93-000256F Lauren, Inc. vs. Department Of Revenue Status: Closed DOAH Final Order on Monday, December 20, 1993.

Summary: No fees awarded where DOR's assessment of tax, although subsequesntly with- drawn, had reasonable basis in fact and law at time it was made.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

LAUREN INC., )

)

Petitioner, )

)

vs. ) CASE NO. 93-0256F

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

________________________________)

FINAL ORDER

Pursuant to notice, a formal hearing was conducted in this case on August

30, 1993, in Tallahassee, Florida, before Stuart M. Lerner, a duly designated

Hearing Officer of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Marie A. Mattox, Esquire

3045 Tower Court

Tallahassee, Florida 32303

Michael Coniglio, Esquire

104 East Third Avenue

Tallahassee, Florida 32303

For Respondent: Eric J. Taylor, Esquire

Assistant Attorney General

Office of the Attorney General

The Capitol, PL01

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

Whether Petitioner is entitled to an award of attorney's fees and costs

pursuant to Section 57.105, 57.111, or 120.575, Florida Statutes, for those fees

and costs Petitioner reasonably incurred as a result of its participation in the

administrative proceeding (DOAH Case No. 92-3612) in which it challenged the

decision of the Department of Revenue (hereinafter referred to as the

"Department" or "Respondent") to issue an assessment against it for taxes owed,

plus penalty and interest, for its alleged use, during the audit period, of real

property in connection with its coin-operated machine business?

PRELIMINARY STATEMENT

On January 19, 1993, following the entry of a final order by the Department

adopting the Hearing Officer's recommendation in DOAH Case No. 92-3612 that it

withdraw the assessment it had issued against Petitioner, Petitioner filed a

petition with the Division of Administrative Hearings requesting that it be

awarded attorney's fees and costs "pursuant to Section 57.105, Section 57.111,

and Chapter 120, F.S." for fees and costs it incurred in successfully

challenging the assessment. On March 1, 1993, the Hearing Officer issued an

order dismissing the petition because it did not comply with all of the

requirements of Rule 60Q-2.035, Florida Administrative Code. The dismissal was

"without prejudice to Petitioner filing an amended petition [meeting] the

requirements of Rule 60Q-2.035, Florida Administrative Code, within 30 days of

the date of this order."

Petitioner filed an amended petition on March 29, 1993. The Department

requested, and was granted, an extension of time to file its response to the

amended petition. The Department's response was filed on May 3, 1993. In its

response, the Department contended that, contrary to the position taken by

Petitioner in the amended petition, the "assessment of sales taxes [against

Petitioner] for the use of real property had a basis in law and fact at the time

of the assessment" and that there were "special circumstances" that would make

the award sought by Petitioner "unjust." It further observed, in a footnote,

that it was "doubtful" that Section 57.105, Florida Statutes, one of the

statutory provisions upon which Petitioner was relying, authorized Hearing

Officers to make fee and cost awards inasmuch as the statute "speaks in terms of

'court.'"

Following his review of the Department's response to the amended petition,

the Hearing Officer determined that it was necessary for him to conduct an

evidentiary hearing in order to resolve the dispute that existed between the

parties with respect to the issues of "substantial justification" and "special

circumstances." Such a hearing was ultimately held, as noted above, on August

30, 1993. At the outset of the hearing the parties entered into various

stipulations. The Department did not present any evidence to supplement these

stipulations. Petitioner presented the testimony of Marie A. Mattox, Esquire,

its counsel of record in this and the underlying proceeding. It also offered 21

exhibits (Petitioner's Exhibits 1 through 13 and 15 through 22) into evidence.

All 21 exhibits offered by Petitioner were received by the Hearing Officer. In

addition, the Hearing Officer indicated that, at the request of the parties, he

would take official recognition of all pertinent statutory and rule provisions,

as well as the Recommended Order and Final Order issued in the underlying

administrative proceeding.

At the close of the evidentiary portion of the hearing on August 30, 1993,

the Hearing Officer advised the parties on the record that post-hearing

submittals had to be filed no later than 30 days following the Hearing Officer's

receipt of the hearing transcript. The Hearing Officer received the hearing

transcript on September 10, 1993. On September 30, 1993, the Department filed

an unopposed motion requesting an extension of the deadline for filing post-

hearing submittals. The motion was granted and the deadline was extended to

Friday, November 12, 1993. The Department filed its proposed final order on

November 12, 1993. That same day, Petitioner filed a motion requesting a

further extension of the filing deadline for post-hearing submittals. The

motion's certificate of service reflects that a copy of the motion was served by

United States Mail on counsel for the Department on November 12, 1993. To date,

no response to the motion has been filed. Upon consideration, the motion is

hereby GRANTED and Petitioner's post-hearing submittal, which was filed on

Monday, November 15, 1993, will be treated as having been timely filed.

The parties' post-hearing submittals each contain, what are labelled as,

"findings of fact." These proposed "findings of fact" have been carefully

considered and are specifically addressed in the Appendix to this Final Order.

FINDINGS OF FACT

Based upon the evidence adduced at hearing, the stipulations of the

parties, matters officially recognized and the record as a whole, the following

Findings of Fact are made:

1. Petitioner is a Florida corporation that was at all times material to

the instant case (but is no longer) in the coin-operated machine business.

2. It owned various amusement and game machines that were placed at

different locations pursuant to agreements with the location operators.

3. Most of these agreements were not reduced to writing.

4. In those instances where there was a written agreement, a "Location

Lease Agreement" form was used, with insertions made where appropriate in the

spaces provided. The form indicated, among other things, that Petitioner was

"in the business of leasing, renting, servicing, maintaining and repairing of

coin-operated machines" and that the agreement was "for the placement, servicing

and maintaining of certain coin-operated machines" in the location specified in

the agreement.

5. In the coin-operated machine trade, the custom (hereinafter referred to

as the "industry custom") was for the parties to an oral or written agreement

for the placement of an amusement or game machine on the property of another to

treat such an agreement as involving the location operator's rental of the

machine owner's tangible personal property rather than the machine owner's

rental of the location operator's real property.

