92-002763 First Federal Savings And Loan Association Of Putnam County vs. Department Of Revenue Status: Closed Recommended Order on Monday, April 5, 1993.

Summary: Transmission of data via a leased telephone line not a private communication service.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FIRST FEDERAL SAVINGS AND )

LOAN ASSOCIATION OF PUTNAM )

COUNTY, )

)

Petitioner, )

)

vs. ) CASE NO. 92-2763

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

______________________________)

RECOMMENDED ORDER

Pursuant to notice, the above matter was heard before the Division of

Administrative Hearings by its duly designated Hearing Officer, Donald R.

Alexander, on December 10, 1992, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Patrick J. Phelan, Jr., Esquire

Post Office Box 669

Tallahassee, Florida 32302

For Respondent: Lealand L. McCharen, Esquire

Lisa M. Raleigh, Esquire

Department of Legal Affairs

The Capitol-Tax Section

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

The issue is whether certain charges made to petitioner by a data

processing company constitute a taxable sale of a "private communication

service" as defined by Subsection 203.012(4)(a), Florida Statutes.

PRELIMINARY STATEMENT

This matter began after an audit was conducted by respondent, Department of

Revenue (DOR), of the taxes paid by petitioner, First Federal Savings and Loan

Association of Putnam County, during the period June 1, 1985, through December

31, 1989. Contending that certain data communication services purchased by

petitioner from a data processing firm were "private communication services" or

"telecommunication services" and thus were subject to the sales tax, DOR

proposed an assessment on petitioner. After various informal appeals were

unsuccessful, petitioner filed its petition for formal hearing challenging the

proposed assessment. The parties have agreed that the total amount of taxes in

dispute are $11,476.12 plus penalties and applicable interest.

The matter was referred by respondent to the Division of Administrative

Hearings on May 6, 1992, with a request that a hearing officer be assigned to

conduct a formal hearing. By notice of hearing dated May 31, 1992, a final

hearing was scheduled on September 23 and 24, 1992, in Tallahassee, Florida. At

the parties' request, the matter was rescheduled to November 5, 1992, and then

again to December 10, 1992, at the same location.

At final hearing, petitioner presented the testimony of Michael E. Riddick,

its chief financial officer, Linda E. Guttman and Ron Futrell, both employees of

Florida Informanagement Services, Inc., Douglas S. Metcalf, also an employee of

Florida Informanagement, Inc. and accepted as an expert, and Park Randall

Miller, a former DOR executive director who was accepted as an expert. Also, it

offered petitioner's exhibits 1-6. All exhibits were received in evidence.

Respondent presented the testimony of R. Clay Brower and James E. Silvey, DOR

tax conferees. Also, it offered respondent's exhibits 1-7. All exhibits were

received in evidence. Finally, and pursuant to petitioner's request, the

undersigned took official notice of various statutes and administrative rules.

The transcript of hearing (two volumes) was filed on January 19, 1993.

Proposed findings of fact and conclusions of law were originally due on February

10, 1993. At the request of the parties, this time was extended to March 8,

1993, and proposed orders were timely filed that date. A ruling on each

proposed finding has been made in the Appendix attached to this Recommended

Order.

FINDINGS OF FACT

Based upon all of the evidence, the following findings of fact are

determined:

A. Background

1. Petitioner, First Federal Savings and Loan Association of Putnam County

(petitioner or First Federal), owns and operates a full service savings and loan

institution in the Palatka, Florida area. As a part of its regular business

operations, petitioner utilizes the services of Florida Informanagement

Services, Inc. (FIS), a data processing servicing firm which provides

bookkeeping and data processing services. In performing these services, FIS

collects financial data from computer terminals located at petitioner's offices

and returns processed data in the form of financial statements, payrolls, tax

reports, accounts receivable and payable statements, and related information to

petitioner.

