03-001249 Cycle Ivan`s, Inc. vs. Department Of Revenue Status: Closed Recommended Order on Friday, November 14, 2003.

Summary: Respondent proved factual and legal bases for assessment after a reduction of sales tax deficiency for service-only transactions.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

CYCLE IVAN'S, INC., )

)

Petitioner, )

)

vs. ) Case No. 03 - 1249

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

______________________________)

RECOMMENDED ORDER

Robert E. Meale , Administrative Law Judge of the Division

of Administrative Hearings, conducted the final hearing by

videoconference in Tallahassee, Florida, on July 1, 2003. The

parties, attorneys for the parties, witnesses, and court

reporter participated by videoconf erence in West Palm Beach,

Florida.

APPEARANCES

For Petitioner: George B. Grosheim

Qualified Representative

Accounting Services of South Florida.

1210 Southeast 5th Street

Deerfield Beach, Florida 33441

For Respondent: Robert F. Langford, Jr.

Assistant Attorney General

Office of the Attorney General

The Capitol -- Tax Section

Tall ahassee, Florida 32399 - 1050

STATEMENT OF THE ISSUE

The issue is whether Petitioner owes additional sales and

use tax, interest, and penalties, pursuant to a Notice of

Proposed Assessment.

PRELIMINARY STATEMENT

By Notice of Proposed Assessment dated Oc tober 23, 2002,

Respondent advised Petitioner that, for the period from

December 1, 1996, through November 30, 2001, it was assessing

additional sales and use tax of $26,917.69, penalty of

$13,458.88, and interest of $9417.61 through October 23, 2002,

for a total of $49,794.18. By letter filed February 24, 2003,

Petitioner requested an administrative hearing.

At the hearing, Petitioner called one witness and offered

into evidence two exhibits: Petitioner Exhibits 1 - 2.

Respondent called two witnesses and offered into evidence one

exhibit: Respondent Exhibit 1. All exhibits were admitted.

The court reporter filed the transcript on July 30, 2003.

After receiving extensions of time within which to file proposed

recommended orders, the parties filed their P roposed R ecommended

O rders on September 30, 2003.

FINDINGS OF FACT

1. Ivan Soberal is the president and sole owner of

Petitioner. Mr. Soberal started the business of Cycle Ivan's 12

years ago. At first, he operated as a sole proprietorship. He

incorpora ted the business in 1997.

2. This case commenced with Respondent's issuance of a

Notice of Proposed Assessment dated October 23, 2002. The

Notice of Proposed Assessment proposes the assessment of

$26,917.69 in additional sales tax, $13,458.88 in penalty, a nd

$9,417.61 in interest through October 23, 2002, for a total of

$49,794.18. The notice warns: "If you choose to request either

an administrative hearing or judicial proceeding, your request

must be filed no later than FEBRUARY 20, 2003 or 60 days from

the date the assessment becomes a Final Assessment." The notice

adds: "The petition for an administrative hearing must be filed

with the Department." Petitioner requested an administrative

hearing by letter dated February 20, 2003, and received by, and

filed with, Respondent on February 24, 2003.

3. The audit period in this case is December 1, 1996,

through November 30, 2001. During this time, Petitioner's

business has been the sale and repair of motorcycles and

scooters. Petitioner does not sell any ne w motorized vehicles

with an engine displacement larger than 50 cc because doing so

would require a dealer's license. Thus, most of the new

motorized vehicles sold by Petitioner are small scooters

manufactured in China or Japan. Petitioner sells used

mot orcycles on consignment. Over the years, Petitioner's

business has transformed from primarily repairs to a greater

emphasis on consignment sales to the present emphasis on part

sales.

4. This is an inadequate - records case. For the most part,

the auditor u sed federal income tax returns and corporate income

statements to calculate Petitioner's tax liability. The auditor

had no cash register receipts, no journal entries, and limited

bank statements (none for 1996, 1997, 1998, and 2001 and only

two months in 1999 and three months in 2000).

