96-000358 Simmons Chemical Corporation vs. Department Of Revenue Status: Closed Recommended Order on Friday, August 16, 1996.

Summary: Re: sales tax; taxpayer unlawfully reduced sales price of ozone-depleting chemicals by amount of excise tax manufacturer paid.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

SIMMONS CHEMICAL CORPORATION, )

)

Petitioner, )

)

vs. ) CASE NO. 96-0358

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

_______________________________)

RECOMMENDED ORDER

Robert E. Meale, Hearing Officer of the Division of Administrative

Hearings, conducted the final hearing in Sarasota, Florida, on June 27, 1996.

APPEARANCES

For Petitioner: Peter W. Simmons, President

Simmons Chemical Corporation

311 Sarasota Center Boulevard

Sarasota, Florida 34240

For Respondent: Olivia P. Klein

Assistant Attorney General

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The issue is whether Petitioner is liable for proposed assessments of sales

tax, interest, and penalty in the total amount of $38,739.48, through June 3,

1994, and local government infrastructure surtax, interest, and penalty in the

total amount of $524.67, through June 3, 1994.

PRELIMINARY STATEMENT

By Notice of Intent to Make Audit Changes of Tax, Penalties, and Interest

dated June 3, 1994, Respondent advised Petitioner of an additional assessment of

$38,739.48 in sales tax ($24,469.73), penalty ($8289.52), and interest

($5980.23). By Notice of Intent to Make Local Government Infrastructure Surtax

Audit Changes dated June 3, 1994, Respondent advised Petitioner of an additional

assessment of $524.67 in infrastructure surtax ($351.43), interest ($85.38), and

penalty ($87.86).

Petitioner timely protested the proposed assessments and demanded a formal

hearing.

At the hearing, Petitioner called three witnesses and offered into evidence

three exhibits. Respondent called two witnesses and offered into evidence four

exhibits. All exhibits were admitted except Respondent Exhibit Number 4.

Prompted by a finding of fact proposed by Petitioner, the hearing officer

has taken official notice of Internal Revenue Service Form 6627 and the

Instructions for Form 6627. These items are Hearing Officer Exhibit Number 1

and are discussed in the rulings on Petitioner's proposed finding 21.

The court reporter filed the transcript on July 11, 1996. Rulings on

proposed findings are in the appendix. Petitioner retained an attorney to

prepare and file proposed findings on its behalf.

FINDINGS OF FACT

1. Petitioner purchases chemicals from manufacturers and resells the

chemicals at retail. Among the chemicals that Petitioner purchases and resells

are certain ozone-depleting chemicals (ODCs) that are subject to two different

federal taxes.

2. One federal tax is found in Section 4681(a)(1) of the Internal Revenue

Code of 1986, as amended (IRC). IRC Section 4681(a)(1) imposes a tax on "any

ozone-depleting chemical sold or used by the manufacturer, producer, or importer

. . .." This is referred to as the "ODC tax."

3. As interpreted by the Department of Treasury in regulations and rulings

and applied by the Internal Revenue Service, IRC Section 4681(a)(1) imposes the

ODC tax at the time of the sale or use of an ODC by the manufacturer, producer,

or importer. As interpreted and applied by these federal agencies, the ODC tax

is a liability exclusively of the manufacturer, producer, or importer; a

purchaser from any of these entities is not liable to pay the ODC tax to the

federal government. The federal government may not attach a lien on the ODCs,

after they have been sold or used, if the manufacturer, producer, or importer

has failed to pay the ODC tax.

4. In this case, the ODC tax is imposed on the chemical manufacturer that

sold the ODCs to Petitioner, and the tax is imposed at the time of the sale from

the manufacturer to Petitioner.

5. It is irrelevant that the manufacturer separately stated the ODC tax on

invoices to Petitioner. The manufacturer could have separately stated other

items of the cost of goods sold or general administration and overhead, such as

the federal gasoline taxes that it paid in transporting the ODCs to Petitioner.

The manufacturer's invoice has no bearing on the exclusive legal liability of

the manufacturer, under IRC Section 4681(a)(1), to pay this federal excise tax.

6. The other federal tax involved in this case is found in IRC Section

4682(h), which imposes a floor stocks tax on persons-other than the

manufacturer, producer, or importer-holding ODCs for use in further manufacture

or sale. Imposed after the payment of the ODC tax, this tax ensures that the

ODC tax, which has increased over time, is not partially avoided by a retailer

holding ODCs in inventory for a considerable period of time following their

purchase from the manufacturer.

7. Following an audit, Respondent issued on June 3, 1994, a Notice of

Intent to Make Audit Changes of Tax, Penalties, and Interest under Chapter 212.

The amount of sales tax due was $24,469.73 with a penalty of $8289.52 and

interest through June 3 of $5980.23 and accruing at a daily rate of $8.04.

8. Respondent issued on June 3, 1994, a Notice of Intent to Make Local

Government Infrastructure Surtax Audit Changes under Section 212.054. The

amount of surtax due was $351.43 with a penalty of $87.86 and interest through

June 3 of $85.38 and accruing at a daily rate of $0.12.

9. Respondent issued the proposed assessments because, in calculating

sales tax and surtax on ODCs sold at retail, Petitioner reduced the actual sales

price by the amount of federal ODC tax paid by the manufacturer and floor stocks

tax paid by Petitioner.

