18-004992RU Gbr Enterprises, Inc. vs. Department Of Revenue Status: Closed DOAH Final Order on Monday, January 14, 2019.

Summary: DOR exceeded its grant of rulemaking authority as to existing rule and the rule enlarges, modifies, or contravenes law implemented. However, agency statement is not a rule.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

GBR ENTERPRISES, INC.,

Petitioner,

vs. Case Nos. 18 - 4475RX

18 - 4992RU

DEPARTMENT OF REVENUE,

Respondent.

_______________________________/

FINAL ORDER

This matter came b efore Administrative 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: Josep h C. Moffa, Esquire

Jonathan W. Taylor, Esquire

Moffa, Sutton & Donnini, P.A.

Trade Center South, Suite 930

100 West Cypress Creek Road

Fort Lauderdale, Florida 33309

Rex 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 S

As to DOAH Case No. 18 - 4475RX, whet her Florida

Administrative Code Rule 12A - 1.044(5)(a) is an invalid exercise

of delegated legislative authority in violation of section

120.52(8), Florida Statutes. 1/

As to DOAH Case No. 18 - 4992RU, whether the Department of

Revenue ' s ( " Department " ) Sta ndard Audit Plan, V ending and

Amusement Machines -- Industry Specific, section 1.1.3.3 ( " SAP " ) is

an un adopted rule in violation of sections 120.54 and 120.56,

Florida Statutes.

PRELIMINARY STATEMENT

On October 16, 2016, GBR Enterprises , Inc. ("GBR") , file d 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

admin istrative 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 date, Judge Cohen

entered an Order Closing File and Relinquishing Jurisdiction.

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

C hapter 120 Hearing challengin g 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 Order granting the motion and

reset ting the final hearing for September 18, 2018.

On August 23, 2018, GBR filed a Petiti on to Determine the

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

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

GBR filed an unopposed motion for continuance based on its filing

of the rule challenge in DOAH Case No. 18 - 4475RX and its intent

to file another petition at DOAH challenging an agency statement

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, J udge 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 - 499 2RU. 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 pr oceedings.

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

Attorney ' s Fees Pursuant to Section 57.105 and 120.595 was filed,

to which GBR responded on October 15, 2018. On October 25, 2018,

GBR filed a request for official recognition.

The final hearing was held i n 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 unopposed 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 testimony 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 deposition transcripts of Mary Gray

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

evidence. 2/ 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. At the hearing, the parties waived

the requirement under section 120.56(1)(d) for the undersigned to

render this Final Order within 30 days of the hearing.

The one - volume final hearing Tran script was filed at DOAH on

November 13, 2018. The parties timely filed proposed final

orders, which were given consideration in the preparation of this

Final Order. 3/

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 owner 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 fin ancial officer of the

two entities.

2. The Department is the state agency 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, 2 014.

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

invitations to bid ( " ITB " ), seeking vendors to furnish, install,

stock, and maintain ve nding machines 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 federal dietary guidelines.

6. GBR operates approximately 700 snack and beverage

v ending machines situated at 65 schools in Broward, P alm Beach,

and Miami - 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

as Coca - Cola and Pepsi. Of the 700 vendin g machines,

approximately 60 percent of the machines are for beverages and

the remaining 40 percent are for snacks.

8. GBR has written ve nding agreements with some schools.

In these agreements, GBR is designated 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 connection 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 to 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 p roperty.

11. However, the schools control the locations of the

vending machines.

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 control pricing strategies.

15. GBR stocks, maintains, and serv ices the vending

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

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 mach ines during school hours pass

background checks.

17. GBR route drivers collect 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 the 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 receipts 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 ledg er as a commission and equipment space fee and cost

of goods sold.

21. For the 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 ledger 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 the

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 au dit period, and according to the

federal tax returns and general ledgers , GBR ' s gross 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 De partment ' 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 involving

vending machines at schools.

25. There after, GBR provided Ms. Gray with its general

ledger, federal returns, and bid documents.

