11-002786 Hernando County, A Political Subdivision Of The State Of Florida vs. Department Of Revenue Status: Closed Recommended Order on Friday, December 30, 2011.

Summary: Additional payments made by a lessor of county property to Hernando County pursuant to a document entitled Lease Agreement, as amended, constitutes "rent" subject to sales tax.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

HERNANDO COUNTY, A POLITICAL )

SUBDIVISION OF THE STATE OF )

FLORIDA, )

)

Petitioner, )

)

vs. ) Case No. 11 - 2786

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

An administrative hearing was conducted in this case on

September 23, 2011 , in Brooksville , Florida , before

James H. Peterson, III, Administrative Law Judge with the

Division of Administrative Hearings.

APPEARANCES

For Peti tioner: Geoffrey Kirk, Esquire

Hernando County AttorneyÓs Office

20 North Main Street, Suite 462

Brooksville, Florida 34601 - 2850

For Respondent: John Mika , Esquire

Office of the Attorney General

The Capitol , Plaza Level 0 1

Tal lahassee, Florida 32399 - 1050

STATEMENT OF THE ISSUE

Whether the "Additional Payment" made by Hernando HMA,

Inc., d/b/a Brooksville Regional Hospital to Hernando County

pursuant to a document entitled Lease Agreement, as amended,

constitutes "rent " subject to sales tax under section 212.031,

Florida Statutes. 1 /

PRELIMINARY STATEMENT

The Department of Revenue (Department or Respondent) issued

a Notice of Proposed Assessment dated December 21, 2010, to

Hernando County (County or Petitioner) . The C ounty timely filed

a petition for formal adminis trative hearing contesting the

assessment .

The p etition was referred to the Division of Administrative

Hearings (DOAH) on or about May 3 1, 20 11 . DOAH Case No. 11 - 2786

was assigned. By Order dated June 17, 2011 , this matter was

scheduled for a final hearing to be held on August 10, 201 1 .

Following an Order granting the parties' Agreed Motion to

Continue Final Hearing, an Order Re - scheduling Hearing for

September 23, 2011, was entered.

At the hearing, the Department proceeded first to show the

factual and legal basis of the proposed assessment. The

Department presented the testimony of one witness and submitted

two exhibits which were rec eived into evidence a s Exhibits R - 1

and R - 2. Thereafter, t he County presented the testimony of four

witnesses and submitted 14 exhibits which were received into

evidence as Exhibits P - 1 through P - 14.

The proceedings were recorded and a t ranscript was ordered.

At their request, the parties were given 30 days from the fi ling

of the t ranscript within which to file their proposed

recommended orders. A one - volume T ranscript of the proceedings

was filed on October 7, 2011. Thereafter, both the Department

and the County timely filed their respective Proposed

Recommended Orde r s , which have been considered in the

preparation of this Recommended Order.

FINDINGS OF FACT

1. Hernando HMA, Inc. (HMA) is a for - profit entity which

operates Brooksville Regional Hospital, Spring Hill Regional

Hospital, and other entities, as successor to an entity that was

in Chapter 11 bankruptcy proceedings from 1993 to 1998, Regional

Healthcare, Inc . (RHI).

2. The Department is an agency of the State of Florida

that has been delegated the responsibility to collect sales and

use tax es imposed by c hap ter 212, Florida Statutes.

3. In 1998, as part of RHI's bankruptcy plan, HMA and the

County entered into various agreements, including a lease

agreement (1998 Lease), regarding the use and operation of

several RHI hospital properties and improvements owne d by the

County, and leased back to RHI.

4. Under the 1998 Lease and other agreements, HMA agreed

to continue to operate the hospita l facilities for 30 years with

possession of the real property and improvements to be returned

to the County at the end of the lease term.

5. Section 1.2W. of the 1998 Lease defined "Rental

Payment" as follows:

"Rental Payment" means all payments due from

Lessee to Lessor or otherwise required to be

paid by Lessee pursuant to the terms of this

lease.

6. The 1998 Lease furth er provided in s ection 3.3 under

the heading "Rent":

The annual rental payment of the Leased

Premises for each year of the Lease Term

(the "Rental Payment") shall be in the

amount of Three Hundred Thousand and 00/100

Dollars ($300,000). This Rental Paym ent

shall be paid to Lessor by Lessee on the

Commencement Dat e and on each anniversary

date o f the Commencement Date during the

Lease Term.

