02-000686 U.F., Inc., D/B/A Ultimate Fantasy Lingerie vs. Department Of Revenue Status: Closed Recommended Order on Friday, June 14, 2002.

Summary: Fees paid to watch lingerie modeling sessions in Petitioner`s store are subject to the sales tax as admissions and licenses to use real property. Petitioner failed to show sufficient grounds for compromise of any portion of tax, interest, or penalty.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

U.F., INC., d/b/a ULTIMATE )

FANTASY LINGERIE, )

)

Petitioner, )

)

vs. ) Case No. 02 - 0686

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing was held in this case

on May 2, 2002, in Clearwater, Florida, before T. Kent

Wetherell, II, the designated Administrative Law Judge of the

Division of Administrative Hearings.

APPEARANCES

For Petitioner: Tho mas C. Little, Esquire

Thomas C. Little, P.A.

2123 Northeast Coachman Road

Suite A

Post Office Box 5379

Clearwater, Florida 34625

For Respondent: R. Lynn Lovejoy, Esquire

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399 - 1050

STATEMENT OF THE ISSUES

Whether sales tax and local government infrastructure

surtax is due on the lingerie modeling session fees received by

Petitioner, and, if so, whether the Department of Revenue should

compromise any portion of the tax, interest, or penalty assessed

against Petitioner.

PRELIMINARY STATEMENT

On October 26, 2000, the Department of Revenue (Department

or Respondent) issued a notice of proposed assessment resulting

from a sales tax audit of Petition er for the period of May 1,

1995, through April 30, 2000 (the audit period). The notice

informed Petitioner that it owed sales and use tax for the audit

period in the amount of $34,418.81, plus interest and penalty,

as well as local government infrastruct ure surtax for the audit

period in the amount of $5,736.48, plus interest and penalty.

The assessments were attributable to the fees received by

Petitioner for the lingerie modeling sessions that occurred in

Petitioner's store during the audit period.

Pet itioner protested the assessments through the

Department's internal appeal process. See Rule 12 - 6.003,

Florida Administrative Code. By letter dated December 17, 2001,

the Department issued its final denial of Petitioner's protest

and upheld the original assessments in full.

On February 13, 2002, Petitioner timely requested a formal

administrative hearing to challenge the Department's decision.

On February 15, 2002, the Department referred the case to the

Division of Administrative Hearings (Division) for the

assignment of an administrative law judge to conduct the hearing

requested by Petitioner.

The hearing was held on May 2, 2002. At the hearing,

Petitioner presented the testimony of Peter Ristorcelli,

Petitioner's accountant, and Steve Smith, Petitio ner's owner and

president during the audit period. Petitioner did not offer any

exhibits. At the hearing, the Department also presented the

testimony of Mr. Smith, as well as the testimony of Charles

Wallace, an attorney in the Department's technical ass istance

and dispute resolution section, and George Watson, a tax audit

supervisor with the Department. The Department offered two

exhibits, R1 and R2, both of which were received into evidence

without objection.

The Transcript of the hearing was filed wi th the Division

on May 17, 2002. In accordance with Rule 28 - 106.216, Florida

Administrative Code, the parties' proposed recommended orders

were due 10 days after that date. The Department timely filed

its Proposed Recommended Order on May 28, 2002. Peti tioner

filed its Proposed Recommended Order on June 6, 2002. The

Department's motion to strike Petitioner's late - filed Proposed

Recommended Order was denied, and the parties' Proposed

Recommended Orders were considered by the undersigned in

preparing this Recommended Order.

FINDINGS OF FACT

Based upon the testimony and evidence received at the

hearing, the following findings are made:

1. Petitioner was established as a Florida corporation in

November 1992. At the time of its incorporation, Petitioner's

name was Ultimate Fantasy of Pinellas, Inc. Subsequently, the

name was changed to U.F., Inc.

2. Petitioner is an "S Corporation," having filed the

required election pursuant to Section 1362 of the Internal

Revenue Code in June 1994.

3. Steve Smith was the sole shareholder and president of

Petitioner during the audit period. Mr. Smith sold his interest

in Petitioner in January 2002.

4. Starting on October 1, 1994, Petitioner leased space

for its business in a small shopping center at 8248 Ulmerton

Road , in unincorporated Pinellas County. Petitioner's store was

less than 1,000 square feet in size.

5. Petitioner's lease included the following schedule of

lease payments due from Petitioner to the lessor: 1

Period Rent Sales Tax (7%) Total

10/1/94 - $585.00 $40.95 $625.95

9/30/96

10/1/96 - $605.00 $42.35 $647.35

9/30/98

10/1/98 - $630.00 $44.10 $674.10

9/30/99

4/1/00 - $670.00 $46.90 $716.90

3/31/02

6. The record does not include receip ts showing that

Petitioner actually made those lease payments. However,

Mr. Smith testified that Petitioner made those payments, and the

weight of the evidence clearly supports the inference that the

payments were made. Specifically, Petitioner claimed a

deduction for rent expenses on its federal income tax returns in

amounts comparable to that set forth above, and Petitioner was

actually operating its business at the location specified in the

lease during the audit period.

