Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following relevant facts are found: Petitioner, a corporation headquartered in Charlotte, North Carolina, is in the business of operating movie theatres both within and without the State of Florida. At these theatres Petitioner Operates concession stands which sell both candy items and drinks in various sizes at different prices to persons who frequent the theatres. For the period of time from September, 1985 through May, 1985, Petitioner remitted to the Department of Revenue sales tax on the total taxable value of all taxable items sold at its concession stands in all of its Florida theatres, in accordance with the presumptive effective rate of tax of 5.63 percent contained in Rule 12A-1.11(37), Florida Administrative Code. As a result of an audit for a previous period dated October 1, 1982, Petitioner remitted to the Department of Revenue the amount of $10,637.00 for sales tax on taxable items sold at its concession stands during this audit period in accordance with the presumptive effective tax rate of 4.5 percent as contained in Rule 12A-1.11(37), Florida Administrative Code during the audit period. On August 15, 1985, Petitioner filed with the Department of Revenue, as agent for Respondent, two (2) applications for sales tax refund in the amount of $16,876.52 and $10,637.00. The applications were dated August 13, 1985, and were timely filed. During the refund periods at issue in this matter, the Petitioner: (a) posted and charged flat prices for the various items offered for sale, which prices included sales tax (b) kept records of daily and weekly sales of taxable items at each of its Florida theatres (c) kept records of daily attendance at each movie shown by each Florida theatre and (d) kept records of weekly calculations, through inventory analysis, of sales of drinks and candy items, including the number, size and price of each item sold at each of its Florida theatre. During the refund periods at issue in this matter, the Petitioner did not maintain cash registers at its concession stands in its Florida theatres and did not maintain records made contemporaneously with the sale of taxable items from the concession stands which separately itemized the amounts of sales tax collected on each sale transaction occurring at the theatres' concession stands. Rather, Petitioner chose, for its own convenience, to operate a "cash box" operation at each of its concession stands in its Florida theatres and willingly remitted sales tax to the Department of Revenue pursuant to the presumptive effective tax rate contained in Rule 12-1.11(37), Florida Administrative Code for the relevant periods. In April, 1985, Petitioner placed computerized cash registers in each of its Florida theatre concession stands. These cash registers provided tapes of each individual transaction each day, specifically recording each taxable and nontaxable sale and the amount of sales tax due on each taxable sale with a daily summation on each tape at each theatre. Rule 12A-1.11(37), Florida Administrative Code, requires concessionaires such as Petitioner to remit sales tax at a rate of 5.63 percent of taxable sales under the present 5 percent statutory sales tax schedule and at 4.5 percent of taxable sales under the previous statutory sales tax schedule unless a concessionaire, through its records, shows another effective rate by "proof to the contrary". Petitioner produced an effective tax rate of 5.13 percent for the month of April 1985, for all its Florida theatres by dividing the total sales tax collected during April, 1985 by the total taxable sales during April, 1985, as evidenced by the cash register tapes from all of Petitioner's concession stands in Florida. Petitioner then used that tax rate as a base to retroactively reconstruct an effective tax rate for the refund periods by assuming that the product sales mix (product mix of products sold) and the transactional sales mix (the number of items purchased together in a single transaction by a customer) experienced during the refund periods were the same as that experienced during the month of April, 1985. There was no competent evidence that the product sales mix or the transactional sales mix experienced during the refund periods were the same as that experienced during the nonth of April, 1985. There is insufficient evidence in the record to support Petitioner's reconstructed effective tax rates that were used to calculate the refunds. Therefore, Petitioner has failed to show "proof to the contrary" that its reconstructed effective tax rates are correct or that the presumptive effective tax rate contained in Rule 12A-1.11(37), Florida Administrative Code were incorrect for the refund periods at issue in this matter.
Recommendation Based on the findings of fact and conclusions of law recited herein, it is RECOMMENDED that the Comptroller enter his final order DENYING Petitioner's refund applications. Respectfully submitted and entered this 25th day of September, 1986, in Tallahassee, Leon County, Florida. WILLIAM R. CAVE Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 25th day of September, 1986.
Findings Of Fact Modern Tool and Die, (MTD), is a privately held corporation engaged in manufacturing equipment. In 1965 they started the manufacture of bumper guards which required electroplating. They entered into agreements with MPC pursuant to which MTD erected two buildings adjacent to their plant which they leased to MPC in which to do the electroplating of the bumper guards. MPC is also a privately held corporation and there is no common ownership of these two companies. The two buildings built for MPC's occupancy were partitioned, compartmented and wired as desired by MPC and at its expense. Florida Power Corporation supplied electricity to the complex through the main transformer of MTD. In 1965 and to a lesser extent now, electricity rates per kilowatt-hour (kwh) were lowered with increased usage of electricity. Since both MTD and MPC are large users of electricity they obtain a cheaper rate if all electricity used is billed from the master meter serving MTD. Accordingly, and at the recommendation of the power company, additional transformers and meters were placed at the two buildings occupied by MPC and read monthly at or about the same time the master meter is read by the power company. The kw used at the two buildings is forwarded by MPC to MTD each month. The latter, upon receipt of the power company bill, computes the cost of the power per kwh and in turn bills MPC for its portion of the bill based upon the usage forwarded by MPC to MTD. Upon the commencement of this working agreement between these two companies in 1965 MPC, pursuant to an oral lease, has paid rent to MTD monthly at the rate of approximately $2,400 per month. It has also paid to MTD its pro rata cost for the electricity used each month. The rent is invoiced each month on the first of the month as in Exhibit 3 and paid by the 10th by MPC. Sales tax is added to the rent and remitted to DOR. Electricity usage is also invoiced by MTD to MPC on or about the 20th of the month and paid by MPC on or about the first of the following month. (Exhibit 4). Sales tax on the electricity used is paid by MTD to Florida Power Company who presumably remits this to DOR. During the 15 years these two companies have shared the cost of electric power they have been audited numerous times; the arrangement was made known to the auditors; and no auditor, prior to the present, suggested that the cost of electricity was part of the rent paid by MPC upon which sales tax was due. Notice of Proposed Assessment (Exhibit 1) in the amount of $9,747.34 is based upon the cost of electricity billed to MPC during the period of the audit December 1, 1976 through November 30, 1979 multiplied by 4 percent sales tax plus penalties and interest. The parties stipulated to the accuracy of this amount. They differ only as to whether the tax is owed.
The Issue The issue is whether Petitioner owes the taxes, interest, and penalties assessed by the Department of Revenue based upon its audit of Petitioner for the period of August 1, 1996, through July 31, 2001.