7. The 1998 Lease also provided that HMA , as Lessee , would

pay "all taxes, if any, prior to delinquency."

8. Unde r the 1998 Lease , the County agreed to lease the

premises in consideration of HMAÓs timely payment of rent and

timely performance of the other covenants and agreements

required under the lease . It was an Ðevent of defaultÑ under

the lease if HMA failed to observe and perform any covenant,

condition, or agreement on its part which could be cured by a

payment of money.

9. Remedies for default under the 1998 Lease included

termination of the lease by the County and exclusion of HMA from

possession of the lea sed premises.

10. Even though the leased premises under the 1998 Lease

were not subject to ad valorem taxes because they were owned by

the County, d uring public discussions of t he proposed 1998

Lease, an issue arose about HMA's responsibility for payme nt of

fire assessments that would have been paid if the property was

not immune or exempt from ad valorem taxes. HMA agreed, by

separate agreement, to pay the fire assessments and buy a new

ambulance to serve the community. T he fire assessment agreemen t

was by separate document that was included as part of the

closing of the 1998 Lease and other agreements involving the

hospital facilities in June 1998. The 1998 Lease was dated

June 1, 1998.

11. The 1998 Lease terms included a merger clause in

s ection 1 5.6 entitled ÐENTIRE AGREEMENT,Ñ which provided:

Th is lease may not be modified, amended or

otherwise changed orally, but may only be

modified, amended or otherwise changed by an

agreement in writing signed by both parties.

This Lease Agreement and its ac companying

guaranty constitute the entire agreement

between the parties affecting this Lea se.

This Lease Agreement supersedes and cancels

any and all previous negotiations,

arrangements, agreements, and understandings

between the parties hereto with respe ct to

the subject matter thereof, and no such

outside or prior agreements shall be used to

interpret or to construe this Lease. There

are no promises, covenants, representations

or inducements in addition to, or at

variance with any of the terms of this L ease

Agreement except the Guaranty.

12. In 2001, the County and HMA began negotiations for

relocation of the Brooksville Regional Hospital which was part

of the leased premises described in the 1998 Lease.

13. During the negotiations, HMA, through its attorney,

Steven Mitchell, prepared a proposed comprehensive relocation

agreement in consultation with former County Attorney Bruce

Snow. Section 7.3 of t he proposed relocation agreement

conte mplated revising the 1998 Lease and suggested the following

pre liminarily negotiated language for rental payments under a

revised 1998 Lease :

Rental Payments

(a) The Lessee shall pay to Lessor on the

due date therefore as set forth in the Lease

Agreement, the sum of Three Hundred Thousand

and no/100 Dollars ($300,000 .00) per annum.

(b) The Lessee shall pay to Lessor on an

annual basis, either as rent or by virtue of

a payment to Hernando County of the same sum

to be used by Hernando County as it deems

appropriate, an amount equal to the ad

valorem taxes that would ha ve been paid on

the New Facility Site as improved with the

New Facility if the New Facility Site were

not owned by Hernando County but owned by a

for - profit entity. In the event the New

Facility Site and the New Facility located

thereon are subsequently r equired by law to

pay ad valorem taxes then the obligation to

pay the amount described in Sectio n 7.3(b)

herein shall immediately terminate and

Lessee shall be responsible for the payment

of the appropriate ad valorem tax.

14. The proposed comprehensive relocation agreement was

discussed at public meetings held by the Hernando County Board

of Commissioners on September 17 and September 25, 2001. The

minutes of the September 25, 2001, meeting indicate that the

County Administrator advised that the propose d relocation

agreement contemplated that HMA would continue to pay $300,000

annually as rent, and Ðwould make a payment - in - lieu of taxes

annually to the County . . . .Ñ The minutes also reflect that,

in responding to a question from a commissioner regardi ng

whether there should be language in the agreement that would

protect the Ð payment - in - lieu of taxes Ñ provision in the event

the law changed:

[Former County Attorney] Snow replied that

it was his recommendation that there should

be a provision that to the extent that the

organic law of the State provided that

facilities, such as the new hospital or

other hospital under the lease, were taxable

for ad valorem tax purposes, that that

provision of the organic law would apply to

ensure that that provision super seded. He

explained that the lease provision to

provide for an ad valorem tax payment was

only to the extent that the organic law did

not otherwise compel it so that the Cou nty

would be receiving ad valore m tax under

either scenario.

