95-004770 Lewis Oil Company, Inc. vs. Department Of Revenue Status: Closed Settled and/or Dismissed prior to entry of RO/FO on Monday, June 1, 1998.

Summary: Petitioner proved that sufficient control and possession of fuel equipment delivered to store owner that it established bailment for mutual benefit and not taxable lease or rental.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

LEWIS OIL COMPANY, INC., )

)

)

Petitioner, )

)

vs. ) CASE NO. 95-4770

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

______________________________)

RECOMMENDED ORDER

Pursuant to Notice, a final hearing in this formal

proceeding was conducted at Gainesville, Florida, on March 6,

1997, before P. Michael Ruff, Administrative Law Judge of the

Division of Administrative Hearings. The appearances were as

follows:

For Petitioner: Jefferson M. Braswell, Esquire

Scruggs and Carmichael, P.A.

Post Office Box 23109

1 Southeast 1st Avenue

Gainesville, Florida 32602

For Respondent: James F. McAuley, Esquire

John Upchurch, Esquire

Office of Attorney General

The Capitol - Tax Section

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

It must be determined whether the placement of storage

tanks, pumps, and appurtenant fueling equipment by Lewis Oil

Company, Inc. (Lewis) at convenience stores constituted a license

or lease of real property upon which that equipment was placed

and, therefore, whether the commissions paid to the convenience

stores for pumping and selling the Petitioner's fuel should have

been the subject of sales tax, or conversely, whether the

placement of the pumping equipment and fuel at the stores was a

bailment and a non-taxable transaction.

PRELIMINARY STATEMENT

On or about October 10, 1994, the Department of Revenue

(Department) concluded an audit of the Petitioner's, Lewis Oil

Company, Inc. (Lewis), discretionary sales surtax and issued a

Notice of Proposed Assessment requiring Lewis to pay additional

tax, penalties and interest. The assessed taxes related to the

sale of petroleum products from petroleum storage tanks that were

installed by Lewis at several convenience stores pursuant to

petroleum supply agreements entered into between Lewis and the

convenience store operators. On August 18, 1995, in response to

Lewis' protest letter, the Department concluded that Lewis was

exercising a taxable privilege because the installation of the

storage tanks was purportedly an agreement for the use of real

property and was not, therefore, a bailment of property which

would be exempt from taxation under Section 212.031, Florida

Statues. On September 19, 1995, the Petitioner filed a petition

with the Department for an administrative hearing in accordance

with Sections 120.57(1) and 120.57(5), Florida Statutes. The

issue presented by Lewis in its petition is whether the contracts

between Lewis and convenience stores for the installation of and

use of tangible personal property constitutes a bailment and

therefore not the exercise of a taxable privilege under Section

212.103, F.S., relating to leases, licenses, or rentals of real

property pursuant to Rule 12A-1.1070(22A), Florida Administrative

Code.

The petition was sent to the Division of Administrative

Hearings and assigned DOAH Case No. 95-4770. At the final

hearing, Lewis, presented the testimony of Jarred Cail, Chief

Financial Officer for Lewis Oil Company and John Deese, Director

of Real Estate for Suwannee Swifty Food Stores, Inc. The

Department presented the testimony of Donald E. Brim, Tax Auditor

for the Florida Department of Revenue. Lewis introduced one

exhibit into evidence, and the Department entered four exhibits

into evidence.

FINDINGS OF FACT

1. Lewis is a jobber or wholesale distributor of gasoline,

diesel fuel, and related petroleum products. As a method of

distributing its fuel products, the Petitioner contracts with

convenience stores that it will install petroleum fuel storage

tanks and dispensing equipment on the convenience store's real

property, and will furnish product on consignment to the

convenience store, who sells the fuels to its customers.

2. Pursuant to the agreement between Lewis and the

convenience stores, the equipment was owned by Lewis but Lewis

relinquished exclusive possession and control of it to the

convenience stores and their management.

3. Lewis agreed to furnish the gasoline equipment installed

at each location, and keep it in good working order. The

convenience stores agreed to sell gasoline on its premises

supplied exclusively by Lewis and agreed to collect and account

for all monies as the result of sales of gasoline.