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 forwa rded for

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

owed additional 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. H owever, very close to the end of the audit, within one

week after issuing the draft, 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 ru le 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, $1,2 18.48 was for addition al

sales tax (A01); $4,181.41 was for purchase expenses (B02);

$13 ,790 was for untaxed rent (B02); and $227.041.04 was for the

purported license to use real property (B03).

29. Ms. Gray then prepared a Standard Audit Report

detail ing her position of the audit and forwarded the report to

the Department ' s dispute 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 testified that the Department ' s

SAP is an audit planning tool or check list which she used in

conducting GBR ' s audit.

32. Employees of the Department are not bound to follow the

SAP , and the SAP can be modified by the auditors on a word

document.

33. The SAP was utilized by Ms. Gray during the audit, but

it was not relied on in the NOD. 4/

CONCLUSIONS OF LAW

3 4 . DOAH has jurisdiction over the subject matter and

p arties pursuant to sections 120.54, 120.56, 120.569, and

120.57(1), Florida Statutes.

Case No. 18 - 4475 RX -- Challenge to Existing Rule 12A -

1.044 (5)(a)

35. Rule 12A - 1.044(5)(a) 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 person ' s location, the arrangement

between the machine operator and location

owner is a lease or license to use real

property. The location owner shall collect

the 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. [ 5/ ]

36. Und er section 120.56(1)(a), " [a]ny person substantially

affected by a rule . . . may seek an administrative determination

of the invalidity of the rule on the ground that the rule is an

invalid exercise of delegated legislative authority. " An

existing rule m ay be challenged at any time during its ex istence.

§ 120.56(3)(a), Fla. Stat. "The administrative law judge may

declare all or part of a rule invalid." § 120.56(3)(b), Fla.

Stat.

37. A party is substantially affected if the rule will

result in real or immediate injury in fact and the alleged

interest is within the zone of interest to be protected or

regulated. Jacoby v. Fla. B d . of Med . , 917 So. 2d 358, 360 (Fla.

1st DCA 2005). GBR is substantially affected by the rule and has

standing to challenge th e rule. GBR is a substantially affected

party because the Department relied on the rule in determining

the B03 assessment against GBR , and GBR is within the zone of

interests to be protected. In its proposed final o rder, the

Department concedes that GBR has standing to challenge the rule.

38. GBR has the burden of proving by a preponderance of the

evidence that the existing rule is an invalid exercise of

delegated legislative authority as to the objections raised.

§ 120.56(3)(a) , Fla. Stat .

3 9. The definition of " invalid exercise of delegated

legislative authority" is set forth in section 120.52(8), which

provides in pertinent part:

(8) " Invalid exercise of delegated

legislative authority " means action that goes

beyond the powers, functions , and duties

delegated by the Legislature. A proposed or

existing rule is an invalid exercise of

delegated legislative authority if any one of

the following applies:

* * *

(b) The agency has exceeded its grant of

rulemaking authority, citation to which is

required by s. 120.54 (3)(a)1.;

(c) The rule enlarges, modifies, or

contravenes the specific provisions of law

implemented, citation to which is required by

s. 120.54(3) (a)1 .;

* * *

A grant of rulemaking authority is necessary

but not sufficient to allow an agency to

adopt a rule; a specific law to be

implemented is also required. An agency may

adopt only rules that implement or interpret

the specific powers and dut ies granted by the

enabling statute. No agency shall have

authority to adopt a rule only because it is

reasonably related to the purpose of the

enabling legislation and is not arbitrary and

capricious or is within the agency ' s class of

powers and duties, nor shall an agency have

the authority to implement statutory

provisions setting forth general legislative

intent or policy. Statutory language

granting rulemaking authority or generally

describing the powers and functions of an

agency shall be construed to extend no

further than implementing or interpreting the

specific powers and duties conferred by the

enabling statute.

40. GBR contends that existing rule 12A - 1.044(5)(a) is an

invalid exercise of delegated legislative authority under section

120.52(8 )(b) because the Department exceeded its grant of

rulemaking authority.

41. In United Faculty of Florida v. State Board of

Educ ation , 157 So. 3d 514 (Fla. 1st DCA 2015), Judge Wetherell

recently stated:

A rule is invalid under section 120.52(8)(b)

if the agency " exceed[s] its grant of

rulemaking authority. " A grant of rulemaking

authority is the " statutory language that

explicitly authorizes or requires an agency

to adopt [a rule]. " § 120.52(17), Fla. Stat.

