16-003105RU Global Hookah Distributors, Inc. vs. Department Of Business And Professional Regulation, Division Of Alcoholic Beverages And Tobacco Status: Closed DOAH Final Order on Tuesday, September 25, 2018.

Summary: There is no proof that the Department of Business and Professional Regulation, Division of Alcoholic Beverages and Tobacco, relied upon an unadopted rule.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

GLOBAL HOOKAH DISTRIBUTORS,

INC.,

Petitioner,

vs. Case No. 16 - 3 1 0 5 RU

DEPARTMENT OF BUSINESS AND

PROFESSIONAL REGULATION,

DIVISION OF ALCOHOLIC BEVERAGES

AND TOBACCO,

Respondent.

___________________________ ____/

FINAL ORDER

Pursuant to notice to all parties, a final hearing was

conducted in this case on August 18 , 2016 , via video

teleconference with sites in Tallahassee and Lauderdale Lakes ,

Florida, before Administrative Law Jud ge R. Bruce McKibben of

the D ivision of Administrative Hearings (ÐDOAHÑ) . The parties

were represented as set forth below.

APPEARANCES

For Petitioner: Gerald J. Donnini, II, Esquire

Joseph C. Moffa, Esquire

James F. McAuley, Esquire

Jonathan W. Taylor, Esquire

Moffa, Sutton and Donnini, P.A.

One Financial Plaza, Suite 2202

100 Southeast Third Avenue,

Fort Lauderdale, Florida 33394

For Respondent: Elizabeth A. Teegen, Esquire

Office of the Attorney Ge neral

The Capitol, Plaza Level 01

Tallahassee, Florida 32399 - 1050

STATEMENT OF THE ISSUE

The issue in this case is whether Respondent, Department of

Business and Professional Regulation, Division of Alcoholic

Beverages and Tobacco (the ÐDepa rtmentÑ) , is operating under an

unadopted rule in its application of sections 210.276 and

210.30, Florida Statutes, which impose a surcharge and an excise

tax, respectively, on tobacco products other than cigarettes or

cigars, commonly known as other tobac co products (ÐOTPÑ), by

utilization of Ðbest available informationÑ in lieu of actual

documents submitted by the taxpayer when performing audits to

establish a tax assessment .

Unless otherwise stated herein, all references to Florida

Statutes shall be to the 201 6 codification.

PRELIMINARY STATEMENT

On June 6, 2016 , Petitioner, Global Hookah Distributors ,

Inc. (Ð Global Hookah Ñ), timely filed a Petition to Determine

Invalidity of Agency Statements. Petitioner has standing to

initiate this proceeding, and D OAH has jurisdiction over the

parties and subject matter in this consolidated proceeding.

The instant case was consolidated with DOAH Case No. 15 -

6901 for the purposes of conducting a final hearing. A separate

and distinct Recommended Order in that case i s being issu ed

contemporaneously with this F inal O rder.

Global Hookah alleges in its Petition that the Department

is creating OTP tax assessments by applying unlawful and

unpromulgated policies in which the Department seeks to

artificially estimate the wholesale sales price of a tobacco

product. Specifically, the Department used something it deemed

the Ðbest available informationÑ to make the assessment .

At the final hearing, Global Hookah called one witness :

Brennan Appel, owner of Global Hookah . Gl obal Hookah Ó s Exhibits

4 through 2 2 , 31 through 34, 37, 38, 40 through 42, and

53 through 55 were admitted into evidence. The Department

called one witness: Julio Cesar Torres, senior tax audit

administrator. The DepartmentÓs E xhibits 1 through 6 were

a dmitted into evidence .

The parties advised that a transcript of the final hearing

would be ordered. The parties were , by rule, allowed 10 days

from the f iling of the t ranscript at DOAH to submit proposed

final orders but asked for and were granted 15 da ys . The

T ranscript was filed at DOAH on September 13 , 2016, and each

party timely submitted a proposed final order.

