Findings Of Fact On August 27, 1976, the Respondent, State of Florida Department of Revenue, notified the Petitioner of its intention to assess sales tax, penalties and interest against the Respondent for business transactions in the period August 1, 1973 through July 31, 1976. This Notice of Proposed Assessment was revised on May 27, 1977, and the Petitioner was notified of that revision. By his letter of June 19, 1977, the Petitioner has challenged the assessment, as revised. Upon receipt of the June 19, 1977 petition, the Respondent moved for a more definite statement and the Petitioner was afforded fifteen (15) days from the date of the Order within which time to amend his petition. Petitioner took advantage of that opportunity to amend and by an undated document did make such an amendment. The Respondent subsequently moved to strike certain portions of the amended petition and filed its answer to the petition. A pre-hearing conference was held to consider the Motion To Strike and after that pre-hearing conference was concluded an Order was issued which struck certain portions of the amended Petition and allowed copies of the proposed notices of assessments of August 27, 1976 and the revision of May 27, 1977 to be made a part of the complaint/petition as Exhibits 1 and 2, respectively. After the pre-hearing Order had been issued by the undersigned, the case was noticed for hearing for December 5, 1977. At the December 5, 1977 hearing date a Second Revised Notice of Proposed Assessment of Tax, Penalties and Interest Under Chapter 212, Florida Statutes was tendered. This revision dated from December 5, 1977, was allowed to be introduced as the final position of the Respondent on the question of the assessment. It was also allowed to be attached as Exhibit 3 to the amended petition. (Under cover of a separate correspondence the original petition, amended petition, exhibits to the amended petition, an Order which was entered after consideration of the Motion To Strike, are being submitted as a part of the record herein). In the ordinary course of his duties a tax examiner employed by the Respondent went to the business premises of the Petitioner to perform an audit to determine whether or not the Petitioner was collecting and remitting sales tax for the category of sales which the Petitioner was making, that required the payment of sales tax. These requirements spoken of are those set forth in Chapter 212, F.S. Mr. DeCico, the tax examiner, allowed Mr. Farhud to pick three (3) months in the year 1976 as being the period to be audited. DeCico then returned to Farhud's place of business and showed him the details of the three (3) month audit. Farhud was dissatisfied wish this audit and indicated that he preferred to have the audit sample expended for a full three (3) years. DeCico replied that he would be willing to expand the audit period. but cautioned Farhud that expansion of the audit period might promote an increased liability. Nonetheless, at Farhud's request, the audit period was expanded to one for thirty-six (36) months. The new audit period dated from August 1, 1973, through July 1, 1976. The work papers on that audit may be found as Respondent's Exhibit No. 1 admitted into evidence. This audit which is depicted in the Respondent's Exhibit No. 1, left out invoices pertaining to stamps, electric bills, wrapping paper, grocery bags, etc., since they were not retail items for sale. The audit was rendered on August 27, 1976. Before the Notice of Assessment was filed, Farhud had expressed his displeasure with the outcome of the second audit process because he felt that certain amounts depicted in the gross sales were not accurate; to wit, the inclusion of certain so-called "service fees", namely income tax preparation, notary fees, etc. DeCico tried to get a reasonable statement of the amounts of the categories which Farhud desired to have excluded. Farhud did not have records of the matters and was unable to provide an estimate as to the amount of income which had been derived from the aforementioned "service fees". The August 27, 1976, proposed assessment was computed on the basis of the proposition that the gross sales are equivalent to actual sales and are subject to sales tax in the taxable categories. As indicated before, this audit did not take into consideration any "service fees", nor did it grant any allowance for pilferage. No allowance was made for the latter category, because Farhud had not provided any estimate and/or police records to indicate the amount which would be lost to pilferage, and cause a reduction of the sales tax liability. Farhud formally challenged the audit of August 27, 1976, by his correspondence of September 8, 1976 in which he rejects the amount claimed and asks for a hearing. A copy of this correspondence may be found as Respondent's Exhibit No. 2 admitted into evidence. An informal conference was held between the parties on October 12, 1976 to see if a resolution of the dispute could be achieved. Mr. Farhud was represented at the informal conference by Michael J. Burman, Esquire, an attorney in Jacksonville, Florida. By a letter of October 14, 1976, Farhud's attorney requested the Respondent to utilize the figures for the three (3) month audit period, as opposed to the thirty-six (36) month period. The letter concluded by stating that Mr. Burman was unaware of any intention Mr. Farhud had to appeal the assessment of August 27, 1976. This letter was followed by a series of letters in which the various parties were indicating the desire to determine whether or not Mr. Farhud intended to accept the August 27, 1976 assessment or to appeal it. In the course of his correspondence Mr. Farhud continued to insist that he did not accept the amount of assessment as accurate. Mr. Farhud failed to indicate to Mr. Burman whether he was going to appeal the assessment or not and Mr. Burman withdrew as his attorney, as shown in the January 31, 1977 correspondence addressed to one of the employees of the Respondent. This correspondence is Respondent's Exhibit No. 7 admitted into evidence. On February 2, 1977, the audit supervisor in the Jacksonville district of the Respondent wrote Mr. Farhud indicating the intention of the Respondent to collect the taxes pursuant to the August 27, 1976 audit. A copy of this correspondence is Respondent's Exhibit No. 8 admitted into evidence. It should be indicated at this point, that the Respondent's representative had continued to request documentation from Farhud on the items requested for exemption which have been referred to as "service fee". The subject of pilferage had also been discussed at the October 12, 1976 informal conference and a request made for some form of records of police reports which would verify pilferage allowances. No documentation had been provided at the time the February 2, 1977 letter was written to Farhud. Subsequent to the February 2, 1977 letter another informal conference was held on April 4, 1977. As a result of that conference it was determined that certain items would be deleted from the audit assessment of August 27, 1976. This is evidenced in Respondents Exhibit No. 9 which is a copy of a letter dated May 27, 1977, from the audit supervisor, Mr. McCrone, to Mr. Farhud. At the April 4, 1977, discussion the subject of pilferage allowance as brought up in the deletion of 4 percent of the purchase price of taxable goods, as to soft drinks, paper and said products, pet foods and miscellaneous sundries were allowed. No allowance was given for beer, wine and tobacco products because these were felt to be out of reach of prospective pilferers. Again, this deletion is found in the Respondent's Exhibit No. 9. The 4 percent figure was arrived at as an industry estimate. Farhud still was not satisfied after the April 4, 1977, conference had been held and adjustments to the assessment had been mode. In view of this dissatisfaction, the Respondent elected to make a new type of audit, which was performed and was premised upon an analysis of the taxable purchases by the Petitioner for the three (3) year period. These purchases were divided into taxable categories and these categories were then marked up in price using an industry average to arrive at the actual taxable sales. The industry average was based upon an examination of the United Food Stores, Inc.'s sales catalog, which had suggested retail prices for low volume and high volume stores. The Respondent gave the Petitioner the benefit of the range of high volume stores, although the Petitioner's store was a neighborhood convenience store and therefore a low volume operation. The effect of allowing the average retail price for the high volume stores was that it made the differential between his purchase price and the retail price less than that for a low volume neighborhood store, causing lesser tax liability. As stated before, this alternative method was elected for the reason that the Respondent had objected that the gross sales figures reported in the monthly tax returns were incorrect, due to the fact that the Petitioner was unable to document his claim for entitlement to certain exemptions due to pilferage and "service fees", and due to the belief that the more correct approach to the audit was the second method. The work sheet on the alternative method may be found on Respondent's Exhibit No. 10 admitted into evidence. The utilization of this method led to the revised assessment of May 27, 1977, which is the subject of the appeal by petition, and amended petition of the Petitioner. This revision was superceded by the second revision of December 5, 1977, which was allowed to be entered without objection from the Petitioner. The second revision reduces the amount of tax liability claimed by the Respondent. An analysis of the documents offered in this cause and the testimony, leads to the conclusion that the Petitioner/taxpayer owed sales tax during the audit period August 1, 1973 through July 31, 1976. Furthermore, the more correct form of audit procedure under the circumstances, was the alternate method employed in arriving at the May 27, 1977 revised Notice of Assessment as further revised by the December 5, 1977 Second Revised Notice of Proposed Assessment. This conclusion is grounded on the requirements of Section 212.05(1), F.S., which requires persons in the Petitioner's category for the exercise of the privilege of doing business, to assist in levying a tax in the amount of 4 percent in the categories covered. Furthermore, Sections 212.06(3) and 212.07(2), F.S., places the duty on the Petitioner to collect this 4 percent sales tax. The Petitioner failed to act in accordance with the provision of Chapter 212, F.S. and the Second Revised Notice of Proposed Assessment is correct and in keeping with the authority of Section 212.12(6), F.S.