4. The money associated with the sale of the gasoline was

collected by the convenience stores. The amount collected was

the entire cost of a gallon of gas to the consumer which would

include the motor fuels tax. The convenience stores paid Lewis

the full retail price of the sales less the agreed upon

commissions and sales taxes. Lewis remitted the motor fuel tax

to the State and paid the bills associated with the cost of fuel

to the supplier, Chevron Oil Company.

5. The convenience stores were required to account for the

monies collected by taking meter readings which were then

recorded on forms and remitted to Lewis regularly.

6. Lewis was permitted to inspect the records, pumps and

metering equipment for the purpose of verifying the accounting

made by the convenience stores to determine whether or not Lewis

was receiving an appropriate portion of the gross profit margin

as agreed to in the commission agreement itself.

7. The metering equipment is located on the face of the

dispenser, and a meter reading can be done by looking at the

meter or by pushing a button. On most of the equipment at the

convenience stores, it was not necessary to take the meter

readings from the actual equipment because the metering equipment

was accessed on the inside of the stores on consoles.

8. The convenience stores were r esponsible for inspecting

the underground tanks by "sticking" the tanks with a long stick

to reconcile actual tank inventory with meter readings to

determine the possible loss of inventory.

9. The convenience stores were responsible for the day to

day maintenance of the pumps and islands such as sweeping and

cleaning the equipment and inspecting the equipment for proper

operations and damage.

10. The convenience stores were responsible for the hiring,

firing and management of employees associated with managing the

gasoline tanks and pumps.

11. If the tanks needed repairs, the convenience store

operator was responsible for notifying Lewis of the necessary

repairs, and Lewis would see that the repairs were made and would

pay for the repairs.

12. All repairs required the permission and cooperation of

the convenience store operator who required that the repairs be

coordinated so as not to interfere with store operations. The

repairs required the cooperation of the convenience stores.

13. Lewi s set the price of the gasoline for the consumer,

and the meters were physically changed by the employees at the

convenience stores.

14. Lewis agreed not to set the price of the gas at a price

that would provide less than 1.5 cents per gallon commission

except on consent of the convenience stores. The stores were

responsible for advertising materials to display the price set.

15. If for any reason Lewis was unable to supply gas for

sale to the convenience store's customers, the stores’ management

was free to obtain gas from other petroleum suppliers. It was

only required to pay Lewis a 2-cent fee in this eventuality.

16. Lewis did not have the right under the contract with

the convenience stores to interfere with the stores’ possession

by physically locking up the pumps or removing the tanks from the

ground or blocking sales of the fuel. Under the terms of the

contract, Lewis did not have the right to remove any of the

gasoline.

17. Upon expiration or termination of the agreement, Lewis

would re-possess all equipment, inventory and merchandise from

the convenience stores, and Lewis was required to return the

ground to its original condition. Lewis would reuse the

equipment if it still met environmental standards.

18. Lewis carried insurance for property damage,

environmental damage and the liability associated with the

operation of the petroleum systems, and the convenience stores

agreed to indemnify and insure against any losses or liabilities

that arose out of their own negligence.

19. The Florida Department of Environmental Protection

lists Lewis as the owner of the petroleum tanks and lists the

convenience store as the operator on its Petroleum Liability

Insurance and Restoration Program forms.

CONCLUSIONS OF LAW

20. The Division of Administrative Hearings has

jurisdiction in this proceeding pursuant to Sections 120.57(1)

and 120.57(5), F.S.

21. The Courts view it as fundamental that the Petitioner

carries the ultimate burden of persuasion. The Department merely

has the burden of showing that an assessment has been made and

the factual and legal grounds upon which it is based. The

taxpayor must then show by a preponderance of the evidence that

the assessment is improper Department of Revenue v. Nu-Life

Health and Fitness Center , 623 So. 2d 747, 751-752 (Fla. 1 st DCA

1992).

