10-008807 True Blue Pools Contracting, Inc. vs. Department Of Revenue Status: Closed Recommended Order on Thursday, January 20, 2011.

Summary: DOR failed to show factual and legal basis for contractor to collect sales taxes from customers; taxpayer conceded liability for additional sales/use taxes for expenses, materials, and fixed assets, but DOR failed to show setoff for taxes paid .

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

TRUE BLUE POOLS CONTRACTING, )

INC. , )

)

Petitioner , )

)

vs. ) Case No. 10 - 8807

)

DEPARTMENT OF REVENUE , )

)

Respondent . )

)

RECOMMENDED ORDER

A dministrative Law Judge Eleanor M. Hunter conducted a

final hearing in this case by video teleconference between sites

in Tallahassee and Miami, Florida, on October 27, 2010.

APPEARENCES

For Petitioner: Samuel B. Reiner, II, Esquire

Reiner & Reiner, P.A

9100 South Dadeland Boulevard, Suite 901

Miami, Florida 33156 - 7815

For Respondent: John Mika, Esquire

Office of the Attorney General

The Capitol, Plaza Level 01

Tallahassee, Florida 32399

STATEMENT OF THE ISSUE

The issue is whether Petitioner collected and remitted to

Respondent the correct amount of sales and use taxes during the

audit period from October 1, 2004, through September 30, 2007,

and, if not, what additional amount of tax plus penalty and

interest is due .

PRELIMINARY STATEMENT

On October 26, 2009, Respondent issued a Notice of Proposed

Assessment to Petitioner to collect $113,632.17 in taxes, plus

$28,408.05 as a penalty, and $43,050.38 in interest (through

October 26, 2010), or a total of $185,090.60 for the audit

period. On February 16, 2010, Respondent received the challenge

to the proposed assessment in a Petition for Formal Hearing,

which was forwarded to the Division of Administrative Hearings

(DOAH) on February 26, 2010, and assigned DOAH Case Number 10 -

1005.

A hearing was scheduled for May 21, 2010, but it was

cancelled after the parties filed a Joint Motion for Continuance

and a Joint Moti on for Provisional Closing Order to allow the

parties to try to settle their dispute. Having been unable to

do so, the parties filed a Joint Motion to Reopen File and

Schedule Final Hearing on August 23, 2010. The case was re -

opened and assigned DOAH Cas e Number 10 - 8807. By Notice of

Hearing, the case was set for final hearing , and the hearing was

held on October 27, 2010.

At the hearing, Respondent presented the testimony of an

auditor, Linda Johnson - Smith. Respondent's Exhibits 1 - 11 were

received in e vidence. Petitioner presented the testimony of

Peter Vigil. Petitioner's Composite Exhibit 1 was received in

evidence. The Transcript of the hearing was filed November 15,

2010. Proposed R ecommended O rders were received from Respondent

on December 6, 2 010, and from Petitioner on December 13, 2010.

FINDINGS OF FACT 1

1. Petitioner True Blue Pools (Petitioner , taxpayer, or

TBP) is a domestic corporation headquartered in Miami - Dade

County, Florida.

2. TBP services, repairs, and renovates swimming pools a nd

constructed some pools during the audit period.

3. Respondent, Florida Department of Revenue (Respondent

or DOR), is the agency of state government authorized to

administer the tax laws of the State of Florida, pursuant to

section 213.05, Florida Statu tes. 2

4. DOR is authorized to prescribe the records to be kept

by all persons subject to taxes under chapter 212, Florida

Statutes. Such persons have a duty to keep and preserve their

records, and the records shall be open to examination by DOR or

its au thorized agents at all reasonable hours pursuant to

section 212.12(6), Florida Statutes.

5. DOR is authorized to conduct audits of taxpayers and to

request information to ascertain their tax liability, if any,

pursuant to section 213.34, Florida Statutes.

6. On November 2, 2007, DOR initiated an audit of TBP to

determine whether it was properly collecting and remitting sales

and use taxes to DOR.

