93-001365 Troycorp, Inc. vs. Department Of Revenue Status: Closed Recommended Order on Thursday, June 2, 1994.

Summary: Florida franchisee that solicited orders from Florida business for advertising coupon mailed to 3rd party addressees in Florida by Arizona franchiser is "dealr"" liable of unpaid use tax

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

TROYCORP, INC., d/b/a American )

Advertising Distributors of )

Central Florida, )

)

Petitioner, )

) CASE NO. 93-1365

vs. )

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

________________________________)

RECOMMENDED ORDER

A formal hearing was conducted in this proceeding before Daniel Manry, a

duly designated Hearing Officer of the Division of Administrative Hearings, on

January 5, 1994, in Orlando, Florida.

APPEARANCES

For Petitioner: B. Theodore Troy, President

TROYCORP, INC.

101 Wymore, Suite 224

Altamonte Springs, Florida 32714

For Respondent: Olivia P. Klein, Esquire

Assistant Attorney General

Department of Legal Affairs

Tax Section, The Capitol

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

The issues are whether Petitioner is liable for tax imposed on the use of

direct mail advertising and, if so, whether any part of the tax, interest, or

penalty should be compromised.

PRELIMINARY STATEMENT

Respondent assessed Petitioner for use tax in the amount of $76,035.60,

including interest and penalty. Petitioner denied liability, asked that the

assessment be compromised, and requested a formal hearing.

At the formal hearing, the parties stipulated to certain facts. Petitioner

called two witnesses and submitted one exhibit. Respondent called one witness

and submitted 20 exhibits. Testimony, exhibits, and rulings are reported in the

transcript of the formal hearing filed on February 25, 1994.

Petitioner did not submit a proposed recommended order ("PRO"). Respondent

timely filed its PRO on April 15, 1994. Respondent's proposed findings of fact

are accepted in this Recommended Order, except those rejected for the reasons

stated in paragraphs 32-38 and 73-82.

FINDINGS OF FACT

1. Stipulated Facts

1. Respondent conducted an audit of Petitioner's business records for the

period July 1, 1985, through June 30, 1990. Respondent determined a deficiency

in sales tax of $174,823.96, including penalty and interest through August 22,

1990.

2. Petitioner objected to the deficiency. Respondent reviewed the audit,

and made audit changes that are the subject of this proceeding.

3. The audit changes determined a deficiency in use tax of $76,035.60,

including tax ($47,910.10), penalty ($11,977.68), and interest through March 12,

1991 ($16,147.60). Interest accrues daily in the amount of $15.75.

4. A First Revised Notice Of Intent To Make Sales Tax Changes, for the

reduced assessment of $76,035.60, was issued on March 21, 1991. A Notice Of

Proposed Assessment was issued on July 2, 1991. The Notice Of Proposed

Assessment became a Final Assessment on August 31, 1991.

5. Respondent made a prima facie showing of the factual and legal basis

for the use tax assessment. Section 120.575(2), Florida Statutes. 1/ The audit

and assessment are procedurally correct. Tax, interest, and penalty are

correctly computed.

2. Formation

6. Petitioner was incorporated in Florida, in January, 1983, by Mr. B.

Theodore Troy, president and sole shareholder. Petitioner's principal place of

business is 101 Wymore Road, Suite 224, Altamonte Springs, Florida.

7. Petitioner conducted business as American Advertising Distributors of

Central Florida. Mroy and his wife operated the business until liquidating

Petitioner's assets in 1992.

3. Operation

8. Petitioner sold direct mail advertising to Florida businesses.

Petitioner operated pursuant to a franchise agreement with American Advertising

Distributors, Inc., of Mesa, Arizona ("AAD"). AAD was Petitioner's franchisor

until AAD filed for bankruptcy in 1990.

9. Petitioner solicited orders from Florida businesses 2/ for advertising

coupons designed and printed by AAD in Arizona. AAD mailed the advertising

coupons to addressees in Florida who were potential customers for Florida

businesses.

10. Florida businesses placed orders with Petitioner on written contracts,

or sales agreements, labeled "advertising orders." AAD was not a party to

advertising orders. Advertising orders identified "AAD" as American Advertising

Distributors of Central Florida, and were imprinted with the name and address of

"AAD" in Central Florida.

11. Advertising orders specified the total charges, color and stock of

paper, number of addressees, and areas of distribution. Petitioner assisted

businesses with rough layout for art work. The rough layout was forwarded to

AAD.

