12-000698 Rowes Supermarkets, Llc vs. Department Of Revenue Status: Closed Recommended Order on Tuesday, July 31, 2012.

Summary: Petitioner demonstrated that Respondent's assessment of additional sales and use taxes was deficient in several respects.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ROWE 'S SUPERMARKETS, LLC , )

)

Petitioner , )

)

vs. ) Case No. 12 - 0698

)

DEPARTMENT OF REVENUE , )

)

Respondent . )

)

RECOMMENDED ORDER

On May 30, 2012, a duly - noticed hearing was conducted via

video teleconferencing with sites in Tallahassee and

Jacksonville, Florida, before Administrative Law Judge Lisa

Shearer Nelson of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: C hristopher Rya n Maloney, Esquire

Foley & Lardner, LLP

One Independent Drive, Suite 1300

Jacksonville, Florida 32202 - 8700

For Respondent: Carrol Y. Cherry, Esquire

Office of the Attorney General

Revenue Litigation Bureau

The Capitol, Plaz a Level 01

Tallahassee, Florida 32399 - 1050

STATEMENT OF THE ISSUE

The issue to be determined is whether Petitioner is liable

for the sales and use tax, penalties , and interest assessed by

the Department of Revenue and if so, what amount?

PRELIMINARY STATEMENT

On March 10, 2010, Respondent, Florida Department of Revenue

("the Department" or "DOR") , issued a Notice of Proposed

Assessment ("NOPA") to Petitioner, Rowe's Supermarkets , LLC

(" Rowe's "), for sales and use tax in the amount of $137,225.27;

int erest through March 10, 2010, in the amount of $44,755.99; and

penalties of $59.70, plus interest to accrue after that date at a

rate of $26.32 per day. By letter dated May 6, 2010, Petitioner

filed a protest to dispute the NOPA.

On October 14, 2010, the Department issued a Notice of

Decision that sustained the NOPA in full. On December 6, 2010,

Petitioner timely filed a petition challenging the NOPA in its

entirety and requesting an administrative hearing. The

Department referred the case to the Divisio n of Administrative

Hearings on December 29, 2010, and it was initially docketed as

DOAH Case No. 10 - 10932 and assigned to Administrative Law Judge

Lawrence P. Stevenson . At the request of the parties, on

February 22, 2011, an Order Closing File was issue d with leave

for either party to move to reopen the case in the event

settlement could not be reached.

On February 16, 2012, the Department filed a Motion to

Reopen Division File, seeking to re - open the case for hearing.

The file was re - opened and dockete d as Case No. 12 - 0 698.

On April 2, 2012, the case was noticed for hearing by video

teleconference on May 30, 2012. On May 16, 2012, the case was

transferred to Administrative Law Judge Nelson and the hearing

proceeded as previously scheduled.

At hearin g, Petitioner presented the testimony of Robert

Rowe and Neil Newman, and Petitioner's Exhibits 3, 6, 7, 10, 12,

15 - 22 , and 25 - 26 were admitted into evidence. Petitioner's

Exhibits 23 - 24 were not admitted but were proffered. Respondent

presented the test imony of Delaine Arrington and Timothy Val

Burgess, and Respondent's Exhibits 1 - 1 6, 18 - 19, and 21 - 24 were

admitted into evidence. The parties filed a Joint Prehearing

Stipulation that included facts f o r which the parties stipulated

no proof was needed. W here relevant, those stipulated facts have

been incorporated into the Findings of Fact below.

On June 18, 2012, a one - volume Transcript was filed with the

Division. Both parties timely filed Proposed Recommended Orders

that have been carefully considered in the preparation of this

Recommended Order.

FINDING S OF FACT

1. Petitioner, Rowe's Supermarkets, LLC ("Petitioner" or

"Rowe ' s"), is a Florida limited liability company. Robert Rowe

was the president and primary shareholder in Rowe ' s.

2. Respondent, Department of Revenue ("DOR" or

"Respondent"), is an agency of the State of Florida authorized to

administer the tax laws of the State of Florida. §§ 20.21 and

213.51, Fla. Stat. (2011)

3. During the audit giving rise to this proceeding, Rowe's

ha d its p rincipal address at 5435 Blanding Boulevard,

Jacksonville, Florida. Currently, Rowe's is located at

1431 Riverplace Boulevard, Jacksonville, Florida.

4. Rowe's organized in Florida on May 4, 2005.

5. Rowe's was a sales and use tax dealer registered with

the Department to conduc t business in this state. It was in

business approximately four years.

6. Rowe's acquired sever al former Albertson's grocery

retail stores, including the adjacent liquor stores, in

Jacksonville, St. Augustine, and Orange Park, Fl orida. During

the audit period, Rowe's sold five stores with the adjacent

liquor stores.

7. Soon after beginning operation, Rowe's experienced

significant financial difficulties which ultimately led to its

demise. Its secured lender forced Rowe's to liq uidate assets

whenever possible, and all proceeds from the sale of the stores

were paid directl y into a locked account to Rowe ' s lender,

T e xtron Financial.

