10-009281 Department Of Business And Professional Regulation, Division Of Alcoholic Beverages And Tobacco vs. Discount Zone, Inc., D/B/A Lakeland Discount Beverage, Inc. Status: Closed Recommended Order on Thursday, May 12, 2011.

Summary: The Department did not provide clear and convincing evidence to support the cigarette surcharge imposed on Respondent. A lesser amount is owed.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BUSINESS AND )

PROFESSIONAL REGULATION, )

DIVISION OF ALCOHOLIC BEVERAGES )

AND TOBACCO , )

)

Petitioner , )

)

vs. ) Case No. 10 - 9281

)

DISCOUNT ZONE, INC., d/b/a )

LAKELAND DISCOUNT BEVERAGE, )

INC. , )

)

Respondent . )

)

RECOMMENDED ORDER

Pursuant to notice to all parties, a final hearing was

conducted in this case on February 2, 2011, in Tampa, Florida,

before Administrative Law Judg e R. Bruce McKibben of the

Division of Administrative Hearings.

APPEARANCES

For Petitioner: Michael B. Golen, Esquire

Department of Business and

Professional Regulation

1940 North Monroe Street, Suite 40

Tallahassee, Florida 32399 - 2022

For Respondent: Peter C. Pappas, Esquire

4798 New Broad Street, Suite 210

Orlando, Florida 32814

STATEMENT OF THE ISSUE

The issue in this case is whether Respondent failed to pay

tax surcharges, penalties , and interest owe d on the sale of

cigarettes , and, if so, the amount that is currently due and

owing.

PRELIMINARY STATEMENT

Petitioner, Department of Business and Professional

Regulation, Division of Alcoholic Beverages and Tobacco (the

"Department") , filed an Administr ative Complaint against

Respondent, Discount Zone, Inc. , d/b/a Lakeland Discount

Beverage, Inc. , dated July 14, 2010, alleging failure to pay

cigarette surcharges that were due and owing. Respondent

requested a formal administrative hearing in response to the

administrative action , and the request was forwarded to the

Division of Administrative Hearings.

At the final hearing, Petitioner called the following

witness: Julie Keenan, senior tax audit administrator for the

Department. Petitioner offered ten exhibits into evidence, each

of which was admitted.

Respondent called one witness: Salah Rabi. Respondent

offered 11 exhibits into evidence , each of which was admitted.

Exhibits 1, 5, 6, and 10 were admitted as demonstrative exhibits

only.

A T ransc ript of the final hearing was ordered by the

parties and filed at the Division of Administrative Hearings on

March 30, 2011. By rule, parties were allowed ten days to

submit proposed recommended orders. Each party timely submitted

a Proposed Recommended Order which was duly considered in the

preparation of this Recommended Order.

FINDINGS OF FACT

1. The Department is the state agency responsible for

monitoring the sale of tobacco products and for assuring that

all businesses selling such products pay th e requisite

surcharges on each pack of cigarettes sold.

2. Respondent is a convenience store which is licensed to

sell tobacco products. The store also sells alcoholic

beverages, food items , and miscellaneous other products. The

sales tax associated wit h the sale of tobacco products (only) is

at issue in this proceeding.

3. The 2009 Florida Legislature enacted legislation

imposing a $1.00 per pack surcharge on each pack of cigarettes

sold in this s tate beginning July 1, 2009. Retailers having a

cigaret te inventory and , as of that date , would be required to

pay a "floor tax" of $1.00 per pack in their inventory.

4. In February 2010, the Department received a letter from

an anonymous source (who identified himself as "A Good Civilian

(Business Owner) (Wh o always pays tax)[sic]. " The letter had a

flyer attached to it which had been distributed by Respondent.

The flyer identified a number of products for which buyers could

realize " [t] he lowest prices in Polk County." Included in the

list of products wer e various tobacco items, including

cigarettes. The anonymous source's letter suggested that anyone

who could sell the tobacco products at those prices must be

doing something illegal.

5. Based on the allegations in the anonymous letter, the

Department de cided to investigate. A team was sent to one of

Respondent's stores (hereinafter referred to as "Store 1") on

February 18, 2010. The team did an inventory of tobacco

products at Store 1. There were 2,855 packs of cigarettes at

Store 1. Some of the ciga rettes were in individual packs; some

were still in cartons (which contain ten packs each). The

cigarette packs had the requisite state stamp on them. However,

most of the packs had a stamp which had been in existence prior

to the change in law on July 1 , 2009. The fact that most of

Store 1's cigarette packs had the old stamp meant that the

cigarettes had been around for a while.

6. The inventory eventually formed the basis for an audit

performed on Respondent's other store ("Store 2"). Store 2 had

jus t recently opened and was stocked with cigarettes brought

over from Store 1. There were, therefore, no invoices available

at Store 2 as to the purchase of the cigarettes it had on hand.