Recommendation Therefore, it is hereby RECOMMENDED: That the Second Revised Notice of Proposed Assessment of Tax, Penalties and Interest found as Exhibit 3 to the amended petition which total is $2,238.92 be allowed with such adjustments as may be necessary for a computation of interest prior to the rendition of a final order. DONE and ORDERED this 3rd day of January, 1978, in Tallahassee, Florida. CHARLES C. ADAMS Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Nathan Weil, Esquire 203 Washington Street Jacksonville, Florida 32202 Patricia Turner, Esquire Assistant Attorney General Department of Legal Affairs The Capitol Tallahassee, Florida 32304 John D. Moriarty, Esquire Attorney, Division of Administration Department of Revenue Carlton Building Tallahassee, Florida 32304
The Issue The issue is whether Petitioner is subject to tax based on a lease or license to use real property pursuant to Sections 212.031, 212.054, and 212.55, Florida Statutes.
Findings Of Fact Jack and Joan Peoples bought and began operating a bait and tackle shop/fish camp in Jacksonville, Duval County, Florida, in approximately 1971. The name of the business was Clark's Fish Camp and Seafood. As the business grew, Mr. and Mrs. Peoples began operating a restaurant in the shop. Initially, they lived on the business premises in an apartment adjoining the shop. When the restaurant became more successful, the restaurant was enlarged to include the apartment area and the family bought a home at another location. In January 1990, Mr. and Mrs. Peoples incorporated their business as a Florida Subchapter S Corporation. Pursuant to the organizational minutes, Mr. Peoples was elected president and Mrs. Peoples was elected vice-president and secretary. Petitioner issued common stock to Mr. and Mrs. Peoples as the sole shareholders, each owning a 50 percent interest, in exchange for the good will and name of Clark's Fish Camp and Seafood. Mr. and Mrs. Peoples did not transfer any real property, fixtures, or equipment to Petitioner. At all times material to this case, Mr. and Mrs. Peoples or Mrs. Peoples, in her sole capacity, owned the real property and fixtures utilized by Petitioner in the operation of the restaurant business. At all times relevant here, Mrs. Peoples acted as hostess, cook, and/or manager for the business. She controlled Petitioner's checkbook along with her kitchen manager, Florence Hatfield, and general manager, Steve Morris. During the audit at issue here, Russ Deeter, an accountant, and his associate/former employee, Maxine Downs were responsible for performing all of Petitioner's formal bookkeeping. Mr. Deeter had served as Petitioner's bookkeeper since the early 1970s. He sold his accounting business to Ms. Downs in 1981, but he continued to assist her with the routine bookkeeping for certain clients including Petitioner. Pursuant to the arrangement between Mr. Deeter and Ms. Downs, she created a general ledger in a computer using Petitioner's checkbook, sales receipts, invoices, etc., as source documents. The source documents were then returned to Petitioner. Additionally, Mr. Deeter prepared state and federal tax returns for Petitioner and Mr. and Mrs. Peoples. Mrs. Peoples maintained all of the source documents for Petitioner's business records in a construction trailer/office located behind the restaurant on the property's highest ground. Because the property was prone to flooding, Petitioner placed the source documents and other business records on shelves in the trailer/office. The only file cabinets in the office were used to store restaurant supplies. On or about October 28, 1998, Respondent sent Petitioner a Notice of Intent to Audit Books and Records for sales and use taxes for the period October 1, 1993, to September 30, 1998. The notice also advised Petitioner that Respondent intended to conduct an audit of Petitioner's corporate intangible taxes for the period January 1, 1994, to January 1, 1998. The audit was scheduled to commence some time after December 28, 1998. In the meantime, Mr. Peoples became so ill that Mrs. Peoples closed their home and moved into a mobile home located on the business property. This move allowed Mrs. Peoples to oversee the restaurant business while she nursed her husband. Mr. Peoples died in March 1999. Thereafter, Mrs. Peoples became Petitioner's sole owner. Mrs. Peoples receives a bi-weekly salary from Petitioner in the amount of $3,000. She also makes draws from its bank account to pay business and personal expenses on an as-needed basis. Mrs. Peoples has an eighth grade education. However, she is, in large part, responsible for the success of Petitioner, which during the audit period grossed between $2,500,000 and $3,000,000 a year. Mrs. Peoples asserts that she does not remember signing any tax returns but admits that she signs documents without examining them when requested to do so by Mr. Deeter. By letter dated March 24, 1999, Respondent advised Petitioner that it was rescinding the October 28, 1998, Notice of Intent to Audit Books and Records and replacing it with a new notice. The new Notice of Intent to Audit Books and Records dated March 24, 1999, included an examination of Petitioner's charter city systems surtax for the period March 1, 1994, through February 28, 1999; Petitioner's sales and use tax from March 1, 1994, through February 28, 1999; and Petitioner's intangible personal property tax from January 1, 1995, through January 1, 1999. The new notice stated that the audit would begin on or before May 24, 1999. On May 23, 1999, Petitioner requested a postponement of the audit due to the death of Mr. Peoples. As a result of this request, Respondent postponed the audit until January 10, 2000. On May 25, 1999, Mrs. Peoples signed a Power of Attorney for Mr. Deeter to represent the business during the audit. In anticipation of the audit, Mrs. Peoples and her staff began going through the source documents stored in the trailer/office. Mr. Deeter also gathered pertinent records and computer printouts. All documents required for the audit were placed in boxes or sacks on the floor of the trailer/office. In September of 1999, Petitioner's property flooded due to a hurricane. The water rose above the elevated entrance to the trailer/office. Mrs. Peoples and Petitioner's employees made no effort to protect the documents on the floor of the trailer/office from the floodwaters. Petitioner's September 1999 insurance claims due to flood loss do not contain a claim for loss of documentation. The 1999 flood loss claims were small in comparison to the flood loss claims for 2001 even though the 1999 floodwaters rose high enough to destroy the records. Record evidence indicates that the trailer/office has flooded on more than one occasion. In September 1999, all of the documents on the floor of the office were destroyed. Subsequently, Mrs. Peoples and Ms. Hatfield disposed of the documents, including but not limited to, the printouts of the general ledger, bank statements, and cancelled checks. On January 7, 2000, Petitioner requested another postponement of the audit until July 1, 2000. Petitioner made the request due to the death of Ms. Downs in December 1999. After her death, Mr. Deeter discovered that Ms. Downs' computer and all backup tapes located in her home office were either stolen or otherwise unaccounted for. The missing computer records included Petitioner's bookkeeping records for the audit period at issue here. On January 15, 2000, Petitioner agreed to extend the time for Respondent to perform the audit. The agreement stated that Respondent could issue an assessment at any time before October 28, 2001. On July 6, 2000, Respondent issued a formal demand for Petitioner to produce certain records. The only records available were Mr. Deeter's own work papers, post-September 1999 materials that had not been placed in the trailer/office prior to the flood, or records prepared after the flood and death of Ms. Downs. On July 17, 2000, the parties signed an Audit Agreement. The agreement states that the audit of sales of tangible personal property would be controlled by the sampling method. On July 17, 2000, Mr. Deeter informed Respondent that Petitioner's records covering the period from 1993 through the middle of 1999 were not available because a flood had damaged them in September 1999. However, using his work papers, Mr. Deeter was able to provide Respondent with copies of some of the original federal tax returns that he had prepared for Petitioner and Mr. and Mrs. Peoples. During the hearing, Mr. Deeter asserted that he had delivered the original tax returns to Mr. and Mrs. Peoples who had the responsibility to sign, date, and file them with the U.S. Internal Revenue Service (IRS) at the appropriate times. Mrs. Peoples testified that she could not remember signing any returns. She believed that Mr. Deeter had assumed responsibility for filing the returns. The unsigned and undated copies of the returns that Mr. Deeter provided Respondent on July 17, 2000, included Petitioner's U.S. Income Tax Return for an S Corporation (Form 1120S) for 1996, 1997, and 1998. These returns showed that Petitioner took the following deductions from income for a lease expense: (a) 1996--$225,546; (b) 1997--$332,791; and 1998--$290,493. These are the amounts that Respondent seeks to tax as rent. Mr. Deeter also provided Respondent with an unsigned and undated copy of Mr. and Mrs. Peoples' 1998 U.S. Individual Income Tax Return (Form 1040). The return included both pages of Schedule E showing rents received from Petitioner. On July 28, 2000, Mr. Deeter provided Respondent with revised copies of Petitioner's 1120S forms and revised copies of Mr. and Mrs. Peoples' 1040 forms. The auditor's file does not contain copies of the revised returns because the auditor did not accept them. The record also indicates that Mr. Deeter did not want to leave the revised returns with Respondent because they were not copies of the original returns. During the hearing, Mr. Deeter testified that he furnished Respondent with revised returns to show that there was no difference in the amount of federal income tax due and payable by Mr. and Mrs. Peoples regardless of whether Petitioner reported a lease expense or a distribution of profit on its 1120S forms and regardless of whether Mr. and Mrs. Peoples reported Petitioner's income as rent received or a profit distribution on their 1040 forms. According to Mr. Deeter, he prepared the revised 1120S returns using