Findings Of Fact The Petitioner, Florida Welding Services Corp., is a Florida corporation doing business in the State of Florida. The Respondent, Florida Department of Revenue, is the agency charged with enforcing the taxing statutes of this State, including the Florida Income Tax Code, Chapter 220, Florida Statutes. Pursuant to Chapter 220, Florida Statutes, the Petitioner is required to file a Florida Corporate Income Tax Return annually with the Respondent. The Return is due on the first day of the fourth month after the close of the tax year. The Petitioner's tax year for 1977 was April 1, 1976, through March 31, 1977. The Florida Corporation Income Tax Return for the 1977 tax year was due on July 1, 1977, and the Petitioner failed to file its Return by this date. The Petitioner's tax year for 1978 was April 1, 1977, through March 31, 1978. The Florida Corporation Income Tax Return for the 1978 tax year was due on July 1, 1978, and the Petitioner failed to file its Return by this date. In January 1977, all of the Petitioner's corporate records were seized, pursuant to a subpoena issued in the United States Federal District Court in and for the Southern District of Florida. (See Exhibit 1) The Petitioner's records were not returned to it for over a year. On September 15, 1978, the Petitioner filed a Tentative Income Tax Return and Application for Extension of Time to File Income Tax Return, wherein Petitioner requested an extension of time until November 15, 1978, in which to file its Florida income tax return for the 1977 and 1978 tax years. (See Exhibit 2) On October 5, 1978, the Department of Revenue denied the Petitioner's request for an extension of time on grounds that the request had been filed after the respective due dates of July 1, 1977, and July 1, 1978. (See Exhibit 2) On November 16, 1978, the Department of Revenue received Petitioner's Florida Corporation Income Tax Returns for the tax years 1977 and 1978. The Petitioner also remitted the tax it believed owing for each taxable year, $3,734.96 for 1977 and $6,803.56 for 1978. On February 2, 1979, the Department of Revenue, Corporate Income Tax Bureau, issued a Delinquent Notice of Tax Due to the Petitioner. The Notice indicated that the Petitioner had a balance due of $1,547.28 for the tax year ending March 31, 1977, which amount represented $933.74 penalty and $613.54 interest. (See Exhibit 3) On February 5, 1979, the Department of Revenue, Corporate Income Tax Bureau, issued a Delinquent Notice of Tax Due to the Petitioner. The Notice indicated that the Petitioner had a balance due of $1,986.43 for the tax year ending March 31, 1978, which amount represented $1,700.89 penalty and $285.54 interest. (See Exhibit 4) On March 15, 1979, Mr. Karl J. Leib, Jr., contacted the Department of Revenue on behalf of his client, the' Petitioner, requesting the Department to delay in issuing any tax warrants against the Petitioner until Mr. Leib had an opportunity to communicate with someone from the Department. (See Exhibit 5) A follow-up letter was sent by Mr. Leib to the Department on June 8, 1979. (See Exhibit 6) On April, 23, 1980, the Department of Revenue issued to the Petitioner a Final Notice and Demand for payment in the amount of $1,547.28. (See Exhibit 7) Although no Final Notice and Demand for payment in the amount of $1,986.43 was issued by the Department, the amount is still outstanding and the Department maintains that Petitioner owes this sum as well. It is the Petitioner's position that its inability to timely file its Florida Corporate Income Tax Returns was entirely due to factors beyond its control, i.e., the confiscation of its corporate records. The Petitioner maintains that it should not be assessed penalty and interest for late filing, as its failure to timely file was "due to reasonable cause and not willful neglect," as is provided for in Section 214.40(1), Florida Statutes. The Department's position is twofold. First, the Petitioner's failure to make a timely request for extension of time in which to file its return does constitute willful neglect. Second, that while Section 214.40(1), Florida Statutes, may provide the Department with some discretion in assessing penalties, there is no comparable provision for modifying interest payments and such amount is absolutely mandated by the statute for any late filed returns. In addition to the foregoing, along with the attached Exhibits, the undersigned hereby incorporate by reference and jointly offer as evidence those Exhibits attached to Petitioner's Request for Formal Proceedings. WHEREFORE, both parties respectfully request the Hearing Officer to consider the foregoing facts and exhibits, along with a Memoranda of Law to be filed by each party within 10 days of the filing of this Joint Stipulation, and to issue his Recommended Order, without the necessity of holding a formal hearing.
Findings Of Fact Based upon the agreement of the parties as to the relevant facts in this case, the following facts are found: For the calendar years ending December 31, 1972 and 1973, petitioner filed its federal corporate income tax returns reporting gross income from dividends in excess of its taxable income before the special deduction of 85 percent of the dividends received, limited to 85 percent of taxable income. As a result, a maximum of 15 percent of its net income was included in its taxable income on the federal tax returns. The federal returns for calendar years ending December 31, 1972 and 1973 reflected the deduction of net capital losses incurred and carried forward from years ending prior to January 1, 1972, the effective date of the Florida corporate income tax code. For its calendar years 1972 and 1973, petitioner filed its Florida corporation income tax returns reporting no Florida net income. The respondent examined the returns and determined deficiencies of $374.49 for 1972 and $566.40 for 1973. Such determination was based primarily on the additions to income of net capital losses carried forward from years ending prior to January 1, 1972.
Recommendation Based upon the findings of fact and conclusions of law recited above, it is recommended that there is no basis for affording petitioner relief from the proposed deficiency and that said deficiencies of corporate income tax of $374.49 and $556.40 for 1972 and 1973 respectively, be sustained. Respectfully submitted and entered this 22nd day of June, 1976, in Tallahassee, Florida. DIANE D. TREMOR, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Mr. T.H. Swindal Chief, Corporate Income Tax Bureau Department of Revenue Post Office Box 3906 Tallahassee, Florida 32303 Mr. Robert Fried Suite 210, Professional Centre 9000 Southwest 87th Court Miami, Florida 33176 Attorney for Petitioner Mr. Stephen E. Mitchell Assistant Attorney General Office of Legal Affairs The Capitol Tallahassee, Florida 32304 Attorney for Respondent
The Issue Whether Petitioners are liable for sales and use tax, penalty, and interest as assessed by the Department of Revenue (the Department)?