7. Petitioner made payments of $2,288.65 in sales tax to

the lessor during the course of the audit period, computed as

follows:

Period Sales Tax Amount Months Total

5/1/95 - $40.95 17 $ 695.15

9/30/96

10/1/96 - $42.35 24 $1,016.40

9/30/98

10/1/98 - $44.10 12 $ 529.20

9/30/99

4/1/00 - $46.90 1 $ 46.90

4/30/00

8. Petitioner's lease stated that Petitioner would use the

premises "as a retail store and for no other uses whatsoever."

That limitation was apparently waived by the landlord because

the lingerie modeling conducted in Petitioner's store required

an adult entertainment permit from Pinellas County and the

landlord's consent was required for Petitioner to obtain a

permit.

9. Petitioner's business includes the retail sale of

lingerie as well as charging patrons a fee to watch lingerie

modeling sessions which occur in Petitioner's store.

10. Patrons are not charged to come into Petitioner's

store. They are free to come in, look at merchandise, purchase

merchandise, and/or leave. However, a p atron who comes into

Petitioner's store and wants to see a piece of lingerie modeled

pays a fee to Petitioner.

11. The fee is $30.00 per session, with a session lasting

no more than a half hour. With a discount coupon, the fee was

$20.00 per session. No sale s tax was collected or remitted on

those amounts.

12. After the patron pays the fee to Petitioner, he then

identifies the lingerie to be modeled and a model does so. The

patron compensates the model for the session through tips.

Neither Petitioner, nor any o f its employees are involved in

that transaction.

13. The patron is not required to purchase the lingerie

that is modeled and, as evidenced by the small amount of sales

on which Petitioner paid tax during the audit period, such

purchases rarely occurred.

14. If th e lingerie is purchased, Petitioner collects

sales tax from the purchaser and remits it to the Department.

If the lingerie is not purchased, it goes back into Petitioner's

inventory.

15. Almost all of Petitioner's income over the course of

the audit period wa s derived from the lingerie modeling

sessions.

16. On the quarterly sales tax reports filed with the

Department, Petitioner reported gross sales of $556,733.83

between May 1995 and December 1999. Of that amount,

$554,829.88, or 99.65 percent, was from the fee s for the

lingerie modeling sessions and was reported as exempt sales.

Only $1,978.57, or 0.35 percent, was reported as taxable

lingerie sales.

17. The women who model the lingerie are not employees of

Petitioner. They are not paid anything by Petitioner, no r do

they pay Petitioner anything. Petitioner did provide security

for the models.

18. The modeling sessions occurred in "segregated areas"

of the store. They did not occur behind closed doors, behind a

curtain, or in separate rooms, as that is prohibited b y the

Pinellas County Code. 2

19. The "segregated areas" accounted for approximately 85

percent of the store's floor space. Thus, it is possible that a

session could be observed from a distance by persons other than

the patron who paid a fee to Petitioner. Ho wever, only the

patron who pays the fee can view the modeling session in the

"segregated areas" where the model performs.

20. Before Petitioner opened for business, Mr. Smith

contacted an accountant, Peter Ristorcelli, to provide

accounting and tax services to Petitioner. Those services

included compliance with Florida's sales tax laws.

21. Mr. Ristorcelli had never worked for a client whose

business was similar to that of Petitioner. Accordingly,

Mr. Ristorcelli advised Petitioner to obtain guidance from the

Dep artment when he registered as a dealer and obtained a sales

tax number.

22. Mr. Smith went to the Department's Clearwater office

pursuant to Mr. Ristorcelli's advice. While there, he explained

the type and operation of Petitioner's business and asked

whether sales tax was due on the receipts from the modeling

sessions. Mr. Smith was told by an unknown Department employee

that the receipts from the modeling sessions were not subject to

the sales tax, but that they should be reported as exempt sales.

Mr. Smit h was also told that receipts from the sale of lingerie

should be reported as taxable sales, and that sales tax should

be collected on those sales.

23. Mr. Smith conveyed this information to Mr. Ristorcelli

who then confirmed it with Bonnie Steffes, an emplo yee in the

Department's sales tax collection division in the Clearwater

office with whom Mr. Ristorcelli had prior dealings.

24. In their conversations with the Department employees,

both Mr. Smith and Mr. Ristorcelli fully explained the nature

and manner of o peration of Petitioner's business. Those

explanations were not made in writing, nor were the Department's

responses. Ms. Steffes is no longer employed by the Department,

and she was not called as a witness at the hearing because she

could not be located. Thus, the record does not contain any

corroboration of the self - serving testimony of Mr. Smith and

Mr. Ristorcelli on these events. Nevertheless, the undersigned

finds their testimony to be credible.

25. Petitioner followed the advice Mr. Smith and

Mr. Rist orcelli received from the Department.

