18-002772 Gbr Enterprises, Inc. vs. Department Of Revenue Status: Closed Recommended Order on Monday, January 14, 2019.

Summary: Vending machine company's arrangement with schools is in the nature of a service contract and not a license fee for use of real property, and therefore, DOR's proposed assessment is incorrect.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

GBR ENTERPRISES, INC.,

Petitioner,

vs. Case Nos. 18 - 2772

DEPARTMENT OF REVENUE,

Respondent.

_______________________________/

RECOMMENDED ORDER

This matter came before Administra tive Law Judge Darren A.

Schwartz of the Division of Administrative Hearings ( " DOAH " ) for

final hearin g on October 26, 2018, by video teleconference with

sites in Lauderdale Lakes and Tallahassee, Florida.

APPEARANCES

For Petitioner: Joseph C. Moffa, Esqu ire

Jonathan W. Taylor, Esquire

Moffa, Sutton & Donnini, P.A.

Trade Center South, Suite 930

100 West Cypress Creek Road

Fort Lauderdale, Florida 33309

R ex D. Ware, Esquire

Moffa, Sutton, & Donnini, P.A.

3500 Financial Plaza, Suite 330

Tallahassee, Florida 32312

For Respondent: Randi Ellen Dincher, Esquire

Timothy Dennis, Esquire

Office of the Attorney General

Revenue Litigation Bureau

The Capitol, Plaza Level - 01

Tallahassee, Florida 32399

STATEMENT OF THE ISSUE

Whether Respondent, Department of Revenue ' s ( " Department " ) ,

B03 assessment against Petitioner, GBR Enterprises, Inc. ( " GBR " ) ,

for sales tax and interest is incorrect.

PRELIMINARY STATEMENT

On October 16, 2016, GBR filed a petition challenging the

Department ' s Notice of Decision ( " NOD " ) issued August 22, 2016 ,

which assessed sales tax and interest against GBR in the amount

of $298,977.10. On October 28, 2016, the Department referred the

matter to DOAH to assign an administrative law judge to conduct

the final hearing. The case was assigned to Judge Robert S.

Cohen under DOAH Case No. 16 - 6331.

On November 3, 2016, the Department filed an Unopposed

Motion to Relinquish Jurisdiction Without Prejudice to Reopen at

a Later Date because the parties desired to explore the

possibility of settlement. On that same da te, Judge Cohen

entered an Order Closing File and Relinquishing Jurisdiction.

On January 27, 2017, GBR filed its Amended Petition for

Chapter 120 Hearing challenging the NOD. On May 30, 2018, the

Department filed its unopposed Motion to Reopen Case. The matter

was reopened under DOAH Case No. 18 - 2772 and reassigned to Judge

Cohen.

On June 1, 2018, Judge Cohen entered an Order setting the

final hearing for August 9, 2018. On July 10, 2018, the parties

filed a joint motion to continue the final hearing. On July 16,

2018, Judge Cohen entered an Orde r granting the motion and

resetting the final hearing for September 18, 2018.

On August 23, 2018, GBR filed a Petition to Determine the

Invalidity of Existing Rule 12A - 1.044. The petition was assigned

to Ju dge Cohen under DOAH Case No. 18 - 4475RX. That same date,

GBR filed an unopposed motion for continuance based on its filing

of the existing rule challenge under DOAH Case No. 18 - 4475RX and

its intent to file another petition at DOAH challenging an agency

s tatement as an unadopted rule. On August 24, 2018, Judge Cohen

entered an Order granting the motion and reset ting the final

hearing for October 26, 2018. On August 27, 2018, Judge Cohen

entered an Order consolidating DOAH Case Nos. 18 - 2772 and

18 - 4475RX .

On September 17, 2018, GBR filed its Petition to Determine

the Invalidity of Agency Statement. The petition was assigned to

Judge Cathy M. Sellers under DOAH Case No. 18 - 4992RU. On

September 21, 2018, the case was transferred to Judge Cohen. On

this same date, Judge Cohen entered an Order consolidating DOAH

Case Nos. 18 - 2772, 18 - 4475RX, and 18 - 4992RU, and the three cases

were transferred to the undersigned for all further proceedings.

On October 8, 2018, the Department ' s Corrected Motion for

Attorney ' s Fees Pursuant to S ection s 57.105 and 120.595 was

filed, to which GBR responded o n October 15, 2018. On

October 25, 2018, GBR filed a request for official recognition.

The final hearing was held in all three cases on October 26,

2018, with both parties present. At the hearing, the undersigned

granted GBR ' s request for official recognition as to Florida

Administrative Code R ules 6A - 1.012, 12A - 1.044, and 1 - 1.010.