8 . On October 29, 2008, the Department issued to Rowe's a

Notification to Audit Books and Records , Form DR - 840, bearing

audit number 200048409, for sales and use tax, for the audit

period beginning October 1, 2005, and ending September 3 0, 2008.

9 . On August 14, 2009, the Department issued to Rowe's a

Notice of Intent to Make Audit Changes, form DR - 1 215, for sales

and use taxes, penalties and interest totaling $321,191.45, with

additional interest accruing at $53.71 per day.

10 . On August 20, 2009, Rowe's canceled its sales and use

tax Certificate of Registration.

1 1 . In a letter dated September 11, 2009, Rowe's requested

an audit conference. The requested audit conference was held

November 19, 2009.

1 2 . On January 8, 2010, the Department issued the taxpayer

a Notice of Intent to Make Audit Changes, form DR - 1215, Revision

#1, for sales a nd use tax, penalty and interest totaling

$180,435.61, with additional interest accruing at $25.32 per day.

1 3 . On March 10, 2010, t he Department issued a NOPA, which

indicated Rowe's owed $137,225.27 in sales and use tax;

$44,755.99 in interest through March 10, 20 10; and $59.70 in

penalties, with additional interest accruing at $26.32 per day.

Prior to issuance of the NOPA, the Department compromised

$34,246.663 in penalties, based upon reasonable cause.

1 4 . By letter dated May 6, 2010, Rowe's filed a protest to

dispute the proposed assessment. The letter stated:

I am submitting this informal protest on

behalf of Rowe's Supermarkets, LLC (RS) as

its past President. RS is no longer in

business and has not assets. Before this

audit began RS was unable to pay its bills.

Also, its line of credit, which was secured

by all of RS's assets, was in default and

had been called by the lender. RS was

unable to refinance the loan because of its

poor financial condition. As a result, it

sold all of its assets to a new comp any

which was able to obtain financing and used

the proceeds of that sale to repay its

secured loan. RS not only has no assets but

also is subject to an unsatisfied judgment

lien against it in the amount of

$ 324,936.33, which has been accruing

interest at 8% per year from August 25,

2009, the date the judgment was entered by

the Circuit Court here in Jacksonville.

Even if Supermarkets was still in

business and could pay its bills, we don't

think it should be assessed with these taxes

on the basis of the audit that was

conducted. The auditor's lack of

communication skills made it difficult for

us to understand what information she

needed. To the extent we understood her

requests, we made every effort to provide

her with the relevant information. But

bec ause most of the stores RS operated had

already been closed, the only repository for

obtaining accurate information was RS's

general ledger, which she declined to

review. She never explained why she made

the proposed adjustments. We still don't

know.

We did our best when RS was operating to

properly collect all sales taxes, we

reflected all of the sale tax collections in

the general ledger and we timely turned over

all of the those taxes to the department of

revenue, as is clear in the general ledger.

W e request that the proposed assessment be

dropped.

1 5 . The Department issued a Notice of Decision on

October 14, 2010, which sustained the assessment in full. In

issuing its Notice of Decision, the Department did not review any

issues related to the asse ssment other than doubt as to

collectability. With respect to this issue, the Department

stated, "[b]ased on our evaluation of all the factors of this

case, including the financial information, we have concluded that

it is not in the best interest of the State to accept your

offer."

1 6 . Petitioner's challenge to the assessment presents f ive

issues: 1) whether it was entitled to an exemption in section

212.12(14) for those additional taxes assessed for "rounding" up

to the whole cent as opposed to using t he bracket system in

section 212.12(9); 2) whether the Department's assessment of

additional taxes for expenses was erroneous where it was based on

a sampling plan not presented to or agreed to by the taxpayer; 3)

whether the additional tax on liquor sales was based on an

incorrect application of Florida Administrative Code Rule 12A -

1.057(3)(a); 4) whether the Department violated the Taxpayer's

Bill of Rights ; and whether the Department was correct in

determining that compromise of the assessment based on

c ollectability was not in the best interest of the state . Each

issue is treated separately below.

The Exemption pursuant to section 212.12(14)

1 7 . Section 212.12(9) and (10), Florida Statutes, require s

that sales taxes be paid on a "bracket system," a nd prescribes

the amount of tax due for each portion of a dollar. S ubsection

(9) provides the tax brackets for those counties, such as St.

Johns, which do not have a discretionary sales surtax and for

which the tax rate is 6 percent. Subsection (1 0 ) prov ides the

brackets for those counties, such as Duval and Clay, where a

discretionary sales surtax of one percent has been adopted,

making the sales - tax rate 7 percent.