2. Respondent, Department of Revenue (DOR), is the state agency charged

with the responsibility of enforcing the Florida Revenue Act of 1949, as

amended. Among other things, DOR performs audits on taxpayers to insure that

all taxes due have been correctly paid. To this end, a routine audit was

performed on petitioner covering the audit period from June 1, 1985, through

December 31, 1989.

3. After the results of the audit were obtained, and an initial assessment

made, on September 13, 1991, DOR issued a notice of decision wherein it proposed

to assess petitioner $43,204.91 in unpaid taxes. After a petition for

reconsideration was filed, DOR issued its notice of reconsideration reducing the

assessment to $37,805.92. The parties later reached an agreement as to all

issues except an assessment of $11,476.12 for unpaid sales taxes plus applicable

interest and penalties. The taxes relate to a charge on the monthly statement

issued to First Federal by FIS and which is identified as "total data

communications". The assessment concluded that the data communi-cations charge

is a taxable sale of a private communication service or a telecommunication

service within the meaning of Subsections 203.012(4)(a) and 203.012(5)(a),

Florida Statutes (1989). Contending that the assessment should be withdrawn,

petitioner initiated this proceeding.

B. The Services Provided by FIS

4. Established in 1968 by a group of savings and loan institutions, FIS is

a data processing service bureau headquartered in Orlando, Florida, and which

contracts with approximately one hundred clients, all savings and loan

institutions, to provide comprehensive data processing and accounting-type

services. Its sole purpose is to provide its clients with state of the art data

processing services at an economical shared cost. The services being rendered

here are commonly provided to banking institutions throughout the state by FIS

and a number of similar data processing companies.

5. FIS utilizes a network of long distance telephone lines leased from

various telephone companies located throughout the state to collect financial

transaction data from each of its member clients, including petitioner.

Keyboards are utilized by bank employees at each office to input financial

transaction information (e. g., a deposit to or withdrawal from a checking

account) to a "data line" or communication channel, which is a multi-link long

distance communication pathway leased by FIS from a telephone company. This

information is collected by a front end processor and transmitted through the

data line to the computer system (mainframe) located at FIS headquarters in

Orlando. The computer acknowledges receipt of the transaction, records and

processes the transaction, and sends a response back through the data line to

the sending terminal. This process is repeated hundreds of times each day for

every terminal located at each bank office. At the end of each business day,

FIS processes all of the transaction data collected during the day into

comprehensive reports which summarize such activities as loan and account

balances, bank department activities, automatic teller transactions, and similar

information. These reports are then delivered to the banks by courier the next

morning. It is noted that during the first two years of the audit period, First

Federal had a single data line with twenty-six terminals. In 1987, a second

data line was added due to an increase in terminals. Today, First Federal has

four offices with a total of forty-eight terminals on two data lines.

6. FIS and its clients have entered into an information processing

agreement which governs the provision of services and their price. This

contractual relationship between FIS and First Federal began in 1974. Copies of

the 1982, 1985 and 1987 agreements have been received in evidence as

respondent's exhibits 6 and 7 and petitioner's exhibit 4, respectively.

Paragraph 4.(c) of the first two agreements provides that "(t)elecommunications

for on-line services will be provided by FIS as part of this agreement" while

the 1985 agreement also provides that "(p)rice increases charged to FIS by

telecommunications senders will be passed on to the institution". The copy of

the 1987 agreement introduced into evidence is incomplete but the testimony

suggests that except for the word "telecommunications" found in paragraph 4.(c)

of the earlier agreements, the same provisions appear in the more recent

agreements.

D. The Data Communications Charge

7. FIS issues on a monthly basis an itemized statement for its services.

Among the charges on the statement is one labeled "total data communications",

which is based upon the total number and types of computer terminals which can

access the FIS computer. The charge is not based on the actual cost of

establishing and maintaining the communication pathway but rather is assessed

equally upon all FIS clients as an identical monthly flat fee per terminal

charge of $86. The same flat fee per terminal charge is assessed regardless of

the number of computer terminals utilized by an institution, the number of

transactions per terminal, the amount of telephone time consumed, or the

geographic distance between the FIS mainframe computer and the customer's

location. Thus, the same fee per terminal would be assessed on a bank in

Orlando a few blocks from the mainframe computer as one located in Pensacola or

the Florida Keys.