12. AAD prepared finished art work and sent copies back to Petitioner for

approval by Florida businesses. AAD then printed, collated, and mailed

advertising coupons to addressees in Florida, without charge to addressees.

13. Florida businesses paid non-refundable deposits when placing

advertising orders. The remaining balance was paid upon approval of final art

work.

14. AAD did not submit invoices to Florida businesses. AAD submitted

invoices to Petitioner for the amount due from Petitioner. 3/ Petitioner paid

AAD 10 days before advertising coupons were mailed.

15. Some advertising coupons were produced by Laberge Printers, Inc., in

Orlando, Florida ("Laberge"). Coupons from Laberge were designed, printed, and

distributed in the same manner as coupons from AAD.

16. Two types of advertising coupons were provided by AAD and Laberge. The

majority of coupons were distributed in coop mailings, or "bonus express"

envelopes, containing coupons for up to 20 businesses. Bonus express envelopes

were mailed approximately eight times a year.

17. Advertising coupons were also distributed in "solo" mailings. A solo

mailing was an individualized, custom printed coupon, or flyer, mailed to

individual addressees.

18. The total charges stated in advertising orders included the cost of

services provided by Petitioner, AAD, and Laberge. Services included

typesetting, art work, printing, inserting envelopes, and mailing.

19. Florida imposed a tax on services, from July 1, 1987, through December

31, 1987. Petitioner collected and remitted tax imposed on the cost of services

included in the total charges stated on advertising orders.

20. Except for the services tax, neither Petitioner, AAD, nor Laberge

collected and remitted sales or use tax to Florida or to Arizona. Petitioner

never utilized resale certificates for any tax other than the tax on services.

4. Collectibility

21. Petitioner was financially able to pay the use tax assessment during

1990 and 1991. No later than August 22, 1990, Mroy knew of the sales tax

deficiency of $174,823.96. By March 21, 1991, Mroy knew of the reduced use

tax assessment of $76,035.60. During 1990 and 1991, Petitioner made

discretionary payments to Mroy of $110,389.

22. Petitioner reported federal taxable income of $58,279 in 1990 and 1991.

4/ In arriving at taxable income, Petitioner deducted payments to Mroy of

$59,430 for compensation to officers, management fees, and salary. 5/ From

taxable income of $58,279, Petitioner paid approximately $50,959 to Mroy in

nondeductible shareholder loans. 6/ Discretionary payments of $110,389, 7/ made

to Mroy in 1990 and 1991, were more than adequate to pay the use tax

assessment of $76,036.60.

23. At the end of 1991, Petitioner reported fixed assets with a book value

of $14,933, a customer list valued at $104,447.72, and retained earnings of

$102,605. The book value of intangible assets was $82,943, comprised primarily

of the franchise, valued at $35,000, and goodwill of $45,000.

5. Termination Of Operations But Continued Existence

24. AAD petitioned for bankruptcy in 1990. Petitioner subsequently

determined that its franchise and goodwill were worthless. In 1992, Petitioner

reported a loss of $99,726 for federal tax purposes.

25. All of Petitioner's assets, including its customer lists, were sold or

transferred for $1,330 to Florida Mail, Inc. ("Florida Mail"). Florida Mail is

a Florida corporation wholly owned by Mroy. Florida Mail sells direct mail

advertising; and shares Petitioner's principal place of business. Since 1992,

Petitioner has been a shell corporation with $579 in assets.

CONCLUSIONS OF LAW

26. The Division of Administrative Hearings has jurisdiction over the

subject matter and parties to this proceeding. Section 120.57(1). The parties

were duly noticed for the formal hearing.

27. Petitioner has the burden of proof in this proceeding. Pursuant to the

stipulation of the parties, the assessment is presumed correct. Section

120.575(2). Petitioner must show by a preponderance of evidence that Respondent

departed from the requirements of law or that the assessment was not supported

by any reasonable hypothesis of legality. Cf. Straughn v. Tuck, 354 So.2d 368,

371 (Fla. 1978)(involving property tax assessments under Chapter 193); Harris

v. State, Department of Revenue, 563 So.2d 97, 99 (Fla. 1st DCA 1990)(citing

Straughn for assessments under Chapter 212).

6. Tangible Personal Property

28. Section 212.06(1)(a) imposes a tax, at the rate of six percent, on the

use of tangible personal property in Florida (the "use tax"). Tangible personal

property is personal property which may be seen, weighed, measured, or touched

in any manner. Section 212.02(20). Advertising coupons printed by AAD and

Laberge were tangible personal property. Section 212.02(20).

