95-004527 Allied Marine Group vs. Department Of Revenue Status: Closed Recommended Order on Tuesday, November 19, 1996.

Summary: Use of boat in fishing tournament to promote business other than sale of boat subjected dealer to use tax.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ALLIED MARINE GROUP, )

)

Petitioner, )

)

vs. ) CASE NO. 95-4527

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

_________________________)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly

designated Administrative Law Judge, Susan B. Kirkland, held a formal hearing in

this case on June 11 and 12, 1996 in Miami and on July 25, and August 6, 1996,

in Tallahassee, Florida.

APPEARANCES

For Petitioner: Craig D. Olmstead, Esquire

Jane W. McMillan, Esquire

Kelley, Drye and Warren LLP

201 South Biscayne Boulevard

2400 Miami Center

Miami, Florida 33131

For Respondent: Albert J. Wollermann

Assistant Attorney General

Mark T. Aliff

Assistant Attorney General

Office of the Attorney General

Department of Legal Affairs

The Capitol

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

Whether Petitioner is liable for use tax as a result of the entry and

participation in a fishing tournament of one of its yachts held in inventory for

resale.

PRELIMINARY STATEMENT

On January 18, 1994, Respondent, State of Florida Department of Revenue

(Department) issued a Notice of Final Assessment for Tax, Penalty, and Interest

Due on a Boat, to Petitioner, Allied Marine, Inc. (Allied). The Assessment was

issued pursuant to Chapter 212, Florida Statutes, after an investigation

confirmed that a vessel, held in inventory for resale by Allied, was used in a

fishing tournament. The Department assessed Allied for a total of $42,301.50,

which reflects $27,000 in tax, $13,500 late filing penalty, and $1,801.50 in

interest as of January 18, 1994.

Allied protested the Assessment in a Petition for Reconsideration, dated

February 7, 1994, in which it alleged that the vessel was operated on behalf of

Allied; that no use tax was due because the vessel was at all times part of

Allied's inventory for resale to customers; that such use is consistent with the

vessel being offered for resale and being maintained in inventory by Allied; and

that Allied's entry of the vessel into the tournament was at all times solely

for the purpose of promoting the sale of this and other vessels.

The Department upheld the Assessment in a Notice of Reconsideration, dated

July 7, 1994 in which it concluded that the vessel was removed from inventory

and used in an activity inconsistent with its being offered for resale. The

Department also found that such "use" of the vessel fell within the statutory

language of Section 212.02(20), Florida Statutes, and that the use of a vessel

held in inventory for resale and used in the manner set forth in the facts of

this case constitutes a taxable use.

The case was forwarded to the Division of Administrative Hearings on

September 13, 1995. The final hearing was scheduled for February 9, 1996. On

January 11, 1996, Respondent filed a Joint Motion for Continuance of Final

Hearing. The final hearing was rescheduled for April 30, 1996. On April 11,

1996, Respondent filed a Motion for Continuance. The motion was granted and the

final hearing was rescheduled for May 28 and 29, 1996. The parties made an ore

tenus motion to again continue the case, and the case was rescheduled for June

11 and 12, 1996.

At the final hearing, Petitioner called the following witnesses: Steven C.

Brown, L. Lamar Gay, Dudley Cunningham, Thomas Sanders, and Charles D. Smith.

Joint Exhibit 1, the parties' prehearing stipulation, was admitted in evidence.

Petitioner's Exhibits 1-10, 13, 15-18 were admitted in evidence. Respondent did

not call any witnesses. Respondent's Exhibits 1-8 were admitted in evidence.

Petitioner filed its proposed recommended order on August 19, 1996.

Respondent filed its proposed recommended order on August 22, 1996.

FINDINGS OF FACT

1. Petitioner, Allied Marine Group, Inc., d/b/a Stuart Hatteras, Ltd.

(Allied), is the largest dealer in new and used yachts in Florida. Its Dealer

Registration Number is 16-03-232. It has 175 employees and sells yachts that

range in price from $100,000 to $9,000,000. In 1993 Allied sold in excess of

300 yachts and realized gross sales of $60,000,000.