8. The data communications charge represents a number of cost elements

including the establishment and maintenance of the FIS mainframe computer

system, research and development, technical support, company overhead, and the

cost of the leased telephone lines. However, the per terminal charge of $86 is

neither a direct nor indirect pass-through by FIS of the actual cost of

establishing and maintaining the communications link with any individual

customer.

E. Is the Transaction Taxable?

9. DOR acknowledges that the various data processing services that First

Federal purchases from FIS, which is acting as a "service bureau" under Rule

12A-1.032(6), Florida Administrative Code, are "professional services" and are

exempt from taxation under Subsection 212.08(7)(v)1., Florida Statutes. It also

admits that as of the date of hearing, it had no "firm" policy on the issue

presented herein and was still in the process of developing one. Even so, DOR

contends that the services identified as "total data communications", which

include the communication network through which FIS collects the raw financial

data from its clients for processing, are taxable since these services

constitute a private communication service as that term is defined in Subsection

203.012(4)(a), Florida Statutes (1989). There, the term is defined as a

communication service that entitles a subscriber "to exclusive or priority use

of a communication channel."

10. DOR first relies upon the fact that during the audit period FIS and

First Federal had entered into agreements for FIS to provide First Federal with

"telecommunications" for its "on line" services. DOR construes this language in

a literal sense to mean that FIS is "selling" a telecommunication service. In

addition, the agreements allow FIS to increase the data communication charges

based upon potential increased telephone costs to FIS. Again, DOR interprets

this language as further evidence that FIS is merely reselling a telephone

service to its clients. DOR also points out that First Federal has a reasonable

certainty of getting its communication through on the communication channel and

that no other communication can take place on the line while First Federal is

transmitting or receiving a message. It considers irrelevant the fact that

First Federal may not have priority or exclusive rights over any other FIS

client having access to the FIS data collection system. Thus, DOR concludes

that First Federal has "exclusive or priority use" of a communication channel

within the meaning of the law. It further concludes that FIS is engaged in the

sale of a private communication service (via the leased telephone lines) which

gives First Federal access to FIS's computer.

11. The evidence shows that the computer terminals located at petitioner's

offices are commonly referred to as "dumb" terminals whose sole function is data

input, that is, to transmit data from the institution to the computer mainframe.

They cannot be utilized to access the FIS mainframe to perform any type of

individualized date processing or other analysis. Further, they cannot

communicate with each other using the data lines nor can they communicate with

any other financial institution or other computer system. In addition, the

lines cannot be used for regular voice communication, and when the institution

is closed, the lines cannot be used for any other purpose.

12. Over ninety percent of FIS member institutions share portions of one

or more data lines with other FIS clients. Although during the audit period

First Federal did not share its two lines with another institution, if one

should open an office in the Palatka area and utilize FIS's services, its

terminals would be placed on the unused portion of First Federal's lines,

assuming such unused capacity is then available. In addition, all of the data

collection and processing services are controlled directly by FIS. Thus, no FIS

client has any priority in transmitting transaction information or obtaining

data processing services over any other FIS customer, regardless of size or

geographic location. Rather, the data is collected by FIS according to a pre-

determined polling system controlled by a communication processor. Since a

single data line can collect information from as many as thirty individual

computer terminals, the polling system must "poll" each of those thirty

terminals in numeric sequence to determine if the terminal has any data to

transmit. Once the polling system has "polled" a particular terminal, the

terminal is unable to transmit data until all other terminals have been polled.