29. Use of tangible personal property that is produced, fabricated,

processed, or printed ("printed") is taxable. Florida Administrative Code Rule

12A-1.024(1). 8/ Advertising coupons printed by AAD and Laberge were tangible

personal property subject to use tax. Section 212.06(1)(a); Rule 12A-1.024(1).

7. Property Printed In Arizona And Used In Florida

30. Section 212.06(8) imposes tax on the use of tangible personal property

that is:

. . . imported or caused to be imported into

this state for use, consumption, [or]

distribution . . . in this state

. . . . (emphasis supplied)

The term "use" includes the use of:

. . . all tangible advertising materials

imported or caused to be imported into this

state. Tangible advertising material

includes displays, display containers,

brochures, catalogs, price lists,

point-of-sale advertising, and technical

manuals or any tangible personal property

which does not accompany the product to the

ultimate consumer.

Section 212.02(15)(b).

31. Advertising coupons printed by AAD in Arizona were used in Florida

within the meaning of Section 212.02(15)(b). That use was subject to tax

pursuant to Sections 212.06(1)(a) and (8).

7.01 User

32. Respondent proposes that Petitioner was the ultimate user of

advertising coupons. Respondent argues that Petitioner "purchased" the

advertising coupons from AAD, pursuant to the terms of the franchise agreement,

and was separately invoiced by AAD. Respondent recognizes the form of the legal

agreements between Petitioner and AAD but disregards the economic substance of

the underlying business transactions. Cf. Complete Auto Transit, Inc. v. Brady,

430 U.S. 274, 279, 97 S.Ct. 1076, 1079 (1977)(the effect of a state tax is

determined by economic substance, rather than legal formalism, because legal

formalism has "no relationship to economic realities").

33. Even if Petitioner was a purchaser under contract law, Petitioner did

not use advertising coupons for purposes of the use tax. The term "use" means

the exercise of a right or power incident to an ownership or other interest in

tangible personal property. Section 212.02(21). Petitioner had no economic or

legal interest in the coupons except for resale to Florida businesses. Compare,

Section 212.02(15)(a)(defining a "retail sale" to exclude a sale made to one who

purchases for resale).

34. Petitioner did not exercise any independent power or control over

advertising coupons. Petitioner did not determine the type or quantity of

coupons, direct their distribution, or otherwise enjoy the benefits and burdens

of the use of advertising coupons in Florida.

35. Florida businesses exercised the right or power contemplated in Section

212.02(21). They prescribed the design and printing of advertising coupons, the

type of mailing, and the distribution. Florida businesses enjoyed the benefit

of the use of advertising coupons in Florida. The business purpose for their

use was to increase sales for Florida businesses.

36. Florida businesses purchased advertising coupons for purposes of the

use tax. Payment for the advertising coupons was collected from Florida

businesses before advertising coupons were mailed. The funds for Petitioner's

payments to AAD came from Florida businesses. AAD was paid before the coupons

were mailed.

37. In D.H. Holmes Company, Ltd. v. McNamara, 486 U.S. 24, 108 S.Ct. 1619

(1988), Louisiana properly imposed use tax on an instate corporation that

contracted with companies outside the state to design and print catalogues and

mail them to addressees in Louisiana. The contention that the Louisiana company

did not use catalogues delivered to Louisiana addressees was characterized by

the Court as verging on "nonsensical." D.H. Holmes, 486 U.S. at 31, 108 S.Ct.

at 1624.

38. The economic burden of the use tax is imposed on purchasers. Section

212.07(2) requires use tax to be added to the purchase price and separately

stated in the total charges shown on advertising orders. The tax due is a debt

owed by Florida businesses to the dealer and to the state. Sections 212.07(2),

(9); Rule 12A-1.091(13).

7.02 Dealer

39. A "dealer" is defined for use tax purposes to include "every"

individual or corporation ("person") who imports tangible personal property from

another state for use in this state. A dealer is also "every person" who causes

tangible personal property to be imported from another state for use in this

state. Sections 212.02(13) and 212.06(2)(b).

40. Petitioner's business activities in Florida caused advertising coupons

to be imported from Arizona for use in Florida within the meaning of Section

212.06(2)(b). Petitioner solicited orders for advertising coupons, assisted

purchasers in choosing the type of mailing, color and stock of paper, number of

addressees, area of distribution, and rough layout for artwork. Petitioner

signed customers to sales agreements, collected payment for itself and AAD, and

paid the printer in Arizona.