2. The yacht sales business is very competitive. Allied's sales and

marketing departments target the well-to-do who can afford expensive yachts and

enjoy fishing and pleasure cruising. The target group subscribes to yachting

magazines, visits boat shows, attends cruising activities, and participates in

fishing tournaments. To reach these individuals in these activities, Allied

spent $585,000 advertising in magazines including publishing its own magazine,

"Makin Wake," $166,000 participating in boat shows, and $155,000 participating

in fishing tournaments and other promotions for the fiscal year ending October

31, 1993.

3. Allied's Vice President of Sales and Operations, Tom Sanders, and

salesman Chris Cunningham actively market the sale of Allied's yachts by

participating in fishing tournaments and boat shows because that is where the

buyers are. Fishing tournaments and boat shows are "selling events" to Allied.

Neither Mr. Sanders nor Mr. Cunningham was of the opinion that Allied could

remain competitive in the yacht sales business by simply displaying vessels at

showrooms and waiting for customers to come.

4. Most yacht sales are made to customers who have purchased yachts in the

past. The selling of a yacht is a process that involves many contacts with a

customer before the customer actually makes a purchase. Customers rarely buy

million dollar vessels on the spot. Purchasers of fishing yachts like to

purchase from dealers who are knowledgeable about fishing.

5. Participation in fishing tournaments and outfitting inventory boats for

fishing is a way of showing a vessel's capabilities to potential purchasers and

Allied's knowledge of fishing vessels. Allied often enters fishing tournaments

to demonstrate the capabilities and amenities of its yachts to prospective

purchasers for the ultimate purpose of selling the yacht entered and increasing

overall sales. It outfits the vessel with elaborate decor and fishing equipment

to attract customers. The salespersons participate in the fishing portion of

the tournament in order to get access to the tournament functions where they can

meet prospective purchasers at the captains' meetings, at the fish weigh-ins and

other gatherings before and after each day's fishing, and at the awards ceremony

at the end of the tournament.

6. In addition to promoting the sale of the vessel entered, Allied and

other dealers enter and sponsor fishing tournaments to give their salespersons

opportunities to meet with potential purchasers and to keep the name of their

products, company and salespersons in the public eye. Salespersons sell yachts

by networking, that is, developing and maintaining one-on-one contacts with

prospective purchasers. Salespersons make and maintain contacts by referrals

from other customers, by hosting parties and by frequenting boat shows, fishing

tournaments and other events that boat enthusiasts attend.

7. There are different sizes and types of fishing tournaments, and a

dealer's participation may vary depending on the tournament. Allied sometimes

participates in fishing tournaments by providing a crew to actually fish. When

a dealer enters a vessel in a fishing tournament, the fishing element is

secondary to the opportunity the tournament presents for the dealer's

salespeople to make contact with potential purchasers. The main reason Allied

enters its yachts in fishing tournaments is to sell the yachts entered in the

tournaments and to promote Allied as a dealer in vessels made for fishing.

Yacht owners that see new models at fishing tournaments often trade up to that

model or newer or larger vessels.

8. Allied promotes its yachts and its business at fishing tournaments in

the same manner as it does at boat shows: by displaying its products and by

sending its salespersons to mingle with the attendees, to pass out business

cards, and to provide information about its products and services. Allied

always stocks yachts participating in fishing tournaments with literature

concerning the particular vessel and the dealership including brochures about

its yachts, specification sheets for the particular yacht, and business cards of

the salespersons.

9. Allied does not have any yachts, in inventory or otherwise, that are

designated as demonstrators. Vessels that are outfitted and decorated to

participate in particular boat shows or fishing tournaments are always for sale

to customers during or after the event.

10. In October, 1992 Tiara Yachts delivered a 43 foot sport fishing vessel

to Allied for resale. The yacht is described as a 4300 Tiara Convertible and

was delivered to Allied's Fort Lauderdale marina. Between October, 1992 and May

27, 1993, Allied displayed the vessel (the Tiara) at its marina showrooms in

Fort Lauderdale, Stuart, and West Palm Beach.

11. The Tiara was held by Allied as part of inventory for resale to

customers and was so reflected on Allied's accounting books and records. The

Tiara was floor plan financed, meaning the manufacturer loaned Allied 95 percent

of the cost of purchasing the vessel and maintained a security interest in the

vessel until its resale to a customer. The manufacturer made periodic and

unannounced checks of Allied's inventory to verify that the vessel was actually

in Allied's possession at one of its facilities and held for resale.