18. Section 212.12(14) provides a "safe harbor" from

additional assessment of taxes for those dealers who fail to

apply the tax brackets required by section 212.12. The taxpayer

is not assessed additional taxes, penalty , and interest based on

the failure to apply the bracket system if it meet s three

requirements: that it acted in a good fai th belief that rounding

was the proper method of determining the amount of tax due; if it

timely reported and remitted all taxes collected on each taxable

transaction; and if the taxpayer agrees in writing to future

compliance with the law and rules concer ning brackets applicable

to the dealer's transactions.

19. It is undisputed that Rowe's was not using the bracket

system to calculate and collect sales taxes. The point - of - sale

cash register system Rowe's purchased when opening its business

was represent ed to Petitioner as compliant with Florida

requirements when in fact it was not.

20. The Department's auditor, De laine Arrington, determined

that assessment of additional taxes was appropriate because she

believed that Rowe's had not timely reported and remitted all

taxes collected on each taxable transaction, and that Rowe's had

not agreed in writing to future compliance with respect to the

bracketing system.

21. The sales tax records for Rowe's were based upon the

meshing of three different computer sy stems. First, there was a

point - of - sale system at each cash register which collected the

data, such as sales amounts, taxable sales, and sales tax

collected, for each individual transaction. A software system

called BR Data would then "pull" the sales da ta from the

individual cash registers to create the cumulative sales register

reports for each store. The cumulative data from BR Data was

then automatically imported into Petitioner's accounting

software, MAS 90, to populate the figures in Rowe ' s general

ledger.

22. Taxes collected were recorded in the general ledger

under the credit column. Th e data in this column was transmitted

from BR Data. It could not be adjusted manually, although other

columns in the general ledger could be.

23. There were som etimes problems with the transmission of

information from BR Data, which generally occurred where there

was a power surge or a thunderstorm that would affect the

communication of information. As a result of these communication

problems, there were times t hat the sales figure transmitted

would be double or triple the actual sales for that day. When

such an error was discovered, Rowe's staff would contact BR Data

and have the report rebuilt, and the general ledger entry would

be corrected.

24. Rowe's infor med Ms. Arrington that there had been

numerous problems with the exporting process and the resulting

need to correct journal entries. Ms. Arrington acknowledged at

hearing that she had been advised that due to these problems, the

sales figures were someti mes doubled or tripled.

25. Ms. Arrington reviewed the general sales ledger, the

cumulative sales register reports, and the sales and use tax

returns for the audit period. According to her review, there

were three days in August 2006 where the amount of collected tax

reflected in the cumulative sales register was higher than what

was reflected in the general ledger. Based upon this review, she

assessed $1,193.98 in additional sales taxes.

26. For August 1, 2006, the general ledger indicated that

$263.48 in sales tax was collected. The cumulative sales report

reflected that $790.44 in sales tax was collected. This second

number in the cumulative sales report is exactly three times the

amount reflected in the general ledger. The difference between

the c umulative sales report amount and the general ledger amount

is $526.96.

27. For August 2, 2006, the general ledger indicated that

$277.04 was collected. The cumulative sales report reflected

that $554.08 in sales tax was collected, an amount exactly twic e

the amount recorded in the general ledger. The difference

between the two documents is $277.04.

28. For August 11, 2006, the general ledger indicated that

$389.98 in sales tax was collected. The cumulative sales report

reflected that $779.96 was colle cted, an amount exactly twice the

amount recorded in the general ledger. The difference between

the two documents is $389.98.

29. The difference in the amount s reflected in the general

ledger (which Rowe's claims is the more accurate document), and

the cumulative sales register (which Ms. Arrington relied upon),

is $1,193.98, the amount of additional tax assessed for this

item .

30. Ms. Arrington acknowledged at hearing that she credited

the cumulative s ales register numbers over Rowe ' s general ledger

d ocuments, and that she knew during the audit that there were

issues relating to BR Data that occurred during the audit period.

The only document upon which she relied was the cumulative sales

register.

31. Given the credible testimony by Robert Rowe an d Neil

Newman regarding the process and the problems encountered with

the interface of data, and the fact that in each instance, the

difference was an exact multiple of the amount reflected in the

general ledger, the greater weight of the evidence presente d at

hearing supports the finding that the general ledger represents

the amount of sales tax actually collected and paid by Rowe's .

32. This finding means that not only is the assessment of

additional sales tax for August 2006, in error, but also that

m eans that Rowe's met the second requirement for avoiding the

assessment of additional taxes under section 212.12(14) for

failing to use the bracket system.

33. Ms. Arrington also found that Rowe's had not agreed in

writing to future compliance with the br acket system.

34. On or about November 19, 2009, in conjunction with the

Audit Conference, Ms. Arrington prepared an Agreement for Future

Compliance (Agreement) and provided it to Mr. Rowe for signature.

The text of the Agreement, which is on DOR lette rhead and

specifically references the Sales and Use Tax Audit number for

Rowe's , states:

The following dealer had demonstrated the

proper actions required by Section

212.12(14),(a) and (b), F.S. (see

attachment), and agree [sic] to sign the

following sug gested form to compliance with

the laws concerning brackets applicable to

the dealer's transactions in the future.