10. As noted above, though, federal law required Petitioner to pay, as a

tax, only the floor stocks tax. Petitioner's payments to the manufacturer of an

amount equal to the ODC tax paid by the manufacturer reflected only an agreement

between Petitioner and the manufacturer as to how to characterize part of the

purchase price.

11. The sales price of the ODCs should have included the ODC tax, but not

the floor stocks tax. The floor stocks tax is a legal obligation imposed on

Petitioner and is based on its inventory of ODCs. As discussed in the following

section, Petitioner is permitted by Respondent's rules to exclude these payments

from the sales price of the ODCs.

12. The record is not especially clear as to the amount of sales tax and

surtax relief to which Petitioner is entitled on account of the floor stocks tax

that it has paid.

13. Petitioner paid approximately $21,500 in federal floor stocks tax in

two forms: $20,418.80 in regular tax payments and about $1000 in tax payments

following an audit. The record contains adequate proof of the $20,418.80

payment, but not of the $1000 additional payment following an audit. The $1000

represented Mr. Simmons' best estimate of the additional floor stocks tax that

his company paid.

14. Mr. Simmons retired from Dow Corning Chemical after a 37-year career

in the chemical industry. He began Petitioner as a hobby, and he and his wife

take obvious pride in the success of this business.

15. Mr. Simmons is a careful reader of provisions of federal and state tax

law. But without expert guidance from one of Petitioner's witnesses, who is one

of a small number of IRS Revenue Agents specially trained in ODC taxes, IRC

Section 4681(a)(1) lends itself to multiple interpretations. In good faith, Mr.

Simmons tried to interpret the ODC tax through a careful reading of the statute

and consideration of its placement in the IRC under Chapter 38, which is titled

"Environmental Taxes," rather than Chapter 32, which is titled "Manufacturers

Excise Taxes." As discussed below, ambiguous language in Respondent's rule may

have furthered Mr. Simmons' understandable confusion on this point.

CONCLUSIONS OF LAW

16. The Division of Administrative Hearings has jurisdiction over the

subject matter. Sections 120.57(1) and 120.575, Florida Statutes. (All

references to Sections are to Florida Statutes. All references to Rules are

to the Florida Administrative Code.)

17. Rule 12A-1.022 provides:

(1) Federal excise taxes imposed upon the

retailer shall be excluded from the price of

tangible personal property in computing the

sales and use tax thereon and only the net

sales price shall be taxable.

* * *

(3) The federal manufacturers excise tax

is to be included in the price upon which sales

and use tax is computed even though the federal

tax is listed as a separate item on the invoice.

18. Rule 12A-1.022(3) requires that Petitioner should have included in the

sales price of the ODCs the federal excise tax paid by the manufacturer.

19. Petitioner argues that the reference to "federal manufacturers excise

tax" is limited to the sole IRC chapter entitled "Manufacturers Excise Tax."

This argument is supported by the rule's reference in the singular to the

manufacturers excise "tax" in subsection (3), as opposed to the reference in the

plural to excise "taxes" in subsection (1), and the inclusion of the definite

article "the" in subsection (3) and not in subsection (1). This argument is

somewhat supported by the placement of "federal" before "manufacturers" in

subsection (3).

20. However, the better reading is that the rule refers to a type of tax,

not the title of a tax. The mention of "manufacturers" in subsection (3) and

not subsection (1) means only that the type of tax described in subsection (3)

is a federal excise tax that is imposed on the manufacturer. The inclusion of

the definite article perhaps was prompted by the use of the singular form in

subsection (3). The placement of "federal" and "manufacturers" is probably

inadvertent.

21. Petitioner's argument frustrates the evident purpose of the rule,

which is to avoid imposing state and local taxes solely on the part of the sales

price that has been directly excised by a federal tax. Petitioner's argument

fails to account for the many other manufacturers excise taxes found in other

chapters of the IRC. The argument unduly narrows the pro-taxpayer scope of

subsection (1), as the IRC does not typically identify federal excise taxes,

including the floor stocks tax, as "excise" taxes. Petitioner's argument also

runs counter to IRC Section 7806(b), which warns:

No inference, implication, or presumption of

legislative construction shall be drawn or

made by reason of the location or grouping

of any particular section or provision or

portion of this title [Title 26, which

includes Chapter 32] . . . .

22. The descriptive nature of the references to "excise taxes" and

"manufacturers excise tax" means that Rule 12A-1.022(1) excludes from the sales

price any federal excise-type tax imposed directly on the retailer. Although

the floor stocks tax does not arise with the conveyance of the ODCs, but rather

attaches simply upon the holding of ODCs, the floor stocks tax works as an

adjunct to the ODC tax, which is clearly an excise tax. The floor stocks tax

complements the ODC tax by ensuring that manufacturers do not evade higher tax

rates by prematurely selling ODCs to retailers, who could then stock the ODCs

for excessive periods before selling them. Thus, as conceded by Respondent's

counsel at hearing (Tr. p. 32), the floor stocks tax is a federal excise tax

imposed directly on the retailer.

23. The record is clear that Petitioner paid $20,418.80 in floor stocks

tax. Respondent must reduce the proposed assessments of sales tax and surtax to

reflect this reduction of $20,418.80 in total sales price.

24. The record is not clear as to the additional floor stocks tax that

Petitioner paid following an audit. Mr. Simmons recalled that the audit

resulted in about $1000 of additional liability. Not unexpectedly, he could not

recall whether this was all floor stocks tax or part of it was interest and

penalty.