Findings Of Fact Salma is a Florida corporation with its principal place of business at 2231 Del Prado Boulevard, Cape Coral, Florida, 33990. Gausia is a Florida corporation with its principal place of business at 11571 Gladiolus Drive, Fort Myers, Florida, 33908. Petitioners are in the business of operating gas stations with convenience stores. The Department is an agency of the State of Florida and is authorized to administer the tax laws of the State of Florida. Petitioners were selected for audit because their reported gross sales were less than the total cost of items purchased (inventory) for the audit period. The Department issued Salma and Gausia each a Notice of Intent to Conduct a Limited Scope Audit or Self-Audit, dated April 26, 2013, for sales and use tax, for the period February 1, 2010, through January 31, 2013 (collectively referred to as the Notices). The Notices requested that Petitioners provide the Department: (a) a list of all their vendors for alcohol, tobacco, soda, chips, candy, etc.; (b) their total purchases of alcohol and tobacco, by vendor, for the period July 2010 to June 2011; (c) copies of their federal tax returns for the examination period; (d) purchase receipts for all purchases for the last complete calendar month; and (e) daily register (Z tapes) for the last complete calendar month. The Notices gave Petitioners 60 days to gather the requested documents before the audit was to commence. The Notices also requested that Petitioners complete an attached Questionnaire and Self Analysis Worksheet. In response to the Notices, Petitioners requested a 30- day extension of time until July 18, 2013, to provide the requested documents and to designate a Power of Attorney. Petitioners did not provide the Department any books and records for inspection, nor did they complete and return the questionnaire and self analysis worksheets. As a result, the Department's auditor determined the sales tax due based upon the best information available. To calculate an estimated assessment of sales tax, the Department used the purchase data of Petitioners' wholesalers and distributors of alcoholic beverages and tobacco, for July 1, 2010, through June 30, 2011; the 2010 National Association of Convenience Stores average markups and in-store sales percentages of alcoholic beverage and tobacco products; and historical audit data. After reviewing the purchase data for July 1, 2010, through June 30, 2011, and for July 1, 2011, through June 30, 2012, the Department's auditor determined that the data was missing a few vendors. As a result, the Department's auditor estimated the amount of Petitioners' cigarette purchases, based on historical audit data that shows that cigarette sales are generally 4.31 times more than beer sales. The Department's auditor and audit supervisor testified that the estimated gross sales seemed reasonable and consistent with the national averages and the purchase data for July 1, 2011, through June 30, 2012. The Department estimated gross sales (i.e., the retail sale value of the goods sold) by marking up the taxable sales and exempt sales reported on the sales and use tax returns submitted to the Department by Petitioners. For example, for July 1, 2010, through June 30, 2011, Salma purchased beer from its wholesalers and distributors for $148,826.15, and the Department marked up the purchase price by 27 percent for a retail value of $189,009.21. For July 1, 2010, through June 30, 2011, Gausia purchased beer from its wholesalers and distributors for $132,138.65, and the Department marked up the purchase price by 27 percent for a retail value of $167,816.09. The Department's markup on the alcoholic beverage and tobacco products is reasonable because the Department's auditor testified that he used a combination of 2010 National Association of Convenience Stores average markups and the competitive pricing and information from audits of other convenience stores. The Department determined that the exemption ratio reported on the sales and use tax returns submitted to the Department by Petitioners was extremely high for their industry. The Department used an exemption ratio of 15 percent, based on historical audit data for the industry, to calculate Petitioners' estimated taxable sales. A review of Petitioners' sales and use tax returns revealed that they did not apply the tax bracket system to their taxable sales transactions, as required under sections 212.12(9) and (10), Florida Statutes. Instead, Petitioners remitted sales tax on their taxable sales based on their gross receipts at a flat tax rate. The Department's auditor testified that this method of reporting tax is inappropriate and does not accurately reflect the sales activity of the business. The Department calculated the average effective tax rate of 6.0856 percent, based on historical audit data for the industry. To calculate the estimated tax due, the Department multiplied the effective tax rate by the estimated taxable sales and gave Petitioners credit for any tax remitted with their tax returns. The Department issued Salma a Notice of Intent to Make Audit Changes, dated August 8, 2013, for audit number 200149872. The Department issued Gausia a Notice of Intent to Make Audit Changes, dated August 8, 2013, for audit number 200149749. The Department assessed Petitioners sales tax on their sales of alcoholic beverages and tobacco. The Notice of Intent to Make Audit Changes gave Petitioners 30 days to request a conference with the auditor or audit supervisor, to dispute the proposed changes. Petitioners did not make such a request. The Department issued a Notice of Proposed Assessment (NOPA) to Salma on March 6, 2014, for tax in the sum of $159,282.26; for penalty in the sum of $39,820.57; and interest as of March 6, 2013, in the sum of $27,772.36. The Department issued a NOPA to Gausia on March 6, 2014, for tax in the sum of $213,754.46; for penalty in the sum of $53,438.62; and interest as of March 6, 2013, in the sum of $36,921.79. Additional interest accrues at $30.55 per day until the tax is paid. The NOPAs became final assessments on May 5, 2014. After filing a request for an administrative hearing, Petitioners completed the Questionnaire and Self Analysis Worksheet and produced the following documents to the Department: (a) a list of all of their vendors for alcohol, tobacco, soda, chips, candy, etc.; (b) a list of vendors for alcohol and tobacco, for the examination period of July 2010 to June 2011; (c) a summary of their taxable sales, for the period February 2010 through December 2012; (d) copies of their federal tax returns, for the tax years 2010 through 2013; (e) copies of its purchase receipts for the months of July 2013; and (f) copies of their daily register (Z-tapes) for the month of July 2013. The Department's auditor testified that aside from being untimely, the records and information provided by Petitioners during these proceedings were not reliable because Petitioners did not provide any source documents that would allow the Department to reconcile the reported figures and confirm the supplied information. In addition, the purchase receipts and Z- tapes were not relevant because they were from outside of the audit period. The Z-tapes are also unreliable because the manager of the convenience store testified at the final hearing that employees purposely and routinely entered taxable sales into the cash registers as tax exempt sales. Petitioners argue that the Department did not use the best information available when estimating the taxes due. Petitioners claim that because their businesses are combination gas station/convenience stores, the national data for standalone convenience stores is inapplicable. However, notably absent from Petitioners' testimony or evidence was any alternative data upon which the Department could have relied for more accurate estimates.2/
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order denying Petitioners' requests for relief and assessing, in full, the Department's assessments of sales tax, penalty, and interest against both Salma and Gausia. DONE AND ENTERED this 9th day of January, 2015, in Tallahassee, Leon County, Florida. S MARY LI CREASY Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 9th day of January, 2015.
The Issue Whether the "Additional Payment" made by Hernando HMA, Inc., d/b/a Brooksville Regional Hospital to Hernando County pursuant to a document entitled Lease Agreement, as amended, constitutes "rent" subject to sales tax under section 212.031, Florida Statutes.1/
Findings Of Fact Hernando HMA, Inc. (HMA) is a for-profit entity which operates Brooksville Regional Hospital, Spring Hill Regional Hospital, and other entities, as successor to an entity that was in Chapter 11 bankruptcy proceedings from 1993 to 1998, Regional Healthcare, Inc. (RHI). The Department is an agency of the State of Florida that has been delegated the responsibility to collect sales and use taxes imposed by chapter 212, Florida Statutes. In 1998, as part of RHI's bankruptcy plan, HMA and the County entered into various agreements, including a lease agreement (1998 Lease), regarding the use and operation of several RHI hospital properties and improvements owned by the County, and leased back to RHI. Under the 1998 Lease and other agreements, HMA agreed to continue to operate the hospital facilities for 30 years with possession of the real property and improvements to be returned to the County at the end of the lease term. Section 1.2W. of the 1998 Lease defined "Rental Payment" as follows: "Rental Payment" means all payments due from Lessee to Lessor or otherwise required to be paid by Lessee pursuant to the terms of this lease. The 1998 Lease further provided in section 3.3 under the heading "Rent": The annual rental payment of the Leased Premises for each year of the Lease Term (the "Rental Payment") shall be in the amount of Three Hundred Thousand and 00/100 Dollars ($300,000). This Rental Payment shall be paid to Lessor by Lessee on the Commencement Date and on each anniversary date of the Commencement Date during the Lease Term. The 1998 Lease also provided that HMA, as Lessee, would pay "all taxes, if any, prior to delinquency." Under the 1998 Lease, the County