26. Petitioner reported the receipts from the modeling

sessions as exempt sales and did not collect or remit sales tax

on those receipts. As stated above, Petitioner reported

$554,829.88 in receipts from the modeling sess ions for the

period of May 1995 through December 1999.

27. Petitioner reported the receipts from the sales of

lingerie as taxable sales and collected and remitted sales tax

on those receipts. As stated above, Petitioner reported taxable

sales of $1,978.57, a nd it collected and remitted sales tax in

the amount of $138.58 for the period of May 1995 through

December 1999.

28. Had Mr. Smith been told that the lingerie modeling

sessions were taxable, he would have collected sales tax from

the patron and remitted it to the Department.

The Department's Audit

29. On June 1, 2000, the Department gave Petitioner notice

of its intent to conduct a sales tax audit on Petitioner's books

and records for the audit period of May 1, 1995, to April 30,

2000.

30. The audit was conducted by J ose Bautista, a tax

auditor in the Department's Clearwater office. Mr. Bautista

reviewed Petitioner's books and records and spoke with

Mr. Ristorcelli and Mr. Smith on several occasions.

31. In conducting the audit, Mr. Buatista utilized

standard methods of a ssessment and followed the Department's

rules and practices. He relied on the facts presented to him by

Mr. Smith and Mr. Ristorcelli regarding the operation of

Petitioner's business and, more specifically, the form and

nature of the lingerie modeling tra nsactions.

32. The audit did not identify any underreporting of

taxable lingerie sales, nor did it find any underreporting of

the receipts from the modeling sessions. In this regard, the

proposed assessment (discussed below) was simply based upon the

Departme nt's determination that the receipts from the lingerie

modeling sessions were taxable, not exempt from taxation.

33. The audit working papers indicate receipts of

$573,642.89 upon which sales tax was not paid over the course of

the audit period. That amount i s solely attributable to the

receipts from the modeling sessions over the audit period, as

identified in the Department's audit.

34. That amount does not correspond with the receipts for

the modeling sessions reported to the Department by Petitioner

on i ts periodic sales tax returns. As stated above, Petitioner

reported exempt sales from the modeling sessions in the amount

of $554,829.88 for the period of May 1995 through December 1999.

For that same period, the audit working papers show receipts

from t he modeling sessions as being only $540,460.32, calculated

as follows:

Grand Total for Audit

Period (5/95 - 4/00) $ 573,642.89

Less: April 2000 ($7,177.49)

March 2000 ( 8,208.15)

February 2000 ( 8,872.59)

January 2000 ( 8,924.34)

( 33,182.57)

Total for Period

Of 5/95 - 12/99 $ 540,460.32

35. This discrepancy works in Petitioner's favor. Had the

Department simply based its assessment on the amount reported by

Petitioner as exempt sales between May 1995 and December 1999

($554,829.88), and then added the receipts for the period of

January 2000 through April 2000 ($33,182.57), the amount upon

which Petitioner would have owed sales tax would have been

$588,012.45 rather than $573,642.89 as found in the Department's

aud it.

36. Based upon the audit conducted by Mr. Bautista, the

Department issued a Notice of Intent to Make Audit Changes

(Notice of Intent) on August 16, 2000.

37. The Notice of Intent assessed a total tax deficiency

of $40,155.29, which included a sales tax deficie ncy of

$34,418.81 and a local government infrastructure surtax

deficiency of $5,736.78. Those amounts were calculated in

accordance with the standardized, statutory methods of

calculation.

38. Petitioner does not contest the calculation of the tax

deficiency.

39. The Notice of Intent also assessed interest and

penalty. The interest and penalty were calculated on the amount

of the tax deficiency pursuant to standardized, statutory

methods of calculation.

40. Petitioner does not contest the calculation of the

interest or penalty.

41. Petitioner, through Mr. Ristorcelli, sought

administrative review of the Notice of Intent. That review is

conducted at the district office level, which in this case was

Clearwater. George Watson supervised the review. No changes

were made b ased upon the review, and on October 26, 2000, the

Department issued a Notice of Proposed Assessment which formally

assessed the tax deficiency, interest, and penalty described

above against Petitioner.

42. Petitioner, through Mr. Ristorcelli, protested the

No tice of Proposed Assessment, and on July 5, 2001, the

Department issued its Notice of Decision rejecting the protest.

The review which resulted in the Notice of Decision was

conducted in Tallahassee by Charles Wallace. The Notice of

Decision upheld the t ax deficiency, interest, and penalty in

full.

43. Petitioner, through Mr. Ristorcelli, sought

reconsideration of the Notice of Decision. On December 17,

2001, the Department issued its Notice of Reconsideration which

again upheld the proposed assessment in fu ll and refused to

compromise any portion of the tax, interest, or penalty.

44. The legal basis for the assessments asserted by the

Department in the Notice of Intent and Notice of Proposed

Assessment was that the fee paid to Petitioner by a patron to

view a lingerie modeling session was an admission charge.