7. The audit period was from October 1, 2004, through

September 30, 2007.

8. On December 15, 2008, DOR sent TBP its Notice of Intent

to Make Audit Changes (NOI), with schedules, showing that TBP

owed to DOR additional sales and use taxes in the amount of

$113,632.17, penalty in the amount of $28,406 . 05, and interest

through December 16, 2008, in the amount of $3 4,546 . 59, making a

total assessment in the amount of $176,586.81.

9. On October 26, 2009, DOR issued its Notice of Proposed

Assessment.

10. TBP timely challenged the Notice of Proposed

Assessment, filing its petition with DOR and requesting an

administra tive hearing.

11. Subsequent to the petition being filed, additional

documentation was provided by TBP resulting in a revision to the

tax, interest, and penalty amount due. DOR's revised work

papers, dated May 27, 2010, claim Petitioner owes $64,430.83 i n

tax, $16,107.71 in penalty, and interest through May 27, 2010,

in the amount of $27,071.99, with an assessment of $107,610.53.

12. The assessed penalty, $16,107.71 , was calculated after

25% of the penalty was waived, pursuant to subsection

213.21(3)(a), Florida Statutes, based on DOR's determination

that there is no evidence of willful negligence, willful

neglect, or fraud.

13. The audit was conducted to determine liability in four

categories: improper sales tax exemptions, unpaid sales taxes

for taxabl e expenses , unpaid use taxes on fixed assets, and

unpaid use taxes on taxable materials used to fulfill contracts

to improve real property.

Sales Tax Exemptions

14. Due to the large volume of invoices and other records,

the auditor conducted a random samp ling of invoices for three

months during the audit period, October 2004, January 2005, and

September 2007. 3 If no sales tax was collected and the

Petitioner claimed that the transaction was exempt from the

requirement to pay taxes , the auditor looked for proof that

either the TBP customer was an exempt organization, for example,

a school or a church, or that TBP had provided its suppliers

with a DOR Form DR - 13 to exempt from taxes products acquired for

resale.

15. In the absence proof of either type of ex emption , DOR

assumed taxes should have been paid. Using the difference

between taxes collected and taxes due for the three months , the

auditor determined that the percentage of error was .016521.

When .016521 was applied to total sales of $1,485,890.79 fo r the

36 - month audit period , the results showed that an additional

$24,548.41 in sales taxes should have been collected from

customers, and is due from TBP.

16. Although a business is required to pay taxes for the

materials it purchases to use in its busi ness, it is not

required to collect taxes from its customers when it enters into

lump sum contracts to perform a service for customers.

17 . At least one invoice for $9,500.00 that the auditor

treated as an improper exemption was, in fact, a part ial paymen t

on a lump - sum contract. The invoice referenced a "shotcrete

draw," which represented the collection of funds after the

concrete part of pool construction was completed. TBP is not

required to collect taxes when it uses lump - sum contracts.

18 . Other in voices for pool repair and services were also

mischaracterized as exempt by the TBP, but it is not clear that

all were payments related to lump - sum contracts . DOR's auditor,

nevertheless, testified as follows:

With the knowledge that I have for True Blue

Pools, being a lump - sum contractor, True

Blue Pools should not charg e their customer

any sales tax.

Transcript at pages 67 - 68.

19. DOR concedes that some of TBP's transactions are also

exempt from taxes as improvements to real property. In its

Proposed Recommended Order, DOR asserted that TBP's use of the

term "improvements to real property" is overbroad, but it did

not specify how or why this is the case . During cross -

examination of the owner of TBP, only one invoice for $500.00

for leak detection on the Delgado property was shown to have

been for a service rather than for swimming pool construction.