However, the undersigned denied GBR ' s request for official

recognition as to various purported school board policies. The

undersigned also granted the Department's request for official

recognition of rule 12A - 1.44 (later transferred to rule 12A -

1.044) in effect October 7, 1968, through October 31, 2005.

The Department presented the testi mony of Amit Biegun, Mary

Gray, Carrie Bowyer, and Mark Zych. The Department ' s Exhibits 1

through 25 were received in evidence based on the stipulation of

the parties. GBR did not present the testimony of any additional

live witnesses. However, the depo sition transcripts of Mary Gray

and Mark Zych (GBR ' s Exhibits 22 and 23) were received in

evidence. 1/ GBR ' s Exhibits 1 throu gh 7, 9, 10, 12, and

19 through 21 were also received in evidence based on the

stipulation of the parties.

The one - volume final hea ring Transcript was filed at DOAH on

November 13, 2018. The parties timely filed proposed recommended

orders, which were given consideration in the preparation of this

Recommended Order. 2/

Unless otherwise indicated, citations to statutes and

administrat ive rules are to the 2018 versions of the Florida

Statutes and Florida Administrative Code.

FINDING S OF FACT

The Parties and Audit Period

1. GBR is a Florida corporation with its principal place of

business in Miami, Florida. Gilda Rosenberg is the own er of GBR

and a related entity, Gilly Vending, Inc. ( " Gilly " ). GBR and

Gilly are in the vending machine business. At all times material

hereto, Amit Biegun served as the chief financial of ficer of the

two entities.

2. The Department is the state agenc y responsible for

administering Florida ' s sales tax laws pursuant to c hapter 212,

Florida Statutes.

3. This case concerns the audit period of January 1, 2012 ,

to December 31, 2014.

GBR ' s Provision of Vending Machine Services

4. Prior to the audit period , the school boards of Broward

and Palm Beach County issued written solicitations through

competitive invitations to bid ( " ITB " ), seeking vendors to

furnish, install, stock, and maintain vending ma chines on school

property.

5. The bids required a " full turn - key operation. " The

stated objectives were to obtain the best vending service and

percentage commission rates that will be most advantage ous to the

school boards, and to provide a contract that will be most

profitable to the awarded vendor. The stated goal was that

student choices from beverage and snack vending machines closely

align with federa l dietary guidelines.

6. GBR operates approximately 700 snack and beverage

vending machines situated at 65 schools in Broward, Palm Beach,

and M iam i - Dade Counties . Of these 65 schools, 43 are in Broward

County, 21 are in Palm Beach County, and one is in Miami - Dade

County.

7. The snack vending machines are all owned by GBR.

Beverage vending machines are owned by bottling companies, such

a s Coca - Cola and Pepsi. Of the 700 ven ding machines,

approximately 60 percent of the machines are for beverages and

the remaining 40 percent are for snacks.

8. GBR has written vending agreements with some schools.

In these agreements, GBR is designa ted as a licensee, the school

is designated as the licensor, and GBR is granted a license to

install vending machines on school property in exchange for a

commission. Furthermore, GBR is solely responsible to pay all

federal, state, and local taxes in con nection with the operation

of the vending machines.

9. Ownership of the vending machines does not transfer to

the schools. However, in some cases the schools have keys to the

machines. In addition, designated school board employees have

access t o the inside of the machines in order to review the

meter, monitor all transactions, and reconcile the revenue from

the machines.

10. GBR places the vending machines on school property.

11. However, the schools control the locations of the

vendin g machine s .

12. The schools also require timers on the machines so that

the schools can control the times during the day when the

machines are operational and accessible to students.

13. The schools also control the types of products to be

placed in the machines to ensure that the products closely align

with the federal dietary guidelines.

14. The schools also c ontrol pricing strategies.

15. GBR stocks, maintains, and services the vending

machines. However, Coca - Cola and Pepsi may repair the beve rage

machines they own. GBR is solely responsible for repairing the

machines it owns.

16. The schools require that any vendor service workers

seeking access to the vending machines during school hours pass

background checks.

17. GBR route drivers col lect the revenue from all of the

vending machines and the revenues are deposited into GBR ' s bank

accounts.

18. In exchange for GBR ' s services, the schools receive

from GBR, as a commission, a percentage of the gross receipts.

However, neither GBR nor th e schools are guaranteed any revenue

unless sales occur from the machines.

19. On its federal income tax returns, GBR reports all

sales revenue from the vending machines.