Findings Of Fact Based upon the testimony and evidence received at the hearing, the following findings are made: Petitioner is a Florida corporation engaged in the business of selling and installing floor covering materials, such as carpet and tile. Petitioner's business is located in Hillsborough County, Tampa, Florida. Petitioner sales fall into two basic categories: "cash and carry sales" and "installation sales." The "cash and carry sales" are retail sales of floor covering materials to customers that come into Petitioner's store. These sales do not involve any installation work by Petitioner. The "installation sales" are sales in which Petitioner installs the floor covering material in the customer's home or business. These sales are performed pursuant to a lump-sum contract which incorporates the price of the installation and the price of the floor covering materials being installed. Petitioner purchases the floor covering materials from suppliers and distributors. Those purchases become part of the inventory from which Petitioner makes its "installation sales." Petitioner also makes general purchases of goods and services necessary for the day-to-day operation of its business. These purchases include items such as cleaning supplies and vehicle repairs. Petitioner made several fixed-assets purchases during the audit period for use in its business. It purchased a word processor in August 1996, and it purchased equipment and fixtures in December 1996. On those occasions that Petitioner collected sales tax from its customers on the "cash and carry sales" or paid sales tax on its inventory purchases and general purchases, it remitted or reported those amounts to the Department. However, as discussed below, Petitioner did not collect the full amount of sales tax due on each sale, nor did it pay the full amount of sales tax due on each purchase. The Department is the state agency responsible for administering Florida's sales tax laws. The Department is authorized to conduct audits of taxpayers to determine their compliance with the sales tax laws. By letter dated September 10, 2001, the Department notified Petitioner of its intent to conduct a sales tax audit of Petitioner's records for the period of August 1, 1996, through July 31, 2001. The audit was conducted by David Coleman, a tax auditor with seven years of experience with the Department. Petitioner designated its certified public accountant, P.J. Testa, as its representative for purposes of the Department's audit. That designation was memorialized through a power of attorney form executed by Petitioner on March 5, 2002. Mr. Coleman communicated with Mr. Testa throughout the course of the audit. Mr. Coleman conducted the audit using a sampling methodology agreed to by Mr. Testa on behalf of Petitioner. Pursuant to that methodology, Mr. Coleman conducted a comprehensive review of Petitioner's year-2000 purchase and sales invoices and extrapolated the results of that review to the other years in the audit period. The sampling methodology was used because of the volume of records and transactions during the audit period and because of the unavailability of all of the records for the audit period. The year 2000 was chosen as the sample period because Petitioner's records for the other years in the audit period were incomplete or unavailable. Mr. Coleman's audit of the year-2000 invoices focused on three broad types of transactions. First, he reviewed invoices of Petitioner's retail "cash and carry sales." Second, he reviewed the invoices through which Petitioner purchased the floor covering materials that it later sold as part of its "installation sales." Third, he reviewed the invoices through which Petitioner made general purchases of tangible personal property used in the day-to-day operation of its business. The sampling methodology was used for the audit of Petitioner's "cash and carry sales," the inventory purchases related to the "installation sales," and the general purchases. The methodology was not used for the audit of Petitioner's fixed-asset purchases; Mr. Coleman reviewed all of the available records for the fixed-asset purchases during each year of the audit period. Mr. Coleman's audit of Petitioner's retail "cash and carry sales" identified 29 invoices during year-2000 on which no sales tax or less than the full sales tax was paid by the customer. Those invoices amounted to $17,451.30, on which $1,178.11 in total sales tax was due, but only $552.97 was paid. As a result, Mr. Coleman's audit identified a sales tax deficiency of $625.14 for the retail sales during the sample period. Mr. Coleman's audit of Petitioner's purchases of floor covering that was later sold in the "installation sales" identified a considerable number of purchases during year-2000 on which no sales tax or less than the full sales tax was paid by Petitioner to the supplier or distributor of the materials. Those purchases amounted to $123,398.52, but only $123,397.80 of that amount was taxable. On the taxable amount, $8,330.07 in total sales tax was due, but only $6,810.68 was paid. As a result, Mr. Coleman's audit identified a sales tax deficiency of $1,519.41 for Petitioner's inventory purchases during the sample period. Mr. Coleman's audit of Petitioner's "general purchases" identified 10 sales during year-2000 on which sales tax was not paid. Those invoices amounted to $2,914.76, on which $196.77 in sales tax was due, but none of which was paid. As a result, Mr. Coleman's audit identified a sales tax deficiency of $196.77 for the general purchases during the sample period. Mr. Coleman's audit of Petitioner's fixed-asset purchases identified only two transactions during the entire audit period on which Petitioner did not pay the full sales tax. Those transactions amounted to $5,078.92, on which $330.14 in total sales tax was due, but none of which was paid. As a result, Mr. Coleman's audit identified a sales tax deficiency of $330.14 for the fixed-asset purchases during the audit period. The tax deficiencies calculated by Mr. Coleman for year-2000 for each category described above take into account any sales tax collected by Petitioner from its customers or paid by Petitioner to its vendors. After Mr. Coleman computed the tax deficiencies based upon his audit of the year-2000 records, he calculated a "percentage of error" for each category of sales/purchases. The percentage of error is the ratio used to extrapolate the results of the audit of the year-2000 records over the remainder of the audit period. No percentage of error was calculated for the fixed-asset purchases because Mr. Coleman reviewed the available records for those purchases over the entire audit period, not just year-2000. The percentage of error was calculated by dividing the sales tax deficiency identified in a particular category for the year-2000 by the total sales/purchases in that category for the year-2000. For the year-2000, Petitioner had retail sales of $1,143,182.45; general purchases of $21,254.88; and inventory purchases of $1,214,016.24. As a result, the applicable percentages of error were 0.000547 ($625.14 divided by $1,143,182.45) for the retail sales; 0.009258 ($196.77 divided by $21,254.88) for the general purchases; and 0.001252 ($1,519.41 divided by $1,214,016.24) for the inventory purchases. The percentages of error were then multiplied by the total sales in the applicable category for the entire audit period to calculate a total tax deficiency in each category. Petitioner's total retail sales over the audit period were $4,455,373.40. Therefore, the total tax deficiency calculated for that category was $2,437.12 (i.e., $4,455,373.40 multiplied by 0.000547). Petitioner's total general purchases over the audit period were $110,741.49. Therefore, the total tax deficiency calculated for that category was $1,025.25 (i.e., $110,741.49 multiplied by 0.009258). Petitioner's total inventory sales over the audit period were $3,130,882.10. Therefore, the total tax deficiency calculated for that category was $3,919.86 (i.e., $3,130,882.10 multiplied by 0.001252). Petitioner's total tax deficiency was computed by adding the deficiencies in each category, as follows: Retail Sales $2,437.12 General Purchases 1,025.25 Inventory Purchases 3,919.86 Fixed-asset purchases 330.14 TOTAL $7,712.37 Of that total, $6,863.02 reflects the state sales tax deficiency; $313.77 reflects the indigent care surtax deficiency; and $535.58 reflects the local government infrastructure surtax deficiency. The sales tax rate in effect in Hillsborough County during the audit period was 6.75 percent. The state sales tax was six percent; the remaining 0.75 percent was for county surtaxes, namely the local government infrastructure surtax and the indigent care surtax. That rate was used by Mr. Coleman in calculating the tax deficiencies described above. On October 4, 2002, Mr. Coleman hand-delivered the Notice of Intent to Make Audit Change (NOI) to Petitioner. The NOI is the end-product of Mr. Coleman's audit. The NOI identified the total tax deficiency set forth above, as well as a penalty of $3,856.26, which is the standard 50 percent of the tax deficiency amount, and interest of $2,561.63, which is calculated at a statutory rate. The NOI included copies of Mr. Coleman's audit work- papers which showed how the taxes, penalties, and interest were calculated. The NOI also included a copy of the "Taxpayers' Bill of Rights" which informed Petitioner of the procedure by which it could protest the audit results reflected on the NOI. On October 29, 2002, the Department issued three NOPAs to Petitioner. A separate NOPA was issued for each type of tax -- i.e., sales tax, indigent care surtax, and local government infrastructure surtax. The cumulative amounts reflected on the NOPAs were the same as that reflected on the NOI, except that the interest due had been updated through the date of the NOPAs. Interest continues to accrue on assessed deficiencies at a cumulative statutory rate of $1.81 per day. The NOPAs were sent to Petitioner by certified mail, and were received by Petitioner on November 1, 2002. By letter dated November 5, 2002, Petitioner protested the full amount of the taxes assessed on the NOPAs and requested a formal administrative hearing. The letter was signed by Mr. Testa on Petitioner's behalf. The protest letter does not allege that the methodology used by Mr. Coleman was improper or that the results of the audit were factually or legally erroneous. Instead, the protest letter states that Petitioner was disputing the results of the audit because it was "following procedures set forth by an agent from a previous audit who established the manner in which [Petitioner was] to compute sales tax on the items being questioned by the current auditor." Mr. Testa made similar comments to Mr. Coleman during the audit. When Mr. Coleman requested documentation from Mr. Testa to corroborate those comments about the procedures allegedly established by the prior auditor, Mr. Testa was unable to provide any such documentation. The record of this proceeding is similarly devoid of evidence to support Petitioner's allegation on this point. The record does not contain any evidence to suggest that Petitioner ever modified or revoked Mr. Testa's authority to represent it in connection with the audit or this protest, which Mr. Testa initiated on Petitioner's behalf. Petitioner, through Mr. Testa, had due notice of the date, time, and location of the final hearing in these cases. Neither Mr. Testa, nor anyone else on Petitioner's behalf, appeared at the final hearing.
Recommendation Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the Department of Revenue issue a final order imposing the taxes, interest, and penalties against Petitioner in the full amounts set forth in the three Notices of Proposed Assessment dated October 28, 2002. DONE AND ENTERED this 30th day of December, 2003, in Tallahassee, Leon County, Florida. S T. KENT WETHERELL, II 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 30th day of December, 2003.
The Issue The issue is whether Respondent's Certificate of Registration 39-8011930243-9 should be revoked for the reasons stated in an Administrative Complaint for Revocation of Certificate of Registration (Administrative Complaint) issued by the Department of Revenue (Department) on June 5, 2014.