The scope of an agency ' s rulemaking authority

is constrained b y section 120.536(1) and the

so - called " flush - left paragraph " in section

120.52(8), which provide that an agency may

only adopt rules to " implement or interpret

the specific powers and duties granted by the

[agency ' s] enabling statute " ; th at an agency

may not adopt rules to " implement statutory

provisions setting forth general legislative

intent or policy " or simply because the rule

" is reasonably related to the purpose of the

enabling legislation and is not arbitrary and

capricious or is w ithin the agency ' s class of

powers and duties " ; and that " [s]tatutory

language granting rulemaking authority or

generally describing the powers and functions

of an agency shall be construed to extend no

further than implementing or interpreting the

specifi c powers and duties conferred by the

enabling statute. "

Section 120.536(1) and the flush - left

paragraph in section 120.52(8) require a

close examination of the statutes cited by

the agency as authority for the rule at issue

to determine whether those stat utes

explicitly grant the agency authority to

adopt the rule. As this court famously

stated in Save the Manatee Club , the question

is " whether the statute contains a specific

grant of legislative authority for the rule,

not whether the grant of authority is

specific enough. Either the enabling statute

authorizes the rule at issue or it does not. "

Id. at 516 - 517.

42. The issue of whether a rule is an invalid exercise of

delegated legislative authority under section 120.52(8)(b) and

the " flush - left " p rovision must be determined on a case - by - case

basis. Sw. Fla. Water Mgmt. Dist. v. Save the Manatee Club,

Inc. , 773 So. 2d 594, 599 (Fla. 1st DCA 2000).

43 . In the instant case, the statutes cited as the

rulemaking authority for the rule are sections 21 2.0515,

212.17(6), 212.18(2), and 213.06(1) , Florida Statutes .

44. Section 212.0515 deals with " [s] ales from vending

machines; sales to vending machine operators; special provisions;

registration; [and] penalties. " The statute provides definitions

of the phrase " vending machine " and " operator " relating solely to

the imposition of a sales tax on the gross proceeds from the

sales of items of tangible personal property contained within the

machines. The statute deals with tax on sales of items from the

vend ing machines, registration of the machines , and other

miscellaneous provisions (an exemption for churches, synagogues,

nonprofit or charitable organizations, and penalt ies). The

statute authorizes the Department to " adopt rules necessary to

administer thi s section. "

45. Section 212.17 deals with " [t] ax credits or refunds. "

Subsection (6)(a) requires the Department to design, prepare,

print, and furnish to all dealers, except dealers filing through

electronic data interchange, or make available or presc ribe to

the dealers, all necessary forms for filing returns and

instructions to ensure full collection from dealers and an

accounting for the taxes due. Subsection (6)(b) prescribes the

format and instructions necessary for filing returns in a manner

that is initiated through an electronic data interchange to

ensure a full collection from dealers and an accounting for the

taxes due. Section 212.17(8) authorizes the Department to " adopt

rules necessary to administer and enforce this section. "

46. Section 212.18(2) requires the Department to

" administer and enforce the assessment and collection of the

taxes, interest, and penalties " imposed by c hapter 212, and

authorizes the Department to " adopt rules pursuant to

ss. 120.536(1) and 120.54 to enforce the pro visions of [Chapter

212] in order that there not be collected on the average more

than the rate levied herein. The department is authorized to and

it shall provide by rule a method for accomplishing this end. "

47. Section 213.06(1) authorizes the Departm ent to adopt

rules pursuant to sections 120.536(1) and 120.54 to implement

Florida ' s revenue laws.

48. Sections 212.0515, 212.17, 212.18(2), and 213.06(1) do

not address any tax to be imposed on payments between the owner

and operator of a vending machine and the owner of property where

the vending machine may be placed. The statutes do not address

any tax to be imposed on payment s for a lease o r license to use

real property.

49. Contrary to the Department ' s contention, statutes

providing onl y general rulemaking authority do not confer the

necessary specific authority required for a rule to be valid.