41. It is unnecessary to determine if AAD's business activities in Arizona

also caused advertising coupons to be imported for use in Florida. The

definition of a dealer in Section 212.06(2)(b) does not require Petitioner to be

the exclusive cause of importation but includes "every person" who causes

advertising coupons to be imported from Arizona for use in Florida. Petitioner

is a dealer within the meaning of Section 212.06(2)(b).

42. A "dealer" is also defined for use tax purposes to include any person

who sells tangible personal property in Florida and can not prove that the

applicable tax has been paid. Section 212.06(2)(d). Petitioner sold

advertising coupons in Florida pursuant to sales agreements. AAD was not a

party to those sales agreements. Sales agreements were executed in Florida, and

the advertising coupons were delivered in Florida.

43. Petitioner did not collect and remit sales tax on sales of advertising

coupons in Florida. The use tax applies to sales of tangible personal property

in Florida when applicable sales tax is not collected and remitted by the

seller. Gore Newspaper Company v. Department Of Revenue, 398 So.2d 945, 946

(Fla. 4th DCA 1981). Florida purchasers did not pay applicable use tax.

Petitioner is a dealer for purposes of the use tax. Section 212.06(2)(d).

44. Even if sales of advertising coupons are deemed to have occurred in

Arizona, Petitioner is a representative or solicitor for an out-of-state

principal who refused to register as a dealer in Florida. 9/ As a

representative or solicitor, Petitioner is a dealer for purposes of the use tax.

Section 212.06(2)(h).

7.03 Dealer Liability

45. Section 212.07(2) requires a dealer to collect and remit sales and use

taxes. See also, Sections 212.05(2), 212.06(3) and (4). A dealer who fails to

collect and remit use tax must pay the tax to the state. Sections 212.07(2) and

(3).

46. The sole burden on Petitioner is the administrative burden of

collecting and remitting the applicable tax. Cf. National Geographic Society v.

California Board Of Equalization, 430 U.S. 551, 558, 97 S.Ct. 1386, 1391

(1977)(concerning an out-of-state dealer). Petitioner becomes liable for use

tax by failing or refusing to collect it from resident purchasers. Id.

47. While the economic burden of the use tax is imposed on purchasers, the

administrative burden of collecting and remitting the tax is placed on dealers.

Compliance with that administrative burden is enforced by making non-complying

dealers liable for unpaid tax. Sections 212.07(2) and (3).

7.04 Commerce Clause

48. Petitioner challenges the constitutionality of applicable statutes in

Chapter 212. The undersigned has no jurisdiction to determine that a statute is

unconstitutional. However, the undersigned is required to construe applicable

statutes in a manner that effectuates their legislative intent and, whenever

possible, preserves their constitutionality. Cf. Myers v. Hawkins, 362 So.2d

926, 930 (Fla. 1978); State v. McDonald, 357 So.2d 405, 407 (Fla. 1978); Novo v.

Scott, 438 So.2d 477, 478 (Fla. 3d DCA 1983)(a statute should be construed in a

manner that effectuates legislative intent, and all doubts should be resolved in

favor of its constitutionality).

7.04(a) Economic Substance, Legal Form, And Tax Reporting

49. The commerce clause prohibits a state from discriminating against

interstate commerce but does not relieve persons engaged in interstate commerce

from their just share of a state's tax burden. U.S. Constitution, Article I,

Section 8, Clause 3; D.H. Holmes, 486 U.S. at 31; 108 S.Ct. at 1623. The issue

of whether a state tax unlawfully discriminates against interstate commerce is

determined by economic reality, or economic substance, rather than by legal

formalism. Complete Auto Transit, 430 U.S. at 279-289, 97 S.Ct. at 1079-1084.

50. Unlike the taxpayer in D.H. Holmes, Florida businesses that used

advertising coupons in Florida contracted with an instate company. However,

economic reality reveals that Petitioner had neither the economic nor technical

capability to design, print, and deliver advertising coupons. 10/

51. Petitioner denies dealer status as a seller in Florida, as defined in

Section 212.06(2)(d). Petitioner disregards the legal form of its separate

corporate existence and its separate contracts with Florida businesses.

Petitioner treats itself and AAD, in economic substance, as acting in the

capacity of a single integrated business unit within the meaning of Section

212.02(13). Petitioner treats its sales in Florida, in economic substance, as

occurring in Arizona in an integrated transaction between Florida businesses and

AAD.