Rowe's Supermarkets, LLC - BP#2134130,

succeeded by Rowe's IGA, LLC - 3082649

agrees to future compliance with the laws

and rules concerning the proper application

of the tax bracket system to the dealer's

transactions.

35. Mr. Rowe did not sign the Agreement at the Audit

Conference because he wanted to be able to confirm that the point

of sale system his store operated could be properly pr ogrammed to

comply with the bracket system before signing a document stating

he would comply. After discussions with both the vendor and

Ms. Arrington, and making sure the system was in fact operating in

compliance with the requirement, Mr. Rowe signed th e Agreement on

December 7, 2009, and returned it to the Department.

36. Ms. Arrington did not recall receiving the Agreement,

but also admitted she had no specific memory as to whether she

received it. Her Case Activity Record indicates that on

Decembe r 3, 2009, she spoke with Mr. Rowe about whether he was

able to input the brackets in his point - of - sale system, and that

he indicated he was able to do so.

37. The greater weight of the evidence supports the finding

that Mr. Rowe executed and returned the Agreement , and it is so

found.

The Use Tax Assessment Based on a Sampling Plan

38. Section 212.12 allows the Department to use a sample

from the taxpayer's records and project audit findings from the

sample to the entire audit period where the reco rds of the

taxpayer are "adequate but voluminous in nature and substance."

The statute, which is discussed in more detail in the Conclusions

of Law, contemplates the use of a sampling plan agreed to by the

taxpayer, and in the absence of an agreement, the taxpayer's right

to have a review by the Department's Executive Director.

39. The work papers to the Notice of Intent to Make Audit

Changes dated January 8, 2010, include a sampling plan that runs

from January 1, 2006, to December 31, 2006 for the calcu lation of

use tax for purchases by Rowe's where sales tax was not collected

by the vendor .

40. Ms. Arrington reviewed Rowe's ' records for expense

purchases for 2006 to determine the total amount of additional tax

due for that period. She then took the t otal additional tax on

expenses for that period, i.e., $14,981.26, and divided it by 12

to obtain a monthly average additional tax of $1,248.44. She then

applied that number to the entire 36 - month audit period to

determine a total assessment of additional tax for expense

purchases of $44,943.84.

41. Ms. Arrington testified that at the initial audit

conference, she discussed different audit techniques in terms of

sampling. However, a specific sampling plan was not discussed

with Mr. Rowe and no Sampling Agreement was presented to him. No

sampling plan was reviewed by the Executive Director.

Ms. Arrington did not tell Mr. Rowe that 2006 would be the year

used as the sample.

42. Mr. Rowe never would have agreed to the use of 2006 as a

sampling plan, because it would not be representative of the

expenses incurred during the audit period. Using 2006 as a

sampling period did not take into account the store closures

during the audit period, and the concomitant reduction in

expenses.

43. Rowe's closed t wo grocery stores by March 2006, and

operated only four stores for the remaining three quarters of the

year. A third store was closed in January 2007, a fourth in May

2007 and a fifth in 2008, leaving only one store open for the

entire audit period. All of the liquor stores were also closed

during the audit period, the last one being sold in May 2008.

44. Ms. Arrington knew that Rowe's had closed almost all of

its stores during the audit period, and included information

regarding the closings in her Sta ndard Audit Report. She

acknowledged at hearing that as the stores decreased, the expenses

related to those stores would also most likely decrease.

45. For the 12 months of 2006, the Department determined

that an additional tax of $14,981.26 would be du e, based on

purchases of $253,637.22. There has been no evidence presented to

rebut the accuracy of the tax assessment for these 2006 purchases.

Petitioner presented evidence establishing that, for the 21 months

of the audit period following 2006, Rowe's made purchases from the

same vendors reflected in the 2006 sample of only $51,073.72,

which would result in additional taxes of $3,575.16. No evidence

was presented by either party as to whether there were any other

purchases from other vendors for which taxes had not been paid.

The difference between the use tax assessed against Rowe's by

using the sampling plan and taxes due based on the actual

purchases demonstrated at hearing is $22,642.08.

46. In addition, there was one vendor, Advo, Inc. (Advo ),

which accounted for a significant percentage of the tax due based

on the sampling plan . While the audit sample period was for

twelve months, payments to Advo for a seven - month period accounted

for approximately 58% of the total additional taxes due for

ex penses. There were no purchases from Advo a fter July 2006

because of Rowe's shrinking assets and inability to pay for direct

advertising. Further, 15 of the 23 vendors reflected in the

sample period from whom purchases were made had no sales to Rowe's

fr om January 2007 through September 2008.

47. The Department's work papers indicate that, within the

sample year, the purchases tapered off significantly as the year

progressed. Given the known closure of five grocery stores and

six liquor stores during t he audit period , using a time period

where the most stores were open is not representative of the

expenses experienced by Petitioner, and use of the sampling plan

to which the taxpayer had not agreed was inappropriate, and led to

an inflated assessment of additional taxes.