Board of Tr s . of the In t . Imp . Tr ust Fund v. Day Cruise Ass ' n,

Inc. , 794 So. 2d 696, 700 (Fla. 1st DCA 2001); Fla. Dep ' t of

High. Saf. & Motor V eh . v. JM Auto, Inc. , 977 So. 3d 733, 734

(Fla. 1st DCA 2008).

50. In sum, sections 212.0515, 212.17, 212.18(2), and

213.06(1) do not confer the Department with specific authority to

enact the i nstant rule dealing with taxing payment s between the

owner and operator of a vending machine and the owner of the

property where the vending machine may be placed as a license to

use real property.

51 . Accordingly, the Department exceeded its rulemaking

authority , and the rule is an invalid exercise of delegate d

legislative authority.

52. In its proposed final o rder, th e Department relies on a

1992 Final O rder in Family Arcade Alliance v. D ep artment of

Revenue , Case No. 91 - 5338RP, 1992 Fla. Div. Adm. Hear. LEXIS 6111

(Fla. DOAH Mar. 17, 1992 ). In Family Arca de Alliance , a group

composed primarily of businesses that operate amusement game

machines challenged several proposed rules of the Department. In

paragraph 59 of the Final Order, Hearing Officer William R.

Dorsey, Jr. , addressed the group ' s contention th at proposed rule

12A - 1.004(10) (the predecessor to that portion of the rule

challenged in the instant case) " impermissibly enlarges or

modifies the statute implemented. " Id. at *44. In response,

Hearing Officer Dorsey stated the following:

Section 212. 05(1)(j)2.a, Florida Statutes

(1991), says a machine owner who is also an

operator cannot deduct from the sales tax due

any rent or license fee paid to the location

owner. The statutory language implicitly

treats the arrangement as a lease or license

to u se real property. The statutory language

is sufficient authority for the rule ' s

presumption, when coupled with the language

of Section 212.031, Florida Statutes (1991),

which imposes sales tax on the business of

leasing or granting a license to use real

p roperty. Both sections are cited in the

portion of the rule disclosing the statutes

the rule implements.

Id.

53 . The Department ' s reliance on Family Arcade Alliance is

misplaced. Family Arcade Alliance did not address whether the

proposed rule was an invalid exercise of delegated legislative

authority in violation of section 120.52(8)(b) and the " flush -

left " provision. Rather, the issue in Family Arcade Alliance was

whether the " rule impermissibly enlarges or modifies the statute

implemented . " (emphasis added). A claim that a rule enlarges,

modifies, or contravenes the specific provisions of law

implemented is a separate claim under section 120.52(8)(c). 6/

54 . Contrary to the Department ' s assertion, section 212.031

does not confer the Department with specific authority to enact

the rule dealing with taxing payments between the owner and

operator of a ve nding machine and the owner of the property where

the vending machine may be placed as a lease or license to use

real property. Sectio n 212.031 is not cited in the rule as

rulemaking authority. An agency cannot rely on statutory

provisions not cited in the rule as rulemaking authority. State

v. Peter R. Brown Constr., Inc. , 108 So. 3d 723, 726 - 727 (Fla.

1st DCA 2013); Dep ' t of Child. & Fam. Servs. v . I.B. , 891 So. 2d

1168, 1172 (Fla. 1st DCA 2005). In any event, section 212.031

addresses taxation on a lease or license to use real property,

but it does not address the taxation of vending machine s.

Finally, section 212.031 does no t spec ific ally grant any

authority to enact rules.

55 . GBR also contends that the rule is an invalid exercise

of delegated legislative authority in violation of section

120.52(8)(c) because the rule enlarges, modifies, or contravenes

the specific provision s of law implemented . Under section

120.52(8)(c), the test is whether the rule gives effect to the

specific laws to be implemented and whether the rule implements

or interprets specific powers and duties. Day Cruise Ass'n ,

Inc. , 794 So. 2d at 704.

56 . The statutes cited as the law implemented for the rule

are sections 212.02(10)(g), (14), (15), (16), (19), (24);

212.031; 212.05(1)(h); 212.0515; 212.054(1), (2) , and (3)(l . );

212.055; 212.07(1) and (2); 212.08(1), (7) and (8); 212.11(1);

212.12(2 ) , (3), (4) , and (9); 212.18(2) and (3).