22. Rule 12A-1.070, F.A.C., pertains to the tax liability

of the use of real property. Subsection (22) of that Rule

provides, in part:

(22)(a) When tangible personal property is

left upon another's premises under a contract

of bailment, the bailee is not exercising a

privilege taxable under the provisions of

Section 212.031, F.S., relating to leases,

licenses, or rentals of real property.

(b) A bailment is a contractual agreement,

oral or written, whereby a person (the

bailer) delivers tangible personal property

to another (the bailee) and the bailor for

the duration of the relationship relinquishes

his exclusive possession, control, and

dominion over the property, so that the

bailee can exclude, within the limits of the

agreement, the possession of the property to

all others. If there is no such delivery in

relinquishment of exclusive possession, and

the owner's control and dominion over the

property is not dependent upon the

cooperation of the person on whose premises

the property is left, and his access thereto

is in no wise subject to the latter's

control, it would generally be held that such

person is a tenant, lessee, or licensee of

the space upon the premises where the

property is left . . .

23 . The issue presented by Lewis is whether Lewis

relinquished exclusive possession, control, and dominion over the

petroleum systems. Under the terms of the contract between Lewis

and the various convenience stores, Lewis retained the right to

"inspect such records and all pumps and metering equipment at all

reasonable times." Lewis presented testimony that this right of

inspection for was for the limited purpose of determining whether

Lewis was receiving an appropriate portion of the gross profit

margin as agreed. In order to determine the above stated issue,

it must be determined whether the limited right of Lewis to

inspect the pumps and metering equipment for accounting purposes

is of such a nature as to mean that Lewis maintained some level

of possession, control and dominion over the property which

violates the terms of Rule 12A-1.070, F.A.C. The rule does not

require that all possession, dominion and control be relinquished

to the bailee. The rule expressly states that the bailee must be

able to exclude the possession of the property to all others,

“ within the limits of the agreement .” The parties can agree to

some sharing of possessory rights without defeating a bailment.

That is the essence of a bailment for mutual benefit.

24. Lewis argues that the nature of the right to inspect

relates more to the control and dominion over the monies that are

collected after the sale of the gasoline that it does to actual

control of the gasoline equipment or the inventory in the tanks.

The record is well established that once Lewis placed the tanks

in the ground and the inventory in the tanks that it did not

possess the right to interfere with the sale of the gasoline or

the management of the equipment. The essence of the agreement

and the instrument of all of the profit was the gasoline in the

tanks, and it is undisputed that Lewis was not responsible and

had no right to the inspection of that gasoline inventory. All

inventory readings were conducted by employees of the convenience

stores who were employed and trained by the convenience store

operators. When repairs were necessary or when deliveries were

made, they were conducted by Lewis, but at the direction and

convenience of the convenience stores. Lewis could not interfere

with the operation of the tanks or the store’s operations by

making repairs or deliveries without the cooperation of the

convenience stores’ management.

25. The testimony presented by Lewis indicates that the

actual inspections conducted by Lewis did not even require a

visit to the equipment. Under most circumstances the metering

equipment was inside the stores. When the metering equipment was

contained on the face of the equipment, it was possible to simply

read the meter. At the most, it required the pushing of a button

of the side of the dispenser. This activity relates to the

accounting of the monies collected and has no impact on the

custody or control of the petroleum equipment. The management

and day to day maintenance of the equipment were exclusively in

the control of the convenience store operator. Lewis maintained

no right to control how or when the equipment was used. The

stores could even buy fuel from another supplier and sell it from

this equipment, if Lewis failed to deliver. As in any bailment,

the agreement called for the reasonable care of the equipment,

and at the termination of the agreement, Lewis would repossess

the equipment.

26. The issue presented in the instant case is similar to

issue presented in V.T. Leasing v. Dept. of Revenue , DOAH Case

No. 95-0021, DOR Case No. 96-28-FOF (Final Order dated October

29, 1996), although the facts are clearly distinguishable. In

V.T. Leasing , the petroleum supplier agreed to furnish, install

and maintain the fuel-pumping equipment. The supplier was

responsible for insuring an adequate inventory of fuel,

collecting all monies and credit card vouchers, and determining

the amount of commission owed to the seller. The supplier

maintained the express right to ingress and egress at all times

for all essential purposes such as servicing the equipment or, if

necessary, the removal of the equipment. Unlike the terms of the

Lewis agreement, at the termination of the V.T. Leasing

agreement, the equipment became the property of the seller.