45. Based upon additional facts and clarifying information

presented to the Department by Petitioner through the protest

process, the Department concluded that the fee charged by

Petitioner was more ak in to a license to use real property and

therefore taxable as such. That is the legal position asserted

by the Department in its Notice of Decision and its Notice of

Reconsideration. That legal position was also argued by the

Department at the hearing an d in its Proposed Recommended Order. 3

46. Despite the change in the legal basis of the

assessment, the amount of the assessment set forth in the Notice

of Reconsideration is the same as the amount set forth in the

Notice of Intent and Notice of Proposed A ssessment. It was

still based upon the full amount of the receipts from the

lingerie modeling sessions (as determined by the audit) which

had been reported as exempt sales.

CONCLUSIONS OF LAW

47. The Division of Administrative Hearings has

jurisdiction over the parties to and subject matter of this

proceeding pursuant to Sections 72.011(1), 120.569, and

120.57(1), Florida Statutes. (All references to Sections and

Chapters are to the Florida Statutes. All references to Rules

are to the Florida Administ rative Code.)

48. In this proceeding, the Department has the initial

burden of showing "that an assessment has been made against the

taxpayer and the factual and legal grounds upon which [the

Department] made the assessment." See Section 120.80(14)(b)2.

However, Petitioner has the ultimate burden to prove by a

preponderance of the evidence that the factual or legal basis

for the assessment is unreasonable or incorrect. See Department

of Revenue v. Nu - Life Health and Fitness Center , 623 So. 2d 747,

751 - 52 (Fla. 1st DCA 1992). And see Section 120.57(1)(j).

49. The Department met its initial burden of proof. The

evidence shows that the Department made an assessment against

Petitioner based upon an audit conducted pursuant to the

Department's rules and s tandard procedures under the authority

of Chapter 212, and that the assessment was supported by the

facts available to the Department at the time of the audit.

Thus, the burden now shifts to Petitioner to show that the

Department's assessment is factually or legally incorrect.

50. Petitioner failed to show that the Department's audit

was factually incorrect. The material facts relied upon by the

Department in making its assessment and upholding the assessment

in the Notice of Reconsideration were provide d to the Department

by Petitioner, and they are consistent with the facts found

above. Moreover, Petitioner has not challenged the Department's

determination of the amount of receipts upon which tax is due or

the Department's calculation of the tax, inter est, and penalty

on that amount.

51. Thus, central issue in this proceeding is whether the

Department's audit was legally correct. Resolution of that

issue turns on whether the receipts from the lingerie modeling

sessions are subject to the sales and use tax and the local

government infrastructure surtax.

Are the receipts from the lingerie modeling sessions

subject to the sales and use tax or the local

government infrastructure surtax?

Sales and Use Tax

52. The sales and use tax is imposed by Chapter 2 12. The

declaration of legislative intent in Section 212.21(2) provides

in relevant part:

It is hereby declared to be the specific

legislative intent to tax each and every

sale, admission, use, storage, consumption,

or rental levied and set forth in this

chapter, except as to such sale, admission,

use, storage, consumption, or rental as

shall be specifically exempted therefrom by

this chapter subject to the conditions

appertaining to such exemption.

53. As the Florida Supreme Court noted in Department o f

Revenue v. Magazine Publishers of America , 565 So. 2d 1304, 1310

(Fla. 1990), "Section 212.21 makes it unmistakably clear that as

between the imposition of the tax or the granting of an

exemption, the tax shall prevail." But cf. Warning Safety

Lights of Georgia, Inc. v. Dept. of Revenue , 678 So. 2d 1377,

1379 (Fla. 4th DCA 1996)("[I]t is a fundamental rule of

construction that the authority to tax must be strictly

construed against the taxing authority and in favor of the

taxpayer and all ambiguities or doubts must be resolved in favor

of the taxpayer.")(citing Maas Bros. v. Dickinson , 195 So. 2d

193 (Fla. 1967)).

54. The Department initially determined that Petitioner's

receipts from the lingerie modeling sessions were taxable as

"admissions." See Sect ions 212.02(1) and 212.04(1); Rule 12A -

1.005. Subsequently, the Department shifted its position and

determined that the receipts were taxable as licenses to use

real property. See Sections 212.02(10)(i) and 212.031(1); Rule

12A - 1.070(10) and (11). Becau se it is unclear as to whether the

Department has abandoned its argument that the receipts are

taxable as "admissions" ( see Endnote 3), each potential basis of

taxation is discussed below.

Admissions

55. Section 212.04(1)(a) provides that "every person i s

exercising a taxable privilege who sells or receives anything of

value by way of admissions," and Section 212.04(1)(b) imposes a

tax on that privilege at the rate of six percent of the

admission price.

56. Section 212.02(1) broadly defines the term

"a dmissions" to include:

the net sum of money after deduction of any

federal taxes for admitting a person or

vehicle or persons to any place of

amusement , sport, or recreation or for the

privilege of entering or staying in any

place of amusement, sport, or r ecreation,

including, but not limited to , theaters,

outdoor theaters, shows , exhibitions , games,

races, or any place where charge is made by

way of sale of tickets, gate charges, seat

charges, box charges, season pass charges,

cover charges, greens fees, p articipation

fees, entrance fees, or other fees or

receipts of anything of value measured on an

admission or entrance or length of stay or

seat box accommodations in any place where

there is any exhibition , amusement, sport,

or recreation, . . . .