52. Arguably, Florida could not have compelled AAD to collect and remit use

tax if advertising coupons were sold by AAD in Arizona and AAD's only activity

in Florida was by mail. See, e.g., National Bellas Hess, Inc. v. Department of

Revenue of Illinois, 386 U.S. 753, 87 S.Ct. 1389 (1967). But see, Section

212.0596 (taxing mail order sales). In Bellas Hess, Illinois was unable to

compel an out-of-state company to collect and remit use tax on goods mailed to

Illinois residents. The out-of-state company had no office, representatives, or

solicitors in Illinois, and the only contact with Illinois residents was by

mail. Bellas Hess, 386 U.S. at 758, 87 S.Ct. at 1392.

53. Petitioner denies that AAD had any contact with Florida residents

except by mail. Petitioner treats itself and AAD as separate business units;

not as a single integrated business unit. Petitioner disregards economic

substance and relies on the legal form of Petitioner's separate corporate

existence and its separate contracts with Florida businesses.

54. Petitioner also denies dealer status as a representative or solicitor

for AAD within the meaning of Section 212.06(2)(h). Petitioner again disregards

economic substance and relies on the legal form of its separate corporate

existence and its separate contracts with Florida businesses.

55. Petitioner's tax reporting position, at best, is inconsistent.

Petitioner relies on economic substance to disregard the legal form of its

business activities in Florida and invoke the aegis of Bellas Hess. Petitioner

then relies on legal form to deny that Petitioner, in economic substance, was a

representative or solicitor for an unregistered out-state-principal. Petitioner

would both eat its cake and have it. 11/

56. Petitioner's solicitation of orders for advertising coupons is

analogous to the solicitation of orders in Scripto, Inc. v. Carson, 362 U.S.

207, 80 S.Ct. 619, (1960). In Scripto, a Georgia company shipped mechanical

advertising instruments directly to Florida residents. The company's only

business activity in Florida consisted of the solicitation of orders by

independent contractors, wholesalers, jobbers, or salesmen. The Court held that

Florida could compel the Georgia company to collect and remit use tax under

Section 212.06. Scripto, 362 U.S. at 212-213, 80 S.Ct. at 622-623.

57. The holding in Scripto is not obviated by the form in which an

independent contractor or salesman conducts the business of soliciting orders.

Petitioner does not avoid Scripto by soliciting orders as a corporation pursuant

to a franchise agreement; rather than as an individual pursuant to an

independent contract or employment agreement.

58. Whether Petitioner determines its tax liability on the basis of

economic substance or legal form, Petitioner is either: a representative or

solicitor for an unregistered out-of-state principal; or a separate Florida

corporation that sold advertising coupons in Florida. Sections 212.06(2)(d) and

(h). As either dealer, Petitioner is liable for use tax it failed to collect

and remit to Florida. 12/

7.04(b) Fairly Related

59. A tax reporting position based on inconsistent applications of

substance and form does not reflect the economic reality of business activities

for state tax purposes. Nor is such a tax reporting position fairly related to

benefits Florida provided for Petitioner's business activities in the state.

Complete Auto Transit, 430 U.S. at 279, 97 S.Ct. at 1079. 13/

60. In Complete Auto Transit, a Mississippi sales tax required motor

carriers to collect and remit tax on automobiles manufactured outside of

Mississippi but delivered by motor carrier to purchasers inside the state. The

Court upheld the Mississippi sales tax, in part, because the motor carrier

failed to show the tax was not fairly related to benefits provided to the

carrier by the taxing state. Complete Auto Transit, 430 U.S. at 277, 97 S.Ct.

at 1078.

61. Florida bestowed powers, privileges, and benefits that enabled

Petitioner to conduct business activities in the state, own and transfer

property, secure sales agreements, collect payment, and seek redress in Florida

courts. Florida is justified in asking a fair and reasonable return for the

powers, privileges, and benefits it provides. Complete Auto Transit, 430 U.S.

at 287, 97 S.Ct. at 1083 (quoting from Colonial Pipeline Co. vaigle, 421

U.S. 100, 113-114, 95 S.Ct. 1538, 1546 (1975)). See, D.H. Holmes, 486 U.S. at

32, 108 S.Ct. at 1624 (a state provides fire and police protection, public

roads, and other services that benefit the company and its customers).