Further, while a message is being transmitted to or received from the computer

mainframe, no other transmissions can take place on the data line, and there is

no provision in the system to interrupt a transmission. Processed data is then

returned to the institution according to the same numeric cycle. Therefore, no

institution has "use" of a data line other than that which is directed by FIS,

and the fact that a client can be reasonably assured that FIS will collect its

data transmissions in a timely manner does not equate to a "priority use" of the

communication pathway.

13. The overall cost of the telephone line "network" represents a

substantial portion of the total data communication charges assessed to each

customer. However, the terminal charge made to each FIS customer is not truly

representative of the cost to FIS of obtaining and providing the actual

communications link between FIS and an individual bank. As noted earlier, and

by way of example, the cost of establishing and maintaining a telephone link

between FIS and a small bank in the Florida Keys or the Panhandle would

substantially exceed the data communications charge assessed to those

institutions.

14. FIS receives telephone bills from every local and regional telephone

company from which it leases telephone lines. During the audit period, it was

not uncommon for FIS to receive between seven hundred and one thousand telephone

bills per month for services to approximately eighty-four full service data

processing clients. These bills included both sales and gross receipts taxes

and were paid by FIS on a monthly basis. The FIS accounting department does not

analyze the individual charges on the various statements to determine the

monthly cost of a data line to an individual customer, nor are the charges made

to FIS by the various telephone companies for each FIS client rebilled to any

particular institution, either directly or indirectly. Rather, FIS absorbs the

cost of the entire telephone network as a part of its normal business expense.

15. The earlier information processing agreements refer to

"telecommunication services" being provided under the agreement. However, the

agreements also refer to the existence of one or more third party providers

(i.e., regulated telephone companies) of the actual telephone service, and FIS

makes no charge for "telephone service". While the agreements allow FIS to

increase the data communications charges based upon the potential increased

telephone costs to FIS, the charges assessed to FIS customers are unrelated to

the actual cost of providing the service between any particular institution and

the computer. Indeed, the provision simply allows FIS, when deemed to be

necessary, to increase the terminal fee based upon an increase in one of its

many cost components. Even if this right is exercised, any increase in that

charge would be equally assessed on all clients throughout the state, regardless

of their size or location. However, it should be noted that FIS has experienced

a substantial increase in costs in providing the telephone service in recent

years, but has not raised the data communication charge to any client since

1986.

16. FIS has never charged First Federal for "telephone service". It is

irrelevant to the institution how FIS establishes or designates its charges. If

the data communication charge was deleted and the costs of the other tax exempt

charges increased accordingly, First Federal would still continue to utilize

FIS's services.

17. During the audit period, FIS was not registered with DOR as a provider

of private communication services. Indeed, its only business is providing data

processing and accounting-type services. If it was reselling private

communication services, as DOR suggests, it would have to register with DOR and

pay a 1.5 percent gross receipts tax on the actual cost of operating the system.

DOR recently concluded an eighteen month audit of FIS for the period 1985-1989

and determined that FIS was not liable for gross receipts tax on the sale of any

alleged telecommunications services.

18. Finally, testimony by an expert who served as DOR executive director

during most of the audit period established that when the law was amended

effective July 1, 1984, to impose both sales and gross receipts taxes on the

sale of private communication services, DOR interpreted the amendments to apply

to those providers who were selling communication services which escaped

taxation by bypassing the existing telephone companies or other regulated

utilities. This included those who provided communications by microwaves,

satellites, privately owned telephone lines and "smart buildings", which utilize

a combination of both public and private communication systems. The expert

further established that if the issue had been raised during his tenure, DOR

would not have construed the activity here to be a taxable sale of a private

communications service since neither FIS nor its clients were operating outside

the existing telephone company pathways thereby escaping the sales and gross

receipts taxes.

19. In summary, the evidence supports a finding that First Federal does

not have exclusive or priority use of the data lines and accordingly the

challenged service cannot be considered a private communication service. In

addition, because FIS could not function as a data processing company without

the data collection system, which is an integral part of its comprehensive data

processing services, the collection of raw financial data must be construed as a

tax exempt service. Therefore, the assessment against First Federal should be

withdrawn.