agreed to lease the premises in consideration of HMA’s timely payment of rent and timely performance of the other covenants and agreements required under the lease. It was an “event of default” under the lease if HMA failed to observe and perform any covenant, condition, or agreement on its part which could be cured by a payment of money. Remedies for default under the 1998 Lease included termination of the lease by the County and exclusion of HMA from possession of the leased premises. Even though the leased premises under the 1998 Lease were not subject to ad valorem taxes because they were owned by the County, during public discussions of the proposed 1998 Lease, an issue arose about HMA's responsibility for payment of fire assessments that would have been paid if the property was not immune or exempt from ad valorem taxes. HMA agreed, by separate agreement, to pay the fire assessments and buy a new ambulance to serve the community. The fire assessment agreement was by separate document that was included as part of the closing of the 1998 Lease and other agreements involving the hospital facilities in June 1998. The 1998 Lease was dated June 1, 1998. The 1998 Lease terms included a merger clause in section 15.6 entitled “ENTIRE AGREEMENT,” which provided: This lease may not be modified, amended or otherwise changed orally, but may only be modified, amended or otherwise changed by an agreement in writing signed by both parties. This Lease Agreement and its accompanying guaranty constitute the entire agreement between the parties affecting this Lease. This Lease Agreement supersedes and cancels any and all previous negotiations, arrangements, agreements, and understandings between the parties hereto with respect to the subject matter thereof, and no such outside or prior agreements shall be used to interpret or to construe this Lease. There are no promises, covenants, representations or inducements in addition to, or at variance with any of the terms of this Lease Agreement except the Guaranty. In 2001, the County and HMA began negotiations for relocation of the Brooksville Regional Hospital which was part of the leased premises described in the 1998 Lease. During the negotiations, HMA, through its attorney, Steven Mitchell, prepared a proposed comprehensive relocation agreement in consultation with former County Attorney Bruce Snow. Section 7.3 of the proposed relocation agreement contemplated revising the 1998 Lease and suggested the following preliminarily negotiated language for rental payments under a revised 1998 Lease: Rental Payments The Lessee shall pay to Lessor on the due date therefore as set forth in the Lease Agreement, the sum of Three Hundred Thousand and no/100 Dollars ($300,000.00) per annum. The Lessee shall pay to Lessor on an annual basis, either as rent or by virtue of a payment to Hernando County of the same sum to be used by Hernando County as it deems appropriate, an amount equal to the ad valorem taxes that would have been paid on the New Facility Site as improved with the New Facility if the New Facility Site were not owned by Hernando County but owned by a for-profit entity. In the event the New Facility Site and the New Facility located thereon are subsequently required by law to pay ad valorem taxes then the obligation to pay the amount described in Section 7.3(b) herein shall immediately terminate and Lessee shall be responsible for the payment of the appropriate ad valorem tax. The proposed comprehensive relocation agreement was discussed at public meetings held by the Hernando County Board of Commissioners on September 17 and September 25, 2001. The minutes of the September 25, 2001, meeting indicate that the County Administrator advised that the proposed relocation agreement contemplated that HMA would continue to pay $300,000 annually as rent, and “would make a payment-in-lieu of taxes annually to the County . . . .” The minutes also reflect that, in responding to a question from a commissioner regarding whether there should be language in the agreement that would protect the “payment-in-lieu of taxes” provision in the event the law changed: [Former County Attorney] Snow replied that it was his recommendation that there should be a provision that to the extent that the organic law of the State provided that facilities, such as the new hospital or other hospital under the lease, were taxable for ad valorem tax purposes, that that provision of the organic law would apply to ensure that that provision superseded. He explained that the lease provision to provide for an ad valorem tax payment was only to the extent that the organic law did not otherwise compel it so that the County would be receiving ad valorem tax under either scenario. The minutes from the September 25, 2001, meeting further state: Mr. Snow replied to County Attorney Garth Coller that there had been recent Supreme Court decisions which may have a bearing on the organic law to the extent that a decision of that nature indicated that the facilities were subject to ad valorem tax, notwithstanding the ownership issue, then they were subject to ad valorem tax and the lease would need to clarify that. He suggested that if the FS or Constitution should change, even in the absence of an interpretation of the Supreme Court decision, the change would obligate the payment of ad valorem taxes pursuant to the constitutional or statutory provisions. He explained that organic law pertained to provisions of FS or the Constitution as opposed to a Court decision. Mr. Snow’s reported reference to recent “Supreme Court decisions” regarding ad valorem taxes undoubtedly was referring the decision, among others, in Sebring Airport Authority v. McIntyre, 718 So. 2d 296 (Fla. 1998). In that decision, rendered a few months after the County entered into the 1998 Lease, the Supreme Court of Florida stated with regard to municipal (as opposed to county) property: [T]here is nothing in article VII, section 3 that allows the legislature to exempt from ad valorem taxation municipally owned property or any other property that is being used primarily for a proprietary purpose or for any purpose other than a governmental, municipal or public purpose. To the extent section 196.012(6) attempts to exempt from taxation municipal property used for a proprietary purpose, the statute is unconstitutional. Id. at 298. The Sebring case did not address tax immunity of county property as distinguished from the issue of tax exemptions for the proprietary use of municipal property. The proposed “Rental Payments” language for revisions to the 1998 Lease, however, demonstrates that the drafters of the comprehensive relocation agreement were aware of the possibility that the Sebring rationale could be expanded and applied to county property. The comprehensive relocation agreement was approved by the County, and executed in late 2001. Attached as to that relocation agreement as Schedule C was an unsigned document entitled “First Amendment to Lease Agreement” that was not to be executed until the new facility was completed and transferred to the County. Subsection 3.3 of the First Amendment to Lease Agreement entitled “Rental Payments” provided: Rental Payments The Lessee shall pay to the Lessor on the due date therefore as set forth in the Lease Agreement, the sum of Three Hundred Thousand and No/100 Dollars ($300,000.00) per annum. The Lessee shall pay to the Lessor on an annual basis, either as rent or by virtue of a payment to Hernando County of an amount (“Additional Payment”) equal to the sum of the following: An amount equal to that portion of the ad valorem taxes that would have been paid to Hernando County on the Leased Premises (as modified by the substitution of the New Facility Site for the Current Hospital Site) if the Leased Premises were not owned by Hernando County but owned by a for profit entity; and An amount equal to that portion of the ad valorem taxes that would have been paid to the Spring Hill Fire and Rescue District, the Township 22 Fire District and/or any other special taxing district that may be established pursuant to law; and An amount equal to all special assessments levied by Hernando County through any Municipal Service Benefit Unit created by Hernando County pursuant to the provisions of Section 125.01, Florida Statutes; and An amount equal to all ad valorem tax levied by Hernando County through any Municipal Service Taxing Unit created by Hernando County pursuant to the provisions of Section 125.01, Florida Statutes. In no event shall the Additional Payments exceed an amount equal to a full ad valorem tax assessment on the New Facility Site as determined annually by the Hernando County Property Appraiser. In the event the Lessee and/or Lessor is required by law to pay ad valorem taxes on the Leased Premises or any portion thereof, the obligation to pay to Lessor the Additional Payment described in this Section 3.3 shall immediately terminate (and/or be adjusted, whichever is applicable), and Lessee shall be responsible for payment of the appropriate ad valorem tax. The First Amendment to Lease Agreement further provided, “[e]xcept as expressly modified herein, all other terms and conditions set forth in the [1998] Lease Agreement are hereby ratified and confirmed.” The new hospital facility was completed and transferred to the County in 2005. On November 15, 2005, the County commission approved documents related to the transfer, including the First Amendment to Lease Agreement in the precise form as attached to the relocation agreement approved in 2001. The approval was obtained on a consent agenda, and the minutes reflect no further discussion by the commission or the public on the documents that were approved. In 2009, the Hernando County School District sued the County Property Appraiser, alleging that the properties subject to the 1998 Lease as amended by the First Amendment to Lease Agreement should not be exempt from ad valorem taxation. In a 13-page Order dismissing the School District’s action, Circuit Judge Daniel B. Merritt, Jr., distinguished the cases disallowing statutory ad valorem tax exemptions for properties owned by special tax districts or cities from the sovereign immunity against ad valorem taxes enjoyed