12. On May 14 and 15, 1993, the Arthur Smith, Kingfish, Wahoo and Dolphin

Fishing Tournament (the Tournament) was held in Palm Beach County. It is a

large tournament which draws about 600 participants. Allied paid the $300

Tournament entry fee, hired a crew, provided the Tiara, and paid for all

supplies. These expenses were charged to Allied's "Tournament and Promotion"

account on its general ledger.

13. Allied listed the Tiara on the Tournament entry form as the vessel to

be used in the Tournament. The participants listed were Edward Sweigart, Chris

Cunningham, Monty Braune, Jim Neill, Bob Wimmer, and Kimberly Kern. Allied's

address in West Palm Beach was listed as the address for each participant;

however, Allied's name was not referenced on the entry form.

14. Allied did not obtain advertising in any medium prior to, during, or

after the Tournament to announce the vessel's participation in the Tournament.

Allied was not a Tournament sponsor and did not donate any prizes to the

Tournament. No banners, flags, or pennants with Allied's name were displayed

either on land or on the Tiara during the Tournament.

15. The transom of the Tiara was marked with the vessel's make-and-model

number, which read, "4300 Tiara Convertible."

16. All rods and reels used on the vessel during the Tournament were the

personal property of Allied's salesman Chris Cunningham.

17. At no time was there a known prospective buyer present, either on land

or upon the vessel, during or after the vessel's participation in the

Tournament.

18. Participation in the Tournament included fishing from the vessel by

various participants. The participants on May 14 included Allied employees:

Chris Cunningham, salesman; Monty Braune, yard worker; Edward Sweigart, boat

washer; as well as non-employees; Ed Steffes; and Sweigart's girlfriend,

Kimberly Kern.

19. The participants on May 15 included Allied employees, Sweigart,

Braune, and David McGee, service manager; as well as non-employees Steffes,

Michael McGee and Bobby Wimmer.

20. The attire of the May 14 participants was, in part, as follows:

Sweigart wore a polo shirt bearing the "Tiara" logo; Cunningham and Kern wore

"Palm Beach Hatteras" t-shirts; Steffes and Braune wore t-shirts without logos.

21. The attire of the May 15 participants was in part, as follows:

Sweigart wore a polo shirt bearing the "Tiara" logo; Braune wore a "Stuart

Hatteras" shirt; David McGee, Michael McGee and Steffes wore shirts with no logo

and Wimmer wore a "Hatteras of Palm Beach" t-shirt.

22. At the Tournament, the weigh-in location for the larger boats

(including the Tiara) was at a park where there were no facilities to dock the

Tiara for display either before or after the day's fishing. Tournament

participants weighing their fish at the park were required to pull up to the

dock, off-load their catches and depart so that other participants could come to

weigh their fish. Mr. Cunningham got off the Tiara at the weigh-in location and

remained there to mingle with prospective purchasers while the captain and crew

returned the Tiara to Soveral Marina where it was available for boarding by

prospective purchasers. Soveral Marina was located approximately ten minutes or

five miles away from the weigh-in location. Allied would have preferred to dock

the Tiara at the Tournament location for easier access by prospective

purchasers. Because this was not possible, displaying the Tiara at nearby

Soveral Marina was a good alternative for making the yacht available to

potential customers.

23. Mr. Cunningham knew that some of his customers would be attending the

Tournament and might be interested in the Tiara. He attended the Tournament's

captains' meetings, weigh-ins and other gatherings and the awards ceremony at

the end of the Tournament. During the Tournament gatherings Mr. Cunningham

handed out business cards and brochures describing the Tiara.

24. For catching the largest dolphin, Edward Sweigart was awarded a prize

which consisted of cash, a boat, an outboard motor, and a boat trailer.

25. The following participants were on stage during the May 16 awards

presentation after Mr. Sweigart caught the biggest dolphin of the tournament:

Mr. Sweigart, wearing a "Tiara" logo shirt; Mr. Cunningham, wearing a "Palm

Beach Hatteras" shirt; and Ms. Kern, wearing a "Palm Beach Hatteras" shirt.

26. Immediately after the Tournament, Mr. Sweigart took the prize boat and

a dispute arose between Allied and Mr. Sweigart over who was entitled to the

prize which culminated in a lawsuit by Allied against Mr. Sweigart. A newspaper

article was published criticizing Allied for trying to recover the prize from

Mr. Sweigart. The negative publicity surrounding Allied's participation in the

Tournament caused Allied to downplay its participation in the event. As a

result of the newspaper article, Steve C. Brown, Senior Tax Specialist with the

Department of Revenue's (Department) Boat Enforcement Unit, conducted an

investigation into Allied's entry and participation in the Tournament.

