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
Findings Of Fact On 22 July 1977 James R. Rivers contracted to sell to John R. Hutchinson, Joan Hutchinson, Adrian Maxwell and Bugs Bunny Marina, Inc., the 65 foot F/V Bugs Bunny II for $113,323.29. (Exhibit 1). The price was comprised of a deposit of $1,500 upon acceptance of the contract, $13,500 at closing and purchasers to assume existing mortgage on the boat of approximately $98,323.29 held by Sun Bank of Volusia County. In addition to the $1,500 down payment, two additional payments were made to Rivers in the amounts of $500 and $14,276.75. No evidence was presented that these payments included, or did not include, payments other than were due pursuant to the contract. (Exhibit 1). This agreement to purchase was executed by the buyers in New York while the Bugs Bunny II was in Florida at the time the contract was executed, and it has remailed in Florida since that time. The Bugs Bunny II has been used as a charter fishing boat and for commercial fishing both before and after its acquisition by Petitioner. It is registered by the U.S. Government and has been issued U.S. Coast Guard official No. 549866. The parties stipulated that at closing, Rivers was not a registered dealer in Florida. At closing, title to the Bugs Bunny II was taken in the name of Bugs Bunny Marina, Inc. a New York Corporation, registered to do business in New York. By Assumption Agreement and Release the purchasers, jointly and severally, assumed and agreed to pay the mortgage indebtedness which as of June 23, 1977, was $98,323.29 and Rivers was released from further liability. No sale or use tax was collected by seller or paid by the buyers for this transaction.
Findings Of Fact Based upon all of the evidence, the following findings of fact are determined. Background Petitioner, Gator Coin Machine Company, Inc. (petitioner or Gator), is a Florida corporation engaged in the vending machine business throughout the northern part of the State extending from Leon County eastward to Duval County. Gator places coin-operated cigarette vending machines in various business locations, such as lounges, package stores, motels and restaurants. In return for allowing the machines to be placed on the premises, the location owner receives a fee for each pack of cigarettes sold from the machine. This fee is paid to the location owner and is considered a commission or rent for allowing Gator to "lease" the real property on which the machines are placed. All such commissions are subject to the sales tax, which rate may vary depending on the sales tax rate in a particular county. The sales tax is included with the commission (rent) paid to the location owner, and the location owner then has the obligation of remitting the tax to the state. However, the burden of showing that the tax has been paid to the location owner rests upon the vending machine owner. Respondent, Department of Revenue (DOR), is the state agency charged with the responsibility of enforcing the Florida Revenue Act of 1949, as amended. Among other things, DOR performs audits on taxpayers to insure that all taxes due have been correctly paid. To this end, in 1990 a routine audit was performed on Gator covering the audit period from June 1, 1985, through April 30, 1989. After the results of the audit were obtained and an initial assessment made, on January 22, 1991, DOR issued a revised notice of intent to make sales and use tax audit changes wherein it proposed to assess Gator $35,561.67 in unpaid sales taxes, $8,887.82 in delinquent penalties, and $12,934.34 in accrued interest on the unpaid taxes through the date of the revised notice, or a total of $57,383.83. The unpaid taxes related to taxes allegedly due on commissions paid to location owners during the audit period and were assessed against Gator on the grounds the taxpayer had not separately stated the tax on its evidence of sale and failed to provide internal documentation to verify that the taxes had actually been paid. On April 19, 1991, a third revision of the proposed assessment was issued which decreased slightly the unpaid taxes and corresponding penalties but increased the size of the assessment to $57,945.10 due to the continuing accrual of interest. On July 1, 1991, Gator was offered the opportunity to informally contest the assessment. A letter of protest was filed on July 29, 1991, wherein Gator generally contended that (a) its records conformed with the industry practice and that an adequate audit trail existed to substantiate the payment of taxes, and (b) the responsibility for payment of the taxes ultimately rested with the location owner rather than Gator. On February 10, 1992, DOR issued its notice of decision rejecting Gator's position but offering to reduce the penalty on the unpaid sales taxes to 5%. At the same time, and although Gator had not challenged the auditor's method of computing the amount of sales tax, DOR upheld the auditor's determination on that point. After a petition for reconsideration was filed by Gator on March 10, 1992, in which Gator raised for the first time a claim that it was due a refund of $11,015 for overpayment of taxes on cigarette sales during the audit period, DOR issued its notice of reconsideration on June 12, 1992, denying the petition and offering Gator a point of entry on these issues. Such a request was timely filed and this proceeding ensued. The Tax The tax for which petitioner has been assessed became effective on July 1, 1986, and is found in Section 212.031, Florida Statutes. On an undisclosed date, DOR mailed each vending machine company in the state a flier which summarized the new changes in the tax law. The flier noted that the sales tax would be levied on each "license to use or occupy property" and specifically included "an agreement by the owner of real property granting one permission to install and maintain full-service coin-operated vending machines on the premises." Because the vending machine owner is considered to have been granted a license to use the real property of the location owner, the fee (rent) paid by the vending machine owner to the location owner was thus subject to the new sales tax. The notice further provided that the tax "must be collected by the person granting the privilege to use or occupy any real property from the person paying the license fee and is due and payable at the time of receipt." This flier constituted the only notice by DOR concerning the imposition of the new tax. There was no notice to the vending machine owners that they must separately state the sales tax from the commission when paying the commission to the location owner. This was because the flier's main purpose was to put the taxpayers on notice that they were subject to the new tax. Sometime after the tax became effective, DOR developed a rule to implement the new law. Specifically, it amended Rule 12A-1.044, Florida Adminstrative Code, to provide guidance to taxpayers in the coin-operated industry as to who had the taxpaying and collecting responsibility. However, the rule simply stated that the owner of the vending machine was responsible for paying the tax on the rental fee paid to the location owner and did not state how this payment was to be documented or recorded by the lessee. In the absence of any guidance from DOR, the Florida Amusement Association, of which Gator is a member, held meetings around the state to inform the members of their responsibilities under the new law. One method thought to be acceptable to establish payment of the sales tax was to keep internal documentation as to commission rate and tax paid to the various locations. As will be discussed hereinafter, Gator and other vending machine owners began following this practice. On May 11, 1992, or three years after the audit period had ended, and almost six years after the imposition of the tax, DOR adopted an amendment to rule 12A-1.044(10) to provide that "the tax must be separately stated from the amount of the lease or license payment." This constituted the first notice to vending machine owners that they were required to state separately on the check remitted to their locations each month the commission plus tax. It should also be noted that DOR has never specified the exact type of documentation required by this rule or the format in which the information should be submitted. The Industry Practice Petitioner is one of many coin-operated vending machine companies doing business in the state of Florida. The evidence shows that of some twenty representative companies doing business in the state, including Gator, all operate in the same manner. Generally, the vending machine owner has a low investment in equipment which is easily relocated from one place of business to another. Because it is not unusual for the businesses in which equipment is placed to frequently change ownership, and often times the location owner can shop around and obtain a better commission from another vending machine company, it is fairly common to have machines placed in a location for as few as six or seven months. Therefore, it is a common practice in the industry to do business on a handshake and without a formal written agreement. In other words, the agreement to allow the machines to be placed on the premises and the amount of commission (rent) to be paid for leasing that space is based largely on a handshake between the two owners. This accounts in part for the lack of documentation such as a charge ticket, sales slip or invoice between the two owners concerning the amount of sales tax associated with the rent since such documents or evidence of sale are not practicable. The lack of documentation is also attributable to the fact that until May 1992 DOR never advised the vending machine companies that some type of "evidence of sale" was needed. In determining the commission rate to be paid to the various locations, the vending machine owner must first ascertain what the market will bear in terms of selling a pack of cigarettes in the machine. After calculating his overhead, the vending machine owner then bargains with the location owner as to how much of the remaining difference between the cost of cigarettes and overhead and the selling price should be paid to the location owner. This amount of money agreed upon by the vending machine and location owners, and expressed in a per pack rate, is commonly known as the commission expense and includes the total sum of rent plus sales tax. For example, if the total commission is twenty cents per pack of cigarettes sold from each machine, the rent would be approximately 18.2 cents while the sales tax would make up the remainder of that amount. All vending machine owners, including Gator, made it explicitly clear to the location owner that the commission check was tax inclusive. During the audit period, it was standard industry practice for the vending machine owner to write a tax inclusive check to the location owner each month. In other words, a check for the amount due the location owner, including rent and tax, is paid to the location owner each month without any notation on the check as to what portion represents the rent and what portion represents the tax. In the case of Gator, its checks carried only the stamped notation "CIG- COM", which represented the words "cigarette commissions." The record shows that except for one small company with relatively few clients, all representative vending machine companies operated in this manner. Gator's Recordkeeping Like other vending machine companies, Gator's records consisted only of hand-written records on index cards. Indeed, Gator kept no computerized records at the time of the audit. More specifically, all calcuations as to taxes owed, the price of cigarettes, tax calculated on cigarettes vended through any given machine, and any additional information pertaining to the individual machines were kept on 8 x 10 white and pink index cards. These cards were commonly referred to as location cards and were updated each time the machine was moved from one location to another and when the price of cigarettes was changed. At the time of the audit, more than 99% of the original white and pink cards from the sample time period requested by the auditor were