his pencil copies of the original handwritten returns because he had never used a computer software program to prepare 1120S forms. Mr. Deeter had a computer software program to prepare 1040 forms, so he used that program to generate the revised 1040 returns. However, Mr. Deeter's testimony that the revised returns were drafts showing Petitioner's deduction of a lease expense and Mr. and Mrs. Peoples' receipt of rent is not persuasive. In November 2000, Respondent obtained copies of Petitioner's 1120S forms and Mr. and Mrs. Peoples' 1040 forms for 1994 and 1995 from the IRS. The IRS did not have copies of these returns for the years 1996 through 1999. However, there is record evidence that Mr. and Mrs. Peoples paid some income taxes for all years in question. The record does not contain copies of the 1994 and 1995 returns. Competent evidence indicates that, consistent with Respondent's routine practice, the auditor reviewed the 1040 and 1120S forms and returned them to the IRS without making copies for Respondent's file. Based on the auditor's review of Petitioner's 1120S returns, Respondent seeks to tax Petitioner for lease expense in the amounts of $152,782.24 in 1994 and $220,355.85 in 1995. During the hearing, Mr. Deeter conceded that he prepared Petitioner's 1120S forms for 1994 and 1995 showing deductions for a lease expense and Mr. and Mrs. Peoples' 1040 forms showing rent received from Petitioner. His testimony that he prepared all returns in subsequent years showing no lease expense for Petitioner and profit distributions instead of rent received for Mr. and Mrs. Peoples is not persuasive. In November 2000, Respondent issued a Notice of Intent to Make Audit Changes. The notice made no adjustment with respect to Petitioner's reported taxable sales. The only adjustment was based on lease payments from Petitioner to Mr. and Mrs. Peoples as consideration for the rent of the building and fixtures utilized by Petitioner in the conduct of its business. On January 26, 2001, Mr. Deeter had an audit conference with Respondent's staff. During the conference, Mr. Deeter requested that Respondent review Petitioner's amended 1120S forms for the years 1996, 1997, 1998, and 1999. The amended 1120S returns did not include deductions for a lease expense. Respondent would not accept the amended returns, but informed Mr. Deeter that it would review the amended returns if he could document that they had been filed with the IRS. On March 7, 2001, the IRS stamped the amended 1120S forms for 1996, 1997, 1998 and 1999 as having been received. Mrs. Peoples had signed the returns as Petitioner's president but she did not date her signatures. Mr. Deeter testified that his wife, Roberta Lawson, signed the amended 1120S returns as the tax preparer. Mrs. Lawson's purported signatures on the forms were dated appropriately for each tax year. However, Mrs. Lawson did not testify at the hearing. Mr. Deeter's testimony that the returns filed with the IRS on March 7, 2001, after the audit was completed were, in fact, exact copies of the returns that he and his wife prepared for Petitioner each year and provided to Respondent on July 17, 2000, is not persuasive. After receiving the amended 1120S returns, Respondent decided not to consider them in the audit because they were self-serving. On August 6, 2001, Respondent issued a Notice of Proposed Assessment of sales and use tax and charter transit system surtax. By letter dated October 2, 2001, Petitioner filed a timely informal protest of the proposed assessment. Petitioner asserted that it had never paid any rent to Mr. and Mrs. Peoples. On January 29, 2002, Respondent issued a Notice of Decision upholding the proposed assessments. However, Petitioner never received this notice. Therefore, Respondent reissued the Notice of Decision without any additional changes on August 14, 2002. During discovery, Petitioner provided Respondent with unsigned and undated copies of Mr. and Mrs. Peoples' 1040 forms for 1996, 1997, 1998, and 1999. These returns show taxable income derived from an S corporation on line 17, passive income and losses from Petitioner on page 2 of Schedule E, and depreciation on Form 4562. In other words, the returns reflect corporate distributions of profit from Petitioner and do not reference any income from rental real estate. Mr. Deeter's testimony during hearing that the 1040 returns provided to Respondent during discovery are exact copies of the original 1040 returns is not persuasive. As of December 12, 2002, Mr. and Mrs. Peoples had not filed 1040 returns for the years 2001, 2000, 1999, 1998, 1997, or 1996 with the IRS. The audit at issue here was based on the best information provided at the time of the audit. Respondent completed the audit on or about January 26, 2001. Petitioner does not assert that the calculation of the assessment was in error. Instead, Petitioner protests that any assessment is due. Petitioner could have requested its bank to provide it with copies of its statements and cancelled checks for the relevant period. Petitioner did not make such a request and Respondent was not under an obligation to do so. There is no evidence that a written lease for Petitioner to use Mr. and Mrs. People's property ever existed. However, the greater weight of the evidence indicates that Petitioner leased the restaurant property from Mr. and Mrs. Peoples for all relevant years. Mr. Deeter is an experienced accountant with over 30 years of experience. Petitioner and Mr. and Mrs. Peoples relied upon Mr. Deeter's advice as to what, if any, taxes should be paid on the lease. Armed with all of the necessary information, Mr. Deeter gave Petitioner obviously erroneous advice concerning the tax consequences associated with Petitioner leasing the property and paying 100 percent of its profits as consideration for the lease. To compound the problem, Mrs. Peoples negligently failed to ensure that Petitioner's business records, gathered specifically in anticipation of Respondent's audit, were safely preserved from hurricane floodwaters. Petitioner has had no previous tax compliance difficulties. It has not been subject to prior audits or assessments. Even so, the facts of this case indicate that Petitioner and Mr. and Ms. Peoples did not exercise ordinary care and prudence in complying with the revenue laws of Florida. Mr. Deeter testified that the fair market value or reasonable consideration for the lease is an amount equivalent to Mr. and Mrs. Peoples' depreciation. According to the depreciation schedules, which accompanied the 1040 forms provided to Respondent during discovery, the annual cost for the use of the property and fixtures were as follows: (a) 1996--$98,296; (b) 1997--$104,840; and (c) 1998--$114,106 ($179,554 less a one time extraordinary loss of $65,448 due to flood damage). Mr. Deeter also testified that using the information on the 1040 forms for 1996, the depreciation expense for 1994 and 1995 can be computed as follows: (a) 1994--$63,000 to $67,000; and (b) 1995--$77,000 to $79,000. Mr. Deeter's testimony that the fair market value of the lease is equivalent to the depreciation set forth on 1040 returns never filed with the IRS is not persuasive. Mr. Deeter testified that an estimate of reasonable net profits for a corporation of similar size and make-up could be determined by reference to ratio profiles prepared by Robert Morris and Associates. Mr. Deeter's testimony regarding average profit distributions to shareholders of similarly situated corporations and reasonable profit distributions for Petitioner are speculative and not persuasive.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED: That Respondent enter a final order upholding the tax assessment. DONE AND ENTERED this 4th day of April, 2003, in Tallahassee, Leon County, Florida. SUZANNE F. HOOD Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 4th day of April, 2003. COPIES FURNISHED: David B. Ferebee, Esquire Post Office Box 1796 Jacksonville, Florida 32201-1796 J. Bruce Hoffmann, General Counsel Department of Revenue 204 Carlton Building Post Office Box 6668 Tallahassee, Florida 32314-6668 R. Lynn Lovejoy, Esquire Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050 James Zingale, Executive Director Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100
Findings Of Fact Petitioner purchased the facilities of a bankrupt chemical recovery plant and on May 13, 1987, was issued a temporary tax exemption (Exhibit 1) for sales taxes on equipment purchased for the production or processing of tangible personal property for resale. Petitioner essentially operates a distillation plant where products are distilled and certain chemicals are produced. The plant also operates as a servicing facility in removing impurities from products submitted for distillation. Because the materials received at the plant were not as clean as originally anticipated, there was less product for resale and more servicing provided than originally intended. The items on which sales tax refunds are requested were used to ,repair and/or refurbish the distillation plant, and the business qualifies as new business under Section 212.08(5)(b)(1), Florida Statutes. In 1987, Petitioner had receivables totaling $824,819 of which only $63,474 (7.7%) was in the account for sale of tangible personal property (Exhibit 3). Petitioner's witness testified that the other receivable accounts (Exhibit 3) are not service accounts. Petitioner now has an inventory of tangible personal property for sale in excess of $100,000 which was produced through the distillation plant. Although Respondent's auditor initially contended that Petitioner had failed to produce all invoices and bills to justify the exemptions claimed, on cross-examination he acknowledged that the refund for sale taxes paid on the equipment purchased was denied solely on the basis that the equipment and plant was not used principally for the production of tangible personal property for sale. The Notice of Intent (Exhibit 6) denied Petitioner's application for a sales tax refund in the amount of $12,592.75 for the reason that: Business is primarily a service organiza- tion and tangible personal property is only a minute show (sic) of the operation. Records were incomplete. The witness who signed the Notice of Intent understands the denial of the refund of sales taxes was because the sale of tangible personal property produced by Petitioner was not the primary or a substantial part of the revenues generated by the plant.