The Effective Tax Rate at the Liquor Stores

48. During the audit period, Rowe's operated package liquor

stores adjacent to the grocery stores. By the time the audit

commenced, Rowe's no longer owned any of the liquor stores, and no

lo nger had the cash register tapes from the liquor stores.

Because of the lack of cash register tapes, the auditor was unable

to determine the effective tax rate Rowe's was collecting. She

did not, however, ask Rowe's what rate was collected. A review of

the sales tax returns indicates that it remitted a flat rate of 6

or 7 percent , depending on the county. Th e s e rate s w ere

consistent with what Rowe's was collecting for the grocery store

sales , and cash register tapes were available from the grocery

store .

49. Ms. Arrington applied the tax rates identified in

Florida Administrative Code Rules 12A - 1.057(3)(a) and 12A -

15.012(2)(a), both of which identify the rate that should be

collected where the dealer sells package goods but does not sell

mixed drinks; does not separately itemize the sales price and the

tax; and does not put the public on notice that tax is included in

the total charge.

50. The work papers paraphrase but do not quote the rules.

With respect to the liquor store in St. Johns County, the work

papers state: "[a]ccording to Rule 12A - 1.057(3)(a), F.A.C., when

the dealer is located in a county with no surtax and the public

has not been put on notice through the posting of price lists or

signs prominently displayed throughout the establishmen t that the

tax is included in the total charge, package stores which sell no

mixed drinks shall remit tax at the effective rate of .0635."

51. With respect to the liquor stores in Clay and Duval

Counties, the work papers state: "[a]ccording to Rule 12 A -

15.012(2)(a)1., F.A.C., when a dealer, located in a county

imposing a 1% surtax, sells package goods but does not sell mixed

drinks and does not put the public on notice that tax is included

in the total charge, the dealer is required to remit tax at the

effective tax rate of .0730 . "

52. The Department's auditor made the assumption that tax

was not separately itemized for package store sales and assessed

the additional tax accordingly. She did not ask the taxpayer

whether this was the case and did not a sk about signage in the

package stores that were no longer owned by Rowe's .

53. Mr. Rowe t estified that the same point - of - sale program

was used for the liquor stores as were used for the adjacent

grocery stores. That program separately identified the ta x due.

His testimony is unrebutted and is credited.

The Taxpayer's Bill of Rights

54. At hearing, Petitioner took the position that the

Department violated the Taxpayer's Bill of Rights as stated in

section 213.015(5), by its failure to provide P etitioner with a

"narrative description which explains the basis of audit changes,

proposed assessments, assessments."

55. In its Proposed Recommended Order, however, Petitioner

candidly acknowledged that the evidence did not support a finding

consiste nt with Petitioner's position. In light of this

concession, no further findings of fact are necessary with respect

to this issue.

Collectibility

56. Rowe's asserted in its challenge that it was unable to

pay any taxes assessed because it was no longer in business and no

longer had any assets.

57. The Department declined to exercise its discretion to

compromise the tax assessment based on collectability. While not

specifically stated in its Notice of Decision, this position was

apparently based upon the belief that the taxes could be paid by

Rowe's IGA, LLC, to whom the assets of Rowe's was sold, and which

shares the same managing member, Robert Rowe.

5 8 . The two companies share a managing member and one common

location , which Rowe's sold to Rowe's IGA . However, no evidence

was presented regarding the specifics of the assets sold to Rowe's

IGA, and the only evidence presented indicates that any proceeds

from the sale went to pay the secured lender for Rowe's , Textron

Financial. Other than the invo lvement of Robert Rowe, no

connection between the companies was established.

5 9 . Rowe's provided to the Department the copy of a judgment

against it for $324,963.33, which bears interest at a rate of 8%

annually . The Department did not identify any asse ts from which

either the assessment or the judgment could be paid.

CONCLUSIONS OF LAW

60 . The Division of Administrative Hearings has

jurisdiction over the subject matter and the parties to this

action in accordance with sections 120.569 and 120.57(1), Fl orida

Statutes (2011) .

6 1 . The Department is the state agency authorized to

conduct audits relating to sales and use tax imposed pursuant to

chapter 212, Florida Statutes, and to request information of a

dealer to ascertain the dealer's liability, if any. § 212.13,

Fla. Stat.

6 2 . In these proceedings, the Department bears the initial

burden to demonstrate that the assessment has been made against

the taxpayer, in this case against Rowe's , and the factual and

legal grounds upon which the Department made t he assessment. The

burden then shifts to the Petitioner to demonstrate by a

preponderance of the evidence that the assessment is incorrect.

§ 120.80(14)(b)(2), Fla. Stat.; IPC Sports, Inc. v. Dep't of

Revenue , 829 So. 2d 330 (Fla. 3d DCA 2002). 1/

6 3 . In tax assessment cases, tax laws are strictly

construed in favor of the taxpayer and against the government.

Maas Brothers, Inc. v. Dickinson , 195 So. 2d 193, 198 (Fla.