6. Petitioner and the location operators with whom it contracted followed

this custom of the trade in their dealings with one another. They construed

their agreements as involving the rental of Petitioner's tangible personal

property by the location operators and acted accordingly. Petitioner collected

from the location operators the sales tax due on such rentals and remitted the

monies collected to Respondent. 1/ It engaged in this practice for

approximately a decade without challenge by Respondent.

7. In late 1990 and early 1991, Respondent conducted a routine audit

(Audit No. 90-19801486) of Petitioner's records. The audit covered the period

from January 1, 1988, to September 30, 1990 (referred to herein as the "audit

period").

8. The Department's auditors are, for the most part, college-trained

accountants.

9. While they receive Department-sponsored training in the general

procedures and standards they are expected to adhere to in conducting their

audits, they are not provided with training and information regarding the trade

customs and practices that are unique to particular industries or businesses

they audit.

10. The Department auditors who conducted the audit of Petitioner's

records reviewed, among other things, those agreements between Petitioner and

location operators that were reduced to writing.

11. Based upon their reading of these agreements, the auditors

erroneously, yet not unreasonably given the imprecise contractual language used,

believed that the agreements into which Petitioner had entered were actually for

the rental of the location operators' real property, not the rental of

Petitioner's machines. They therefore concluded that, in light of then existing

provisions of Rule 12A-1.044, Florida Administrative Code (hereinafter referred

to as the "Rule"), Petitioner, as opposed to the location operators, should have

paid sales tax and that Petitioner's purchase of machines and parts should not

have been treated as tax exempt.

12. In March of 1991, the Department sent Petitioner a Notice of Intent to

Make Sales and Use Tax Audit Changes for the audit period based upon the

auditors' findings.

13. The Notice advised Petitioner of its right to meet with the Department

and discuss these findings made by the auditors.

14. Petitioner requested such a meeting.

15. The meeting was held on May 7, 1991, in Tallahassee.

16. Petitioner's attorney, Marie A. Mattox, Esquire, represented

Petitioner at the meeting. Mattox was accompanied by Robert Matthews, one of

Petitioner's officers.

17. The Department was represented by the head of the its Bureau of

Hearings and Appeals and several other employees.

18. Mattox and the Department representatives discussed the contents of

the written agreements the auditors had reviewed. During the discussion, Mattox

reminded the Department representatives of the "industry custom." 2/ In

addition, she brought to their attention that the agreements under review

involved amusement and game, not vending, machines.

19. The meeting lasted only approximately ten minutes.

20. Mattox and Matthews left the meeting with the impression, based upon

the comments made by the Department representatives, that the matter would be

resolved in Petitioner's favor.

21. To their surprise, on May 23, 1991, the Department issued a Notice of

Proposed Assessment in which it announced its intention, based upon Audit No.

90-19801486, to issue an assessment against Petitioner in the amount of

$238,780.06 for taxes owed (plus penalty and interest) for Petitioner's alleged

use, during the audit period, of real property in connection with its coin-

operated machine business.

22. The Notice of Proposed Assessment contained a statement advising

Petitioner of its right to protest the Department's proposed action.

23. Mattox, on behalf of Petitioner, responded to the Notice of Proposed

Assessment by sending a letter, dated July 22, 1991, to the Department's General

Counsel. In her letter, Mattox advised the General Counsel that Petitioner was

contesting the proposed assessment and made the following argument in support of

Petitioner's position that the Department had made "an error:"

This tax has been assessed apparently because

of a misunderstanding on the part of the

auditors as to the arrangements under which

Lauren, Inc. conducts business. As I am sure

you are aware, under Rule 12A-1.004, Florida

Administrative Code, there are various arrange-

ments and agreements through which amusement

and game machine owners conduct business. The

first arrangement is where the machine owner

rents the real property upon which the machine

is located from the location owner. Under this

arrangement, the machine owner pays a "lease fee"

to the location owner, which fee is subject to

sales and use tax. Under this arrangement, the

location owner collects tax upon the lease fee

and remits said tax to the state.

The second arrangement through which amusement

and machine owners conduct business is where the

machine is rented by the location owner. Under

this scenario, the machine owner acts as tax

collector for the State and submits sales and

use tax paid on the "rental fee" paid to the

machine owner by the location owner.

On March 25, 1991, Carmen R. Cordoba, C.P.N.,

Audit Group Supervisor with the Department of

Revenue, wrote to Mr. Matthews indicating that

the Department was construing the arrangement

under which Mr. Matthews operated to be a lease

of real property as opposed to the rental of

personal property. Specifically, the Department

stated the following: "we found them to be

agreements to lease space to place the vending

machines." To the contrary, Mr. Matthews'

agreements are not for the rental of real property.

Instead, he rents his personal property (the

amusement and game machines) to the various

locations. Under this scenario, Mr. Matthews is

responsible for collecting sales and use tax on

the rental fee paid to him and transmitting the

sales and use tax thereon to the Department of

Revenue. Apparently, the Department of Revenue

has assessed an additional use tax on the payments

made to the location owners where the Department

has construed that Lauren, Inc. "rents space" for

the machines. An additional tax has been assessed

on the purchase of the machines, purchases of parts,

etc... because the Department found that he was not

renting these machines. This is simply in error.

The Department has specified that Lauren, Inc.

must refund all taxes collected from the

location owners where Lauren, Inc., purportedly

"rents space." At that point, Lauren, Inc. can

apply for a refund on the taxes paid by Lauren,

Inc. on the rental of the personal property. It

is my opinion that this is a simple misunderstanding

by the Department of Revenue staff as not under-

standing the arrangements made by Lauren, Inc.

in conducting its business with various location

owners.

24. On July 25, 1991, Mattox sent a copy of this letter to the Disposition

Section of the Department's Bureau of Hearings and Appeals.

25. By letter dated September 6, 1991, the Administrator of the Sales Tax

Appeals Section of the Department's Bureau of Hearings and Appeals gave notice

that Mattox's July 22, 1991, letter, had "been accepted for review as a

qualifying protest."

26. On November 13, 1991, a Notice of Decision was issued denying the

protest.