27. Twelve days after the Tournament, on May 27, 1993, the vessel was sold

to Mr. Arthur Levitan for the sum of $506,727.80. Mr. Levitan was not at the

Tournament nor did he know the vessel had been in the Tournament. Six percent

sales tax of $26,727.30 along with a luxury tax of $34,504.50 was collected from

Mr. Levitan. The sales tax was paid to the Department of Revenue.

28. As a result of Mr. Brown's investigation, the Department issued a

Notice of Final Assessment for Tax, Penalty, and Interest Due on a Boat, dated

January 18, 1994, for use tax in the amount of $27,000, plus a late filing

penalty of $13,500 and interest as of January 18, 1994 of $1,801.50, which

totaled $42,301.50.

29. Allied protested the Assessment in a Petition for Reconsideration,

dated February 7, 1994, in which it alleged: that the vessel was operated on

behalf of Allied as part of its promotional activities and to expose the vessel

to potential buyers. Allied further alleged that no use tax was due because the

vessel was at all times part of Allied's inventory for sale to customers; that

such use is consistent with the vessel being offered for resale and being

maintained in inventory and that entry of the vessel into the tournament was at

all times solely for the purpose of promoting the sale of this vessel, Tiara

Yachts, and Allied. It was also alleged that there are no rules or statutes

that support the Department's assessment of use tax for vessels for resale.

30. The Department rejected the facts and arguments in the Petition and

upheld the Assessment in a Notice of Reconsideration, dated July 7, 1994, in

which it concluded that the vessel was: removed from inventory and used in an

activity inconsistent with it being offered for resale; that such "use" of the

vessel fell within the statutory language of Section 212.02(20), Florida

Statutes; that the use of a vessel held in inventory for resale and used in the

manner set forth in the facts of this case constitute a taxable use, as there is

no rule or statute that allows a dealer an exemption for such use.

31. The Department's Special Programs Unit is charged with collection and

enforcement of sales and use tax, especially with respect to boats. The Special

Programs Unit was created by L. Lamar Gay in 1983 and was headed by Mr. Gay from

its creation through June, 1989. Mr. Gay developed the policy for the unit and

was responsible for hiring Steve Brown in November of 1980.

32. From the inception of the Special Programs Unit through Mr. Gay's

tenure as an assistant bureau chief and head of that unit, the Department's

interpretation of the term "use" for use tax purposes was that it did not

include participation of an inventory vessel in a fishing tournament.

33. According to Brown, it is presently the policy of the Department that

the promotion of vessels at boat shows by dealers is not a taxable use. The

Department has not issued use tax assessments to dealers participating in boat

shows.

CONCLUSIONS OF LAW

34. The Division of Administrative Hearings has jurisdiction over the

parties to and the subject matter of this proceeding. Section 120.57(1),

Florida Statutes.

35. Section 212.06(6), Florida Statutes, states:

It is however, the intention of this chapter

to levy a tax on the sale at retail, the use,

the consumption, the distribution, and the

storage to be used or consumed in this state

of tangible personal property after it has

come to rest in this state and has become a

part of the mass property of this state.

36. Section 212.05(1)(b), Florida Statutes, imposes a tax of six percent

of the cost price of each item or article of tangible personal property when

"the same is not sold but is used, consumed, distributed, or stored for use or

consumption in this state."

37. Section 212.06(1), Florida Statutes, provides that dealers shall

collect a use tax at the rate of six percent of the cost price of the tangible

personal property at the time when the property is commingled with the general

mass of property in Florida upon the use of the tangible personal property in

Florida.

38. Rule 12A-1.091, provides:

(1) The Florida Sales and Use Tax Act

imposes a tax on the use ... and storage

for use ... in this state of tangible

personal property purchased in such manner

that the sales tax would not be applicable

at the time of purchase.

* * *

(7) Under Section 212.06(1), F.S., use tax

is imposed upon the cost of tangible personal

property imported into this state for use ...

in this state, after it has come to rest and

has become a part of the general mass of

property in this state . . . .