available for her inspection. The only documentation existing between the location and vending machine owners was the machine or route ticket, which is no different than merchandising tickets showing the number of units sold. This document reflected the amount of packs sold and the amount of money received from each machine but did not contain a separation of commission plus tax. This information was used by Gator to determine the number of packs sold from each machine during the month. The number of packs was then multiplied by the "rate" for that machine to ascertain the commission due the location owner. Although route tickets were contemporaneously prepared by a route (service) man, they were discarded before the audit began. This is probably because in a prior audit conducted in 1983 or 1984 DOR auditors expressed no interest in reviewing the route tickets. In any event, the route tickets are not essential to a resolution of the issues. A pink card was generated by Gator for each machine placed in a lessor's place of business. The card contained information, all written in pencil and amended as necessary, regarding inventory, location of machine, selling price of cigarettes, the negotiated commission rate to be paid to the location owner, and the tax computed on the license fee. The latter item was recorded in the top right hand side of the index card and, when coupled with the independent accounting firm's representation as to the integrity of the accounting system, provides reliable evidence that the commission paid to the location owner was tax inclusive. For example, petitioner's exhibit 2 received in evidence, which contains representative pink cards, reveals that on November 7, 1986, machine number 175 was installed at "River Walk Cruises #1" in Jacksonville and the location owner was thereafter paid a per pack commission of fourteen cents, of which 13.15 cents represented the rent while the remainder represented the sales tax. It is noted again that more than 99% of these cards from the sample period audited were available for inspection. A white card was also prepared for each machine and listed the number of packs sold, the per pack rate, and the amount paid to the location owner. However, it did not contain a breakdown between commission expense and the related tax. In addition, Gator maintained what was known as a monthly report, which was a summation and accumulation of sales information derived from the white cards. The report listed the rate and number of packs sold for each machine. Like the white card, the monthly report did not contain a breakdown between the rent and sales tax. Finally, journals and ledgers were prepared containing summaries of information taken from the machine cards. Expert testimony by two certified public accountants (CPAs) and a longtime industry representative established that petitioner's records (general accounting records, route tickets, location cards and ledgers) were in conformity with good accounting practice and the industry norm. If anything, Gator's records were more comprehensive than most other vending machine companies and satisfied the requirements of applicable rules and statutes. More specifically, by maintaining location cards which show the sales price per pack of cigarettes with a breakdown between the tax and rent, Gator's records were consistent with good accounting practices and the type of recordkeeping maintained by the industry. It was further established that the industry practice is to conduct business on a "tax inclusive" basis, that is, to issue checks without separately stating what portion of the amount is taxes. In addition, cancelled checks, bank statements, journals and ledgers were available to verify commissions paid to various locations. DOR did not challenge the accuracy of this supporting documentation and agreed, for example, that the month-end commission summaries tied into petitioner's journals and checks. Both financial experts concluded, and the undersigned so finds, that the records establish that the taxes were paid. During final hearing, and for the first time during the administrative hearing process, DOR challenged both the testimony of the experts and the reliability of petitioner's records on the ground the CPAs who testified were not present when the checks were written and thus had no personal knowledge that the checks were tax inclusive. However, the CPAs established the integrity of petitioner's recordkeeping and accounting system and the fact that the system used by Gator produces accurate information that can be relied upon by third party users. This was not credibly contradicted. It can be reasonably inferred from these facts that the hand-written notations on the pink cards concerning the sales tax computed on the license fee were accurate and that the corresponding checks paid to the location owners were tax inclusive. DOR also suggested that the penciled entries on the pink cards pertaining to the tax may have been prepared solely for purposes of this litigation and were not contemporaneous. For the reason stated above, this assertion is also rejected. It should be noted further that except for the allegations themselves, DOR did not challenge the authenticity of the records nor produce any evidence of circumstances that would show the records lacked trustworthiness. DOR further contended that because there was no written contract or other tangible evidence of sale between the two owners where the tax was separately stated, there was insufficient evidence to support petitioner's claim that the taxes were paid. Put another way, DOR contended that Gator needed not only internal documents (such as location cards) to verify the payment of taxes, it also needed documents submitted to the location owner reflecting the separation of tax and commission. However, prior to the 1992 amendment to rule 12A-1.044(10), there was no formal or informal requirement to do so nor had DOR given notice of such a need, and since the internal documentation confirms the payment of the taxes, no other evidence is required. Finally, the evidence shows that a vending machine company has never been considered a "dealer" within the meaning of Subsection 212.07(2), Florida Statutes, as asserted by DOR, and thus the requirement in that subsection that a dealer separately state the amount of tax on the evidence of sale is not applicable. Indeed, this interpretation of the statute is consistent with the language in Rule 12A-1.086, Florida Administrative Code, which characterizes the lessor (location owner) rather than the lessee as the dealer. Refund Issue Gator contends that using an error rate of two or three percent, a recomputation of its taxes paid during the audit period reveals that it is owed a refund of $11,015 occasioned by its bookkeeper incorrectly computing the tax due on the gross sales price of cigarettes rather than on the net price. Since the alleged overpayment of taxes occurred during the period from June 1, 1985, through April 30, 1989, the last alleged overpayment of taxes would have occurred shortly after April 30, 1989. Prior to March 10, 1992, when Gator filed its petition for reconsideration with DOR, Gator had not filed a request for a refund on DOR Form 26 (DR-26), which is the form on which refunds must be requested. In its petition for reconsideration, Gator noted that "a Petition for Refund will be filed in the immediate future if this has not previously been accomplished." As of the date of hearing, which was more than three years after the last alleged overpayment of taxes was made, no DR-26 had been filed. Therefore, the request for refund is deemed to be untimely.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent enter a final order granting the petition of Gator Coin Machine Company, Inc. and rescinding (withdrawing) the assessment set forth in the notice of reconsideration dated June 12, 1992, but denying petitioner's request for a refund of $11,015 for sales taxes allegedly overpaid during the audit period. DONE AND ENTERED this 19th day of March, 1993, in Tallahassee, Leon County, Florida. DONALD R. ALEXANDER Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 19th day of March, 1993. APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-4806 Petitioner: 1-2. Partially accepted in finding of fact 2. 3-6. Partially accepted in finding of fact 3. 7. Partially accepted in finding of fact 1. 8-9. Rejected as being unnecessary. 10. Partially accepted in finding of fact 17. 11. Partially accepted in finding of fact 15. 12-14. Rejected to the extent they are inconsistent with findings of fact 17 and 18. 15-17. Partially accepted in finding of fact 8. 18-20. Rejected as being irrelevant. 21-22. Rejected as being unnecessary. 23-24. Partially accepted in finding of fact 11. 25. Rejected as being unnecessary. 26. Partially accepted in findings of fact 13 and 14. 27. Partially accepted in finding of fact 14. 28-29. Partially accepted in finding of fact 17. 30-33. Partially accepted in finding of fact 4. 34-35. Partially accepted in finding of fact 5. 36. Partially accepted in finding of fact 15. 37. Rejected as being unnecessary. 38-39. Partially accepted in finding of fact 15. 40-41. Partially accepted in finding of fact 8. 42. Partially accepted in findings of fact 10 and 15. 43-45. Partially accepted in finding of fact 9. 46-49. Partially accepted in finding of fact 6. 50-51. Partially accepted in finding of fact 7. 52. Rejected as being unnecessary. 53-54. Partially accepted in finding of fact 10. 55-56. Partially accepted in finding of fact 7. Partially accepted in finding of fact 15. Rejected as being a conclusion of law. Rejected as being a conclusion of law. Partially accepted in finding of fact 15. 61-63. Rejected to the extent they are inconsistent with findings of fact 17 and 18. 64-65. Partially accepted in finding of fact 12. 66-68. Partially accepted in finding of fact 14. 69. Partially accepted in finding of fact 7. 70-75. Rejected as being unnecessary. Partially accepted in finding of fact 12. Rejected to the extent it is inconsistent with findings of fact 17 and 18. Partially accepted in finding of fact 15. 79-81. Partially accepted in finding of fact 16. 82. Partially accepted in findings of fact 13 and 14. 83-84. Partially accepted in finding of fact 12. Rejected to the extent it is inconsistent with findings of fact 17 and 18. Partially accepted in finding of fact 16. 87-88. Rejected to the extent they are inconsistent with findings of fact 17 and 18. Partially accepted in finding of fact 16. Partially accepted in finding of fact 17. Partially accepted in finding of fact 16. Rejected as being irrelevant since the collection of taxes from Jax Liquors occurred after the audit period. 93-95. Rejected as being unnecessary. Respondent: 1-2. Partially accepted in finding of fact 1. 3-4. Partially accepted in finding of fact 9. 5. Partially accepted in finding of fact 13. 6-8. Partially accepted in finding of fact 12. 9. Partially accepted in finding of fact 10. 10. Rejected as being unnecessary. 11a. Partially accepted in finding of fact 12. 11b. Partially accepted in findings of fact 10, 13 and 15. 11c. Partially accepted in finding of fact 14. 11d. Partially accepted in finding of fact 14. 12-15. Partially accepted in finding of fact 10. Note - Where a proposed finding has been partially accepted, the remainder has been rejected as being unnecessary, subordinate, irrelevant, not supported by the more credible and persuasive evidence, or a conclusion of law. COPIES FURNISHED: Linda Lettera, Esquire General Counsel Department of Revenue 204 Carlton Building Tallahassee, FL 32399-0100 Mr. Larry Fuchs Executive Director Department of Revenue 104 Carlton Building Tallahassee, FL 32399-0100 William A. Friedlander, Esquire Marie A. Mattox, Esquire 3045 Tower Court Tallahassee, FL 32303 Eric J. Taylor, Esquire Department of Legal Affairs The Capitol-Tax Section Tallahassee, FL 32399-1050
The Issue The issue to be resolved in this proceeding concerns whether the Petitioner is liable for sales tax, together with interest and penalties on the purported unpaid tax amount, as referenced in the assessment and the Respondent agency's notice of decision issued on October 18, 1994.