Although Lewis did maintain the ownership of the equipment for

the life of the equipment as was the case in V.T. Leasing , this

single fact is not inconsistent with the nature of a bailment as

defined under Rule 12A-1.070, F.A.C. which does not require the

relinquishment of title in order to qualify for the tax

exemption. In fact, retention of title in the bailor is typical

of bailment, otherwise it would be a sale or gift. The above

referenced facts in the V.T. Leasing case were the determining

factors in the Department's Final Order which found that there

was the exercise of a taxable privilege. In the instant case,

Lewis did not have the right to check the inventory in the tanks,

did not have the right for unfettered ingress and egress for the

purpose of repairing, removing or locking equipment, and did not

have responsibility for determining the commission of sales.

Lewis only had the right to account for the fuel sold to make

sure it was getting the monies owed to it. Because the facts of

the instant case are so clearly distinguishable from V.T.

Leasing , the determination that Lewis was not exercising a

taxable privilege is not inconsistent with that previous case.

27. The instant case is nearly identical to the facts

recited in Fort Pierce Gas Company v. Toombs , 193 So. 2d 669

(Fla. 4 th DCA 1966) which was cited by the Hearing Officer in

V.T. Leasing as an example of a typical bailment and adopted by

the agency in the Final Order. In V.T. Leasing , the Hearing

Officer recites as the determining facts in establishing the

bailment relationship:

. . . when a propane gas storage tank was

delivered and located at the residence of a

homeowner, in order to facilitate the gas

company being able to sell and distribute a

supply of gas to the homeowner for use in his

home gas appliances, the relationship between

the gas company and the homeowner, with

reference to the possession and use of the

tank was held to be that of bailor and

bailee, the bailment being for the mutual

benefit of the parties. The homeowner

received the benefit of having a supply of

gas to operate his home appliances, for which

he paid the gas company, and the gas company

received the benefit of having the facility

available to the homeowner so that the gas

company could sell its gas for profit.

(emphasis supplied).

This mimics the relationship between Lewis and the convenience

stores where the agreement provided for the mutual benefit of

both parties. Lewis got a marketplace to sell its gasoline as

well as the personnel to maintain the equipment, manage inventory

and collect monies. The convenience stores attracted additional

customers and received a portion of the sales. The relationship

between Lewis and the convenience stores is one of bailor and

bailee and is nearly identical to facts of the Fort Pierce Gas

Company case previously adopted as exemplary by the Department in

the V.T. Leasing Final Order.

28. Other legal sources have concluded that bailments have

certain characteristics which, although not without exception,

may serve as a guide in the instant case in establishing the

relationship between Lewis and the convenience stores as a

bailment. In a bailment, possession of the property bailed is

severed from the ownership, the bailer retaining general

ownership and the bailee receiving lawful possession or custody

for the specific purpose of the bailment. Furthermore, a

bailment contemplates return of the property. Volume 5, Fla.

Jur. 2d, Section 2.

29. The element of compensation is essential in every

bailment for mutual benefit of the parties which is the essence

of the Lewis agreements. Id. As is the case with Lewis, a

bailee is required to re-deliver the property entrusted to him in

good condition. Id. Consistent with the instant case, where a

bailment is for mutual benefit and there is no express agreement

to the contrary, the bailee is held to the exercise of ordinary

care and diligence in safeguarding the bailer's property and is

answerable for loss or injury resulting from his own negligence.

Id.