1967); Allied Marine Group v. Dep't of Revenue , 701 So 2d 630,

631 (Fla. 4th DCA 1997).

6 4 . Petitioner's first assertion concerns the assessment of

additional tax for failure to comply with the bracket system

contained in section 212.12(9) and (10). It contends that it was

entitled to the safe harbor contained in section 212.12(14),

which states:

(14 ) If it is determined upon audit that a

dealer has collected and remitted taxes by

applying the applicable tax rate to each

transaction as described in subsection (9)

and rounding the tax due to the nearest

whole cent rather than applying the

a ppropriate bracket system provided by law

or department rule, the dealer shall not be

held liable for additional tax, penalty, and

interest resulting from such failure if:

(a ) The dealer acted in a good faith belief

that rounding to the nearest whole cen t was

the proper method of determining the amount

of tax due on each taxable transaction.

(b ) The dealer timely reported and remitted

all taxes collected on each taxable

transaction.

(c) The dealer agrees in writing to future

compliance with the laws and rules

concerning brackets applicable to the

dealerÓs transactions.

6 5 . The Department did not dispute that Rowe's was acting

in good faith. It contended that Petitioner did not meet the

second and third requirements of subsection (14), because it did

not remit all sales tax collected in August 2006, and did not

sign a compliance agreement. However, as found in findings of

fact 31 - 32, the preponderance of the evidence indicates that

Petitioner did in fact remit all sales tax collected for the

month of August 2006. Therefore, not only was the assessment of

additional taxes, penalty , and interest for August 2006 in error,

but the determination that Petitioner had not remitted all taxes

collected as required for the safe harbor provision also in

error.

6 6. Likewise, the preponderance of the evidence

demonstrated that Petitioner did complete and return the

Agreement to comply with the bracket system. Accordingly,

Petitioner met the requirements of section 212.12(14), and the

assessment of additional taxe s, interest , and penalties for

failing to comply with the bracket system was in error.

6 7 . The assessment of additional use taxes for expense

purchases by Petitioner is based on a sampling plan used by the

Department. The use of sampling plans is authori zed by section

212.12( 6)(c), which provides:

(c)1 . If the records of a dealer are

adequate but voluminous in nature and

substance, the department may sample such

records and project the audit findings

derived therefrom over the entire audit

period to dete rmine the proportion that

taxable retail sales bear to total retail

sales or the proportion that taxable

purchases bear to total purchases. In order

to conduct such a sample, the department must

first make a good faith effort to reach an

agreement with th e dealer, which agreement

provides for the means and methods to be used

in the sampling process. In the event that

no agreement is reached, the dealer is

entitled to a review by the executive

director. . . .

6 8 . The evidence presented is very clear that the

Department did not make a good faith effort to reach an agreement

with Rowe's regarding the sampling plan. The evidence indicates

that the sampling agreement was never even presented to

Petitioner. Inasmuch as section 212.12(6)(c)1. makes a goo d

faith effort to reach an agreement a condition precedent for

employing a sampling plan, the Department was not entitled to use

the sampling plan to evaluate expense purchases in this case.

6 9 . The Department argues that Rowe's did not ask for a

review b y the E xecutive D irector, and therefore waived any

challenge to the sampling plan. However, when the Department

does not present a sampling agreement to the taxpayer in the

first place, there is nothing for the taxpayer to ask the

Executive Director to re view. The Department is affirmatively

required to make a good faith effort to reach an agreement with

the taxpayer, which it clearly did not do here.

70 . Moreover, the particular sampling plan used in this

case is fundamentally flawed, given the known condition of the

taxpayer during the audit period. At the beginning of the audit

period, Rowe's had six grocery stores and six adjacent liquor

stores. The Department was aware that all but one grocery store

and all of the liquor stores were sold. Under these

circumstances, it was virtually guaranteed that expenses from

2006 would not be a representative sample of the audit period.

Accordingly, while the Department established that an assessment

had been made, it did not establish a factual and legal bas is for

using the sampling plan. Therefore, the application of the

additional taxes due in relation to expense purchases for 2006

cannot be applied to the entire audit period.

71 . Rowe's presented evidence of what the assessment might

be, assuming purchas es for the remainder of the audit period from

the vendors used in 2006 were taxable purchases for which taxes

are due. It did so in order to show that the amount assessed was

grossly inflated compared to actual purchases, which it is.

However, the Depart ment has not reviewed those records and made

no assessment based on those records. While it presented a

factual and legal basis for the use taxes due on expense

purchases made for the 12 - month period comprising 2006, and the

assessment for those expenses should be sustained, DOR has not

met its burden with respect to the remainder of the audit period

to show the factual and legal basis for the assessment related to

expense purchases.