The Issue The issues in this bid protest are, first, whether, as Petitioner alleges, Intervenor's failure to attach copies of "occupational licenses" to its proposal was a deviation from the requirements of the Request for Proposal; second, whether any such deviation was material; and third, whether Respondent's preliminary decision to award Intervenor the contract at issue was clearly erroneous, arbitrary or capricious, or contrary to competition.
Findings Of Fact On September 18, 2009, Respondent Department of Transportation ("Department") issued Request for Proposal No. RFP-DOT-09/10-4007FS (the "RFP"). Through the RFP, which is entitled, "Treasure Coast Road Ranger Service Patrol," the Department solicited written proposals from qualified providers who would be willing and able to perform towing and emergency roadside services on Interstate 95 in Martin County, St. Lucie County, and Indian River County. The Department intended to award a three-year contract to the "responsive and responsible Proposer whose proposal is determined to be the most advantageous to the Department." The Department anticipated that the contract would have a term beginning on December 1, 2009, and ending on November 31, 2012. The annual contract price was not to exceed $1.59 million. Proposals were due on October 13, 2009. Four firms timely submitted proposals in response to the RFP, including Petitioner Sunshine Towing @ Broward, Inc. ("Sunshine") and Intervenor Anchor Towing and Marine of Broward, Inc. ("Anchor"). An evaluation ensued, pursuant to a process described in the RFP, during which the Department rejected two of the four proposals for failing to meet minimum requirements relating to technical aspects of the project. As a result, Sunshine and Anchor emerged as the only competitors eligible for the award. Sunshine offered to perform the contractual services for an annual price of $1,531,548. This sum was less than the price that Anchor proposed by $46,980 per year. Despite Sunshine's lower cost, Anchor nevertheless edged Sunshine in the final score, receiving 92.86 points (out of 100) from the Department's evaluators, to Sunshine's 87.75. On November 30, 2009, the Department duly notified the public of its intent to award the contract to Anchor. Sunshine promptly initiated the instant protest, whereby Sunshine seeks to have Anchor's proposal disqualified as nonresponsive, in hopes that the Department will then award the contract to Sunshine as the highest-ranked (indeed the sole) responsive proposer. Sunshine alleges that Anchor's proposal failed to conform strictly to the specifications of the RFP, principally because Anchor did not attach copies of its "occupational licenses" to the proposal. Anchor insists that its proposal was responsive but argues, alternatively, that if its proposal deviated from the specifications, the deviation was merely a minor irregularity which the Department could waive. Anchor further contends that Sunshine's proposal contains material deviations for which it should be deemed nonresponsive. The Department takes the position that Anchor's failure to attach "occupational licenses" was a minor irregularity that could be (and was) waived.1 The RFP includes a "Special Conditions" section wherein the specifications at the heart of this dispute are located. Of particular interest is Special Condition No. 8, which specifies the qualifications a provider must have to be considered qualified to perform the services called for under the contract to be awarded. Special Condition No. 8 provides as follows: QUALIFICATIONS General The Department will determine whether the Proposer is qualified to perform the services being contracted based upon their proposal demonstrating satisfactory experience and capability in the work area. The Proposer shall identify necessary experienced personnel and facilities to support the activities associated with this proposal. Qualifications of Key Personnel Those individuals who will be directly involved in the project should have demonstrated experience in the areas delineated in the scope of work. Individuals whose qualifications are presented will be committed to the project for its duration unless otherwise excepted by the Department's Project Manager. Where State of Florida registration or certification is deemed appropriate, a copy of the registration or certificate should be included in the proposal package. Authorized To Do Business in the State of Florida In accordance with sections 607.1501, 608.501, and 620.169, Florida Statutes, foreign corporations, foreign limited liability companies, and foreign limited partnerships must be authorized to do business in the State of Florida. Such authorization should be obtained by the proposal due date and time, but in any case, must be obtained prior to the posting of the intended award of the contact. For authorization, [contact the Florida Department of State].[2] Licensed to Conduct Business in the State of Florida If the business being provided requires that individuals be licensed by the Department of Business and Professional Regulation, such licenses should be obtained by the proposal due date and time, but in any case, must be obtained prior to the posting of the intended award of the contract. For licensing, [contact the Florida Department of Business and Professional Regulation]. References and experience must entail a minimum of three (3) years of experience in the towing industry in Florida. NOTE: Copies of occupational licenses must also be attached to the back of Form 'F'. (Boldface in original.) Special Condition No. 19, which defines the term "responsive proposal," provides as follows: RESPONSIVENESS OF PROPOSALS Responsiveness of Proposals Proposals will not be considered if not received by the Department on or before the date and time specified as the due date for submission. All proposals must be typed or printed in ink. A responsive proposal is an offer to perform the scope of services called for in this Request for Proposal in accordance with all the requirements of this Request for Proposal and receiving fifty (50) points or more on the Technical Proposal.[3] Proposals found to be non-responsive shall not be considered. Proposals may be rejected if found to be irregular or not in conformance with the requirements and instructions herein contained. A proposal may be found to be irregular or non-responsive by reasons that include, but are not limited to, failure to utilize or complete prescribed forms, conditional proposals, incomplete proposals, indefinite or ambiguous proposals, and improper and/or undated signatures. (Emphasis and boldface in original.) In the "General Instructions to Respondents" section of the RFP there appears the following reservation of rights: 16. Minor Irregularities/Right to Reject. The Buyer reserves the right to accept or reject any and all bids, or separable portions thereof, and to waive any minor irregularity, technicality, or omission if the Buyer determines that doing so will serve the State's best interests. The Buyer may reject any response not submitted in the manner specified by the solicitation documents. Anchor did not attach copies of any "occupational licenses" to the back of Form 'F' in its proposal. Anchor contends that it did not need to attach such licenses because none exists. This position is based on two undisputed facts: (1) The Florida Department of Business and Professional Regulation ("DBPR") does not regulate the business of providing towing and emergency roadside assistance; therefore, neither Anchor nor Sunshine held (or could hold) a state-issued license to operate, and neither company fell under DBPR's regulatory jurisdiction. (2) The instrument formerly known as an "occupational license," which local governments had issued for decades, not for regulatory purposes but as a means of raising revenue, is presently called (at least formally) a "business tax receipt," after the Florida Legislature, in 2006, amended Chapter 205 of the Florida Statutes, changing the name of that law from the "Local Occupational License Tax Act" to the "Local Business Tax Act." See 2006 Fla. Laws ch. 152. Sunshine asserts that the terms "occupational license" and "business tax receipt" are synonymous and interchangeable, and that the RFP required each offeror to attach copies of its occupational licenses/business tax receipts to the proposal. Sunshine insists that Anchor's failure to do so constituted a material deviation from the specifications because, without such documentation, the Department could not be sure whether an offeror was authorized to do business in any given locality. Sunshine presses this argument a step further based on some additional undisputed facts. As it happened, at the time the proposals were opened, Anchor held a local business tax receipt from the City of Pembroke Pines, which is the municipality in which Anchor maintains its principal place of business. Anchor had not, however, paid local business taxes to Broward County when they became due, respectively, on July 1, 2008, and July 1, 2009. Anchor corrected this problem on December 14, 2009, which was about two weeks after the Department had posted notice of its intent to award Anchor the contract, paying Broward County a grand total of $248.45 in back taxes, collection costs, and late penalties. As of this writing, all of Anchor's local business tax obligations are paid in full. Sunshine contends, however, that during the period of time that Anchor's Broward County business taxes were delinquent, Anchor was not authorized to do business in Broward County and hence was not a "responsible" proposer eligible for award of the contract. In support of this proposition, Sunshine relies upon Section 20-15 of the Broward County, Florida, Code of Ordinances ("Broward Code"), which states: Pursuant to the authority granted by Chapter 205, Florida Statutes, no person shall engage in or manage any business, profession or occupation, as the same are contemplated by Chapter 205, Florida Statutes, unless such person first obtains a business tax receipt as required by this article, unless other exempt from this requirement . . . . On this latter point regarding Anchor's authority to operate in Broward County, Sunshine appears to be correct, at least in a narrow legal sense. It is abundantly clear, however, and the undersigned finds, that, as a matter of fact, Anchor was never in any danger of being shut down by the county. Indeed, even under the strict letter of the local law, Anchor was entitled to continue operating in Broward County unless