20. For the tax year 2012, GBR ' s federal income tax return

reflects gross rece ipts or sales of $5,952,270. Of this amount,

GBR paid the schools $1,363,207, a percentage of the gross

receipts which GBR characterized on the tax return and its

general ledger as a commission and equipment space f ee and cost

of goods sold.

21. For th e tax year 2013, GBR ' s federal income tax return

reflects gross receipts or sales of $6,535,362. Of this amount,

GBR paid directly to the schools $1,122,211, a percentage of the

gross receipts which GBR characterized on the tax return and its

general ledg er as a commission and equipment space fee and cost

of goods sold.

22. For the tax year 2014, GBR ' s federal income tax return

reflects gross receipts or sales of $6,076,255. Of this amount,

GBR paid directly to the schools $1,279,682, a percentage of t he

gross receipts which GBR characterized on the tax return and its

general ledger as a commission and equipment space fee and cost

of goods sold.

23. Thus, for the audit period, and according to the

federal tax returns and general ledgers , GBR ' s gros s receipts or

sales were $18,563,887. Of this amount, GBR paid directly to the

schools $3,765,100, as a commission and equipment space fee and

cost of goods sold.

The Department ' s Audit and Assessment

24. On January 27, 201 5, the Department, through its tax

a uditor , Mary Gray, sent written notice to GBR of its intent to

conduct the audit. This was Ms. Gray ' s first audit involvin g

vending machines at schools.

25. Thereafter, GBR provided Ms. Gray with its general

ledger, federal returns, and bid do cuments.

26. On October 28, 2015, Ms. Gray issued a draft assessment

to GBR. The email transmittal by Ms. Gray to GBR ' s

representative states that " [t]he case is being forwarded for

supervisory review. " In the draft, Ms. Gray determined that GBR

owed ad ditional tax in the amount of $28,589.65, but there was no

mention of any purported tax on the monies paid by GBR to the

schools as a license fee to use real property.

27. However, very close to the end of the audit, within

one week after issuing the dr aft, and after Ms. Gray did further

research and conferred with her supervisor, Ms. Gray ' s supervisor

advised her to issue the B03 assessment pursuant to section

212.031 and rule 12A - 1.044, and tax the monies paid by GBR to the

schools as a license fee to use real property.

28. Thus, according to the Department, GBR was now

responsible for tax in the amount of $246,230.93, plus applicable

interest. Of this alleged amount, $1,218.48 was for additional

sales tax (A01), $4,181.41 was for purchase expenses (B 02),

$13,790 was f or untaxed rent (B02), and $227, 041.04 was for the

purported licens e to use real property (B03).

29. Ms. Gray then prepared a Standard Audit Report

detailing her position of the audit and forwarded the report to

the Department ' s disput e resolution division.

30. On January 19, 2016, the Department issued the Notice

of Proposed Assessment ( " NOPA " ) against GBR for additional tax

and interest due of $288,993.31. The Department does not seek a

penalty against GBR.

31. At hearing, Ms. Gray acknowledged that she and her

supervisor " struggled " with understanding GBR ' s reference to

commissions and equipment expense fees in the tax returns and

general ledgers and the Department ' s decision to ultimately issue

the B03 assessment.

32. At h earing, the Department ' s representative, Mr. Zych,

acknowledged that a proper analysis as to whether a particular

arrangement constitutes a license to use real property involves a

consideration of issues of control, such as control over access

to and place ment of the machines, products, and money.

33 . In the instant case, the schools controlled significant

aspects of the parties ' arrangement, including placement of and

access to the machines, pricing strategies, and the type of

products that could be pla ced and sold from the machines. The

vending machines were placed at the schools and under significant

control by the schools so that the schools would be in compliance

with federal dietary guidelines.

34 . GBR provided an important service to the school s in

order that the schools meet federal dietary guidelines. GBR was

able to provide the service only because of a competitive ITB

process. The goal of the bids was to obtain a vendor service for

the sale of products to students in conformity with federa l

dietary guidelines, not to enter into a license for the use of

real property.

35 . Although GBR characterized the payouts to the schools

on its tax returns and general ledgers as "commissions" and

"equivalent space fees," and GBR controls some aspec ts of the

arrangements, the facts adduced at hearing demonstrate that the

substance of the arrangement is in the nature of a service

contract. In sum, given the totality of the circumstances and

under the unique facts of this case, the undersigned conclud es as

an issue of fact, that the arrangement between GBR and the

schools boards and schools is in the nature of a service, and not

a license to use real property.

CONCLUSIONS OF LAW

36 . DOAH has jurisdiction over the subject matter and

parties pursuant to sections 120.569, 120.57(1), and 120.80(14),

Florida Statutes.

