96-001934 Terry Thomas Carousel, Inc. vs. Department Of Revenue Status: Closed Recommended Order on Tuesday, September 29, 1998.

Summary: Petitioner did not meet burden of proving that Respondent's tax assessment was factually or legally incorrect.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

TERRY THOMAS CAROUSEL, INC. )

d/b/a THE CAROUSEL LOUNGE, )

)

Petitioner, )

)

vs. ) Case No. 96-1934

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

___________________________________)

RECOMMENDED ORDER

This cause came on for formal hearing on May 27, 1998,

before Suzanne F. Hood, Administrative Law Judge with the

Division of Administrative Hearings, in Pensacola, Florida.

APPEARANCES

For Petitioner: James L. Chase, Esquire

101 East Government Street

Pensacola, Florida 32501

For Respondent: Olivia P. Klein, Esquire

Office of the Attorney General

The Capitol, Tax Sectio n

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The issues are whether Respondent violated Chapter 212,

Florida Statutes, by failing to pay sales tax and local

government infrastructure surtax, and if so, what penalty should

be imposed.

PRELIMINARY STATEMENT

On or about August 25, 1993, Respondent State of Florida,

Department of Revenue (Respondent) began an audit of Petitioner

Terry Thomas Carousel, Inc. d/b/a The Carousel Lounge

(Petitioner). Respondent audited Petitioner's state sales tax

records for the period April 1, 1988 through March 31, 1993 and

local government infrastructure surtaxes records for the period

June 1, 1992 through March 31, 1993.

On April 7, 1994, Respondent issued a Notice of Intent to

Make Sales and Use Tax Audit Changes and a Notice of Intent to

Make Local Government Infrastructure Surtax Audit Changes.

On August 2, 1994, Respondent issued a Notice of Proposed

Assessment of tax, penalty, and interest based on the audit of

Petitioner's sales tax records. That same day, Respondent issued

a Notice of Proposed Assessment of tax, penalty, and interest

based on the audit of Petitioner's local government

infrastructure surtax records. In response to these notices,

Petitioner filed letters of protest.

On April 3, 1996, Petitioner issued a Notice of Decision,

advising Respondent that he was being assessed $48,085.08 in

sales and use taxes for the period April 1, 1988 through

March 31, 1993, and $1,214.32 in local government infrastructure

surtaxes for the period June 1, 1992 through March 31, 1993.

Petitioner filed a Petition for Formal Administrative

Hearing with Respondent as to both audit assessments on April 17,

1996. Respondent referred the case to the Division of

Administrative Hearings on April 23, 1996.

On May 8, 1996, the undersigned issued a Notice of Hearing,

scheduling this case for formal hearing on September 9-12, 1996.

Subsequently, the undersigned granted numerous requests for

continuance. An order dated January 14, 1998, rescheduled the

hearing for May 27-29, 1998.

On May 26, 1998, Petitioner filed a Motion to Enforce

Settlement Agreement or Continue Hearing. Respondent filed a

response to this motion during the hearing on May 27, 1998.

After hearing oral argument, the undersigned denied the motion.

When the hearing commenced, the parties stipulated to the

assessed sales tax and local government infrastructure surtaxes

and related interest for all items listed in the audit reports

with the exception of taxes attributable to alleged admission

charges and souvenir sales. The contested issues at the hearing

included alleged admissions charges, alleged souvenir sales, and

penalties on all of the assessed items.

Respondent presented the testimony of three witnesses and

offered seven exhibits which were admitted into evidence.

Petitioner testified on his own behalf and presented the

testimony of one witness. Petitioner offered one exhibit, which

was admitted into evidence.

The transcript of the proceeding was filed with the Division

of Administrative Hearings on July 6, 1998.

Petitioner filed his Proposed Recommended Order on June 21,

Extend Time to File Respondent's Proposed Recommended Order.

Petitioner filed an amended Proposed Recommended Order on

on August 21, 1998.