and until the county took steps to compel the payment of the delinquent taxes. Broward Code Section 20-22, which deals with the enforcement of the business tax provisions, provides: Whenever any person who is subject to the payment of a business tax or privilege tax provided by this article shall fail to pay the same when due, the tax collector, within three (3) years from the due date of the tax, may issue a warrant directed to the Broward County Sheriff, commanding him/her to levy upon and sell any real or personal property of such person liable for said tax for the amount thereof and the cost of executing the warrant and to return such warrant to the tax collector and to pay him/her the money collected by virtue thereof within sixty (60) days from the date of the warrant. . . . The tax collector may file a copy of the warrant with the Clerk of the Circuit Court of Broward County[, which shall be recorded in the public records and thereby] become a lien for seven (7) years from the due date of the tax. . . . Any person subject to, and who fails to pay, a business tax or privilege tax required by this article, shall, on petition of the tax collector, be enjoined by the Circuit Court from engaging in the business for which he/she has failed to pay said business tax, until such time as he/she shall pay the same with costs of such action. There is no evidence suggesting that the county ever sought to enjoin, or that a court ever issued an injunction prohibiting, Anchor from engaging in business, nor does it appear, based on the evidence, that a tax warrant ever was issued, filed, or executed to force Anchor to pay its back taxes. Given the relatively small amount of tax due, the likelihood of such enforcement actions being taken must reasonably be reckoned as slim to none. While paying taxes when due is certainly the obligation of a good corporate citizen, it would not be reasonable, based on the facts established in this case, to infer that Anchor is a scofflaw for failing to timely pay a local tax amounting to about $80 per year. Anchor, in short, was a responsible proposer. Sunshine's other argument has more going for it. The RFP clearly and unambiguously mandated that "occupational licenses" be attached to a proposal. If, as Sunshine maintains, the terms "occupational license" and "business tax receipt" are clearly synonymous, then Anchor's proposal was noncompliant. For reasons that will be explained below, however, the undersigned has concluded, as a matter of law, that the term "occupational license" does not unambiguously denote a "business tax receipt"——at least not in the context of Special Condition No. 8. The specification, in other words, is ambiguous. No one protested the specification or otherwise sought clarification of the Department's intent. The evidence shows, and the undersigned finds, that the Department understood and intended the term "occupational license" to mean the instrument now known as a "business tax receipt." The Department simply used the outdated name, as many others probably still do, owing to that facet of human nature captured by the expression, "old habits die hard." The Department's interpretation of the ambiguous specification is not clearly erroneous and therefore should not be disturbed in this proceeding. Based on the Department's interpretation of Special Condition No. 8, the undersigned finds that Anchor's failure to attach copies of its occupational licenses was a deviation from the requirements of the RFP. That is not the end of the matter, however, for a deviation is not necessarily disqualifying unless it is found to be material. The letting authority may, in the exercise of discretion, choose to waive a minor irregularity if doing so will not compromise the integrity and fairness of the competition. There is no persuasive direct evidence in the record that the Department made a conscious decision to waive the irregularity in Anchor's proposal. Documents in the Department's procurement file show, however, that the Department knew that Anchor's proposal lacked copies of occupational licenses, and in any event this was a patent defect, inasmuch as nothing was attached to the back of Anchor's Form 'F'. It is therefore reasonable to infer that the Department elected to waive the irregularity, and the undersigned so finds. Necessarily implicit in the Department's action (waiving the deficiency) is an agency determination that that the irregularity was a minor one. The question of whether or not Anchor's noncompliance with Special Condition No. 8 was material is fairly debatable. Ultimately, however, the undersigned is unable to find, for reasons more fully developed below, that the Department's determination in this regard was clearly erroneous. Because the Department's determination was not clearly erroneous, the undersigned accepts that Anchor's failure to submit occupational licenses was a minor irregularity, which the Department could waive. The Department's decision to waive the minor irregularity is entitled to great deference and should be upheld unless it was arbitrary or capricious. The undersigned cannot say that waiving the deficiency in question was illogical, despotic, thoughtless, or otherwise an abuse of discretion; to the contrary, once it has been concluded that the irregularity is minor and immaterial, as the Department not incorrectly did here, waiver seems the reasonable and logical course of action. The upshot is that the proposed award to Anchor should be allowed to stand. The foregoing determination renders moot the disputed issues of fact arising from Anchor's allegation that Sunshine's proposal was nonresponsive. It is unnecessary, therefore, for the undersigned to make additional findings on that subject.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department enter a Final Order consistent with its preliminary decision to award Anchor the contract at issue. DONE AND ENTERED this 6th day of April, 2010, in Tallahassee, Leon County, Florida. JOHN G. VAN LANINGHAM Administrative Law Judge Division of Administrative Hearings Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 6th day of April, 2010.
Findings Of Fact The State of Florida, Department of Revenue issued to the Petitioners a tax warrant dated May 12, 1986, for sales and use tax alleged to be due and delinquent, interest, penalties, and filing fees in the total sum of $8,269.95. Susan R. Bayer is the owner of a parcel of property located in Hillsborough County, Florida, commonly known as 3001 East Hillsborough Avenue, having become the owner of that property on February 29, 1984. Lloyd W. Bayer owned the property in finding 2 above prior to February 29, 1984. When Susan Bayer became the owner of the property, she became the successor in interest to a lease between Brown Bayer, Inc., and Creech Produce, Inc., wherein a portion of the property was leased to Creech Produce, Inc., for use by Creech Produce, Inc., to let sellers of produce use a space to park a vehicle to sell produce out of the vehicle. This business of Creech was licensed by the City of Tampa as a parking lot. The spaces in the lot were rented on a nightly basis and rent was collected on a nightly basis. There were no terms of rentals for periods longer than a nightly basis. The persons parking vehicles in the spaces generally sold wholesale produce out of the vehicles but not all of them did so, and there was no requirement the vehicles occupying these spaces be used for any specific purpose. In 1985, Susan Bayer filed proceedings against Creech Produce, Inc., seeking to revoke the lease to Creech. One ground alleged in this complaint (Exhibit 8) was that Creech was using the property in violation of state laws and regulations in failing to collect sales taxes on the parking fees and remit same to the Department of Revenue. The court not only ruled against Bayer on the eviction proceedings but extended the lease for an additional year. The lease to Creech (Exhibit 5) provided, inter alia, that the lessee would pay 1/2 of the sanitation expense paid by the lessor and that portion of electricity used for the portion of the building used and the lights for the outside of the property." The electricity was billed to the lessor and, pursuant to this lease provision, Creech remitted its share of the bill to the lessor. This payment for electricity by Creech was included by Respondent as rent on which the sales tax was levied. Exhibit 3 clearly conveys the intent of the parties to lease the property to be used by the lessee as a parking lot for the vehicles from which produce was to be sold and that the lessee could collect the fees for the use of these parking spaces. On February 1, 1984, Bayer entered into an Agreement for Purchase and Sale (Exhibit 2) with Bobby Lee McGilvery and Adella Fisher to sell the business known as Farmer Jahn's Ice to the latter. This business consisted of two icemaking machines on the premises of 3001 East Hillsborough Avenue, storage- disposing facilities at about 60 locations in Tampa, a pickup truck, step-van, ice baggers, bags, etc. McGilvery had worked for Bayer in this business of making and selling ice cubes for 15 years and purchased the business with no money down for a total price of $125,000 to be paid at the rate of $1,275 per month at 10 percent interest until the total of $125,000 is paid. Exhibit 2 provided that a separate lease agreement for the property occupied by the business would be executed providing for payment of $500 per month. A promissory note in the amount of $125,000 payable to Bayer was executed by McGilvery and Fisher (Exhibit 3) which provided for payment of $1,725 per month with interest at 10 percent until the total of $125,000 was paid. There appears to have been a scrivener's error in the preparation of the note so far as the monthly payment is concerned. Since the sale agreement provided for the business to be paid for at $1,275 per month and a rental price of $500 per month the monthly payments should have been $1,775. The Business Lease executed February 1, 1984, (Exhibit 4) provided "consideration for this lease is the note on the sale of the business." The auditor for Respondent based his sales tax calculation solely on the Business Lease (Exhibit 4) and the promissory note and calculated the tax on a rental of $1,725 per month. McGilvery and Fisher defaulted on the payments on the note and the business was recaptured by Petitioner. Having no lien on the personal property sold to the buyers Petitioner was able to recover only a small portion of those items enumerated in Finding 9 above.
