91-007583 Johnson Smith-Lighter Side Company vs. Department Of Revenue Status: Closed Recommended Order on Monday, August 3, 1992.

Summary: Sufficient evidence to show that transfer of title to tangible personal property occurred at destination rather than point of origin.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

JOHNSON SMITH-LIGHTER SIDE CO., )

)

Petitioner, )

)

vs. ) CASE No. 91-7583

)

STATE OF FLORIDA, )

DEPARTMENT OF REVENUE, )

)

Respondent. )

_________________________________)

RECOMMENDED ORDER

Pursuant to notice, William R. Cave, the assigned Hearing Officer, from the

Division of Administrative Hearings, held a formal hearing in the above-styled

case on April 9, 1992, in Bradenton, Florida.

APPEARANCES

For Petitioner: Mitchell I. Horowitz, Esquire

FOWLER WHITE GILLEN BOGGS

VILLAREAL & BANKER, P.A.

501 East Kennedy Boulevard

Post Office Box 1438

Tampa, Florida 33601

For Respondent: C. Lynne Chapman, Esquire

Assistant Attorney General

Department of Legal Affairs

Tax Section, The Capitol

Tallahassee, Florida 32399 1050

STATEMENT OF THE ISSUES

1. Whether charges made by Petitioner for "shipping, handling, packing and

guaranteed safe delivery" were subject to sales tax during the audit period.

2. Whether penalty was properly assessed against Petitioner.

PRELIMINARY STATEMENT

Johnson Smith-Lighter Side Company (Johnson Smith) is in the mail order

business, and during the audit period at issue operated out of a facility

located in Bradenton, Florida. Johnson Smith used various types of carriers in

order to cause the delivery of items sold to its customers. During the audit

period in question, Johnson Smith did not charge sales tax on the items

referred to in the order form as "Shipping, Handling, Packing and Guaranteed

Safe Delivery."

The Department of Revenue (Department), in its audit of Johnson Smith's

business for the period of July 1, 1985 through December 31, 1989 (audit

period), determined that charge for the items "Shipping, Handling, Packing and

Guaranteed Safe Delivery" should have been subject to sales tax, resulting in a

sales tax assessment of $9,063.17. Also, the Department made other sales and

use tax assessments against Johnson Smith totalling $33,466.85 to which Johnson

Smith agreed and paid at the conclusion of the audit. Finally, the Department

determined that Johnson Smith was liable for the penalty under Section

212.12(2), Florida Statutes, at maximum rate of twenty-five percent (25%), or a

total of $11,859.02, on all issues raised in the audit, including those to which

Johnson Smith agreed and paid at the conclusion of the audit. All of these

matters were set out in the Department's Notice of Intent to Make Audit Changes

dated July 12, 1990.

A Notice of Proposed Assessment was issued by the Department to Johnson

Smith dated October 12, 1990, to which Johnson Smith filed a Protest dated

December 12, 1990. The Protest contested only the issues on the item "Shipping,

Handling, Packing and Guaranteed Safe Delivery" and delinquent penalty. By

Notice of Decision dated September 30, 1991, Johnson Smith was notified that the

Department had taken adverse action by denying all clams made in the Protest. A

Petition for Administrative Hearing dated November 18, 1991 was filed with the

Department on November 22, 1991.

By letter dated November 22, 1991 this matter was transferred to the

Division of Administrative Hearings by the Department for the assignment of a

Hearing Officer and to conduct a hearing. The matter was scheduled for hearing

on April 9, 1992.

At the hearing, Johnson Smith presented the testimony of Ronald Hernden and

Paul Hoenle. Johnson Smith's exhibits 1 through 5 were received as evidence in

this case. The Department presented the testimony of Derrick Boston.

Department's exhibits 1 through 3 were received as evidence in this case.

A transcript of this proceeding was filed with the Division of

Administrative Hearings on April 29, 1992. At the conclusion of the hearing,

the parties requested and were granted until May 20, 1992 to file their proposed

findings of fact and conclusions of law with the understanding that any time

constraint imposed in Rule 28-5.402, Florida Administrative Code, for the

issuance of a Recommended Order was waived pursuant to Rule 22I-6.031(2),

Florida Administrative Code. The parties timely filed their proposed findings

of facts and conclusions of law under the extended time frame. A ruling on each

proposed finding of fact submitted by the parties has been made and is reflected

in an Appendix to the Recommended Order.