Findings Of Fact The Petitioner is the sole proprietor of a marina and restaurant business located in Pensacola Beach, Florida. The Respondent is an agency of the State of Florida charged with enforcing pertinent statutes and rules providing for the collection of sales and use taxes, as well as penalties and interest for tax amounts determined to be due and payable but not timely paid to the Department and the State of Florida. Included within the Department's regulatory authority over the assessment and collection of sales and use taxes is the authority to conduct audits of taxpayers to determine amounts of tax due and owing to the State, as well as whether such taxes have been timely and properly remitted and otherwise accounted for. The relevant audit period involved in this proceeding extended from October 1, 1987 through December 31, 1992. The Petitioner's marina and restaurant business operated during the audit period was operated on property owned by the Santa Rosa Island Authority (Authority) and the State of Florida Department of Natural Resources (now Department of Environmental Protection, DEP). The property was leased to the Petitioner for the purpose of operation of this business. The property leased by the Petitioner from the Authority consisted of certain land above the mean high water mark and five boat slips. These five boat slips will be referred to sometimes hereafter as the "Santa Rosa boat slips". During the audit period, the Petitioner operated the restaurant business on the property leased from the Authority and rented the five boat slips to various boating customers. The Petitioner also rented 70 other boat slips to customers during the audit period. These slips were built by the Petitioner in 1977 on submerged land which had been leased from the State of Florida, Department of Natural Resources, Bureau of Land Management. This property adjoined the property leased from the Authority. On November 16, 1992, the Department sent to the Petitioner a notice of intent to audit its books and records. As part of the audit, the Department requested that the Petitioner produce various records, including but not limited to, the Petitioner's federal tax returns, Florida corporation income tax returns, Florida sales and use tax returns, depreciation schedules, general ledgers, property records, cash receipts journals, cash disbursement journals, purchase journals, general journals, sales journals, sales invoices, shipping documents, purchase invoices, intangible property records, sales tax exemption certificates and lease agreements for the real or tangible property involved in the Petitioner's business. The Petitioner basically was able to provide few records to support his restaurant sales and boat slip rental receipts, except for Florida sales tax returns and federal income tax returns. There were no sales control documentation records, such as general ledgers and general journals provided to the Department's auditor for review, except for a cash register tape for the night of December 1, 1992, representing that night's restaurant gross receipts activity. The Petitioner's method of record keeping essentially consisted of his writing down the gross sales each evening from the cash register tapes, totaling those figures at the end of the month, and reporting this total on his Florida sales tax returns as the gross receipts from the restaurant business. However, the Petitioner did not keep the cash register tapes or maintain other documents to support the information reported to the Respondent on the monthly sales tax returns. The Petitioner reported as, "exempt income," the rental from the boat slips for the five Santa Rosa boat slips on the monthly sales tax returns filed with the Respondent. He did not report his monthly rental income from the remaining 70 boat slips on his sales tax returns filed with the Respondent. He did report a great deal more gross receipts on his federal income tax returns than on his Florida sales tax returns. The Department compared the Petitioner's federal income tax returns during the audit period with his Florida sales tax returns and determined that the gross receipts reported to the federal government were substantially larger than the gross receipts reported to the Department. It determined that the primary difference in the gross receipts was attributable to rental revenues from the boat slips, which were not accounted for by the Petitioner in his Florida monthly sales tax returns. The auditor determined that four percent of the recorded restaurant gross receipts were attributable to alcohol sales and 96 percent to food sales. The Department calculated the sales tax due on the undisclosed income through the audit, which represented gross receipts from the restaurant business and the boat-slip rental business, which was not reported by the Petitioner on his Florida sales tax returns. It calculated the sales tax due during the audit period on the rentals of the five boat slips, which were improperly listed as exempt sales on the Petitioner's monthly sales tax returns filed with the Respondent. It was also revealed that during the audit period, the Petitioner had sub-leased a portion of the Santa Rosa property to his former wife for $5,000.00 per year. The Department calculated that the Petitioner owed $300.00 in taxes based upon the sub-lease to his former wife. The Department additionally calculated that the Petitioner owed an additional $314.00 for use taxes, based upon non-exempt purchases of tangible personal property. The Department assessed the Petitioner's sales taxes based upon the estimated boat-slip rental receipts, although it did not assess the lease payments made by the Petitioner to the Authority or to the State of Florida, Department of Natural Resources. On February 12, 1993, the Department assessed the Petitioner a total of $71,308.30 for the audit period, representing $45,694.90 of sales tax due, $14,093.37 of interest due thereon, $11,041.36 of penalties, and $314.98 of use tax, together with $91.02 of interest due on use taxes unpaid, and $72.67 of penalties due thereon. Daily interest of $15.13 commencing on February 13, 1993 was also assessed. Additionally, on February 12, 1993, the Department assessed the Petitioner $1,060.97 for the audit period, including penalties and interest, for local government infrastructure surtax due. Daily interest of $.29, commencing on February 13, 1993, was assessed on that amount. The Petitioner, in essence, does not dispute the Department's calculation of the assessed amount. The Petitioner, rather, contends that he believes that he reported all income and paid all sales taxes which were due and that his certified public accountant failed to account properly for his gross receipts and income to the federal internal revenue service, without the Petitioner's knowledge, during the audit period. He maintains, therefore, that the method of calculation of the Department's tax assessment, based upon the difference between the gross receipts depicted on the federal income tax returns and on the sales tax returns filed with the Department, is inaccurate, apparently because of the CPA's errors. Additionally, the Petitioner maintains that he was of the belief that the boat-slip rentals were not taxable and reportable for sales tax purposes to the Department because he believes, citing Rule 12A-1.061(5)(a) and (b), Florida Administrative Code. He bases this view on his assertion that the persons residing in the boat slips were "95 percent" live-aboard-type tenants, residing on their boats and that, essentially, they treated their boats as beach homes or condominiums, etc., for purposes of that rule, by residing for longer periods than six months. He thus contends that the rental revenues from such residents were tax exempt. The Department, however, established through its auditor's testimony and the Department's Composite Exhibit 2, that the Petitioner's CPA, through information he generated, did not establish that the difference between the gross receipts reported to the internal revenue service on the federal tax returns and the gross receipts reported on the Florida sales tax returns was not taxable. The Petitioner's proof does not show the factual elements necessary to establish that the 75 boat slips meet the rule's standard for exempt revenues from non-taxable residences.
Recommendation Having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record and the candor and demeanor of the witnesses, it is, therefore RECOMMENDED that a Final Order be entered by the Respondent assessing the taxes, penalties, and accumulated interest in the above-found amounts. DONE AND ENTERED this 21st day of June, 1996, in Tallahassee, Florida. P. MICHAEL RUFF, 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 21st day of June, 1996. APPENDIX TO RECOMMENDED ORDER CASE NO. 94-7256 Petitioner's Proposed Findings of Fact Accepted. Accepted, based upon the Petitioner's testimony in this regard, but immaterial. 3-4. Rejected, as not established by preponderant evidence. The Petitioner did not show that all or even most of the tenants are on annual rentals and, moreover, if they were, the rule cited by the Petitioner himself requires that such lease agreements or contracts be written. The Petitioner has simply failed to establish that the boat-slip rental arrangements were exempt transactions. Rejected, as incorrect as a matter of law and as immaterial and irrelevant. Rejected, as immaterial and irrelevant to the issues in this proceeding. Rejected, as subordinate to the Hearing Officer's findings of fact on this subject matter and as not probative by a preponderance of evidence that the assessment is incorrect. Rejected, as immaterial to the issues in this proceeding. The Department is not seeking to establish fraudulent intent. 9-27. These constitute argument and enunciation of the Petitioner's and the Respondent's perceived legal positions, and attempted equitable arguments concerning justification for the Petitioner's lack of relevant records, including a description of his financial difficulties related to destruction of his business by fire and by two hurricanes. While this is understandable and regrettable, these arguments and positions asserted by the Petitioner are immaterial and irrelevant to the issues in this case. Respondent's Proposed Findings of Fact 1-26. Accepted. COPIES FURNISHED: Richard E. Wells 715 Pensacola Beach Boulevard Post Office Box 505 Pensacola Beach, FL 32562-0505 Jarrell L. Murchison, Esquire Office of the Attorney General The Capitol - Tax Section Tallahassee, FL 32399-1050 Linda Lettera, General Counsel Department of Revenue 204 Carlton Building Tallahassee, FL 32399-0100 Larry Fuchs, Executive Director Department of Revenue 104 Carlton Building Tallahassee, FL 32399-0100
The Issue The issue for determination is whether Petitioner owes unpaid sales and use tax, interest, and penalties for the period of February 1, 1994 through June 30, 1998.