(emphas is supplied). And cf. Rule 12A - 1.005.

57. The phrase "place of amusement" is not defined in

statute or the Department's rules. Thus, it should be given its

plain and ordinary meaning. See Southwest Florida Water

Management District v. Save the Manatee Club, Inc. , 773 So. 2d

594, 599 (Fla. 1st DCA 2000).

58. A "place" is a "space or physical environment" and an

"amusement" is "a pleasurable diversion." See Mirriam - Webster's

Online Collegiate Dictionary , at http://www.m - w.com. The

"segregated areas" w here the lingerie modeling sessions occur

certainly fit that definition, even if Petitioner's entire store

might not. The modeling sessions themselves fit the definition

of "exhibitions" or "shows." See id. (defining "exhibition" to

mean "a public show ing" and defining "show" to mean a "display

or exhibition arranged to arouse interest or stimulate sale").

59. That Petitioner does not control the "exhibition" or

"show" performed by the model is immaterial. The "exhibition"

or "show" occurs in Petition er's store, and Petitioner collects

a fee from patrons who want the privilege of viewing the

modeling session.

60. The fee charged by Petitioner to have a lingerie

modeling session is based upon a "length of stay," i.e. , $20 or

$30 per half hour. Payment of the fee affords the patron a

privilege not afforded to those who come into Petitioner's store

but do not pay the fee. Specifically, it allows the patron to

enter and stay in the "segregated areas" of the store where the

model performs and to interact with the model.

61. That patrons in the store who have not paid the fee

might be able to observe the modeling session from a distance

because the sessions do no occur in private rooms does not

affect the taxability of the fees. As noted above, the fee

af fords the paying patron a privilege not afforded to those who

do not pay the fee.

62. Accordingly, the fee collected by Petitioner is a sum

of money measured on a length of stay, and it is charged for the

for the privilege of entering or staying in a pla ce of amusement

where there is an exhibition or show. Accordingly, the fee is

an admission, as defined in Section 212.02(1).

63. The lingerie modeling session fees collected by

Petitioner are not an incidental part of Petitioner's business.

Indeed, t he record reflects that more than 99 percent of

Petitioner's income over the audit period came from such fees.

Accordingly, Department of Revenue v. Camp Universe, Inc. , 273

So. 2d 148 (Fla. 1st DCA 1973), cited by Petitioner, is

distinguishable.

64. In light of the broad definition of "admissions" in

current law, Petitioner's reliance on bills considered by the

Legislature in 1996 and 2000 to amend that definition to

specifically include references to "adult entertainment

services" and "lingerie modeling " is misplaced.

65. Although the Legislature's failure to enact

legislation is considered relevant in some circumstances, see

Dept. of Insurance v. Insurance Servs. Office , 434 So. 2d 908

(Fla. 1st DCA 1983) (Legislature's consideration of, an refusal

t o enact, proposed legislation is "strong evidence" that agency

was not authorized to promulgate rules dong what the Legislature

refused to do), 4 it is generally not viewed as a reliable source

when construing the meaning of existing law.

66. As the Unite d States Supreme Court stated in Central

Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. ,

511 U.S. 164 (1994):

[F]ailed legislative proposals are a

particularly dangerous ground on which to

rest an interpretation of a prior statute.

Congres sional inaction lacks persuasive

significance because several equally tenable

inferences may be drawn from such inaction,

including the inference that the existing

legislation already incorporated the offered

change.

Id. at 187 (citations and internal quo tations omitted).

67. In this case, the limited legislative history

information introduced at the hearing is inconclusive, at best,

regarding the intent and potential effect of the failed bills

cited by Petitioner. Indeed, the analysis prepared by the

D epartment on the bill proposed in 2000 noted that "the present

definition of 'admissions' found in section 212.02(1), F.S., is

sufficiently broad to include admissions to such establishments

[ i.e. , those offering 'adult entertainment services']."

68. Acc ordingly, to the extent that the Department has not

abandoned this argument, it is concluded that the fees received

by Petitioner for the lingerie modeling sessions are taxable as

admissions.

License to Use

69. Section 212.031(1)(a) provides that "every person is

exercising a taxable privilege who engages in the business of

renting, leasing, letting, or granting a license to use real

property," and Section 212.031(1)(c) imposes a tax on that

privilege at a rate of six percent on the total rent or license

fee.

70. The obligation to pay the tax on a license to use

falls on the person granting the license, which in this case is

Petitioner. See Section 212.031(2); S & W Air Vac Systems, Inc.

v. Dept. of Revenue , 697 So. 2d 1313, 1314 n.1 (Fla. 5th DCA

1997) (citing Schurmacher Holding, Inc. v. Noriega , 542 So. 2d

1327 (Fla. 1989)).