CONCLUSIONS OF LAW

20. The Division of Administrative Hearings has jurisdiction of the

subject matter and the parties hereto pursuant to Sections 120.57 and 120.575,

Florida Statutes (1991).

21. As provided for in Subsection 120.575(2), Florida Statutes (1991), the

agency's "burden of proof...shall be limited to a showing that an assessment has

been made against the taxpayer and the factual and legal grounds upon which the

(agency) has made the assessment". See also, Department of Revenue v. Quotron

Systems, Inc., 18 F.L.W. D692, D693 (Fla. 3d DCA, March 9, 1993). Once that

showing is made, the burden shifts to the taxpayer to demonstrate by a

preponderance of the evidence that the assessment is incorrect.

22. The DOR assessment is predicated on the premise that the service being

offered by FIS to First Federal, namely, the furnishing of access to FIS's

computer via a leased telephone line (data line), constitutes a sale of a

private communication service as that term is defined in Subsection

203.012(4)(a), Florida Statutes. There, the term is defined as follows:

(4) The term "private communication service"

means:

(a) A communication service furnished to a

subscriber or user that entitles the

subscriber or user to exclusive or priority

use of a communication channel or groups of

channels, or to the use of an inter-

communication system for the subscriber's

stations, regardless of whether such channel,

groups of channels, or intercommunication

system may be connected through switching with

a service described in subsection (3),

subsection (6), or subsection (7). (Emphasis

added)

* * *

In construing the foregoing statute, the undersigned is obliged to honor the

long established rule that taxing statutes are to be strictly construed against

the taxing power and any ambiguity in the provisions of the statute should be

resolved in favor of the taxpayer. See, e. g., Maas Brothers, Inc. v.

Dickinson, 195 So.2d 193, 198 (Fla. 1967).

23. To sustain the assessment under the foregoing statute, it must be

clearly established that the subscriber (petitioner) has "exclusive or priority

use of a communication channel or group of channels." In the absense of an

express statutory definition, "exclusive" and "priority" should be accorded

their common and ordinary meanings. See, e. g., State, Department of

Administration v. Moore, 524 So.2d 704, 707 (Fla. 1st DCA 1988). To have

priority, one should have "precedence in time, order, (and) importance" while

exclusive means "excluding all others (and) not shared or divided." Webster's

New Twentieth Century Dictionary, Unabridged Second Edition (1979). At the same

time, because a taxing statute governs this dispute, these terms should be

strictly construed against the taxing power. Maas Brothers, Inc., supra. The

evidence shows that the data lines are shared by all of FIS's clients as a group

of subscribers rather than First Federal alone and that First Federal has no

"priority" or "exclusive" use of the data line or mainframe computer over any

other subscriber. In addition, all data collection services are controlled by

FIS rather than the institutions, the sole function of the terminals is to

transmit data from the institution to the FIS mainframe, and First Federal is

only assured that FIS will collect its data transmissions in a timely manner and

nothing more. Given this factual underpinning, it is concluded that First

Federal does not have "exclusive or priority use of a communication channel or

groups of channels" within the meaning of the law and therefore the services

encompassed within the data communications charge do not constitute a private

communication service. This conclusion is consistent with the testimony of

petitioner's expert who established that after the enactment of the tax in 1984,

DOR interpreted the new law to be applicable to those persons selling a private

communication service which was otherwise escaping taxation through a "by-pass"

of the regulated telephone system. Since FIS has been paying gross receipts and

sales taxes on its telephone bills, and has not bypassed the regulated system,

the service here was not intended to be subject to the tax in question.

