taxes owed, the price of cigarettes, tax calculated on cigarettes vended through any given machine, and any additional information pertaining to the individual machines were kept on 8 x 10 white and pink index cards. These cards were commonly referred to as location cards and were updated each time the machine was moved from one location to another and when the price of cigarettes was changed. At the time of the audit, more than 99% of the original white and pink cards from the sample time period requested by the auditor were available for her inspection. The only documentation existing between the location and vending machine owners was the machine or route ticket, which is no different than merchandising tickets showing the number of units sold. This document reflected the amount of packs sold and the amount of money received from each machine but did not contain a separation of commission plus tax. This information was used by Gator to determine the number of packs sold from each machine during the month. The number of packs was then multiplied by the "rate" for that machine to ascertain the commission due the location owner. Although route tickets were contemporaneously prepared by a route (service) man, they were discarded before the audit began. This is probably because in a prior audit conducted in 1983 or 1984 DOR auditors expressed no interest in reviewing the route tickets. In any event, the route tickets are not essential to a resolution of the issues. A pink card was generated by Gator for each machine placed in a lessor's place of business. The card contained information, all written in pencil and amended as necessary, regarding inventory, location of machine, selling price of cigarettes, the negotiated commission rate to be paid to the location owner, and the tax computed on the license fee. The latter item was recorded in the top right hand side of the index card and, when coupled with the independent accounting firm's representation as to the integrity of the accounting system, provides reliable evidence that the commission paid to the location owner was tax inclusive. For example, petitioner's exhibit 2 received in evidence, which contains representative pink cards, reveals that on November 7, 1986, machine number 175 was installed at "River Walk Cruises #1" in Jacksonville and the location owner was thereafter paid a per pack commission of fourteen cents, of which 13.15 cents represented the rent while the remainder represented the sales tax. It is noted again that more than 99% of these cards from the sample period audited were available for inspection. A white card was also prepared for each machine and listed the number of packs sold, the per pack rate, and the amount paid to the location owner. However, it did not contain a breakdown between commission expense and the related tax. In addition, Gator maintained what was known as a monthly report, which was a summation and accumulation of sales information derived from the white cards. The report listed the rate and number of packs sold for each machine. Like the white card, the monthly report did not contain a breakdown between the rent and sales tax. Finally, journals and ledgers were prepared containing summaries of information taken from the machine cards. Expert testimony by two certified public accountants (CPAs) and a longtime industry representative established that petitioner's records (general accounting records, route tickets, location cards and ledgers) were in conformity with good accounting practice and the industry norm. If anything, Gator's records were more comprehensive than most other vending machine companies and satisfied the requirements of applicable rules and statutes. More specifically, by maintaining location cards which show the sales price per pack of cigarettes with a breakdown between the tax and rent, Gator's records were consistent with good accounting practices and the type of recordkeeping maintained by the industry. It was further established that the industry practice is to conduct business on a "tax inclusive" basis, that is, to issue checks without separately stating what portion of the amount is taxes. In addition, cancelled checks, bank statements, journals and ledgers were available to verify commissions paid to various locations. DOR did not challenge the accuracy of this supporting documentation and agreed, for example, that the month-end commission summaries tied into petitioner's journals and checks. Both financial experts concluded, and the undersigned so finds, that the records establish that the taxes were paid. During final hearing, and for the first time during the administrative hearing process, DOR challenged both the testimony of the experts and the reliability of petitioner's records on the ground the CPAs who testified were not present when the checks were written and thus had no personal knowledge that the checks were tax inclusive. However, the CPAs established the integrity of petitioner's recordkeeping and accounting system and the fact that the system used by Gator produces accurate information that can be relied upon by third party users. This was not credibly contradicted. It can be reasonably inferred from these facts that the hand-written notations on the pink cards concerning the sales tax computed on the license fee were accurate and that the corresponding checks paid to the location owners were tax inclusive. DOR also suggested that the penciled entries on the pink cards pertaining to the tax may have been prepared solely for purposes of this litigation and were not contemporaneous. For the reason stated above, this assertion is also rejected. It should be noted further that except for the allegations themselves, DOR did not challenge the authenticity of the records nor produce any evidence of circumstances that would show the records lacked trustworthiness. DOR further contended that because there was no written contract or other tangible evidence of sale between the two owners where the tax was separately stated, there was insufficient evidence to support petitioner's claim that the taxes were paid. Put another way, DOR contended that Gator needed not only internal documents (such as location cards) to verify the payment of taxes, it also needed documents submitted to the location owner reflecting the separation of tax and commission. However, prior to the 1992 amendment to rule 12A-1.044(10), there was no formal or informal requirement to do so nor had DOR given notice of such a need, and since the internal documentation confirms the payment of the taxes, no other evidence is required. Finally, the evidence shows that a vending machine company has never been considered a "dealer" within the meaning of Subsection 212.07(2), Florida Statutes, as asserted by DOR, and thus the requirement in that subsection that a dealer separately state the amount of tax on the evidence of sale is not applicable. Indeed, this interpretation of the statute is consistent with the language in Rule 12A-1.086, Florida Administrative Code, which characterizes the lessor (location owner) rather than the lessee as the dealer. Refund Issue Gator contends that using an error rate of two or three percent, a recomputation of its taxes paid during the audit period reveals that it is owed a refund of $11,015 occasioned by its bookkeeper incorrectly computing the tax due on the gross sales price of cigarettes rather than on the net price. Since the alleged overpayment of taxes occurred during the period from June 1, 1985, through April 30, 1989, the last alleged overpayment of taxes would have occurred shortly after April 30, 1989. Prior to March 10, 1992, when Gator filed its petition for reconsideration with DOR, Gator had not filed a request for a refund on DOR Form 26 (DR-26), which is the form on which refunds must be requested. In its petition for reconsideration, Gator noted that "a Petition for Refund will be filed in the immediate future if this has not previously been accomplished." As of the date of hearing, which was more than three years after the last alleged overpayment of taxes was made, no DR-26 had been filed. Therefore, the request for refund is deemed to be untimely.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent enter a final order granting the petition of Gator Coin Machine Company, Inc. and rescinding (withdrawing) the assessment set forth in the notice of reconsideration dated June 12, 1992, but denying petitioner's request for a refund of $11,015 for sales taxes allegedly overpaid during the audit period. DONE AND ENTERED this 19th day of March, 1993, in Tallahassee, Leon County, Florida. DONALD R. ALEXANDER 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 19th day of March, 1993. APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-4806 Petitioner: 1-2. Partially accepted in finding of fact 2. 3-6. Partially accepted in finding of fact 3. 7. Partially accepted in finding of fact 1. 8-9. Rejected as being unnecessary. 10. Partially accepted in finding of fact 17. 11. Partially accepted in finding of fact 15. 12-14. Rejected to the extent they are inconsistent with findings of fact 17 and 18. 15-17. Partially accepted in finding of fact 8. 18-20. Rejected as being irrelevant. 21-22. Rejected as being unnecessary. 23-24. Partially accepted in finding of fact 11. 25. Rejected as being unnecessary. 26. Partially accepted in findings of fact 13 and 14. 27. Partially accepted in finding of fact 14. 28-29. Partially accepted in finding of fact 17. 30-33. Partially accepted in finding of fact 4. 