7. The audit process involved a determination of

distributors from w hich Respondent purchased its cigarettes.

The two primary distributors were Sam's Club and Dosal. The

Department ascertained from those distributors how many packs of

cigarettes Respondent had purchased over a given span of time.

Sam's Club provided rec ords seeming to indicate the purchase of

37,770 packs between February 1 and June 29, 2009; another 9,090

packs were purchased between July 4, 2009 , and January 29, 2010.

Dosal said 65,490 packs had been purchased between March 3 and

June 23, 2009; anothe r 17,800 were purchased between July and

December 2009.

8. An audit investigation was commenced at Store 2 on

March 17, 2010. The auditors did not ascertain the actual

number of packs of cigarettes on hand at the store on that date.

The auditors talked with the owners of the stores (Salah Rabi

and his brother, Mohammed Rabi) about their sales history.

Pursuant to requests of the auditors, the owners also sent in

some additional records reflecting their sale of cigarettes.

9. In order to calculate the n umber of cigarette packs

sold by Store 2 during a four - month period, the auditors

determined how much business the store had done in all products

(including non - tobacco products) for that period. Respondent

gave the Department a list of daily sales on all products sold

and the taxes paid on those products for the period February

2009 through January 2010. The average monthly sales amount for

the store during the audit period was $25,000. However, the

Department found the information provided by Responden t to be

incomplete and , thus , unreliable.

10. The auditors then assumed that 80 percent of the

store's sales were for cigarettes 1/ and that the average price

per pack was $4.50. Using this formula, the auditors found that

approximately 4,444 packs of ciga rettes were sold each month,

which the auditors rounded up to 4 , 500. Thus, for the audit

period, the auditors estimated that 18,000 packs of cigarettes

were sold. Neither of the auditors testified at final hearing

as to the reasonableness of the formula or as to their alleged

conversations with the owners.

11. Based on their findings, the auditors concluded that

Respondents owe a balance of $77,798.23. That figure was

derived as follows:

Ʊ Total packs purchased 3/09 - 6/09

from Dosal 65,490

f rom Sam's 37,770

Ʊ Total purchases prior to 7/1/09 103,260

Ʊ Estimated monthly sales at 4 , 500

packs per month for four months 18,000

Ʊ Total estimated inv entory on 7/1/09 85,260

Ʊ Floor tax due on estimated inventory $85,260

Ʊ Floor tax paid $ 4,963,09

Ʊ Unpaid floor tax $80,296.91

Ʊ Overpayment on other tobacco product $(2,498.54)

Ʊ Total cigar ette floor tax due $77,798.37

12. Missing from the evidence presented was any statement

by the Department as to whether , on March 17, 2010, or any other

date, there were 80,000 - plus packs of cigarettes visible at the

store. It seems plausible th at so many packs, even if in

cartons of 10 packs apiece, would be easy to identify.

13. Respondent refutes the basic premise of the auditor's

findings. Using cash register receipts (called Z Tapes) from

March and May 2009 (two of the four months at issue) , Respondent

was able to establish a more accurate percentage of cigarette

sales versus all products sold. The Z Tapes are printed out

each day by way of turning a key on the cash register. The

tapes print out a receipt showing the date, the number of pa cks

of cigarettes sold, the number of food items sold, and the

number of taxable items sold.

14. According to the Z Tapes, close to 90 percent 2/ of

Store 2's total sales for those months were cigarette sales,

i.e., a much higher percentage than used by the auditors. The

evidence presented by the owners is credible and persuasive.

15. Respondent also provided a calculation of its price

per pack of cigarettes. The price depends , in part , on how much

they pay the distributors for each pack or carton of cig arettes.

Of its four best selling cigarettes, the following costs were

determined for the period March through June 2009:

Brand Cost Markup Markup% Price

305's 2.93 .06 2 2.99

Marlboro 4.66 .08 1.7 4.74

Romy 2.75 .21 7.0 2.96

Newport 4.45 .34 7.6 4.79

Then, using the inventory of products on hand, a weighted

average markup percentage was calculated as follows:

Weighted Weighted Weighted

Brand Number Cost Price Markup

305's 5,900 17,287 $17,641

Marlboro 1,957 9,394 9,27 6

Romy 1,611 4,430 4,769

Newport 108 454 517

TOTAL 31,565 $32,203 2.02%

Based on the foregoing calculation, the owners estimated an

average price per pack of $3.00, i.e., much less than the $4.50

per pack figure utilized by the a uditors.

16. The unrefuted testimony of the owners is credible and

seems reasonable based upon the facts. Inasmuch as neither of

the auditors was available to provide further justification for

their price - per - pack estimation, the owners' calculation is

ac cepted for use in this proceeding.