25. Section 120.575(2) provides:

In any administrative proceeding brought

pursuant to s. 120.57, the applicable depart-

ment's burden of proof, except as otherwise

specifically provided by general law, shall

be limited to a showing that an assessment

has been made against the taxpayer and the

factual and legal grounds upon which the

applicable department made the assessment.

26. Respondent has shown that it made two assessments against Petitioner.

Respondent has also shown the factual and legal grounds supporting nearly the

entire amount of the assessments by showing the legal and factual grounds for

including in the total sales price the ODC tax paid by the manufacturer.

27. However, Respondent has not shown the factual and legal grounds for

the portion of the assessments pertaining to the $20,418.80 in floor stocks tax

paid by Petitioner and the roughly $1000 in post-audit payments made by

Petitioner in connection with underpayments of the floor stocks tax.

28. The allocation of the burden of producing evidence is unimportant as

to the $20,418.80. The record is sufficiently clear that Petitioner paid this

sum, so it does not matter which party bears the risk of nonpersuasion as to

this issue.

29. The allocation of the burden of producing evidence is important as to

the $1000. The record is undeveloped as to this payment, as noted above, so the

party with the risk of nonpersuasion loses on this issue.

30. Section 120.575(2) requires that Respondent do something more than

merely produce an assessment and prove that the Petitioner in this case is the

taxpayer in the assessment. Respondent must prove the factual and legal grounds

for the assessment. This requirement means that Respondent must, among other

things, establish a sales price against which to apply sales tax and surtax.

31. The requirement that Respondent must prove the sales price or, here,

"net sales price", is revealed by the fact that Respondent is relieved of this

burden in extraordinary cases, such as where the taxpayer fails to produce his

records or files a "grossly incorrect report." In such extraordinary cases,

Section 212.12(5)(b) permits Respondent to "make an assessment from an estimate

based upon the best information then available to it." Section 212.12(5)(b)

provides that the resulting assessment is prima facie correct, "and the burden

to show the contrary shall rest upon the dealer, seller, owner, or lessor, as

the case may be." The record in this case clearly does not permit Respondent to

rely on Section 212.12(5)(b) to relieve itself of the burden of proving the "net

sales price," as described in the rule.

32. Rule 12A-1.022(1) does not establish an exemption or credit, for which

Petitioner would bear the burden of proof. It is the taxpayer's burden to prove

entitlement to an exemption or credit, and Respondent has no obligation to

disprove such entitlement in proving the factual and legal grounds for the

assessment under Section 120.575(2). See, e.g., Department of Revenue v. Kemper

Investors Life Insurance Company, 660 So. 2d 1124 (Fla. 1st DCA 1995) (tax

exemption or credit statutes are construed against the taxpayer).

33. Instead, Rule 12A-1.022(1) requires an adjustment in the sales price

in order to determine the "net sales price" on which the sales tax and surtax

are calculated. Requiring Respondent to prove the "net sales price" is

consistent with the judicial rule of construction that statutes extending taxes,

as contrasted to those providing exemptions or credits, are construed against

Respondent. Id. Respondent must therefore reduce the proposed assessments of

sales tax and surtax to reflect this reduction of $1000 in sales price.

34. Section 212.21(3) provides that a taxpayer's liability for any tax or

interest may be compromised on the grounds of "doubt as to liability for or

collectibility of such tax or interest." The record provides no basis for doubt

as to the collectibility of the taxes or interest. Likewise, there is no doubt

as to the liability for the taxes and interest found owing in this recommended

order.

35. Some doubt might arise from the word order in Rule 12A-1.022(3) and

the use of the singular form with a definite article in subsection (3), as

contrasted to the plural reference in subsection (1). But this doubt is

certainly dispelled by the indulgence given agencies in any reasonable

interpretation of their rules. Moreover, Respondent's interpretation of the

rule is not only reasonable, but is a better interpretation than that offered by

Petitioner. The record thus provides no basis for doubt as to Petitioner's

liability for the taxes.

36. Section 212.21(3) provides that a taxpayer's liability for penalties

may be settled or compromised if the "noncompliance is due to reasonable cause

and not to willful negligence, willful neglect, or fraud." There is no evidence

of willful negligence, willful neglect, or fraud. To the contrary,

noncompliance in this case was due to reasonable cause. Mr. Simmons read

Respondent's rule to exclude the ODC tax from the "net sales price." The rule

invites Mr. Simmons' misreading for the reasons already stated. IRC Section

4681 yields its meaning reluctantly, even to the informed reader. Under these

circumstances, Respondent is not entitled to collect from Petitioner any

penalties in this case.

RECOMMENDATION

It is

RECOMMENDED that the Department of Revenue enter a final order finding that

Petitioner owes the amounts assessed in the Notice of Intent to Make Audit

Changes of Tax, Penalties, and Interest dated June 3, 1994, and Notice of Intent

to Make Local Government Infrastructure Surtax Audit Changes dated June 3, 1994;

provided, however, that the final assessments shall be reduced by the amount of

the assessed penalties and shall be further reduced to reflect a reduction in

total sales price of $21,418.80 with a corresponding reduction in interest.

ENTERED on August 16, 1996, in Tallahassee, Florida.

___________________________________

ROBERT E. MEALE

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

on August 16, 1996.

APPENDIX

Rulings on Petitioner's Proposed Findings

1: adopted or adopted in substance. The tax, surtax, and penalties are

accurate. The interest figures appear accurate. However, these are not the

Notices of Intent that were admitted into evidence in this case.

