92-003612 Lauren, Inc. vs. Department Of Revenue Status: Closed Recommended Order on Monday, November 23, 1992.

Summary: Arrangement between game machine owner and location operator was rental of tangible personal property; machine owner thus not liable for taxes.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

LAUREN INC., )

)

Petitioner, )

)

vs. ) CASE NO. 92-3612

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

________________________________)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing was conducted in this case on October

6, 1992, in Tallahassee, Florida, before Stuart M. Lerner, a duly designated

Hearing Officer of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Marie A. Mattox, Esquire

William A. Friedlander, Esquire

3045 Tower Court

Tallahassee, Florida 32303

For Respondent: Eric J. Taylor, Esquire

Assistant Attorney General

Office of the Attorney General

The Capitol, PL01

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

Whether the tax, penalty and interest assessment issued against Petitioner

as a result of Audit No. 90-19801486 should be withdrawn as requested by

Petitioner.

PRELIMINARY STATEMENT

By letter dated November 13, 1991, Respondent provided written notice of

its decision, as a result of Audit No. 90-19801486, to issue an assessment

against Petitioner in the amount of $238,780.06 for taxes owed (plus penalty and

interest) for Petitioner's alleged use during the audit period of real property

in connection with its coin-operated machine business. Petitioner sought

reconsideration. On April 21, 1992, Respondent issued its Notice of

Reconsideration sustaining the assessment. Petitioner subsequently filed with

Respondent a Petition for Formal Hearing. On June 18, 1992, Respondent referred

the matter to the Division of Administrative Hearings for the assignment of a

Hearing Officer to conduct the formal hearing Petitioner had requested.

Two witnesses testified at the final hearing held in this case: Robert

Mathews, Petitioner's chief executive officer during the audit period; and

Manley Lawson, a member of the Board of Directors of the Florida Amusement and

Vending Association, a trade association representing the interests of those in

the coin-operated machine business in this state. In addition to the testimony

of these witnesses, a total of 11 exhibits were offered and received into

evidence. The evidence presented was supplemented by a stipulation into which

the parties had entered prior to hearing.

At the close of the evidentiary portion of the hearing on October 6, 1992,

the Hearing Officer advised the parties on the record that post-hearing

submittals had to be filed no later than 20 days following the Hearing Officer's

receipt of the hearing transcript. The Hearing Officer received the hearing

transcript on October 27, 1992.

On November 16, 1992, Respondent timely filed a proposed recommended order.

The following day, Petitioner filed its proposed recommended order. It was

accompanied by a motion requesting that the Hearing Officer extend by one day

the deadline for submission of proposed recommended orders. Upon consideration,

Petitioner's motion for extension of time is hereby GRANTED.

The parties' proposed recommended orders contain, what are labelled as,

"findings of fact." These proposed "findings of fact" have been carefully

considered and are specifically addressed in the Appendix to this Recommended

Order

FINDINGS OF FACT

Based upon the evidence adduced at hearing, and the record as a whole, the

following Findings of Fact are made:

1. Petitioner is a Florida corporation that was at all times material to

the instant case (but is no longer) in the coin-operated machine business.

2. It owned various amusement and game machines that were placed at

different locations pursuant to agreements with the location operators.

3. Most of these agreements were not reduced to writing.

4. In those instances where there was a written agreement, a "Location

Lease Agreement" form was used, with insertions made where appropriate in the

spaces provided. The form indicated, among other things, that Petitioner was

"in the business of leasing, renting, servicing, maintaining and repairing of

coin-operated machines" and that the agreement was "for the placement, servicing

and maintaining of certain coin-operated machines" in the location specified in

the agreement.

5. In the coin-operated machine trade, the custom was for the parties to

an oral or written agreement for the placement of an amusement or game machine

on the property of another to treat such an agreement as involving the location

operator's rental of the machine owner's tangible personal property rather than

the machine owner's rental of the location operator's real property.