34-35. Partially accepted in finding of fact 5. 36. Partially accepted in finding of fact 15. 37. Rejected as being unnecessary. 38-39. Partially accepted in finding of fact 15. 40-41. Partially accepted in finding of fact 8. 42. Partially accepted in findings of fact 10 and 15. 43-45. Partially accepted in finding of fact 9. 46-49. Partially accepted in finding of fact 6. 50-51. Partially accepted in finding of fact 7. 52. Rejected as being unnecessary. 53-54. Partially accepted in finding of fact 10. 55-56. Partially accepted in finding of fact 7. Partially accepted in finding of fact 15. Rejected as being a conclusion of law. Rejected as being a conclusion of law. Partially accepted in finding of fact 15. 61-63. Rejected to the extent they are inconsistent with findings of fact 17 and 18. 64-65. Partially accepted in finding of fact 12. 66-68. Partially accepted in finding of fact 14. 69. Partially accepted in finding of fact 7. 70-75. Rejected as being unnecessary. Partially accepted in finding of fact 12. Rejected to the extent it is inconsistent with findings of fact 17 and 18. Partially accepted in finding of fact 15. 79-81. Partially accepted in finding of fact 16. 82. Partially accepted in findings of fact 13 and 14. 83-84. Partially accepted in finding of fact 12. Rejected to the extent it is inconsistent with findings of fact 17 and 18. Partially accepted in finding of fact 16. 87-88. Rejected to the extent they are inconsistent with findings of fact 17 and 18. Partially accepted in finding of fact 16. Partially accepted in finding of fact 17. Partially accepted in finding of fact 16. Rejected as being irrelevant since the collection of taxes from Jax Liquors occurred after the audit period. 93-95. Rejected as being unnecessary. Respondent: 1-2. Partially accepted in finding of fact 1. 3-4. Partially accepted in finding of fact 9. 5. Partially accepted in finding of fact 13. 6-8. Partially accepted in finding of fact 12. 9. Partially accepted in finding of fact 10. 10. Rejected as being unnecessary. 11a. Partially accepted in finding of fact 12. 11b. Partially accepted in findings of fact 10, 13 and 15. 11c. Partially accepted in finding of fact 14. 11d. Partially accepted in finding of fact 14. 12-15. Partially accepted in finding of fact 10. Note - Where a proposed finding has been partially accepted, the remainder has been rejected as being unnecessary, subordinate, irrelevant, not supported by the more credible and persuasive evidence, or a conclusion of law. COPIES FURNISHED: Linda Lettera, Esquire General Counsel Department of Revenue 204 Carlton Building Tallahassee, FL 32399-0100 Mr. Larry Fuchs Executive Director Department of Revenue 104 Carlton Building Tallahassee, FL 32399-0100 William A. Friedlander, Esquire Marie A. Mattox, Esquire 3045 Tower Court Tallahassee, FL 32303 Eric J. Taylor, Esquire Department of Legal Affairs The Capitol-Tax Section Tallahassee, FL 32399-1050
The Issue Whether the Petitioner should be subjected to a penalty pursuant to Section 395.5094, Florida Statutes (1987), or Section 407.51, Florida Statutes (1989)?
Findings Of Fact The Respondent, the Health Care Cost Containment Board, is an agency of the State of Florida charged with the responsibility of regulating hospital budgets. The Office of the Public Counsel is authorized pursuant to Section 407.54, Florida Statutes, to represent the general public in budget review proceedings before the Respondent. The Petitioner, Centro Asturiano Hospital, is a 144-bed acute care hospital located in Tampa, Florida. During all times relevant to this proceeding, the Petitioner's fiscal year was the calendar year. During 1984, 1985 and 1986, the accounting firm of Peat, Marwick and Main (hereinafter referred to as "Peat") prepared financial statements and Medicare reports for the Petitioner. Peat also performed audits of the Petitioner during 1984, 1985 and 1986. During all times relevant to this proceeding, the Petitioner's comptroller, Hilda Smith, prepared reports filed with the Respondent on behalf of the Petitioner. For the fiscal year 1987, the Respondent had approved the Petitioner's budgeted gross revenue per adjusted admission (hereinafter referred to as "GRAA") of $7,536.00 and net revenue per adjusted admission (hereinafter referred to as "NRAA") of $4,913.00. Based upon the Petitioner's audited actual experience for fiscal year 1987, the Petitioner's actual NRAA exceeded its budgeted NRAA. Therefore, the Respondent proposed to impose a penalty (hereinafter referred to as the "Main Penalty") on the Petitioner pursuant to Section 395.5094, Florida Statutes (1987), and Rule 10N-1.062, Florida Administrative Code. By letter dated May 12, 1988, the Respondent notified the Petitioner that it was imposing a Main Penalty on the Petitioner for 1987. A second letter dated August 15, 1988, was sent by the Respondent to the Petitioner revising the amount of the penalty. In calculating the revised penalty the Respondent took into account the Petitioner's case-mix and outlier activity. The total recommended penalty was $609,218.00. The penalty consists of a budget reduction to net revenue of $566,938.00 with a corresponding reduction to gross revenue of $854,425.00, and a cash fine of $42,280.00. The reason for imposing the Main Penalty was explained in the Respondent's letter of August 15, 1988, as follows: Preliminary findings indicated that an excess of net revenue per adjusted admission in the amount of $381.00 had occurred. These findings are based upon a comparison [sic] of the previous year's audited actual experience inflated by the MARI, and the Board approved budget for the fiscal year ended December 31, 1987. The total excess has been adjusted by case-mix and outlier activity and results in a total recommended penalty of $609,218. . . . The proposed penalty could have been avoided if the Petitioner had sought a budget amendment for 1987 or if the Petitioner had modified its operations during 1987 when it learned that its actual experience would exceed its approved budget. The Petitioner believes that the difference in the Petitioner's actual experience for 1987 and its approved budget for 1987 was caused primarily by an adjustment to Medicare contractual allowances. When a hospital treats a patient eligible for Medicare payment for the patient's services, the hospital records the gross amount of the hospital's charges for the patient's services. Medicare, however, only pays a portion of the total charges. The difference between the hospital's charges and the amount actually paid by Medicare is referred to as "Medicare contractuals." For example, if a patient is charged $1,000.00 by a hospital for services but Medicare will only pay $800.00 for those services, the $200.00 difference is referred to as a Medicare contractual. If the $200.00 is not paid from some other source it must be deducted from gross revenue to arrive at net revenue on the books of the hospital. The Petitioner receives a substantial portion of its revenue for Medicare reimbursed services. Therefore, Medicare contractuals constitute a significant item in the Petitioner's budget. An adjustment to the Petitioner's Medicare contractuals could have a significant impact on the Petitioner's budget. During April, 1987, Peat notified the Petitioner's comptroller, Ms. Smith, that the Petitioner's Medicare contractuals needed to be adjusted by $488,000.00. This adjustment was the result of Peat's audit of Petitioner's 1986 financial records and was related to Medicare cost reports for 1983, 1984 and 1985. Peat also determined that an additional $200,000.00 adjustment was required. The Petitioner knew that the adjustments were material. The net effect of Peat's 1986 audit was that the Petitioner was required in 1987 to reduce 1986 Medicare and other contractual deductions from gross revenue by $688,000.00. This amount was a significant amount. The $688,000.00 adjustment was reported by Peat to the Board of Directors of the Petitioner and accepted by the Board in April, 1987. Between June, 1987, and July, 1987, Ms. Smith, the Petitioner's comptroller, prepared a Current Year Actual and Estimated Interim Report (hereinafter referred to as the "1987 Interim Report"). In the 1987 Interim Report the Petitioner compared actual GRAA for the first 6 months of 1987 and projected GRAA for the last 6 months of 1987 with 1987 budgeted GRAA. Based upon this computation it was apparent that the Petitioner was operating in excess of the Petitioner's budget for 1987 as approved by the Respondent. The Petitioner, therefore, could have sought a budget amendment or modified its operations. Ms. Smith testified that she believed that the excess of actual GRAA and NRAA over budgeted GRAA and NRAA had been caused by the Medicare contractual adjustment recommended by Peat for 1986. The Petitioner failed to prove what the cause of the excess actually was. Ms. Smith testified that the Petitioner did not realize what the affect of the contractual adjustment was until the 1987 Interim Report was prepared. The Petitioner, however, could have determined in April of 1987 what affect the Medicare contractual adjustment would have on its 1987 budget. Therefore, if the Medicare contractual adjustment was the cause of the excess of its actual experience over its budget, the Petitioner could have taken steps as early as April, 1987, to seek a budget amendment for its 1987 fiscal year or to modify its operations. In July, 1987, Ms. Smith contacted staff of the Respondent. She