1. At all times material to this proceeding, Peti

owned and operated a bar and lounge business in Pensacola,

of providing music and other entertainment to a variety of

2. Petitioner derived its revenue mainly from the sale of

(admissions), souvenir sales, snack food sales, and vending

vending machine.

that operated

end of each business day, a "Z" tape would "cash out" each

beverages. Each bartender would count up the cash in each drawer

would then compare her "Z" tape to the "change order" and mark

the daily cash report, a deposit slip was prepared for that day's

4. From 1989 through January 1994, Petitioner charged door

$1.00 on Thursday and Friday nights and $2.00 on Saturday nights.

for adults and $5.00 for eighteen through twenty-year olds,

5. For door admissions, Petitioner had a cash drawer.

6. At the end of each night when there was a door

responsible for collecting the cover charge would go to the

The money was placed in an envelope, together with a slip of

shelf in the manager's safe. The shelf was designated as

envelope, throw away the slip of paper indicating the amount, and

7. Cash sales that were not rung up on a cash register were

kept at the bar. The proceeds from the sale of souvenirs,

jackets and T-shirts, were kept in the "drink cup" until the

money was counted and placed in an envelope on Terry's shelf in

the safe.

8. The prices for the jackets varied through the years.

The average price of the jackets was between $25.00 and $35.00.

The average price of the T-shirts was between $7.00 and $15.00.

Some of the jackets and T-shirts were given away free. However,

employees and customers did purchase both T-shirts and jackets

from Petitioner.

9. Petitioner kept a guest list of persons that were given

free admission to the club. It consisted of less than one legal

sheet of paper during Petitioner's operation. Testimony by Terry

Thomas that he had a guest list of 327 names and that at least

one-third of those patrons were not charged an admissions fee on

Friday and Saturday nights is not credible.

10. In conjunction with a routine audit, Respondent sent

Petitioner a Notice of Intent to Audit Petitioner's books and

records in April of 1993. Attached to this notice was a detailed

list of the books and records required for review at the time of

the audit.

11. Upon receipt of the notice, Petitioner directed

Respondent's auditor to meet on August 25, 1993, with

Petitioner's accountant. On that date, Respondent's auditor and

Petitioner's accountant discussed the audit objectives and the

records required for the audit. The auditor toured the

Petitioner's business premises with the accountant and began the

review of Petitioner's bank deposits.

12. Due to the cash business that Petitioner operated, the

auditor specifically requested that Petitioner produce its daily

cash reports. The daily cash reports were essential as primary

source material to allow the auditor to confirm Petitioner's bank

deposit slips and bank statements and to determine the nature of

Petitioner's daily cash sales and compliance with Florida tax

laws.

13. In other words, a review of the daily cash reports

would have allowed the auditor to verify that all the gross sales

from the Petitioner's business were actually deposited. The

daily cash reports also would have identified the type of sales

that were attributable to the deposits.

14. Petitioner's accountant told Respondent's auditor that

he used Petitioner's daily cash reports, bank statements, and

bank deposits to report the monthly sales taxes due to

Respondent. Therefore, Respondent's auditor knew that

Petitioner's daily cash reports existed.

15. Petitioner's accountant produced the following in

response to the auditor's request for Petitioner's books and

records: (1) detail trial balances; (2) federal tax returns; (3)

sales and use tax returns; (4) bank deposits; (5) purchase

invoices; (6) depreciation schedules; and (7) the IRS Adjustment

to Income. However, the documents produced by Petitioner's

accountant for the auditor's review did not include daily cash

reports.

16. Petitioner's accountant informed Respondent's auditor

that an Internal Revenue Service (IRS) audit was pending against

Petitioner. It is a common practice to obtain information from

the IRS when Respondent audits a taxpayer who is the subject of a

known IRS audit.

17. In October of 1993, Respondent's auditor went through

the process of requesting disclosure of information regarding

Petitioner from the IRS. Respondent's auditor spoke with an IRS

agent, Barbara Allen. Ms. Allen informed Respondent's auditor

that, based on her audit, Petitioner derived a portion of its

income from taxable door admissions and souvenir sales.

18. Ms. Allen provided Respondent's auditor with copies of

the "Income Tax Examination Changes" form and "Explanation of

Items" form from Petitioner's IRS audit file. 1 She did not

provide Respondent's auditor with copies of Petitioner's daily

cash reports.

19. The IRS audited Petitioner's federal corporate income

tax returns for the fiscal years ending 1990, 1991, and 1992. In

the process of this audit, Ms. Allen examined Petitioner's daily

cash reports for 1990 and 1991 at the office of Petitioner's

accountant. When Ms. Allen requested the daily cash reports for

1992, Petitioner's accountant told her they were not available.

20. Ms. Allen made copies of the 1990 and 1991 daily cash

reports and left the originals with Petitioner's accountant.

21. The IRS agent was able to trace Petitioner's 1990 and

1991 daily cash reports from cash register receipts to a bank

deposit slip.