Findings Of Fact Based on the oral and documentary evidence presented at the final hearing and on the entire record of this proceeding, the following findings are made. Petitioner, Macfarlane, Ferguson, & McMullen, P.A., ("Macfarlane"), is a law firm located in Tampa, Florida. In May 1993, Macfarlane entered into a Copy Control Services Agreement ("1993 Contract") with Copy Control Center ("CCC"). The 1993 Contract, which was effective for three years, called for CCC to provide copying services within the physical confines of the MacFarlane law firm. CCC provided the personnel and MacFarlane provided the equipment and space for copying. The 1993 Contract called for a flat rate charge to Macfarlane. This stated flat rate charge covered a maximum number of copies each month. Pursuant to the terms of the 1993 Contract, so long as MacFarlane did not make more than 160,000 copies per month, it was charged a flat rate of $10,000 per month. Additional copy-related work over the flat rate charge for the maximum of 160,000 copies was at additional cost. An appendix to the 1993 Contract set forth the additional costs not covered by the flat monthly fee. If no copies were made under the contract, the base fee of the $10,000 would still have to be paid by Macfarlane. Paragraph 4 of the 1993 Contract required CCC to bill Macfarlane "monthly for the preceding month's copies." That paragraph of the 1993 Contract also provides that, "[i]ncluded with the invoice will be a detailed monthly usage report." The invoices issued under the 1993 Contract listed all costs for the month or preceding month. At the bottom of each invoice, CCC listed a total "sale amount" which consisted of the total of the copying facilities management charge and the additional charges. Between May 1993 and January 1994, Macfarlane paid sales tax on the total amount invoiced under the 1993 Contract (i.e. for all goods (copies) and services). In 1993 and 1994, the Department audited CCC. The audit was conducted by Elizabeth Sanchez, an auditor employed by the Department. Based on the 1993 and 1994 audit of CCC, the Department, through its auditor, Ms. Sanchez, alleged that CCC was not properly collecting sales tax from its clients, such as Macfarlane. Specifically, Ms. Sanchez determined that CCC should not have been taxing the entire cost of the 1993 Contract since a portion of the contract was related to services. Instead, the auditor represented that CCC should only tax the direct materials for the photocopy process (paper, toner, developer, and other supplies). Ultimately, CCC was assessed $16,000 in back taxes because it failed to pay sales tax on direct materials. During the aforementioned audit of CCC, Ms. Sanchez developed a formula which CCC could use in charging sales and use taxes to its clients. The formula was discussed with CCC personnel. CCC believed that the formula devised by Ms. Sanchez required or allowed the allocation of tax between nontaxable services and taxable photocopy consumables. Based on its understanding of the formula, CCC quit taxing Macfarlane for the entire amount of the monthly invoices issued under the 1993 Contract. Rather, consistent with its understanding of what was allowed under Ms. Sanchez's formula, CCC modified its billing to allocate tax between what CCC considered to be the facilities management services rendered under the 1993 Contract and the photocopy consumables used under that contract. The Department does not dispute that Ms. Sanchez developed a formula during the 1993 and 1994 audit of CCC. In fact, in the Department's Response to Petitioner's Request for Admissions, the Department admits that "Ms. Sanchez did audit Copy Control Center . . . and did develop a formula during that audit." However, the Department contends that the formula developed by Ms. Sanchez has no basis in law and fact and her actions are contrary to Rule 12A-1.0161(7)(a), Florida Administrative Code. According to the Department, that Rule requires both a statement of the actual cost of the taxable sales and the nontaxable services and the separation of taxable sales from non-taxable services in a contract or invoice for the service to be untaxed. In 1996, Macfarlane executed a new Copy Control Services Agreement with CCC (the "1996 Contract"). The 1996 Contract, dated May 22, 1996, was in effect from May 1996 through April 30, 2000. The 1996 Contract contained similar terms and conditions as the 1993 Contract, including a flat-rate charge and a maximum number of copies before additional charges were imposed. The flat-rate charge in the 1996 contract was $10,200 and the maximum number of copies before additional charges were imposed increased to 170,000. Additional copy- related work over the flat rate charge was at additional cost. The additional costs not covered by the flat monthly fee were set forth in an appendix to the 1996 Contract. Paragraph 6 of the 1996 Contract was entitled "Invoices." That section provides in pertinent part the following: A summary invoice for all Customer Locations shall be sent by Copy Control to the bill-to address and contact person of the Customer set forth hereinbelow, on a monthly basis. The monthly minimum base charge will be invoiced on the first day of each month. Additional charges for copies in excess of target volume or additional services from the previous month will be included with this invoice. In addition, Copy Control specifically agrees to provide to such Customer contact person, on a monthly in arrears basis, a summary report of the C.C.M. [Copy Control Management] Services transaction activity at, (A) all Customer Locations; and, (B) the Copy Control back-up facility, if any ("Summary Report"). Each Summary Report will contain, at a minimum, the following information: The total volume of Copies rendered; The number of Copies rendered per Customer location; The number of Copies above the Targeted Copy Volume, if any, and total Excess Copy Charge therefor by Customer Location and Copy Control back-up facility; The volume of Copies and associated dollar amount rendered at Copy Control's back-up facility, if any; The number of Copies "short" of Targeted Copy Volume; Additional Supplies procured, if any; Amount of overtime paid, if any, for Copy Control Personnel and dates therefor; A description of the Related Services, if any provided by Copy Control and the charge(s) therefore, if any; (emphasis supplied) Consistent with the terms of the 1996 Contract, CCC rendered an invoice to Macfarlane each month during the term of the contract and during the remainder of the audit period covered by that contract. Each invoice listed charges for making copies and off-site copies and other copy-related work and/or materials and products. Under the line for "Copying Facilities Mgt. Billing" were the additional charges made according to the appendix to the contract. The following invoice, dated June 30, 1995, is representative of the monthly invoices issued by CCC to Macfarlane during the period covered by the Department's audit of Macfarlane. That invoice provides in material part the following: COPY CONTROL CENTER INVOICE NO. 131611 3907 W. Osborne Avenue Tampa, Florida 33614 SOLD TO: MacFarlane Ausley & et al 23rd Floor LeeAnn Conley 111 E. Madison Street Tampa, Florida 33602 INVOICE DATE 6/30/95 QYT. ORDERED 1 QTY. SHIPPED 1 ITEM NO. COPIES DESCRIPTION COPIES UNIT PRICE 10000.00 Copying Facilities Mgt.Billing for June 23913 23913 Copies Copies Overage 0.04 1 1 TAX Tax on CCM Material 106.39 1 1 Copies Off Site Services 349.36 1 1 TONER 90 TONER 174.25 9 9 STOCK 8 1/2 x 11 White Paper 2.85 SALE AMOUNT 11612.17 MISC. CHARGES 6.500% SALES TAX 35.70 FREIGHT TOTAL 11647.87 For all the invoices generated under the 1996 Contract, CCC taxed Macfarlane in accordance with its understanding of the formula devised and recommended by Ms. Sanchez. Based on application of this formula, Macfarlane was charged and remitted only sales tax for the consumable goods portion of the contract. During the audit period which is the subject of this proceeding, February 1, 1994 through June 30, 1998, the sales tax was either 6.5 percent or 7 percent, whichever was in effect at the time of the invoice. The sales tax listed on the invoices do not reflect tax on the total amount of the invoice. A multiplication of the total amount by either 6.5 or 7 percent reveals that the amount of sales taxes paid by Macfarlane for the audit period in question, February 1, 1994 through June 30, 1998, was only on a small portion of the total invoice billing. The 1993 Contract and the 1996 Contract between Macfarlane and CCC do not address, contain language, or speak directly to any "facilities management services." Neither do the contracts define the terms "service," "related services," or "other related services." Although the terms listed in paragraph 22 above are not defined in the 1993 Contract and the 1996 Contract, Mr. Cayo, the regional operations manager of Lanier Professional Services (LPS), formerly CCC, testified that other services included facilities management services. According to Mr. Cayo, "facilities management" at Macfarlane included making deliveries and rounds, key-oping equipment, filing, supporting, and cleaning and setting up conference rooms. Diane Garner, an employee of CCC, was assigned to work at Macfarlane during the time of the audit period which is the subject of this proceeding. Ms. Garner testified that facilities management services or other services provided by CCC included providing coffee service, sorting mail, sending and delivering faxes, sending and delivering Federal Express packages, moving boxes, ordering and delivering office supplies, and making interoffice mail runs. If the above-described facilities management services were provided, none of the invoices sent by CCC to Macfarlane separately listed any charges to Macfarlane for those services. Moreover, CCC did not separately list on its invoices to Macfarlane a charge for "mail delivery," "filing," "charge-back accounting," or "clerical services," or any other such services. If these services were deemed "related services," the provisions of the 1996 Contract quoted in paragraph 16 required that a description of such services be provided on the invoice or summary report. No description of the foregoing services appears on any of the invoices prepared by CCC and issued to Macfarlane. No other contracts existed between CCC and Macfarlane during the audit periods which reflect that the services described in paragraphs 23 and 24 above would be offered or provided by CCC to Macfarlane. The Department audited Macfarlane in 1999. The audit was conducted by Darlene Bebbington, an auditor with the Department. During this audit, contrary to the position of Ms. Sanchez during the aforementioned audit of CCC, the Department stated that Macfarlane was required to pay tax on the full amount of the invoices. This conclusion was reached by Ms. Bebbington based on the information contained on each invoice. The invoices did not itemize or otherwise separately list or detail products, materials, and/or services that were exempt from tax. To address issues raised by Ms. Bebbington during the audit, Macfarlane sought information from CCC regarding the sales tax amounts that were listed on the invoices. In response, CCC provided two letters to Macfarlane, one dated April 29, 1999, and the second one dated September 22, 1999. In the April 29, 1999, letter to Macfarlane, Mr. Cayo explained how the company handled the sales tax issue for Facilities Management customers and the rationale for doing so. Mr. Cayo stated that during the Department's audit of CCC, Ms. Sanchez indicated that "Facilities Management" was a service and it "was not subject to be taxed." In the letter, Mr. Cayo also stated that all equipment and material used in the performance of these services needed to be taxed, but not the total "Facilities Management" charge. The September 22, 1999, letter was from Andrew Schutte, Finance Manager of LPS, formerly CCC, to Macfarlane and was in response to a specific inquiry from Macfarlane. In that letter, Mr. Schutte stated that the two full-time CCC employees working at the Macfarlane office assigned 87 percent of their collective time performing various facilities management services and spent approximately 13 percent of their collective time making photocopies. However, the letter did not indicate how Mr. Schutte arrived at the quoted percentages or the time period for which those percentages applied. Based on CCC's claim that the formula devised by Ms. Sanchez was used to calculate the amount of sales tax it should charge Macfarlane, Ms. Bebbington pulled CCC's audit file from the Department's records. The Department contends that any agreement to use a formula such as the one described in paragraph 10, should have, by Department policy, been in writing, signed by the auditor and the supervisors, and placed in the audit file. However, upon a review of the Department's records, no such written agreement or documentation was in the CCC audit file. In light of the Department's admission noted in paragraph 13 above, Ms. Sanchez devised a formula which was shared with CCC, but she apparently did not include this formula or her discussions with CCC in the audit file. After Ms. Bebbington completed the audit of Macfarlane and based on the results thereof, the Department notified Macfarlane that it intended to impose additional sales and use tax, interest, and penalties. After the audit report was issued Macfarlane objected to the findings and requested that the Department reconsider the assessment. On or about April 10, 2001, the Department issued a Notice of Reconsideration ("Notice") based on Macfarlane's protest of the Department's audit findings for the period of February 1, 1994 through June 30, 1998. The Notice showed that Macfarlane owed additional sales and use tax of $35,958.27, a penalty of $17,979.37, and interest through April 6, 2000, of $16,701.32, and additional interest through April 12, 2000, of $3,606.12. The notice also indicated that interest would continue to accrue at $9.72 per day from April 12, 2001. According to the Notice, Macfarlane made a payment of $6,407.65 to the Department on April 6, 2000, leaving an unpaid balance of $67,837.43. Macfarlane asserts that it should not have to pay sales and use tax on the full amount of the invoice because a portion of that amount is for services that are exempt from sales and use tax. Contrary to this assertion, the auditor found that the invoices and other documentary evidence provided to the Department did not provide substantial competent evidence that any portion of the invoice amounts were attributable to products, materials, or services that were exempt from tax. Accordingly, based on the information provided by Macfarlane, the Department properly concluded that the total amount of each invoice was subject to sales and use tax. Because there is no substantial competent written documentation evidencing what tax exempt services were performed by CCC for Macfarlane and what specified portion of the monthly costs invoiced to Macfarlane were for those "claimed" tax exempt services, Macfarlane is liable for the entire amount on the invoices for the audit period. There is nothing in the record to indicate that Macfarlane did not timely pay the total amount of the invoices, including the amount attributable by CCC to sales and use tax. But for CCC's changing the manner in which it calculated the sales and use tax for its customers in early 1994, Macfarlane would have continued paying the tax on all goods and services as it did prior to January 1994.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that a final order be entered sustaining the assessment for sales and use tax against Petitioner, but compromising the entire interest and penalty amount. DONE AND ENTERED this 6th day of March, 2002, in Tallahassee, Leon County, Florida. CAROLYN S. HOLIFIELD 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 6th day of February, 2002. COPIES FURNISHED: James W. Goodwin, Esquire MacFarlane, Ferguson & McMullen, P.A. 400 North Tampa Street, Suite 2300 Tampa, Florida 33602 Bruce Hoffman, General Counsel Department of Revenue 204 Carlton Building Tallahassee, Florida 32399-0100 James Zingale, Executive Director Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100 Jarrell L. Murchison, Esquire Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050 Eric J. Taylor, Esquire Office of the Attorney General Department of Legal Affairs The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050 David Adams, Esquire Charles Moore, Esquire Macfarlane, Ferguson & McMullen, P.A. 400 North Tampa Street, Suite 2300 Tampa, Florida 33602
The Issue The issue is whether Petitioner owes additional sales and use tax, interest, and penalties, pursuant to a Notice of Proposed Assessment.