15. The minutes fro m the September 25, 2001, meeting

further state:

Mr. Snow replied to County Attorney Garth

Coller that there had been recent Supreme

Court decisions which may have a bearing on

the organic law to the extent that a

decision of that nature indicated that the

facilities were subject to ad valorem tax,

notwithstanding the ownership issue, then

they were subject to ad valorem tax and the

leas e would need to clarify that. He

suggested that if the FS or Constitution

should change, even in the absence of an

interp retation of the Supreme Court

decision, the change would obligate the

payment of ad valorem taxes pursuant to the

constitutional or statutory provisions. He

explained that organic law pertained to

provisions of FS or the Constitution as

opposed to a Court decision.

16. Mr. SnowÓs reported reference to recent ÐSupreme Court

decisionsÑ regarding ad valorem taxes undoubtedly was referring

the decision , among others, in S ebring Airport Authority v.

McIntyre , 718 So. 2d 296 (Fla. 1998). In that decision ,

ren dered a few months after the County entered into the 1998

Lease, the Supreme Court of Florida stated with regard to

municipal (as opposed to county) property:

[ T ] here is nothing in article V II, section 3

that allows the legislature to exempt from

ad valore m taxation municipally owned

property or any other property that is being

used primarily for a proprietary purpose or

for any purpose other than a governmental,

municipal or public purpose. To the extent

section 196.012(6) attempts to exempt from

taxation municipal property used for a

proprietary purpose, the statute is

unconstitutional.

Id. at 29 8.

17. T he Sebring case did not address tax immunity of

county property as distinguished from the issue of tax

exemptions for the proprietary use of municipal p roperty . T he

proposed ÐRental PaymentsÑ language for revisions to the 1998

Lease , however, demonstrates that the drafters of the

comprehensive relocation agreement were aware of the possibility

that the Sebring rational e could be expanded and applied to

c ounty property .

18. The comprehensive relocation agreement was approved by

the County , and executed in late 2001 . Attached as to that

relocation agreement as Schedule C was an unsigned document

entitled ÐFirst Amendment to Lease AgreementÑ that was not t o be

executed until the new facility was completed and transferred to

the County. S ubsection 3.3 of the First Amendment to Lease

Agreement entitled ÐRental PaymentsÑ provided :

3.3 Rental Payments

3.3.1 The Lessee shall pay to the Lessor on

the due da te therefore as set forth in the

Lease Agreement, the sum of Three Hundred

Thousand and No/100 Dollars ($300,000.00)

per annum.

3.3.2 The Lessee shall pay to the Lessor on

an annual basis, either as rent or by virtue

of a payment to Hernando County of a n amount

(ÐAdditional PaymentÑ) equal to the sum of

the following:

3.3.2.1 An amount equal to that portion of

the ad valorem taxes that would have been

paid to Hernando County on the Leased

Premises (as modified by the substitution of

the New Facility S ite for the Current

Hospital Site) if the Leased Premises were

not owned by Hernando County but owned by a

for profit entity; and

3.3.2.2. An amount equal to that portion of

the ad valorem taxes that would have been

paid to the Spring Hill Fire and Resc ue

District, the Township 22 Fire District

and/or any other special taxing district

that may be established pursuant to law; and

3.3.2.3. An amount equal to all special

assessments levied by Hernando County

through any Municipal Service Benefit Unit

cre ated by Hernando County pursuant to the

provisions of Section 125.01, Florida

Statutes; and

3.3.2.4. An amount equal to all ad valorem

tax levied by Hernando County through any

Municipal Service Taxing Unit created by

Hernando County pursuant to the pro visions

of Section 125.01, Florida Statutes.

In no event shall the Additional Payments

exceed an amount equal to a full ad valorem

tax assessment on the New Facility Site as

determined annually by the Hernando County

Property Appraiser . In the event the Lessee

and/or Lessor is required by law to pay ad

valorem taxes on the Leased Premises or any

portion thereof, the obligation to pay to

Lessor the Additional Payment described in

this Section 3.3 shall immediately terminate

(and/or be adjusted, whichever is

applicable), and Lessee shall be responsible

for payment of the appropriate ad valorem

tax.

19. The First Amendment to Lease Agreement further

provided, Ð[e]xcept as expressly modified herein, all other

terms and conditions set forth in the [1998] Lea se Agreement are

hereby ratified and confirmed.Ñ

20. The new hospital facility was completed and

transferred to the County in 2005. On November 15, 2005, the

County commission approved documents related to the transfer,

including the F irst Amendment to L ease Agreement in the precise

form as attached to the relocation agreement approved in 2001.