2: adopted or adopted in substance.

3: rejected as unsupported by the weight of the evidence and incorrect

legally.

4: adopted.

5: rejected as unsupported by the weight of the evidence.

6: (first sentence): adopted.

6: (remainder): rejected as unsupported by the weight of the evidence and

incorrect legally.

7-9: rejected as irrelevant.

10-12: adopted.

13-20: rejected as irrelevant.

21: rejected as unsupported by the weight of the evidence. Petitioner's

counsel states in this proposed finding: "The Instructions to Internal Revenue

Service Form 6627 state that the entity which holds the subject Ozone-Depleting

Chemicals for sale can be held responsible for the filing of said Form 6627."

At best, this statement reflects a poor understanding of the multi-purpose Form

6627 and related instructions. Taxpayers use this form to report several taxes,

including the ODC excise tax and floor stocks tax. Nothing whatsoever in Form

6627 or the instructions imposes any liability on Petitioner for the ODC excise

tax. The only liability imposed on Petitioner in Form 6627 or the instructions

is for the floor stocks tax.

22: rejected as repetitious.

23: adopted or adopted in substance.

24 (first sentence): adopted.

24 (remainder)-25: rejected as unsupported by the weight of the evidence

and incorrect legal argument.

Rulings on Respondent's Proposed Findings

1-11: adopted or adopted in substance.

12-17: rejected as subordinate, irrelevant, and recitation of testimony.

18-20: adopted or adopted in substance.

21: rejected as recitation of testimony.

22: Adopted.

23: rejected as recitation of evidence.

24: rejected as subordinate.

25-26: adopted or adopted in substance.

27-29: rejected as subordinate and recitation of testimony.

30-44: adopted or adopted in substance.

COPIES FURNISHED:

Peter W. Simmons, President

Simmons Chemical Corporation

311 Sarasota Center Boulevard

Sarasota, Florida 34240

Bradley D. Magee

Abel Band

240 South Pineapple Avenue

Sarasota, Florida 34236

Olivia P. Klein

Assistant Attorney General

Office of the Attorney General

The Capitol-Tax Section

Tallahassee, Florida 32399-1050

Larry Fuchs, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399-0100

Linda Lettera, General Counsel

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 to this Recommended

Order. All agencies allow each party at least 10 days within which to submit

written exceptions. Some agencies allow a longer period within which to submit

written exceptions. You should contact the agency that will issue the final

order 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.

=================================================================

AGENCY FINAL ORDER

=================================================================

STATE OF FLORIDA, DEPARTMENT OF REVENUE

TALLAHASSEE, FLORIDA

SIMMONS CHEMICAL CORPORATION,

Petitioner,

vs. DOR CASE NO. 96-29-FOF

DOAH CASE NO. 96-0358

FLORIDA DEPARTMENT OF REVENUE,

Respondent.

__________________________________/

FINAL ORDER

This cause came before the Department of Revenue for the purpose of issuing

a final order. The Hearing Officer assigned by the Division of Administrative

Hearings issued a Recommended Order. A copy of that Recommended Order is

attached to this Final Order. Petitioner timely filed exceptions to the

Recommended Order and a copy of those exceptions is attached to this Final

Order. Respondent timely filed exceptions to the Recommended Order and a

Proposed Substituted Order and copies of those filings are attached to this

Final Order. In accordance with Rule 12-3.009, F.A.C., rulings on these

exceptions are set forth below.

Petitioner's Exceptions to Paragraphs 1, 2, and 6.

Petitioner asserts that the Hearing Officer should have found that the

taxes imposed by ss. 4681 and 4682(h) of the Internal Revenue Code ("I.R.C.")

are not different taxes. The purpose of the floor tax imposed under s. 4682(h)

is to prevent the enrichment of persons holding an inventory of the ozone-

depleting chemical ("ODC") when the initial tax was imposed on January 1, 1990

or when the tax is subsequently increased. Section 4682 contains definitions

and special rules relating to s. 4681, including the floor tax imposition of s.

4682(h). Whether the tax imposed by s. 4682(h) is considered to be distinct

from the tax imposed by s. 4681 is irrelevant. What is relevant is the person

upon whom the tax is legally incident, the person who is required to pay the tax

to the federal government and who is liable for the tax if not paid. The tax

imposed by s. 4681 is incident upon the manufacturer and the tax imposed by s.

4682(h) is incident upon the owner of the inventory.

Petitioner's exceptions to paragraphs 1, 2, and 6 are hereby rejected.

Petitioner's Exceptions

Petitioner's Exceptions to Paragraphs

3, 4, 5, 9, 10, 11, 18, 20, 21, 34, and 35

Petitioner asserts that language of s. 4681(a), IRC, "[t]here is hereby

imposed a tax on any ozone-depleting chemical sold. .." imposes the tax on the

chemical itself and thereby places the incidence of the tax on Petitioner the

person to whom the sale is made. The tax is an excise tax imposed on account of

a transaction, the sale of the chemical. The legal incidence is upon the

manufacturer, the person liable for the tax if not paid to the federal

government.

Petitioner's exceptions to paragraphs 3, 4, 5, 9, 10,

11, 18, 20, 21, 34, and 35 are hereby rejected.