Findings Of Fact Ivan Soberal is the president and sole owner of Petitioner. Mr. Soberal started the business of Cycle Ivan's 12 years ago. At first, he operated as a sole proprietorship. He incorporated the business in 1997. This case commenced with Respondent's issuance of a Notice of Proposed Assessment dated October 23, 2002. The Notice of Proposed Assessment proposes the assessment of $26,917.69 in additional sales tax, $13,458.88 in penalty, and $9,417.61 in interest through October 23, 2002, for a total of $49,794.18. The notice warns: "If you choose to request either an administrative hearing or judicial proceeding, your request must be filed no later than FEBRUARY 20, 2003 or 60 days from the date the assessment becomes a Final Assessment." The notice adds: "The petition for an administrative hearing must be filed with the Department." Petitioner requested an administrative hearing by letter dated February 20, 2003, and received by, and filed with, Respondent on February 24, 2003. The audit period in this case is December 1, 1996, through November 30, 2001. During this time, Petitioner's business has been the sale and repair of motorcycles and scooters. Petitioner does not sell any new motorized vehicles with an engine displacement larger than 50 cc because doing so would require a dealer's license. Thus, most of the new motorized vehicles sold by Petitioner are small scooters manufactured in China or Japan. Petitioner sells used motorcycles on consignment. Over the years, Petitioner's business has transformed from primarily repairs to a greater emphasis on consignment sales to the present emphasis on part sales. This is an inadequate-records case. For the most part, the auditor used federal income tax returns and corporate income statements to calculate Petitioner's tax liability. The auditor had no cash register receipts, no journal entries, and limited bank statements (none for 1996, 1997, 1998, and 2001 and only two months in 1999 and three months in 2000). During the audit period, Petitioner used primarily repair orders to record sales of goods or services. After the audit period, Petitioner computerized its recordkeeping for inventory and sales, but, until then, the available records are extremely limited. Respondent's auditor tried to use samplings of Petitioner's invoices to determine any sales tax deficiencies, but the records were poorly maintained. Taking a sample over the first six months of 2000, the auditor was unable to find invoices totaling thousands of dollars, thus making it appear that Petitioner over-reported taxable sales during these months. Obviously, Petitioner did not over-report taxable sales, but instead had removed invoices from the records that it had provided the auditor. Recognizing the impossibility of reassembling Petitioner's actual taxable sales from its incomplete and nonexistent records, the auditor resorted to Petitioner's federal income tax returns and, for 2001, corporate income statements. By these means, Respondent's auditor determined Petitioner's gross sales, treated them entirely as taxable sales, and calculated the sales tax due on these gross sales. After having done so, the auditor subtracted the taxes actually remitted by Petitioner during the audit period, and the remainder is the sales tax deficiency in this case. Petitioner's basic claim is that many of its sales during the audit period are exempt. However, Petitioner's manner of calculating exempt sales during the audit period was no better than its recordkeeping. Each month, Petitioner subtracted its taxable sales, or what it deemed to be its taxable sales, from its bank deposits, and the remainder was its exempt sales. This method, of course, results in potentially vast overstatements of exempt sales. Petitioner lacks resale or consumer certificates of exemption to support its exemption claims. Mr. Soberal admitted at the hearing that he did not keep records of exempt sales. Exempt sales for Petitioner would also include parts sold to locations outside of the United States, but the nature of Petitioner's business suggests that this type of transaction would not produce significant sales. The only significant exemption in this case is service-only repairs, such as when parts are not required for the repair or the customer provides the parts. The best way of accounting for service-only repairs is to calculate them from the auditor's workpapers for the six months in early 2000 that he sampled. These workpapers identify which invoices are for service only and which invoices include parts, accessories, or other tangible personal property. After calculating the total of service-only repairs, it is possible to derive a fraction with the numerator being the total price of the service-only repairs and the denominator being the total sales reported by Petitioner, which, for each month, was higher than the total gross sales shown on the invoices that Petitioner produced for the auditor. Because this fraction is based on sales during the first half of 2000, which is relatively late in the audit period, it probably represents a fair allocation of service versus sales. As noted above, service transactions predominated early in the audit period, but sales transactions (first of vehicles and later of parts) predominated later in the audit period. Thus, the reduction of total gross sales for the entire audit period by this fraction generated the most reliable estimate of taxable sales during the audit period from available records and still does not reward Petitioner for its failure to maintain records. For January 2000, the service-only repairs total $1052.50 out of total reported sales of $8095.88. For February 2000, the service-only repairs total $1739.99 out of total reported sales of $10,311.55. For March 2000, the service-only repairs total $372.50 out of total reported sales of $11,654.93. For April 2000, the service-only repairs total $796.76 out of total reported sales of $8877.07. For June 2000, the service-only repairs total $595.50 out of total reported sales of $15,970.71. For July 2000, the service-only repairs total $409.95 out of total reported sales of $10,280.58. For these six months, service-only repairs total $4967.20 out of total reported sales of $65,190.72. The resulting reduction is 7.6 percent. Applying the reduction to the sales tax deficiency proposed in the Notice of Proposed Assessment, the resulting tax deficiency is reduced by $2045.74 to a new total of $24,871.95.
Recommendation It is RECOMMENDED that the Department of Revenue enter a final order dismissing Petitioner's protest as untimely and sustaining the total amount set forth in the Notice of Proposed Assessment dated October 23, 2002, or, in the alternative, reducing the additional sales tax due to $24,871.95 and recalculating the penalty and interest accordingly. DONE AND ENTERED this 14th day of November, 2003, in Tallahassee, Leon County, Florida. S 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 14th day of November, 2003. COPIES FURNISHED: James Zingale, Executive Director Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100 Bruce Hoffmann, General Counsel Department of Revenue 204 Carlton Building Tallahassee, Florida 32399-0100 George B. Grosheim Qualified Representative Accounting Services of South Florida. 1210 Southeast 5th Street Deerfield Beach, Florida 33441 Nicholas Bykowsky Assistant Attorney General Office of the Attorney General The Capitol--Tax Section Tallahassee, Florida 32399-1050
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 issues are: Whether Latin America Sales made unreported sales which became subject to sales tax because they went unreported? Are purchases of inventory by Latin America Sales from overseas vendors subject to state use tax while temporarily warehoused in Miami and before export? Are purchases of inventory of Latin America Sales subject to state use tax because of its failure to register as a dealer, although its purchases would be exempt had it registered?