Findings Of Fact The Department is the state agency charged with administering and enforcing the state revenue laws, including the laws related to the imposition and collection of sales and use taxes pursuant to chapter 212. Respondent is a Florida limited liability corporation doing business as The Hyde Park Cafe at 1806 West Platt Street, Tampa, Florida. For purposes of collecting and remitting sales and use taxes, it is a dealer as defined in section 212.06(2) and is required to comply with chapter 212. Respondent holds Certificate of Registration number 39- 8011930243-9, which became effective on July 27, 2000. A certificate of registration is required in order to do business in the state and requires its holder to collect and remit sales tax pursuant to chapter 212. See § 212.05(1), Fla. Stat. Respondent is also an employing unit as defined in section 443.036(20) and is subject to the unemployment compensation tax (UCT) provisions of chapter 443, as provided in section 443.1215. Through an interagency agreement with the Department of Economic Opportunity, the Department provides collection services for UCTs. See § 443.1316(1), Fla. Stat. In doing so, the Department is considered to be administering a revenue law of the state. See § 443.1316(2), Fla. Stat. A dealer must file with the Department sales tax returns and remit the tax collected on a monthly basis. See § 212.15(1), Fla. Stat. Also, an employment unit must remit payment to the Department for UCTs due and owing on a quarterly basis. The Department is authorized to revoke a dealer's certificate of registration for failure to comply with state tax laws. See § 212.18(3)(e), Fla. Stat. If the Department files a warrant, notice of lien, or judgment lien certificate against the property of a dealer, it may also revoke a certificate of registration. See § 213.692(1), Fla. Stat. Before revoking a certificate of registration, the Department must convene an informal conference that the dealer is required to attend. See § 213.692(1)(a), Fla. Stat. At the conference, the dealer may either present evidence to refute the Department's allegations of noncompliance or enter into a compliance agreement with the Department to resolve the dealer's failure to comply with chapter 212. Id. After a compliance agreement is executed by the dealer, the Department may revoke the certificate of registration if the dealer fails to comply with its terms and conditions. See Pet'r Ex. 6, p. 2, ¶ E. If a breach occurs, the entire amount is due and payable immediately. Id. at ¶ G. An informal conference can be characterized as the Department's last administrative remedy to collect delinquent taxes before beginning revocation proceedings. A dealer can also enter into a diversion program with the State Attorney's Office to resolve liabilities, but the record shows that Respondent defaulted on that arrangement. According to the Department, collection problems with this dealer first began in 2003. Department records show that Respondent failed to remit required sales taxes for the months of January 2012, August through December 2012, January through December 2013, and January and February 2014. In addition, Respondent failed to remit UCTs for the calendar quarters ending September 2010, December 2010, March 2011, June 2011, September 2011, December 2011, March 2012, June 2012, September 2012, December 2012, and March 2013. Respondent does not dispute that it failed to timely remit and pay the foregoing taxes for the time periods listed above. For the purpose of collecting the delinquent taxes, the Department issued and filed against Respondent delinquent tax warrants, notices of lien, or judgment lien certificates in the Hillsborough County public records. See Pet'r Ex. 3. Before seeking revocation of Respondent's certificate of registration, on February 5, 2014, the Department's Tampa Service Center served on Respondent a Notice of Conference on Revocation of Certificate of Registration (Notice). See Pet'r Ex. 4. The Notice scheduled an informal conference on March 21, 2014. It listed 16 periods of sales and use tax noncompliance and 11 periods of re-employment tax noncompliance and provided the total tax liability as of that date. This number was necessarily fluid, as the taxes owed were accruing interest, penalties, and/or fees on a daily basis. The purpose of the informal conference was to give Respondent a final opportunity to make full payment of all delinquent taxes, or to demonstrate why the Department should not revoke its Certificate of Registration. As pointed out by the Department, an informal conference allows a dealer to bring up "any concerns" that it has regarding its obligations. Respondent's manager and registered agent, Christopher Scott, appeared at the conference on behalf of Respondent.1/ At the meeting, he acknowledged that the dealer had not timely paid the taxes listed in the Notice and that the money was used instead to keep the business afloat. However, Mr. Scott presented paperwork representing that sales and use tax returns and payments for the months of November 2013 through February 2014 had just been filed online, and checks in the amount of $8,101.41 and $9,493.99 were recently sent to Tallahassee. It takes 24 hours for online payments to show up in the system, and even more time for checks to be processed in Tallahassee. Accordingly, the Department agreed that Mr. Scott could have a few more days before signing a compliance agreement. This would allow the Department to verify that the payments were posted and recalculate the amount of taxes still owed. Also, before entering a compliance agreement, Respondent was required to make a down payment of around $20,000.00. Mr. Scott had insufficient cash, and a delay of a few days would hopefully allow him to secure the necessary money for a down payment. When none of the payments had posted by March 25, 2014, the Department calculated a total liability of $113,448.13, consisting of sales and use taxes and UCTs, penalties, interest, and fees. As of that date, none of the taxes listed in Finding of Fact 9 had been paid. On March 25, 2014, Respondent's controller, who did not attend the informal conference, sent an email to the Department requesting a breakdown on the new tax liability. In response to her request, the Department faxed a copy of the requested information. See Resp. Ex. 4. After getting this information, the controller continued to take the position that the Department's calculations overstate Respondent's tax liability. On March 31, 2014, Mr. Scott signed the compliance agreement. See Pet'r Ex. 6. Despite the controller testifying that she did not agree with the numbers, no question was raised by Mr. Scott when he signed the agreement. By then, the check in the amount of $8,101.41 had cleared and been credited to Respondent's account. Along with other funds, it was used towards the down payment of $20,000.00. The record does not show the status of the other payments that Mr. Scott claimed were mailed or filed online prior to the informal conference; however, on March 31, 2014, except for the one check, none had yet posted. The compliance agreement required scheduled payments for 12 months, with the final payment, a balloon payment in an undisclosed amount, being subject to renegotiation in the last month. Payments one and two were $1,500.00, while payments three through 11 were $2,900.00. The compliance agreement reflected a balance owed of $95,887.36, consisting of $60,504.34 in sales taxes and $35,347.02 in UCTs.2/ In return for the Department refraining from pursuing revocation proceedings, the compliance agreement required Respondent to "remit all past due amounts to the Department as stated in the attached payment agreement," "accurately complete and timely file all required tax returns and reports for the next 12 months," and "timely remit all taxes due for the next 12 months." Pet'r Ex. 1, p. 1. In other words, the compliance agreement addressed both delinquent taxes and current taxes that would be due during the following 12-month period, and it required that both categories of taxes be timely paid in the manner prescribed by the agreement. To summarize the salient points of the agreement, all taxes were to be timely paid; delinquent taxes were to be paid by certified check, money order, or cash and were to be mailed or hand delivered to the Tampa Service Center and not Tallahassee; and while not specifically addressed in the agreement, the dealer was instructed to pay all current obligations electronically, as required by law. Otherwise, Respondent was in violation of the compliance agreement. A Payment Agreement Schedule for past due taxes was incorporated into the compliance agreement and provided that the first payment was due April 30, 2014, payable to: Florida Department of Revenue, Tampa Service Center, 6302 East Dr. Martin Luther King, Jr. Boulevard, Suite 100, Tampa, Florida 33619. Payments 2 through 12 were to be mailed or hand delivered to the same address. This meant, with no ambiguity, that money should not be sent to Tallahassee. There is no credible evidence that these instructions were misunderstood. Unless a waiver is granted, Respondent is required by statute and rule to electronically file sales and use tax returns and UCT reports. See § 213.755, Fla. Stat.; Fla. Admin. Code R. 12-24.009 (where a taxpayer has paid its taxes in the prior state fiscal year in an amount of $20,000.00 or more, subsequent payments shall be made electronically). No waivers have been approved. In 2003, the Department notified Respondent of these requirements and Respondent complied with this directive until 2009. For reasons not disclosed, in 2009 Respondent voluntarily quit filing electronically. The record is silent on why this was allowed.3/ In any event, at the informal conference, Mr. Scott was specifically told that all current returns, reports, and taxes must be filed electronically, and not by mail, and that no money should be sent to Tallahassee. There is no credible evidence that he misunderstood these instructions. In its PRO, Respondent correctly points out that the requirement to file current returns electronically was not specifically addressed in the compliance agreement. This is because the compliance agreement does not set forth every statutory and rule requirement that applies to a dealer. If this amount of detail were required, a dealer could ignore any otherwise applicable rule or statute not found in the compliance agreement. This contention has no merit. Respondent failed to electronically file the current sales and use tax return and payment for the month of March 2014, due no later than April 21, 2014. Instead, it sent a paper check, which was returned by the bank for insufficient funds. This constituted a breach of the compliance agreement. Despite repeated instructions on how and where to pay the delinquent taxes, payment 1, due on April 30, 2014, was paid by regular check and sent to Tallahassee, rather than the Tampa office. This contravened the compliance agreement. When payment was not timely received by the Tampa Service Center, Respondent was told that a check must be delivered to the Tampa office by May 9. Respondent hand delivered a second check, this one certified, to the Tampa Service Center on May 9, 2014, or after the April 30 due date. The second check was treated as payment 1. Respondent points out that on May 7 the Tampa Service Center granted its request for an extension of time until May 9 in which to deliver the certified check. While this is true, the extension was allowed in an effort to "work with" the Respondent on the condition that the account would be brought current by that date; otherwise, revocation proceedings would begin. Even if the extra ten days is construed as a grace period for payment 1, there were other violations of the compliance agreement set forth below. Payment 2 for delinquent taxes, due on May 30, 2014, was paid by regular