71. Section 212.02(10)(i) defines "license" to mean "the

granting of a privilege to use or occupy a building or a parcel

of real property for any purpose." The Department's rul es

elaborate on that definition as follows:

(10) When the owner of a business, or the

operator of a business who is a lessee or

licensee, provides floor space to any

person , and in addition thereto and in

connection therewith also provides certain

service s to such person such as display,

delivery, wrapping, packaging, telephone,

credit, collection, or accounting, the

amount charged by the lessee or licensee to

such person constitutes the lease or rental

of or license to use or occupy real

property , and whe re the charges for such

services are not separately stated in the

agreement and on the invoices or other

billings, the total consideration paid under

the agreement is taxable . . . . . When the

operator of a business is a lessee or

licensee, he may take c redit in accordance

with the provisions of subsection (8) of

this rule, for the tax paid on the floor

space which he subleases or assigns.

(11) When the operator of a business, who

may be the owner or prime lessee, provides

space to an independent operat or or

licensee, the operator shall collect and

remit tax on the total consideration paid by

the independent operator or other person for

the right of such person to occupy or use

such space.

Rule 12A - 1.070(10) and (11) (emphasis supplied).

72. The evid ence establishes that Petitioner provides

floor space in its store to the models to conduct lingerie

modeling sessions. Although the model does not pay any

consideration to Petitioner for use of that space, the patron --

who is also using the space to vie w the modeling session -- does

pay a fee to Petitioner. By paying the fee, the patron receives

a privilege not afforded to other persons who come into

Petitioner's store but who do not pay the fee. Specifically,

the patron is allowed to watch a lingerie modeling session in a

"segregated area" of Petitioner's store and interact with the

model.

73. That Petitioner does not control the "exhibition" or

"show" performed by the model is immaterial. Compare Rule 12A -

1.071(10) (d) (exercise of control by the li censor is important

consideration in determining the taxability of a license to use

tangible personal property) with Rule 12A - 1.070 (identifying no

similar consideration related to the taxability of licenses to

use real property). And cf. S & W Air Vac , s upra (affirming

order imposing tax under Section 212.031 against gas stations

and convenience stores which permitted owners of coin - operated

"air vac" machines to place the machines on the stores' property

despite the fact that the stores exercised almost no control

over the operation of the "air vac" machines).

74. In this regard, the fee paid by the patron grants him

a privilege to use a portion of the floor space in Petitioner's

store to view a lingerie modeling session. This constitutes a

license to u se, as defined in Section 212.02(10)(i) and Rule

12A - 1.070(10) and (11). Therefore, the fees paid to Petitioner

by the patrons are taxable under Section 212.031.

75. Lord Chumley's of Stuart, Inc. v. Dept. of Revenue ,

401 So. 2d 817 (Fla. 4th DCA 1981), cited by Petitioner, is

distinguishable. In that case, court reversed the Department's

Final Order because the Department had rejected the hearing

officer's factual finding that the taxpayer was not engaged in

the business of renting real property despite the fact that the

finding was supported by competent substantial evidence. Id. at

819. In this case, the evidence establishes that Petitioner is

clearly (and almost exclusively) in the business of collecting a

fee for the lingerie modeling sessions whic h occur in

"segregated areas" of its store which, as discussed above, is a

license to use. And cf. S & W Air Vac , supra (rejecting

argument that convenience stores were not in the business of

granting licenses to use where they did not limit themselves to

the sale of goods and derived income from a range of activities

on their premises).

76. If, in its final order, the Department chooses to tax

the receipts from the lingerie modeling sessions as a license to

use real property (rather than as admissions), then it should

grant Petitioner a credit in the amount of $1,945.35, i.e. ,

$2,288.65 multiplied by 85 percent (see Findings of Fact 7 and

19), to reflect the pro rata portion of the sales tax paid by

Petitioner to its landlord on the portion of the store where the

lingerie modeling actually occurred. See Rule 12A - 1.070(8),

(10).

Local Government Infrastructure Surtax

77. The local government infrastructure surtax is a

discretionary tax that a county may impose after approval of a

referendum by the voter s in the county. See Section 212.055(2).

The surtax is imposed in Pinellas County at the rate of one

percent.

78. The surtax is imposed in the same manner and on the

same transactions that are subject to the sales tax. See

Section 212.054(2)(a).

79. I n light of the foregoing determination that the

receipts from the lingerie modeling sessions are subject to the

sales and use tax, those receipts are also subject to the local

government infrastructure surtax.

Should the Department compromise

any portion of the tax or interest?

80. The Department is authorized, but not required, to

compromise tax and interest "upon the grounds of doubt as to

liability for or collectibility of such tax or interest." See

Section 213.21(3)(a).

81. The Department's rules prescribe the factors that the

Department is to consider when determining whether to compromise

tax and interest. Specifically, Rules 12 - 13.005 and 12 - 13.006

provide:

12 - 13.005 Grounds for Finding Doubt as to

Liability.