spoke with Pete Pearcy and Bill Summers. She also spoke to these staff members in September, 1987. Ms. Smith contacted the Respondent because of her concern about the excess of the Petitioner's actual 1987 experience over its 1987 approved budget. She contacted the Respondent seeking assistance in determining what steps the Petitioner should take to resolve the potential problem the excess in the Petitioner's actual experience over its approved budget could cause. The Petitioner failed to prove that Ms. Smith's explanation of the problem adequately informed the Respondent what the Petitioner's problem was. Generally, the Respondent's staff will consult and/or counsel hospitals concerning matters within the Respondent's responsibilities. The Respondent's policy prohibits staff from advising hospitals, however, as to whether a budget amendment should be filed; that decision is left up to each individual hospital. Consistent with the Respondent's policy, staff of the Respondent attempted to assist Ms. Smith. During September, 1987, Ms. Smith asked Mr. Summer of the Respondent's staff whether the Petitioner should file a budget amendment. Mr. Summer responded "amend what?" This response was based upon the inability of Ms. Smith to explain to Mr. Summer what exactly the Petitioner believed it needed to amend or exactly how the Medicare contractual adjustments affected the Petitioner's 1987 budget. Mr. Summer did not specifically recommend to Ms. Smith that the Petitioner file or not file a budget amendment. Nor did anyone else on the Respondent's staff advise the Petitioner that a budget amendment should or should not be filed. Mr. Summer asked Ms. Smith to send him information concerning the problem. Mr. Summer told Ms. Smith that he would review the material before discussing the problem further. Mr. Summer did not, however, contact Ms. Smith. Nor did Ms. Smith attempt to contact Ms. Summer before the end of the Petitioner's 1987 fiscal year. The Petitioner was aware of the fact that any budget amendment for its 1987 fiscal year had to be filed before the end of the 1987 fiscal year. The Petitioner was also familiar with the manner in which a budget amendment was to be filed since the Petitioner had obtained approval of a budget amendment for its 1986 fiscal year. The Petitioner did not file a budget amendment for its 1987 fiscal year. The Petitioner was aware that it was required to operate within its 1987 approved budget. Ms. Smith indicated that she believed that the Respondent's staff would have warned her if the Petitioner had been in danger of having a penalty imposed. The Petitioner, however, was not informed by the Respondent that the Main Penalty would not be imposed upon it for its 1987 fiscal year. The Petitioner's actual GRAA for 1987 was $8,096.00 and its approved GRAA was $7,536. Therefore, the Petitioner's actual GRAA for 1987 exceeded its approved GRAA by 7.4%. The Petitioner's actual NRAA for 1987 was $5,294.00 and its approved NRAA was $4,913.00. The excess of actual NRAA over approved NRAA was 7.7%. The percentage of excess of actual GRAA and NRAA over budget is almost the same. Therefore, it is possible that whatever caused the Petitioner's excessive GRAA also caused its excessive NRAA. GRAA is not affected by Medicare contractual adjustments. NRAA is affected by Medicare contractual adjustments. Therefore, since the Petitioner's percentage excess in GRAA (7.4%) and NRAA (7/7%) for 1987 was almost the same, it is questionable whether the Petitioner's Medicare contractual adjustments were the sole cause for the excess of the Petitioner's actual experience over its budget for 1987. It is more likely that the excessive GRAA and NRAA were caused by the same problem. The Petitioner, therefore, failed to prove that its discussions with the Respondent about the Medicare contractual adjustment would have helped the Petitioner avoid the penalty proposed in this proceeding. The Petitioner filed its 1988 budget and the 1987 Interim Report with the Respondent on or about September 29, 1987. The 1987 Interim Report includes information concerning the Petitioner's actual experience for the first 7 months of 1987 and projections for the remaining 5 months of 1987. The 1987 Interim Report was submitted for informational purposes. For the first 7 months of 1987 the Petitioner's actual gross revenue was $10,171,658.00. Gross revenue for the last 5 months of 1987 was projected at $7,265,470.00. The Petitioner's estimated adjusted admissions for 1987 were 1,221 for the first 7 months and 873 for the last 5 months. Gross revenue divided by adjusted admissions for 1987 yields GRAA of $8,337.00 for the first 7 months and projected GRAA of $8,322.00 for last 5 months. Based upon the information contained in the 1987 Interim Report, the Petitioner's GRAA for the entire 1987 fiscal year was projected to be $8,331.00. The Petitioner's approved GRAA, which was included in the 1987 Interim Report, was only $7,536.00. Therefore, the Petitioner should have been aware that it would very likely exceed its approved 1987 budgeted GRAA by approximately $795.00 (approximately 10.5%) in June of 1987. Accordingly, the Petitioner should have taken steps in September of 1987 to amend its budget or to modify its operations. The Petitioner had sufficient information during 1987 (April, June and September, 1987) to warn it that its actual experience would exceed its approved budget. Although the Petitioner's comptroller did discuss what she believed to be the cause of the Petitioner's problem (the Medicare contractual adjustment) with the Respondent, the evidence failed to prove that it was reasonable for the Petitioner to wait for the Respondent to take some action while the Petitioner took no action on its own behalf to rectify the problem.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Respondent issue a final order dismissing the Petitioner's petition. DONE and ENTERED this 23rd day of July, 1990, in Tallahassee, Florida. LARRY J. SARTIN 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 23rd day of July, 1990. APPENDIX TO RECOMMENDED ORDER The parties have submitted proposed findings of fact. It has been noted below which proposed findings of fact have been generally accepted and the paragraph number(s) in the Recommended Order where they have been accepted, if any. Those proposed findings of fact which have been rejected and the reason for their rejection have also been noted. The Petitioner's Proposed Findings of Fact Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection 1 3. 1 and hereby accepted. hereby accepted. 2 and hereby accepted. 5 4. 6 15. 7-8 16. 9 17. 10-11 Hereby accepted. 12-13 Not supported by the weight of the evidence. 14 7. NRAA was $4,913.00 and not $4,938.00. 15 19. 16 33. 31 and hereby accepted. Not supported by the weight of the evidence. 19 22. 20 24. Hereby accepted. The last sentence is not supported by the weight of the evidence. Not supported by the weight of the evidence. Not relevant. Not supported by the weight of the evidence. See 22 and 25. Several of the contacts with the Respondent took place after 1987 and are not relevant to this proceeding. The second sentence is hereby accepted. The last sentence is not supported by the weight of the evidence. Not supported by the weight of the evidence. The Respondent's Proposed Findings of Fact Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection 1 3. 2 4. 3 5-6. 4 8-9. 10 and hereby accepted. Hereby accepted. 7 11. 8 8 and 11. 9 13 and 20. 10 16. See 21. 18 and hereby accepted. See 22. See 25. 15 27. 16 Hereby accepted. 17-18 Although true, not relevant to this proceeding. 19-21 Hereby accepted. 22 21. 23 See 21. 24 19 and 33-36. 25 11. Not relevant. See 21. Incorrect conclusion of law. Ms. Smith testified what she was told. Her testimony about what she heard is not hearsay. 29 14. 30-32 Hereby accepted. 33 33-34. 34 35 and hereby accepted. 35 36. 36 32 37 Cumulative. 38 12. 39 31-32. The Intervenor's Proposed Findings of Fact Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection 1 3. 2 4. 3 6. 4 5 and hereby accepted. 5 5-6. 6 hereby accepted. 7 7. 8 14. 9-10 15. 11 16. 12-13 17. 14 16. 15 18. 16 16. Hereby accepted. See 21. Hereby accepted. See 16. 21-22 Hereby accepted. 23-24 Not relevant. 25 Hereby accepted. 26 27. 27 21. First contact with the Respondent was in July, and not August. 28 19. 29 19-20. 30 Cumulative. 31 22. 32-33 24. 34-35 Hereby accepted. 36-37 25. 38 30. 39 Hereby accepted. 40 29. Not relevant. Hereby accepted. 43-44 Not relevant. 45 31-32. 46 33. 47-51 36. 52-54 19. 55-57 31. 58-59 32. 60 Not supported by the weight of the evidence. 61-62 Hereby accepted. 63 31-32. 64 Hereby accepted. 65 9. 66 10-11. COPIES FURNISHED: Julia P. Forrester Senior Attorney Health Care Cost Containment Board Building L, Suite 101 325 John Knox Road Tallahassee, Florida 32303 David D. Eastman, Esquire Patrick J. Phelan, Jr., Esquire Post Office Box 669 Tallahassee, Florida 32302 Jack Shreve, Public Counsel David R. Terry, Associate Public Counsel Peter Schwarz, Associate Public Counsel c/o The Florida Legislature 111 West Madison Street, Room 801 Tallahassee, Florida 32399-1400 Stephen Presnell, General Counsel Health Care Cost Containment Board Woodcrest Office Park 325 John Knox Road Building L, Suite 101 Tallahassee, Florida 32303
The Issue Whether the contested and unpaid portions of the tax, penalty and interest assessment issued against Petitioners as a result of Audit No. 9317210175 should be withdrawn as Petitioners have requested?