FINDINGS OF FACT

1. Global Hookah was formed as a Florida corporation on

June 9, 2005, with its principal place of business in Melbourne,

Florida. After graduation from college, Global HookahÓs owner

and 100 percent shareholder, Brennan Appel, decided to move his

company to North Carolina. Global Hookah was re - formed as a

North Carolina corporation on June 14, 2007. Appel then moved

all of his inventory and business equipment to a 10,000 - square -

foot warehouse in Charlotte, North Carolina. Each corporate

annual report filed since 2007 reflect s the Charlotte, North

Carolina, address. All annual meetings and corporate tax

returns indicate North Carolina as the situs for the

corporation. Mr. Appel, sole shareholder of Global Hookah, has

resided in North Carolina continuously since 2007. At all times

pertinent hereto, Global Hookah was conducting its business from

North Carolina. When the North Carol ina corporation was formed,

Mr. Appel mistakenly failed to convert the Florida Global Hookah

corporation into a foreign for - profit corporation. That

oversight was corrected on May 31, 2016, by way of a filing with

the Florida Division of Corpor ations.

2 . Global Hookah does not currently have a physical place

of business in Florida; its only connection to the State is the

sale and delivery (by unaffiliated carriers) of the products it

sells. When the company was still operating out of its Fl orida

offices, Mr. AppelÓs mother, Jennifer Appel, worked as an

employee and was an officer of the Florida corporation. After

the move to North Carolina, Mrs. Appel became a part - time

employee, performing quality assurance checks in the North

Carolina war ehouse. She was paid for her services by way of a

direct deposit into her checking account in Florida . Mrs. Appel

continues to reside permanently in Florida, traveling to North

Carolina when working for Global Hookah. Mrs. Appel is not an

officer of the North Carolina corporation.

3 . When Global H ookah was located in Melbourne, Florida,

the DepartmentÓs Orlando office conducted its semiannual tax

audits. The DepartmentÓs office in Margate, Florida , conducts

audits of out - of - state licensees, and the aud it at issue was

therefore conducted by the Margate office.

4 . Global Hookah sells about 3 ,500 different tobacco -

related products to customers in many jurisdictions, including

Florida. Its customers are primarily businesses , such as hookah

lounges, nigh t clubs, bars, restaurants, and cigar stores, but

also other tobacco distributors. Some products are also sold by

Global Hookah directly to consumers. The products are sent to

customers via U.S. Mail , or third - party carriers.

5 . The Department is the government agency responsible

for, inter alia, monitoring and collecting taxes on the sale of

tobacco and OTP in Florida. As part of its duties, the

Department audits on a regular basis (from every six months to

every two years) each entity which distribu tes tobacco and OTP

in Florida.

6 . In July 2013, the Department notified Global Hookah

that an audit would be performed on that company for the period

January 1, 2013 through June 30, 2013. The primary purpose of

the audit was to determine the wholesale sales price of the OTP

sold by Global Hookah in Florida during the audit period ,

determine the amount of products which had been sold, and assess

a tax on the total . How that audit actually transpired is a

matter of dispute between the parties. The parti es agree that

an auditor from the Departmen t, Deborah Spady, contacted

Mr. Appel and requested certain records so that she could

conduct the audit. Beyond that, the parties completely disagree

as to what transpired.

7 . The DepartmentÓs position, based a lmost entirely on

unsubstantiated hearsay testimony from Mr. Torres, is as

follows: Ms. Spady asked for certain company records to be sent

to her via U.S. Mail , but Global Hookah refused to comply with

the request . Ms. Spady then scheduled a visit to the Global

Hookah offices in North Carolina to obtain the records she

needed . She was pr ovide d numerous boxes of documents to review ,

but was not allowed to use the companyÓs copier to make copies.

She called her supervisor, Mr. Torres, who told her to purc hase

a hand - held scanner and to scan all the documents so they could

be printed on her return to Florida. Ms. Spady purchased a

scanner and returned to Global Hookah. At that point , she was

told that she could not scan the documents. Discussions between

the Department and attorneys for Global Hookah ensued, resulting

in Ms. Spady being allowed to scan the documents. She allegedly

scanned an amazingly large number of documents in just a day and

a half at the Global Hookah offices. Ms. Spady brought the

scanned documents back to Florida so they could be printed and

an audit could be performed for the audit period. At that

point, Ms. Spady commenced the audit.

8 . According to Mr. Appel, the audit happened like this:

Mr. Appel was informed by Mr. Torres that Ms. Spady would be

conducting an audit for the aforementioned time period.