. . . . Doubt as to liability is indicated

when there is reasonable doubt whether an

action is required in view of conflicting

rulings, decisions, or ambiguities in the

law, and the taxpayer has exercised ordinary

care and prudence in attempting to comply

with the revenue laws of this st ate .

(2) Reasonable reliance upon the express

terms of a written determination by the

Department is one basis for doubt as to

liability.

* * *

12 - 13.006 Grounds for Finding Doubt as to

Collectibility.

Tax or interest or both will be compromised

or s ettled on the grounds of "doubt as to

collectibility" when it is determined that

the financial status of the taxpayer is such

that it is in the best interests of the

State to settle or compromise the matter

because full payment of the unpaid

obligation is highly doubtful and there

appears to be an advantage in having the

case permanently and conclusively closed.

The discretion to make this determination is

delegated pursuant to the procedures in Rule

12 - 13.004, F.A.C.

(emphasis supplied).

82. The record does not establish a basis for finding

"doubt as to liability." See Rule 12 - 13.005. The shift in the

Department's position regarding the basis of taxation of the

modeling sessions ( i.e. , admission or license to use) suggests

that there may be some ambig uity in the law. However, aside

from the non - binding oral advice received by Mr. Smith and

Mr. Ristorcelli, the Department's position that the modeling

sessions are taxable has not changed throughout this proceeding.

Moreover, as discussed above, both of the Department's legal

positions have ample support in the law.

83. Although the record establishes that Petitioner

(through Mr. Smith) made a good faith effort to determine the

taxability of the modeling sessions, given the significant

percentage of Pe titioner's business that involves lingerie

modeling, Mr. Smith's reliance on what amounts to oral legal

advice from a Department employee was not reasonable under the

circumstances.

84. In this regard, the circumstances of this case are

strikingly similar to those in Glass v. Department of Revenue ,

650 So. 2d 684 (Fla. 5th DCA 1995). In that case, the court

expressly rejected the taxpayer's argument that "he should not

have to pay [sales] tax because DOR employees [orally] gave him

misinformation" regardi ng the taxability of the transactions at

issue. Id. at 685. There, as here, the taxpayer provided the

initial representations regarding the operation of the business,

and the "misinformation" provided by the Department employees

were statements of law ba sed upon details supplied by the

taxpayer, not mistakes of material fact. Id. at 686. And see

Dept. of Revenue v. Anderson , 403 So. 2d at 397, 400 (Fla. 1981)

(equitable estoppel will be applied against the State only in

"exceptional circumstances").

85 . There is nothing in the record regarding the current

financial status of the Petitioner. Therefore, there is no

basis for a finding of "doubt as to collectability." See Rule

12 - 13.006.

86. Accordingly, the record does not establish a basis for

the D epartment to compromise any portion of the tax or the

interest.

Should the Department compromise

any portion of the penalty?

87. The Department is authorized, but not required, to

compromise a taxpayer's liability for penalties if it determines

that "t he noncompliance is due to reasonable cause and not to

willful negligence, willful neglect, or fraud . . . ." See

Section 213.21(3)(a).

88. The Department's rules prescribe the factors that the

Department is to consider when determining whether "reasona ble

cause" exists to compromise a penalty. Specifically, Rule 12 -

13.007 provides in pertinent part:

(2) Reasonable cause is indicated by the

existence of facts and circumstances which

support the exercise of ordinary care and

prudence on the part of the taxpayer in

complying with the revenue laws of this

state . Depending upon the circumstances,

reasonable cause may exist even though the

circumstances indicate that slight

negligence, inadvertence, mistake, or error

resulted in noncompliance. Consideratio n

will be given to the complexity of the facts

and the difficulty of the tax law and the

issue involved, and also to the existence or

lack of clear rules or instructions covering

the taxpayer's situation.

(3) Ignorance of the law or an erroneous

belief a s to the need to comply with a

revenue law constitutes reasonable cause

when there are facts and circumstances which

indicate ordinary care and prudence was

exercised by the taxpayer .

(a) For example, ignorance of the law or

an erroneous belief held by the taxpayer is

a basis for reasonable cause when the

taxpayer has a limited knowledge of

business, a limited education, limited

experience in Florida tax matters, or advice

received from a competent advisor was relied

upon in complying with the provision s of a

revenue law .

(b) A good faith belief held by a

taxpayer with limited business knowledge,

limited education, or limited experience

with Florida tax matters is a basis for

reasonable cause when there is reasonable

doubt as to whether compliance is required

in view of conflicting rulings, decisions,

or ambiguities in the law .

(4) Reliance upon the erroneous advice of

an advisor is a basis for reasonable cause

when the taxpayer relied in good faith upon

written advice of an advisor who was

competen t in Florida tax matters and the

advisor acted with full knowledge of all of

the essential facts. Informal advice,

advice based upon insufficient facts, advice

received in cases where facts were

deliberately concealed, or obviously

erroneous advice are no t grounds for

reasonable cause. To establish reasonable

cause based upon reliance on the advice of a

competent advisor, the taxpayers shall

demonstrate:

(a) That the taxpayer sought timely

advice of a person who was competent in

Florida tax matters;

(b) That the taxpayer provided the

advisor with all of the necessary

information and withheld nothing; and

(c) That the taxpayer acted in good faith

upon written advice actually received from

the advisor.