FINDINGS OF FACT

Based upon the stipulated facts, the testimony of the witnesses, and the

documentary evidence received at the hearing, the following relevant findings of

fact are made:

Stipulated Facts

1. Johnson Smith is a Florida corporation with corporate headquarters and

a warehouse located in Manatee County, Florida. Johnson Smith is in the

business of making mail order sales of small items of tangible personal property

throughout the United States. Johnson Smith has no showroom and all its sales

are mail order sales.

2. Johnson Smith has been in business for over 78 years and moved its base

of operations from Michigan to Bradenton, Florida in July of 1986.

3. The Department of Revenue (Department) conducted a Sales and Use Tax

Audit of Johnson Smith for the period June 1, 1985 through December 31,1989. As

a result of this audit, Johnson Smith was assessed for delinquent sales and use

tax, penalty and interest. [Joint Exhibit 1] The assessment was in the amount

of $42,530.02 for tax, $11,859.00 for penalty and $11,192.46 for interest

through October 10, 1990. Johnson Smith agreed that $33,466.85 of the tax plus

interest on that amount was due and has paid all undisputed tax and interest.

Johnson Smith disputed the remainder of the tax and interest and all of the

assessed penalty.

4. Johnson Smith timely protested disputed amounts of tax, penalty and

interest. The disputed amounts are:

TAX PENALTY INTEREST

$9,063.17 $11,859.02** $3,589.04*

* computed through November 19, 1991 and

accruing at $2.98 daily.

** this figure appears to be incorrect in that

25% of the total tax assessment of $42,4530.02

(Schedule A $13,099.66 and Schedule B $29,430.36)

amounts to $10,632.51 rather than $11,859.02.

Johnson Smith timely filed a Petition for Administrative Hearing with the

Department; accordingly, the Division of Administrative Hearings has

jurisdiction over the case.

5. During the audit period, Johnson Smith periodically mailed catalogs to

its customers. Each catalog contained an order form. All order forms used

during the audit period were substantially similar. Joint Exhibit 2 is a sample

order form. Joint Exhibit 3 is a sample catalog. During the audit, a copy of

Joint Exhibit 2 was given to the Department's Auditor by an employee of the

taxpayer when the Auditor asked for a copy of Johnson Smith's order form.

6. Each order form instructed the customer to pay a charge for "Shipping,

Handling, Packing and Guaranteed Safe Delivery." During the audit period, no

sales tax was collected or remitted on this charge by Johnson Smith. The

Auditor assessed sales tax on this charge for sales to Johnson Smith's customers

within Florida.

7. During the audit period, all orders were shipped to Johnson Smith's

customers by United Parcel Service or the United States Postal Service. United

Parcel Service was primarily used by Johnson Smith. Both United Parcel Service

and the Postal Service charged for shipping by weight of the item and the zone

of the United States where the package is being shipped.

8. Johnson Smith is not contesting the methodology or accuracy of the

audit.

Additional Findings of Fact

9. The Department's auditor assessed sales tax on the charge for

"shipping, handling, packing and guaranteed safe delivery" because the charges

were not separately stated. The auditor did not consider whether the tangible

personal property was shipped "FOB origin" or "FOB destination." In fact, even

if the shipping charges had been separately stated, the auditor's testimony was

that he would not have considered whether the goods were shipped "FOB origin" or

"FOB destination," and would have charged sales tax on the shipping charges.

10. The Department reviewed the invoices for the sample months of October

1986, October 1987 and February 1988 to determine the ratio of Florida sales to

sales everywhere. Using this sampling technique, the Department determined that

approximately 4.06 percent of all sales made by Johnson Smith during the audit

period were made in Florida, and taxable.

11. Using the year 1989 as a sample period, Johnson Smith reviewed

invoices and determined the amount it received for the charge "shipping,

handling, packing and safe delivery" from customers for all Florida sales to be

$60,803.00. To determine the shipping charges attributable to Florida sales

Johnson Smith multiplied 4.06 percent times all shipping charges paid to

carriers by it during 1989. This amount was $71,248.00 or approximately

$10,455.00 more than received from customers for shipping Florida sales.