check and sent by mail to Tallahassee rather than the Tampa Service Center.4/ This contravened the compliance agreement. After the May 30, 2014 payment, Respondent made no further payments pursuant to the Payment Agreement Schedule. This constituted a violation of the compliance agreement. Respondent did not remit payment with its current sales and use return for the month of August 2014. This contravened the compliance agreement. Respondent did not file any current sales and use tax returns or remit payment for the months of July 2014 or September through January 2015. This contravened the compliance agreement. Beginning in March 2014, Respondent filed current reemployment tax returns and payments using the incorrect tax rate on every return. This delayed their processing and resulted in penalties being imposed. In addition, even though Respondent was repeatedly told that such returns must be filed electronically, none were filed in that manner, as required by statute and rule. This contravened the compliance agreement. In its PRO, Respondent contends the compliance agreement cannot be enforced because there was no "meeting of the minds" by the parties on all essential terms of the agreement. Specifically, it argues that the total amount of taxes owed was still in dispute -- the dealer contended that it owed $23,000.00 less than was shown in the agreement; the Payment Schedule Agreement did not specify the amount of the final balloon payment; the compliance agreement failed to state when payments are due if the due date falls on a weekend or holiday; the compliance agreement did not specify how the dealer's payments would be allocated between UCTs and sales and use taxes; and the compliance agreement failed to address the issue of filing electronically. Although some of these issues were not raised in the parties' Joint Pre-hearing Stipulation, or even addressed by testimony at hearing, they are all found to be without merit for the reasons expressed below. First, Mr. Scott did not dispute the amount of taxes owed when he signed the agreement, and he brought no evidence to the conference to support a different amount. Second, as explained to Mr. Scott at the informal conference, the precise amount of the balloon payment can only be established in the 12th month. This is because the exact amount depends on the dealer's compliance with the agreement over the preceding 11 months, and the amount of interest, penalties, and/or other fees that may have accrued during the preceding year. Third, there is no evidence that the dealer was confused when a due date for a payment fell on a weekend or holiday. Even if it was confused, reference to section 212.11(1)(e) and (f) would answer this question. Fourth, there is no statute or rule that requires the Department to specify how the delinquent payments are allocated. Moreover, neither Mr. Scott nor the controller requested that such an allocation be incorporated into the agreement before it was signed. Finally, the issue of filing electronically already has been addressed in Finding of Fact 22 and Endnote 3. At hearing, Respondent's controller testified that she was out of town when the conference was held, suggesting that Mr. Scott, who is not an accountant, was at a disadvantage when he attended the informal conference. However, Respondent had six weeks' notice before the conference, and there is no evidence that Respondent requested that the meeting be rescheduled to a more convenient day. Also, Respondent does not dispute that Mr. Scott was authorized to represent its interests at the conference, or that he could have been briefed by the controller before attending the informal conference or signing the compliance agreement. See also Endnote 1. Notably, at hearing, the controller testified that she "was involved in actually negotiating the agreement both before and after it was actually signed" even though she did not attend the conference. Tr. at 89. Respondent also contends that after the Department considered the compliance agreement to be breached, the dealer had no further obligation to make payments pursuant to the agreement or state law until the parties negotiated a new agreement. Aside from Respondent's failure to cite any authority to support this proposition, nothing in the compliance agreement comports with this assertion. To the contrary, the compliance agreement specifically provides that if a breach occurs, the entire tax liability becomes due immediately. See Pet'r Ex. 6, p. 2, ¶ G. Thus, Respondent is obligated to pay the entire tax liability, which now exceeds $200,000.00. All other arguments raised by Respondent have been carefully considered and are rejected as being without merit.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order revoking Respondent's Certificate of Registration 39- 8011930243-9. DONE AND ENTERED this 11th day of June, 2015, in Tallahassee, Leon County, Florida. S D. R. ALEXANDER Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 11th day of June, 2015.
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 Department of Revenue's ("Department") assessment of tax, penalty, and interest against American Import Car Sales, Inc., is valid and correct.
Findings Of Fact The Department is the agency responsible for administering the revenue laws of the State of Florida, including the imposition and collection of the state's sales and use taxes. Petitioner, American Import Car Sales, Inc., is a Florida S-corporation with its principle place of business and mailing address in Hollywood, Florida. Petitioner, during the period of June 1, 2007, through May 31, 2010 ("assessment period"), was in the business of selling and financing new and used motor vehicles. On June 29, 2010, the Department issued to Petitioner a Notice of Intent to Audit Books and Records (form DR-840) for sales and use tax for the assessment period. Said notice informed Petitioner that the audit would begin on or around 60 days from the date of the notice and included an attachment identifying the records and information that would be reviewed and should be available when the audit commenced. Specifically, the Sales and Use Tax Information Checklist attachment requested the following: chart of accounts, general ledgers, cash receipts journals, cash disbursement journals, federal income tax returns, county tangible property returns, Florida Sales and Use Tax returns, sales journals, sales tax exemption certificates (resale certificates), sales invoices, purchase invoices, purchase journals, lease agreements for real or tangible property, depreciation schedules, bank and financial statements, detail of fixed asset purchases, and other documents as needed. On the same date, in addition to the Notice of Intent, the Department issued to Petitioner, inter alia, an Electronic Audit Survey, and a Pre-Audit Questionnaire and Request for Information. On September 17, 2010, the auditor requested the following records to review by October 4, 2010: (1) general ledger for the assessment period; (2) federal returns for 2007, 2008, and 2009; (3) lease agreement for the business location; (4) deal folders for the assessment period; (5) all expense purchase invoices for the assessment period; (6) all purchase invoices relating to assets added to the Depreciation Schedule during the assessment period; (7) resale/exemption certificates, shipping documents, and any other exempt sales documentation to support exempt sales during the assessment period; (8) bank statements for the assessment periods; and (9) all worksheets used to prepare monthly sales tax returns for the assessment period. On October 5, 2010, the auditor met with Petitioner's President Joe Levy, Petitioner's Secretary Joanne Clements, and Petitioner's Certified Public Accountant, Steve Levy. At that time, Petitioner provided a hard copy of the 2007 and 2008 general ledger and profit and loss statements. At that time, the auditor again advised Petitioner that the Department needed the federal returns, as well as the completed electronic audit survey and pre-audit questionnaire. On October 5, 2010, the Department and Petitioner signed a Consent to Extend the Time to Issue an Assessment or to File a Claim for Refund (form DR-872). The consent provided that assessments or claims for refunds may be filed at any time on or before the extended statute of limitations, December 31, 2011. On October 18, 2010, Petitioner provided the Department with the completed electronic audit survey and pre-audit questionnaire. Thereafter, Petitioner provided the Department with the following books and records: (1) 2009 "deal folders;" Petitioner's general ledger in Excel format for June 1, 2007, through December 31, 2010; (3) January 2009 through May 2010 bank statements; (4) a listing of exempt sales; and (5) lease agreements with attendant invoices. On August 25, 2011, the Department issued its assessment, entitled a Notice of Intent to Make Audit Changes (form DR-1215)("NOI"). Said notice provided that Respondent owed $2,324,298.42 in tax, $581,074.61 in penalties, and $515,117.04 in interest through August 25, 2011. The NOI addressed Petitioner's alleged failure to collect and remit tax on: (1) certain vehicle sales (audit Exhibit A01-Sales Tax Collected and Not Remitted)1/; (2) vehicle sales with no documentation regarding its exempt status (audit Exhibit A02-Disallowed Exempt Sales)2/; (3) motor vehicle sales where no discretionary tax was assessed (audit Exhibit A03- Discretionary Surtax)3/; and (4) unreported sales (audit Exhibit A04-Unreported Sales). The assessment also related to Petitioner's alleged failure to pay/accrue tax on: (1) taxable purchases (audit Exhibit B01-Taxable Purchases); (2) fixed assets (audit Exhibit B02-Fixed Assets); and (3) commercial rent (Exhibit B03-Commercial Realty). At hearing, Petitioner stipulated that the only component of the NOI remaining at issue pertains to audit Exhibit A04-Unreported Sales, as Petitioner has conceded A01, A02, A03, and all fee schedules. An understanding of audit Exhibit A04, and the assessment methodology employed by the auditor, is articulated in the Department's Exhibit MM, entitled Explanation of Items, which is set forth, in pertinent part, as follows: Reason for Exhibit: The records received for the audit were inadequate. The taxpayer provided bank statements for the period of January 2009 through May 2010. This period was deemed the test period for unreported sales. A review of the bank statements for the test period revealed that sales were underreported. This exhibit was created to assess for sales tax on unreported sales. Source of Information: Sales tax returns and Bank of America bank statements for the test period of January 2009 through May 2010; The Department of Motor Vehicles (DMV) [sic] was acquired for the period of June 2007 through May 2010. Description of Mathematical Adjustments: The bank statements were reviewed for the period of January 2009 through May 2010. Taxable Sales on sales tax returns, sales tax on sales tax returns, taxable sales on Exhibit on [sic] Exhibit A01, sales tax Exhibit A01 and Exempt Sales on Exhibit A02 was subtracted from Bank Deposits to arrive at unreported sales. See calculations on page 53. Unreported sales for the period of January 2009 through May 2010 were scheduled into this exhibit. A rate analysis of the DMV database resulted in an effective tax rate of 6.2689. Scheduled transactions were multiplied by the effective tax rate of 6.2689 to determine the tax due on the test period. A percentage of error was calculated by dividing the tax due by the taxable sales for each test period. The percentage of error was applied to taxable sales for each month of the audit period which resulted in additional tax due. The auditor's analysis of the test period, applied to the entire assessment period, resulted in a determination that Petitioner owed $1,599,056.23 in tax for unreported sales. On August 25, 2011, the auditor met with