27. The nature of the protest was described in the Notice of Decision as

follows:

Lauren, Inc. is protesting the assessment of

use taxation for the rental of real property

involving the following situations:

1. Taxation of purchases of vending machines,

repairs and purchasers [sic] of parts; and

2. Tax erroneously collected to be reimbursed

to customers/landlords and taxpayer to request a

refund from D.O.R.

28. The following were set forth in the Notice of Decision as the "facts"

pertinent to the protest:

This is a first time audit of the taxpayer.

The taxpayer is a full service vending machine

business.

The taxpayer has furnished representative con-

tracts between his business and the location

owners where his machines are placed. The

specifics of the contracts are discussed below.

According to the agreement, the taxpayer "installs,

operates, services, and maintains coin operated

machines on the proprietor's premises."

The taxpayer has collected tax from location owners

on their share of the proceeds, which he refers to

as "rentals of the machine" to the location owners.

The contract provides for the location owner to

provide a space for the vending machines. It makes

no reference whatsoever to a lease of the machine to

the location owner. The taxpayer collects the money

from the machines, and when applicable, also provides

and owns the merchandise.

29. The Notice of Decision contained the following discussion and analysis

of the "law and [Petitioner's] argument:"

You argue in the letter of protest that the Lauren,

Inc. lease agreements are for the rental of

personal property (the vending machines) to

various locations. You state that "Mr. Matthews

is responsible for collecting sales and use tax

on the rental fee paid to him and transmitting

the sales and use tax thereon to the Department

of Revenue." You also state "an additional tax

has been assessed on the purchase of the machine,

purchases of parts, etc.... because the Department

found that he was not renting these machines.

This is simply in error."

A tax is imposed on the privilege of engaging in

the business of coin operated vending and amusement

machines by Rule 12A-1.044(2)(A), F.A.C., which is

written as follows:

"(a) When coin-operated vending and amusement

machines or devices dispensing tangible personal

property are placed on location by the owner of

the machines under a written agreement, the terms

of the agreement will govern whether the agreement

is a lease or license to use tangible personal

property or whether it is a lease or license to

use real property."

Rule 12A-1.044(4), F.A.C., states..."the purchase

of amusement machines or merchandise vending

machines and devices is taxable, unless purchased

for exclusive rental."

The effect of the agreement is utterly clear.

Lauren, Inc. provides the food and cigarette items

to be sold. The sales revenues belong to Lauren,

Inc. Sales tax is due the state from Lauren, Inc.

on the entire amount of those sales revenues. A

share of the sales revenues is paid to the location

owner by Lauren, Inc. as consideration for what the

location owner has provided, a license to use his

realty by placing the vending machines on the

premises. NO RENT WHATSOEVER FOR THE MACHINES IS

PAYABLE BY THE LOCATION OWNER TO LAUREN, INC. UNDER

THE AGREEMENT.

Generally, whether an agreement is a lease or a

license depends upon the intent of the parties as

determined from the entire agreement. In determining

the intent of the parties, the fact that the parties

may use terms such as "lease," "lessor," "lessee,"

or "rent" will not be determinative of whether an

agreement is a lease.

In Napoleon v. Glass, supra, 224 So.2d 883 (3d Dist.

Ct. App. 1968), the court, at 884-885 states:

"Although the parking concession agreement was

called a Concession Lease and provided for the

payment of 'rent,' the document unquestionably

created a licensor-licensee relationship rather

than a landlord-tenant relationship."

30. The "conclusion" that the Department reached by applying the foregoing

principles of "law" to the pertinent "facts" in Petitioner's case was

articulated as follows in the Notice of Decision:

It is the Department's position that based upon

the terms of the agreements provided by Lauren,

Inc. that this is a license to use the location

owner's real property rather than a lease of

Lauren, Inc.'s tangible personal property to

the location owners.

Likewise, absent a re-rental of the vending

machines, the sales tax is due from, Lauren,

Inc. on its purchases of and repairs to its

vending machines. Likewise, the taxes collected

in error by the taxpayer from his customers should

be reimbursed to the taxpayer's customers. The

audit findings shall, therefore, remain as assessed.

31. The Notice of Decision advised Petitioner of its right to file a

Petition for Reconsideration.

32. Such a Petition for Reconsideration was subsequently submitted on or

about December 10, 1991, by Mattox on Petitioner's behalf.

33. In the Petition for Reconsideration, Mattox made the following

argument:

The Notice of Decision is flawed in all respects.

With respect to issue No. 1, which the Tax Conferee

[the author of the Notice] has entitled "Vending

Machines," even the situations set forth are

incorrect.

Lauren, Inc. does not contest nor is there any

issue related to any finding regarding its vending

machines. There is simply no issue regarding

vending machines. There is also no issue regarding

the taxation of purchases of vending machines,

repairs, and/or purchases or parts. Lauren, Inc.,

purchases its machines and performs repairs for

machines that are rented to various locations.

Therefore, under Rule 12A-1.044, Florida Admini-

strative Code, these purchases and repairs are

exempt from taxation.

The only issue in this case is the factual

scenario with which Lauren, Inc. conducts business.

Under Rule 12A-1.044, Florida Administrative Code,

there are several instances in which the rental

of tangible personal property are recognized.

The Tax Conferee has apparently ignored the

industry standards in this regard and has

misinterpreted the manner and method in which

Lauren, Inc., conducts business.

As I originally stated in my July 22, 1991

correspondence to the Department protesting the

assessment of Sales and Use Tax, Lauren, Inc.

has agreements with various location owners to

place amusement and game machines at any particular

location and the location owner rents Lauren,

Inc.'s personal property (amusement and game machines).

Even under the Location Lease Agreements that Lauren,

Inc. has with its customers, they specify that the

company (Lauren, Inc.) is in "the business of leasing,

renting, servicing, operating, maintaining and

repairing... coin operated machines..."

I am absolutely confounded as to why the Department

has determined that Lauren, Inc., owes the above-

stated tax and penalty. There has never been any

question that Lauren, Inc. collected tax from the

various locations and remitted this tax to the

Department of Revenue. It appears that Lauren,

Inc. is now to apply for a refund to the Department

of Revenue, pay all sums already paid to the Depart-

ment of Revenue to the various locations where its

machines are located, for the various locations to

remit this same amount back to the Department of

Revenue. This simply does not make sense to me.