Additionally, it was the unrebutted testimony of Paul Hoenle that the cost of

shipping Florida sales exceeded the amount collected from customers for Florida

sales for the charge "shipping, handling, packing and safe delivery" set out on

its order form. At all times material to this proceeding, Paul Hoenle was

President and 100% stockholder of Johnson Smith, and was very familiar with all

aspects of the operation of Johnson Smith.

12. There was competent, substantial evidence to establish facts to show

that the cost of shipping Florida sales exceeded the amount received by Johnson

Smith for the charge set forth in the order form as "Shipping, Handling,

Packaging and Guaranteed Safe Delivery" for Florida sales.

13. The term "handling, packaging and guaranteed safe delivery" was a

merchandising tool used by Johnson Smith to convince the customer that the were

getting a "good deal" and to avoid complaints about high shipping costs.

14. Johnson Smith performed the services of handling, packing. However,

the cost for these services were included in the price of the item being sold.

15. In a typical sale, Johnson Smith would receive an order from the

customer, with either a check or a credit card number in payment for the item(s)

purchased. The order would be entered, the item(s) pulled from inventory,

placed in appropriate packaging, wrapped and addressed to the designated

delivery address shown on the Johnson Smith order form. Once this was

completed, the check was deposited or the credit card charge entered.

16. All arrangements with the carrier(s) to pick up the item(s) for

delivery to the customer were made by Johnson Smith. All items for shipment to

the customer were picked up at the Johnson Smith distribution facility in

Bradenton, Florida. The customers did not make any of the arrangements with the

carrier for delivery of the item(s) purchased by the customer. Johnson Smith

selected the carrier to be used for delivery unless the customer indicated on

the order form a preference for a particular carrier. The order forms

introduced into evidence did not indicate that the customer had the option to

select the carrier. However, Paul Hoenle testified that some order forms did

offer the customer this option, and when the customer noted a preference for a

particular carrier then that carrier was used for delivery.

17. Usually where the item being shipped did not exceed a $100.00 in value

the carrier furnished insurance on the item in its normal shipping charge. In

those cases where the item being shipped exceeded $100.00 in value the carrier

charged an additional amount above the regular shipping charge to insure the

item. In those instances where the item shipped was lost or damaged by the

carrier, Johnson Smith was reimbursed by the carrier and either replaced the

item lost or damaged without cost to the customer or reimbursed the customer the

price of the item.

18. There is competent, substantial evidence to establish facts to show

that Johnson Smith was responsible for the item until it was delivered to the

customer at the address furnished by the customer, and that title to the

property did not pass to the customer until the item was delivered to the

customer by the carrier at the address furnished by the customer.

19. Johnson Smith's structuring of its order form is consistent with order

forms of other mail order sales firms in and outside of state of Florida in that

the order forms of other mail order firms do not indicate that sales tax was

charged on shipping, packing and handling charges. However, there was no

evidence that the Department, in its audit of these other mail order sales

firms, treated the charge for shipping, packing and handling for sales tax

purposes any differently than it did in its audit of Johnson Smith.

20. Just prior to its move from Michigan to Florida, Johnson Smith hired

Hernden to become its internal controller. Hernden had previously owned his own

accounting practice in Michigan, and Johnson Smith was one of his accounting

clients. Hernden is a Certified Public Accountant in both Michigan and Florida,

and, at the time of the final hearing, was in charge of the tax department at

the accounting firm of Christopher, Smith & Gentile in Bradenton, Florida, which

is the Petitioner's current accounting firm.

21. Johnson Smith, which had no specific knowledge of Florida tax law,

hired Hernden and charged him with the responsibility of learning Florida tax

law and applying that information to Johnson Smith's business operations.

Hernden had full access to all of the Petitioner's sales and purchase

information.