Findings Of Fact Based upon the evidence adduced at hearing, and the record as a whole, the following Findings of Fact are made: Shuckers is an oceanfront restaurant and lounge located at 9800 South Ocean Drive in Jensen Beach, Florida. In November of 1992, Petitioner Mesa's brother, Robert Woods, Jr., telephoned Mesa and asked her if she wanted a job as Shuckers' bookkeeper. Woods had been the owner of Shuckers since 1986 through his ownership and control of the corporate entities (initially Shuckers Oyster Bar Too of Jensen Beach, Florida, Inc., and then NAT, Inc.) that owned the business. Mesa needed a job. She therefore accepted her brother's offer of employment, notwithstanding that she had no previous experience or training as a bookkeeper. When Mesa reported for her first day of work on November 19, 1992, she learned that Woods expected her to be not only the bookkeeper, but the general manager of the business as well. Mesa agreed to perform these additional responsibilities. She managed the day-to-day activities of the business under the general direction and supervision of Woods. After a couple of weeks, Woods told Mesa that it would be best if she discharged her managerial responsibilities through an incorporated management company. Woods had his accountant draft the documents necessary to form such a corporation. Among these documents were the corporation's Articles of Incorporation. Mesa executed the Articles of Incorporation and, on December 3, 1992, filed them with the Secretary of State of the State of Florida, thereby creating Petitioner TAN, Inc. TAN, Inc.'s Articles of Incorporation provided as follows: The undersigned subscribers to these Articles of Incorporation, natural persons competent to contract, hereby form a corporation under the laws of the State of Florida. ARTICLE I- CORPORATE NAME The name of the corporation is: TAN, INC. ARTICLE II- DURATION This corporation shall exist perpetually unless dissolved according to Florida law. ARTICLE III- PURPOSE The corporation is organized for the purpose of engaging in any activities or business permitted under the laws of the United States and the State of Florida. ARTICLE IV- CAPITAL STOCK The corporation is authorized to issue One Thousand (1000) shares of One Dollar ($1.00) par value Common Stock, which shall be designated "Common Shares." Article V- INITIAL REGISTERED OFFICE AND AGENT The principal office, if known, or the mailing address of this corporation is: TAN, INC. 9800 South Ocean Drive Jensen Beach, Florida 34957 The name and address of the Initial Registered Agent of the Corporation is: Linda A. W. Mesa 9800 South Ocean Drive Jensen Beach, Florida 34957 ARTICLE VI- INITIAL BOARD OF DIRECTORS This corporation shall have one (1) director initially. The number of directors may be either increased or diminished from time to time by the By-laws, but shall never be less than one (1). The names and addresses of the initial directors of the corporation are as follows: Linda A. W. Mesa 9800 South Ocean Drive Jensen Beach, Florida 34957 ARTICLE VII- INCORPORATORS The names and addresses of the incorporators signing these Articles of Incorporation are as follows: Linda A. W. Mesa 9800 South Ocean Drive Jensen Beach, Florida 34957 On the same day it was incorporated, December 3, 1992, TAN, Inc., entered into the following lease agreement with the trust (of which Woods was the sole beneficiary) that owned the premises where Shuckers was located: I, Michael Blake, Trustee, hereby lease to Tan, Inc. the premises known as C-1, C-2, C-3, C-4, 9800 South Ocean Drive, Jensen Beach, Florida for the sum of $3,000.00 per month. This is a month to month lease with Illinois Land Trust and Michael Blake, Trustee. Mesa signed the agreement in her capacity as TAN, Inc.'s President. She did so at Woods' direction and on his behalf. No lease payments were ever made under the agreement. 3/ The execution of the lease agreement had no impact upon Shuckers. Woods remained its owner and the person who maintained ultimate control over its operations. At no time did he relinquish any part of his ownership interest in the business to either Mesa or her management company, TAN, Inc. Mesa worked approximately 70 to 80 hours a week for her brother at Shuckers doing what he told her to do, in return for which she received a modest paycheck. Woods frequently subjected his sister to verbal abuse, but Mesa nonetheless continued working for him and following his directions because she needed the income the job provided. As part of her duties, Mesa maintained the business' financial records and paid its bills. She was also required to fill out, sign and submit to Respondent the business' monthly sales and use tax returns (hereinafter referred to as "DR- 15s"). She performed this task to the best of her ability without any intention to defraud or deceive Respondent regarding the business' tax liability. The DR-15s she prepared during the audit period bore NAT, Inc.'s Florida sales and use tax registration number. On the DR-15 for the month of December, 1992, Mesa signed her name on both the "dealer" and "preparer" signature lines. Other DR-15s were co-signed by Mesa and Woods. In April of 1993, Woods told Mesa that she needed to obtain a Florida sales and use tax registration number for TAN, Inc., to use instead of NAT, Inc.'s registration number on Shuckers' DR-15s. In accordance with her brother's desires, Mesa, on or about May 14, 1993, filed an application for a Florida sales and use tax registration number for TAN, Inc., which was subsequently granted. On the application form, Mesa indicated that TAN, Inc. was the "owner" of Shuckers and that the application was being filed because of a "change of ownership" of the business. In fact, TAN, Inc. was not the "owner" of the business and there had been no such "change of ownership." By letter dated June 22, 1993, addressed to "TAN INC d/b/a Shuckers," Respondent gave notice of its intention to audit the "books and records" of the business to determine if there had been any underpayment of sales and use taxes during the five year period commencing June 1, 1988, and ending May 31, 1993. The audit period was subsequently extended to cover the six year period from June 1, 1987 to May 31, 1993. Relying in part on estimates because of the business' inadequate records, auditors discovered that there had been a substantial underpayment of sales and use taxes during the audit period. The auditors were provided with complete cash register tapes for only the following months of the audit period: June, July, August and December of 1992, and January, February, March, April and May of 1993. A comparison of these tapes with the DR-15s submitted for June, July, August and December of 1992, and January, February, March, April and May of 1993 revealed that there had been an underreporting of sales for these months. Using the information that they had obtained regarding the three pre- December, 1992, months of the audit period for which they had complete cash register tapes (June, July and August of 1992), the auditors arrived at an estimate of the amount of sales that had been underreported for the pre- December, 1992, months of the audit period for which they did not have complete cash register tapes. The auditors also determined that Shuckers' tee-shirt and souvenir sales, 4/ Sunday brunch sales, cigarette vending sales, vending/amusement machine location rentals 5/ and tiki bar sales that should have been included in the sales reported on the DR-15s submitted during the audit period were not included in these figures nor were these sales reflected on the cash register tapes that were examined. According of the "Statement of Fact" prepared by the auditors, the amount of these unreported sales were determined as follows: TEE-SHIRT SALES: Sales were determined by estimate. This was determined to be $2,000/ month. No records were available and no tax remitted through May, 1993. SUNDAY BRUNCH SALES: Sales were determined by estimate. This was determined to be 100 customers per brunch per month (4.333 weeks). No audit trail to the sales journal was found and no records were available. CIGARETTE VENDING SALES: The estimate is based on a review of a sample of purchases for the 11 available weeks. The eleven weeks were averaged to determine monthly sales at $3/pack. VENDING MACHINE LOCATION RENTAL REVENUE: The revenue estimate is based on a review of a one month sample. TIKI BAR SALES: The sales estimate is based on a review of infrequent cash register tapes of February, 1993. The daily sales was determined by an average of the sample. The number of days of operation per month was determined by estimate. In addition, the auditors determined that TAN, Inc. had not paid any tax on the lease payments it was obligated to make under its lease agreement with Illinois Land Trust and Michael Blake, Trustee, nor had any tax been paid on any of the