34. With respect to the statement made in the Notice of Decision that the

"effect of the agreement is utterly clear," Mattox continued:

We are in complete agreement with the Tax

Conferee in this regard, except for the fact

that our conclusions are utterly inapposite.

Lauren, Inc. does provide food and cigarette

items to be sold out of the various machines,

however, in this audit and protest, there is

no issue regarding food and cigarette items or

the tax paid thereon. The only issue is the

[e]ffect of the agreement between Lauren, Inc.

and the location owners. If the Tax Conferee

had characterized this relationship correctly,

a completely different result would have been

reached. Lauren, Inc. does have vending machines

as well as amusement and game machines. The Tax

Conferee may have confused the vending arrangements

with location owners with the amusement and game

agreements. There is a recognized difference

industry wide in the method and manner within

which vending businesses and amusement and game

business are conducted. There has been no such

recognition by the Tax Conferee and we would

sincerely appreciate the opportunity to present

additional evidence, if necessary, to the

Department of Revenue for its reconsideration

of the issues raised herein.

35. Sometime after it received the Petition for Reconsideration, the

Department, through one of its employees, Vicki Allen, telephoned Mattox and

asked her to provide the Department with any additional materials she wanted the

Department to consider.

36. Mattox responded to this request by letter dated February 19, 1992, in

which she stated the following:

You have requested that I provide additional

information regarding Lauren, Inc. however,

in lieu of providing this information through

the mails, I would like the opportunity to sit

down and explain in person our position regarding

the sales and use tax assessments set forth in

the recent assessment.

Moreover, I am not certain as to whether any

additional documentation or information exists

or the nature of the documentation that will be

helpful to you. Upon your receipt of this

correspondence, please contact me to discuss

this matter further. We are more than willing

to provide additional information, but truly

believe that the issues involved in this assessment

could be resolved through a meeting between all

parties concerned. Please advise accordingly.

37. Allen never responded to Mattox's letter.

38. On April 21, 1992, the Department issued a Notice of Reconsideration

sustaining an assessment against Petitioner in the amount of $206,017.85 for

taxes owed (plus penalty and interest).

39. Allen was the author of the Notice of Reconsideration.

40. The following were set forth in the Notice of Reconsideration as the

"facts" upon which the sustained assessment was based:

Lauren, Inc. is in the business of owning and

operating coin-operated vending machines. The

corporation entered into various agreements under

which it received permission to install, place,

operate, service and maintain its coin-operated

vending machines on the premises of various

location owners in return for an agreement to

pay the location owners a percentage of the

gross receipts from the machines.

The corporation interpreted the agreements to

be transactions involving the rental of tangible

personal property and not for the license to use

real property. Therefore the corporation collected

and remitted tax on the gross receipts taken from

the machines and from the location owners on the

rental of the machines as provided under Rule 12A-

1.044(2)(b), F.A.C.

The auditor determined that the agreements between

Lauren, Inc. and the location owners, involving the

placement of vending machines at the various location

owner's premises, were agreements made for the license

to use real property and not for the rental of tangible

personal property. Therefore, the auditor assessed use

tax on these transactions. In addition, the auditor

assessed use tax on the purchases made by Lauren,

Inc. for the coin-operated machines, parts, and

accessories.

The only issue maintained by you is whether or not

the agreements between Lauren, Inc. and the location

owners were agreements for the license to use real

property or whether the agreements constitute the

rental of tangible personal property and would

therefore, exempt the purchases of the coin operated

vending machines, parts, and accessories as provided

under Rule 12A-1.044(2)(B), F.A.C.

41. In the Notice of Reconsideration, the Department cited Section 66 of

Chapter 86-152, Laws of Florida, which, the Department stated in the Notice,

"amended Section 212.031, Florida Statutes, (F.S.), effective July 1, 1986, to

make licenses to use real property, as well as leases, subject to tax."

42. The Notice of Reconsideration also contained the following excerpt

from Rule 12A-1.070, Florida Administrative Code:

"(g) An agreement whereby the owner of real

property grants another person permission to

install and maintain a full service coin-operated

vending machine, coin-operated amusement machine,

coin-operated laundry machine, or any like items,

on the premises is a taxable use of real property.

The consideration paid by the machine owner to the

real property owner is taxable."

[Emphasis in original.]

43. In addition, the provisions of subsections (2)(a), (b) and (c) of the

Rule were recited in the Notice of Reconsideration.

44. Allen stated her "conclusion" as follows in the Notice of

Reconsideration:

A review of the agreements presented in the audit

file was made by this writer and the following

conclusion was made:

1. The agreements clearly reflect that Lauren,

Inc. is installing, placing, operating and

maintaining the coin-operated vending machines

on the various location owner's realty for a

percentage of the gross proceeds.

2. Nowhere in the agreements does it state

that Lauren, Inc. is leasing or renting the coin-

operated vending machines to the location owner

for a percentage of the gross proceeds.

3. The agreements do, however, specifically

state that the location owner will provide a space

for Lauren, Inc. to install, operate, service, and

maintain a coin-operated vending machine on the

location owner's premises.

The agreements made between Lauren, Inc., the

owner of the machines[,] is and has been since

July 1, 1986, a taxable license to use real property.

Before that date, amounts paid for leases of real

property were taxable, but licenses to use were not.

Black's Law Dictionary defines a license to use real

property as:

"a privilege to go on premises for a certain

purpose, but does not operate to confer on, or vest

in a licensee any title, interest, or estate in such

property."

The agreements did not confer to Lauren, Inc. any

"title, interest, or estate" in the location owner's

realty, but, instead, only permitted Lauren, Inc.

to come onto the property and place the coin-

operated vending machines on the property for the

purpose of making the machines available to those

who wanted to use them.

It is the Department's decision that the subject

tax was assessed correctly pursuant to Rule 12A-

1.070(1)(g), F.A.C. and 12A-1.044(2)(a) and (c),

F.A.C. and in accordance with Departmental policies

and procedures. The audit findings shall remain as

assessed in the enclosed closing statement.