7.04(c) Nexus

62. In Bellas Hess and Scripto the Court determined whether adequate nexus

existed between the business activities of an out-of-state company and a taxing

state to compel the company to collect and remit use tax. 14/ In National

Geographic, California required an out-of-state magazine publisher to collect

and remit use tax on advertising that was printed outside the state, purchased

by California businesses, and mailed to addressees in California. The printer's

only business activity in the taxing state was the solicitation and sale of

advertising by employees in two offices. The Court found that there was

adequate nexus to require the printer to collect use tax from California

businesses. The Court held that the out-of-state dealer:

. . . becomes liable for the tax only by

failing or refusing to collect the tax from

[the] resident consumer. Thus, the sole

burden imposed upon the out-of-state seller

. . . is the administrative one of collecting

it. . . .

National Geographic, 430 U.S. at 558, 97 S.Ct. at 1391.

63. The holding in National Geographic is even more compelling for an

instate company that qualifies as a dealer and fails to collect and remit use

tax. Petitioner was organized under Florida law and carried on its business

activities entirely in Florida. Petitioner's business activities had

independent economic significance for Petitioner and for Florida. Cf. National

Geographic, 430 U.S. at 558, 97 S.Ct. at 1391(concerning the business activities

of an out-of-state dealer).

64. The purpose of the commerce clause is not to relieve those engaged in

interstate commerce from their just share of a state's tax burden. Complete

Auto Transit, 430 U.S. at 288, 97 S.Ct. at 1083. Accordingly, a taxpayer

engaged in both intrastate and interstate commerce is subject to tax on the

privilege of carrying on its business activities in the taxing state. Complete

Auto Transit, 430 U.S. at 283, 97 S.Ct. at 1081. See also, Sections 212.05

(introductory paragraph) and 212.06(1)(a)(Florida imposes tax on the exercise of

the privilege of selling or using tangible personal property).

65. Even if advertising coupons were ordered directly from AAD, sold in

Arizona, and Petitioner was not a representative or solicitor for AAD, the use

of advertising coupons in Florida is subject to use tax. Rule 12A-1.091(2)(a)

imposes use tax on the use in this state of:

. . . tangible personal property purchased

outside Florida which would have been subject

to the sales tax if purchased from a Florida

dealer. . . .

Sales for the printing of tangible personal property are subject to sales tax in

Florida. Rule 12A-1.027(1).

66. Petitioner's business activities in Florida caused advertising coupons,

arguably sold in Arizona, to be imported from Arizona for use in Florida.

Petitioner is an instate dealer within the meaning of Section 212.06(2)(b).

Petitioner failed to collect and remit use tax from Florida businesses.

Petitioner is liable for the unpaid tax. Sections 212.07(2) and (3). Cf.

National Geographic, 430 U.S. at 558, 97 S.Ct. at 1391 (compelling an out-of-

state dealer to collect and remit tax.)

8. Property Printed Inside Florida

67. Section 212.05(1)(a) imposes a tax, at the rate of six percent, on the

sale of tangible personal property in Florida (the "sales tax"). The printing

of tangible personal property is subject to sales tax. Rules 12A-1.024(1) and

12A-1.027(1).

68. The use tax applies to sales of tangible personal property in Florida

when the purchaser can not prove that sales tax was collected and remitted by

the seller. Gore Newspaper Company, 398 So.2d at 946. Neither Petitioner nor

Laberge collected and remitted tax on advertising coupons printed in Florida.

Florida businesses did not pay use tax on advertising coupons printed in Florida

(other than the services tax). As a dealer, Petitioner is liable for use tax

that it failed to collect from Florida businesses. Respondent may assess any of

the dealers that Florida law makes liable for unpaid use tax.

9. Tax Base

69. Use tax is imposed on the cost price of each item of tangible personal

property without deduction for the cost of labor, service, transportation, or

similar services. Sections 212.02(4) and 212.06(1)(a). The total charges

stated in advertising orders included the cost of services provided by

Petitioner, AAD, and Laberge. The cost of those services was properly included

in the applicable tax base.

70. Giving advertising coupons to addressees free of charge does not avoid

use tax. See, e.g., D.H. Holmes, 486 U.S. at 26, 108 S.Ct. at 1621; United

States Gypsum Company v. Green, 110 So.2d 409, 412 (Fla. 1959). Use tax is

imposed on the use of advertising coupons by Florida businesses. Petitioner is

liable as a dealer for the unpaid tax.

10. Exemptions

71. The advertising coupons printed in Arizona and Florida are not exempt

from use tax under any of the exemptions in Section 212.08, including the

exemption in Section 212.08(7)(w) for newspapers, shoppers, and community

newspapers. Furthermore, the coupons are not promotional materials for the sale

or subscription of publications imported into the state for later export.