6. Petitioner and the location operators with whom it contracted followed

this custom of the trade in their dealings with one another. They construed

their agreements as involving the rental of Petitioner's tangible personal

property by the location operators and acted accordingly. Petitioner collected

from the location operators the sales tax due on such rentals and remitted the

monies collected to Respondent. 1/ It engaged in this practice for

approximately a decade without challenge by Respondent.

7. In late 1990 and early 1991, Respondent conducted an audit of

Petitioner's records. The audit covered the period from January 1, 1988, to

September 30, 1990 (referred to herein as the "audit period").

8. Among the records reviewed were those agreements between Petitioner and

location operators that were reduced to writing.

9. Based upon their reading of these agreements, the auditors were of the

view that the agreements into which Petitioner had entered were actually for the

rental of the location operators' real property, not the rental of Petitioner's

machines. They therefore concluded that Petitioner, as opposed to the location

operators, should have paid sales tax and that Petitioner's purchase of machines

and parts should not have been treated as tax exempt.

10. The assessment which is the subject of this proceeding thereafter

issued.

CONCLUSIONS OF LAW

11. The instant case is governed by the version of Rule 12A-1.044, Florida

Administrative Code, that was in effect during the audit period (referred to

herein as the "Rule"). It read in pertinent part as follows:

(2) Vending and amusement machines, machine

parts, and locations.

(a) When coin-operated vending and amusement

machines or devices dispensing tangible

personal property are placed on location by

the owner of the machines under a written

agreement, the terms of the agreement will

govern whether the agreement is a lease or

license to use tangible personal property or

whether it is a lease or license to use real

property.

(b) If machines are placed on location by

the owner under an agreement which is a lease

or license to use tangible personal property,

and the agreement provides that the machine

owner receives a percentage of the proceeds

and the location operator receives a

percentage, the percentage the machine owner

receives is rental income and is taxable.

The tax is to be collected by the machine

owner from the location operator. The

purchase of the records, needles, tapes,

cassettes, and similar items, machines,

machine parts and repairs, and replacements

thereof by the machine owner is exempt.

(c) If machines are placed on location by the

owner under an agreement which is a lease or

license to use real property, and the

agreement provides that the machine owner

receives a percentage of the proceeds and the

location operator receives a percentage, the

percentage the location operator receives is

income from the lease or license to use real

property and is taxable. The tax is to be

collected by the location operator from the

machine owner. The purchase of the records,

needles, tapes, cassettes, and similar items,

machines, machine parts, and repairs and

replacements thereof by the machine owner is

taxable.

* * *

(4) The purchase of amusement machines or

merchandise vending machines and devices is

taxable, unless purchased for exclusive

rental.

* * *

(7) The following examples are intended to

provide further clarification of the

provisions of this section:

(a) Example: The owner of Town Tavern enters

into a lease agreement with Funtime Company.

Under the terms of the agreement, Funtime will

provide coin-operated video game machines to

Town Tavern, with Funtime retaining title to

the machines and providing repairs or

replacement parts as necessary. As

consideration for the rental of the machines,

Town Tavern will give Funtime 60% of the

proceeds from the machine. By the terms of

the agreement, this arrangement is a lease of

tangible personal property and Funtime, as the

lessor, must collect tax from Town Tavern on

the portion of the proceeds it receives. The

purchase of the video game machines, machine

parts, and repairs thereof by Funtime Company

is exempt. The portion of the proceeds

retained by Town Tavern is not taxable.

(b) Example: An amusement and vending

machine owner enters into a license agreement

with City Airport, which grants the machine

owner the right to place amusement and vending

machines in Concourse A. The amusement

machines consist of several electronic games

and a pinball machine. The vending machines

consist of soft drink, snack food, and candy

machines. City Airport has the right to

designate the areas within the concourse where

the machines will be located; the machine

owner and owner's employees are to stock the

machines and provide repairs as needed. As

consideration under the agreement, City

Airport will receive 15 percent of all

proceeds from the machines. By the terms of

the agreement, this arrangement is a license

to use real property, and City Airport, as the

licensor, must collect tax from the machine

owner.