30. The rule appears well-settled that in the absence of

statute or express contract, a bailee is not an insurer of the

property delivered This makes sense because ownership remains

with the bailor along with the ultimate right to recovery of

possession. Except where the contract is violated, the bailee

should not be liable for the loss of, or injury to, the thing

bailed. Volume 5, Fla. Jur. 2d, Section 10. A bailee will not

be liable if the property bailed is damaged or lost by accident,

or by some other means wholly without the fault of the bailee,

and in the absence of some special stipulation in the bailment

contract such damage or loss falls on the bailor. Id. This is

completely consistent with the fact that Lewis carried property,

environmental and liability insurance on the storage tanks and is

in no way indicative of control and dominion over the equipment.

The night and duty to insure the property runs as an indicia of

ownership and is not dependent on retention of possession and

control (auto insurance is an apt example). The fact that Lewis

was responsible for the repairs due to internal decay or a defect

in the equipment, the negligence of a third person, or other

causes over which the bailee had no control, such as disaster, is

also consistent with general principles defining a bailment

relationship. Volume 5, Fla. Jur. 2d, Section 10; Peacock

Motor Co. v. Eubanks , 145 So. 2d 498 (Fla. 1 st Dist. 1962).

Moreover, it is logical that it perform repair because it

presumable has expertise with such equipment as an integral part

of its business. That does not mean that the bailee, by agreeing

that Lewis could repair the equipment was allowing control and

possession to lie with Lewis.

31. The Department relies on Section 212.02(2), F.S.

containing the definition of “business” “. . . any activity

engaged in by any person . . . with the object of public or

private gain . . . either direct or indirect.” It contends this

broad definition of “business” includes the activity at issue.

It also relies on Section 212.031, F.S. which imposes sales tax

on the privilege of engaging in the “business” of leasing renting

or licensing the use of real property, Regal Kitchens, Inc. v.

Dept. of Revenue , 641 So. 2d 158, 162 (Fla. 1 st DCA 1994). It

seeks to apply this concept of business to the agreement and

practice at issue. That principle and comparison is inopposite.

Clearly the agreement at issue and the proven intent and

operations of the parties shows that neither contemplated

engaging in the business or renting, leasing or licensing real

property. Lewis simply bailed its property to Suwannee Swifty so

that they both could engage in the business of selling gasoline

at a shared profit, as a joint venture. Neither intended, nor

specified in the agreement, that their transaction and

arrangement was to be a lease or rental of real property, nor did

they intend that the commissions were property rent.

32. The terms of the contract between Lewis and the various

convenience stores establishes that the relationship between the

parties was one of bailor and bailee. The limited right to read

the meters to determine the accuracy of the accounting provided

by the convenience stores is insufficient to prove that Lewis

maintained any measure of possession, control, and dominion over

the equipment. The record supports the conclusion that the

convenience store operators could have excluded Lewis from taking

possession of the property to the extent that it could not

service, shut down or remove the equipment without the

cooperation of the store operators. The single right to take

meter readings was the only method provided under the contract

for Lewis to make certain that it received its share of the

profits as provided by the agreement. This related to the

control and dominion of the monies collected and not to the

control and dominion of the fueling equipment. Lewis has

maintained its burden of proof in establishing that the

contractual agreement at issue is a bailment as contemplated

under Rule 12A-1.070, F.A.C. The rule does not require delivery

of exclusive possession and control but relinquishment of

exclusive possession and control by the owner.

RECOMMENDATION

Based on the foregoing, it is, hereby,

RECOMMENDED:

That the Department enter a Final Order determining that

Lewis was not exercising a taxable privilege under Sections

212.103, F.S.

DONE and ENTERED this 11 th day of June, 1997, in

Tallahassee, Leon County, Florida.

___________________________________

P. MICHAEL RUFF

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 th

this 11 day of June, 1997.

COPIES FURNISHED:

Jefferson M. Braswell, Esquire

Scruggs and Carmichael, P.A.

Post Office Box 23109

Gainesville, FL 32602

James F. McAuley, Esquire

John Upchurch, Esquire

Office of Attorney General

The Capitol - Tax Section

Tallahassee, FL 32399-1050

Linda Lettera, Esquire

Department of Revenue

204 Carlton Building

Tallahassee, FL 32399-0100

Larry, Fuchs, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, FL 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