Taxable Expenses

20 . DOR audited TBP's purchases of tangible personal

property used in the daily operation of its business. The

products included chlori ne and other chemicals, office supplies,

and vehicle parts, expenses, and repairs. The ledger for a 12 -

month period, calendar year 2006, showed an average monthly

additional tax due of $111.18, or a total of $4 , 002.48 in

additional taxes for the 36 - month audit period. As noted in

Petitioner's Proposed Recommended Order, "[t]he representative

of TBP did not dispute DOR's allegation that no tax may have

been paid on the purchase of all of these items . . . . "

Fixed Assets

2 1 . TBP's list of fixed assets wa s taken from the

depreciation schedule on Internal Revenue Service Form 4562.

The items listed are computer - and software - related. TBP

provided no proof that it had paid a use tax. The additional

tax due equal s $419.94. Petitioner's Proposed Recommende d Order

includes the statement that "[a]gain, the representative of TBP

did not dispute DOR's allegation that no tax may have been paid

on the purchase of these items . . . . "

Taxable Materials

22 . Taxable materials, those purchased to fulfill a

contract to improve real property, included items used to build,

renovate , and repair pools. The items included concrete,

meters, drains, and valves.

23 . For the 12 - month sample period, calendar year 2006,

TBP failed to pay taxes on material purchase s in the tot al

amount of $168,310.05, or an average of $14,078.96 a month. For

the 36 - month audit period, the total of the purchases was

$506,842.56 . With a 6 percent tax due for the state and 1

percent for the county, the total additional tax due on

materials is $3 5,460.00.

24 . TBP conceded that it improperly used a resale

exemption to purchase taxable materials from suppliers without

paying taxes. The materials were used to provide services and

were not resold. Acknowledging again that TBP uses lump - sum

contract s, this time to support the collection of additional

taxes, the auditor testified as follows:

And the law states that the taxpayer's [ sic ]

an ultimate consumer of all materials

purchased to fulfill a lump - sum contract,

and that's what they told me they ope rate

under, a lump - sum contract.

Transcript at page 58.

25 . At the hearing, TBP used its actual profit and loss

statement to show that the cost of goods it sold (general

purchases and taxable materials) in the amounts of $18,360.77 in

October 2004, $8,51 9.22 in January 2005, and $4 , 818.65 in

September 2007. Corresponding taxes for each of those months

should have been $1 , 285.25, $596.35, and $337.31, or an average

of $739.63 a month, or a total of $26,626.68 for 36 months. The

goods that it sold were no t at issue in the audit of taxable

materials , rather it wa s TBP's purchases from vendors that

should have been taxed that resulted in DOR's audit results.

Tota l Additional Sales and Use Taxes Du e

2 6 . The three categories of additional taxes due,

$4,002.48 for taxable expenses , $419.94 for fixed assets, and

$ 35,460.00 for taxable materials, equal $3 9, 882 .42 i n additional

taxes due during the audit period.

Taxes Paid

2 7 . TBP filed DOR Forms DR - 15, monthly sales and use tax

reporting forms, and paid sales an d use taxes during the audit

period. For the sample month s used by DOR to examine sales tax

exemptions , TBP paid $1 , 839.10 in taxes in October 2004,

$1 , 672.73 in January 2005, and $1 , 418.13 in September 2007.

Using the three months to calculate an averag e, extended to 36

months, it is likely that TBP paid $59,712 in taxes.

2 8 . TBP asserted that DOR was required to, but did not ,

offset the deficiency of $39, 882 .42, by what appears to be an

overpayment of $59,712.00 in sales and use taxes.

29 . Other than pointing out that the amount reported on

the DR - 15 s differed, being sometimes more and sometimes less

than the amount shown on the profit and loss statements, DOR did

not dispute TBP's claim that it had paid sales and use taxes.

TBP's representative expla ined that end - of - the - year adjustments

for additional collections or for bad debt could cause the

amounts on the DR - 15 s and profit and loss statements to differ.

30 . With regard to the taxes paid, DOR took the following

position in its Proposed Recommended Order:

Petitioner's DR - 15's [ sic ] for the

collection periods October 2004, and January

2005, [and September 2007] (Petitioner's

Composite Exhibit 1) do reflect sales tax

being collected and remitted to DOR. DOR

does not allege that Petitioner never paid

tax on its purchases, or made bona fide

exempt sales for which no tax was collected.