Joe and Steve Levy to discuss and present the NOI. At that time, Joe and Steve Levy were advised that Petitioner had 30 days to provide additional documents to revise the NOI. On September 28, 2011, the Department issued correspondence to Petitioner advising that since a response to the NOI had not been received, the case was being forwarded to Tallahassee for issuance of the Notice of Proposed Assessment ("NOPA")(form DR-831). On October 7, 2011, the Department issued the NOPA, which identified the deficiency resulting from an audit of Petitioner's books and records for the assessment period. Pursuant to the NOPA, Petitioner was assessed $2,324,298.42 in tax, $31,332.46 in penalty, and $534,284.54 in interest through October 7, 2011. The NOPA provided Petitioner with its rights to an informal written protest, an administrative hearing, or a judicial proceeding. On December 5, 2011, Petitioner filed its Informal Written Protest to the October 7, 2011, NOPA. The protest noted that the NOPA was "not correct and substantially overstated." The protest raised several issues: (1) that the calculation was primarily based upon bank statement deposits; (2) not all deposits are sales and sources of income; and (3) a substantial amount of the deposits were exempt sales and loans. The protest further requested a personal conference with a Department specialist. On January 10, 2013, Martha Gregory, a tax law specialist and technical assistance dispute resolution employee of the Department, issued correspondence to Petitioner. The documented purpose of the correspondence was to request additional information regarding Petitioner's protest of the NOPA. Among other items, Ms. Gregory requested Petitioner provide the following: [D]ocumentation and explanations regarding the source of income—vehicle sales, loan payments, etc.—for each deposit. For vehicle sales deposits, provide the customer name, vehicle identification number and amount; for loan payments, provide proof of an existing loan and the amount received from the borrower; and for any other deposits, provide documentation of the source of this income. A conference was held with Petitioner on February 7, 2013. At the conference, Ms. Gregory discussed the January 10, 2013, correspondence including the request for information. The Department did not receive the requested information. Following the conference, the Department provided the Petitioner an additional 105 days to provide documentation to support the protest. Again, Petitioner failed to provide the information requested. On June 14, 2013, the Department issued its Notice of Decision ("NOD"). The NOD concluded that Petitioner had failed to demonstrate that it was not liable for the tax, plus penalty and interest, on unreported sales as scheduled in audit Exhibit A04, Unreported Sales, as assessed within the compliance audit for the assessment period. Accordingly, the protested assessment was sustained. On July 15, 2013, Petitioner filed a Petition for Reconsideration to appeal the Notice of Decision ("POR"). The POR advanced the following issues: (1) the records examined were not the books and records of Petitioner; (2) the audit should be reduced because the auditor's methodology was incorrect; and the Petitioner should be allowed a credit for bad debts taken during the audit period. At Petitioner's request, on October 22, 2013, Petitioner and Ms. Gregory participated in a conference regarding the POR. At the conference, Petitioner requested a 30-day extension to provide documentation in support of Petitioner's POR. No additional documentation was subsequently provided by Petitioner. On April 29, 2014, the Department issued its Notice of Reconsideration ("NOR"). The NOR sustained the protested assessment. Petitioner, on June 30, 2014, filed its Petition for Chapter 120 Hearing to contest the NOR. Petitioner did not file its federal tax returns for the years 2008, 2009, and 2010 until after the Department issued the NOR. Indeed, the federal returns were not filed until June 3, 2014.4/ Ms. Kruse conceded that the auditor's assessment utilized Petitioner's bank statements to determine unreported sales; however, the auditor did not make any adjustments for "unusual items that would have been on the face of the bank statements." Ms. Kruse further acknowledged that the auditor's assessment does not reference Petitioner's general ledger information. Ms. Kruse acknowledged that, for several representative months, the general ledger accurately reported the deposits for the bank statements provided. When presented with a limited comparison of the bank statement and the general ledger, Ms. Kruse further agreed that, on several occasions, deposits noted on the bank statements were probably not taxable transactions; however, the same were included as taxable sales in the auditor's analysis. Ms. Kruse credibly testified that the same appeared to be transfers of funds from one account into another; however, because the Department only possessed the bank statements from one account, and never received the requested "back up information" concerning the other account, the Department could not discern the original source of the funds.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that The Department conduct a new assessment of Petitioner's sales and use tax based on a test or sampling of Petitioner's available records or other information relating to the sales or purchases made by Petitioner for a representative period, giving due consideration to Petitioner's available records, including Petitioner's general ledger, to determine the proportion that taxable retail sales bear to total retail sales. DONE AND ENTERED this 17th day of April, 2015, in Tallahassee, Leon County, Florida. S TODD P. RESAVAGE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 17th day of April, 2015.
The Issue Whether the Department of Revenue's final assessment of sales and use tax plus interest against Petitioner Karsten Enterprises FL, Inc., is correct.
Findings Of Fact Petitioner is a corporation headquartered in Dothan, Alabama, doing business in Florida. The Department is an agency of the State of Florida that has been delegated the responsibility to collect sales and use tax imposed by Chapter 212, Florida Statutes. During the audit period in controversy, from October 1, 2004 through September 30, 2007, Petitioner was a dealer in manufactured or modular homes and did business at one or more Florida locations. During the pertinent period, Petitioner entered into various contracts to provide manufactured or modular homes to its customers for delivery at locations in Florida. At a Karsten Sales Center, models of residential factory-built buildings are displayed. These residential factory-built buildings are produced by manufacturers that Karsten uses for that purpose. In most of the transactions during the audit period, Petitioner's customers would contract with Petitioner for the sale and installation of a factory built building on property owned by the customer. In the remainder of the contracts during the audit period, Petitioner would either purchase the property or enter into a contract for the sale of the property to the customer, and Petitioner would install a home that Petitioner had purchased from a manufacturer and then sell the home and land package to the customer. The contract prices were a lump sum, which included not only the manufactured or modular home, but also installation of the home at a Florida location. Petitioner’s contracts with its customers did not itemize individual components of the modular or manufactured homes, such as individual nuts, bolts, and shingles, but instead agreed to deliver the entire modular or manufactured home on an installed basis. The contracts between Petitioner and its customers specify the type of home that the customer wanted to have erected or installed on the property. Upon selection of a floor plan, options, and other customization, the customer would agree to order a specific home from a manufacturer. Petitioner purchased the pre-fabricated manufactured or modular homes from various manufacturers. The manufacturer would produce the home upon receiving an order from Petitioner. The manufacturer shipped the completed home to Petitioner, delivering the home to the property where the home would ultimately be erected and installed. Once shipped to the site, the factory-built buildings were placed on a foundation constructed for that purpose. Petitioner would either directly, through the manufacturer, or through subcontractors, construct the foundations, place the homes on the foundations, and connect the homes to required utilities. All of these activities were done as part of Petitioner's contracts with its customers for real property improvement. In many instances, the manufacturer both delivered the homes to the sites and provided post-delivery services to the homes. Additional services provided by the manufacturer after it installed the homes on the foundations included trim work, repair work, and fit and finish work. Petitioner paid the manufactures directly for these post-delivery services. During the audit period at issue, Petitioner sold, erected and installed approximately 30 residential modular or factory-built buildings in the state of Florida. If the home was built by a Florida factory, the factory would include sales tax in its invoice to Petitioner, based upon the cost of materials, but not including labor, that the manufacturer used in the construction of the home prior to its delivery to the site. If an out-of-state manufacturer built the home, the manufacturer would not include a sales tax amount in its invoices to Petitioner. Rather, the out-of-state manufacturers indicated that the cost of materials for construction of the homes at the factory was approximately 60% of the purchase price Petitioner paid for the homes. When Petitioner closed its contracts with its customers, if the manufacturer was an out-of-state manufacturer that had not previously included a sales or use tax in its invoice to Petitioner, Petitioner would remit a use tax directly to the Department, based upon 60% of Petitioner’s purchase price of the manufactured or modular homes. In either case, whether paying sales tax directly to a Florida manufacturer based only on the Florida manufacturer's cost of materials, or remitting use tax on 60% of its purchase price of manufactured or modular homes from out-of-state manufacturers, rather than paying tax on 100% of the price it paid for the homes, Petitioner did not pay sales or use tax on the manufacturer’s labor or fabrication costs. In remitting use tax, or paying sales tax to the Florida manufacturers, Petitioner was seeking to pay tax only on the manufacturer’s cost of materials used in the manufacturing process. There is no dispute concerning the Department’s math calculations. Rather, Petitioner disputes that the labor costs were taxable. Petitioner has no proof that the Department has ever received payment of tax from any person on the manufacturer’s labor costs at issue in this proceeding. Drenea York, who testified for the Department, is an accountant and auditor with twenty years of experience, all in sales and use taxation. Tammy Miller, who testified for the Department, is an attorney who has worked with the Department for eight years within the Department's Technical Assistance and Dispute Resolution section (Department's Dispute Resolution Section). The Department's Dispute Resolution Section employs “Tax Conferees,” such as Ms. Miller, who hear informal taxpayer protests, issue the Department's notices of decisions regarding final assessments, and provide guidance to the public upon request. Her practice has focused principally upon sales and use taxation, and she has handled several cases involving taxation of modular home contractors. Tammy Miller signed the notice of decision regarding the Final Assessment at issue. She also wrote the article for