pre-December, 1992, lease payments that had been made in connection with the business during the audit period. According to the "Statement of Fact" prepared by the auditors, the amount of these lease payments were determined as follows: The estimate is based on 1990 1120 Corporate return deduction claimed. This return is on file in the Florida CIT computer database. The 1990 amount was extended through the 6/87 - 11/92 period. For the period 12/92 - 5/93 audit period, TAN's current lease agreement of $3,000/month was the basis. No documentation was produced during the audit supporting any the sales tax exemptions that the business had claimed during the audit period on its DR-15s. 6/ Accordingly, the auditors concluded that the sales reported as exempt on the business' DR-15s were in fact taxable. Using records of sales made on a date selected at random (February 1, 1993), the auditors calculated effective tax rates for the audit period. They then used these effective tax rates to determine the total amount of tax due. An initial determination was made that a total of $201,971.71 in taxes (not including penalties and interest) was due. The amount was subsequently lowered to $200,882.28. On or about December 22, 1993, TAN, Inc., entered into the following Termination of Lease Agreement with Ocean Enterprises, Inc.: TAN, Inc., a Florida corporation, hereby consents to termination of that certain lease of the premises known as C-1, C-2, C-3 and C-4 of ISLAND BEACH CLUB, located at 9800 South Ocean Drive, Jensen Beach, Florida, dated December 3, 1992, acknowledges a landlord's lien on all assets for unpaid rent; and transfers and sets over and assigns possession of the aforesaid units and all of its right, title and interest in and to all inventory, equipment, stock and supplies located on said premises 7/ in full satisfaction of said unpaid rent; all of the foregoing effective as of this 22nd day of December, 1993. FOR AND IN CONSIDERATION of the foregoing termin- ation of lease, OCEAN ENTERPRISES, Inc., a Florida corporation, hereby agrees to pay Linda Mesa, each month all of the net revenues of the operation of the bar and restaurant located on said premises, up to the sum of $15,000.00, for sales tax liability asserted against TAN, Inc. or Linda A. W. Mesa based upon possession or ownership of said premises or any of the assets located thereon, plus attorney's fees incurred in connection with defending or negotiating settlement of any such liability. Net revenue shall mean gross revenue, less operating expenses, includ- ing, but not limited to, rent, up to the amount of $5,000.00 per month, costs of goods sold, utilities, payroll and payroll expense and insurance. OCEAN ENTERPRISES, Inc. represents that it has entered into a lease of said premises for a term of five years commencing on or about December 22, 1993, pursuant to the terms and conditions of which OCEANFRONT [sic] ENTERPRISES, Inc. was granted the right to operate a restaurant and bar business on said premises. Ocean Enterprises, Inc., leases the property from Island Beach Enterprises, which obtained the property through foreclosure. TAN, Inc., has been administratively dissolved.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is hereby RECOMMENDED that the Department of Revenue enter a final order withdrawing the contested and unpaid portions of the assessment issued as a result of Audit No. 9317210175, as it relates to TAN, Inc., and Linda A. W. Mesa. DONE AND ENTERED in Tallahassee, Leon County, Florida, this 27th day of June, 1995. STUART M. LERNER 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 27th day of June, 1995.
Findings Of Fact Having listened to the testimony and considered the evidence presented in this cause, it is found as follows: Dr. Melvin J. Hellinger is licensed to practice dentistry in the State of Florida by the State Board of Dentistry. Dr. Melvin J. Hellinger is currently practicing dentistry in Miami, Florida. Dr. Melvin J. Hellinger was indicted on three counts of income tax evasion in the United States District Court, District of Massachusetts. The indictment charged that Dr. Melvin J. Hellinger did willfully and knowingly attempt to evade and defeat a large part of the income taxes due and owing by him and his wife to the United States of America for the calendar years 1969, 1970 and 1971, by filing and causing to be filed with the District Director of Internal Revenue for the Internal Revenue District of Boston, in the District of Massachusetts, a false and fraudulent joint income tax return for the calendar years 1969, 1970 and 1971, each calendar year constituting a separate count. On March 10, 1975, Dr. Melvin J. Hellinger pled guilty to and was convicted of the offense of willfully and knowingly attempting to evade and defeat a large part of the income taxes due and owing by him and his wife to the United States of America by filing and causing to be filed with the Internal Revenue, a false and fraudulent joint income tax return, in violation of Section 7201, I.R.C., Title 26, U.S.C., Sec. 7201, as charged in Counts 2 and 3 of the aforementioned indictment. Count 2 charged that Dr. Hellinger did evade income taxes by filing an income tax return wherein it was stated that his and his wife's taxable income for calendar year 1970 was $47,883.08 and that the amount of tax due and owing thereon was $16,401.58, whereas, as he then and there well knew, their joint taxable income for said calendar year was $101,503.07, upon which said taxable income there was owing an income tax of $47,264.70. Count 3 charged that Dr. Hellinger did evade income taxes by filing an income tax return wherein it was stated that his and his wife's taxable income for calendar year 1971 was $50,877.52 and that the amount of tax due and owing thereon was $17,498.76, whereas, as he then and there well knew, their joint taxable income for said calendar year was $67,786.12, upon which said taxable income there was owing an income tax of $26,502.36. The United States District Court for the District of Massachusetts sentenced Dr. Melvin J. Hellinger to imprisonment for a period of three months, execution of prison sentence to be suspended and Dr. Hellinger placed on probation for a period of two years. As a special condition of his probation, he is to spend two days a month doing work at a charitable hospital or some similar institution under the supervision of the probation office. It was further ordered that Dr. Hellinger pay a fine in the amount of $10,000, payable on or before March 17, 1975. Dr. Melvin J. Hellinger is presently performing voluntary work one day a week at Jackson Memorial Hospital in Miami, Florida. Dr. Melvin J. Hellinger is a competent oral surgeon. Dr. Melvin J. Hellinger currently holds a valid license to practice dentistry in the state of Massachusetts, which license was renewed after his conviction for income-tax evasion. By his own statement, Dr. Hellinger can return to Massachusetts to practice dentistry. Dr. Melvin J. Hellinger was removed from the staff at Miami-Dade General Hospital because of the subject conviction for income tax evasion and omissions he made from his application to Miami-Dade General Hospital, which omissions reflected upon his character. Dr. Melvin J. Hellinger's membership in the American Dental Association and the American Society of Oral Surgeons has been revoked as a result of accusations by Blue Cross-Blue Shield concerning duplicate claims filed by Dr. Hellinger, which accusations have now been settled between Dr. Hellinger and Blue Cross-Blue Shield. Dr. Melvin J. Hellinger became a diplomate of the American Board of Oral Surgery in 1965, when in his late 20's. He has published in dental journals and taught at Tuft's University in oral pathology and Boston University in oral surgery. Dr. Melvin J. Hellinger came to Florida in December of 1974 from Wakefield, Massachusetts. In Wakefield, Massachusetts, Dr. Melvin J. Hellinger was very active in civic and religious affairs, contributing a substantial amount of time to community service. During the time within which Dr. Hellinger committed the subject felonies, his wife discovered that she had a cancer malignancy, which is presently being treated by a specialist in Miami. Also at that time, Dr. Hellinger's father-in-law, of whom he thought highly, suffered several strokes. Further, during that time, Dr. Hellinger suffered large stock-losses, putting a severe financial burden on him. Dr. Hellinger and his wife have four children, ages seven to twelve. Since moving to Florida, Dr. Hellinger has been active in his temple and coaches children's league football. Dr. Hellinger has no other criminal record. Dr. Melvin J. Hellinger pled guilty to and was adjudged guilty of a felony under the laws of the United States involving income tax evasion as set forth in Counts and 2 of the Accusation filed herein by the Florida State Board of Dentistry.