22. While in Michigan, Johnson Smith maintained its books and records

manually. Prior to moving to Florida, Johnson Smith studied various computer

based systems designed specifically for a mail order business. After reviewing

several available software programs, Johnson Smith hired a company based in

Indiana to install a computer system for order entry and inventory control, as

well as to determine the amount of sales to Florida residents for purpose of

sales and use tax reporting.

23. The computer system was installed and operational at the time Johnson

Smith commenced its business operations in Florida. However, a minor "glitch"

in the program inadvertently caused, during the audit period, the misreporting

of monthly sales in Florida, resulting in either too much or not enough sales

tax reported to the Department.

24. Johnson Smith had no data on which to determine its historical sales

to Florida. Thus, Johnson Smith was unable to ascertain that the computer

program and system installed by the computer specialists engaged by Johnson

Smith had this "glitch," which caused the additional tax due shown on Schedule

A-1 attached to the Notice of Intent to Make Audit Changes.

25. Johnson Smith engaged both a New York law firm, as well as a local law

firm, to assist it in obtaining an income tax exempt industrial revenue bond to

construct its distribution facility located in Bradenton, Florida. In addition,

Johnson Smith also had engaged the accounting firm of Christopher, Smith &

Gentile by the time Johnson Smith moved from Michigan to Florida in July 1986.

None of these professionals ever advised Johnson Smith that sales tax was due on

the lease payments made by Johnson Smith to its related landlord during the

audit.

26. Hernden handled the acquisition of the computer equipment and

accessories, and believed that Florida sales tax was included in the total sales

price charged by the seller for such equipment. Hernden knew the Florida

requirement that the charge for sales tax must be separately stated, but

believed that the responsibility for charging, collecting, and remitting any

sales tax due on the purchase of the computer equipment was that of the seller,

and not that of Johnson Smith, and that the seller had in fact complied with

this duty.

27. In the Internal work papers prepared by the Department's auditor, it

was recommended that the delinquent penalty charge be reduced to ten percent

(10%), which recommendation was agreed to by auditor's supervisor. Despite this

recommendation, the full twenty-five percent (25%) penalty was assessed against

Johnson Smith.

28. There is competent, substantial evidence to establish facts to show

that Johnson Smith's noncompliance with its obligation to collect and remit the

additional amounts of sales and use tax determined to be due by the Respondent

as a result of the subject audit was due to reasonable cause, and not willful

neglect or willful negligence.

CONCLUSIONS OF LAW

29. The Division of Administrative Hearings has jurisdiction over the

parties to, and the subject matter of, this proceeding pursuant to Sections

72.011 and 120.57(1), Florida Statutes.

30. Section 212.02(16)(a), Florida Statutes, defines a sale to mean any

transfer of title or possession, or both, exchange, barter, license, lease, or

rental, conditional or otherwise, in any manner or by any means whatsoever, of

tangible personal property for a consideration.

31. Section 212.06(1)(a), Florida Statutes, provides that sales tax is due

upon the sales price of taxable goods at the moment of sale.

32. Section 212.02(17), Florida Statutes, in pertinent part, defines sales

price as follows:

"Sales price" means the total amount paid

for tangible personal property, including any

services that are a part of the sale, valued

in money, whether paid in money or otherwise,

and includes any amount for which credit is

given to the purchaser by the seller, without

any deduction therefrom on account of the

cost of the property sold, the cost of

materials used, labor or service cost,

interest charged, losses, or any other

expense whatsoever.

In the instant case, Johnson Smith has shown that the separately stated charge

for "Shipping, Handling, Packaging and Guaranteed Safe Delivery" is in fact a

charge for shipping and therefore, would not be considered as part of the sales

price, and taxable, unless it can be shown that transfer of title to the goods

occurred at the destination rather than at the time the carrier accepted the

goods for delivery at Johnson Smith's distribution facility in Bradenton,

Florida. Rule 12A-1.045 and Rule 12A-1.103, Florida Administrative Code. In

the instant case, there is competent, substantial evidence to show that transfer

of title to the goods occurred at the destination rather than at the time the

carrier picked up the items at Johnson Smith's distribution facility in

Bradenton, Florida. Therefore, the charge separately stated on the Order Form

as "Shipping, Handling, Packaging and Guaranteed Safe Delivery" is subject

to sales tax.