the Florida Institute of Certified Public Accountants, which Petitioner introduced into evidence as P1. She testified as the Department’s corporate representative. Douglas Uhler testified as a former employee of Petitioner and also as an expert witness for the Petitioner. He is a CPA with some tax experience, who was not shown to be a specialist in taxation or in Florida sales and use taxation. He practices in Birmingham, Alabama, where he is licensed. He has knowledge and expertise in valuation and other areas, but was not qualified as an expert to testify as to the tax determinations at issue in this controversy. Neither Petitioner nor Mr. Uhler applied for a TAA. Mr. Uhler was permitted to testify, over the Department’s hearsay and relevancy objections, that he relied on an oral statement from an alleged Department employee, concerning how Florida sales and use tax law is applied in the manufactured and modular home industry. During his testimony, however, Mr. Uhler did not know the name of the person to whom he allegedly spoke and he was not sure that the person he spoke to was an employee of the Department of Revenue. Therefore, no weight was given to his testimony regarding his recollection of a conversation with an alleged Department employee on the issue of how Florida sales and use tax law is applied in the manufactured and modular home industry. During the audit period at issue, the Department made four revisions to its original audit report in response to additional information provided by the Petitioner. During this period, the Petitioner paid the uncontested portion of the Department's assessment, leaving only one issue in dispute: whether additional tax and interest is due on Petitioner’s purchase of the modular homes. The Department’s audit and resulting tax assessment considered Petitioner, and not the manufacturer, to be the “real property contractor” responsible for the payment of the tax, within the meaning of the aforementioned rule provisions. The Department’s determination that Petitioner was the responsible “real property contractor” is consistent with the fact that the real property improvement contracts at issue were entered directly between Petitioner and its customers, and not between the manufacturer and Petitioner’s customers. In its contracts with its customers, Petitioner directly arranged installation work, either providing the installation itself or through the manufacturer or a subcontractor on behalf of Petitioner's customers. The issue of whether Petitioner or the manufacturer performed the installation work, however, was not considered by the Department to be a determinative factor, in and of itself, in making the Final Assessment. According to the Department, it would not consider a manufacturer to be the responsible “real property contractor” unless the contracts for real property improvement were directly between the manufacturer and Petitioner’s customers. The evidence does not support a finding that Petitioner's customers had direct contracts for real property improvements with the manufacturers of the homes. The Department also considered Petitioner to be the “end user” under Chapter 212, Florida Statutes, and Florida Administrative Code Rule 12A-1.051(3) and (4), which, according to the Department, imposes tax on the “end user.” The Department considered Petitioner, as opposed to Petitioner's customers, to be the end user based upon the reasoning that Petitioner was the last party to purchase the modular units as “tangible personal property,” before the modular homes became affixed to real property. Ms. York and Ms. Miller explained that the Department did not consider Petitioner’s customers to be the “end users” because Petitioner's customers did not purchase resold items of “tangible personal property,” itemized in detail under Florida Administrative Code Rule 12A-1.051(3)(d). Rather, they explained that Petitioner’s customers, who purchased under lump- sum contracts, were considered to have purchased an improvement to real property, and improvements to real property fall outside the scope of the Florida sales and use tax chapter. In its audit, the Department examined Petitioner’s contracts with its customers solely to determine that the Petitioner was the end user or the “real property contractor.” The Department’s assessment did not seek to impose tax or interest liability on Petitioner’s transactions with its customers. Instead, the Department taxed Petitioner on Petitioner’s “cost price” of purchasing modular homes, giving Petitioner full credit for any partial tax that Petitioner had paid. As noted above, during the audit period, when it was dealing with a Florida manufacturer, Petitioner generally remitted sales or use tax directly to the manufacturer, at the time of purchase. More often, however, Petitioner paid sales or use tax on a monthly basis, by direct accrual or remittance to the Department on approximately 60% of the amount Petitioner paid for homes manufactured by out-of-state manufacturers. The invoices to Petitioner frequently included other itemized charges, which the Department did not consider part of Petitioner’s “cost price” of the purchased modular units. For example, if an invoice included sales or use tax, the Department excluded charges for tax when calculating Petitioner’s “cost price,” so as to avoid imposing tax on the itemized tax. Likewise, no charges for installation of the modular units onto real property were included in the Department’s calculation of “cost price.” The Department instead determined “cost price” by adding up the “Base Price” for purchasing the modular homes, together with itemized home “Options,” as they appeared on the manufacturer's invoices to Petitioner for the modular homes. Examples of several “Options” would be such things as better carpeting, a sliding glass door, or a plywood floor. The combined total of “Base Price” and “Options” were used by the Department in determining Petitioner’s “cost price” of purchasing the units as items of tangible personal property from the manufacturer’s factory. Petitioner's "cost price" as determined by the Department reflected the seller’s (in this case the manufacturer’s) material and labor costs. The Department's Final Assessment, however, did not include costs related to the installation of the modular homes onto real property, as those were considered by the Department as costs arising subsequent to the sale of the product as tangible personal property. The Final Assessment only sought tax on Petitioner’s purchase cost of the modular homes as tangible personal property leaving the factory. Because Petitioner had already paid tax on approximately 60% of its cost price, the Department’s assessment sought to capture the 40% of sales and use tax that Petitioner never paid. The Department's assessment determined that Petitioner owed tax on its own “cost price” as invoiced by the manufacturer. The Department determined that the Petitioner’s “cost price” was a different “cost price” than the manufacturer’s “cost price.” According to the Department, the manufacturer’s cost price excluded labor on its factory floor but Petitioner’s “cost price” included all materials and labor costs that were necessarily a component of Petitioner's actual purchase price. The Department’s auditor gave Petitioner full credit for all taxes paid, whether Petitioner had paid the tax by direct remittance or at the time that it paid an invoice, with one exception: credit was generally not given for payments made by Petitioner to a company named Cavalier because during the audit period at issue, Petitioner remitted certain amounts of sales tax to a manufacturer named Cavalier, but Cavalier refunded these amounts to Petitioner.3/ The Department’s audit and assessment did not treat Petitioner as a “manufacturer” nor give Petitioner the benefit of the special exemption, under Section 212.06(1)(b), Florida Statutes, which is available to manufacturers of a “factory- built building.” This is because the Department did not consider Petitioner to be a manufacturer. Although Petitioner argued that it qualified for the special exemption under Section 212.06(1)(b), Florida Statutes, under the theory that it was a "manufacturer," Petitioner failed to show that it is a “manufacturer” entitled to such exemption. In accordance with Petitioner's Application for Registration with the Department, Petitioner was registered as a “Manufactured (Mobile) Home Dealer” rather than as a manufacturer. In response to audit interview questions, Petitioner advised the auditor that it was in the business of “Retail Sale” of “Mobile and Modular Homes.” Petitioner made this same representation again in its response to a Pre-Audit Questionnaire and Request for Information. The first time that Petitioner ever asserted that it was a "manufacturer" was after Petitioner received the Department’s Notice of Intent to make Audit Changes, and became aware that, as a “real property contractor,” it would be assessed tax on 100% of its “cost price.” Petitioner then changed its self-description of its business model, asserting that it was a “manufacturer.” When Petitioner protested the Department’s assessment, however, it abandoned, at least at the informal protest stage, the argument that it was a manufacturer. Petitioner instead argued that it should be treated like a real property contractor engaged in the business of stick built homes. According to Tammy Miller, Petitioner's president, Mr. Copeland, told Ms. Miller during the informal protest process, that Petitioner was not a manufacturer. The Final Assessment corroborates Tammy Miller’s recollection because it addressed Petitioner’s various legal arguments but did not address Petitioner’s argument that it is a manufacturer, because that argument apparently was not made during the informal protest. The Amended Petition does not allege that Petitioner was a manufacturer or that it should be treated like one. Petitioner instead asserts that it is a modular home dealer who purchases from “the factory” and that it should be treated like a stick-built contractor. Petitioner stipulated that it is a modular home “dealer” and that it purchased the pre-fabricated manufactured or modular homes from various manufacturers. No evidence was introduced that Petitioner owns or operates factories or an assembly line. Rather, the evidence showed that Petitioner operated out of an office building in Alabama. No evidence was presented that Petitioner has been licensed or certified as a “manufacturer” by the Department of Community Affairs, which is the agency that regulates manufacturers of factory-built buildings. See Fla. Admin. Code R. 9B-1.002(15) and 1.007(1). Petitioner’s representative repeatedly referred to Petitioner, throughout opening statement, argument and testimony, as a dealer purchasing from the factory. The Department’s witnesses testified that the sales and use tax applies to “real property contractors” in a way that taxes all real property contractors (stick-built or modular) on their full “cost price” of purchased materials, regardless of whether the purchased materials are lumber, shingles, nails, finished kitchen cabinetry, or assembled modular home modules. The Department's witnesses explained that the cost price of each item purchased will vary because the item purchased in each instance is different and some items will include greater material and labor costs than others. The Final Assessment reflects the unpaid balance assessed, after all revisions and payments made, and provides a per diem amount so that accrued interest may be readily calculated. The Final Assessment determined that the unpaid balance of tax and interest for the audit period (after crediting Petitioner with all payments made) was as follows: $41,446.31 combined tax and interest through 1/26/09, with $7.57 per day for each day thereafter until the postmark date of payment. The Final Assessment waived all penalties.