Particularly in light of the provision of Rule 12A-1.070, Florida Administrative

Code, set forth in the Notice of Reconsideration, the agreements that Petitioner

had provided the Department were reasonably susceptible to the interpretation

that they were, as Allen had concluded, "taxable license[s] to use real

property," notwithstanding that the parties to these agreements had intended

that they be interpreted otherwise.

45. The Notice of Reconsideration advised Petitioner of its right "to file

a petition for a Chapter 120 administrative hearing with the Department."

46. Petitioner filed such a petition with the Department on May 8, 1992.

47. The Department referred the matter to the Division of Administrative

Hearings on June 18, 1992, for the assignment of a Hearing Officer to conduct

the hearing Petitioner had requested.

48. The hearing was held on October 6, 1992.

49. Two witnesses testified at the hearing, Matthews and Manley Lawson, a

member of the Board of Directors of the Florida Amusement and Vending

Association. In addition to the testimony of these two witnesses, a total of 11

exhibits were offered and received into evidence.

50. The evidence presented at hearing was supplemented by a stipulation

into which the parties had entered prior to hearing.

51. On November 23, 1992, the Hearing Officer issued a Recommended Order

recommending that the Department "enter a final order withdrawing the assessment

that is the subject of the instant proceeding."

52. The Hearing Officer's recommendation was based upon the following

Conclusions of Law set forth in his Recommended Order:

11. The instant case is governed by the version

of Rule 12A-1.044, Florida Administrative Code,

that was in effect during the audit period (referred

to herein as the "Rule"). It read in pertinent part

as follows:

"(2) Vending and amusement machines, machine

parts, and locations.

(a) When coin-operated vending and amusement

machines or devices dispensing tangible personal

property are placed on location by the owner of

the machines under a written agreement, the terms

of the agreement will govern whether the agreement

is a lease or license to use tangible personal

property or whether it is a lease or license to

use real property.

(b) If machines are placed on location by the

owner under an agreement which is a lease or license

to use tangible personal property, and the agreement

provides that the machine owner receives a percentage

of the proceeds and the location operator receives a

percentage, the percentage the machine owner receives

is rental income and is taxable. The tax is to be

collected by the machine owner from the location

operator. The purchase of the records, needles,

tapes, cassettes, and similar items, machines,

machine parts and repairs, and replacements thereof

by the machine owner is exempt.

(c) If machines are placed on location by the

owner under an agreement which is a lease or license

to use real property, and the agreement provides

that the machine owner receives a percentage of

the proceeds and the location operator receives

a percentage, the percentage the location operator

receives is income from the lease or license to use

real property and is taxable. The tax is to be

collected by the location operator from the machine

owner. The purchase of the records, needles, tapes,

cassettes, and similar items, machines, machine

parts, and repairs and replacements thereof by

the machine owner is taxable.

* * *

(4) The purchase of amusement machines or

merchandise vending machines and devices is

taxable, unless purchased for exclusive rental.

* * *

(7) The following examples are intended to

provide further clarification of the provisions

of this section:

(a) Example: The owner of Town Tavern enters

into a lease agreement with Funtime Company.

Under the terms of the agreement, Funtime will

provide coin-operated video game machines to Town

Tavern, with Funtime retaining title to the

machines and providing repairs or replacement

parts as necessary. As consideration for the

rental of the machines, Town Tavern will give

Funtime 60 percent of the proceeds from the

machine. By the terms of the agreement, this

arrangement is a lease of tangible personal

property and Funtime, as the lessor, must collect

tax from Town Tavern on the portion of the proceeds

it receives. The purchase of the video game

machines, machine parts, and repairs thereof by

Funtime Company is exempt. The portion of the

proceeds retained by Town Tavern is not taxable.

(b) Example: An amusement and vending machine

owner enters into a license agreement with City

Airport, which grants the machine owner the right

to place amusement and vending machines in Concourse

A. The amusement machines consist of several

electronic games and a pinball machine. The vending

machines consist of soft drink, snack food, and candy

machines. City Airport has the right to designate

the areas within the concourse where the machines

will be located; the machine owner and owner's

employees are to stock the machines and provide

repairs as needed. As consideration under the

agreement, City Airport will receive 15 percent

of all proceeds from the machines. By the terms

of the agreement, this arrangement is a license

to use real property, and City Airport, as the

licensor, must collect tax from the machine

owner." 3/

12. At issue in the instant case is whether

the agreements Petitioner entered into with

location operators during the audit period were,

as claimed by Petitioner, leases or licenses to

use tangible personal property, within the meaning

of subsection (2)(b) of the Rule, or whether they

were, as asserted by Respondent, leases or licenses

to use real property, within the meaning of sub-

section (2)(c) of the Rule.

13. After having carefully examined the record

in the instant case, particularly the stipulations

and evidence regarding the contents of the agreements

in question, how the agreements were interpreted by

Petitioner and the other parties to the agreements,

and the trade customs prevailing at the time, the

Hearing Officer finds that the agreements were

leases or licenses to use tangible personal property,

within the meaning of subsection (2)(b) of the Rule,

and that therefore the assessment issued against

Petitioner, which was predicated upon a contrary

finding, is not valid. See Blackhawk Heating &

Plumbing Co., Inc., v. Data Lease Financial Corp.,

302 So.2d 404, 407 (Fla. 1974)("[i]n the construction

of written contracts, it is the duty of the court,

as near as may be, to place itself in the situation

of the parties, and from a consideration of the

surrounding circumstances, the occasion, and apparent

object of the parties, to determine the meaning and

intent of the language employed;" "[w]here the

terms of a written agreement are in any respect

doubtful or uncertain, or if the contract contains

no provisions on a given point, or if it fails to

define with certainty the duties of the parties

with respect to a particular matter or in a given

emergency, and the parties to it have, by their

own conduct, placed a construction upon it which

is reasonable, such construction will be adopted

by the court, upon the principle that it is the

duty of the court to give effect to the intention

of the parties where it is not wholly at variance

with the correct legal interpretation of the terms

of the contract"); Oakwood Hills Company v. Horacio

Toledo, Inc., 599 So.2d 1374, 1376 (Fla. 3d DCA

1992)("[i]t is a recognized principle of law that

the parties' own interpretation of their contract

will be followed unless it is contrary to law;"