Findings Of Fact The parties stipulated to findings of fact set forth in paragraphs 1-5, below. Zurich is an insurer domiciled in the State of New York. Zurich is authorized to do insurance business in the State of Florida. Zurich pays insurance premium taxes to the State of Florida. As a foreign insurer doing business in Florida, Zurich is subject to the provisions of Florida's retaliatory tax, Section 624.5091, Florida Statutes. Respondent Department of Revenue (Revenue) is the state agency charged with the duty to implement and enforce Section 624.5091, Florida Statutes. Zurich's interests are substantially affected by Revenue's Rule 12B- 8.016(3)(a)(4), Florida Administrative Code, by virtue of the tax assessment made against Zurich pursuant to the rule. OTHER FACTS Prior to 1989, the Department of Insurance administered insurance taxation. Now, Revenue has that responsibility. Section 213.05, Florida Statutes, directs Revenue to administer provisions of Sections 624.509 through 624.514, Florida Statutes. Section 213.06(1), Florida Statutes, authorizes Revenue to promulgate rules to implement those responsibilities. Rule 12B-8.016 was first promulgated by Revenue in December of 1989 to implement statutory authority of Section 624.429 (currently renumbered as 624.5091). This statute authorized retaliatory taxation against non-domiciled insurers in the amount by which their state of domicile would tax Florida insurers in excess of Florida's comparable tax. The statute provides in pertinent part: When by or pursuant to the laws of any other state or foreign country any taxes, licenses, and other fees, in the aggregate, and any fines, penalties, deposit requirements, or other material obligations, prohibitions, or restrictions are or would be imposed upon Florida insurers or upon the agents or representatives of such insurers, which are in excess of such taxes, licenses, and other fees, in the aggregate, or other obligations, prohibitions, or restrictions directly imposed upon similar insurers, or upon the agents or representatives of such insurers, of such other state or country under the statutes of this state, so long as such laws of such other state or country continue in force or are so applied, the same taxes, licenses, and other fees, in the aggregate, or fines, penalties, deposit requirements, or other material obligations, prohibitions, or restrictions of whatever kind shall be imposed by the department upon the insurers, or upon the agents or representatives of such insurers, of such other state or country doing business or seeking to do business in this state. As it existed in 1989 and currently, the statute contains an exclusionary provision expressly excluding from the retaliatory tax any special purpose assessments in connection with insurance other than property insurance. This exclusionary provision is part of Subsection 3 of the current statute, 624.5091, and reads as follows: (3)This section does not apply as to personal income taxes, nor as to sales or use taxes, nor as to ad valorem taxes on real or personal property, nor as to reimbursement premiums paid to the Florida Hurricane Catastrophe Fund, nor as to emergency assessments paid to the Florida Hurricane Catastrophe Fund, nor as to special purpose obligations or assessments imposed in connection with particular kinds of insurance other than property insurance, except that deductions, from premium taxes or other taxes otherwise payable, allowed on account of real estate or personal property taxes paid shall be taken into consideration by the department in determining the propriety and extent of retaliatory action under this section. The parties concede that Revenue's Rule 12B-8.016 accurately tracts the first part of the retaliatory taxation statute. But a subpart of the Rule, 12B- 8.016(3)(a)(4), is challenged by Zurich in this proceeding because that subpart provides for inclusion of the assessment for administration of workers compensation in Florida and comparable assessments in other states. The rule subpart states: (3)(a) Other items which shall be included in the retaliatory calculations are: * * * 4. The workers compensation administrative assessment imposed by s. 440.51, F.S., as well as comparable assessments in other states. The State of Florida imposes assessment on workers compensation carriers such as Zurich in accordance with authority contained in Section 440.51, Florida Statutes, which is entitled "Expenses of Administration." Section 440.51 provides for the pro-rata assessment of all insurers and self- insurers of workers compensation to cover expenses of administering the workers compensation program. The assessment is a "special fund" that does not involve appropriated funds or general state revenues. Zurich's home state of New York imposes a comparable assessment. In accordance with Rule 12B-8.016(3)(a)(4), Florida Administrative Code, Revenue includes calculations for the Worker's Compensation Board Administrative Fund in the state of New York in Zurich's retaliatory tax calculation. In drafting the rule in 1989, Revenue relied upon Attorney General Opinion 057-173, which advised that Florida's Worker's Compensation Administrative Assessment should be considered a "tax" for purposes of retaliatory tax calculation. On this basis, Revenue's rule requires that such assessments be considered as "taxes" and included in the retaliatory tax calculation. However, following the issuance of Attorney General Opinion 057-173, the Florida legislature in 1959 enacted the present Subsection 624.5091(3), Florida Statutes, specifically excluding the consideration of "special purpose obligations or assessments imposed in connection with particular kinds of insurance other than property insurance" in retaliatory tax calculations. Following the 1959 enactment of the exclusionary language contained in Subsection 624.5091(3), Florida Statutes, the Department of Insurance did not include comparable worker compensation assessments of other states. The Department of Insurance administered insurance taxation until 1989. Department of Insurance forms introduced into evidence for 1986 showed that the Florida assessment, pursuant to Section 440.51 Florida Statutes, was treated as a deduction against Florida's premium tax and added back in on the Florida side of the retaliatory tax calculation. But the assessment was not included in a manner to inflate the calculation of the domiciliary state's comparative tax base. When Revenue assumed administration of insurance taxation in 1989, a proposed rule and an emergency rule were promulgated. Neither provided for inclusion of foreign states' special purpose administrative assessments in retaliatory tax calculation. In the course of the promulgation process, the determination to treat the worker compensation administrative assessment as a tax became a part of the rule. The purpose of Florida's retaliatory statute is to influence other states' legislative discretion to lower the tax burden on Florida insurers doing business in those other states. The items to be compared for retaliatory purposes are determined by the legislature and not by Revenue, Revenue auditors, or other states.
The Issue The issues to be resolved in this case are what amount of federal income tax expense is properly included as an expense in Premier's excessive profits filings for the years 2005-2007, and in light of that deduction, how much Petitioner must refund as excessive profits pursuant to section 627.215, Florida Statutes (2009)?