Recommendation Based on the foregoing Findings of Facts and Conclusions of Law, it is RECOMMENDED that, consistent with the Final Assessment and this Recommended Order, the Department of Revenue enter a final order finding that Petitioner owes tax and interest due as of January 26, 2009, in the amount of $41,446.39, with interest thereafter accruing at $7.57 per day, without penalties. DONE AND ENTERED this 1st day of October, 2010, in Tallahassee, Leon County, Florida. S JAMES H. PETERSON, III Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 1st day of October, 2010.
Findings Of Fact On August 27, 1976, the Respondent, State of Florida Department of Revenue, notified the Petitioner of its intention to assess sales tax, penalties and interest against the Respondent for business transactions in the period August 1, 1973 through July 31, 1976. This Notice of Proposed Assessment was revised on May 27, 1977, and the Petitioner was notified of that revision. By his letter of June 19, 1977, the Petitioner has challenged the assessment, as revised. Upon receipt of the June 19, 1977 petition, the Respondent moved for a more definite statement and the Petitioner was afforded fifteen (15) days from the date of the Order within which time to amend his petition. Petitioner took advantage of that opportunity to amend and by an undated document did make such an amendment. The Respondent subsequently moved to strike certain portions of the amended petition and filed its answer to the petition. A pre-hearing conference was held to consider the Motion To Strike and after that pre-hearing conference was concluded an Order was issued which struck certain portions of the amended Petition and allowed copies of the proposed notices of assessments of August 27, 1976 and the revision of May 27, 1977 to be made a part of the complaint/petition as Exhibits 1 and 2, respectively. After the pre-hearing Order had been issued by the undersigned, the case was noticed for hearing for December 5, 1977. At the December 5, 1977 hearing date a Second Revised Notice of Proposed Assessment of Tax, Penalties and Interest Under Chapter 212, Florida Statutes was tendered. This revision dated from December 5, 1977, was allowed to be introduced as the final position of the Respondent on the question of the assessment. It was also allowed to be attached as Exhibit 3 to the amended petition. (Under cover of a separate correspondence the original petition, amended petition, exhibits to the amended petition, an Order which was entered after consideration of the Motion To Strike, are being submitted as a part of the record herein). In the ordinary course of his duties a tax examiner employed by the Respondent went to the business premises of the Petitioner to perform an audit to determine whether or not the Petitioner was collecting and remitting sales tax for the category of sales which the Petitioner was making, that required the payment of sales tax. These requirements spoken of are those set forth in Chapter 212, F.S. Mr. DeCico, the tax examiner, allowed Mr. Farhud to pick three (3) months in the year 1976 as being the period to be audited. DeCico then returned to Farhud's place of business and showed him the details of the three (3) month audit. Farhud was dissatisfied wish this audit and indicated that he preferred to have the audit sample expended for a full three (3) years. DeCico replied that he would be willing to expand the audit period. but cautioned Farhud that expansion of the audit period might promote an increased liability. Nonetheless, at Farhud's request, the audit period was expanded to one for thirty-six (36) months. The new audit period dated from August 1, 1973, through July 1, 1976. The work papers on that audit may be found as Respondent's Exhibit No. 1 admitted into evidence. This audit which is depicted in the Respondent's Exhibit No. 1, left out invoices pertaining to stamps, electric bills, wrapping paper, grocery bags, etc., since they were not retail items for sale. The audit was rendered on August 27, 1976. Before the Notice of Assessment was filed, Farhud had expressed his displeasure with the outcome of the second audit process because he felt that certain amounts depicted in the gross sales were not accurate; to wit, the inclusion of certain so-called "service fees", namely income tax preparation, notary fees, etc. DeCico tried to get a reasonable statement of the amounts of the categories which Farhud desired to have excluded. Farhud did not have records of the matters and was unable to provide an estimate as to the amount of income which had been derived from the aforementioned "service fees". The August 27, 1976, proposed assessment was computed on the basis of the proposition that the gross sales are equivalent to actual sales and are subject to sales tax in the taxable categories. As indicated before, this audit did not take into consideration any "service fees", nor did it grant any allowance for pilferage. No allowance was made for the latter category, because Farhud had not provided any estimate and/or police records to indicate the amount which would be lost to pilferage, and cause a reduction of the sales tax liability. Farhud formally challenged the audit of August 27, 1976, by his correspondence of September 8, 1976 in which he rejects the amount claimed and asks for a hearing. A copy of this correspondence may be found as Respondent's Exhibit No. 2 admitted into evidence. An informal conference was held between the parties on October 12, 1976 to see if a resolution of the dispute could be achieved. Mr. Farhud was represented at the informal conference by Michael J. Burman, Esquire, an attorney in Jacksonville, Florida. By a letter of October 14, 1976, Farhud's attorney requested the Respondent to utilize the figures for the three (3) month audit period, as opposed to the thirty-six (36) month period. The letter concluded by stating that Mr. Burman was unaware of any intention Mr. Farhud had to appeal the assessment of August 27, 1976. This letter was followed by a series of letters in which the various parties were indicating the desire to determine whether or not Mr. Farhud intended to accept the August 27, 1976 assessment or to appeal it. In the course of his correspondence Mr. Farhud continued to insist that he did not accept the amount of assessment as accurate. Mr. Farhud failed to indicate to Mr. Burman whether he was going to appeal the assessment or not and Mr. Burman withdrew as his attorney, as shown in the January 31, 1977 correspondence addressed to one of the employees of the Respondent. This correspondence is Respondent's Exhibit No. 7 admitted into evidence. On February 2, 1977, the audit supervisor in the Jacksonville district of the Respondent wrote Mr. Farhud indicating the intention of the Respondent to collect the taxes pursuant to the August 27, 1976 audit. A copy of this correspondence is Respondent's Exhibit No. 8 admitted into evidence. It should be indicated at this point, that the Respondent's representative had continued to request documentation from Farhud on the items requested for exemption which have been referred to as "service fee". The subject of pilferage had also been discussed at the October 12, 1976 informal conference and a request made for some form of records of police reports which would verify pilferage allowances. No documentation had been provided at the time the February 2, 1977 letter was written to Farhud. Subsequent to the February 2, 1977 letter another informal conference was held on April 4, 1977. As a result of that conference it was determined that certain items would be deleted from the audit assessment of August 27, 1976. This is evidenced in Respondents Exhibit No. 9 which is a copy of a letter dated May 27, 1977, from the audit supervisor, Mr. McCrone, to Mr. Farhud. At the April 4, 1977, discussion the subject of pilferage allowance as brought up in the deletion of 4 percent of the purchase price of taxable goods, as to soft drinks, paper and said products, pet foods and miscellaneous sundries were allowed. No allowance was given for beer, wine and tobacco products because these were felt to be out of reach of prospective pilferers. Again, this deletion is found in the Respondent's Exhibit No. 9. The 4 percent figure was arrived at as an industry estimate. Farhud still was not satisfied after the April 4, 1977, conference had been held and adjustments to the assessment had been mode. In view of this dissatisfaction, the Respondent elected to make a new type of audit, which was performed and was premised upon an analysis of the taxable purchases by the Petitioner for the three (3) year period. These purchases were divided into taxable categories and these categories were then marked up in price using an industry average to arrive at the actual taxable sales. The industry average was based upon an examination of the United Food Stores, Inc.'s sales catalog, which had suggested retail prices for low volume and high volume stores. The Respondent gave the Petitioner the benefit of the range of high volume stores, although the Petitioner's store was a neighborhood convenience store and therefore a low volume operation. The effect of allowing the average retail price for the high volume stores was that it made the differential between his purchase price and the retail price less than that for a low volume neighborhood store, causing lesser tax liability. As stated before, this alternative method was elected for the reason that the Respondent had objected that the gross sales figures reported in the monthly tax returns were incorrect, due to the fact that the Petitioner was unable to document his claim for entitlement to certain exemptions due to pilferage and "service fees", and due to the belief that the more correct approach to the audit was the second method. The work sheet on the alternative method may be found on Respondent's Exhibit No. 10 admitted into evidence. The utilization of this method led to the revised assessment of May 27, 1977, which is the subject of the appeal by petition, and amended petition of the Petitioner. This revision was superceded by the second revision of December 5, 1977, which was allowed to be entered without objection from the Petitioner. The second revision reduces the amount of tax liability claimed by the Respondent. An analysis of the documents offered in this cause and the testimony, leads to the conclusion that the Petitioner/taxpayer owed sales tax during the audit period August 1, 1973 through July 31, 1976. Furthermore, the more correct form of audit procedure under the circumstances, was the alternate method employed in arriving at the May 27, 1977 revised Notice of Assessment as further revised by the December 5, 1977 Second Revised Notice of Proposed Assessment. This conclusion is grounded on the requirements of Section 212.05(1), F.S., which requires persons in the Petitioner's category for the exercise of the privilege of doing business, to assist in levying a tax in the amount of 4 percent in the categories covered. Furthermore, Sections 212.06(3) and 212.07(2), F.S., places the duty on the Petitioner to collect this 4 percent sales tax. The Petitioner failed to act in accordance with the provision of Chapter 212, F.S. and the Second Revised Notice of Proposed Assessment is correct and in keeping with the authority of Section 212.12(6), F.S.