"the court may consider the conduct of the parties

through their course of dealings to determine the

meaning of a written agreement"); International

Bulk Shipping, Inc. v. Manatee County Port Authority,

472 So.2d 1321, 1323 (Fla. 2d DCA 1985)("[w]hile

we agree that the language of Item 220 [of the

tariff] does not clearly cover the shifting charges

at issue, we observe that a court may consider trade

customs and prior dealings between the parties to

give meaning to the provision"); Bay Management,

Inc., v. Beau Monde, Inc., 366 So.2d 788, 793

(Fla. 2d DCA 1978)("where a contract fails to

define with certainty the duties of the parties,

and the parties by their conduct have placed a

reasonable construction on it, . . . such

construction should be adopted by the court").

14. Accordingly, the assessment should be withdrawn.

53. The Department, on January 15, 1993, issued a Final Order adopting the

Hearing Officer's Findings of Fact and Conclusions of Law and his recommendation

that the subject assessment be withdrawn.

CONCLUSIONS OF LAW

Section 57.111, Florida Statutes

54. Petitioner is seeking an award of attorney's fees and costs in the

instant case pursuant to Section 57.111, Florida Statutes, subsection (4)(a) of

which provides as follows:

Unless otherwise provided by law, an award of

attorney's fees and costs shall be made to a

prevailing small business party in any adjudicatory

proceeding or administrative proceeding pursuant

to chapter 120 initiated by a state agency, unless

the actions of the agency were substantially

justified or special circumstances exist which

would make the award unjust.

55. A party seeking such an award of "attorney's fees and costs" 4/ has

the initial burden of proving that it is a "small business party," within the

meaning of the statute, which had prevailed in an earlier "adjudicatory

proceeding or administrative proceeding pursuant to chapter 120 initiated by a

state agency." Once such proof has been submitted, the burden shifts to the

agency to establish by a preponderance of the evidence that its actions in

initiating the proceeding "were substantially justified or special circumstances

exist which would make the award unjust." See Department of Professional

Regulation, Division of Real Estate v. Toledo Realty, Inc., 549 So.2d 715, 717-

18 (Fla. 1st DCA 1989). An agency meets its burden of demonstrating that its

actions were "substantially justified" by showing that the proceeding "had a

reasonable basis in law and fact at the time it was initiated." Section

57.111(3)(e), Fla. Stat.; Gentele v. Department of Professional Regulation,

Board of Optometry, 513 So.2d 672 (Fla. 1st DCA 1987).

56. In the instant case, it is undisputed that Petitioner was a

"prevailing small business party" in an "administrative proceeding pursuant to

chapter 120 initiated by a state agency." 5/

57. The only issue that needs to be resolved to determine Petitioner's

entitlement to an award pursuant to Section 57.111, Florida Statutes, is whether

the Department met its burden of establishing that it was "substantially

justified" in initiating the proceeding.

58. An examination of the evidentiary record in this case reveals that the

Department did meet its burden of proof on this issue.

59. The evidentiary record affirmatively establishes that the assessment

against Petitioner that the Department sustained in its Notice of

Reconsideration had a reasonable basis in law and fact at the time the Notice

issued, notwithstanding that the Department's interpretation of the transactions

upon which the assessment was based as involving licenses to use real property,

and therefore subject to the tax consequences prescribed in subsection (2)(c),

rather than (2)(b), of the Rule, may not have been the only, or even, in the

opinion of some, the most preferable, interpretation possible and further

notwithstanding that such interpretation was subsequently rejected by the

Department in favor of the interpretation urged by Petitioner, which was deemed

to be more consistent with the intent of the parties to the transactions. C.f.

Edward J. Seibert, Architect and Planner, P.A., v. Bayport Beach and Tennis Club

Association, 573 So.2d 889, 892 (Fla. 2d DCA 1990)("[w]hen an agency with the

authority to implement a statute construes the statute in a permissible way,

that interpretation must be sustained even though another interpretation may be

possible"); Gentele v. Department of Professional Regulation, Board of

Optometry, 513 So.2d 672, 673 (Fla. 1st DCA 1987)("DPR's determination to

prosecute essentially turned on a credibility assessment of the investigator's

testimony and, as such, had a reasonable basis in law and fact"); Humhosco v.

Department of Health and Rehabilitative Services, 476 So.2d 258, 261 (Fla. 1st

DCA 1985)("[w]hen an agency committed with authority to implement a statute

construes the statute in a permissible way, that interpretation must be

sustained even though another interpretation may be possible or even, in the

view of some, preferable").

60. Because the preponderance of the evidence establishes that the

Department was "substantially justified" in initiating the underlying

administrative proceeding, Petitioner is not entitled to an award of attorney's

fees and costs under Section 57.111, Florida Statutes, for fees and costs it

incurred as a result of its participation in the proceeding. See Gentele v.

Department of Regulation, Board of Optometry, 513 So.2d 672 (Fla. 1st DCA 1987).

Section 57.105, Florida Statutes

61. Section 57.111, Florida Statutes, is not the only statute upon which

Petitioner relies in support of its position that the Hearing Officer should

require the Department to pay these attorney's fees and costs.

62. Petitioner also contends that the provisions of Section 57.105(1),

Florida Statutes, as well as those of Section 120.575, Florida Statutes,

authorize the Hearing Officer to make such an award.

63. Section 57.105(1), Florida Statutes, provides as follows:

The court shall award a reasonable attorney's

fee to be paid to the prevailing party in equal

amounts by the losing party and the losing party's

attorney in any civil action in which the court

finds that there was a complete absence of a

justiciable issue of either law or fact raised

by the complaint or defense of the losing party;

provided, however, that the losing party's attorney

is not personally responsible if he has acted in

good faith based upon the representations of his

client. If the court finds that there was a

complete absence of a justiciable issue of either

law or fact raised by the defense, the court

should also award prejudgment interest.