12. At issue in the instant case is whether the agreements Petitioner

entered into with location operators during the audit period were, as claimed by

Petitioner, leases or licenses to use tangible personal property, within the

meaning of subsection (2)(b) of the Rule, or whether they were, as asserted by

Respondent, leases or licenses to use real property, within the meaning of

subsection (2)(c) of the Rule.

13. After having carefully examined the record in the instant case,

particularly the stipulations and evidence regarding the contents of the

agreements in question, how the agreements were interpreted by Petitioner and

the other parties to the ageements, and the trade customs prevailing at the

time, the Hearing Officer finds that the agreements were leases or licenses to

use tangible personal property, within the meaning of subsection (2)(b) of the

Rule, and that therefore the assessment issued against Petitioner, which was

predicated upon a contrary finding, is not valid. See Blackhawk Heating &

Plumbing Co., Inc., v. Data Lease Financial Corp., 302 So.2d 404, 407 (Fla.

1974)("[i]n the construction of written contracts, it is the duty of the court,

as near as may be, to place itself in the situation of the parties, and from a

consideration of the surrounding circumstances, the occasion, and apparent

object of the parties, to determine the meaning and intent of the language

employed;" "[w]here the terms of a written agreement are in any respect

doubtful or uncertain, or if the contract contains no provisions on a given

point, or if it fails to define with certainty the duties of the parties with

respect to a particular matter or in a given emergency, and the parties to it

have, by their own conduct, placed a construction upon it which is reasonable,

such construction will be adopted by the court, upon the principle that it is

the duty of the court to give effect to the intention of the parties where it is

not wholly at variance with the correct legal interpretation of the terms of the

contract"); Oakwood Hills Company v. Horacio Toledo, Inc., 599 So.2d 1374, 1376

(Fla. 3d DCA 1992)("[i]t is a recognized principle of law that the parties' own

interpretation of their contract will be followed unless it is contrary to law;"

"the court may consider the conduct of the parties through their course of

dealings to determine the meaning of a written agreement"); International Bulk

Shipping, Inc. v. Manatee County Port Authority, 472 So.2d 1321, 1323 (Fla. 2d

DCA 1985)("[w]hile we agree that the language of Item 220 [of the tariff] does

not clearly cover the shifting charges at issue, we observe that a court may

consider trade customs and prior dealings between the parties to give meaning to

the provision"); Bay Management, Inc., v. Beau Monde, Inc., 366 So.2d 788, 793

(Fla. 2d DCA 1978)("where a contract fails to define with certainty the duties

of the parties, and the parties by their conduct have placed a reasonable

construction on it, . . . such construction should be adopted by the court").

14. Accordingly, the assessment should be withdrawn.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of Law, it is

hereby

RECOMMENDED that the Department of Revenue enter a final order withdrawing

the assessment that is the subject of the instant proceeding.

DONE AND ENTERED in Tallahassee, Leon County, Florida, this 23rd day of

November, 1992.

___________________________________

STUART M. LERNER

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 23rd day of November, 1992.

ENDNOTE

1/ Respondent concedes that, assuming these agreements involved the rental of

tangible personal property by the location operators rather than the rental of

real property by Petitioner, the "correct" amount of sales tax was collected and

remitted by Petitioner. It also concedes that such amount "is no different than

the total amount that [Petitioner] would have paid its location o[perato]rs in

sales tax" had these agreements been treated, as Respondent contends they should

have been, as rentals of real property by Petitioner.

APPENDIX TO RECOMMENDED ORDER

IN CASE NO. 92-3612

The following are the Hearing Officer's specific rulings on, what are

labelled as, "findings of facts" in the parties' proposed recommended orders:

Petitioner's Proposed "Findings of Fact"

II.a.- Accepted and incorporated in substance, although not

necessarily repeated verbatim, in this Recommended Order.