7 2 . Petitioner also disputes the application of a higher

rate of sales tax on liquor sales in the liquor stores. Rowe's

collected and remitted a flat 6 or 7 percent sales tax, depending

on the county. DOR assessed additional taxes based up on rules

12A - 1.057 (3) and 12A - 15.012 (2)(a) . For St. Johns County, the

Department app lied the provisions of rule 12A - 1.057(3)(a). The

rule provides in pertinent part:

12A - 1.057 Alcoholic and Malt Beverages.

(1) Alcoholic beverages, including beer,

ale, and wine are taxable. The dealer shall

add the tax to the sale price (including any

other state and federal taxes) of each sale

and he shall not advertise or hold out to

the public in any manner that he will absorb

any part of the tax or that he will relieve

the purchaser from the payment thereof.

However, nothing herein contained shall be

construed as prohibiting a dealer from

setting his prices on the sale of alcoholic

beverages in such a manner as to avoid the

handling of pennies; PROVIDED, HOWEVER, that

each and every one of the dealerÓs price

lists shall show the price of the bevera ge

and the amount of tax due thereon as

separate items. For example, a dealerÓs

price may list a bottle of beer for 47¢,

sales tax 3¢, total 50¢; a glass of wine for

80¢ plus sales tax of 5¢, total 85¢; or a

cocktail for $1.69 plus sales tax of 11¢,

total $1.80.

* * *

(3) In some instances, it may be

impractical for a dealer to separately

record the sales price of the beverage and

the tax thereon. In such cases, for the

privilege of deviating from the requirement

of subsection (1) above, a dealer shall

remit tax in accordance with one of the

methods outlined below, and his records

must substantiate the method so elected .

(a) When the public has not been put on

notice through the posting of price lists

or signs prominently displayed throughout

the establi shment that the tax is included

in the total charge, package stores which

sell no mixed drinks shall remit tax at

rate of 6.35 percent of their total

receipts. Dealers who sell mixed drinks or

a combination of mixed drinks and package

goods shall remit the tax at the rate of

6.59 percent of their total receipts.

(Emph a sis supplied.)

7 3 . The auditor assumed that the provisions of subsection

(3) (a) were applicable, and applied a 6.35 percent rate to the

liquor sales in St. Johns County. She did so because she did not

have the sales tapes from the liquor stores. However, she had no

factual basis for determining that sales tax was not separately

recorded from the sales price, especially where she had access to

the grocery sales receipts, which used the same point - of - sale

system and separately itemized the sales price and the tax to be

paid. It is only where those items are not separately itemized

that the provisions of subsection (3) should come into play.

7 4 . Clay and Duval Counties both assess a surta x on liquor

sales . Accordingly, the Department applied the provisions of rule

12A - 15.012(2)(a ). The rule provides in pertinent part;

12A - 15.012 Alcoholic and Malt Beverages.

(1)(a ) Alcoholic beverages, including beer,

ale, and wine, are subject to surt ax at the

rate imposed by the county where the

business is located. The dealer shall add

the sales tax, plus the applicable surtax,

to the sales price of each sale. The dealer

is not permitted to advertise or hold out to

the public in any manner that the dealer

will absorb any part of the sales tax or

surtax due or that the dealer will relieve

the purchaser from the payment of sales tax

or surtax.

(b) In some instances, it may be

impractical for dealers who sell package

goods, mixed drinks, or a combinat ion of

package goods and mixed drinks to separately

itemize the sales price of the beverage and

the tax. In such cases, a dealer is required

to remit tax in accordance with one of the

methods outlined below, and the dealerÓs

records must substantiate the m ethod chosen .

(2) DEALERS WHO DO NOT SELL MIXED DRINKS.

(a)1. When a dealer, located in a county

imposing a surtax, who sells package goods

but does not sell mixed drinks, does not put

the public on notice that tax is included in

the total charge, the de aler is required to

remit tax at the following rates. The

dealer should multiply the total gross

receipts derived from the sale of package

goods by the following effective tax rates

to compute the amount of sales tax, plus

surtax, due. (Emphasis supplied .)

7 5 . As with the sales in St. Johns County, the auditor

assumed that Rowe's did not separately itemize the liquor sales

price and the corresponding tax. As with the sales in St. Johns

County, the liquor st ores in Clay and Duval Counties shared the

same point - of - sale system as the grocery stores. The auditor had

no factual basis for assuming that sales tax was not separately

stated, which means there is no factual basis for applying the

higher rate identified in subsection (2) of the rule.

7 6 . Wit hout application of the higher rates used by the

auditor, the bracket system in section 212.12(10) discussed

earlier would still apply. However, Rowe's would be entitled to

the safe harbor in section 212.12(14) in that it acted in good

faith; remitted all taxes collected ; and signed an agreement for

future compliance. Therefore, the assessment of additional taxes,

penalty and interest on the sale of liquor at the stores in

St. Johns, Clay and Duval County was not warranted.

7 7 . Rowe's also alleged that the Department violated the

Taxpayer's Bill of Rights, as stated in section 213.015(5), by its

failure to provide Petitioner with a "narrative description which

explains the basis of audit changes, proposed assessments,

assessments." In its Proposed Recommended Order, Petitioner

concedes that the evidence at hearing would not support such a

conclusion.