Respondent' s Exceptions

Respondent's Exceptions to Paragraph 7

Respondent asserts that an adjustment was made during the audit appeal

process and that the Florida Water Quality pollutants tax should be withdrawn

from the assessment.

Respondent's exception to paragraph 7 is accepted.

Respondent's Exceptions to Paragraphs 13

Respondent asserts that Respondent's Exhibit 3 indicates that the federal

ODC tax and the floor tax are stated as a single lump sum, labeled as "Federal

CFC excise tax."

Respondent's exception to paragraph 13 is accepted.

Respondent's Exceptions to Paragraphs 13 and 29

Respondent concedes that the evidence indicated that the amount of federal

ODC floor stocks tax paid by Petitioner was $21,500.00.

Respondent's exceptions to paragraphs 13 and 29 are accepted.

Respondent's Exceptions to Paragraph 15

Respondent asserts that there is no evidence to support a finding that Mr.

Simmons needed expert guidance from the IRS regarding the correct interpretation

of s. 4681(a)(1), I.R.C., or that Rule 12A-1.022, F.A.C., is ambiguous.

Respondent's exceptions to paragraph 15 are accepted.

Respondent's Exceptions to Paragraph 24

Respondent asserts that paragraph 24 should be modified to clarify that the

audit referred to in that paragraph was an IRS audit,

Respondent's exception to paragraph 24 is accepted.

Respondent's Exception to the Citation of Rule

12A-1.022(2) F.A.C.

Respondent asserts that all citations in the Recommended Order to Rule 12A-

l.022(3), F.A.C., should be corrected to indicate Rule 12A-1.022(2), F.A.C.

Respondent's exception to the citation of the rule is accepted.

Respondent's Exceptions to Paragraphs 24-31 and 33

Respondent asserts that the Hearing Officer has misstated and misapplied

the burden of proof. As stated in s. 120.575(2), F.S., Respondent's burden of

proof "... shall be limited to a showing that as assessment has been made

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

[Respondent] made the assessment." Once this prima facie case is presented the

burden shifts to the Respondent to establish that the assessment is incorrect or

improper.

Respondent's exceptions to paragraphs 24-31 and 33 are accepted.

Adoption and Modification of the Recommended Order

The Statement of the Issue and the Preliminary Statement as set forth in

the Hearing Officer's Recommended Order are adopted. The Department adopts and

incorporates findings of fact set forth in paragraphs 1 through 6, 8, 10, 12,

and 14 of the Recommended Order. The Department adopts and incorporates

conclusions of law set forth in paragraphs 16 through 23, 32, 34, and 36 of the

Recommended Order. The Department modifies findings of fact set forth in

paragraphs 7, 9, 11, 13, and 15 of the Recommended Order and modifies

conclusions of law set forth in paragraphs 24-31, 33, and 35 of the Recommended

Order. For proposes of clarity, the Recommended Order as adopted and modified

is set forth below.

RECOMMENDED ORDER AS ADOPTED AND MODIFIED

Robert E. Meale, Hearing Officer of the Division of Administrative

Hearings, conducted the Final Hearing in Sarasota, Florida, on June 27, 1996.

APPEARANCES

For Petitioner: Peter W. Simmons, President

Simmons Chemical Corporation

311 Sarasota Center Boulevard

Sarasota, Florida 34240

For Respondent: Olivia P. Klein

Assistant Attorney General

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The issue is whether Petitioner is liable for proposed assessment of sales

tax, interest, and penalty in the total amount of $38,739.48, through June 3,

1994, and local government infrastructure surtax, interest, and penalty in the

total amount of $524.67, through June 3, 1994.

PRELIMINARY STATEMENT

By Notice of Intent to Make Audit Changes of Tax, Penalties, and Interest

dated June 3, 1994, Respondent advised Petitioner of an additional assessment of

$38,739.48 in sales tax ($24,469.73), penalty ($8,289.52), and interest

($5,980.23). By Notice of Intent to Make Local Government Infrastructure Surtax

Audit Changes dated June 3, 1994, Respondent advised Petitioner of an additional

assessment of percent 524.67 in infrastructure surtax ($351.43), interest

($85.38), and penalty ($87.86).

Petitioner timely protested the proposed assessments and demanded a formal

hearing.

At the hearing, Petitioner called three witnesses and offered into evidence

three exhibits. Respondent called two witnesses and offered into evidence four

exhibits. All exhibits were admitted except Respondent Exhibit Number 4.

Prompted by a finding of fact proposed by Petitioner, the hearing officer

has taken official notice of Internal Revenue Service Form 6627 and the

Instruction for Form 6627. These items are Hearing Officer Exhibit Number 1 and

are discussed in the rulings on Petitioner's proposed finding 21.

The court reporter filed the transcript on July 11, 1996. Rulings on

proposed findings are in the appendix. Petitioner retained an attorney to

prepare and file proposed findings on its behalf.

FINDINGS OF FACT

1. Petitioner purchases chemicals from manufacturers and resells the

chemicals at retail. Among the chemicals that Petitioner purchases and resells

are certain ozone-depleting chemicals (ODCs) that are subject to two different

federal taxes.

2. One federal tax is found in Section 4681(a)(1) of the Internal Revenue

Code of 1986, as amended (IRC). IRC Section 4681(a)(1) imposes a tax on "any

ozone-depleting chemical sold or used by the manufacturer, producer, or importer

" This is referred to as the "ODC tax".