Mr. Torres said that Ms. Spady preferred to come to North

Carolina to do the audit. Upon her arrival at the Global Hookah

offices in North Carolina, Mr. Appel gave Ms. Spady a CD

containing all the requested documents, i.e., purchase invoices

showing the cost of the tobacco and OTP, sales documents showing

the products were sold in Florida, and the monthly returns filed

by the taxpayer pursuant to Florida requirements. The mo nthly

returns are a self - reporting summarization of products shipped

to and sold in Florida by a distributor (minus some allowed

exemptions). Compilation of those records on a CD was

Mr. AppelÓs normal procedure for the semiannual audits conducted

by the Department. Ms. Spady reviewed the CD on her computer

when she went to lunch. When she returned to Global Hookah Ós

office after lunch , she reported that some of the files on the

CD would not open properly. Mr. Appel converted the documents

on the CD int o another format and verified that Ms. Spady could

open the files. Ms. Spady said she was satisfied with the

results and left the Global Hookah offices. Mr. Appel never saw

Ms. Spady again.

9 . The parties basically agree only that an audit was

initiated by the Department, it was commenced by Ms. Spady, and

that someone else ultimately completed the audit. Just about

everything else about the pre - audit process is disputed. It is

as if the parties were talking about two completely different

audits, which is what Global Hookah suggests happened. There

was a subsequent audit performed by the Department where the

auditor did scan some documents. There was allegedly some

dispute in the latter audit concerning the auditor attempting to

scan documents relatin g to sales in states other than Florida.

A letter was supposedly sent to the auditor addressing that

issue, but no such evidence was presented at final hearing. The

Department says there was a subsequent audit, but Global Hookah

Ðrefused to provide recor dsÑ so it was not completed.

10 . At some point in time, another auditor, Robert Lerman,

took over the Global Hookah aud it from Ms. Spady. None of

Ms. SpadyÓs audit notes were preserved and so were not available

for review at final hearing to substantiat e Mr. TorresÓ hearsay

testimony concerning how the audit was initiated. Ms. Spady,

who no longer works for the Department, was not called as a

witness at final hearing.

11 . On November 24, 2014 (about four month after Ms. Spady

commenced the audit), Mr. Lerman set up an audit file. At the

commencement of his work, Mr. Lerman was advised by Mr. Torres

that the records obtained from Global Hookah could not be

trusted. This was due to the fact that Global Hookah had

produced documents entitled Ð s ales o rder Ñ rather than

traditional Ðinvoices,Ñ even though the Department had accepted

the same kinds of documents from Global Hookah in the past. The

Department believed that the sales orders could be altered,

while the invoices would be more precise and final. Faced with

its unease using the sales order s, the Department contacted

Mr. Appel and requested that he submit invoices instead of sales

o rders for the audit period. Global Hookah contacted its

supplier in California, Fantasia Distributors, Inc.

(ÐFantasia Ñ) , to obtain invoices to submit to the Department.

The only difference between the sales orders and invoices Î -

bes ides the title of the documents - - was that some charges had

been zeroed out, presumably because the amount had been paid

when the invoice was issued. Mr. Appel provided the Department

with 40 pages of invoice documents marked as Ðinvoiced in full.Ñ

12 . The Department compared the new Fantasia invoices with

the Global Hookah sales orders and determined that some of the

information contained t herein did not match up appropriately.

There were some missing numbers, some invoices were not in

logical number sequence, and there appeared to be other

discrepancies.

13 . At that point, Mr. Torres got more involved in the

Global Hookah audit. From the documents supplied by Global

Hookah, Torres prepared a spreadsheet identifying 18 separate

dates of transactions between Global Hookah and Fantasia during

the audit period. He found, however, that there were really

only about 15 actual purchases; some of the costs relative to a

single purchase were divided and appeared on invoices with

different dates. Some of the invoices had five - digit

identification numbers that did not seem to match up with the

sales orders previously provided. Based upon his review and

findings, Mr. Torres deemed the invoices from Fantasia (which

had been provided by Global Hookah) to be less than credible.