Findings Of Fact The Assessments The Department of Revenue assessed sales and use tax against Latin America Sales International for the period February 1, 1985 to June 30, 1987, in the amount of $114,682.88, a penalty of $28,670.72, and interest of $19,704.39, for a total of $163,057.99. It also assessed sales and use tax against the taxpayer for the period July 1, 1987 to January 31, 1988, in the amount of $72,374.71, a penalty of $18,093.68, and interest of $4,655.37, for a total of $95,123.76. These taxes were assessed for three reasons, failure to pay sales tax, failure to pay use tax and failure to pay tax due on rentals of space used to store sewing machine inventory in Florida. Sales Tax Latin America Sales International, Inc., is a Florida Corporation organized in 1975 by Cuban immigrants Ricardo and Elsie Miranda. It was formed to avail itself of a benefit created by the Internal Revenue Code for companies which qualified as western hemisphere trading corporations. Under 26 U.S.C. Section 921, a substantial tax reduction was available to United States corporations which made at least 95% of their sales to buyers outside of the United States, and within the western hemisphere. Mr. and Mrs. Miranda and a Mr. Ricardo Gomez had been operating a business known as Richards Sewing Machines Company, which sold industrial sewing machines both domestically and in Central American countries such as Guatemala, El Salvador, the Dominican Republic, Haiti and in Jamaica. They bought the industrial sewing machines in Taiwan and Italy. To take advantage of the deduction available to a western hemisphere trading corporation, Mr. and Mrs. Miranda incorporated Latin America Sales International, Inc. (Latin America). On its federal corporate income tax returns which were prepared by its certified public accountant, Eugene Drascher, Latin America obtained a deduction for its activities as a western hemisphere trading corporation for its fiscal years ending October 31, 1976, 1977, 1978, 1979 and 1980. Ultimately, this federal deduction was phased out. Richards Sewing Machines had been registered properly with the Florida Department of Revenue as a dealer and a payor of sales and use taxes, but no similar registration was filed for Latin America when it was formed. Mr. Drascher advised Mr. and Mrs. Miranda that the sales by Latin America would be made outside the United States, and consequently Florida was not entitled to collect sales tax from the foreign buyer, and that Latin America was only involved in importing and exporting industrial sewing machine inventory for resale, so the corporation was not responsible to pay use tax to the State of Florida on those sewing machines in its inventory. In essence, the CPA advised Mr. and Mrs. Miranda that there were no reports concerning sales and use tax to be filed and no reportable sales or use tax due from Latin America. This advice about reports was erroneous, and the failure of Latin America to register as a dealer has serious financial consequences with respect to liability for use tax. To allow persons claiming to engage in tax exempt sales to file no returns or to avoid registration entirely would provide a means of tax evasion which could be easily abused. All vendors must register and file tax returns so the Department of Revenue will be aware the vendor is in business and so the Department can audit to verify claims that sales are made in a way which is tax exempt. Some accomodations are made for tax exempt export sales; for instance, vendors may apply to file their returns semi-annually or annually rather than monthly. After the tax deduction available to western hemisphere trading corporations was phased out, Mr. and Mrs. Miranda continued to use Latin America to make foreign sales because the corporation had made a name for itself in the export market. In essence, Latin America had built up good will with its foreign customers. Latin America continued to engage only in export sales; it made no domestic sales within the United States or the State of Florida, except sales to other exporters. On those few occasions, Latin America obtained an appropriate resale certificate from the buyer/exporter. Latin America never filed any returns with the Florida Department of Revenue with respect to its inventory purchased from overseas vendors in Taiwan or Italy. Even if exempt, these purchases should have been reported as property held for export on schedule B of an annual sales tax return, under a dealer registration number Latin America should have obtained. (Tr. 118) Latin America received shipments of containers of sewing machines at the Miami free port, but because rent there was so expensive, Latin America transferred the inventory to a warehouse in Miami, after a customs broker paid the applicable federal customs duties on behalf of Latin America. Latin America never registered as an exporter with the State of Florida. Latin America never filed any returns with respect to gross sales made of its inventory stored in Miami which it exported to customers in the Caribbean or Central America. These sales should have been reported to the Department of Revenue under a dealer registration number as exempt sales. (Tr. 118) Richards Sewing Machines Company, which handled domestic sales and which was appropriately registered with the Department of Revenue, made proper and timely filings of all Florida Department of Revenue sales tax returns, Forms DR-15. The Department of Revenue initially audited the sales tax payments of Richards Sewing Machines, and the results of that audit are not at issue here directly. The Mirandas maintained their invoices in alphabetical order by vendor, so that invoices for Richards Sewing Machines and Latin America were physically located in the same file cabinet, although it would be obvious to the Mirandas from the face of the invoice whether the sale was one made by Richards Sewing Machine (a domestic sale), or Latin America (an export sale).1 Similarly, a single journal was used by Ms. Miranda to record the dollar amount of sales by both corporations. Each entry contained the purchaser, the sale date, the invoice number, the total amount of the sale, and if tax were collected on that sale, the amount of tax. Mrs. Miranda then used that journal to file on Form DR-15 with the Department of Revenue the gross amount of sales, taxable sales, and remit the tax collected by Richards Sewing Machines. No such filings were made by Latin America because the Mirandas had been advised by their accountant that no sales tax was due on export sales and none had been collected. Actually, returns showing that all sales were exempt should have been filed. See, Finding 7, above. In performing the audit of Richards Sewing Machines, the Department's auditors used that corporation's United States Corporate Income Tax Return, IRS Form 1120, for the applicable years, and compared the gross sales reported on those forms to the federal government with the amount of gross sales Richards Sewing Machines had reported monthly to the State of Florida on its Florida Sales and Use Tax Form, Form DR-15. The gross sales shown on the federal returns, Form 1120, for Richards Sewing Machines were 7.49 million dollars over the three years of the audit (1984, 1985 and 1986). Over the same period, Richards Sewing Machines had shown gross sales on Florida Department of Revenue Forms DR-15 of 7.46 million dollars. There was a $33,000 discrepancy, amounting to less than 1/2 of one percent. The Department's auditor never found any evidence that any sales made by Latin America failed to have attached a resale certificate, or a bill of lading showing that the machinery or parts sold were shipped outside the United States (Tr. 45, 110-11, 126, 129-30). The actual invoices, resale certificates and bills of lading have been destroyed. After the completion of the audit on Richards Sewing Machines, the auditor told Mrs. Miranda there was no further need to keep those records, and relying on that advice, Mrs. Miranda disposed of the records (Tr. 84-5). The Department never contested that this advice was given to Mrs. Miranda. Due to the commingling of the invoices and the sales journal for Richards Sewing Machines and Latin America, the auditor for the Florida Department of Revenue decided to audit Latin America, and received authorization to do so. The auditor believed that the total sales tax owed by these two separate legal entities had been combined and reported together on one Florida Department of Revenue Form DR-15, but separate Federal Income Tax Returns, Form 1120, had been filed for each of the two companies. She believed that the total gross sales for both companies on the federal tax returns should have equalled the amount shown on the DR-15s filed with Florida by Richards Sewing Machines. The auditor then determined that a percentage of sales should be computed for each year in order to prorate the sales reported on the DR-15s for each company, Richards Sewing Machines and Latin America. The methodology used was that the total sales reported on the Federal Forms 1120 filed by Richard Sewing Machines and Latin America for each of their fiscal years was prorated to a calendar year, to derive a monthly average gross sales for each entity. (Richards and Latin America had different fiscal years). The average was then multiplied by the applicable number of months in each calendar year to arrive at the annual sales total for each company. The estimated sales for each company were then divided by the total sales for both companies to obtain the percentage of sales for each company. Latin America's percentage was then applied to the gross sales report of the monthly DR-15s to determine its estimated gross sales for each month. (Department Exhibit 1, Audit Report, Page 9.) The monthly average of gross sales derived from Latin America's IRS Form 1120, was compared with its estimated monthly gross sales reported on the DR-15. For each month Latin America reported higher gross sales based on its IRS form, the difference was treated as unreported Florida sales and taxed at 5%. There is no logical reason for the Department to have engaged in its proration calculations. There is no credible evidence that any sales by Latin America to its export customers were subject to sales tax in Florida. Mrs. Miranda had prepared a list for the auditor which separated all invoices to demonstrate that all sales by Latin America were export sales. Appropriate bills of lading or certificates of resale for sales by Latin America were in the files. There is no reasonable basis to accept the Department's contention that State Form DR-15s filed by Richards Sewing Machines reflect combined sales figures for both Latin America and Richards Sewing Machines. The Department makes its argument because using the sales journal kept by Mrs. Miranda, the amount of sales tax due according to the journal is the same amount recorded on the DR-15s, but Richards Sewing Machines reported $33,000 more in sales to the federal government. From that the Department's witnesses somehow infer that the DR-15s reflected sales from both companies. The more reasonable inference here, however, is that the figures in the sales journal and DR-15 forms match because all sales by Latin America were foreign sales on which no tax was due, no tax was collected, and no tax was carried on the sales journal. When the amount of sales tax collected was computed from the sales journal, and reported by Mrs. Miranda on the State DR-15, that figure dealt solely with sales by Richards Sewing Machines. To the extent there is any discrepancy in the total sales Richards Sewing Machines reported to the State of Florida and to the Federal Government on Federal Form 1120, that discrepancy is due to a bookkeeping error. A small amount of additional tax was due on sales by Richards Sewing Machines in the years 1984 to 1986 ($33,000 times 5% or about $1,500). The evidence does not support an inference that taxable sales from both corporations were combined in the sales journal kept by Mrs. Miranda, and were then reported as a lump sum figure on the DR-15 filed by Richards Sewing Machines. The Department argues that its proration process did not tax Latin America for sales which were reported, because the Department agreed to recognize proper bills of lading or certificates of resale from customers of Latin America as justification for not collecting sales tax. It does, however, believe that tax should be assessed