3. As interpreted by the Department of Treasury in regulations and rulings

and applied by the Internal Revenue Service, IRC Section 4681(a)(1) imposed the

ODC tax at the time of the sale or use of and ODC by the manufacturer, producer,

or importer; a purchased from any of these entities is not liable to pay the ODC

tax to the federal government. The federal government may not attach a lien on

the ODCs, after they have been sold or used, if the manufacturer, producer, or

importer has failed to pay the ODC tax.

4. In this case, the ODC is tax imposed on the chemical manufacturer that

sold the ODCs to Petitioner, and the tax is imposed at the time of the sale from

the manufacturer to Petitioner.

5. It is irrelevant that the manufacturer separately stated the ODC tax on

invoices to Petitioner. The manufacturer could have separately stated other

items of the cost of goods sold or general administration and overhead, such as

the federal gasoline taxes that it paid in transporting the ODCs to Petitioner.

The manufacturer's invoice has no bearing on the exclusive legal liability of

the manufacturer, under IRC Section 4681(a)(1), to pay this federal excise tax.

6. The other federal tax involved in this case is found in IRC Section

4682(h), which imposes a floor stocks tax on persons other than the

manufacturer, producer, or importer- holding ODCs for use in further

manufacturer or sale. Imposed after the payment of the ODC tax, this tax

ensures that the ODC tax, which has increased over time, is not partially

avoided by a retailer holding ODCs in inventory for a considerable period of

time following their purchase from the manufacturer.

7. Following an audit, Respondent issued on June 3, 1994, a Notice of

Intent to Make Audit Changes of Tax, Penalties, and Interest under Chapter 212.

The amount of sales tax due was $24,469.73 with a penalty of $8,289.52 and

interest through June 3 of $5,980.23 and accruing at a daily rate of $8.04.

Subsequent to the issuance of this Notice of Intent to make Sales and Use Tax

Audit Changes, DOR withdrew the assessment portion relating to the water

pollutants tax, thus the taxpayer owes the following corrected amounts and

balance due to DOR:

Sales and Use Tax Amount Withdrawn

$23,861.32 $608.41

8,137.42 152.10

6,880.20 193.47

$38,878.94 $953.98

690.34 (Interest thru 1-13-95)

$39,569.28

24,469.73 (Payment rec'd 1-13-96)

$15,099.55 Balance due

8. Respondent issued on June 3, 1994, a Notice of Intent to Make Local

Government Infrastructure Surtax Audit Changes under Section 212.054. The

amount of surtax due was $351.43 with a penalty of $87.86 and interest through

June 3 of $85.38 and accruing at a daily rate of $0.12.

9. Respondent issued the proposed assessments based on the federal taxes

stated on invoices provided by the taxpayer. In calculating sales tax and

surtax on ODC's sold at retail, Petitioner has erroneously reduced the actual

sales price by an amount designated as "federal CFC excise tax "on Petitioner's

invoices. Although this lump-sum amount included both the federal ODC tax paid

by the manufacturer and the floor stocks tax paid by Petitioner, the retail

invoices failed to separately distinguish these two federal taxes. The auditor

thus imposed the tax assessment on the total federal tax reflected on the fact

of the taxpayer's invoices.

10. As noted above, though, federal law required Petitioner to pay, as a

tax, only the floor stocks tax. Petitioner to pay, as a tax, only the floor

stocks tax. Petitioner's payments to the manufacturer of an amount equal to the

ODC tax paid by the manufacturer reflected only an agreement between Petitioner

and the manufacturer as to how to characterize part of the purchase price.

11. The sales price of the ODCS should have included the ODC tax, but not

the floor stocks tax. The federal floor stocks tax is a legal obligation

imposed on Petitioner and is based on its inventory of ODCs. As discussed in

the following section, Petitioner is permitted by Respondent's rules to exclude

these payments form the sales price of the ODCs.

12. The record is not especially clear as to the amount of sales tax and

surtax relief to which Petitioner is entitled on account of the floor stocks tax

that it has paid.

13. The record contains adequate proof that Petitioner paid $20,418.80 in

1990 for federal floor stocks tax. Mr. Simmons also estimated that

approximately $1,000 of additional floor stocks tax was paid sometime during the

years 1992 or 1993 by his company following an IRS audit. He could not recall

the exact amount of the payment, the exact year to which the payment applied,

nor whether this amount included interest and penalty.

14. Mr. Simmons retired from Dow Corning Chemical after a 37-year career

in the chemical industry. He began Petitioner as a hobby, and he and his wife

take obvious pride in the success of this business.

15. In good faith, Mr. Simmons tried to interpret the ODC tax through a

careful reading of the provisions of federal and state tax law as well as the

relevant federal regulations and state tax rules. Specifically, he tried to

assess the ODC statute under Chapter 38, entitled "Environmental Taxes." and

chapter 32, entitled "Manufacturer's Excise Taxes," and to relate these federal

chapters to language in Respondent's rules. Albeit mistakenly, Mr. Simmons did

put forth his best efforts, within his limited knowledge, to interpret the rules

and statutes in considering whether the federal ODC tax should be included in

the total sales price.

CONCLUSIONS OF LAW

16. The Division of Administrative Hearings has jurisdiction over the

subject matter. Sections 120.57(1) and 120.575, Florida Statutes. (All

references to Sections are to Florida Statutes. All references to Rules are to

the Florida Administrative Code.)