Mr. Torres in fact concluded, unilaterally, that Global Hookah

was attempting to hide purchases and to ÐdeceiveÑ the

Departmen t. It is noted that the Department made no attempt to

contact Fantasia, with whom it was very familiar, to ascertain

why the documents did not match up.

14 . Once Mr. Torres reached that conclusion, he decided to

ascertain the actual purchase amounts by w ay of Ð best available

information.Ñ According to his audit notes, Mr. Lerman was

directed by Mr. Torres to determine the Ð best available

information Ñ as follows: He was to make a schedule of all

products purchased by Global Hookah from Fantasia. Inasmuc h as

the Department was familiar with Fantasia and knew that company

supplied many distributors in Florida, Mr. Lerman was told to

compare the cost of each product Global Hookah had bought from

Fantasia with the cost other providers had paid for the same

p roducts. An average unit price for the products was thus

calculated by the Department.

15 . The Department determined that Global Hookah was

paying far less for some products than Fantasia was charging

some of its other distributor customers. No compet ent evidence

was produced as to why this disparity existed. The Department

simply surmised that Global Hookah was apparently misstating the

amounts it had paid Fantasia for the products. The Department,

based on its comparison of FantasiaÓs other non - rel ated

invoices, determined that Global Hookah was understating those

product costs amounts by 454 percent .

16 . The Department thereupon applied a factor of 4.54 to

all of Global HookahÓs purchases and Florida sales for the

entire audit period. Although less than 20 percent of Global

HookahÓs purchases for that audit period were with Fantasia, the

factor was applied to all Florida sales in order to make the tax

assessment. 1/ The tax assessment on Global Hookah using the

revised cost figures was determine d to be $305,374.76, plus

$152,687.37 of penalties, and $58,419.43 in interest, for a

total tax assessment of $516,481.53. The Department had taken

the purchases reported by Global Hookah on the monthly returns

filed during the audit period, multiplied th at figure by 4.54 to

arrive at an adjusted figure, took the difference between the

reported amount and the adjusted figure, and made a tax

assessment on that amount.

17 . Later, the Department decided to revise its assessment

by removing some of the non - Fantasia purchases, resulting in a

tax assessment of $170,292.42 in tax, plus 1 percent interest

per month, plus a penalty in the amount of 50 percent of the

assessment, for a total tax assessment of $241,818.77. The

basis for this reduction in tax assess ment was that the

Department determined that the 454 percent mark - up based on the

Fantasia invoices should not necessarily be applied to the other

80 percent of Global HookahÓs purchases from other suppliers.

18 . Contrary to the DepartmentÓs position re garding the

Fantasia purchases, Mr. AppelÓs unrefuted testimony was that the

prices shown on the sales orders were the actual amounts paid by

Global Hookah to Fantasia. An affidavit dated April 2, 2016,

from FantasiaÓs president , Randy Jacob, corroborated Mr. AppelÓs

testimony. 2/ T hat evidence is contrary to Mr. TorresÓ contention

that Global Hookah was falsifying its purchase price as to

products purchased from Fantasia. The Department presented no

competent evidence as to the basis for the prices Fanta sia

charged Global Hookah for products. The DepartmentÓs position,

though based on logical reasoning in the abstract, was still

entirely speculative and unpersuasive. 3/

19 . The DepartmentÓs decision to rely upon Ðbest available

informationÑ is a new, unique way of conducting its review of

records for an audit. Mr. Torres stated that in 30 years , he

had not had to resort to such a process. The Department relied

upon the Ðbest available informationÑ policy only in the instant

case. There is no evidenc e that the policy was to be used in

any other case or as a regular or appropriate method of dealing

with less than acceptable records. It was used in the case at

issue because Mr. Torres felt no other means would suffice.

20 . Global Hookah also contends that the DepartmentÓs

inclusion of federal excise tax, shipping costs and other items

in the taxable base for distributors constitutes an

unpromulgated rule. That issue, however, has already been

decided in Florida Bee Distrib utors , Inc. v. Department of

Bus iness and Prof essional Reg ulation , Case No. 15 - 6108 (DOAH

Mar. 3, 2016)(ÐFlorida BeeÑ) , and will not be addressed in this

Recommended Order. The Final Order in Florida Bee has been

stayed and is currently under appeal at the First District Court

of Ap peal, Case No. 1D16 - 1064, meaning that the Department is

free to rely on the policy pendi ng a decision by the appellate

c ourt.