against Latin America for unreported sales, i.e., on the gross sales derived from its IRS Form 1120. Because the evidence is persuasive that Latin America made no sales which were taxable in Florida, the Department's argument is rejected as lacking a factual basis. All sales by Latin America were to exporters who gave a resale certificate to Latin America, or to foreign purchasers who provided an appropriate bill of lading showing that the material was exported from the State of Florida. It is true, however, that Latin America was required to file information returns reporting all of its sales, both gross and exempt. Its report would have shown all sales were exempt, and no tax was due. The mere failure to have filed the report does not make those export sales taxable. Use Tax Use tax is due for two reasons. Latin America made purchases of sewing machines and equipment from foreign manufacturers in Taiwan and Italy. It imported those machines and parts into the United States to an airport free zone. The machines and parts then cleared customs and were moved to a warehouse in Miami at 2303 Northwest 2nd Avenue, which interrupted the export process. Secondly, the failure of Latin America to have registered as a dealer has an important affect on its liability for use tax. Because it was never registered as a dealer during the audit period, it was impossible for Latin America to execute and deliver a certificate of resale to its Taiwanese and Italian suppliers of the industrial sewing machines it received and warehoused in Miami. Latin America introduced no proof that it was already contractually obligated to sell its inventory overseas at the time it was delivered to the free zone, or when it was removed from the free zone. Therefore, when Latin America removed the industrial sewing machines or parts from the airport free zone and stored them in its warehouse at 2303 Northwest 2nd Avenue in Miami, it engaged in a taxable event. The bills of lading showing eventual export of its inventory are insufficient to avoid the use tax, for "tax will apply if the property is diverted in transit to the purchaser," Rule 12A-1.064(1)(c), Florida Administrative Code. Under use tax law, removing those sewing machines from the stream of international commerce subjected them to use tax, even though Latin America may have harbored a subjective intent of ultimately reselling them to foreign purchasers in the Caribbean and Central America. Moreover, by failing to file as a dealer, Latin America also failed to report its purchases from its Taiwanese and Italian suppliers as exempt sales for which use tax was not due on schedule B of an annual return. It should have filed as a dealer engaged in resale. That failure to file a return is not the reason use tax is due, however. Latin America may be assessed use tax because it was not a registered dealer, took possessions of the sewing machines in Florida, and was unable to give a valid dealer's certificate of resale to its Taiwanese and Italian suppliers because it had never registered as a dealer. The tax is due at the rate of 5% on purchases made from its suppliers beginning February 1, 1985 to January 31, 1988, plus interest. See audit report, page 16- 17, Schedule B. Penalty There is no reason to assess any penalty on the use tax due in this case. The tax payer's failure to register as a dealer or to file information returns was based on the advice of a CPA, and that advice was facially reasonable. The Department is not required to impose a penalty if the applicable penalty, here 25% of the tax due, "would be too severe or unjust." Rule 12A-1.056(9)(a), Florida Administrative Code. Had Latin America registered as a dealer and given its suppliers a certificate of resale, no tax at all may have been due. There is no indication of some intent to evade a tax. Rather, laxness of the tax payer has rendered a transaction otherwise tax free fully taxable. Payment of the tax and interest is penalty enough. Commercial Rental Latin America offered no evidence with respect to the assessment the Department made for taxes due on commercial rentals. The amount involved is small, for the period November 1985 through June 1987, the tax due is $184.16.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a Final Order be entered assessing use tax on inventory imported into Florida, plus interest and for tax due on commercial rentals, with interest. DONE and ENTERED this 30th day of October, 1990, at Tallahassee, Florida. WILLIAM R. DORSEY, JR. Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 30th day of October, 1990. APPENDIX TO RECOMMENDED ORDER DOAH CASE NO. 89-0136 Rulings on proposals by Latin America: Discussed in Findings 4, 22 and 25. There is no credible evidence that Latin America ever actually sold sewing machines to Richards Sewing Machines for resale in the domestic market. There was, however, no legal impediment to doing so. Covered in paragraph 7, 8 and 11. Covered in Findings 17-19. Covered in Finding 10. The proposed findings based on materials which may have been produced in response to the Department's first request for production of documents have no bearing on this case, for they were not introduced into evidence at the final hearing. The testimony that all sales by Latin America were for export or to other exporters has been accepted. Rulings on proposals by the Department: Covered in Finding 1. Covered in Finding 2. Rejected as unnecessary. Rejected in Finding 17, although both corporations did file their own Form 1120s. The methodology is described in Finding 18. The methodology is described in Finding 18. Rejected because State Form DR-15 did not reflect combined sales figures. See, Findings 19 and 20. Rejected. See, Finding 21, although it is true that Latin America was not registered as a dealer, see, Finding 7. Adopted in Finding 25. Adopted in Finding 25. Adopted in Finding 27. Adopted in Findings 9 and 10. Adopted in Findings 9, 24 and 25. Adopted in Finding 24. Copies furnished: Mark R. Vogel, Esquire 201 South Biscayne Boulevard Miami Center, Suite 880 Miami, FL 33131 Matt Goldman, Esquire 1001 South Bayshore Drive Suite 1712 Miami, FL 33131 Linda Miklowitz, Esquire Lealand L. McCharen, Esquire Mark T. Aliff, Esquire Assistant Attorneys General Department of Legal Affairs Tax Section, The Capitol Tallahassee, FL 32399-1050 William D. Moore, General Counsel Department of Revenue 203 Carlton Building Tallahassee, FL 32399-0100 J. Thomas Herndon, Executive Director Department of Revenue 104 Carlton Building Tallahassee, FL 32399-0100
The Issue Whether the Respondent, Holiday Inn Oceanside/Cleveland Caribbean, Inc., is liable for the payment of $10,176.18, together with a penalty of 5 percent and interest accruing daily as claimed in the audit by the Petitioner, State of Florida, Department of Revenue, for the period September 1, 1975, through August 31, 1970.
Findings Of Fact This cause comes on for consideration based upon the Respondent, Holiday Inn Oceanside/Cleveland Caribbean, Inc.`s challenge to the tax audit conducted by the Petitioner, State of Florida, Department of Revenue, covering the period September 1, 1975, through August 31, 1978. The claim of the audit is for sales tax due pursuant to Chapter 212, Florida Statutes, and its supporting rules found in the Florida Administrative Code. The audit document showing the Proposed Notice of Assessment of Tax, Penalties and Interest may be found as the Petitioner's Exhibit A admitted into evidence. Although the audit document originally claimed tax in the amount of $29,600.37, at the commencement of the hearing the amount remaining in dispute was $15,288.75, together with a penalty of 5 percent and interest accruing until date of payment. During the hearing, a stipulation was entered into between the parties to the effect that, of the remaining disputed tax, penalty and interest, $5,112.57, together with the applicable penalty and interest was acknowledged to be owed by the Respondent. Therefore, there remains in dispute the amount of $10,176.18, with a 5 percent penalty and interest accruing until date of payment. This amount of tax, penalty and interest claimed represents the difference between the tax rate which the Petitioner has applied in this assessment process and the tax rate that the Respondent claims to be applicable. The Petitioner claims that a tax rate of 4.5 percent against total receipts, in keeping with the authority of Rule 12A-1.57(3), Florida Administrative Code. The Respondent counters that position by offering its own formula arrived at in view of the nature of its prices charged its customers, and that tax rate is 4.1666667 percent. The sales in question during the audit period pertain to sales of alcoholic and malt beverage in the lounges of the Respondent's licensed premises located in Dade County, Florida. The facts reveal that the sale of all alcoholic beverages in the time period at issue were made in increments of a quarter dollar ($.25). These quarter-dollar increments included the imposition of sales tax. As example: SALES PRICE TAX TOTAL $ .48 $.02 $ .50 .72 .03 .75 .96 .04 1.00 1.20 .05 1.25 1.44 .06 1.50 1.68 .07 1.75 Although the tax was computed on the sales price and this system was made known to the public by prominently displaying the price list, which list indicated that the beverage prices included tax; the Respondent did not separate the increment of the total price into categories of sales price and tax at the time of each transaction. Consequently, the books audited in the process of making the claim for assessment only demonstrated the total sales price of a given day's alcoholic beverage sales as an aggregate and did not reflect the tax as a separate item from the sales price. To this aggregate amount the Respondent applied its tax rate formula of 4.166667 by taking the amount of total receipts for the day and dividing by 1.04666667 to get gross sales. The gross sales were then subtracted from the amount of total receipts to obtain the figure for tax collected. This method was rounded off to the nearest penny on each day of computation. The Petitioner, as stated before, relies on Rule 12A-1.57(3), Florida Administrative Code, as a basis for its claim that the rate of tax should be 4.5 percent. That provision states: (3) Dealers in alcoholic and malt beverages are required to remit the actual tax collected to the State. In some instances, however, it may be impractical for such dealers to separately record the sales price of the beverage and the tax collected thereon. In such cases, dealers may elect to report tax on the following basis. Package stores who sell no mixed drinks should remit the tax at 4.3 percent of total receipts and dealers who sell mixed drinks or a combination of mixed drinks and packaged goods should remit the tax at the rate of 4.5 percent of total receipts. In those instances where the sales price and the tax have not been separately recorded but where it can be demonstrated that the public has been put on notice by means of price lists posted prominently throughout the establishment that the total charge includes tax, the dealer may deduct the tax from the total receipts to arrive at the appropriate tax and gross sales figures using the method shown below: Total receipts divided by the tax rate = gross sales. For example, a package store which sells no mixed drinks and whose total receipts are $2,000 would compute sales as follows: $2,000 divided by 1.043 percent = gross sales $1,917.54 tax collected 82.46 A dealer who sells drinks or a combination of drinks and package goods and whose total receipts are $2,000 would compute sales as follows: $2,000 divided by 1.045 percent = gross sales $1,913.87 tax collected 86.12 When the public has hot been put on notice through the posting of price lists that tax is included in the total charge, tax shall be computed by multiplying total receipts by the applicable rates referred to in this rule. In the mind of the Petitioner, by failing to segregate the total amounts collected into the categories of sales price and tax and then to remit the tax collected as a separate item, the Respondent is relegated to the utilization of Rule 12A-1.57(3), Florida Administrative Code, in remitting its tax. Under its theory, the Petitioner has taken the total receipts recorded in the Respondent's work sheets and divided those total receipts by the formula 1.045 percent to get gross sales and then subtracted the gross sales from the amount of total receipts to get the