57 . The provisions in section 212.02 are definitions of

terms referenced in the rule.

58 . The Department principally relies on section 212.031.

As discussed above, section 212.031 addresses taxation on a lea se

or license to use real property, but it does not address the

taxation of vending machines. Not only does the rule address

vending machines, but it goes even further dictating that a

vending machine owner , who is also the operator , is aut omatically

s ubj ect to a tax on payment s to the property owner as a lease or

license to use real property based solely on the owner/operator ' s

" place[ment][of] the machine at another person ' s location. "

Accordingly, the rule enlarges, modifies, or contravenes section

212 .031.

59 . The Department concedes that section 212.05(1)(h) is a

law imposing tax on coin - operated amusement machines, and was

cited in error as the law implemented.

60 . As discussed above, section 212.0515 does not address

any tax to be imposed on paym ents between the owner and operator

of a vending machine and the owner of property where the vending

machine may be placed, and it does not address any tax to be

imposed on a lease or license to use real property. Accordingly,

the rule enlarges, modifies , or contravenes section 212.0515 .

61 . Sections 212.054 and 212.055 relate to discretionary

sales surtax. Section 212.07(1) and (2) relate to a privilege

tax on retail sales and resales. Section 212.08 relates to

exemptions. Section 212.11(1) relates to the method of

calculating an estimated tax liability. Section 212.12(2), (3),

(4), and (9) relates to penalties. Section 212.18(2) relates to

the Department ' s authority to administer and enforce the

assessment and collection of taxes and to adopt rule s " to enforce

the provisions of this chapter in order that there shall not be

collected on the average more than the rate levied. " Section

212.18(3) relates to registration certificates and penalties for

failure to apply and obtain certificates of registr ation. These

statutes do not address any tax to be imposed on payments between

the owner and operator of a vending machine and the owner of

property where the vending machine may be placed, and they do not

address any tax to be imposed on a lease or licen se to use real

property. Accordingly, the rule enlarges, modifies, or

contrave nes sections 212.054; 212.055; 212.07(1) and (2); 212.08;

212.11(1); 212.12(2), (3), (4) and (9); 212.18(2) and (3).

Case No. 18 - 4992RU -- Challenge to Section 1.1.3.3 of the

D epartment ' s SAP

62 . Section 120.56(4)(a) authorizes any person who is

substantially affected by an agency statement to seek an

administrative determination that the statement is actually a

rule whose existence violates section 120.54(1)(a) because the

agency has not formally adopted the statement. GBR has standing

to seek an administrative determination that section 1.1.3.3 of

the SAP (the agency statement) is actually a ru le because

Ms. Gray considered the statement during the course of the audit.

63 . Section 120.54(1)(a) declares that " [r]ulemaking is not

a matter of agency discretion " and directs that " [e]ach agency

statement defined as a rule by s. 120.52 shall be adopted by the

rulemaking procedure provided by this section as soon as fe asible

and practicable. "

64 . Section 120.52(16) defines the term " rule, " in

pertinent part, as:

Each agency statement of general

applicability that implements, interprets, or

prescribes law or policy or describes the

procedure or practice requirem ents of an

agency and includes any form which imposes

any requirement or solicits any information

not specifically required by statute or by an

existing rule.

65 . To be a rule, a statement of applicability must operate

in the manner of a law. Thu s, an agency statement is " generally

applicable " if it is intended by its own effect to create rights,

or to require compliance, or otherwise to have the direct and

consistent effect of law. Coventry First, LLC v. Off. of Ins.