II.b.- Rejected as unnecessary to the extent that it references

Petitioner's reliance on the December 6, 1971, letter

from the Florida Revenue Commission. Otherwise, it has

been accepted and incorporated in substance.

II.c.- First sentence- Rejected as unnecessary; Second

sentence: Rejected as more in the nature of a summary of

testimony than a finding of fact based upon such

testimony; Third sentence: Accepted and incorporated in

substance.

II.d.- Rejected as not supported by persuasive competent

substantial evidence. Petitioner was made aware of the

audit results in March of 1991.

II.e. through II.f.- Accepted and incorporated in substance.

II.g.- Accepted and incorporated in substance to the extent that

it states that "Petitioner was renting [out its] personal

property." Rejected as unnecessary to the extent that it

states that the "auditor conducting the audit for the

Respondent failed to thoroughly review all of the

information in the Petitioner's possession."

II.h.- Rejected as unnecessary.

II.i.- First and fourth sentences: Rejected as unnecessary;

Second and third sentences: Rejected as more in the

nature of statements of law than findings of fact

inasmuch as they purport to describe the provisions of an

agency rule.

II.j.- Accepted and incorporated in substance.

II.k.- Rejected as more in the nature of argument than a finding

of fact.

Respondent's Proposed "Findings of Fact"

1-5. Accepted and incorporated in substance.

6. Rejected as more in the nature of a statement of law than

a finding of fact to the extent that it states that "Rule

12A-1.044(2)(b), F.A.C. . . . covers rentals of tangible

personal property." Otherwise, it has been accepted and

incorporated in substance.

7. Rejected as more in the nature of a statement of law than

a finding of fact inasmuch as it purports to describe the

provisions of an agency rule.

8. Accepted and incorporated in substance to the extent that

it states that Petitioner collected sales tax from

location operators and remitted the amount collected to

Respondent. Rejected as more in the nature of a

conclusion of law than a finding of fact to the extent

that it describes the amount collected and remitted as

"correct."

9. Rejected as more in the nature of a statement of law than

a finding of fact inasmuch as it purports to describe the

provisions of an agency rule.

10-13. Accepted and incorporated in substance.

14. Rejected as more in the nature of a statement of law than

a finding of fact inasmuch as it purports to describe the

provisions of an agency rule.

15. Accepted and incorporated in substance.

16. Rejected as more in the nature of a conclusion of law

than a finding of fact.

17. Rejected as more in the nature of a statement of law than

a finding of fact inasmuch as it purports to describe the

provisions of an agency rule.

18-19. Accepted and incorporated in substance.

COPIES FURNISHED:

Marie A. Mattox, Esquire

William A. Friedlander, Esquire

3045 Tower Court

Tallahassee, Florida 32303

Eric J. Taylor, Esquire

Assistant Attorney General

Office of the Attorney General

The Capitol, PL01

Tax Section

Tallahassee, Florida 32399-1050

Dr. James Zingale, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399-0100

Linda Lettera, Esquire

General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399-0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

ALL PARTIES HAVE THE RIGHT TO SUBMIT WRITTEN EXCEPTIONS TO THIS RECOMMENDED

ORDER. ALL AGENCIES ALLOW EACH PARTY AT LEAST 10 DAYS IN WHICH TO SUBMIT

WRITTEN EXCEPTIONS. SOME AGENCIES ALLOW A LARGER PERIOD OF TIME WITHIN WHICH TO

SUBMIT WRITTEN EXCEPTIONS. YOU SHOULD CONTACT THE AGENCY THAT WILL ISSUE THE

FINAL ORDER IN THIS CASE CONCERNING AGENCY RULES ON THE DEADLINE FOR FILING

EXCEPTIONS TO THIS RECOMMENDED ORDER. ANY EXCEPTIONS TO THIS RECOMMENDED ORDER

SHOULD BE FILED WITH THE AGENCY THAT WILL ISSUE THE FINAL ORDER IN THIS CASE.