CONCLUSIONS OF LAW

21 . The Division of Administrative Hearings has

jurisdiction over the parties to and the subject matter of this

proceeding pursuant to s ection 120. 56(4) , Florida Statutes.

22 . Global Hookah allege s the Department is relying upon a

statement of general applicability that should have been

promulgated as a rule , i.e., an unadopted rule . Se ction

120.56(4) states in p art:

(a) Any person substantially affect ed by an

agency statement that is an unadopted

rule may seek an administrative

determination that the statement

violates s. 120.54(1)(a). The petition

shall include the te x t of the statement

or a description of the statement and

shall state facts sufficient to show

that the statement constitutes an

unadopted rule.

23 . Global Hookah has standing to bring this proceeding

pursuant to section 120.56(4)(a).

24 . The term Ðrul eÑ is defined in section 120.52 (16),

which st ates:

ÐRuleÑ means each agency statement of

general applicability that implements,

interprets, or prescribes law or policy or

describes the procedure or practice

requirements of any agency and includes any

form wh ich imposes any requirement or

solicits any information not specifically

required by statute or an existing rule.

The term also includes amendment or repeal

of a rule.

2 5 . An Ðunadopted ruleÑ is defined as an agency statement

that meets the definition of the term Ðrule,Ñ but that has not

been a dopted pursuant to the requirements of section 120.54.

§ 120.52(20), Fla. Stat.

2 6 . Florida case law has expanded on the definition of

rule to include Ð [ t ]hose statements which are intended by their

effect to create rights, or to require compliance, or o therwise

have the direct and consistent effect of law.Ñ A g . for Health

Care Admin. v. Harvey , 356 So. 2d 323, 325 (Fla. 1 st DCA 1977).

2 7 . An agency statement is any declaration, expression, or

communication. It does not need to be in writing. See Dep Ót of

High. Saf. & Motor Veh. v. Schluter , 705 So. 2d 81, 84 (Fla. 1st

DCA 1997). To be a rule, the statement must be an Ðagency

statement,Ñ that is, a statement which reflects the agencyÓs

position with regard to law or policy. A generally applicable

st atement purports to affect not just a single person or

singular situations, but a category or class of persons and

activities. See McCarthy v. DepÓt of Ins. , 479 So. 2d 135 (Fla.

2d DCA 1985). The statement need not apply universally to every

person or a ctivity within the agencyÓs jurisdiction. It is

sufficient that the statement apply uniformly to a class of

persons or activities over which an agency may properly exercise

authority. See Schluter , 705 So. 2d at 83. In this case, it

appears the Departme nt used the Ðbest available informationÑ

technique solely due to the facts surrounding this particular

audit and does not propose relying on it in the future .

2 8 . Global Hookah has the burden of demonstrating that the

agency statement regarding Ðbest av ailable informationÑ meets

the definition of a rule, and that the agency has not adopted

the statement by rulemaking procedures. S.W. Fla. Water Mgt.

Dist. v . Charlotte Cnty. , 774 So. 2d 903, 908 (Fla. 2 d DCA

2001); see also Ag. for Pers. w ith Disab. v . C .B. , 130 So. 3d

713, 717 (Fla. 1 st DCA 2013).

29 . The standard of proof is by a preponderance of the

evidence. § 120.56(1) ( e ) , Fla. Stat.

30 . Global Hookah has not proven by a preponderance of

evidence that the Ðbest available informationÑ policy use d in

the conduct of the January 1 through June 30, 2013 , audit was

used as or intended to be a statement of general applicability .

There is no evidence that the policy would be used on any other

audited entities. Nor was the phrase, in and of itself,

suf ficient to be deemed an unadopted rule.

3 1 . Global Hookah has requested an award of attorneysÓ

fees pursuant to section 120.595. Fees may be awarded under

that statute only if Ðall or part of an agency statement

violates s. 120.54(1)(a).Ñ As stated ab ove, the Department did

not violate that provision of statute.

ORDER

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

ORDER ED that the policy statement by the Department of

Business and Professional Regulation, Division of Alcoholic

Beverage s and Tobacco, concerning the use of a Ðbest available

informationÑ process is not an unadopted rule whose existence

violates section 120.54(1)(a), Florida Statutes .