Reg. , 38 So. 3d 200, 203 (Fl a. 1st DCA 2010); Jenkins v. State ,

855 So. 2d 1219, 1225 (Fla. 1st DCA 2003).

66 . Section 120.56(4)(c) authorizes an administrative law

judge ( " ALJ " ) to enter a final order determining that all or part

of a challenged statement violates section 120.54( 1)(a). The ALJ

is not authorized to decide, however, whether the statement is an

invalid exercise of delegated legislative authority as defined in

section 120.52(8). Thus, in a section 120.56(4) proceeding, it

is not necessary or even appropriate for the ALJ to decide

whether an unadopted rule exceeds the agency ' s grant of

rulemaking authority, for example, or whether it enlarges,

modifies, or contravenes the specific provisions of law

implemented, or is otherwise " substantively " an invalid exercise

of de legated legislative authority. Section 120.56(4) is

forward - looking in its approach. It is designed to prevent

future or recurring agency action based on an unadopted rule, not

to provide relief from the final agency action that has already

occurred.

6 7 . In Dep artment of Rev enue v. Vanjaria Enter prise s ,

675 So. 2d 252 (Fla. 5th DCA 1996), the Department attempted to

subject a taxpayer to sales tax based on calculations pursuant to

a procedure set forth in its sales and use tax training manual.

The cou rt held the Department ' s tax assessment procedure was a

" rule " because it was a " statement of general applicability that

implements, interprets, or prescribes law or policy. " Id . at 255.

Specifically, the court found that the Department ' s tax assessment

procedure created its entitlement to taxes while adversely

affecting property owners, with the training manual being the sole

guide for auditors in their assessment of multiple - use properties.

In determining exempt versus nonexempt uses of multiple - use

pr operties, the Department ' s auditors strictly complied with the

procedure set forth in the training manual for all audits

performed. Moreover, the Department ' s auditors were not afforded

any discretion to take action outside the scope of the training

manua l. Id .

68 . However, in Coventry First, LLC , an insurance company

challenged the O ffice of I nsurance R egulation's policy and

procedures requiring production of records regarding out - of - state

transactions as an unpromulgated rule. The First District held

that the evidence presented at hearing supported the ALJ ' s

conclusion that the documents were internal management memoranda,

not statements of general applicability, because their use was

subject to the discretion of the examiners, and they did not

so licit or require any information not required by statute. Id.

at 204.

69 . Moreover, in Dep artment of Highway Safety & Motor

Vehicles v. Schluter , 705 So. 2d 81, 82 (Fla. 1st DCA 1997), the

First District held that three policies of the agency were not

unpromulgated rules because the record established that they were

only to apply under " certain circumstances. " The court found

such statements to be merely guidelines in that their application

was subject to disc retion, and, therefore, the policy did not

have the direct and consistent effect of law. Id.

70 . Finally, in Agency for Health Care Administration v.

Custom Mobility, Inc. , 995 So. 2d 984, 986 (Fla. 1st DCA 2008),

the First District held that a formula was not an unpromulgated

rule beca use it was subject to discretionary application in that

the agency could choose whethe r or not to use the methodology .

71 . As detailed above, at hearing, Ms. Gray testified that

the Department ' s SAP is an audit planni ng tool or check list which

she used i n conducting GBR ' s audit. The SAP can be modified by

the auditors on a word document, employees are not bound to

follow the SAP, and t he SAP was not relied on by Ms. Gray or the

Department in the NOD.

72 . Accordingly, the undersigned concludes that the

D epartment ' s SAP is not an un promulgated rule.

ORDER

Based on the foregoing Findings of Fact and Conclusions of

Law, it is ORDERED as follows: (1) a s to DOAH Case No. 18 -

4475RX, Florida Administrative Code Rule 12A - 1.044(5)(a) is an

invalid exercis e of delegated legislative authority in violation

of section 120.52(8), Florida Statutes (2018) 7/ ; (2) a s to DOAH

Case No. 18 - 4992RU, GBR ' s P etition is dismissed; and (3) t he

undersigned retains jurisdiction to address issues regarding

attorney ' s fees and costs.

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

Tallahassee, Leon County, Florida.

S

DARREN A. SCHWARTZ

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkwa y

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 .

ENDNOTE S

1/ Unless otherwise indicated, citations to stat utes and

administrative rules are to the 2018 versions of the Florida

Statutes and Florida Administrative Code.

2/ Ms . Gray and Mr. Zych were both party representatives of the

Department.