(5) Reasonable reliance upon the express

t erms of written advice given by the

Department establishes reasonable cause when

the taxpayer shows that the advice was

timely sought from a departmental employee

and that all material facts were disclosed,

and that the express terms of the advice

were act ually followed. "Written advice"

for purposes of establishing reasonable

cause as a basis for compromise of penalties

includes a writing issued to the same

taxpayer by the Department in response to

that taxpayer's request for advice. The

determination wh ether the taxpayer has

reasonably relied on such written advice

will be made in accordance with the criteria

for determining if a taxpayer has reasonably

relied on a written determination for

purposes of compromise of tax and interest

as set forth in subse ction 12 - 13.005(2),

F.A.C.

(emphasis supplied).

89. Petitioner's failure to collect and remit sales tax on

the lingerie modeling sessions is not due to willful negligence,

willful neglect, or fraud. Indeed, the evidence establishes

that Petitioner made a good faith effort to comply with the tax

laws by soliciting advice from the Department and an accountant.

However, the facts and circumstances of this case do not

establish "reasonable cause" as that phase is narrowly construed

in Rule 12 - 13.007.

90. Although Mr. Ristorcelli, the accountant whose advice

Mr. Smith sought regarding the taxability of the lingerie

modeling sessions, may be competent in Florida tax matters, he

had no experience with the type of business engaged in by

Petitioner. According ly, the only advice he gave Mr. Smith was

to consult with the Department. Moreover, Mr. Ristorcelli's

advice was oral, not written, and it is not the type of advice

referred to in Rule 12 - 13.007(4). Therefore, that advice does

not provide a basis for a f inding of "reasonable cause."

91. Similarly, the advice that Mr. Smith obtained from a

Department employee (and that he and Mr. Ristorcelli later

"confirmed") does not provide a basis for a finding of

"reasonable cause" because it was oral, not written. See Rule

12 - 13.007(5). And cf. Rule 12 - 11.003(1) ("Oral opinions and

advice issued by representatives of the Department are not

binding on the Department."); Glass , 650 So. 2d at 686

(rejecting estoppel claim based upon advice of a Department

employee th at was a mistake of law).

92. Finally, as noted above, Mr. Smith's reliance on oral

legal advice from the Department is not reasonable under the

circumstances in light of the large percentage of Petitioner's

income that was derived from lingerie modeling sessions. See

Glass , supra .

93. Accordingly, the record does not establish a basis for

the Department to compromise the penalty imposed on Petitioner.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions

of Law, it is

RECOMMENDED that the Department of Revenue issue a final

order that assesses tax, interest, and penalties, against

Petitioner in the amounts set forth in the Notice of

Reconsideration dated December 17, 2001; and, if the tax

assessed in the final order is based upon S ection 212.031

(license to use) rather than Section 212.04 (admissions), the

Department should grant Petitioner a credit in the amount of

$1,945.35, for the sales tax paid by Petitioner to its landlord

on that portion of Petitioner's store where the linger ie

modeling sessions occurred.

DONE AND ENTERED this 14th day of June, 2002, in

Tallahassee, Leon County, Florida.

___________________________________

T. KENT WETHERELL, II

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1 230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 14th day of June, 2002.

ENDNOTES

1/ The record does not contain any information on the period

between October 1, 1999, and March 31, 2000. The original lease

expired on September 30, 1999, and the addendum to the lease

included in the record is for the period beginning April 1,

2000.

2/ Article III of Chapter 42 of the Pinellas County Code

regulates adult uses. Sections 42 - 106 and 42 - 108 of the Code

prescribe the operational requirements for adult use

establishments such as Petitioner's business.

3/ At the hearing, and in its Proposed Recommended Order (PRO),

the Department stopped short of abandoning its argument that the

fees for the lingerie modeling sessions are taxable as

admissions. Indeed, it argued in its PRO that "[s]ometimes

licenses to use real property are also admissions."

4/ This c ase appears to reflect the minority view in Florida

and, perhaps, even a minority view at the First District Court

of Appeal. See Board of Trustees of the Internal Improvement

Trust Fund v. Day Cruise Ass'n, Inc. , 794 So. 2d 696, 704 n.8

(Fla. 1st DCA 200 1) (citing conflicting cases, including

conflicting cases in the First District Court of Appeal).

COPIES FURNISHED :

Thomas C. Little, Esquire

Thomas C. Little, P.A.

2123 Northeast Coachman Road, Suite A

Post Office Box 5379

Clearwater, Florida 34625

R . Lynn Lovejoy, Esquire

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399 - 1050

Bruce Hoffmann, General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399 - 0100

James Zingale, 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 Reco mmended Order should be filed with the agency that

will issue the final order in this case.