The approval was obtained on a consent agenda, and the minutes

reflect no further discussion by the commission or the public on

the documents that were approved.

21. In 2009, the Hernando County School District sued the

County Property Appraiser, alleging that the properties subject

to the 1998 Lease as amended by the First Amendment to Lease

Agreement should not be exempt from ad valorem taxation. In a

13 - page O rder dismissing the School DistrictÓs action, Circuit

Judge Daniel B. Merritt, Jr. , disting uished the cases

disallowing statutory ad valorem tax exemption s fo r properties

owned by special tax districts or cities f rom the sovereign

i mmunity against ad valor em taxes enjoyed by real estate owned

by the State of Florida and its counties. In his ruling, Judge

Merritt noted that Florida law specifically makes leasehold

interests in governmental property subject to taxation, noting:

The Legislature defines leaseh old interests

as intangible personal property and, hence,

assessed by the Florida Department of

Revenue, when: (1) rent is due ; (2) the

property is used for commercial purposes;

(3) is not used for agriculture; (4) not

financed with revenue bonds, and; (5 ) the

lease is for an initial term of less than

100 years; §§196.199(2)(b), Florida Statutes

(2008), 199.023(1)(d), Florida Statutes

(2005), specifically preserved in Chapter

2006 - 312, Laws of Florida (2006). However,

see below for further analysis with r egard

to presumed ownership of property leased for

100 years or more as set forth in

§ 196.199(7), Florida Statutes .

22. Judge Merritt also discussed those instances where

ÐleasedÑ property might not qualify as State or county property

where lessees are t he Ðequitable owners , Ñ such as leaseholds of

100 years or more or where properties do not revert to the State

until the end of a lease term. In his order, however, Judge

Merritt noted that the tax immunity of the County was a

fundamental attribute of c oun ty property and held that Ðunder

th e terms of the Lease Agreements the Court concludes that HMA

has merely the right to use and possession and is not the

beneficial owner as a matter of law H ernando CountyÓs immune

property and improvements.Ñ Judge Merrit tÓ s O rder was affirmed

on appeal. School Board of Hernando County v. Mazourek , Case

No. H - 27 - CA - 2009 - 549 (5th Cir. 2009), per curiam affÓd , 2010 WL

4323055 (Fla. 5th DCA 2010)

23. In December, 2010, the Department notified the County

it had been select ed for a tax compliance audit under c hapter

212, Florida Statutes, Sales and Use Tax . The audit period was

from January 1, 2007 , through December 31, 2009.

24. The CountyÓs personnel were cordial and receptive

during the audit process and t he DepartmentÓ s auditor determined

that the boo ks and records kept by the County had adequate

intern al accounting controls in place and sufficient data

integrity .

25. Out of the approximately 19 ta x registration accounts

the County has with the Department, the Departme ntÓs auditor

found exception with only tax account #12445797, the tax

col lected and remitted under its lease with HMA.

26. In her record review, the DepartmentÓs auditor noticed

invoices and worksheets from the County to HMA, titled ÐPayment

in lieu of ta xes . Ñ

27. In examining the First Amendment to the Lease

Agreement , Section 3.3 ÐRental Payments , Ñ the DepartmentÓs

auditor determined that the County was not collecting sales tax

on a portion o f the rent received under that s ection.

28. The monthly tax return filed by the County under

account # 12445797 reflected that it was collecting and

remitting the sales tax calculated on the $300,000.00 annual

rent payment, but was not collecting and remitting sales tax

calculated on the additional payment s in lieu of taxes .

29. The DepartmentÓs auditor dete rmined the additional

payments, required under the lease and made as a condition of

occupancy, constituted a taxable transaction as additional rent

co nsideration . The amount of the additional payments, made

Ja nuary 2007 and March 2008, as revealed on the CountyÓs

ÐPaym ent in lieu of taxes worksheets , Ñ was multiplied by 6.5

percent to arrive at the additional tax amount due of

$78,710.17.

30. On December 9, 2010, the Department issued a Notice of

Intent to Mak e Audit Changes, Form DR 1215, advising the County

of its audit findings , which included $78,710.1 7 in tax es due ,

$14,526.37 in accrued interest through December 9, 2010, and a

$19,677.55 late payment p enalty.