3/ 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 sales

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

$13,790.00 was for untaxed rent (Exhi bit B02); and $227,041.04

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

sales tax on the sale of the revenue items sold from the vending

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

The only remaining issue in DOAH Case No. 18 - 2722 is whether GBR

is liable f or $227,041.04 as a tax on a lic ense to use real

property, plus applicable interest. On this issue, the

undersigned has recommended order authority, and the challenge in

that case is being addressed in a separate Recommended Order.

The challenges in DOAH Case Nos. 18 - 4475RX and 18 - 4992RU are

being addressed in the instant Final Order because the

undersigned has final order authority in DOAH Case Nos. 18 - 4475RX

and 18 - 4992RU.

4/ Section 1.1.3.3 of the SAP provides as follows:

For vending machines only, if both the owner

of the machine and the location owner have

the keys to the money box and are responsible

for removing the receipts, then they shall

designate in writing who shall be considered

the operator. Absent such written

designation, the owner of the machine shall

be deemed to [b]e the operator (See Rule 12A -

1.044, F.A.C.). Do not confuse with Section

212.05(h)2c., F.S., which provides otherwise.

For both amusement and vending machines, if

available, check written agreement for terms.

The agree ment should identify who is

responsible for remitting the tax on the

receipts, who is responsible for purchasing

the certificate (as operator of an amusement

machine or will provide a notice on the

vending machine, and whether the arrangement

if a lease o f tangible personal property (the

machines) or a lease of real property (See

TAA 96A - 006 and TUB 95(A)1 - 001).

5/ Rule 12A - 1.044, titled Vending Machines, was first promulgated

by the Department in 1968. The rule has been amended many times

since 1968, w ith the most recent amendment enacted in January

2018. In the most recent amendment in January 2018, subsection

(6)(a) was renumbered as (5)(a), but the substantive language

within the rule remained the same. Thus, the opera tive rule

provision in effect during the audit period, cited in the NOD and

relied on by the Department in making the B03 assessment , was

subsection (6)(a).

6/ Notably, t he Legislature had not even enacted the " flush - left "

provision when the Final Order in Family Arcade Alliance wa s

issued. The flush - left provision, which was adopted in 1999,

represents the Legislature ' s intent to clarify significant

restrictions on agencies ' exercise of rulemaking authority.

B d . of Tr s . o f the Int . Imp ust Fund v. Day Cruise Ass ' n,

Inc. , 794 S o. 2d 696, 700 (Fla. 1st DCA 2001).

7/ This Final Order only addresses the validity of existing

rule 12A - 1.044(5)(a) , formerly (6)(a) because that is the only

rule provision cited in the NOD as legal authority for the B 03

assessment and the Department' s proposed agency action to impose

a sales tax on the monies paid by GBR to the schools as a license

to use real property . Because the undersigned has determined

that section (5)(a) is invalid, and the NOD does not rely on any

other provisions of the rule as a basis for the Department ' s

proposed action, it is unnecessary for the undersigned to

specifically address the validity of any provisions in the rule

other than (5)(a) . However, to the extent the Department may

seek to justify the B03 assessment agai nst GBR based on any other

provision s with in the rule , such other provisions would also

constitute an invalid exercise of delegated legislative authority

for the same reasons discussed above.

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 Denni s, Esquire

Office of the Attorney General

Revenue Litigation Bureau

The Capitol , Plaza Level - 01

Ta llahassee, 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 33 0

Tallahassee, Florida 32312

(eServed)

Mark S. Hamilton, General Counsel

Department of Revenue

Post Office Box 6668

Tallahassee, Florida 32314 - 6668

(eServed)

Leon M. Biegalski , Executive Director

Department of Revenue

Post Office Box 6668

Tallahassee, Florida 32314 - 6668

(eServed)

Ken Plante, Coordinator

Joint Admin istrative Proced ures Committee

Room 680, Pepper Building

111 West Madison Street

Tallahassee, Florida 32399 - 1400

(eServed)

Ernest Reddick, Program Administrator

Anya Grosenbaugh

Florida A dministrative Code & Register

Department of State

R. A. Gray Building

500 South Bronough Street

(eServed)

NOTICE OF RIGHT TO JUDICIAL 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 filing 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 res ides or

as otherwise provided by law.