Recommendation Therefore, it is hereby RECOMMENDED: That the Second Revised Notice of Proposed Assessment of Tax, Penalties and Interest found as Exhibit 3 to the amended petition which total is $2,238.92 be allowed with such adjustments as may be necessary for a computation of interest prior to the rendition of a final order. DONE and ORDERED this 3rd day of January, 1978, in Tallahassee, Florida. CHARLES C. ADAMS Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Nathan Weil, Esquire 203 Washington Street Jacksonville, Florida 32202 Patricia Turner, Esquire Assistant Attorney General Department of Legal Affairs The Capitol Tallahassee, Florida 32304 John D. Moriarty, Esquire Attorney, Division of Administration Department of Revenue Carlton Building Tallahassee, Florida 32304
The Issue The issue for determination is whether Petitioner should be assessed sales and use tax for the audit period May 1, 1997 through April 30, 2002, per the Notice of Proposed Assessment dated July 3, 2003.
Findings Of Fact Wales is a Florida S corporation. Its principal place of business is located at 2916 Southeast 6th Avenue, Fort Lauderdale, Florida. Wales' federal employee identification number is 59- 1703273. Wales' Florida sales and tax number is 16-03-095273- 26/1. By letter dated June 6, 2002, the Department issued to Wales a Notice of Intent to Audit Books and Records (Notice of Intent). The Notice of Intent identified the audit number as A0205310975. On July 10, 2002, the Department's auditor assigned to perform the audit conducted an initial interview with Wales. The auditor discussed, among other things, the audit and sample methods that would be employed during the audit. On August 13, 2002, the auditor began examining Wales' books and records at Wales' business location. Wales was cooperative during the audit. Wales provided all available books and records for the audit. The sole shareholders of Wales are Stewart Levy and Diane Levy. Wales leased its business location from Element Two Enterprises, Inc., ( Element Two) a related entity. Stewart Levy and Diane Levy are also the sole officers of Element Two, president and secretary, respectively. Element Two is the record owner of the improved real property located at 2916 Southeast 6th Avenue, Fort Lauderdale, Florida, (realty). The address for the realty is also the address for Wales' place of business. Element Two mortgaged the realty leased by Wales. Wales paid monthly monetary consideration to Element Two in lease payments, which directly correlated to the amount of the monthly mortgage payments. Ad valorem taxes and property insurance were included in the monthly mortgage payments. Wales paid the ad valorem taxes and property insurance on the leased property. The lease payments to Element Two by Wales included the amount of the ad valorem taxes, property insurance, and common areas of maintenance. Wales did not pay sales tax on any of the lease payments to Element Two. Element Two did not charge or remit sales tax to the Department on the lease payments by Wales. Element Two was not registered with the Department as a dealer. Only dealers that are registered can remit sales tax on lease payments. Consequently, Element Two could not remit sales tax on the lease payments by Wales. Wales did not utilize all of the property it leased. Wales sub-leased a portion of the leased property to an unrelated entity. A prior sales and use tax audit was conducted of the sub-lessee, which included the period May 1997 through December 1998. The Department examined the sublease audit to determine whether Wales owed additional sales tax. The Department's examination of that audit revealed that the sales and use tax on the rent paid by the sub-lessee for the period May 1997 through September 1998 was assessed and paid by the sub-lessee. For the period May 1997 through December 1998, Wales had neither charged or collected sales tax nor remitted sales tax to the Department on the sub-lessee's payments. No sales tax was charged or paid on the sublease payments for the period October 1998 through December 1998. From January 1999 through April 2002, Wales charged, collected, and remitted sales tax on the sublease payments. The Department credited Wales for sales tax already paid on the subleased portion for the period May 1997 through September 1998 and January 1999 through April 2002. On its general ledger, Wales posted the lease payments to Element Two as rent payments. Element Two posted the lease payments to its general ledger as rent income. On its federal income tax returns, Wales reported the lease payments to Element Two as rent expense. Element Two reported the lease payments on its federal income tax returns as rent income. On November 29, 2002, the Department issued to Wales a Notice of Intent to Make Audit Changes for audit number A0205310975. Wales requested and the Department agreed to hold an audit conference to discuss the audit findings. Wales claimed that rent payments made were not subject to sales tax because both Wales and Element Two signed the mortgage and promissory note on the realty leased by Wales. However, only Element Two was reflected as the borrower on the loan and only Element Two was the signatory on the mortgage even though both Wales and Element Two signed the promissory note. On January 10, 2003, Wales executed a Consent to Extend the Time to Issue an Assessment or to File a Claim for Refund (Consent). The Consent extended the statute of limitations for the period of time in which an assessment may be issued or a claim for refund may be filed to December 31, 2003. On July 3, 2003, the Department issued, by certified mail, the Notice and an Addendum to Proposed Assessment for audit number A0205310975. The Notice provided, among other things, for the assessment of sales and use tax in the amount of $17,481.73; penalty in the amount of $8,741.10; interest in the amount of $5,756.03, with additional daily interest being computed at the rate of $3.54 per day from July 3, 2003; and a total assessment in the amount $31,978.86. On September 1, 2003, the Notice became a Final Assessment for audit number A0205310975. Wales contested the Final Assessment and requested a hearing. Wales is not contesting that part of the audit which found that Wales failed to pay sales tax on certain fixed assets purchased for use in its business. At hearing, Wales contended that its federal income tax returns could be amended to reflect the payments to Element Two as mortgage payments instead of rent payments, which would, in turn, change the Department's audit to reflect the payments as mortgage not rent. To address this contention, the Department presented the testimony of an expert witness in the area of rental consideration and sales tax audits. The Department's expert testified that the consideration for rental or use of property is the payment between/to one who owns the real property and/from one who uses the property; and concluded that consideration, as rental, was provided to Wales by Element Two based on the Department's taxing statute, Section 212.031, Florida Statutes, and its rules and regulation, Florida Administrative Code Rule 12A-1.070. The expert opined that the mortgage payments were consideration for a lease or license to use the real property and that, therefore, the monthly lease payment, which equaled the monthly mortgage payment, paid by Wales to Element Two was consideration for the lease or license to use the realty. The expert's testimony is found to be credible. The evidence presented shows that the mathematical computations performed by the Department in its audit are correct. Further, the evidence shows that the mathematical computations as to tax, penalty, and interest assessed are correct.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue's assessment of sales tax, interest, and penalty against Wales Garage Corporation be sustained and that the Department of Revenue enter a final order assessing sales tax, interest, and penalty against Wales Garage Corporation for the period May 1, 1997 through April 30, 2002, consistent herewith. DONE AND ENTERED this 27th day of May, 2004, in Tallahassee, Leon County, Florida. S ERROL H. POWELL 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 27th day of May, 2004. COPIES FURNISHED: Gerald S. Schnitzer GSS Advisory Services, Inc. 2455 East Sunrise Boulevard, Suite 502 Fort Lauderdale, Florida 33304 Carrol Y. Cherry, Esquire Office of the Attorney General The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050 Bruce Hoffmann, 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