amount of tax that should have been collected, and then made a further subtraction of the tax which the Respondent remitted, from the tax formula which the Petitioner claims to be due on the transactions to arrive at the tax presently outstanding. This amount being the figure referenced above. From that computation, the amount of penalty and interest has been claimed. (By its position the Petitioner does not seem to question the fact that the public has been put on notice by price lists posted throughout the establishment that the total charge reflected on the price lists includes tax, as referred to in the subject Rule 12A-1.57(3), Florida Administrative Code.) According to the Respondent, the reason for the utilization of the rate of 4.1666667 percent was the fact that all beverages having a break in price increments of a quarter-dollar ($.25), it is mathematically impossible for the proper effective rate being charged on all beverages sold in the lounges to vary from their tax rate of 4.1666667 percent because each increment of increase has the same ratio of sales price to tax. The Respondent argues that to claim a rate of 4.5 percent causes the collection in excess of the amount allowed by Chapter 212, Florida Statutes. After considering the position of the parties, the Respondent is found to be correct in its position. The overall scheme of Chapter 212, Florida Statutes, calls for the taxation of sales of tangible personal property at a rate of 4 percent, see Section 212.05, Florida Statutes. A further refinement of that theory is found in Subsection 212.12(10), Florida Statutes, which creates a bracketing system for sales representing the various fractions of a dollar in amount. This bracketing system thereby causes imposition of a sales tax greater than 4 percent in some transactions. The Petitioner is granted further authority to refine the system of taxation by those provisions of Subsections 212.17(6) and 212.18(2), Florida Statutes, which state in turn: 212.17(6) The department shall have the power to make, prescribe and publish reasonable rules and regulations not inconsistent with this chapter, or the other laws, or the constitution of this state, or the United States, for the enforcement of the provisions of this chapter and the collection of revenue hereunder, and such rules and regulations shall when enforced be deemed to be reasonable and just. 212.18(2) The department shall administer and enforce the assessment and collection of the taxes, interest, and penalties imposed by this chapter. It is authorized to make and publish such rules and regulations not inconsistent with this chapter, as it may deem necessary in enforcing its provisions in order that there shall not be collected on the average more than the rate levied herein. The department is authorized to and it shall provide by rule and regulation a method for accomplishing this end. It shall prepare instructions to all persons required by this chapter to collect and remit the tax to guide such persons in the proper collection and remission of such tax and to instruct such persons in the practices that may be necessary for the purpose of enforcement of this chapter and the collection of the tax imposed hereby. The use of tokens in the collection of this tax is hereby expressly forbidden and prohibited. It can be seen that the Petitioner has the authority to promulgate the necessary rules for the accomplishment of the purpose of Chapter 212, Florida Statutes, but is restricted in this task by being prohibited from making rules and regulations which are inconsistent with this chapter or other statutes within the laws of the State of Florida or the Constitution of the United States or the Constitution of the State of Florida and it is further restricted from imposing rules or regulations which cause the tax to be collected on the average more than the rate levied in Chapter 212, Florida Statutes. While it is clear that the legislature intended to keep the effective rate of tax as near the 4 percent level as possible, it is also evident that the system contemplated a segregation of the amount collected in a sale as sales price, and the amount of tax applied to the sale at the point of the transaction. This is a means of accountability that helps insure that the proper remittance of tax due on each and every retail sales occurs. However, the preeminent charge to the Petitioner is the duty to collect the tax at a rate which most closely approximates the 4 percent called for, without abandoning responsibility or the close monitoring of the records of a given taxpayer. When considered in the overall context of the purpose of Chapter 212, Florida Statutes, the method which the Respondent used to collect and remit tax, does not violate the conditions of Chapter 212, Florida Statutes, nor the rules designed to enforce that chapter. The tax rate of 4.1666667 percent has been proven to be correct, in the sense of more closely approximating the 4 percent tax rate called for than the application of a tax rate of 4.5 percent. The correctness is established because the increments charged for alcoholic beverages are always in the amount of a quarter-dollar ($.25) and each increment of increase carries the same tax rate. This fact, when considered with the additional fact that the break-out of the tax in the price structure as established by the Respondent, is in keeping with the tables of the bracket system found in Subsection 212.12(10), Florida Statutes, is sufficiently convincing to demonstrate the propriety of the Respondent's position. Nonetheless, a further examination of the Petitioner's argument is indicated. The focus of the Petitioner's position is Rule 12A-1.57(3), Florida Administrative Code, and a detailed reading of this rule reveals that dealers who have properly put the public on notice that their sales prices include tax, "may" elect to remit tax by using the formula of the rate of 4.5 percent of total receipts as the tax due. The use of the word "may" in this instance creates an option on the part of the Respondent, an option which it has elected not to proceed under and by the facts of this case, the alternate method which the Respondent used in computing this tax, i.e., the rate 4.1666667 percent is efficacious. Finally, the Petitioner has advanced the argument that the formula found in Rule 12A-1.57(3), Florida Administrative Code, is unique to that rule and may not be utilized unless the prerequisite factors are shown and unless the tax rate factor 4.5 percent is part of the formula. Even though the formula as expressed in Rule 12A-1.57(3), Florida Administrative Code, may have legitimate application to some cases, it is not preemptive in its scope and it would not prohibit the Respondent in this case from using the formula and substituting the rate of tax of 4.1666667 percent for the rate of 4.5 percent in that part of the formula. In summary, the Petitioner has failed to demonstrate its entitlement to the tax, penalty and interest under its claim founded on Rule 12A-1.57(3), Florida Administrative Code. (Petitioner in this cause had submitted Proposed Findings of Fact, Conclusions of Law and a Recommendation in the case styled, Holiday Inn Oceanside/Cleveland Caribbean, Inc., Petitioner, vs. State of Florida, Department of Revenue, Respondent, D.O.A.H. Case No. 70-1003R, and in doing so made reference to matters which have been considered in the present case. Therefore, to the extent that those matters are not inconsistent with this Recommended Order they have been utilized. To the extent that those proposals are inconsistent with this Recommended Order they are specifically rejected. The Respondent has also submitted Proposed Findings of Fact, Conclusions of Law and a Recommended Order and to the extent that those matters are not inconsistent with this Recommended Order they have been utilized. To the extent that those proposals are inconsistent with this Recommended Order they are specifically rejected.)
Recommendation It is recommended that the Respondent, Holiday Inn Oceanside/Cleveland Caribbean, Inc., be relieved from further responsibility to pay the amount of tax, $10,176.18 and the 5 percent penalty and interest accruing on that amount of tax. DONE AND ENTERED this 29th day of June, 1979, in Tallahassee, Florida. CHARLES C. ADAMS, Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675 COPIES FURNISHED: Martha J. Cook, Esquire Department of Revenue Room 422, Fletcher Building Tallahassee, Florida 32301 Richard Watson, Esquire c/o Spieth, Bell, McCurdy & Newell 1190 Union Commerce Building Cleveland, Ohio 44115 Mark J. Wolff, Esquire and Howard E. Roskin, Esquire First Federal Building, 30th Floor One Southeast Third Avenue Miami, Florida 33131
The Issue The issue is whether Petitioner is liable for sales and use taxes, penalties, and interest and, if so, how much.
Findings Of Fact Petitioner operated a bar and grill in Punta Gorda that served beer, wine, liquor, and food at retail. In the course of business, Petitioner collected tax from the customers. Petitioner reported to Respondent sales tax collections for May 1996, November 1996, March 1997, November 1997, and December 1997. In connection with these collections, Petitioner remitted to Respondent seven checks representing the net tax due Respondent. These checks totaled $6700.64. The bank on which the checks were drawn dishonored them. The remittance of net sales tax proceeds by payment through checks that are later dishonored implies a fraudulent, willful intent to evade the payment of these sums. Respondent has issued five warrants concerning the unremitted taxes, penalties, and interest. Warrant 953620064 shows that Petitioner owes $1171 in sales tax remittances for the five months from July through November 1995. With penalties and interest, the total due on this warrant, through June 5, 1998, is $1832.37. Interest accrues after June 5 at the daily rate of $0.35. Warrant 467049 shows that Petitioner owes $2940.25 in sales tax remittances for the following months: April 1996, October 1996, December 1996, and January 1997. Petitioner purportedly paid each of these remittances with five (two in January) checks that were later dishonored. With penalties, including the 100 percent penalty for fraud, and interest, the total due on this warrant, through June 5, 1998, is $7480.12. Interest accrues after June 5 at the daily rate of $0.95. Warrant 971680037 shows that Petitioner owes $1301.85 in sales tax remittances for the following months: December 1995, June 1996, July 1996, September 1996, November 1996, and February 1997. With penalties and interest, the total due on this warrant, through June 5, 1998, is $2669.69. Interest accrues after June 5 at the daily rate of $0.43. Warrant 471481 shows that Petitioner owes $2912.48 in sales tax remittances for October and November 1997, for which Petitioner made remittances with two dishonored checks. With penalties, including the 100 percent penalty, and interest, the total due on this warrant, through June 5, 1998, is $6751.49. Interest accrues after June 5 at the daily rate of $0.95. Warrant 989840034 shows that Petitioner owes $8077.76 in sales tax remittances for the following months: August 1997, September 1997, December 1997, January 1998, and February 1998. With interest, the total due on this warrant, through June 5, 1998, is $8285.21. Interest accrues after June 5 at the daily rate of $2.65. Totaling the five warrants, Petitioner owes a total of $27,018.88 in taxes, penalties, and interest through June 5, 1998, and $5.33 per day for each ensuing day until the amount is paid.
Recommendation It is RECOMMENDED that the Department of Revenue enter a final order determining that Petitioner owes $27,018.88 in taxes, penalties, and interest through June 5, 1998, and $5.33 per day for each ensuing day until the amount is paid. DONE AND ENTERED this 10th day of July, 1998, 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 Filed with the Clerk of the Division of Administrative Hearings this 10th day of July, 1998. COPIES FURNISHED: John N. Upchurch Nicholas Bykowsky Assistant Attorneys General Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050 Judith Crown, President Tombstone, Inc. Suite P-50 1200 West Retta Esplanade Punta Gorda, Florida 33950 Linda Lettera, General Counsel Department of Revenue Post Office Box 6668 Tallahassee, Florida 32314-6668 Larry Fuchs, Executive Director Department of Revenue Post Office Box 6668 Tallahassee, Florida 32314-6668