by real estate owned by the State of Florida and its counties. In his ruling, Judge Merritt noted that Florida law specifically makes leasehold interests in governmental property subject to taxation, noting: The Legislature defines leasehold interests as intangible personal property and, hence, assessed by the Florida Department of Revenue, when: (1) rent is due; (2) the property is used for commercial purposes; (3) is not used for agriculture; (4) not financed with revenue bonds, and; (5) the lease is for an initial term of less than 100 years; §§196.199(2)(b), Florida Statutes (2008), 199.023(1)(d), Florida Statutes (2005), specifically preserved in Chapter 2006-312, Laws of Florida (2006). However, see below for further analysis with regard to presumed ownership of property leased for 100 years or more as set forth in §196.199(7), Florida Statutes. Judge Merritt also discussed those instances where “leased” property might not qualify as State or county property where lessees are the “equitable owners,” such as leaseholds of 100 years or more or where properties do not revert to the State until the end of a lease term. In his order, however, Judge Merritt noted that the tax immunity of the County was a fundamental attribute of county property and held that “under the terms of the Lease Agreements the Court concludes that HMA has merely the right to use and possession and is not the beneficial owner as a matter of law Hernando County’s immune property and improvements.” Judge Merritt’s Order was affirmed on appeal. School Board of Hernando County v. Mazourek, Case No. H-27-CA-2009-549 (5th Cir. 2009), per curiam aff’d, 2010 WL 4323055 (Fla. 5th DCA 2010) In December, 2010, the Department notified the County it had been selected for a tax compliance audit under chapter 212, Florida Statutes, Sales and Use Tax. The audit period was from January 1, 2007, through December 31, 2009. The County’s personnel were cordial and receptive during the audit process and the Department’s auditor determined that the books and records kept by the County had adequate internal accounting controls in place and sufficient data integrity. Out of the approximately 19 tax registration accounts the County has with the Department, the Department’s auditor found exception with only tax account #12445797, the tax collected and remitted under its lease with HMA. In her record review, the Department’s auditor noticed invoices and worksheets from the County to HMA, titled “Payment in lieu of taxes.” In examining the First Amendment to the Lease Agreement, Section 3.3 “Rental Payments,” the Department’s auditor determined that the County was not collecting sales tax on a portion of the rent received under that section. The monthly tax return filed by the County under account # 12445797 reflected that it was collecting and remitting the sales tax calculated on the $300,000.00 annual rent payment, but was not collecting and remitting sales tax calculated on the additional payments in lieu of taxes. The Department’s auditor determined the additional payments, required under the lease and made as a condition of occupancy, constituted a taxable transaction as additional rent consideration. The amount of the additional payments, made January 2007 and March 2008, as revealed on the County’s “Payment in lieu of taxes worksheets,” was multiplied by 6.5 percent to arrive at the additional tax amount due of $78,710.17. On December 9, 2010, the Department issued a Notice of Intent to Make Audit Changes, Form DR 1215, advising the County of its audit findings, which included $78,710.17 in taxes due, $14,526.37 in accrued interest through December 9, 2010, and a $19,677.55 late payment penalty. On December 21, 2010, the Department issued its Notice of Proposed Assessment, Form DR 831, showing an assessment of $78,710.17 in tax and $14,707.51 in accrued interest, for a total of $93,417.68 through December 21, 2010, with interest accruing thereafter at the rate of $15.10 per diem. All penalty amounts were waived. At the final hearing, the County argued that the additional payments from HMA under the First Amendment to Lease Agreement were not rent, but rather separate payments to pay for County services. While the actual language used in the First Amendment to Lease Agreement appears to unambiguously indicate that the additional payments were rent, the County offered additional evidence of facts and circumstances beyond the terms of the lease itself in support of its argument that the additional payments were not rent. That evidence was admitted, without objection, and has been considered in determining the intention of the parties to the lease with regard to the additional payments. In addition to evidence that the lease drafters were aware of certain cases decided on the issue of whether the leased premises would be subject to ad valorem taxes, the County offered the testimony of Mr. Mitchell regarding the “Rental Payments” language found in the First Amendment to Lease Agreement. When asked whether there had been much negotiation over the format or wording of the First Amendment to Lease Agreement, Mr. Mitchell recalled: No, there really wasn’t other than, you know, the concept – what this amendment does is what we had agreed to pay rental payment. The rental payment was $300,000. And then, we also had agreed independently just to go ahead and pay the County for certain services that they were providing to us. And then we specified those. Those were independent payments, not part of the rental payment. Mr. Mitchell further testified: [B]asically, this property is free of ad valorem tax. That is why the school board filed their lawsuit because, of course, they were not getting any of the ad valorem taxes. So, the property is free of payment of ad valorem taxes. We’re paying our 300,000. It was very, very clear. However, HMA felt that the County was providing certain services, the fire districts and whatnot. So, independent of the rent, we paid this amount. If you read the section dealing – it’s 3.3.[2], or whatever it is, which I’ll read it to you, it talks about, at the very end – and they did it for whatever reason the property became taxable, you know, it effectively became taxable and we had to pay full ad valorem taxes on the property, then the specialties – these additional payments we called, you know, would go away and they, effectively, be part of rent. That's why it talks about it as such, and it was either additional payment and/or rent. Contrary to Mr. Mitchell’s recollection, section 3.3.2 of the First Amendment to Lease Agreement does not speak in terms of “additional payment and/or rent” but rather states that another payment would be made “either as rent or by virtue of a payment to Hernando County of an amount ('Additional Payment') . . .". Mr. Mitchell makes a valid point regarding the fact that HMA was concerned about having to pay both the additional payment and ad valorem taxes. Consistent with this concern, the lease amendment made it clear that HMA would not have to pay the additional amount if the property ever became subject to ad valorem taxes. Mr. Mitchell’s testimony in support of the County’s contention that HMA’s payment in lieu of taxes under the First Amendment to Lease Agreement was not rent, however, is unpersuasive. Considering the extrinsic evidence offered by the County, especially evidence of the parties concern that the subject County property might someday be subject to ad valorem taxes, together with the 1998 Lease, language negotiated for the proposed relocation agreement, and the actual terms of the First Amendment to Lease Agreement, it is found that the parties intended the language under the "Rental Payments" section to assure that HMA did not have to pay the additional amount twice. The extrinsic evidence offered by the County, however, was insufficient to support a finding that the parties intended to differentiate between “rent” and the “additional payment” or that, however characterized, the payment in lieu of taxes was not rent subject to assessment by the Department. If the parties had wanted to provide language that designated the payment in lieu of taxes as a payment for services instead of rent they could have, as they did in the Second Amendment to Lease Agreement entered into on September 13, 2011, just ten days prior to the final hearing in this case.2/ That Second Amendment to Lease Agreement changed the name of section 3.3 from “Rental Payments,” as found in the First Amendment, to “Rent and Additional Payment for County Services.” Pertinent subsections of the Second Amendment further provided: 3.3.2 Additional Payment for County Services. The Lessee shall pay to Lessor on an annual basis, as an additional payment (“Additional Payment”) for services provided by Hernando County [in its role as a service provider and local taxing authority], . . . * * * The Additional Payment is not intended to constitute “rent” and is not intended to create an event subject to Florida sales tax – but rather is intended to constitute a separate payment for the provision of services, payable to the local taxing authority, as provided in § 212.031(1)(c), Florida Statutes (which allow parties by contractual arrangement to distinguish between payments which are intended to be taxable and payments which are intended to be nontaxable), as this section may be amended or renumbered from time to time.
Recommendation Based on the foregoing Findings of Facts and Conclusions of Law, it is RECOMMENDED that, consistent with the Notice of Proposed Assessment dated December 21, 2010, and this Recommended Order, the Department of Revenue enter a final order finding that Petitioner owes tax and interest due totaling $93,417.68 through December 21, 2010, with interest accruing thereafter at the rate of $15.10 per diem, without penalties. DONE AND ENTERED this 30th day of December, 2011, in Tallahassee, Leon County, Florida. S JAMES H. PETERSON, III 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 30th day of December, 2011.
The Issue The issue for determination is whether Petitioner is liable for use tax, pursuant to Chapter 212, Florida Statutes, to the Florida Department of Revenue for the use and storage of a vessel.