64. Statutes such as Section 57.105, Florida Statutes, which authorize an

award of attorney's fees are in derogation of the common law and therefore must

be strictly construed. See Whitten v. Progressive Casualty Insurance, Co., 410

So.2d 501, 505 (Fla. 1982); Certain Lands v. City of Alachua, 518 So.2d 387,

388 (Fla. 1st DCA 1987).

65. Moreover, no statute may be construed in such a manner as to add words

omitted from the statute by the Legislature. See In Re Order on Prosecution of

Criminal Appeals By Tenth Judicial Circuit Public Defender, 561 So.2d 1130, 1137

(Fla. 1990); Chafee v. Miami Transfer Company, Inc., 288 So.2d 209, 215 (Fla.

1974).

66. To construe Section 57.105(1), Florida Statutes, as authorizing

Hearing Officers of the Division of Administrative Hearings to award a

reasonable attorney's fee to a prevailing party in an administrative proceeding,

when the Legislature has employed language in the statute that plainly appears,

particularly when compared to the language used elsewhere in Chapter 57, Florida

Statutes, specifically Section 57.111, Florida Statutes, to limit the authority

to award such a fee under Section 57.105(1), Florida Statutes, to a "court" in a

"civil action," would certainly run counter to these well established rules of

statutory construction.

67. Accordingly, the Hearing Officer declines to adopt such an

interpretation and, instead, finds that under no circumstances does he have the

authority to make a fee award under Section 57.105(1), Florida Statutes.

Section 120.575, Florida Statutes

68. Section 120.575(5), Florida Statutes, provides as follows:

The prevailing party in a proceeding under s.

120.57 authorized by s. 72.01(1), may recover

all legal costs incurred in such proceeding,

including reasonable attorney's fees, if the

losing party fails to raise a justiciable issue

of law or fact in its petition or response.

69. This statutory provision took effect on October 1, 1992, after the

Department had filed its response to Petitioner's petition for an administrative

hearing.

70. Accordingly, it may not be applied to support an award of attorney's

fees and costs against the Department. See Florida Patients Compensation Fund

v. Scherer, 558 So.2d 411, 414 (Fla. 1990); Wilson Insurance Service v. West

American Insurance Company, 608 So.2d 857, 858 (Fla. 4th DCA 1992); Parrish v.

Mullis, 458 So.2d 401, 402 (Fla. 1st DCA 1984).

71. In any event, even if Section 120.575, Florida Statutes, had been in

effect at the time of the filing of the Department's response to the petition,

the Department would still not be liable to pay Petitioner's attorney's fees and

costs thereunder, inasmuch as the position taken by the Department in its

response was not only, at the time, non-frivolous, it had, as explained above, a

reasonable basis in law and fact and therefore was substantially justified. Cf.

Department of Health and Rehabilitative Services v. S.G., 613 So.2d 1380, 1386

(Fla. 1st DCA 1993)("erroneous to equate "a finding of 'no frivolous purpose'

with a finding of 'substantial justification,' as that phrase is defined in

subsection 57.111(3)(e)," Florida Statutes; "while governmental action may not

be so unfounded as to be frivolous, it may nonetheless be based on such an

unsteady foundation factually and legally as not to be substantially

justified);" Lambert v. Nelson, 573 So.2d 54, 56 (Fla. 1st DCA 1990)("[t]otal

or absolute lack of a justiciable issue is tantamount to a finding that the

action is frivolous;" "'[t]he frivolousness of a claim or a defense is to be

judged and determined as of the time it is initially presented, and if it can

pass muster at that point, subsequent developments which render the claim or the

defense to be without justiciable issue in law or fact should not subject the

losing party to attorney's fees'"); Marexcelso Compania Naviera v. Florida

National Bank, 533 So.2d 805 (Fla. 4th DCA 1988)(error to award attorney fees

under Section 57.105, Florida Statutes, 6/ "on the theory that the action

against the Bank, although not initially frivolous, became frivolous after a

certain point in the case").

Based upon the foregoing Findings of Fact and Conclusions of Law, it is

hereby

ORDERED that Petitioner's application for an award of attorney's fees and

costs is DENIED.

DONE AND ENTERED in Tallahassee, Leon County, Florida, this 20th day of

December, 1993.

___________________________________

STUART M. LERNER

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 20th day of December, 1993.

ENDNOTES

1/ In the underlying administrative proceeding, Respondent conceded that, if

these agreements had involved the rental of tangible personal property by the

location owners as Petitioner contended, it would agree that Petitioner had

collected and remitted the "correct" amount of sales tax; and it further

conceded that such amount was "no different than the total amount that

[Petitioner] would have paid its location owners in sales tax" had these

agreements been treated, as Respondent contended they should have been, as

rentals of real property by Petitioner.

2/ Mattox, in her capacity as the General Counsel for the Florida Amusement and

Vending Association, had previously, during 1988 and 1989, met with Department

representatives and provided them with input as to how the Rule should be

drafted to properly reflect the "industry custom."

3/ It is apparent from a reading of this "example," as well as the provisions

of subsection (2)(A), that the framers of the Rule recognized that there were be

circumstances under which an arrangement between an amusement and game machine

owner and a location operator could be considered a license to use real

property.

4/ "Attorney's fees and costs," as that term is used in Section 57.111, Florida

Statutes, "means the reasonable and necessary attorney's fees and costs incurred

for all preparations, motions, hearings, trials, and appeals in a proceeding."

5/ According to Section 57.111(3)(b), Florida Statutes, the term "initiated by

a state agency" means that the state agency:

1. Filed the first pleading in any state or federal court

in this state;

2. Filed a request for an administrative hearing pursuant

to chapter 120; or

3. Was required by law or rule to advise a small business

party of a clear point of entry after some recognizable

event in the investigatory or other free-form proceeding

of the agency.

6/ In its proposed final order, Petitioner correctly observes that "[t]here are

relatively few, if any, cases interpreting Section 120.575, Florida Statutes,

but the requirements of Section 57.105, Florida Statutes, provides a comparable,

if not identical, standard for an award of attorney's fees."