The Issue The issue is whether Petitioner is liable for tax, interest, and penalty, as claimed in the proposed assessment.
Findings Of Fact Gary J. Bell (Mr. Bell) and his father Sidney Bell formed Petitioner in 1992. Until Mr. Sidney Bell left the company in his son's sole control in 2001, they were the sole shareholders and officers of the company, which had two other employees. Mr. Bell and his father estimated and checked jobs. Not fabricating fences itself, Petitioner obtained finished fences from suppliers and installed them, primarily at private residences. The audit period in this case extends from May 1, 1995, through November 30, 1999 (Audit Period). By 1995, Petitioner had four employees: one in the office and three laborers. The nature of Petitioner's business had changed from entirely residential to about half commercial, mostly consisting of sales to the State of Florida. The size and nature of Petitioner's business did not change significantly during the remainder of the audit period, although the percentage of sales to the State of Florida increased somewhat. Without referring to any records, Mr. Bell estimates that Petitioner's gross sales during the 55-month audit period totaled $1.2 to $1.4 million. Jose Rouco, a tax auditor of Respondent, sent a notice in May 2000 to Mr. Bell informing him of Respondent's intention to examine Petitioner's records. Due to a change of address, Mr. Rouco sent the form a second time. When he received no response to the form, in September 2000, Mr. Rouco visited the address that he had found for the company. Speaking to someone at a nearby business, Mr. Rouco learned that the fencing business had recently moved from the second address. On November 22, 2000, Mr. Rouco spoke to Mr. Bell on the telephone and learned that the records required for the audit were at Petitioner's present business address. Mr. Rouco directed Mr. Bell to send him copies of these records. When Mr. Bell failed to do so, Mr. Rouco sent a demand letter on December 12, 2000, warning that the failure to provide the requested records by December 27 would result in the issuance of a Formal Notice of Demand to Produce Certain Records. On December 28, 2000, after Mr. Bell had failed to respond by the deadline stated in the December 12 letter, Mr. Rouco issued a Formal Notice of Demand to Produce Certain Records for the Audit Period by 10:00 a.m. on January 9, 2001. The form warns: "Failure to produce [the records] may result in the immediate issuance of a distress warrant or a jeopardy assessment in the amount of an estimated assessment of all taxes, interest, and penalties due and payable to the State of Florida." When Mr. Bell failed to produce the records by January 9, 2001, Mr. Rouco proceeded to estimate taxes that Petitioner owed. A couple of weeks later, he received as unclaimed the December 12 letter and December 28 notice, which he had sent certified mail, return receipt requested, to Petitioner's correct address. The record does not disclose why Mr. Bell never took delivery of this mail. Based on Mr. Rouco's work, Respondent issued on April 30, 2001, a Notice of Proposed Assessment, which claimed, for the Audit Period, taxes of $227,610, a penalty of $113,805, and interest of $98,583.19 through April 30, 2001, and $74.83 daily after April 30, for a total of $439,998.19. The notice warns that the proposed assessment would become a final assessment if Petitioner did not file an informal protest by June 29, 2001, and that Petitioner must commence a judicial action or administrative proceeding by August 28, 2001. By letter dated August 10, 2001, Willie Barnett, a certified public accountant, informed Respondent that he was Petitioner's accountant, and he was responding to Respondent's tax notice dated July 25, 2001. The record does not contain any documents from Respondent dated July 25, 2001. However, Mr. Barnett's letter states that Petitioner "is in the business of installing fences, not retail sale. In those instances where the company purchases the fencing materials, the sales taxes are paid at the point of purchase." The letter concludes that Petitioner is therefore not liable for sales taxes. Mr. Bell asserts that Petitioner has paid all taxes lawfully due, but that Petitioner is not required to collect any tax on its sales to consumers because these are sales pursuant to real property contracts. Respondent's file already contained the information that Mr. Barnett supplied. By Audit Assignment Request received January 11, 1999, by Respondent's Case Selection Division, L. David Mills, evidently an employee of Respondent, wrote: "Taxpayer sells and installs real property. Potential for recovery on purchases and fabrication labor and overhead. Taxpayer does not appear to be registered." By a file memorandum dated October 25, 2000, Joan C. Rietze, also evidently an employee of Respondent, wrote: "Talked to Gary Bell. . . . He also stated that he pays tax on all of the purchases he makes. He requested that his tax number be cancelled in December of last year. The sales tax number was cancelled in October, 2000." In estimating Petitioner's tax liability in January 2001, Mr. Rouco identified four areas: taxable sales, taxable purchases, taxable acquisition of fixed assets, and taxable rent. Mr. Rouco's estimates were $207,900 for uncollected taxes on sales, $6270 for unpaid taxes on purchases of items other than fixed assets, $6840 for unpaid taxes on fixed assets, and $6600 for unpaid taxes on warehouse rent. Without much explanation, Mr. Rouco selected a "small construction company" as the source of gross monthly sales of $63,000, as well as other relevant business activity. However, this choice produces $3.465 million of gross sales during the Audit Period, which is almost three times Mr. Bell's estimate. Factually, the record offers scant support for Mr. Rouco's selection of the "small construction company" as a comparable to Petitioner's business. Petitioner's business was not construction; it purchased already-fabricated fences and installed them. Coupled with the problem with the comparable, the record does not support Mr. Rouco's estimate of Petitioner's tax due on purchase amounts of fixed assets, and Petitioner has proved that it does not owe additional taxes on such purchases. Petitioner's labor-intensive services, coupled with its itinerant nature during the Audit Period, suggest strongly few, if any, such purchases. Coupled with the problem with the comparable, the record does not support Mr. Rouco's estimate of Petitioner's tax due on warehouse rent, and Petitioner has proved that it does not owe additional taxes on such rent payments. The estimate concerning unpaid warehouse rent sales tax requires the presumption that Petitioner's several lessor's found some reason not to collect and remit sales tax based on the lease payments. Any dealer-like activities by Petitioner involving sales for resales would not impact its liability to pay this tax, so misuse of a dealer registration is unlikely here. Nor has Respondent suggested such widespread noncompliance with this component of the sales tax as to justify a presumption of noncompliance among Petitioner's lessors, even assuming that Mr. Rouco generated a gross rent that is factually supported by the record. Notwithstanding the problem with the comparable, the factual record supports Mr. Rouco's estimate of Petitioner's tax due on purchases of items other than fixed assets, and Petitioner has failed to prove that it does not owe additional taxes on such purchases. For much, if not all, of the Audit Period, Petitioner appears to have been a registered dealer. Mr. Bell's unprofessional handling of this matter while Mr. Rouco attempted to perform a routine audit inspires little confidence that Mr. Bell would not misuse a dealer registration and resale certificate. Thus, although the use of the "small construction company" as a comparable is questionable, there is factual support for the assessment of $6270 in unpaid taxes on these purchases over the Audit Period. As noted below, the main problem with Mr. Rouco's estimate of Petitioner's tax due on sales to consumers is legal, not factual. As for the main factual aspect of this issue, the record offers no support that Petitioner sold to consumers using a retail sale plus installation contract, as opposed to a simple lump sum contract. Nothing in Petitioner's operation, as reflected on this record, suggests that it would be more inclined to use the more sophisticated contract.