Findings Of Fact Camden Corporation (Petitioner) is a foreign corporation, incorporated in Delaware on August 7, 1990. Petitioner is a solely owned, closed corporation. Petitioner has two officers: a President, who is the sole owner, and a Treasurer. At all times material hereto, Petitioner's President and Treasurer were residents of Jacksonville, Florida. Petitioner's business address is in Jacksonville, Florida. Petitioner's officers handled its day-to-day activities and records from Jacksonville, Florida. Prior to the Petitioner's incorporation, its President wanted to purchase a vessel to take a world wide cruise. He obtained the services of a law firm to advise him on avoiding a state's sales and use tax on the purchase of a vessel, with Florida being one of the states. A lawyer in the firm contacted the Florida Department of Revenue (Respondent) and inquired, without relating any of Petitioner's factual circumstances, as to whether the case of Department of Revenue v. Yacht Futura, 510 So.2d 1047 (Fla. 1st DCA 1987) was still good case law in Florida. Yacht Futura was a case in which the parameters of Florida's sales and use tax were interpreted regarding repairs and personal use of vessels while in Florida waters. Respondent's representative informed the firm's lawyer that Yacht Futura was still being followed by Respondent and that no exceptions existed; but Respondent's representative further cautioned that the factual circumstances must conform to Yacht Futura. The firm's lawyer prepared a memorandum advising Petitioner's President, among other things, that no liability for Florida's sales and use tax would be incurred for repairs and personal use of a vessel in Florida's waters, so long as the circumstances complied with Yacht Futura. After having received the firm's advice and advice from tax advisors, Petitioner's President created and incorporated Petitioner. On August 14, 1990, Petitioner purchased a used motor vessel in international waters for $5,618,000. The vessel was a 131' Feadship with Coast Guard documentation number 623589. Petitioner named the vessel "CAMDEN." The CAMDEN was the only assest owned by Petitioner. Petitioner did not pay any Florida sales tax at the time of CAMDEN's purchase. From August 14, 1990 through October 15, 1990, the CAMDEN was outside the State of Florida. Petitioner's President had taken the vessel on a cruise. During the time period that the vessel was on the cruise, Petitioner did not pay any sales or use tax in any jurisdiction in the United States. Also, during the time period that the vessel was on the cruise, Petitioner did not license, title, or register the CAMDEN in any jurisdiction in the United States. On October 15, 1990, relying on the law firm's advice, Petitioner imported the CAMDEN into Florida waters for major repairs, with the intention of departing after the repairs and not returning to Florida waters. Petitioner obtained the services of Huckins Yacht Corporation, a registered repair facility, in Jacksonville to perform repairs to the CAMDEN, which had a dock in Huckins Marina. However, the dock at Huckins Marina was unable to accommodate a vessel the size of the CAMDEN. The vessel was docked at Southbank Marina which could accommodate the vessel and which was the closest marina to Huckins Marina. Petitioner's President was not in the State of Florida when the CAMDEN arrived in Florida waters. He did not return to Florida until October 24, 1990. Petitioner did not have a written contract with Huckins Yacht Corporation (Huckins) to perform any repairs on the CAMDEN. However, Huckins did perform some minor repairs to the CAMDEN. Also, Huckins arranged for a major repair to the CAMDEN. It arranged for Petitioner to purchase a global position satellite electronic system as a nonwarranty repair. The electronic system was to be installed by someone who was not an employee of Huckins and who did not have a contractual agreement with Huckins for the installation. The electronic system was installed on the CAMDEN at the Southbank Marina. During the time that repairs were being made to the CAMDEN, its crew remained on board. Petitioner never received any bill from Huckins for any repairs made to the CAMDEN, including the installation of the electronic system. While the vessel was docked for repairs at the Southbank Marina, it was used for personal entertainment. On October 25, 1990, Petitioner's President and his friends had an open house type of party on the CAMDEN. On October 26, 1990, Petitioner had a luncheon cruise on the CAMDEN. On October 27, 1990, Petitioner had a dinner cruise and a birthday party for the daughter of Petitioner's President. On October 28, 1990, Petitioner took the CAMDEN from Jacksonville to St. Augustine for a pleasure trip. Leaving St. Augustine, the CAMDEN traveled to Miami, Florida and docked there on October 30, 1990, to get the vessel prepared for world travel. In Miami, the CAMDEN was docked at the Moorings Yacht Services, Inc. (Moorings), a registered repair facility. In November 1990, the Moorings began repairs to the CAMDEN, and in December 1990, the vessel departed the Moorings. In November 1990, Petitioner hired a tax consultant, who was a former employee of Respondent, for advice regarding Petitioner's liability for sales and use tax of the CAMDEN in Florida. The tax consultant advised Petitioner to register the CAMDEN as a charter for sales and use tax. Further, he advised Petitioner to late-file with Respondent an Exemption Affidavit for Boats Placed in a Registered Repair Facility, referred to as a Safe Harbor Affidavit, pursuant to Subsection 212.08(7)(t), Florida Statutes. On December 19, 1990, a Safe Harbor Affidavit was executed by both Huckins and Petitioner's President. The Safe Harbor Affidavit indicated, among other things, that Huckins was a registered repair facility in Jacksonville, Florida and that, from October 16, 1990 through October 25, 1990, the CAMDEN was under the care, custody, and control of Huckins for the purpose of installing electronics, which was the electronic system. Even though the Safe Harbor Affidavit does not provide that Huckins installed the electronic system on the CAMDEN, it does infer that Huckins had installed the electronic device. Respondent interprets "care, custody, and control" as the vessel being in the "physical" care, custody, and control of the registered repair facility. Clearly shown on the Safe Harbor Affidavit is that it is to be filed with the Respondent within 72 hours after the repair facility takes possession of the vessel. Additionally, clearly shown on the Safe Harbor Affidavit is that a copy of it is to be filed with Respondent within 72 hours after the work is completed and the vessel is released to the owner. On or about December 22, 1990, the CAMDEN departed Florida waters for a pleasure cruise to the Bahamas. In early January 1991, the vessel returned to Florida. The CAMDEN remained in Florida until mid-January 1991, when it traveled to the Caribbean. Around mid-May 1991, the vessel returned to Florida. In 1990, Petitioner was not issued a permit by any agency of the United States government to use the CAMDEN in Florida waters. In April 1991, one of Respondent's representatives discovered, during a routine examination of the records of the Miami Marina, that the CAMDEN was named as a boat docked in Florida with an out-of-state hailing port. On May 13, 1991, Respondent's representative sent a Declaration for Florida Sales and Use Tax (Declaration) to Petitioner for it to complete and return to Respondent. Instead of completing the Declaration, on December 10, 1991, Petitioner's tax consultant delivered the Safe Harbor Affidavit executed on December 19, 1990, to Respondent's representative. Additionally, Petitioner's tax consultant verbally supported the Safe Harbor Affidavit by stating that the CAMDEN was docked at Southbank Marina in Jacksonville while the repairs to the vessel were being completed by Huckins and the nonemployee. The Moorings filed a Safe Harbor Affidavit with Respondent, providing that the CAMDEN entered the facility in November 1990 and departed in December 1990. The Safe Harbor Affidavit was not submitted to Respondent within 72 hours of the CAMDEN either entering the facility for repairs or departing the facility after the repairs were completed. 1/ Respondent has a practice of accepting late-filed Safe Harbor Affidavits, with the condition that all documents supporting repairs are also to be submitted. A subsequent review of all the documents submitted would determine whether a person would be responsible for sales and use tax. On December 10, 1991, based on the Safe Harbor Affidavit and the representations by Petitioner's tax consultant, Respondent's representative closed her file regarding the sales and use tax, without assessing any sales or use tax against Petitioner. However, she forwarded neither a closing letter nor a closing agreement to Petitioner. Even though Petitioner had not received a closing letter or a closing agreement from Respondent, it believed that Respondent had terminated its inquiry of any assessment against it. In or around November 1991, another of Respondent's representative (Respondent's second representative) observed, while performing a routine marina check, the CAMDEN docked at the Palm Harbor Marina in West Palm Beach, Florida. Subsequently, he opened a new file on the CAMDEN. Petitioner was unaware that Respondent's second representative had opened a new file. Respondent's second representative performed an investigation of the vessel, including reviewing the Safe Harbor Affidavit submitted to the Respondent's other representative on December 10, 1991. His investigation led to the assessment at issue. The investigation by Respondent's second representative showed, and it is determined as a finding of fact here, that the CAMDEN was not in the physical care, custody, and control of Huckins during the repairs for the period October 16, 1990 through October 25, 1990. From October 15, 1990, when the CAMDEN entered in Florida waters for repairs, the vessel remained in Florida for more than a total of 10 days. Petitioner decided to sell the CAMDEN and listed it for $6.9 million. On February 14, 1992, Petitioner sold the CAMDEN for $5.3 million, which was $1.6 million less than it was originally listed. For 1991 and 1992, Petitioner's President treated the CAMDEN as his personal second home and took a home interest deduction for federal income tax purposes. On October 10, 1992, Respondent notified Petitioner that it was assessed, as of April 10, 1992, a tax of $337,080, representing: 6 percent of the CAMDEN's purchase price of $5,618,000; $84,270 in penalty; $168,540 in specific penalty; and $59,826.60 in interest. On October 26, 1992, Respondent issued a notice of final assessment to Petitioner which included the above assessment and the facts and reasons, including legal reasons, for the assessment. Petitioner contested the assessment. On January 14, 1994, Respondent issued a notice of reconsideration of the assessment and revised final assessment, withdrawing the $168,540 in specific penalty but sustaining the remaining assessment of $503,113.02, which represented: $337,080 tax; $84,270 penalty; and $81,763.02 interest. In its notice of reconsideration, Respondent determined, among other things, that Petitioner was issued an out-of-state registration, effective December 1, 1990, as a result of Petitioner submitting an application for sales and use tax registration, listing the major business activity as rental of tangible personal property. Additionally, Respondent determined, among other things, that Petitioner, as the corporation, maintained control and use of the CAMDEN during the period December 1990 through February 1992 when the CAMDEN was sold. No tax at issue was assessed for this period of time. Petitioner protested the revised assessment. Petitioner has not paid any Florida use tax.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order affirming the assessment of use tax against the Camden Corporation in the amount of $503,113.02, plus accrued interest. DONE AND ENTERED on this 30th day of September, 1996, in Tallahassee, Leon County, Florida. ERROL H. POWELL, 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 30th day of September, 1996.