22. Ms. Allen checked Petitioner's daily cash report for

December 31, 1989, marked New Year's Eve. The total on the daily

cash report for the sale of liquor and drinks was $6,016.00,

which was traceable to a bank deposit slip. On the same daily

cash report, there was a notation "door" in the amount of

$2,441.00. The IRS agent could not trace the door charges to any

bank deposit slip. More significantly, Ms. Allen was unable to

trace the door charges, or "miscellaneous" income to any bank

deposit.

23. Ms. Allen performed a cash flow analysis of Petitioner

and Terry Thomas, individually, to calculate Petitioner's door

charges and souvenir sales. The methods she used to make these

calculations were reasonable under the circumstances.

24. Ms. Allen estimated the amount of unreported admission

charges by a "best guess estimate" of the number of patrons

paying an admissions charge on Thursday, Friday, and Saturday

nights. She multiplied these figures by the amount of admission

charges each night. Specifically, Ms. Allen considered the

capacity of the club and estimated that 150 patrons paid $1 every

Thursday night, 250 patrons paid $1 every Friday night, and 400

patrons paid $2 every Saturday night, for all three years of the

IRS audit. Ms. Allen also considered the amount of beverage

sales for those nights.

25. To calculate the souvenir sales, Ms. Allen reviewed

Petitioner's purchase invoices and multiplying the amount of such

purchases by the estimated sales price. She assumed that

Petitioner sold all of the souvenirs.

26. Petitioner's U.S. Corporate Income Tax Returns for the

fiscal years ending 1989, 1990, and 1991 indicate that the

Petitioner's gross income steadily increased from $663,364.00 in

1989 to $812,582,00 in 1991.

27. On February 24, 1994, Respondent's auditor learned from

Petitioner's accountant that he could not find any daily cash

reports for any portion of the audit period. According to the

accountant, the IRS had the daily cash reports.

28. Respondent's auditor was required to use the "best

information available" to determine the amount of Petitioner's

door cover charges and souvenir sales because Petitioner failed

to provide records relative to those items. The best and only

information available was the information derived from the IRS

audit.

29. Respondent's auditor did not conduct an independent

investigation as to Petitioner's door charges or souvenir sales

because Petitioner did not provide the records with which to

perform such an investigation. Instead, Respondent's auditor

accepted the figures as adjusted on Petitioner's federal income

tax by the IRS agent. Three years of the IRS Income Tax

Examination Changes overlapped Respondent's five-year audit

period.

30. The calculations of Respondent's auditor for

Petitioner's door admissions and souvenir sales was reasonable.

As to the door admissions, the auditor totaled the three years of

IRS adjustments to Petitioner's income and divided by thirty-six

months to reach an average monthly total. The auditor then

projected the average monthly total of the thirty-six months over

the five years of the audit period.

31. Respondent's auditor used the same methodology for

calculating taxable sales of souvenirs. The auditor took the

total three-year adjustment for income relating to souvenir

sales, calculated the average monthly amount, and projected that

figure over the five-year audit period.

32. Respondent's auditor found no indication of any door

charges when he reviewed the records provided by Petitioner's

accountant during the audit. Additionally, no resale

certificates for souvenirs were provided to the auditor.

Petitioner has not presented persuasive evidence that it paid

sales taxes on all of its purchased souvenirs which were

subsequently given away.

33. The most persuasive evidence indicates that

Respondent's tax assessments on door admissions and souvenir

sales were reasonable and proper under the circumstances.

CONCLUSIONS OF LAW

34. The Division of Adm inistrative Hearings has

jurisdiction over the subject matter and the parties to this

action pursuant to Sections 120.569 and 120.57(1), Florida

Statutes.

35. Respondent has met its burden of showing that it made

an assessment against Petitioner and has provided the factual and

legal grounds upon which the assessment was made. Section

120.80(14)(b)2., Florida Statutes. Petitioner has not met its

burden of showing, by a preponderance of the evidence, that the

factual and legal basis for the assessment is unreasonable or

incorrect. Department of Revenue v. Nu-Life Health and Fitness

Center , 623 So. 2d 747, 751-752 (Fla. 1st DCA 1992).

36. Section 95.091(3)(a)1.a., Florida Statutes, authorizes

Respondent to conduct an audit "within 5 years after the tax is

due, any return with respect to the tax is due, or such return is

filed, whichever occurs first."

37. Respondent is authorized by law to "audit and examine

the accounts, books, or records of all persons who are subject to

a revenue law . . ." Section 213.34, Florida Statutes. See also

Rule 12A-1.093(7)(a)2.a., Florida Administrative Code.