37 . The Department bears the initial burden to demonstrate

that the assessment has been made against the taxpayer, and the

factual and legal grounds upon which the Department made the

assess ment. The burden then shifts to the taxpayer 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 Rev . , 829 So. 2d 330, 333 (Fla. 3d DCA

2002).

38 . It is well - settled that tax statutes should be

construed narrowly, not broadly, and strongly in favor of the

taxpayer and against the Department, with all ambiguities

resolved in favor of the taxpayer. Brandy ' s Prods. v. Dep ' t of

Bus. & Prof ' l Reg . , 188 So. 3d 130, 132 - 133 (Fla. 1st DCA 2016);

Grabba - Leaf, LLC v. Dep ' t of Bus. & Prof ' l Reg . , 2018 Fla. App.

LEXIS 15780, at *10 n. 5 (Fla. 1st DCA 2018); Lloyd Enters . , Inc.

v. Dep ' t of Rev . , 651 So. 2d 735, 739 (Fla. 5th DCA 1995). " This

is because ' the duty to pay tax es, while necessary to the

business of the sovereign, is still a duty of pure statu tory

creation and taxes may be co llected only within the clear

definite boundaries recited by the statute. ' " Brandy ' s Prods. ,

188 So. 3d at 132 - 133.

39 . Applying the for egoing legal principles to the instant

case, the Department issued the B03 assessment pursuant to

section 212.031 and rule 12A - 1.044(6)(a), 3/ concluding that the

amounts paid to the schools by GBR are subject to sales tax as a

license to use real property. The Department therefore

established its purported legal and factual basis for the

assessment. 4/

40 . GBR thereafter demonstrated by a preponderance of the

evidence that the B03 assessment is incorrect. The Department ' s

B03 assessment is based on the allegation that GBR has been

granted a license to use real property.

41 . Section 212.031 provides in pertinent part as follows:

212.031 Tax on rental or license fee for use

of real property

(1)(a) It is declared to be the legislative

intent that every person is exercising a

taxable privilege who engages in the business

of renting, leasing, letting, or granting a

license for the use of any real

property . . . .

42 . For the exercise of a privilege of granting a license

to use real property, a tax is levied in the amount of six

percent of the total license fee paid. § 212.031(1)(c), Fla.

Stat.

43. In Lloyd Enterprises v. Dep artment of Revenue , 651 So.

2d 735 (Fla. 5th DCA 1995), the court considered whether a

business ' s payment of a be ach concessionaire fee to the county in

exchange for the business ' s right to occupy a concession spot on

the beach for the rental of motorcycles to the general public was

taxable by the Department as a license to use real property under

section 212.031. T he court held that the fee was not taxable as

a license to use real property under section 212.031 because the

county was not in the business of granting a license to use real

property.

44 . In reaching this conclusion, the court found that the

conc ession fee was based on a local ordinance under which the

county exercised its authority to regulate the sale of

concessions on the beach. The ordinance served a public purpose

of ensuring the public ' s enjoyment of the beach. The fee paid by

concessionai re to the county was based on the concessionaire ' s

gross sales, and the county designated a particular concession

spot and regulated the concessionaire ' s hours of operation.

45 . Similarly, in the instant case, the school boards

exercised their auth ority to engage in the competitive bidding

process through invitations to bid to solicit contractual vendor

services and regulate the sale of food and beverage items.

Rule 6A - 1.012(1)(b) provides that an invitation to bid is used

when school boards are " c apable of specifically defining the

scope of work for which a contractual service is required or when

the district school board is capable of establishing precise

specifications defining the actual commodity or group of

commodities required. "

46 . A s detailed above, the goal of the bids was to obtain a

vendor service for the sale of products to students in conformity

with federal dietary guidelin es, not to enter into a license for

the use of real property. The schools control significant

aspects of the arrangement, including the location and hours of

operation of the vending machines, who can access the machines,

and the type and pricing of products that can be sold in the

machines. The arrangement between GBR and the school board and

schools is in the nature of a service, and not a license to use

real property. Accord ingly , the payments by GBR to the schools

are not taxable as a license fee for the use of real property.

4 7 . In support of its position, the Department relies on

S&W Air Vac Syst ems v . Dep artment of Revenue , 697 So. 2d 1313

(Fla. 5th DCA 1997). However, that case is distinguishable from

the instant case. The arrangement in S&W Air Vac was between

purely private parties for the placement of coin - operated " air -

vac " machines at com mercial properties (gas stations and

convenience stores ) . The arrangement did n ot involve an

essential service -- providing food to students at public schools

in accordance with federal dietary guidelines. Moreover, unlike

the instant case, S&W employees w ere authorized to enter the

properties at any time to collect monies or perform maintenance

and repairs.