Recommendation It is RECOMMENDED that Department enter a final order adjusting the assessment against Petitioner to reflect unpaid sales tax of $6270, a penalty of $3135, and interest at the lawful rate. DONE AND ENTERED this 26th day of February, 2002, in Tallahassee, Leon County, Florida. ROBERT E. MEALE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 26th day of February, 2002. COPIES FURNISHED: James Zingale, Executive Director Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100 Bruce Hoffman, General Counsel Department of Revenue 204 Carlton Building Tallahassee, Florida 32399-0100 Gary J. Bell, Qualified Representative Bell & Son Fence Company, Inc. 6600 Northwest 27th Avenue Miami, Florida 33147 John Mica, Assistant Attorney General Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050
The Issue The issue is whether Petitioner, Christopher B. Scott, as the managing member of PNC, LLC (PNC), is personally liable for a penalty equal to twice the total amount of the sales and use tax owed by PNC to the State of Florida.1/
Findings Of Fact The Department is the state agency charged with administering and enforcing the laws related to the imposition and collection of sales and use taxes. PNC is a now-dissolved Florida limited liability company that did business under the name "CHEAP" at 309 South Howard Avenue, Tampa, Florida. PNC was registered as a business and filed its Articles of Organization with the Secretary of State on June 16, 2010. Until the company was dissolved by the Secretary of State in 2018 for failure to pay the 2017 annual filing fees, Mr. Scott served as its managing member and had administrative control over the collection and payment of taxes. Verna Bartlett was PNC's controller. PNC was registered with the Department as a dealer pursuant to section 212.18, Florida Statutes, and was issued Sales and Use Tax Certificate of Registration 39-8015401140-8. A certificate of registration requires the taxpayer to file sales and use tax returns and pay to the Department all taxes owed as they are received. After making numerous attempts to collect delinquent sales tax owed by PNC for tax reporting periods in 2013 and 2014, the Department filed this action seeking to impose a personal penalty assessment against Mr. Scott, the managing member of the company. Section 213.29, Florida Statutes, provides that any person who has administrative control over the collection and payment of taxes and who willfully fails to pay the tax or evades the payment of the tax shall be liable to a penalty equal to twice the amount of tax not paid. The penalty is based only on the taxes owed, and not the interest and fees that have accrued. The statute provides that if the business liability is fully paid, the personal liability assessment will be considered satisfied. On January 18, 2018, the Department issued a NAPL against Mr. Scott after PNC failed to pay the sales and use taxes owed the State for the reporting periods from February 2013 through October 2014. The outstanding taxes, exclusive of interest or penalties, total $79,325.75. The NAPL imposes a total penalty of $158,647.50, or twice the amount of sales tax owed by PNC. No payments have been made on the account since the issuance of the NAPL, and, PNC, now closed, currently has a total liability in excess of $200,000.00. During the relevant time period, Mr. Scott was personally responsible for collecting PNC's sales tax and remitting it to the Department; he had the authority to sign checks on behalf of PNC; he made financial decisions as to which creditors should be paid; he made the decision to use the sales tax collected for the business and for stipulation payments; and he made the decision not to remit the sales tax that was collected. This was confirmed by PNC's controller, Ms. Bartlett, who responded to the Department's Requests for Admissions. Mr. Scott also confirmed to a Department tax specialist that the admissions provided by Ms. Bartlett were accurate. Mr. Scott either never remitted payment or did not remit payment timely on behalf of PNC for the following reporting periods: February, April, and December 2013, and January through October 2014. Tax warrants were issued and judgment liens were recorded for the following reporting periods: February, April, and December 2013, and January, February, and April through October 2014. Resp. Ex. 5 and 6. All warrants and liens relate to reporting periods that fall within the personal liability assessment period. A Notice of Jeopardy Finding and Notice of Final Assessment (Notice of Jeopardy) dated June 18, 2014, was issued to PNC pertaining to the April 2014 reporting period. Resp. Ex. This notice was issued after Mr. Scott ceased making regular tax payments, the estimated deficiency was substantial, and the Department determined that collection of the tax would be jeopardized by further delay. A Notice of Jeopardy and Notice of Final Assessment dated August 7, 2014, also was issued to PNC pertaining to the April, May, and June 2014 reporting periods. Resp. Ex. 12. Because PNC reported more than $20,000.00 in sales tax each year, unless a waiver was obtained, Mr. Scott was required to file and pay PNC's sales tax electronically for all reporting periods within the personal liability period. See § 213.755(1), Fla. Stat.; Fla. Admin. Code R. 12-24.003. Despite having obtained no waiver, Mr. Scott never filed returns or paid PNC's sales tax electronically. And even though he never remitted a payment electronically, Mr. Scott indicated on at least six sales tax returns during the relevant time period that sales tax for the reporting period was remitted electronically. The only conclusion to draw from this action is that Mr. Scott filed or directed the filing of these returns knowing them to be false. The record shows that, dating back to 2011, Mr. Scott has a long-standing history of failing to abide by the tax laws of the state as it relates to PNC. For example, on September 15, 2011, Mr. Scott was referred for criminal investigation by the state attorney for his failure to pay taxes. Also, numerous returns were filed without a payment. This is prima facie evidence of conversion of the money due. § 212.14(3), Fla. Stat. Respondent's Exhibit 1 summarizes numerous contacts by the Department's Tampa District Office with Mr. Scott regarding collection notices, telephone calls, emails, assessment letters, warrant letters, and the like in an effort to secure compliance with tax laws. It is fair to find that Mr. Scott willfully attempted to evade or avoid paying sales and reemployment taxes during the relevant period. To prevent its Sales and Use Tax Certificate of Registration from being revoked, PNC entered into a compliance agreement on July 10, 2013, to pay past due sales tax and reemployment tax totaling $65,789.25. The agreement required PNC to: (a) accurately complete all past due tax returns and reports no later than July 10, 2013; (b) remit all past due payments in accordance with the attached schedule, which required 11 monthly payments of $4,000.00 beginning on August 10, 2013, and a final balloon payment on July 10, 2014; (c) accurately complete and file all required tax returns and reports for the next 12 months; and (d) timely remit all taxes due for the next 12 months. A $15,000.00 down payment also was required to be paid on or before July 10, 2013. An addendum to the agreement (added by Mr. Scott) provided that "[a]ll payments, including the $15,000.00 down payment, shall first be applied to Sales and Use Tax." Although the down payment was made timely, the agreement was breached the first month (August) because Mr. Scott did not make the payment electronically. However, the agreement was not voided by the Department until October 12, 2013. Therefore, any payments made on or after October 12, 2013, were not considered compliance payments and are not subject to the addendum in the agreement. A somewhat confusing aspect of this dispute concerns Mr. Scott's contention, by way of cross-examination, that contrary to the addendum, the Department incorrectly applied his $15,000.00 down payment and subsequent compliance payments to the reemployment tax account, rather than the sales tax account, and that his sales tax liability should be reduced by that amount. As noted above, the addendum governs only the payments that predate October 12, 2013, which are the down payment ($15,000.00) and the August and September payments -- $4,000.00 each month. This issue was not raised by Mr. Scott until the Department issued a NAPL on April 13, 2017. The NAPL issued on April 13, 2017, indicated that the outstanding tax owed by PNC through October 31, 2014, was $90,808.17, and the personal assessment was twice that amount. In response to Mr. Scott's request, the Department acknowledged that it incorrectly applied the down payment to the reemployment account. Also, it took a second look at the two payments made in August and September, which predate the voiding of the agreement. The August installment payment consisted of two separate checks: $3,390.00 for sales tax and $610.00 for reemployment tax, and these amounts were applied in that manner. The September payment, $4,000.00, submitted in one check, was applied in the same manner as the August payment, with $610.00 going to the reemployment tax and the remainder to sales tax. Therefore, only $1,220.00 was incorrectly applied to the reemployment tax during those two months. On July 3, 2017, the Department reapplied a total of $16,551.00 from the reemployment tax account to the sales tax account for the relevant reporting periods. Mr. Scott contends the reapplication of the $16,551.00 to sales tax should reduce the amount of sales tax due by that amount. However, section 213.75(2) dictates that if a lien or warrant has been filed against the taxpayer, as is true here, the payment shall be applied in a priority order spelled out in the statute. Thus, the Department applied that amount in the following order: against the costs to record the liens against PNC; against the administration collection processing fee, if any; against any accrued interest; against any accrued penalty; and against any tax due. Under this priority order, the penalty/interest/fees categories totaled $5,066.58, while the tax liability category totaled $11,484.42. A detailed breakdown of this allocation is found in Respondent's Exhibit 29. Therefore, the total tax liability on the 2017 NAPL ($90,808.17) is reduced by $11,484.42, resulting in a total tax liability of $79,323.75, as shown on the updated 2018 NAPL. In the same vein, in his PRO, Mr. Scott argues that he was not given credit for payments of $9,110.24, $2,688.53, $178.28, and $1,321.80, which reduce his sales tax liability to $66,024.90 and the personal assessment to $132,049.80. See Pet'r Ex. 10. However, all of these payments (some of which are bank levies) were made after the compliance agreement was voided and do not apply to the reporting periods in this case. By way of cross-examination, Mr. Scott also contends that he was never given an accounting of what PNC owes despite "multiple requests" for the same. The record shows otherwise. On April 13, 2017, the 2017 NAPL was mailed to Mr. Scott, along with a ZT09, a computer-generated form which lists, in detail, a taxpayer's outstanding taxes owed by reporting period. A second copy of a ZT09 was faxed to him the following day. In his May 3, 2017, letter protesting the 2017 NAPL, Mr. Scott alleges that payments were not applied properly. In response, the Department sent a fax to Mr. Scott on May 10, 2017, listing checks that were not honored by the bank and requesting information concerning which payments PNC contends were not applied properly. In his response on May 12, 2017, Mr. Scott did not provide the requested information. On January 17, 2018, the 2018 NAPL was mailed to Mr. Scott, along with a ZT09. Finally, on April 12, 2018, per Ms. Bartlett's request, the Department mailed a ZT09 with the outstanding amounts due. Finally, in its PRO, the Department points out that after the hearing ended, it discovered that it made an error, in Mr. Scott's favor, in calculating his sales tax liability for the relevant reporting periods. Had it correctly calculated the amount of payments made by PNC, the sales tax liability for the relevant period would be increased from $79,323.75 to $84,444.35, which in turn would increase the personal assessment. However, the Department consents to the lower tax and assessed penalty amount, as reflected on the 2018 NAPL.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order determining that Petitioner, Christopher B. Scott, is liable to the Department for a penalty of $158,647.50. DONE AND ENTERED this 22nd day of April, 2019, in Tallahassee, Leon County, Florida. S D. R. ALEXANDER Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 22nd day of April, 2019.