Findings Of Fact Premier is a foreign insurer authorized to write workers' compensation insurance in the State of Florida. As a workers' compensation insurer, Premier is subject to the jurisdiction of the Office. Premier began writing workers' compensation insurance coverage in Florida on January 1, 2005. The Office is a subdivision of the Financial Services Commission responsible for the administration of the Insurance Code, including section 627.215. Section 627.215(1)(a) requires that insurer groups writing workers' compensation insurance file with the Office on a form prescribed by the Commission, the calendar-year earned premium; accident-year incurred losses and loss adjustment expenses; the administrative and selling expenses incurred in or allocated to Florida for the calendar year; and policyholder dividends applicable to the calendar year. Insurer groups writing types of insurance other than workers' compensation insurance are also governed by section 627.215. Its purpose is to determine whether insurers have realized an excessive profit and if so, to provide a mechanism for determining the profit and ordering its return to consumers. Insurer groups are also required to file a schedule of Florida loss and loss adjustment experience for each of the three years prior to the most recent accident year. Section 627.215(2) provides that "[t]he incurred losses and loss adjustment expenses shall be valued as of December 31 of the first year following the latest accident year to be reported, developed to an ultimate basis, and at two 12-month intervals thereafter, each developed to an ultimate basis, so that a total of three evaluations will be provided for each accident year." Section 627.215 contains definitions that are critical to understanding the method for determining excess profits. Those definitions are as follows: "Underwriting gain or loss" is computed as follows: "the sum of the accident-year incurred losses and loss adjustment expenses as of December 31 of the year, developed to an ultimate basis, plus the administrative and selling expenses incurred in the calendar year, plus policyholder dividends applicable to the calendar year, shall be subtracted from the calendar-year earned premium." § 627.215(4). While the sum of the accident-year losses and loss adjustment expenses are required by the statute to be developed to an ultimate basis, the administrative and selling expenses are not. "Anticipated underwriting profit" means "the sum of the dollar amounts obtained by multiplying, for each rate filing of the insurer group in effect during such period, the earned premium applicable to such rate filing during such period by the percentage factor included in such rate filing for profit and contingencies, such percentage factor having been determined with due recognition to investment income from funds generated by Florida business, except that the anticipated underwriting profit . . . shall be calculated using a profit and contingencies factor that is not less than zero." § 627.215(8). Section 627.215 requires that the underwriting gain or loss be compared to the anticipated underwriting profit, which, as previously stated, is tied to the applicable rate filing for the insurer. Rate filings represent a forecast of expected results, while the excess profits filing is based on actual expenses for the same timeframe. The actual calculation for determining whether an insurer has reaped excess profits is included in section 627.215(7)(a): Beginning with the July 1, 1991, report for workers' compensation insurance, employer's liability insurance, and commercial casualty insurance, an excessive profit has been realized if the net aggregate underwriting gain for all these lines combined is greater than the net aggregate anticipated underwriting profit for these lines plus 5 percent of earned premiums for the 3 most recent calendar years for which data is filed under this section. . . Should the Office determine, using this calculation, that an excess profit has been realized, the Office is required to order a return of those excess profits after affording the insurer group an opportunity for hearing pursuant to chapter 120. OIR B1-15 (Form F) is a form that the Office has adopted in Florida Administrative Code Rule 69O-189.007, which was promulgated pursuant to the authority in section 627.215. The information submitted by an insurer group on Form F is used by the Office to calculate the amount of excessive profits, if any, that a company has realized for the three calendar-accident years reported. The terms "loss adjustment expenses," and "administrative and selling expenses," are not defined by statute. Nor are they defined in rule 69O-189.007 or the instructions for Form F. Form F's first page includes section four, under which calendar-year administrative and selling expenses are listed. Section four has five subparts: A) commissions and brokerage expenses; B) other acquisition, field supervision, and collection expense; C) general expenses incurred; D) taxes, licenses, and fees incurred; and E) other expenses not included above. No guidance is provided in section 627.215, in rule 60O-189.007, or in the instructions for Form F, to identify what expenses may properly be included in the Form F filing. There is no indication in any of these three sources, or in any other document identified by the Office, that identifies whether federal income taxes are to be included or excluded from expenses to be reported in a Form F filing. While the form clearly references taxes, licenses, and fees incurred under section 4(D), the instructions do not delineate what types of taxes, licenses, and fees should be included. The instructions simply state: "for each of the expenses in item 4, please provide an explanation of the methodology used in deriving the expenses, including supporting data." On or about June 30, 2009, Premier filed its original Form F Filing with the Office pursuant to section 627.215 and rule 69O-189.007. Rule 69O-189.007 requires that a Form F be filed each year on or before July 1. On March 19, 2010, the Office issued a Notice of Intent, directing Premier to return $7,673,945.00 in "excessive profits" pursuant to section 627.215. Premier filed a petition challenging the Office's determination with respect to the amount to be refunded, based in part on its position that federal income tax expense is appropriately included as an expense for calculation of excess profits. The parties attempted to resolve their differences over the next year or so. As part of their exchange of information, Premier subsequently filed three amendments to its Form F filing on December 11, 2009; on June 21, 2010; and on January 13, 2012. In each of its amended filings, Premier included the federal income tax expense attributable to underwriting profit it earned during the 2005-2007 period. These expenses were included under section 4(E). As reflected in the Preliminary Statement, Premier filed a challenge to the Office's policy of not allowing federal income taxes to be used as an expense for excess profits filings as an unadopted rule. On July 5, 2012, a Final Order was issued in Case No. 12-1201, finding that the Office's Policy regarding the inability to deduct federal income taxes as an expense for excess profits filings met the definition of a rule and had not been adopted as a rule, in violation of section 120.54(a). The Final Order in Case No. 12-1201 directed the Office to discontinue immediately all reliance upon the statement or any substantially similar statement as a basis for agency action. At this point, the parties have resolved their differences with respect to all of the calculations related to the determination of excess profits, with one exception. The sole issue remaining is the amount, if any, that should be deducted as an administrative expense for payment of federal income tax. The parties have also stipulated that, before any adjustment to federal income tax is made, Premier's underwriting profit for 2005 was $2,923,157 and for 2006 was $2,119,115. For 2008, Premier suffered an underwriting loss of $785,170. Premier's federal income tax rate for all three years was 35%. The maximum amount of underwriting profit that a company can retain is the net aggregate anticipated profit, plus five percent of earned premiums for the calendar years reported on workers' compensation business. For the 2005-2007 reporting years, Premier's maximum underwriting profit is stipulated to be $1,189,892. Anything over this amount is considered excessive profits which must be returned to policyholders. The parties also agree that, prior to any deduction for federal income tax paid by Premier, the amount of excess profit earned by Petitioner and subject to return to policyholders is $3,067,220. Premier has filed a fourth amended Form F, which incorporated all of the stipulations of the parties to date. The fourth amended Form F also includes an allocation of federal income tax expense based upon the statutory allocation methodology outlined in section 220.151, Florida Statutes (2009). Section 220.151 provides the statutory method for allocating federal income tax expenses for purpose of paying Florida corporate income taxes. This section directs that insurance companies shall allocate federal taxable income based on the ratio of direct written premium the insurance company has written in Florida for the relevant period, divided by the direct written premium anywhere. Premier paid its Florida corporate income tax based upon this statutory methodology. Consistent with the methodology in section 220.151, Premier allocated its federal taxable income to the State of Florida based upon the percentage of direct premium written on risks in Florida, and reduced the amount of its federal taxable income by the amount investment income reflected on its federal tax return. Premier then multiplied the Florida portion of its taxable income by its 35% federal tax rate, resulting in the federal income tax expense allocated to Florida. For the year 2005, Premier's federal taxable income according to its tax return is $7,614,512.89. After subtracting investment