24. In reaching the above conclusions, the undersigned has considered

DOR's contention that because the earlier FIS-First Federal agreements referred

to the furnishing by FIS of a "telecommunications" service, this strongly

suggests the resale of a telephone line. However, the use of the word

"telecommunications" does not subject the service to taxation if it otherwise

does not meet the statutory definition of a private communication service. The

undersigned has also considered a similar contention by DOR that the provision

in the agreements which allows FIS to increase the data communications charge

due to potential increased telephone costs provides further evidence that a

resale of telephone service has occurred. However, this language simply

confirms the right of FIS, when necessary, to pass on one of many cost

components that make up the terminal fee. In addition, on those few rare

occasions when terminal fees have been raised, there is no relationship between

the increase and the telephone tariff rates.

25. In summary, it is concluded that the communication services in issue

here do not constitute a private communication service. Rather, the collection

of financial transaction information through the data lines is a part of the tax

exempt professional services rendered by FIS as a service bureau and is a non-

taxable transaction.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is

RECOMMENDED that respondent enter a final order withdrawing (rescinding)

the assessment against petitioner.

DONE AND ENTERED this 5th day of April, 1993, in Tallahassee, Leon County,

Florida.

___________________________________

DONALD R. ALEXANDER

Hearing Officer

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

[phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 5th day of April, 1993.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-2763

Petitioner:

1. Partially accepted in finding of fact 1.

2. Partially accepted in findings of fact 2 and 3.

3. Partially accepted in findings of fact 4 and 6.

4-8. Partially accepted in finding of fact 5.

9. Partially accepted in finding of fact 7.

10-12. Partially accepted in finding of fact 9.

13. Rejected as being unnecessary.

14. Partially accepted in finding of fact 10.

15-16. Partially accepted in findings of fact 7 and 10.

17-18. Partially accepted in finding of fact 8.

19-20. Partially accepted in finding of fact 13.

21-23. Partially accepted in finding of fact 14.

24. Partially accepted in finding of fact 16.

25-27. Partially accepted in finding of fact 15.

28. Partially accepted in findings of fact 11 and 12.

29-30. Partially accepted in finding of fact 11.

31-35. Partially accepted in finding of fact 12.

36. Partially accepted in finding of fact 5.

37-39. Partially accepted in finding of fact 18.

40. Rejected as being unnecessary.

41. Partially accepted in finding of fact 17.

42. Partially accepted in findings of fact 3 and 4.

Respondent:

1-2. Partially accepted in finding of fact 1.

3-4. Partially accepted in finding of fact 3.

5. Partially accepted in finding of fact 6.

6. Partially accepted in finding of fact 10.

7. Partially accepted in finding of fact 5.

8. Partially accepted in finding of fact 10.

9. Rejected as being contrary to more credible and

persuasive evidence.

10-13. Partially accepted in finding of fact 12.

Note - Where a proposed finding has been partially accepted, the remainder has

been rejected as being irrelevant, unnecessary, subordinate, not supported by

the evidence, or a conclusion of law.

COPIES FURNISHED:

Mr. Larry Fuchs

Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, FL 32399-0100

Linda Lettera, Esquire

General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, FL 32399-0100

Patrick J. Phelan, Jr., Esquire

P. O. Box 669

Tallahassee, FL 32302

Lealand L. McCharen, Esquire

Department of Legal Affairs

The Capitol-Tax Section

Tallahassee, FL 32399-1050

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

ALL PARTIES HAVE THE RIGHT TO SUBMIT TO THE DEPARTMENT OF REVENUE WRITTEN

EXCEPTIONS TO THIS RECOMMENDED ORDER. ALL AGENCIES ALLOW EACH PARTY AT LEAST

TEN DAYS IN WHICH TO SUBMIT WRITTEN EXCEPTIONS. SOME AGENCIES ALLOW A LARGER

PERIOD WITHIN WHICH TO SUBMIT WRITTEN EXCEPTIONS. YOU SHOULD CONSULT WITH THE

DEPARTMENT OF REVENUE CONCERNING ITS RULES ON THE DEADLINE FOR FILING EXCEPTIONS

TO THIS RECOMMENDED ORDER.