7 8 . Finally, Rowe's challenged the assessment based on the

inability to pay. Section 213.21(3)(a), Florida Statutes,

provides in pertinent part th at "[a] taxpayerÓs liability for any

tax or interest specified in s. 72.011(1) may be compromised by

the department upon the grounds of doubt as to liability for or

collectibility of such tax or interest. " Florida Administrative

Code Rule 12 - 13.006, which implements section 213.21(3), provides:

Tax or interest or both will be compromised

or settled on the grounds of Ðdoubt as to

collectibilityÑ when it is determined that

the financial status of the taxpayer is such

that it is in the best interests of the

S tate 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 pur suant to the procedures in Rule

12 - 13.004, F.A.C .

7 9 . Ru le 12 - 13.004, in turn, provides the delegation

structure for what officials have the authority to compromise tax

liabilities at different dollar amounts.

80 . The ability to compromise a tax asses sment pursuant to

section 213.21(3)(a) is discretionary. In reaching that

discretionary decision the Department looks to whether full

payment of the obligation is "highly doubtful and there appears to

be an advantage in having the case . . . closed." The Department

declined to make a finding here, apparently based on the fact that

Robert Rowe was a shareholder in Rowe's and is now a managing

member in Rowe's IGA.

81 . The record in this case does not demonstrate that there

are any assets from which t he remaining tax assessment could be

paid. However, the use of the Department's discretion to

compromise the debt is premised on two factors: inability to pay

and the best interest of the State. The undersigned is not

inclined to state that the Departme nt abused its discretion.

However, it is recommended that it reconsider its decision to

compromise the remaining debt based on the record presented in

this case.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is RECOMMEN DED that the Department of Revenue enter a

Final Order that:

1. Reduces the Department's assessment for additional

taxes, penalties , and interest by any amounts attributable to the

failure to comply with the sales bracket system at Petitioner's

grocery st ores;

2. Reduces the Department's assessment for additional use

taxes, penalties , and interest by any amounts attributable to the

failure to remit all taxes due for the month of August 2006;

3. Reduces the Department's assessment for additional use

ta xes, penalties , and interest by any amounts attributable to

expense purchases for the period January 2007 through September

2008;

4. Sustains the assessment for additional use tax,

penalties , and interest for expense purchases in calendar year

2006;

5. Reduces the Department's assessment for additional use

taxes, penalties , and interest by any amounts attributable to the

asserted basis that Petitioner should have collected tax at a

higher effective tax rate at its liquor stores based upon the

applicatio n of rules 12A - 1.057(3)(a) or 1 2 A - 15.012(2)(a);

6. Sustains the Department's assessment for additional

sales tax, penalties , and interest against Petitioner for failure

to pay tax on certain capital asset purchases identified in the

audit;

7. Sustains th e Department's assessment for additional

sales tax, penalties , and interest against Petitioner for failure

to pay sales tax on commercial rent payments under certain of

Petitioner's store leases identified in the audit; and

8. Sustains the Department's assessment for additional

sales tax, penalties , and interest against Petitioner for failure

to pay sales tax on Petitioner's payment of ad valorem taxes

under certain of Petitioner's store leases identified in the

audit.

In addition, it is Recommended that the Department

reconsider its decision as to whether the remaining assessment is

collectible , and whether it is in the best interest of the state

to compromise the assessment, based on the record contained in

this proceeding.

DONE AND ENTERED this 31st d ay of July , 2012, in

Tallahassee, Leon County, Florida.

S

LISA SHEARER NELSON

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 92 1 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 31st day of Ju l y, 2012.

ENDNOTE

1/ The Department asserts in its Proposed Recommended Order that

the provisions of subsection 212.12(5)(b) apply, making i ts

assessment prima facie correct, with the burden to show otherwise

resting on the dealer. However, section 212.12(5)(b) applies

when a dealer fails to make its records available for inspection

" so that no audit or examination has been made of the books and

records. " That is not the case here. In any event, even under

these circumstances, Petitioner has met this burden with respect

to the issues discussed above.

COPIES FURNISHED:

Carrol Y. Cherry, Esquire

Office of the Attorney General

The Capitol, PL - 01

Revenue Litigation Bureau

Tallahassee, Florida 32399

[e-mail]

Marshall Stranburg, Esquire

Department of Revenue

The Carlton Building, Room 204

501 South Calhoun Street

Tallahassee, Florida 32314 - 6668

Christopher Ryan Maloney, Esquire

Foley and Lardner

Suite 1300

1 Independent Drive

Jacksonville, Florida 32202

[e-mail]

Nancy Terrel, General Counsel

Department of Revenue

Post Office Box 6668

Tallahassee, Florida 32314 - 6668

Lisa Vickers, Executive Director

Depart ment of Revenue

Post Office Box 6668

Tallahassee, Florida 32314 - 6668

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 ex ceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.