Section 212.06(11). A tax equal to or greater than the Florida use tax was not

paid in another state. Section 212.06(7). The advertising coupons were not

religious materials within the meaning of Section 212.06(9). Finally, the

advertising coupons were not sold to a nonresident print purchaser within the

meaning of Section 212.06(5)(c).

11. Compromise

11.01 Taxes And Interest

72. Section 213.21(3) provides that Petitioner's liability for taxes and

interest:

. . . may be compromised . . . upon the

grounds of doubt as to liability for or

collectibility of such tax or interest.

There is no doubt as to Petitioner's liability for use tax and interest.

Petitioner was financially capable of paying tax and interest at the time it was

assessed.

11.02 Penalty

73. Section 213.21(3) provides that Petitioner's liability for penalties:

. . . may be settled or compromised if it is

determined . . . that the noncompliance is

due to reasonable cause and not to willful

negligence, willful neglect, or fraud. . . .

74. The issue of whether a state can tax interstate commerce within its

borders is a frequent source of conflict and dilemma. D.H. Holmes, 486 U.S. at

30, 108 S.Ct. at 1623. It is no less a source of conflict and dilemma in this

proceeding.

75. In form, Florida's use tax is imposed on the use of advertising coupons

in Florida. In substance, however, the use tax burdens interstate commerce.

76. Florida does not apportion use tax to avoid discrimination against

interstate commerce. Florida provides a credit for tax paid in another state up

to the amount of the Florida tax. Section 212.06(7); Cf. D.H. Holmes, 486 U.S.

at 32, 108 S.Ct. at 1624(approving a similar credit system in Louisiana). 15/

77. Petitioner's tax reporting position, in effect, apportions use taxes.

Petitioner and AAD are treated as a single integrated business unit. Section

212.02(13). The cost price of advertising coupons is apportioned entirely to

goods and services provided in Arizona and no use tax is collected in Florida.

78. The apportionment of use taxes in Florida has precedent in the services

tax. An apportionment formula was formerly applied to determine what portion of

a service purchased outside of Florida, by a member of an affiliated group, or

by a multi-state business, was used inside the state. See, Sections

212.059(1)(b), (2), 212.0591(9)(b)4., 212.02(2) and (17) (1987).

79. Mroy believed that the cost price for advertising coupons was

attributable entirely to services. Petitioner did not collect and remit tax

before or after the services tax. Similarly, Mroy did not believe that

Petitioner was liable for tax that Laberge was required to collect and remit on

advertising coupons printed in Florida.

80. Petitioner's tax reporting position is consistent with its business

practice. Except for the services tax, Petitioner never collected and remitted

tax. Even Petitioner's payments to Mroy in 1990 and 1991 reflect Mroy's

good faith belief that Petitioner had no tax liability other than the services

tax.

81. The error in Petitioner's tax reporting position is due to the conflict

and dilemma inherent in state taxation of interstate commerce. See, e.g., D.H.

Holmes, 486 U.S. at 30. It is not due to willful negligence or fraud. Section

213.21(3).

82. However misguided Mroy may have been, he was not guided by willful

negligence or fraud. Section 213.21(3). His testimony was credible and

persuasive. It was consistent with Petitioner's long standing business practice

and tax reporting position. Conversely, Respondent presented no evidence that

Petitioner's noncompliance was willful or fraudulent.

RECOMMENDATION

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

RECOMMENDED that Respondent enter a Final Order upholding the assessment of

tax and interest and waive all of the penalty included in the assessment.

DONE AND ENTERED in Tallahassee, Leon County, Florida, this 2nd day of

June, 1994.

____________________________________

DANIEL MANRY

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 2nd day of June, 1994.

ENDNOTES

1/ All section and chapter references are to Florida Statutes (1993) unless

otherwise stated.

2/ Petitioner's exclusive marketing territory under the franchise agreement was

restricted to counties in the central Florida area including Orange, Seminole,

Osceola, and Volusia counties. See, Respondent's Exhibit 3, Franchise

Agreement, Schedule A, Exclusive Marketing Territory. See also, Respondent's

Exhibit 2, Agreement For Purchase And Sale Of Franchise.

3/ Invoices were mailed to "AAD Of Central Florida" and Mroy at

Petitioner's address. They were prepared by AAD and imprinted with the name and

address of AAD in Arizona. Throughout the tax audit period, Petitioner paid

royalty fees to AAD and fees for finished art work, printing, mailing, and

postage. Petitioner never paid sales or use taxes to AAD.