DOR's audit findings identify just those

which occurred within the sample period,

scheduled in the auditor's workpapers, and

applied over the entire audit period.

31 . T he DR - 15s are taken from the sample months selected

by DOR within the audit period, and DOR does not address TBP's

claim that a set off for taxes paid was mandatory , pursuant to

subsection 213.34(4), Florida Statutes . Using the audit

schedules, DOR showed credit for taxes paid in the amounts of

$20.63 for taxable expenses, $0 for fixed assets, and $24.31 in

state taxes and $1.03 for county taxes on taxable materials.

The amounts are far less that the $59,712.00 in sales/use taxes

TBP showed that it paid d uring the audit period.

CONCLUSIONS OF LAW

32 . The Division of Administrative Hearings has

jurisdiction over the parties to and subject matter of this

proceeding pursuant to s ections 72.011(1) , 120.569 , and

120.57(1), Florida Statutes (2003).

33 . DOR has the burden of proof in this proceeding , but

that burden is "limited to a showing that an assessment has been

made against the taxpayer and the factual and legal grounds upon

which the . . . department made the assessment." See §

120.80(14)(b)2., Fla. Stat.

34. The standard of proof is a preponderance of the

evidence. See § 120.57(1)(j), Fla. Stat. A " preponderance" of

the evidence means the greater weight of the evidence. See

Fireman's Fund Indemnity Co. v. Perry , 5 So. 2d 862 (Fla. 1942).

3 5 . Fl orida Administrative Code Rule 12A - 1.051 applies to

sale s to or by c ontractors who repair, alter, improve and

construct real property . Rule 12A - 1.051(4) provides the

following:

General rule of taxability of real property

contractors. Contractors are the ultimate

consumers of materials and supplies they use

to perform real property contracts and must

pay tax on their costs of those materials

and supplies, unless the contractor has

entered a retail sale plus installation

contract. Contractors performing only

contracts described in paragraphs (3)(a) . .

. do not resell the tangible personal

property used to the real property owner but

instead use th e property themselves to

provide the completed real property

improvement. Such contractors should pay

tax to their suppliers on all purchases. . .

. They should charge no tax to their

customers, regardless of whether they

itemize charges for materials an d labor in

their proposals or invoices, because they

are not engaged in selling tangible personal

property.

36. As referenced in the general rule, the specific

provision applicable to lump - sum contracts is as follows:

( 3) Classification of contracts by p ricing.

The taxability of purchases and sales by

real property contractors is determined by

the pricing arrangement in the contract.

Contracts generally fall into one of the

following categories:

(a) Lump sum contracts. These are contracts

in which a con tractor or subcontractor

agrees to furnish materials and supplies and

necessary services for a single stated lump

sum price.

37. TBP is not required to collect taxes when it performs

work pursuant to a lump - sum contract.

38. In response to DOR's claim t hat TBP's use of the term

"improvement to real property" is overbroad, Technical

Assistance Advisement 03A - 025R on Sales and Use Tax -- Service

Warranties , was issued by DOR to interpret s ections: 212.0506,

212.06, F lorida Statutes, and Rule 12A - 1.051 , and provides, in

relevant part, the following taxpayer guidance:

FACTS :

According to the petition, Taxpayer sells

service warranty contracts for the repair

and/or replacement of certain swimming pool

equipment and provides certain services.

The service cont ract identifies the covered

equipment as pumps, motors, filters,

underwater light fixtures, transformers,

skimmers, main drains, and valves. The

contract identifies the covered services as

leak detection and leak repair . . .

REQUESTED ADVISEMENT :

Advic e is requested whether the sale of the

service warranty is subject to tax.

LAW AND DISCUSSION :

Section 212.06(14), Florida Statutes,

defines certain terms to help determine

whether a person is working with an

improvement to real property . . .