17. Rule 12A-1.022 provides:

(1) Federal excise taxes imposed upon the

retailer shall be excluded from the

price of tangible personal property in

computing the sales and use tax thereon

and only the net sales shall be taxable.

(2) The federal manufacturers excise tax is

to be included in the price upon which

sales and use tax is computed even

though the federal tax is listed as a

separate item on the invoice.

18. Rule 12A-l.022(2) requires that Petitioner should have included in the

sales price of the ODCs the federal excise tax paid by the manufacturer.

19. Petitioner argues that the reference to "federal manufacturers excise

tax" is limited to the sole IRC chapter entitled "Manufacturers Excise Tax".

This argument is supported by the rule's reference in the singular to the

manufacturers excise "tax in subsection (2), as opposed the reference in the

plural to excise "taxes" in subsection (1). This argument is somewhat supported

by the placement of "federal" before "manufacturers" in subsection (2).

20. However, the better reading is that the rule refers to a type of tax,

not the title of a tax. The mention of "manufacturers" in subsection (2) and

not subsection (1) means only that the type of tax described in subsection (2)

is a federal excise tax that is imposed on the manufacturer. The inclusion of

the definite article perhaps was prompted by the use of the singular form in

subsection (2). The placement of "federal" and "manufacturers" is probably

inadvertent.

21. Petitioner's argument frustrates the evident purpose of the rule,

which is to avoid imposing state and local taxes solely on the part of the sales

price that has been directly excised by a federal tax. Petitioner's argument

fails to account for the many other manufacturers excise taxes found in other

chapters of the IRC. The argument unduly narrows the pro-taxpayer scope of

subsection (1), as the IRC does not typically identify federal excise taxes,

including the floor stocks tax, as "excise" taxes. Petitioner's argument also

runs counter to IRC Section 7806(b), which warns:

No inference, implication, or presumption of

legislative construction shall be drawn or made

by reason of the location or grouping of any

particular section or provision or portion of

this title [Title 26, which includes Chapter 32]

22. The descriptive nature of the references to "excise taxes" and

"manufacturers excise tax" means that Rule 12A-1.022(1) excludes from the sales

price any federal excise-type tax imposed directly on the retailer. Although

the floor stocks tax does not arise with the conveyance of the ODCs, but rather

attaches simply upon the holding of ODCs, the floor stocks tax works as an

adjunct to the ODC tax, which is clearly an excise tax. The floor stocks tax

complements the ODC tax by ensuring that manufacturers do not evade higher tax

rates by prematurely selling ODCs to retailers, who could then stock the ODCs

for excessive periods before selling them. Thus, as conceded by Respondent's

counsel at hearing (Tr. p. 32), the floor stocks tax is a federal excise tax

imposed directly on the retailer.

23. The record is clear that Petitioner paid $20,418.80 in floor stocks

tax. Respondent must reduce the proposed assessments of sales tax and surtax to

reflect this reduction of $20,418.80 in total sales price.

24. The record is not clear as to the additional floor stocks tax that

Petitioner paid following an IRS audit. Mr. Simmons recalled that the audit

resulted in about $1000 of additional liability. Not unexpectedly, he could not

recall whether this was all floor stocks tax or part of it was interest and

penalty.

25. Section 120.575(2) provides:

In any administrative proceeding brought

pursuant to s. 120.57, the applicable

department's burden of proof, except as

otherwise specifically provided by general law,

shall be limited to a showing that an assessment

has been made against the taxpayer and the

factual and legal grounds upon which the

applicable department made the assessment. To

meet its burden of proof, Respondent is required

to make a limited showing to demonstrate the (1)

an assessment was made, and (2) the factual and

legal grounds upon which the assessment was made.

To meet its burden of proof, Respondent is required to make a limited showing to

demonstrate that (1) an assessment was made, and (2) the factual and legal

grounds upon which the assessment was made.

26. Respondent has shown that it has made assessments against Petitioner

for two taxes, namely, the sales tax and the corresponding government

infrastructure surtax. Respondent has also shown the factual and legal grounds

supporting these assessments by demonstrating the legal and factual ground for

including in the total taxable "sales price" the ODC tax paid by the

manufacturer.

27. Once DOR has met the requirements under s 120.575(2), Fla. Stat.

(1995), then its assessment is deemed prima facie correct. The burden of proof

then shifts to the Petitioner to show by a preponderance of the evidence that

the tax assessment is incorrect. See Department of Revenue v. Nu-Life Health

and Fitness Center, 623 So.2d 747, 751-52 (Fla. 1st DCA 1992).

28. Petitioner argued that the tax assessments were improper because of

the federal CFC excise tax was a federal excise tax imposed upon the retailer

and should be excluded from Petitioner's taxable sales price base. Petitioner

failed to show that the federal CFC excise tax listed on its invoices was

imposed on the retailer and therefore it was not excludable from the sales tax

base.

29. Petitioner did, however, provide sufficient evidence in oral and

written testimony to support its claim that $21,500 in federal floor stocks

taxes should be excluded from the tax base since these were imposed directly on

the retailer. Thus, Petitioner did meet its burden of producing evidence solely

as to the federal floors stocks tax.

30. The burden of producing evidence as to the factual and legal grounds

for the tax assessment is initially on Respondent. This limited statutory

burden of proof having been met, Petitioner then has the burden of producing

evidence to establish that the tax assessment is incorrect or improper. Having

failed to meet its burden to establish that the tax assessment is incorrect or

improper. Having failed to meet its burden to establish that the federal CFC

excise tax paid by the manufacturer is a federal excise tax on the retailer,

Petitioner is nonetheless entitled to a credit based solely on the floor stocks

tax as noted above.