31. On December 21, 2010, the Department iss ued its Notice

of P roposed Assessment, Form DR 831, showing an assessment of

$78,710.1 7 in tax and $14,707.51 in accrued interest , for a

total of $93,417.68 through December 21, 2010, with interest

accruing thereafter at the rate of $15.10 per diem. All p enalty

amounts were waived.

32. At the final hearing, the County argued that the

additional payments from HMA under the First Amendment to Lease

Agreement were not rent, but rather separate payments to pay for

County services. While the actual language u sed in the First

Amendment to Lease Agreement appears to unambiguously indicate

that the additional payments were rent, the County offered

additional evidence of facts and circumstances beyond the terms

of the lease itself in support of its argument that t he

additional payments were not rent. That evidence was admitted ,

without objection, and has been considered in determining the

intention of the parties to the lease with regard to the

additional payments.

33. In addition to evidence that the lease draft ers were

aware of certain cases decided on the issue of whether the

leased premises would be subject to ad valorem taxes, the County

offered the testimony of Mr. Mitchell regarding the ÐRental

PaymentsÑ language found in the First Amendment to Lease

Agreem ent. When asked whether there had been much negotiation

over the format or wording of the First Amendment to Lease

Agreement, Mr. Mitchell recalled:

No, there really wasnÓt other than, you

know, the concept Î what this amendment does

is what we had agreed to pay rental payment.

The rental payment was $300,000. And then,

we also had agreed independently just to go

ahead and pay the County for certain

services that they were providing to us.

And then we specified those. Those were

independent payments, n ot part of the rental

payment.

34. Mr. Mitchell further testified:

[B]asically, this property is free of ad

valorem tax. That is why the school board

filed their lawsuit because, of course, they

were not getting any of the ad valorem

taxes. So, the pro perty is free of payment

of ad valorem taxes. WeÓre paying our

300,000. It was very, very clear.

However, HMA felt that the County was

providing certain services, the fire

districts and whatnot. So, independent of

the rent, we paid this amount. If you read

the section dealing Î itÓs 3.3.[2], or

whatever it is, which IÓll read it to you,

it talks about, at the very end Î and t he y

did it for whatever reason the property

became taxable, you know, it effectively

became taxable and we had to pay full ad

valorem taxes on the property, then the

specialties Î these additional payments we

called, you know, would go away and they,

effectively, be part of rent. That 's why it

talks about it as such, and it was either

additional payment and/or rent.

35. Co ntrary t o Mr. MitchellÓs recollection, s ection 3.3.2

of the First Amendment to Lease Agreement does not speak in

terms of Ðadditional payment and/or rentÑ but rather states that

another payment would be made Ð either as rent or by virtue of a

payment to Her nando County of an amount ( 'Additional Payment' ) .

. ." .

36. Mr. Mitchell makes a valid point regarding the fact

that HMA was concerned about having to pay both the additional

payment and ad valorem taxes . Consistent with this concern, the

lease amendmen t made it clear that HMA would not have to pay the

additional amount if the property ever became subject to ad

valorem taxes.

37. Mr. MitchellÓs testimony in support of the CountyÓs

contention that HMAÓs payment i n lieu of taxes under the First

Amendment to Lease Agreement was not rent, however, is

unpersuasive.

38. Considering the extrinsic evidence offered by the

County, especially evidence of the parties concern that the

subject County property might someday be subject to ad valorem

taxes, together w ith the 1998 Lease, language negotiated for the

proposed relocation agreement , and the actual terms of the First

Amendment to Lease Agreement , it is found that the parties

intended the language under the "Rental Payments" section to

assure that HMA did not have to pay the additio nal amount twice.

The extrinsic evidence offered by the County, however, was

insufficient to support a finding that the parties intended to

differentiate between ÐrentÑ and the Ðadditional paymentÑ or

that, however characterized, t he payment in lieu of taxes was

not rent subject to assessment by the Department.

39. If the parties had wanted to provide language that

designated the payment in lieu of taxes as a payment for

services instead of rent they could have, as they did in the

Second Amendment to Lease Agre ement entered into on

September 13, 2011, just ten days prior to the final hearing in

this case. 2 / That Second Amendment to Lease Agreement changed

the name of s ection 3.3 from ÐRental Payments,Ñ as found in the

First Amendm ent, to ÐRent and Additional Payment for County

Services. Ñ Pertinent subsections of the Second Amendment

further provided:

3.3.2 Additional Payment for County

Services . The Lessee shall pay to Lessor on

an annual basis, as an additional payment

(ÐAdditi onal PaymentÑ) for services provided

by Hernando County [in its role as a service

provider and local taxing authority], . . .