Findings Of Fact Petitioner, Lloyd Enterprises, Inc. (Lloyd) has requested that it be awarded $22,006.00 in attorney's fees and out-of-pocket expenses of $589.31 for a total of $22,595.31. All fees and expenses listed by Lloyd were incurred in its successful appeal of the adverse decision in its Section 120.57(1) F.S. proceeding challenging the Respondent agency's tax assessment. All fees and costs claimed were incurred during appeal after the recommended and final orders were entered against Lloyd in a formal tax assessment proceeding, Lloyd Enterprises, Inc. v. Department of Revenue, DOAH Case No. 92-2348. The formal tax assessment proceeding arose pursuant to Section 72.011 and Chapter 212 F.S. concerning the balance ($57,471.43) of a greater sales and use tax assessment levied against Lloyd for its alleged failure to pay sales tax on goods and services sold to customers of concession stands on Daytona Beach for an audit period before Lloyd owned and operated the stands. Because Lloyd was unable to provide records of predecessors in interest, the agency estimated tax on the basis of Lloyd's existing records after purchasing the stands. Also, Lloyd was assessed sales taxes (approximately $6,004.38 of the assessed tax liability) for all beach concession fees it had paid to Volusia County during the audit period of 11/1/85--12/31/90, pursuant to Section 212.031, F.S. [1989]. Lloyd's petition for formal hearing before DOAH was a letter previously utilized in the parties' informal negotiations. FDOR moved for a more definite statement and time to file an answer if Lloyd were required to file a more definite statement or a more definite petition. An order dated May 19, 1992 denied the agency's request for more definite statement and provided, in pertinent part, "...As Respondent's motion has observed, an answer in this type of proceeding is not mandatory. Respondent is, however, granted 10 days from the date of this order in which to file an answer should the agency elect to do so." The agency elected to stand on its prior notices of proposed assessment. Therefore, for purposes of this proceeding, the agency's "petition," as contemplated by Section 120.575(5) F.S. is the original tax assessment. The tax assessment proceeding went to formal hearing pursuant to Section 120.57(1) F.S. without any motions to dismiss or for other summary relief filed by either party. The recommended order found in favor of the agency's assessment, with some minor arithmetical adjustments required. The final order adopted the recommended order in toto. Lloyd appealed the final order. In Lloyd Enterprises, Inc. v. Department of Revenue, 651 So. 735 (Fla. 5th DCA 1995), decided upon Lloyd Enterprises, Inc. v. Department of Revenue, DOAH Case No. 92-2348, (RO entered by the undersigned Hearing Officer on 4/01/93; FDOR's FO entered 5/24/93), Lloyd argued that Section 212.031, F.S. [1989], had been erroneously applied to the beach concession fees charged by Volusia County and that Section 212.10 [1989] was unconstitutional as applied to Lloyd in this case and that the "projection" method used by FDOR's auditors to determine the amount of taxes due was unauthorized, unreasonable, and arbitrary. FDOR argued that the transfer and annual fees charged by the County to beach concessionaires pursuant to its Unified Beach Code and Ordinance, (Volusia County Ordinance 88-32), constituted rent payments for the various beach locations. The Fifth District Court of Appeal partially agreed with Lloyd and reversed. The court did not reach Lloyd's argument that Section 212.10 F.S. is arbitrary and capricious and, therefore, unconstitutional but did agree with Lloyd that under the facts of this case and the statutory framework, the best estimate provisions of Section 212.12(5)(b), F.S. [1989], could not be invoked to impose liability upon Lloyd as a "successor" dealer. (615 So.2d 735 at 736). The appellate court ruled with regard to the first issue raised on appeal that, The hearing officer erred in deciding it was proper to impose a sales tax on the fees Volusia County charged Lloyd for the privilege of selling and renting goods and services to the public on public beaches and that these privileges constituted taxable events under Rule 12A-10.070 F.A.C. and Section 212.031 F.S.. It ruled further that, The hearing officer arrived at this ruling simply by deferring to the Department's interpretation of the rule and by noting there was no contrary case law. The hearing officer correctly pointed out that deference should be given to an agency's interpretation of its rules and the statutes it is charged to administer. However, the agency's interpretation is subject to review and is not conclusive. (651 So.2d 735 at 736). The court went on to say, We hold that, in exercising the duties imposed on it by the Unified Beach Code, the County did not enter into the business of renting, leasing, or licensing real property. Accordingly, the tax liability assessed on the basis of the concession- aire fees being a license or lease of land is reversed. (651 So.2d 735 at 737) The appellate court also stated that, At the time Lloyd purchased the concessions, neither Lloyd nor the sellers were aware of the duties imposed by Section 212.10 [1989] which imposed on a purchasing or successor dealer the sales tax liabilities of a selling dealer under certain circumstances, and Lloyd concedes it did not comply with the statute. (651 So.2d 735 at 738). The Fifth District Court of Appeal majority opinion criticized the agency for relying solely on Lloyd's own, adequate records for the more current years after Lloyd purchased the concessions which are records not listed in Section 212.12(5)(b) F.S. as usable even if that section were applicable. It further criticized the agency for making no effort to obtain or project--or estimate--sales tax liabilities of the prior concessionaires on the basis of their own records which would have been for the relevant taxable period. However, the appellate court's ultimate ruling on the second issue raised on appeal was that the agency was not entitled to invoke Section 212.12(5)(b) F.S. without showing that Lloyd was guilty of a default listed by the statute. The opinion relies on the fact that, because there was no statutory or regulatory mechanism in place by which Lloyd could have ascertained the prior owners' tax liability, Lloyd, the taxpayer, could not be in default. The court observed the longstanding and frequently reiterated precedent that, "tax laws should be construed strongly in favor of the taxpayer and against the government with all ambiguities or doubts resolved in the taxpayer's favor." The opinion stops short of finding the statute unconstitutional as written or as applied to Lloyd. The foregoing rulings by the appellate court are res judicata for purposes of determining whether or not there was any justiciable issue of law or fact raised by the agency's initial tax assessment. The recommended and final orders appealed from did not reserve jurisdiction to determine entitlement to any fees or costs. The Petitioner made no request for fees and costs to the appellate court and none were awarded. There is no order of the appellate court requiring FDOR or DOAH to award fees or costs. Petitioner makes its claim herein only pursuant to Sections 57.111 and 120.575(5), F.S. The agency has never entered a final order on remand in accord with the decision of the Fifth District Court of Appeal, but clearly, Lloyd ultimately prevailed at the appellate level. Petitioner filed its original fees and costs petition with DOAH within 60 days of the appellate court's mandate. That petition was dismissed by an order herein dated June 28, 1995. The second paragraph of the June 28, 1995 order read, "Petitioner shall have 15 days from date of this order to amend its motion (sic=petition)." The fifteenth day was July 13, 1995. The Amended Petition was served and filed with DOAH on July 14, 1995. Respondent set forth no showing of prejudice by the one day's delay.