39. Rule 12A-1.007(1)(a), Florida Administrative Code, provides:

(1)(a) . . . the use . . . in this state of

any ... boats ... of a class or type required

to be registered, licensed, titled, or

documented in this state . . . is taxable on

the full sales price . . . .

40. The Department has the burden to establish that the entry and

participation of an inventory vessel in a fishing tournament constitutes a "use"

as defined in Section 212.02(20), Florida Statutes, which provides that a "use"

is

... the exercise of any right or power over

tangible personal property incident to the

ownership thereof, or interest therein,

except that it does not include the sale at

retail of that property in the regular

course of business.

41. In HMY New Yacht Sales, Inc. v. Department of Revenue, 676 So.2d 1385

(Fla. 1st DCA 1996), the First District Court of Appeal approved the

Department's interpretation of "use" as defined in Section 212.02(20), Florida

Statutes.

We also approve the agency's interpretation

of the statutory definition of 'use' with

respect to demonstration and promotional

activities, i.e., that such activities

related solely to resale of the vessel do

not constitute a taxable 'use,' but that

when such activities are also related to

the sale of other vessels or to the general

promotion of the dealer's business or another

business, they constitute a taxable 'use' of

the vessel.

Id. at 1389, 1390.

42. In HMY New Yacht Sales, the Court held that the conversion of a yacht

from an inventory item to a capital asset on the books of the dealer was a use

and therefore a taxable event. The Court went on to say that the Hearing

Officer had not made a finding of fact that the yacht had been used for more

than to aid in its own resale because she had erroneously concluded that such a

finding was not central to the issue of whether the dealer was liable for use

tax; therefore the Department was without authority to make such a finding of

fact and could not base a tax assessment only on the physical use of the yacht

in that case.

43. In the instant case, the entry and participation of the Tiara in the

fishing tournament was a promotional activity. The issue then becomes whether

the activity was to aid solely in the resale of the Tiara or whether the

activity was also to sell other yachts and promote the business of Allied.

44. Allied did not use the Tiara as a demonstrator, per se. However, the

testimony did establish that part of the reason that Allied entered the Tiara in

the Tournament was to promote Allied's sales in general, including the sale of

other vessels. There was no pre-tournament advertising that the Tiara would be

participating in the fishing tournament. Allied did not specifically decorate

the vessel to encourage potential buyers to buy the Tiara as it had done for

vessels it used in other fishing tournaments. There were no known potential

buyers for the Tiara in attendance at the fishing tournament. Although Allied

argues that the promotion of its business in general is an incidental benefit of

entering the tournament, the testimony does not support a finding that the sole

reason for entering the Tiara in the Tournament was to promote the sale of the

Tiara.

45. The entry and participation of the Tiara in the Tournament was a

taxable event pursuant to Section 216.06, Florida Statutes, and Rule 12A-

1.091(7) and 12A-1.007, Florida Administrative Code.

46. Section 213.21(3), Florida Statutes, gives the Department wide

discretion to assess penalties. There has been no showing that the failure of

Allied to timely pay the use tax was a result of willful negligence, willful

neglect or fraud. At the time that Allied entered the Tiara in the Tournament,

it did not have the benefit of the guidance set forth in HMY New Yacht Sales.

RECOMMENDATION

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

RECOMMENDED that a Final Order be entered assesing Allied Marine Group,

Inc., for payment of use tax in the amount of $27,000 plus interest incurred as

a result of the participation of one of its inventoried vessels in the Arthur

Smith, Kingfish, Dolphin and Wahoo Fishing Tournament of May 14-15, 1993.

DONE AND ENTERED this 19th day of November, 1996, in Tallahassee, Leon

County, Florida.

___________________________________

SUSAN B. KIRKLAND

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 19th day of November, 1996.

COPIES FURNISHED:

Albert J. Wollermann, Esquire

Mark T. Aliff, Esquire

Office of the Attorney General

The Capitol - Tax Section

Tallahassee, Florida 32399-1050

Craig D. Olmstead, Esquire

Jane W. McMillan, Esquire

Kelley, Drye and Warren

201 South Biscayne Boulevard, Suite 2400

Miami, Florida 33131

Linda Lettera, General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399-0100

Larry Fuchs, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399-0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15 days from the

date of this recommended order. Any exceptions to this recommended order should

be filed with the agency that will issue the final order in this case.