income listed on the tax return of $969,051.97, the taxable income attributable to premium is $6,645,460.92. For 2006, Premier's federal taxable income according to its tax return is $6,577,534.06. After subtracting investment income of $2,011,614.86, the taxable income attributable to premium is $4,565,919.20. For 2007, Premier's federal taxable income according to its tax return was $4,359,742.88. After subtracting investment income of $2,266,291.99, the taxable income attributable to premium is $2,093,450.89. For the three years combined, the federal taxable income was $18,551,789.83. The amount of investment income subtracted was $5,246,958.82, leaving a balance of taxable income attributable to premium as $13,304,831.01. For the years 2005 through 2007, Premier paid $2,665,079.51; $2,302,136.92; and $1,525,910.01 respectively, in federal income tax. During those same years, Premier wrote 58.8388%; 51.2514%; and 29.8536%, respectively, of its direct premium in Florida. Allocating a portion of Premier's federal tax income and income tax liability to Florida, consistent with section 220.151, results in a calculation of Florida's portion of taxable underwriting income. For 2005, this amount is $3,910,109.46; for 2006, $2,340,097.51; and for 2007, $624,970.45. The total amount of federal taxable income allocated to Florida for the three-year period of $6,875,177.42. The taxable income is then multiplied by the applicable tax rate of 35%, which results in a federal income tax expense allocated to Florida of $1,368,538.46 for 2005; $819,034.13 for 2006; and $218,739.45 for 2007, totaling $2,406,312.10 for the three-year period at issue. The undersigned notes that Premier only writes workers' compensation insurance. It does not write other lines of insurance, which makes the allocation of earned premium much simpler than it would be for a company writing multiple lines of insurance. Under the methodology described above, Premier determined that $2,406,312.10 is the appropriate amount of federal income tax expense to be deducted for calendar years 2005-2007, resulting in an excess profit pursuant to section 627.215, of $660,907. Mr. Hester, a certified public accountant and president of Premier, testified that this methodology was used by Premier in determining its Florida corporate income tax liability. The methodology described above uses the amounts that Premier actually paid in taxes, and therefore reflects the actual expense experienced by Premier. It is accepted as a reasonable method. According to Mr. Watford, the Office does not determine the methodology that must be used in allocating expenses. The insurance company provides the methodology and the data to support it, and then the Office determines whether, in a given case, the methodology is appropriate. Premier points out that the Office has provided no guidance on how to allocate federal income tax expense for excess profits reporting. That no guidance has been offered is understandable, inasmuch as the Office holds firmly to the belief that no allowance for federal income tax expense should be made. Nonetheless, the Office reviewed the method provided by Premier and did not find it to be reasonable. Premier included in its Form F filing for the years 2005-2007 a deduction for the portion of Florida corporate income tax expense not related to investment income. The Office accepted the Florida corporate income tax deduction, which is calculated using the same allocation method Premier used to allocate federal income tax expense. Indeed, the Office acknowledged at hearing that it has permitted the methodology of direct written premium in Florida divided by direct written premium written everywhere for the determination of other expenses for excess profits filings, and has only rejected the methodology on one occasion. However, it has not accepted this same methodology for determining the appropriate amount of federal income tax expense and does not believe it to be a reasonable methodology. The rationale for this distinction is that, in Mr. Watford's view, federal income tax is "a totally different type of expense." Mr. Watford did not consult an accountant or certified public accountant in making the determination that the methodology used was impermissible. Mr. Watford opined that in order to determine that a proposed methodology is reasonable, the insurance company would need to have an adjustment in the profit factor, i.e., submit a new rate filing for the years in question; have a projected tax expense that did not exceed the expense he calculated, based on the effect on future tax expenses caused by the return of excess profits; and submit a methodology that was "appropriate for the insurance company." This approach is rejected. First, the rate filing is supposed to be a forecast, and the Office cited to no authority for adjusting the forecast in light of actual events. Further, Mr. Watford admitted that in this instance, the profit and contingencies factor is already at zero for the years at issue, and section 627.125 provides that no factor less than zero can be used to determine excess profits. Second, the excess profits statute specifies that the deduction for administrative and selling expenses is for those expenses incurred in Florida or allocated to Florida for the current year. Unlike incurred losses and loss adjustment expenses, administrative and selling expenses are not developed to an ultimate basis, which appears to be what the Office is attempting to require. Administrative expenses are incurred by calendar year.1/ Other than the net cost of re-insurance, the Office has not permitted any expense that is to be valued at a date that is later than the end of the calendar year(s) at issue in the excess profits filing. The future effect of these expenses would be considered in the year that effect is realized. Third, allowing whatever is "appropriate for the insurance company" is simply too nebulous a standard, to the extent it is a standard at all, to apply.2/ As noted by Mr. Hester, federal income tax liabilities are governed by the Internal Revenue Code and its attendant regulations, and not tied specifically to underwriting gain or loss.3/ Similarly, Florida corporate income tax liabilities are governed by Florida's taxing statutes. The fact that their calculation is not governed by the Florida Insurance Code does not change the fact that they are administrative expenses borne by the insurance company.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Office enter a Final Order finding that $2,406,312.10 may be deducted for federal income tax expense incurred or allocated to Florida for purposes of section 627.215, and that Premier must return $660,907.90 in excessive profits to its policyholders. DONE AND ENTERED this 19th day of December, 2012, in Tallahassee, Leon County, Florida. S LISA SHEARER NELSON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 19th day of December, 2012.
Findings Of Fact Petitioner, Omni International of Miami, Limited (Omni), is the owner of a large complex located at 1601 Biscayne Boulevard, Miami, Florida. The complex is commonly known as the Omni complex, and contains a shopping mall, hotel and parking garage. On July 30, 1981, Petitioner filed two applications for refund with Respondent, Department of Banking and Finance, seeking a refund of $57,866.20 and $4,466.48 for sales tax previously paid to the Department of Revenue on sales of electricity and gas consumed by its commercial tenants from April, 1978 through March, 1981. On November 22, 1982, Respondent denied the applications. The denial prompted the instant proceeding. The shopping mall portion of the Omni complex houses more than one hundred fifty commercial tenants, each of whom has entered into a lease arrangement with Omni. The utility companies do not provide individual electric and gas meters to each commercial tenant but instead furnish the utilities through a single master meter. Because of this, it is necessary that electricity and gas charges be reallocated to each tenant on a monthly basis. Therefore, Omni receives a single monthly electric and gas bill reflecting total consumption for the entire complex, and charges each tenant its estimated monthly consumption plus a sales tax on that amount. The utility charge is separately itemized on the tenant's bill and includes a provision for sales tax. Petitioner has paid all required sales taxes on such consumption. The estimated consumption is derived after reviewing the number of electric outlets, hours of operations, square footage, and number and type of appliances and lights that are used within the rented space. This consumption is then applied to billing schedules prepared by the utility companies which give the monthly charge. The estimates are revised every six months based upon further inspections of the tenant's premises, and any changes such as the adding or decreasing of appliances and lights, or different hours of operations. The lease agreement executed by Omni and its tenants provides that if Omni opts to furnish utilities through a master meter arrangement, as it has done in the past, the tenant agrees to "pay additional rent therefor when bills are rendered." This term was included in the lease to give Omni the right to invoke the rent default provision of the lease in the event a tenant failed to make payment. It is not construed as additional rent or consideration for the privilege of occupying the premises. Omni makes no profit on the sale of electricity and gas. Rather, it is simply being reimbursed by the tenants for their actual utility consumption. If the applications are denied, Petitioner will have paid a sales tax on the utility consumption twice -- once when the monthly utility bills were paid, and a second time for "additional rent" for occupancy of the premises.
Recommendation Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that Petitioner's applications for refund, with interest, be approved. DONE and RECOMMENDED this 15th day of April, 1983, in Tallahassee, Florida. DONALD R. ALEXANDER 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 15th day of April, 1983.