* * *

The Additional Payment is not intended to

constitute ÐrentÑ and is not intended to

create an event subject to Florida sal es tax

Î but rather is intended to constitute a

separate payment for the provision of

services, payable to the local taxing

authority, as provided in § 212.031(1)(c),

Florida Statutes (which allow parties by

contractual arrangement to distinguish

between p ayments which are intended to be

taxable and payments which are intended to

be nontaxable), as this section may be

amended or renumbered from time to time.

CONCLUSIONS OF LAW

40. The Division of Administrative Hearings has

jurisdiction over the parties a nd the subject matter of this

proceeding pursuant to sections 72.011(1), 120.569, 120.57(1),

and 120.80, Florida Statutes.

41. Section 120 .80(14)(b)(2) provides that the

DepartmentÓs evidentiary burden in taxpa yer - contest proceedings ,

as in this case , i s Ð limited to a showing that an assessment has

been made against the taxpayer and the factual and legal grounds

upon which the applicable department made the assessment.Ñ

42. S ection 212.031(1)(c) , Florida Statute s , imposes tax

on the Ðto tal rent or licen se fee charged" and includes Ðbase

rent, percen tage rents, or similar charges." 3 /

43. Florida Administrative Code Rule 12A - 1.070(4)(b),

provides that the tax is paid upon Ðall consideration due and

payableÑ by the tenant or person occupying, using, or ent itled

to use any real property Ðfor the privilege of use, occupancy,

or the right to use or occupy.Ñ

44. The contractual requirements for payments by HMA as

lessee to the County as lessor under the lease for the use or

occupancy of the premises are found in s ection 3.3 entitled

"Rent" in the 1998 Lease and s ection 3.3 of the First Amendment

to Lease Agreement, entitled " Rental Payments. " 4 /

45. Pursuant to s ection 3.3 of the First Amendment to

Lease Agreement , f or each of the years at issue, two sepa rate

payments were made by HMA -- a fixed payment in the amount of

$300,000.00 annually, and an annual payment (the Ðadditional

paymentÑ) which var ied in amount as calculated on the total

amount of ad valorem taxes and special assessments that would

have be en d ue if the leased premises were not owned by the

County .

46. Arguably, the fact that the payments made under the

lease were made pursuant to a section entitled "Rental Payments"

would end the inquiry on the grounds that , under the plain terms

of the contra ct , the parties unambiguously agreed that those

payments were rent . As noted in Duval Motors Co. v. Rogers , 73

So. 3d 261, 266 - 67 (Fla. 1st DCA 2011):

Interpretation of a contract begins with its

plain language. [citation omitted] As a

general rule, evi dence outside the contract

language, which is known as parol evidence,

may be considered only when the contract

language contains a latent ambiguity.

[footnote and citations omitted] Parol

evidence includes a "verbal agreement or

other extrinsic evidence where such

agreement was made before or at the time of

the instrument in question." [citation

omitted] The parol evidence rule precludes

consideration of such evidence "to

contradict, vary, defeat, or modify a

complete and unambiguous written instrument ,

or to change, add to, or subtract from it,

or affect its construction." [citations

omitted]

47. Moreover, the fact that there is a merger clause in

the 1998 Lease ratified and confirmed by the First Amendment to

Lease Agreement 5/ is a persuasive indic ator that the parties

intended the terms of the lease to be integrated. 6 /

48. "A latent ambiguity exists 'where the language

employed is clear and intelligible and suggests but a single

meaning, but some extrinsic fact or extraneous evidence creates

a nec essity for interpretation or a choice among two or more

possible meanings.'" Duval , 73 So. 3d at 266, n. 2 ( quoting

Barnwell v. Miami - Dade Sch. Bd. , 48 So. 3d 144, 145 - 46 (Fla. 1st

DCA 2010) ) .

49 . As noted in the Findings of Fact above, extrinsic

evidenc e was considered in this proceeding without objection.

C onsidering that evidence, as well as language actually employed

by the parties both before and after execution of the First

Amendment to Lease Agreement, it is concluded that the payments

made by HMA pursuant to s ection 3.3 of the First Amendment to

Lease were rent subject to the tax imposed by the assessment

challenged in this proceeding.

50 . Parties to a contract are bound by the tax

consequences of their choice in structuring the transaction .