17. Respondent purchased 91,520 packs of cigarettes during

the period of March 2009 through June 2009. Respondent sold

55,634 packs of cigarettes during that same period. The average

price per pack sold was $3.00 (three dollars) . Based on the

foregoing, Respondent had a floor inventory of 35,886 packs of

cigarettes on July 1, 2009.

18. Respondent paid a cigarette surcharge floor tax of

$4,963.09 on July 15, 2009. Respondent also overpaid its floor

tax for other tobac co products by $2,948.54 for a total of

$7,815.83 in payments to the Department. That amount should be

credited against any tax liability determined in this

proceeding.

19. The Department provided bank statements for Store 1

and Store 2 showing much large r monthly transactions than

evidenced by the stores' sale of products. That fact raised a

red flag justifying further investigation into Respondent's

business. However, the discrepancy was explained by the fact

that Respondent does a large amount of chec k - cashing business at

its stores. The large bank transactions are not relevant to the

issue in this proceeding.

CONCLUSIONS OF LAW

20. The Division of Administrative Hearings has

jurisdiction over the parties to and the subject matter of this

proceeding p ursuant to s ections 120.569 and 120.57(1), Florida

Statutes (2010).

21. The general rule is that the burden of proof is on the

party asserting the affirmative of an issue before an

administrative tribunal. See Balino v. Dep't of HRS , 348 So. 2d

349 (Fla. 1st DCA 1977), citing Dep't of Agric. & Consumer

Servs. v. Strickland , 262 So. 2d 893 (Fla. 1st DCA 1972). In

the instant action, the Department has the burden of proof.

22. The standard of proof for proceedings seeking to

impose penal sanctions is clear and convincing evidence. Ferris

v. Turlington, 510 So. 2d 292 (Fla. 1987). Inasmuch as the

Department is seeking to impose fines against Respondent, the

clear and convincing standard applies.

23. Clear and convincing evidence is an intermediate

standar d of proof , which is more than the "preponderance of the

evidence" standard used in most civil cases , but less than the

"beyond a reasonable doubt" standard used in criminal cases.

See State v. Graham , 240 So. 2d 486 (Fla. 2d DCA 1970). Clear

and convinc ing evidence has been defined as evidence which:

Requires that the evidence must be found to

be credible; the facts to which the

witnesses testify must be distinctly

remembered; the testimony must be precise

and explicit and the witnesses must be

lacking in confusion as to the facts in

issue. The evidence must be of such weight

that it produces in the mind of the trier of

fact a firm belief or conviction, without

hesitancy, as to the truth of the

allegations sought to be established.

Slomowitz v. Walker , 429 So. 2d 797, 800 (Fla. 4th DCA 1983)

(citations omitted).

24. Section 210.011, Florida Statutes (2010), provides the

requirements for payment of the tax surcharge on tobacco

products. Subsection (3)(b) sets a surcharge amount of $1.00

per pack for pa ckages containing more than ten , but not more

than 20 cigarettes.

25. The Department has not proven, by clear and convincing

evidence, that its calculation of cigarette surcharges owed by

Respondent is accurate. The projections made by the

Department's au ditors w ere not substantiated or proven beyond

speculations by a senior auditor. By contrast, the evidence

presented by Respondent was clear, convincing , and credible.

26. The evidence supports Respondent's calculation that as

of July 1, 2009, it held 35, 886 packs of cigarettes in inventory

at its store.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that a final order be entered by Petitioner,

Department of Business and Professional Regulation, Division of

Alcoholic Beverages and Tobacco, imposing a cigarette surcharge

in the amount of $35,886 (th irty - five thousand, eight hundred

and eighty - six dollars) against Respondent, Discount Zone, Inc. ,

d/b/a Lakeland Discount Beverage, Inc., minus $7,815.83 alrea dy

paid.

DONE AND ENT ERED this 12th day of May , 2011 , in

Tallahassee, Leon County, Florida.

S

R. BRUCE MCKIBBEN

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tall ahassee, 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 12th day of May , 2011 .

ENDNOTE S

1/ The auditors did not testify. A supervisor was made awa re

that the auditors used 80 percent , but how they arrived at

80 percent is not known.

2/ Respondent said approximately 93 percent of sales were

cigarettes; the Department said the Z T apes reflect 86 or 87

percent .

COPIES FURNISHED :

John R. Powell, Di rector

Division of Alcoholic Beverages

and Tobacco

Department of Business and

Professional Regulation

1940 North Monroe Street, Suite 40

Tallahassee, Florida 32399

Layne Smith, General Counsel

Department of Business and

Professional Regulation

1940 North Monroe Street, Suite 40

Tallahassee, Florida 32399 - 0792

Michael B. Golen, Esquire

Department of Business and

Professional Regulation

1940 North Monroe Street, Suite 40

Tallahassee, Florida 32399

Peter C. Pappas, Esquire

4798 New Broad Street, Suite 210

Orlando, Florida 32814

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 exceptio ns

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.