48 . Finally, for the reasons stated in the Final Order on

GBR ' s challenge to the validity of rule 12A - 1.044 (Case No. 18 -

4475RX), the rule upon which the B03 assessment is based is an

invalid exercise of delegated legislative authority. Because the

rule is invalid, the Department ' s reliance on the rule is

incorrect.

49 . Even if the rule were valid, however, the Department ' s

assessment was based on the incorrect premise that GBR owned all

of the vending machines. The evidence adduced at hearing

demonstrates that GBR did not own the beverage machines, which

constitutes 60 percent of the machines. Given that GBR did not

own those machines, r ule 12A - 1. 0 44 would be inapplicable to

60 percent of the monies ultimately taxed as a license for the

use of real property. 5/

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is RECOMMENDED that the Department of Revenu e enter a

final o rder rescinding the B03 assessment in its entirety.

DONE AND ENTERED this 14th day of January , 2019 , in

Tallahassee, Leon County, Florida.

S

DARREN A. SCHWARTZ

Administrative Law Judge

Division of Administ rative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 14th day of January , 2019 .

END NOTE S

1/ Ms. Gray and Mr. Zych are party representatives of the

Department.

2/ The NOD assessed sales tax against GBR in the amount of

$246,230.93, plus interest , for a total assessment of

$298,977.10. Of this amount, $1,218.48 was for additional sale s

(Exhibit A01), $4,181.41 was for purchase expenses (Exhibit B02),

$13,790.00 was for untaxed rent (Exhibit B02), and $227,041.04

was for a license to use real property (Exhibit B03). GBR paid

sales tax on the sale of the revenue items sold from the vend ing

machines, which was subject to sales tax on the products sold.

The only remaining issue in this proceeding (Case No. 18 - 2772)is

whether GBR is liable for $227,041.04 as a tax on a license to

use real property, plus applicable interest. On this issue, the

undersigned has recommended order authority. The challenges in

Case Nos. 18 - 4475RX and 18 - 4992RU are being addressed in a

separate Final Order because the undersigned has final order

authority in Case Nos. 18 - 4475RX and 18 - 4992RU.

3/ S ubs ection (6) (a) is now (5)(a).

4/ Schools are exempt from sales tax under section 212.08(7)(o).

Sales tax on the gross revenues from products sold from the

vending machines was already collected by the Department from GBR

pursuant to section 212.05. In this pro ceeding, the Department

seeks to collect an additional sales tax on the monies paid by

GBR to the schools as a license to use real property (the B03

assessment). The purported s ales tax which is the subject of the

B03 assessment and the sales tax on the g ross revenues from

products sold from the machines are two different types of taxes,

which would not constitute pyramiding or duplication of tax,

provided, of course, that the B03 assessment was correct, which

it is not. Ryder Truck Rental, Inc. v. Bryant , 170 So. 2d 822,

825 (Fla. 1964).

5/ Rule 12A - 1.044, entitled Vending Machines, was amended in

January 2018. The current version of the rule provides, in

pertinent part, as follows:

(5) Lease or license to use real property;

direct pay authority.

( a) If the machine owner is also the

operator and the operator places the machine

at another personÓs location, the arrangement

between the machine operator and location

owner is a lease or license to use real

property. The location owner shall collect

th e tax from the machine operator on the

amount the location owner receives for the

lease or license to use the real property.

The tax must be separately stated from the

amount of the lease or license payment.

COPIES FURNISHED:

Jonathan W. Taylor, Esquire

Moffa, Sutton & Donnini, P.A.

Trade Center South, Suite 930

100 West Cypress Creek Road

Fort Lauderdale, Florida 33309

(eServed)

Randi Ellen Dincher, Esquire

Timothy Dennis, Esquire

Office of the Attorney General

Revenue Litigation Bureau

The Capitol , P laza Level - 01

Tallahassee, Florida 32399

(eServed)

Joseph C. Moffa, Esquire

Moffa, Sutton & Donnini, P.A.

100 West Cypress Creek Road , Suite 930

Fort Lauderdale, Florida 33309

(eServed)

Rex D. Ware, Esquire

Moffa, Sutton, & Donnini, P.A.

3500 Financial Plaza , Suite 330

Tallahassee, Florida 32312

(eServed)

Mark S. Hamilton, General Counsel

D epartment of R evenue

Post Office Box 6668

Tallahassee, Florida 32314 - 6668

(eServed)

Leon M. Biegalski, Executive Director

Department of Revenue

Post Office Box 6 668

Tallahassee, Florida 32314 - 6668

(eServed)

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.