Findings Of Fact Structural Homes, Inc., the Petitioner, is in the business of constructing prefabricated, custom-built homes at its plant in Florida City, Florida. These homes are primarily sold to customers in the Florida Keys. The homes consist of a prefabricated steel frame, which Structural Homes purchases, constituting the skeleton of the house. The frame is modular and is delivered, generally, a minimum of two modules, or sections, for the typical home because of building code requirements related to minimum square footage, which necessitates using two frame units to build a legally minimal size house. The frames are delivered from the supplier to the Structural Homes' plant in Florida City, where employees of Structural Homes' plant in Florida City, house around the skeleton consisting of adding frame walls, paneling, exterior siding walls, plumbing and flooring. The customer is given the opportunity during the assembly or construction of the home to select all tile, carpeting and other floor covering materials. The work at the job site, before construction of the home, consists primarily of only digging and installing the foundation, including anchor bolts for anchoring the house upon when it is delivered to the job site. The homes are assembled at the plant and then moved to the lot for bolting down to the foundation. One module or unit of such a house requires one trip by truck to deliver to the job site. Thus, there must be at least two trips to deliver the two units used to construct a house of the minimal 750 square foot size. Thus, the house is assembled almost solely at the Petitioner's plant and delivered in several trips to the job sited and bolted down. Although many more trips are necessary from the Petitioner's facility to the job site that involve various items of finish labor and construction, for all intents and purposes the house is, to a great degree, assembled at the plant and then delivered to the job site. At the job site, the house is bolted down to its foundation, carpet or other finish floor covering is put in and the plumbing, which was "roughed in" or "stubbed in" at the foundation at the job site, is connected with plumbing already installed in the house modules at the Petitioner's plant. In effect then, the only work done at the job site is foundation preparation, site erection of the completed modules, and connection of utility services, which are done at the lot. Pursuant to the Department's audit, it was determined that the bulk of the assessment, $8,389.49, including penalties and interest, related to tax on the fabrication of the completed homes at the factory. There was also a tax assessed on rental of the plant building from the Petitioner's landlord in the amount of $533.19, including penalties and interest, as well as a use tax on purchases by the Petitioner of materials generally from out-of-state vendors where no tax was paid, which assessment originally amounted to $2,697.18. After negotiations between the parties, the Department ultimately issued its revised notice of assessment, which culminated in the instant administrative proceeding. The parties stipulated at the hearing that there were no disputed issues of material fact, but pursuant to agreement, elected to proceed formally before the undersigned anyway.
Recommendation Having considered the foregoing Findings of Fact and Conclusion of Law, and the evidence in the record, it is therefore RECOMMENDED: That a Final Order be entered upholding the tax assessment involved herein and that the subject taxes, penalties and interest are due. DONE and ORDERED this 1st day of August, 1983, in Tallahassee, 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 2nd day of August, 1983.
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 Based upon all of the evidence, the following findings of fact are determined: Background Petitioner, Gainesville Amateur Radio Society, Inc. (GARS or petitioner), a Florida non-profit corporation, was incorporated on December 31, 1975. Its stated purpose is to promote an interest in amateur radio operation. Among other things, GARS provides preparation for Federal Communication Commission licensing examinations, supports community activities with free communication services, and encourages public awareness of ham radio activities through the publication of a monthly newsletter called the GARS-MOUTH. Respondent, Department of Revenue (DOR), is charged with the responsibility of administering and implementing the Florida Revenue Act of 1949, as amended. It has the specific task of collecting sales taxes and enforcing the state tax code and rules. By law, certain transactions are exempt from the state sales and use tax. Among these are sales or lease transactions involving "scientific organizations." In order for an organization to be entitled to an exemption, it must make application with DOR for a consumer's certificate of exemption and demonstrate that it is a qualified scientific organization within the meaning of the law. Once the application is approved, the certificate entitles the holder to make tax exempt purchases that are otherwise taxable under Chapter 212, Florida Statutes. In the case of petitioner, a certificate would enable it to save a hundred or so dollars per year. Claiming that it was entitled to a certificate of exemption as a charitable organization, GARS filed an application with DOR on December 21, 1993. After having the application preliminarily disapproved by DOR on the ground it did not expend "in excess of 50.0 percent of the . . . organization's expenditures toward referenced charitable concerns, within (its) most recent fiscal year," a requirement imposed by DOR rule, GARS then amended its application to claim entitlement on the theory that it was a scientific organization. Although DOR never formally reviewed the amended application, it takes the position that GARS still does not qualify for a certificate under this new theory. Is GARS a Scientific Organization? Under Section 212.08(7)(o)2.c., Florida Statutes, a scientific organization is defined in relevant part as an organization which holds a current exemption from the federal income tax under section 501(c)(3) of the Internal Revenue Code. A DOR rule tracks this statute almost verbatim. Accordingly, as a matter of practice, in interpreting this statutory exemption, DOR simply defers to the final determination of the Internal Revenue Service (IRS). If the IRS grants an organization a 501(c)(3) status based on the determination that it is a scientific organization, then DOR accepts this determination at face value. DOR does not make an independent determination whether the organization is "scientific" or question the decision of the IRS. This statutory interpretation is a reasonable one and was not shown to be erroneous or impermissible. GARS received a federal income tax exemption from the IRS regional office in Atlanta, Georgia by letter dated August 12, 1993. The record shows that GARS was granted an "exempt organization" status as a "charitable organization" and as an "educational organization" under Treasury Regulation Section 1.501(c)(3). However, GARS did not receive an exempt status as a "scientific organization" nor did the IRS make that determination. Therefore, GARS does not qualify as a scientific organization within the meaning of the law. While petitioner submitted evidence to show that it engages in what it considers to be a number of scientific endeavors, these activities, while laudable, are irrelevant under Florida law in making a determination as to whether GARS qualifies for a sales tax exemption as a scientific organization. Therefore, the application must be denied.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent enter a final order denying petitioner's application for a consumer certificate of exemption. DONE AND ENTERED this 23rd day of June, 1995, in Tallahassee, 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 23rd day of June, 1995. APPENDIX TO RECOMMENDED ORDER, CASE NO. 94-1200 Petitioner: 1-2. Partially accepted in finding of fact 4. 3. Partially accepted in finding of fact 6. 4. Partially accepted in finding of fact 1. 5. Rejected as being irrelevant. 6. Rejected as being unnecessary. 7. Partially accepted in finding of fact 5. 8-9. Partially accepted in finding of fact 7. 10. Partially accepted in finding of fact 5. 11. Partially accepted in finding of fact 7. 12. Partially accepted in finding of fact 6. 13. Rejected as being unnecessary. 14. Partially accepted in finding of fact 6. Respondent: 1. Partially accepted in finding of fact 1. 2. Partially accepted in finding of fact 2. 3. Rejected as being unnecessary. 4. Rejected as being cumulative. 5-12. Partially accepted in finding of fact 7. 13-14. Partially accepted in finding of fact 4. 15. Partially accepted in finding of fact 3. 16. Covered in preliminary statement. 17. Partially accepted in finding of fact 4. 18-19. Partially accepted in finding of fact 6. 20-21. Rejected as being unnecessary. 22. Partially accepted in finding of fact 5. 23-24. Partially accepted in finding of fact 6. Note - Where a proposed finding has been partially accepted, the remainder has been rejected as being irrelevant, unnecessary for a resolution of the issues, not supported by the evidence, cumulative, subordinate, or a conclusion of law. COPIES FURNISHED: Mr. Larry Fuchs Executive Director Department of Revenue 104 Carlton Building Tallahassee, FL 32399-0100 Linda Lettera, Esquire General Counsel Department of Revenue 204 Carlton Building Tallahassee, FL 32399-0100 Sidney Schmukler, Esquire 3922 N. W. 20th Lane Gainesville, Florida 32605-3565 Olivia P. Klein, Esquire Department of Legal Affairs The Capitol-Tax Section Tallahassee, Florida 32399-1050