(c) "Improve ments to real property" includes

the activities of building, erecting,

constructing, altering, improving,

repairing, or maintaining real property.

Pumps, motors, filters, underwater light

fixtures, transformers, main drains, valves

and timer boxes on an in - ground pool are

classed as improvements to real property.

Leak detection and repair of an in - ground

pool are also improvements to real property.

Revised Technical Assistance Advisement No. 03A - 025R Department

of Revenue, 2003 Fla. Tax LEXIS 47 (July 14, 2003).

39. TBP's interpretation of leak detection as an

improvement to real property is not overbroad.

40. DOR failed to demonstrate that it has a factual or

legal basis to collect sales taxes on lump - sum contract s for

constructing or repairing in - ground swimming pools.

41. TBP does not contest DOR's assessment of $4 , 002.48 in

sales taxes, $ 419.94 in use taxes on fixed assets, and

$35,460.00 in use taxes on materials, or a total of $39,882.42.

42. DOR did not contest TBP's claim that it paid sales and

u se taxes during the audit period, nor its use of the sampling

method to determine that, over the 36 - month audit period , it

paid $59,712.00 in use/sales taxes. TBP asserted that

subsection 213.34(4), Florida Statutes, mandates a setoff of

taxes paid agains t taxes owed.

43. DOR took the position that TBP should file a request

for a refund rather than have a deficiency offset against taxes

paid.

44. TBP's position is supported by the decision in Dep ' t

of Revenue v. Kemper Investors Life Ins. Co. , 660 So. 2d 1124 ,

at 1129 - 1130 (Fla. 1st DCA 1995) in which the c ourt ruled as

follows:

Here, although there was no audit of an

alleged overpayment of insurance premium

taxes in the audit period under review, we

are of the view that this omission works

against the De partment, rather than against

the taxpayer. By reference to section

215.26 , the language of section 213.34(4)

appears to place a responsibility upon the

state, through its departments and

officials, correctly and timely to determine

the tax burden falling upon the taxpayer,

over and above its responsib ilities in

merely responding to claims for a refund.

We view these amendments as remedial

legislation, and therefore applicable to the

resolution of the case before us.

(citations omitted )

As shown above, section 213.34 specifically

states that the Department shall offset the

overpayment of any tax during an audit

period against a deficiency of any tax

determined to be due during the same audit

period.

45. Because the deficiency is less than the taxes paid,

the assessment should be voided.

RECOMMENDATION

Based upon the forgoing findings of fact and conclusions of

law, it is recommended that the Department of Revenue issue a

final order dismissing the N otice of Intent to Make Audit

Changes dated December 15, 2010.

D ONE AND ENTERED this 20 th day of January , 2011 , in

Tallahassee, Leon County, Florida.

S

ELEANOR M. HUNTER

Administrative Law Judge

Division of Administrativ e Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 20 th day of January , 2011 .

ENDNOTES

1 Findings of Fact 1 through 11 are taken from the Joint Pre -

Hearing Stipulation.

2 Unless otherwise indicated, all references to Florida Statutes

are to the 2010 edition.

3 The taxpayer never signed the Sampling Agreement, a consent

form for the us e of the sampling method , but the auditor said

the taxpayer agreed verbally. Any objection to the sampling

method is assumed to have been waived at hearing when the

Petitioner used the same method to estimate the taxes it had

paid. See Finding of Fact 2 7 .

COPIES FURNISHED :

John Mika, Esquire

Office of the Attorney General

The Capitol, Plaza Level 01

Tallahassee, Florida 32399

Samuel B. Reiner, II, Esquire

Reiner & Reiner, P.A

9100 South Dadeland Boulevard, Suite 901

Miami, Florida 33156 - 7815

Marsha ll Stranburg, General Counsel

Department of Revenue

The Carlton Building, Room 204

501 South Calhoun Street

Tallahassee, Florida 323 99 - 6668

Lisa Vickers, Executive Director

Department of Revenue

The Carlton Building, Room 104

501 South Calhoun Street

Tal lahassee, 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.