It is FURTHER ORDERED that no award of attorneysÓ fees or

costs is warranted in this matter .

DONE AND ORDERE D this 20th day of October, 2016 , in

Tallahassee, Leon County, Florida.

S

R. BRUCE MCKIBBEN

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Pa rkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 20th day of October, 2016 .

ENDNOTES

1/ Although Global Hookah only makes less tha n 20 percent of its

purchases from Fantasia, and about 60 percent from Sierra

Network, the Department did not investigate whether Fantasia was

paying less for Sierra Network products than other distributors

were paying. The significance of the DepartmentÓ s analysis

regarding the Fantasia invoices (only) is questionable.

2/ The Department objected to admission of the affidavit on the

basis of hearsay. While the affidavit is an out of court

statement offered for the truth of the matter asserted therein,

t he affidavit Ðsupplemented and explainedÑ Mr. AppelÓs testimony

and is thus admissible. See § 120.57(1)(c), Fla. Stat. The

Department also complained that it did not have sufficient time

to depose the affiant, Mr. Jacobs, but that complaint did not

appea r credible.

3/ It must be noted that the credibility and impact of

Mr. TorresÓ testimony was significantly reduced by the fact that

his attorney continuously offered extensive testimony in the

form of leading questions. It was difficult to ascertain

Mr. TorresÓ own knowledge versus his willingness to affirm his

counselÓs statements.

COPIES FURNISHED:

Elizabeth A. Teegen, Esquire

Office of the Attorney General

The Capitol, Plaza Level 01

Tallahassee, Florida 32399 - 1050

(eServed)

Jonathan W. Taylor, Esquire

Gerald J. Donnini, II, Esquire

Moffa, Sutton, and Donnini, P.A.

One Financial Plaza, Suite 2202

100 Southeast Third Avenue

Fort Lauderdale, Florida 33394

(eServed)

Sean J. Anderson, Esquire

Department of Business and

Professional Regulation

260 1 Blair Stone Road

Tallahassee, Florida 32399

(eServed)

James F. McAuley, Esquire

Joseph C. Moffa, Esquire

Moffa, Sutton, and Donnini, P.A.

One Financial Plaza, Suite 2202

100 Southeast Third Avenue

Fort Lauderdale, Florida 33394

(eServed)

James H. Sut ton, Jr., Esquire

Moffa, Sutton, and Donnini, P.A.

One Financial Plaza, Suite 2202

100 Southeast Third Avenue

Fort Lauderdale, Florida 33394

Thomas Philpot, Director

Division of Alcoholic

Beverages and Tobacco

Department of Business and

Professiona l Regulation

Capital Commerce Center

2601 Blair Stone Road

Tallahassee, Florida 32399

(eServed)

Jason Maine, General Counsel

Department of Business and

Professional Regulation

Capital Commerce Center

2601 Blair Stone Road

Tallahassee, Florida 32399 - 22 02

(eServed)

Ken Lawson, Secretary

Department of Business and

Professional Regulation

Capital Commerce Center

2601 Blair Stone Road

Tallahassee, Florida 32399 - 2202

(eServed)

Ernest Reddick, Chief

Alexandra Nam

Department of State

R. A. Gray Building

500 South Bronough Street

Tallahassee, Florida 32399 - 0250

(eServed)

Ken Plante, Coordinator

Joint Admin istrative Proced ures Committee

Room 680, Pepper Building

111 West Madison Street

Tallahassee, Florida 32399 - 1400

(eServed)

NOTICE OF RIGHT TO JUDIC IAL REVIEW

A party who is adversely affected by this Final Order is entitled

to judicial review pursuant to section 120.68, Florida Statutes.

Review proceedings are governed by the Florida Rules of Appellate

Procedure. Such proceedings are commenced by fi ling the original

notice of administrative appeal with the agency clerk of the

Division of Administrative Hearings within 30 days of rendition

of the order to be reviewed, and a copy of the notice,

accompanied by any filing fees prescribed by law, with the clerk

of the District Court of Appeal in the appellate district where

the agency maintains its headquarters or where a party resides or

as otherwise provided by law.