Findings Of Fact The facts in this cause are essentially undisputed. The Pen Haven Company was a Subchapter "S" corporation for federal income tax purposes and therefore incurred no State income tax liability. It was formed in 1960 and retained its Subchapter "S" status thorough 1976 for federal income tax purposes. In December of 1977, the capital stock of Pen Haven Sanitation Company was sold to the Board of County Commissioners of Escambia County. Inasmuch as the sole corporate stock holder then was no longer an individual, but rather a governmental entity, the corporation Subchapter "S" election for federal income tax purposes was terminated. Escambia County did not wish to own stock in a private corporation so it accordingly liquidated Pen Haven and its assets were distributed to the County's direct ownership. Thereafter the Corporation filed a final corporate income tax return for 1977 which reflected capital gains on the assets of the corporation which had been distributed. Some of those assets had tax bases which had been reduced to zero through reduction by depreciation, most of which had been charged off prior to January 1, 1972, the effective date of the Florida corporate income tax code. All of the depreciation deductions had been taken prior to the termination of the Subchapter "S" status of the Pen Haven Company. On disposition of the Pen Haven assets however, a gain was reported equal to the fair market value or salvage value, less the basis. This gain was accordingly reported on Pen Haven's federal income tax return, and on the 1977 Florida corporate income tax return, albeit under the protest as to the Florida tax return. Inasmuch as Pen Haven had previously deducted depreciation since its inception, and had the benefit thereof for federal tax purposes, it was required by the Internal Revenue Service to recapture the depreciation for federal tax purposes upon its sale and the filing of its tax return in 1977. The same recapture of depreciation treatment was required of West Florida Utilities. Thereafter an application was made by the Petitioner corporations for Florida Corporate Income Tax Refunds asserting that they should have not paid taxes on the amount of gains which represented a recapture of depreciation which had been taken as a deduction prior to the effective date of the Florida corporate income tax on January 1, 1972. In effect the Petitioner is contending that the so- called "income" which is the subject of the tax in question was not realized in 1977, but rather merely "recognized" in that year by the federal tax law and that it represented income actually "realized" during the years when the depreciation was taken as a deduction prior to January 1, 1972. The Petitioners contend that "realization" for federal income tax purposes occurs when the taxpayer actually receives an economic gain. "Recognition" on the other hand refers only to that time when the tax itself becomes actually due and payable. The Petitioners maintain that when the tax became due and payable in 1977 that was merely the point of "recognition" of the subject taxable gain and not "realization" in that the gain was actually realized prior to the Florida Jurisdictional date of January 1, 1972, in the form of the economic benefit derived from those depreciation deductions applied to federal tax liability prior to that date. The Petitioners cite SRG Corporation vs. Department of Revenue, 365 So2d 687 (Fla. 1st DCA 1978), for the proposition that Florida could not tax those gains accruing to the taxpayer prior to Florida's having the constitutional and statutory power to impose a corporate income tax. The Respondent in essence agrees that the question of when the economic benefit to the Petitioners was received by them or was "realized" is the key question in this cause. The Respondent contends, however, that "realization" of a taxable gain occurred when the assets were disposed of by the Petitioners in 1977, well after the date when Florida's power to tax such a gain was enacted. The underlying facts in the case of West Florida Utilities are substantially similar. This corporation, however, was organized in 1962 and has never been clothed with Subchapter "S" corporate status. The only grounds upon which it can therefore claim a refund is its assertion that Florida does not have authority to tax that portion of the capital gains attributable to recapture of depreciation which was originally charged off as a deduction prior to January 1, 1972. The Department of Revenue and the Comptroller of the State of Florida both denied the refund claim made on behalf of the Petitioners, and thereafter they seasonably petitioned for a formal administrative hearing pursuant to Chapter 120.57(1), Florida Statutes.
Recommendation Having considered the foregoing Findings of Fact and Conclusions of Law, the evidence in the record, the candor and demeanor of the witness and pleadings and arguments of counsel it is, therefore RECOMMENDED this 3rd day of September, 1981, in Tallahassee, Leon County, Florida. P. MICHAEL RUFF, 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 3rd day of September, 1981. COPIES FURNISHED: Thurston A. Shell Post Office Box 1831 Pensacola, Florida 32578 Robert A. Pierce, Esquire General Counsel Department of Revenue Tallahassee, Florida 32301 Michael Basile, Esquire Deputy General Counsel Office of Comptroller The Capitol, Suite 1302 Tallahassee, Florida 32301 Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs The Capitol Tallahassee, Florida 32310
Findings Of Fact Stipulated Facts Respondent conducted an audit of Petitioner's business records for the period July 1, 1985, through June 30, 1990. Respondent determined a deficiency in sales tax of $174,823.96, including penalty and interest through August 22, 1990. Petitioner objected to the deficiency. Respondent reviewed the audit, and made audit changes that are the subject of this proceeding. The audit changes determined a deficiency in use tax of $76,035.60, including tax ($47,910.10), penalty ($11,977.68), and interest through March 12, 1991 ($16,147.60). Interest accrues daily in the amount of $15.75. A First Revised Notice Of Intent To Make Sales Tax Changes, for the reduced assessment of $76,035.60, was issued on March 21, 1991. A Notice Of Proposed Assessment was issued on July 2, 1991. The Notice Of Proposed Assessment became a Final Assessment on August 31, 1991. Respondent made a prima facie showing of the factual and legal basis for the use tax assessment. Section 120.575(2), Florida Statutes. 1/ The audit and assessment are procedurally correct. Tax, interest, and penalty are correctly computed. Formation Petitioner was incorporated in Florida, in January, 1983, by Mr. B. Theodore Troy, president and sole shareholder. Petitioner's principal place of business is 101 Wymore Road, Suite 224, Altamonte Springs, Florida. Petitioner conducted business as American Advertising Distributors of Central Florida. Mr. Troy and his wife operated the business until liquidating Petitioner's assets in 1992. Operation Petitioner sold direct mail advertising to Florida businesses. Petitioner operated pursuant to a franchise agreement with American Advertising Distributors, Inc., of Mesa, Arizona ("AAD"). AAD was Petitioner's franchisor until AAD filed for bankruptcy in 1990. Petitioner solicited orders from Florida businesses 2/ for advertising coupons designed and printed by AAD in Arizona. AAD mailed the advertising coupons to addressees in Florida who were potential customers for Florida businesses. Florida businesses placed orders with Petitioner on written contracts, or sales agreements, labeled "advertising orders." AAD was not a party to advertising orders. Advertising orders identified "AAD" as American Advertising Distributors of Central Florida, and were imprinted with the name and address of "AAD" in Central Florida. Advertising orders specified the total charges, color and stock of paper, number of addressees, and areas of distribution. Petitioner assisted businesses with rough layout for art work. The rough layout was forwarded to AAD. AAD prepared finished art work and sent copies back to Petitioner for approval by Florida businesses. AAD then printed, collated, and mailed advertising coupons to addressees in Florida, without charge to addressees. Florida businesses paid non-refundable deposits when placing advertising orders. The remaining balance was paid upon approval of final art work. AAD did not submit invoices to Florida businesses. AAD submitted invoices to Petitioner for the amount due from Petitioner. 