5. During the audit period, Petitioner used primarily

repair orders to record sales of goods or services. After the

audit period, Petitioner computerized its recordkeeping for

inventory and sales, but, until then, the availa ble records are

extremely limited.

6. Respondent's auditor tried to use samplings of

Petitioner's invoices to determine any sales tax deficiencies,

but the records were poorly maintained. Taking a sample over

the first six months of 2000, the auditor was u nable to find

invoices totaling thousands of dollars, thus making it appear

that Petitioner over - reported taxable sales during these months.

Obviously, Petitioner did not over - report taxable sales, but

instead had removed invoices from the records that it had

provided the auditor.

7. Recognizing the impossibility of reassembling

Petitioner's actual taxable sales from its incomplete and

nonexistent records, the auditor resorted to Petitioner's

federal income tax returns and, for 2001, corporate income

statem ents. By these means, Respondent's auditor determined

Petitioner's gross sales, treated them entirely as taxable

sales, and calculated the sales tax due on these gross sales.

After having done so, the auditor subtracted the taxes actually

remitted by Pet itioner during the audit period, and the

remainder is the sales tax deficiency in this case.

8. Petitioner's basic claim is that many of its sales

during the audit period are exempt. However, Petitioner's

manner of calculating exempt sales during the audit period was

no better than its recordkeeping. Each month, Petitioner

subtracted its taxable sales, or what it deemed to be its

taxable sales, from its bank deposits, and the remainder was its

exempt sales. This method, of course, results in potentially

v ast overstatements of exempt sales.

9. Petitioner lacks resale or consumer certificates of

exemption to support its exemption claims. Mr. Soberal admitted

at the hearing that he did not keep records of exempt sales.

Exempt sales for Petitioner would also include parts sold to

locations outside of the United States, but the nature of

Petitioner's business suggests that this type of transaction

would not produce significant sales. The only significant

exemption in this case is service - only repairs, such as when

parts are not required for the repair or the customer provides

the parts.

10. The best way of accounting for service - only repairs is

to calculate them from the auditor's workpapers for the six

months in early 2000 that he sampled. These workpapers iden tify

which invoices are for service only and which invoices include

parts, accessories, or other tangible personal property. After

calculating the total of service - only repairs, it is possible to

derive a fraction with the numerator being the total price of

the service - only repairs and the denominator being the total

sales reported by Petitioner, which, for each month, was higher

than the total gross sales shown on the invoices that Petitioner

produced for the auditor. Because this fraction is based on

sa les during the first half of 2000, which is relatively late in

the audit period, it probably represents a fair allocation of

service versus sales. As noted above, service transactions

predominated early in the audit period, but sales transactions

(first o f vehicles and later of parts) predominated later in the

audit period. Thus, the reduction of total gross sales for the

entire audit period by this fraction generated the most reliable

estimate of taxable sales during the audit period from available

recor ds and still does not reward Petitioner for its failure to

maintain records.

11. For January 2000, the service - only repairs total

$1052.50 out of total reported sales of $8095.88. For

February 2000, the service - only repairs total $1739.99 out of

total reporte d sales of $10,311.55. For March 2000, the

service - only repairs total $372.50 out of total reported sales

of $11,654.93. For April 2000, the service - only repairs total

$796.76 out of total reported sales of $8877.07. For June 2000,

the service - only repa irs total $595.50 out of total reported

sales of $15,970.71. For July 2000, the service - only repairs

total $409.95 out of total reported sales of $10,280.58. For

these six months, service - only repairs total $4967.20 out of

total reported sales of $65,190 .72. The resulting reduction is

7.6 percent.

12. Applying the reduction to the sales tax deficiency

proposed in the Notice of Proposed Assessment, the resulting tax

deficiency is reduced by $2045.74 to a new total of $24,871.95.