31. The taxpayer has a statutory duty to provide books and records to the

auditor during the course of the audit. In this case, Petitioner provided

invoices that stated "federal CFC excise tax" paid by the manufacturer was being

added to its customers' bill. Petitioner, however, failed to add this amount

into the total "sales price" when calculating the sales tax. Respondent proved

that the legal and factual grounds for the tax assessment imposed on the "sales

price" as defined in s 212.02(17), Fla. Stat. (1993) was derived from the

taxpayer's own invoices. Thus Respondent established the "sales price" upon

which DOR applied a sales tax and the surtax assessment.

32. Rule 12A-1.022(1) does not establish an exemption or credit, for which

Petitioner would bear the burden of proof. It is the taxpayer's burden to prove

entitlement to an exemption or credit, and Respondent has no obligation to

disprove such entitlement in proving the factual and legal grounds for the

assessment under Section 120.575(2). See, e.g, Department of Revenue v. Kemper

Investors Life Insurance Company, 660 So.2d 1124 (Fla. 1st DCA 1995)(tax

exemption or credit statutes are construed against the taxpayer).

33. Instead, Rule 12A-l.022(1) requires an exclusion of federal excise

taxes imposed upon the retailer, and, after this exclusion, the remaining "net

sales price" is taxable. The invoices that were the basis of Respondent's tax

assessments were in the possession and control of the taxpayer. Based on the

invoices given to the auditor, a sales tax assessment was calculated to include

all federal CFC excise tax that had been omitted from the sales price by the

taxpayer. It was therefore required that Petitioner prove not only that all

federal excise tax was on the retailer, but also establish what the "net sales

price" should be if it differed from Respondent's sales tax assessment.

34. Section 212.21(3) provides that a taxpayer's liability for any tax or

interest may be compromised on the grounds of "doubt as to liability for or

collectibility of such tax or interest:. The record provides no basis for doubt

as to the collectibility of the taxes or interest. Likewise, there is no doubt

as to the liability for the taxes and interest found owing in this Recommended

Order.

35. Some doubt might arise from the word order in Rule 12A-1.022(2) and

the use of the singular form with a definite article in subsection (2), as

contrasted to the plural reference in subsection (1). But this doubt is

certainly dispelled by the indulgence given agencies in any reasonable

interpretation of their rules. Moreover, Respondent's interpretation of the

rule is not only reasonable, but is a better interpretation than that offered by

Petitioner. The record thus provides no basis for doubt as to Petitioner's

liability for the taxes.

36. Section 212.21(3) provides that a taxpayer's liability for penalties

may be settled or compromised if the "noncompliance is due to reasonable cause

and not to willful negligence, willful neglect, or fraud.: There is no evidence

of willful negligence, willful neglect, or fraud. To the contrary,

noncompliance in this case was due to reasonable cause. Mr. Simmons read

Respondent's rule to exclude the ODC tax from the "net sales price." The rule

invites Mr. Simmons' misreading for the reasons already stated. IRC Section

4681 yields it meaning reluctantly, even to the informed reader. Under these

circumstances, Respondent should not be entitled to collect from Petitioner any

penalties in this case.

Based on the foregoing, it is,

ORDERED:

That the sales and use tax assessment is sustained for $22,571.32 tax and

$6,958.46 interest resulting in a balance of $5,060.07 owed to Respondent; and

that the local government infrastructure tax assessment is sustained for $269.71

tax and $77.89 interest resulting in a balance of $3.81 to be refunded to

Petitioner.

Any party to this Order has the right to seek judicial review of the Order

pursuant to section 120.68, F.S., by the filing of a Notice of Appeal pursuant

to Rule 9.110, Florida Rules of Appellate Procedure, with the Clerk of the

Department in the Office of the General Counsel, Post Office Box 6668,

Tallahassee, Florida 32314-6668, and by filing a copy of the Notice of Appeal

accompanied by the applicable filing fees with the appropriate District Court of

Appeal. The Notice of Appeal must be filed within 30 days from the date this

Order is filed with the Clerk of the Department.

DONE AND ENTERED in Tallahassee, Leon County, Florida this 15th day of

November, 1996.

STATE OF FLORIDA

DEPARTMENT OF REVENUE

________________________

L. H. FUCHS

EXECUTIVE DIRECTOR

CERTIFICATE OF FILING

I HEREBY CERTIFY that the foregoing Final Order has been filed in the

official records of the Department of Revenue, this 15th day of November, 1996.

________________________

JUDY LANGSTON

AGENCY CLERK

Attachments: Hearing Officer's Recommended Order

Petitioner' s Exceptions

Respondent' s Exceptions

Respondent's Proposed Substituted Order

COPIES FURNISHED:

Robert E. Meale, Hearing Officer

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

Peter W. Simmons, President

Simmons Chemical Corporation

311 Sarasota Center Boulevard

Sarasota, Florida 34240

Bradley D. Magee

Abel Band

240 Pineapple Avenue

Sarasota, Florida 34236

Olivia P. Klein

Assistant Attorney General

Tax Section

Department of Legal Affairs

The Capitol

Tallahassee, Florida 32399-1050

Rick H. McClure

Assistant General Counsel

Department of Revenue

P.O. Box 6668

Tallahassee, Florida 32314-6668