See , eg. , Dep ' t of Rev . v. McCoy Motel, Inc. , 302 So. 2d 440,

443 (Fla. 1 st DCA 1974) ("We may not concern ourselves with what

might have been have been had appellee handled this transaction

in a different way."). Under the facts and law in this case,

includi ng consideration of extrinsic evidence introduced at the

final hearing, t he Ðtotal rent or license fee chargedÑ and

taxable under s ection 212.031(1)(c), Florida Statute s , includes

all payments required by s ection 3.3 of the First Amendment to

Lease Agreeme nt. 7/

51 . In sum, the Department demonstrated the factual and

legal basis for its assessment, and the County failed to prove

that the assessment was wrong.

WHEREFORE, it is RECOMMENDED that Respondent enter a final

order sustaining the Notice of Proposed Assessment challenged in

this proceeding.

RECOMMENDATION

Based on the foregoing Findings of Facts and Conclusions of

Law, it is

RECOMMENDED that , consistent with the Notice of Proposed

Assessment dated December 21, 2010, and this Recommended Order ,

the De partment of Revenue enter a final order finding that

Petitioner owes tax and interest due totaling $93,417.68 through

December 21, 2010, with interest accruing thereafter at the rate

of $15.10 per diem , without penalties .

DONE AND ENTERED this 30th day of December, 2011 , in

Tallahassee, Leon County, Florida.

S

JAMES H. PETERSON, III

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 921 - 684 7

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 30th day of December , 201 1 .

ENDNOTES

1 / Unless otherwise indicated, all references to the Florida

Statutes or Florida Administrative Code are to those versions in

effect in 2010.

2 / Whether the Second Amendment to Lease Agreement is effective

in avoiding future taxation is beyond the scope of this

proceeding.

3 / The state tax rate under s ection 212.31(1)(c) is 6% . The

6.5% tax rate used in the assessment is composed of 6% state tax

and 0.5% county tax. See Exhibit R - 1, p. 5. The County has not

challenged t he 6.5% rate utilized by the Department.

4/ References to s ection 3.3 of the First Amendment to Lease

Agreement include its subsections 3.3.1 through 3 .3.2.4.

5 / See Findings of Fact 11 and 19, supra .

6 / "Although the existence of a merger clause does not per se

establish that the integration of an agreement is total, . . . a

merger clause is a highly persuasive statement that the parties

intended th e agreement to be totally integrated and generally

works to prevent a party from introducing parol evidence to vary

or contradict the written terms." Duval , 73 So. 3d at 267 - 68

(quoting Jenkins v. Eckerd Corp. , 913 So. 2d 43, 53 n.1 (Fla.

1st DCA 2005) ) .

7/ Notably, "[a]d valorem taxes paid by the tenant or other

person actually occupying, using, or entitled to use any real

property to the lessor or any other person on behalf of the

lessor, including transactions between affiliated entities, are

taxable. " Rule 12A - 11.070, Fla. Admin. Code. In other words,

whether payments are characterized as rent or as ad valorem

taxes paid by a lessee, they are taxable. Petitioner argues

that the parties to the lease created a third category -- a non -

taxable payment for county services characterized as payments in

lieu of taxes. The distinction defies logic, given the fac t

that ad valorem taxes are for county services, and the County

contends that the payments in lieu of taxes are to pay for

County services. While t he question of whether a payment in

lieu of taxes by separate agreement would avoid taxation is

beyond the scope of this proceeding, the language employed under

the First Amendment of Lease Agreement and the extrinsic

evidence surrounding that transaction presented in this case are

inadequate to support a conclusion that the parties to the First

Amendment to Lease Agreement intended a third category of

payments that were not subject to taxation.

COPIES FURNISHED :

John Mika, Esquire

Office of the Attorne y General

The Capitol, Plaza Level 01

Tallahassee, Florida 32399 - 1050

Jon Aaron Jouben, Esquire

Hernando County Attorney`s Office

20 North Main Street, Suite 462

Brooksville, Florida 34601

Nancy Terrel, Acting General Counsel

Department of Revenu e

The Carlton Building, Room 204

501 South Calhoun Street

Tallahassee, Florida 32399

Lisa Vickers, Executive Director

Department of Revenue

The Carlton Building, Room 1 04

501 South Calhoun Street

Tallahassee, Florida 32399

NOTICE OF RIGHT TO SUBMIT EX CEPTIONS

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.