38. "Each person required by law to perform any act in the

administration of any tax . . . shall keep suitable books and

records relating to that tax, . . . and shall preserve such books

and records until expiration of the time within which the

department may make an assessment with respect to that tax

pursuant to s. 95.091(3)." Section 213.35, Florida Statutes.

See also Sections 212.12(6) and 212.13(2), Florida Statutes;

Rules 12A-1.093(2) and 12A-1.093(5), Florida Administrative Code.

39. Respondent has the authority to prescribe the type of

records that taxpayers must keep. Section 212.12(6)(a), Florida

Statutes. Rule 12A-1.093(2), Florida Administrative Code,

provides as follows:

(2) Each dealer defined in Chapter 212,

F.S., each licensed wholesaler, and any other

person subject to the tax imposed by Chapter

212, F.S., shall keep and preserve a complete

record of all transactions, together with

invoices, bills of lading, gross receipts

from sales, RESALE CERTIFICATES, CONSUMER

EXEMPTION CERTIFICATES and other pertinent

records and papers as may be required by the

Department of Revenue for the reasonable

administration of Chapter 212, F.S., an such

books of account as may be necessary to

determine the amount of tax due thereunder.

40. In the event that a taxpayer does not make his records

available for inspection, Respondent "has the duty to make an

assessment from an estimate based upon the best information then

available . . . [and] the assessment . . . shall be considered

prima facie correct, and the burden to show the contrary shall

rest upon the dealer, seller, owner, or lessor, as the case may

be." Section 212.12(5)(b), Florida Statutes.

41. Pursuant to Section 212.04(1)(a), Florida Statues, a

charge for admission to any place of amusement, sport, or

recreation is a taxable transaction.

42. Section 212.02(14)(a), Florida Statutes, provides as

follows:

(14)(a) "Retail sale" or a "sale at retail"

means a sale to a consumer or to any person

for any purpose other than for resale in the

form of tangible personal property or

services taxable under this chapter, and

includes all such transactions that may be

made in lieu of retail sales or sales at

retail.

43. A resale certificate permits a dealer to have an

exemption from remitting sales tax on items sold for resale.

Section 212.07(1)(b), Florida Statutes.

A resale must be in strict compliance with

the rules and regulations, and any dealer who

makes a sale for resale which is not in

strict compliance with the rules and

regulations shall himself or herself be

liable for and pay the tax. . . .

Section 212.07(1)(b), Florida Statutes. See also Rules 12A-1.038

and 12A-1.093(8)(a), Florida Administrative Code.

44. During the audit of Petitioner's books and records,

Respondent's auditor repeatedly requested that Petitioner furnish

him with copies of its daily cash reports. Over one year elapsed

between the issuance of the original Notice of Intent to Audit

and the termination of the formal audit. During this time,

Petitioner did not produce the required records.

45. After the audit file was sent to Tallahassee,

Petitioner had numerous opportunities in internal appeals and

through litigation to produce any additional financial data to

support its claims and to contradict the audit findings.

Petitioner did not produce the required records.

46. Specifically, Petitioner failed to produce general

ledgers, journals, or fully detailed daily cash reports, showing

the amount of door admissions and souvenir sales. On the other

hand, Respondent's auditor correctly relied on information

furnished by the IRS. This information was the best, and only,

information then available.

47. Even if Respondent's auditor had obtained Petitioner's

daily cash reports and/or change orders from the IRS, those

records only contained information related to the cash register

receipts. They did not include information related to door

admissions and souvenir sales .

48. Respondent's assessment for the sales and use tax, and

the local government infrastructure surtax is reasonable and

proper as to the disputed audit schedules A2 and A3. Petitioner

has not provided credible evidence to the contrary.

RECOMMENDATION

Based upon the findings of fact and conclusions of law, it

is

RECOMMENDED:

That Respondent enter a Final Order upholding its assessment

against Petitioner in full, including all taxes, penalties, and

interest statutorily due until date of payment for both the sales

and use tax and the local government infrastructure.

DONE AND ENTERED this 29th day of September, 1998, in

Tallahassee, Leon County, Florida.

___________________________________

SUZANNE F. HOOD

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 Ad ministrative Hearings

this 29th day of September , 1998.

ENDNOTE

1 / Both of these documents are dated October 18, 1993.

COPIES FURNISHED:

James L. Chase, Esquire

Chase, Quinell and McIver, P.A.

101 East Government Street

Pensacola, Florida 32501

Olivia P. Klein, Esquire

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399-1050

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.