CONCLUSIONS OF LAW

13. The Divisio n of Administrative Hearings normally has

jurisdiction over sales tax disputes, pursuant to Sections

72.011, 120.569, 120.57(1), and 120.80(14) Florida Statutes.

(All references to Sections are to Florida Statutes (2003). All

references to Rules are to t he Florida Administrative Code.)

14. Petitioner filed its request for an administrative

hearing 124 days after the date on which Respondent issued the

Notice of Proposed Assessment. Under Rule 12 - 6.003(1)(b), a

domestic taxpayer may protest a proposed assessm ent by

postmarking or faxing a written protest within 60 days of the

date of issuance of the notice of proposed assessment. Under

Rule 12 - 6.003(1)(c), absent an extension of time from

Respondent, the proposed assessment becomes final after 60 days,

if the taxpayer fails to timely mail or fax a written protest.

In this case, then, the Notice of Proposed Assessment, which was

issued on October 23, 2002, became final on December 22, 2002,

which was a Sunday. If the deadline were extended to the next

business day, then the proposed assessment became final on

December 23, 2002.

15. Section 72.011(2)(a) provides: "An action may not be

brought to contest an assessment of any tax . . . assessed under

. . . subsection (1) more than 60 days after the date the

assess ment becomes final." Sixty days after December 23, 2002,

is February 21, 2003. As noted in the Notice of Proposed

Assessment, this is a filing deadline. Petitioner thus appears

to have filed its request for an administrative hearing three

days late. Se ction 120.80(14)(b)3.b provides that the filing

deadlines of Section 72.011(2) are "jurisdictional," so there

appears to be no jurisdiction over this case.

16. Because Respondent may calculate these periods

differently than suggested above, this Recommended Or der will

proceed to the merits of Petitioner's protest.

17. Section 212.05 imposes a sales tax upon persons

engaged in the business of selling tangible personal property at

retail in Florida. Section 212.05(1)(a)1.a imposes the sales

tax at the rate of six pe rcent of the "sales price." Section

212.02(16) defines "sales price" as the "total amount paid for

tangible personal property, including any services that are part

of the sale . . .."

18. Section 212.12(6)(b) authorizes Respondent, "upon the

basis of a test o r sampling of a dealer's available records or

other information relating to the sales . . . made by such

dealer for a representative period, determine the proportion

that taxable retail sales bear to total retail sales . . . ."

19. Section 120.80(14)(b)2 provi des that Respondent's

burden of proof "shall be limited to a showing that an

assessment has been made against the taxpayer and the factual

and legal grounds upon which [Respondent] made the assessment."

20. Respondent has proved that it made an assessment

agai nst Petitioner. The record adequately details the factual

and legal grounds for the assessment, except for the failure of

the assessment to exclude from taxable sales the sales price of

service - only transactions. The corrected total of sales tax

deficien cy is $24,871.95, on which Respondent may calculate the

penalty and interest due.

RECOMMENDATION

It is

RECOMMENDED that the Department of Revenue enter a final

order dismissing Petitioner's protest as untimely and sustaining

the total amount set forth in the Notice of Proposed Assessment

dated October 23, 2002, or, in the alternative, reducing the

additional sales tax due to $24,871.95 and recalculating the

penalty and interest accordingly.

DONE AND ENTERED this 14th day of November, 2003, in

Tallahassee , Leon County, Florida.

S

___________________________________

ROBERT E. MEALE

Administrative Law Judge

Division of Admin istrative Hearings

The DeSoto Building

1230 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 November, 20 03.

COPIES FURNISHED:

James Zingale, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399 - 0100

Bruce Hoffmann, General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399 - 0100

George B. Grosheim

Qualified Representative

Accounting Services of South Florida.

1210 Southeast 5th Street

Deerfield Beach, Florida 33441

Nicholas Bykowsky

Assistant Attorney General

Office of the Attorney General

The Capitol -- Tax Section

Tallahassee, Florida 32 399 - 1050

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 must be filed with the agency that

will issue the fin al order in this case.