3/ Petitioner paid AAD 10 days before advertising coupons were mailed. Some advertising coupons were produced by Laberge Printers, Inc., in Orlando, Florida ("Laberge"). Coupons from Laberge were designed, printed, and distributed in the same manner as coupons from AAD. Two types of advertising coupons were provided by AAD and Laberge. The majority of coupons were distributed in coop mailings, or "bonus express" envelopes, containing coupons for up to 20 businesses. Bonus express envelopes were mailed approximately eight times a year. Advertising coupons were also distributed in "solo" mailings. A solo mailing was an individualized, custom printed coupon, or flyer, mailed to individual addressees. The total charges stated in advertising orders included the cost of services provided by Petitioner, AAD, and Laberge. Services included typesetting, art work, printing, inserting envelopes, and mailing. Florida imposed a tax on services, from July 1, 1987, through December 31, 1987. Petitioner collected and remitted tax imposed on the cost of services included in the total charges stated on advertising orders. Except for the services tax, neither Petitioner, AAD, nor Laberge collected and remitted sales or use tax to Florida or to Arizona. Petitioner never utilized resale certificates for any tax other than the tax on services. Collectibility Petitioner was financially able to pay the use tax assessment during 1990 and 1991. No later than August 22, 1990, Mr. Troy knew of the sales tax deficiency of $174,823.96. By March 21, 1991, Mr. Troy knew of the reduced use tax assessment of $76,035.60. During 1990 and 1991, Petitioner made discretionary payments to Mr. Troy of $110,389. Petitioner reported federal taxable income of $58,279 in 1990 and 1991. 4/ In arriving at taxable income, Petitioner deducted payments to Mr. Troy of $59,430 for compensation to officers, management fees, and salary. 5/ From taxable income of $58,279, Petitioner paid approximately $50,959 to Mr. Troy in nondeductible shareholder loans. 6/ Discretionary payments of $110,389, 7/ made to Mr. Troy in 1990 and 1991, were more than adequate to pay the use tax assessment of $76,036.60. At the end of 1991, Petitioner reported fixed assets with a book value of $14,933, a customer list valued at $104,447.72, and retained earnings of $102,605. The book value of intangible assets was $82,943, comprised primarily of the franchise, valued at $35,000, and goodwill of $45,000. Termination Of Operations But Continued Existence AAD petitioned for bankruptcy in 1990. Petitioner subsequently determined that its franchise and goodwill were worthless. In 1992, Petitioner reported a loss of $99,726 for federal tax purposes. All of Petitioner's assets, including its customer lists, were sold or transferred for $1,330 to Florida Mail, Inc. ("Florida Mail"). Florida Mail is a Florida corporation wholly owned by Mr. Troy. Florida Mail sells direct mail advertising; and shares Petitioner's principal place of business. Since 1992, Petitioner has been a shell corporation with $579 in assets.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Respondent enter a Final Order upholding the assessment of tax and interest and waive all of the penalty included in the assessment. DONE AND ENTERED in Tallahassee, Leon County, Florida, this 2nd day of June, 1994. DANIEL MANRY 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 2nd day of June, 1994.
Findings Of Fact Petitioner is a corporation organized and existing under the laws of Florida with its sole place of business located at 6186 Southwest 8th Street, Miami, Florida. Petitioner operates a delicatessen and restaurant in the same building at the above location. Petitioner's restaurant prepares food to be served to paying customers who consume that food at tables provided in the restaurant for that purpose. This food is served by waiters and waitresses who prepare guest checks which separately indicate the amount of sales tax charged thereon. Petitioner's delicatessen sells unprepared food to customers who do not consume that food on the premises and for whom no eating facilities are provided. The items sold by Petitioner's delicatessen are grocery-type items. A common cash register serves the two facilities, which cash register has a separate key for the sale of delicatessen items and a separate key for the sale of restaurant items. The restaurant and delicatessen occupy the same general space and are not separated by a wall or other physical barrier. Petitioner's Exhibit 4 contains a list of those items sold on the delicatessen or grocery side of Petitioner's business. The accuracy of that list was not challenged in this proceeding and it is found as a matter of fact that those items on Petitioner's Exhibit 4 accurately reflect the items sold by Petitioner across his delicatessen counter. That list includes items such as bread, rolls, bagels, milk, beer, soda, catsup, canned goods and various meats such as salami, bologna, franks, fish and ham. Petitioner collects sales tax for those items sold in the restaurant portion of the business and does not collect sales tax on those items sold in the delicatessen portion of the business. The taxable and nontaxable items are segregated and distinguished on the cash register tapes. Petitioner has so conducted his business from its inception in 1959 through the audit period in question. Throughout that period of time Petitioner regularly maintained separate and distinct records sufficient to allocate sales between taxable restaurant sales and nontaxable delicatessen or grocery sales. Petitioner's tax returns have reflected this behavior for the above period of time. When the business first opened Mr. Leo Hoffman, the owner of Petitioner corporation, contacted the Department of Revenue by telephone and was told that the foregoing method of operation was proper. Petitioner has always filed tax returns reflecting this activity and such returns were apparently not questioned until the audit at issue here. The period of time for which Petitioner was audited in this cause was January 1, 1976, to December 31, 1978. On March 12, 1979, Respondent issued a proposed sales and use tax delinquency assessment against Petitioner in the amount of $40,018.14. This assessment was based on the total sales revenue generated by both of Petitioner's enterprises and did not allocate sales revenue between the delicatessen portion of the business and the restaurant portion of the business. On May 10, 1979, the Respondent issued a revised proposed sales tax delinquency assessment against Petitioner in the amount of $33,259.20. This revised assessment was based on the total sales revenue generated by both of Petitioner's separate enterprises and did not allocate sales revenue between the delicatessen portion of the business and the restaurant portion of the business. Petitioner did pay approximately $12,000 in sales tax for the subject audit period. That was the sales tax Petitioner believed he owed for the restaurant portion of his business. The additional assessment is apparently the sales tax (with penalty and interest) Respondent believes is owed for the delicatessen portion of Petitioner's business. The items sold on the delicatessen side of Petitioner's business represent approximately 75 percent of his gross revenue. The items sold on the restaurant, or taxable side of Petitioner's business, represents approximately 25 percent of his gross revenue. The assessment by Respondent against Petitioner was based, at least in part, upon Rule 12A-1.11(1), Florida Administrative Code. Petitioner holds a restaurant license from the State of Florida, Division of Hotels and Restaurants. Petitioner also holds a retail sales license from Dade County for its delicatessen operation.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is, therefore, RECOMMENDED: To the extent that the assessment for unpaid sales tax is based upon sales made by the delicatessen or grocery side of Petitioner's business, such assessment is invalid and should be withdrawn. DONE AND ENTERED this 4th day of June 1980 in Tallahassee, Florida. CHRIS H. BENTLEY 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 4th day of June 1980. COPIES FURNISHED: Mark J. Wolff, Esquire Sparber, Shevin, Rosen, Shapo & Heilbronner, P.A. First Federal Building, 30th Floor One Southeast Third Avenue Miami, Florida 33131 Linda C. Procta, Esquire Department of Legal Affairs Office of the Attorney General The Capitol, LL04 Tallahassee, Florida 32304