33. Section 212.12(2)(a), Florida Statutes, imposes a penalty upon a

taxpayer who fails to timely pay sales or use tax when due. The imposition of

the penalty is mandatory. However, the legislature has given the Department the

authority and the discretion to compromise or settle the penalty when the

Department determines that noncompliance is due to reasonable cause and not due

to willful negligence, willful neglect, or fraud. Section 212.21(3), Florida

Statutes. The Department promulgated and adopted Rule 12-13.007, Florida

Administrative Code, which sets out the conditions upon which the penalty can be

compromised or settled. The Petitioner has produced sufficient evidence of

compliance with the above rule to justify a reduction in the amount of the

penalty.

RECOMMENDATION

Based on the foregoing finding of fact and conclusions of law, it is,

accordingly,

RECOMMENDED:

That the Department of Revenue enter a Final Order as follows:

(1) Upholding the assessment of sales tax and interest on the charge for

shipping, handling, packing and guaranteed safe delivery, in the amount of

$9,063.17 for the tax and $3,589.04 for interest accrued through November 19,

1991 plus interest accruing at the rate of $2.98 per day from, and including,

November 20, 1991 until paid.

(2) Assessing a penalty of ten (10) percent on the total amount of taxes

owed ($42,530.02) for a total penalty of $4,253.00.

DONE and ENTERED this 3rd day of August, 1992, in Tallahassee, Leon County,

Florida.

___________________________________

WILLIAM R. CAVE

Hearing Officer

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

[phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 3rd day of August, 1992.

APPENDIX TO RECOMMENDED ORDER IN CASE NO. 91-7583

The following constitutes my specific rulings pursuant to Section

120.59(2), Florida Statutes, on the Proposed Findings of Fact submitted by the

parties in this case.

Specific Rulings On Proposed Findings of Fact

Submitted by the Petitioner

1. The following proposed findings of fact are adopted in substance as

modified in the Recommended Order. The number in parenthesis is the finding(s)

of fact which so adopts the proposed finding(s) of fact: 1(1); 2(2); 6(7);

7(16); 8(17); 9(16); 10-11(15); 12(11,12); 13(13); 14(12,14); 15(19); 17(11,12);

18-19(9); 24-25(27); 26(28); 27(20); 28(21); 30(22); 31(23); 32(24); 35(25); 36-

37(10); and 40(26).

2. Proposed findings of fact 3, 4, 5, 16, 29, 33, 34, 38, and 39 are

either unnecessary or not relevant to the conclusion reached in the Recommended

Order..

3. Proposed findings of fact 20 through 23 are conclusions of law rather

than findings of fact.

Specific Rulings on Proposed Findings of Fact

Submitted by the Respondent

1. The following proposed findings of fact are adopted in substance as

modified in the Recommended Order. The number in parenthesis is the finding(s)

of fact which so adopts the proposed finding(s) of fact: 1 - 8;(1 - 8); 9(9 and

14); 13(6); 14(16 and 17); 15(13); 16(16); 17(15); 18(11); and 19(19).

2. Proposed finding of fact 10 is rejected as not being supported by

competent, substantial evidence in the record.

3. Proposed findings of fact 11 and 12 are covered in the Preliminary

Statement.

4. Proposed findings of fact 20 through 22 are not relevant as they go to

the weight given to the testimony of the witnesses Hoenle and Hernden.

COPIES FURNISHED:

Mitchell I. Horowitz, Esquire

FOWLER WHITE GILLEN BOGGS

VILLAREAL & BANKER

Post Office Box 1438

Tampa, Florida 33601

C. Lynne Chapman, Esquire

Assistant Attorney General

Department of Legal Affairs

Tax Section, The Capitol

Tallahassee, Florida 32399 1050

Vicki Weber, Esquire

General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399 0100

J. Thomas Herndon

Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399 0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions to this Recommended

Order. All agencies allow each party at least 10 days in which to submit

written exceptions. Some agencies allow a larger period within which to submit

written exceptions. You should contact the agency that will issue the final

order in this case concerning agency rules on the deadline for filing exceptions

to this Recommended Order. Any exceptions to this Recommended Order should be

filed with the agency that will issue the final order in this case.