4/ Taxable income reported on form 1120, for federal tax purposes, was $31,232

in 1991 and $27,047 in 1990.

5/ On form 1120, Petitioner deducted: $19,249 as compensation to officers in

1991 and $4,656 in 1990; management fees of $6,500 in 1991 and $8,000 in 1990;

and salary to Mroy and his wife of $10,200 in 1991 and $10,825 in 1990.

6/ Loan payments of $50,959 were part of $168,156 paid to Mroy in

connection with various shareholder loans between January, 1986, and December

31, 1991. From 1983 through December, 1985, Mroy loaned Petitioner

approximately $127,000. By December 31, 1989, the balance due Mroy had been

reduced to $9,803. On December 31, 1990, the remaining loan balance of $9,803

had been paid off, and Mroy owed Petitioner $14,705. By December 31, 1991,

Mroy owed Petitioner $41,156 in shareholder loans. At the end of 1992,

Petitioner eliminated Mroy's loan obligation by converting it to an item of

deferred compensation.

7/ The aggregate amount of $110,389 is comprised of loan payments ($50,959),

compensation to officers ($23,905), management fees ($14,500), and salary

($21,025).

8/ All references to rules are to rules published in the Florida Administrative

Code on the date this Recommended Order is entered.

9/ A franchise is a license from the owner of a trademark or trade name

permitting another to sell a product or service under that trademark or trade

name. The franchisee typically must conduct its business in accordance with

methods and procedures prescribed by the franchisor. See, Black's Law

Dictionary Fifth Edition (West 1979), at 592.

10/ Petitioner had fixed assets of $14,933 and was owned by one shareholder who

operated the business with the help of his wife. The franchise agreement states

that one of the purposes for entering into the agreement is that the franchisor

has the capability of designing, printing, and mailing the coupons. See,

Respondent's Exhibit 3, Franchise Agreement, Recitals and para. 5.1.

11/ "Would ye both eat your cake and have your cake?" J. Heywood, Proverbs

(1546); "Wouldst thou both eat thy cake and have it?" G. Herbert, The Size

(1633). See, J. Bartlett, Familiar Quotations at 185b (14th ed. 1968).

12/ "To do two things at once is to do neither." Publiliu Syrus, Maxim 7 (1st

Cent. B.C.). See, J. Bartlett, Familiar Quotations at 125a (14th ed. 1968).

Petitioner's attempt to determine its tax liability by applying two conflicting

standards at once does not make Petitioner "neither dealer." Petitioner is

"either dealer." Petitioner is not "neither dealer."

13/ The "fairly related" requirement is one element in a four part test

formulated in Complete Auto Transit. First, the activities of an out-of-state

company must have a substantial nexus with the taxing state. In addition, the

tax must be fairly apportioned, must not discriminate against interstate

commerce, and must be fairly related to benefits provided by the state.

Complete Auto Transit, 430 U.S. at 279, 97 S.Ct. at 1079.

14/ The requirement for nexus between the business activities of a company and

a state seeking to tax the sale or use of goods within its borders is one

requirement in the four part test formulated in Complete Auto Transit, 430 U.S.

274. It is unnecessary to determine whether solicitation of orders for

advertising coupons by an instate franchisee, such as Petitioner, establishes an

adequate nexus for Respondent to compel Petitioner's out-of-state franchisor to

collect use tax on purchases inside Florida. Respondent is not compelling

Petitioner's out-of-state franchisor to collect and remit use tax. Respondent

is compelling Petitioner, an instate corporation, to collect and remit use tax

on advertising coupons that Petitioner caused to be imported into Florida within

the meaning of Section 212.06(2)(b).

15/ A state tax can burden interstate commerce if the tax is fairly apportioned

and does not otherwise discriminate against interstate commerce. Complete Auto

Transit, 430 U.S. at 279, 97 S.Ct. at 1079.

COPIES FURNISHED:

Linda Lettera, Esquire

General Counsel

Department of Revenue

104 Carlton Building

Tallahassee, FL 32399-0100

Larry Fuchs, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, FL 32399-0100

Olivia P. Klein, Esquire

Asst. Attorney General

Dept. of Legal Affairs

The Capitol-Tax Section

Tallahassee, FL 32399-1050

Theodore Troy, President

TROYCORP, Inc.

101 Wymore, Ste . 224

Altamonte Springs, FL 32714

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 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.