APPENDIX TO FINAL ORDER

IN CASE NO. 93-0256F

The following are the Hearing Officer's specific rulings on, what are

labelled as, "findings of facts" in the parties' proposed recommended orders:

Petitioner's Proposed "Findings of Fact"

14. Rejected as a finding of fact because it is more in the nature of a

conclusion of law.

15. Accepted and incorporated in substance, although not necessarily

repeated verbatim, in this Final Order.

16. First sentence: Rejected because it is more in the nature of a

summary of testimony than a finding of fact based upon such testimony; Second

sentence: Accepted and incorporated in substance; Third sentence: Rejected

because it would add only unnecessary detail to the factual findings made by the

Hearing Officer.

17-19. Rejected as findings of fact because they are more in the nature of

statements of the law.

18. First sentence: To the extent that this proposed finding asserts that

representatives of the Florida Amusement and Vending Association had met with

Department representatives and provided them with input as to how the Rule

should be drafted to properly reflect the "industry custom," it has been

accepted and incorporated in substance. To the extent that it states that it

was the intent of the Department officials to draft the Rule to provide that, in

all instances, agreements between amusement and game machine owners and location

operators should be construed as the location operator's rental of the machine

owner's tangible personal property, as is the "industry custom," regardless of

the language contained in their agreement, it has been rejected because it is

not supported by persuasive competent substantial evidence; Second sentence:

Accepted and incorporated in substance; Third sentence: Rejected because it is

not supported by persuasive competent substantial evidence; Fourth sentence:

To the extent that this proposed finding asserts that it was the intent of the

Department officials to draft the Rule to provide that, in all instances,

agreements between amusement and game machine owners and location operators

should be construed as the location operator's rental of the machine owner's

tangible personal property, as is the "industry custom," regardless of the

language contained in their agreement, it has been rejected because it is not

supported by persuasive competent substantial evidence. To the extent that it

states that "subsection (7)(a) deals specifically with an example as to who has

the tax paying responsibility related to coin-operated amusement and game

machines," it has been rejected as a finding of fact because it is more in the

nature of a statement of the law; Fifth sentence: Rejected as a finding of

fact because it is more in the nature of a statement of the law.

21. Accepted and incorporated in substance.

22. First sentence: Accepted and incorporated in substance; Second

sentence: To the extent that this proposed finding asserts that there was

evidence before the auditors supporting the conclusion that "the arrangement

that Lauren, Inc. had with its various locations constituted a lease of tangible

personal property as opposed to a lease of real property," it has been accepted

and incorporated in substance. To the extent that it suggests that they had no

evidence to support a contrary conclusion, it has been rejected because it is

not supported by persuasive competent substantial evidence.

23. To the extent that this proposed finding states that the auditors'

conclusion was contrary to the provisions of the Rule, it has been rejected as a

finding of fact because it is more in the nature of a conclusion of law.

Otherwise, it has been accepted and incorporated in substance.

24. Rejected because it is not supported by persuasive competent

substantial evidence.

25-30. Accepted and incorporated in substance.

31. Last sentence: Rejected because it would add only unnecessary detail

to the factual findings made by the Hearing Officer; Remaining sentences:

Accepted and incorporated in substance.

32-33. Accepted and incorporated in substance.

34. To the extent that this proposed finding asserts that in her July 22

and 25, 1991, letters, Mattox "again reminded" the Department of the "industry

custom," it has been rejected because it is not supported by persuasive

competent substantial evidence. Otherwise, it has been accepted and

incorporated in substance.

35. Accepted and incorporated in substance.

36. Rejected because it would add only unnecessary detail to the factual

findings made by the Hearing Officer.

37. First and second sentences: Accepted and incorporated in substance;

Third sentence: Rejected because it is not supported by persuasive competent

substantial evidence.

38. Rejected because it is not supported by persuasive competent

substantial evidence.

39-43. Accepted and incorporated in substance.

44. First sentence: Accepted and incorporated in substance; Second

sentence: To the extent that this proposed finding suggests that the assessment

was based solely upon the "conception that the Department was dealing with

'vending machines,' rather than 'amusement and game machines,'" it has been

rejected because it is not supported by persuasive competent substantial

evidence. Otherwise, it has been accepted and incorporated in substance.

45-47. Accepted and incorporated in substance.

48. Before second comma: Accepted and incorporated in substance; After

second comma: Rejected because, even if it were true, it would have no impact

upon the outcome of the instant case inasmuch as the Department, through its

representatives, did not "view. . . these machines with the naked eye." It

simply, in accordance with subsection (2)(a) of the Rule, reviewed the

agreements into which Petitioner had entered.

49. Rejected because it would add only unnecessary detail to the factual

findings made by the Hearing Officer.

50-51. Accepted and incorporated in substance.

52-56. Rejected because they would add only unnecessary detail to the

factual findings made by the Hearing Officer.

Respondent's Proposed "Findings of Fact"

1-4. Accepted and incorporated in substance.

5-6. Rejected as findings of fact because they are more in the nature of

statements of the law.

7. Accepted and incorporated in substance.

8. To the extent that this proposed finding suggests that the Department's

auditors are, for the most part, college-trained accountants and that they

receive Department-sponsored training in the general procedures and standards

they are expected to adhere to in conducting their audits, but are not provided

with training and information regarding the trade customs and practices that are

unique to particular industries or businesses they audit, it has been accepted

and incorporated in substance. Otherwise, it has been rejected because it is

not supported by persuasive competent substantial evidence.

9-13. Accepted and incorporated in substance.

14. Rejected as a finding of fact because it is more in the nature of a

conclusion of law.

15. Accepted and incorporated in substance.

16-18. Rejected as findings of fact because they are more in the nature of

statements of the law.

COPIES FURNISHED:

Marie A. Mattox, Esquire

3045 Tower Court

Tallahassee, Florida 32303

Michael Coniglio, Esquire

104 East Third Avenue

Tallahassee, Florida 32303

Eric J. Taylor, Esquire

Assistant Attorney General

Office of the Attorney General

The Capitol, PL01

Tax Section

Tallahassee, Florida 32399-1050

Larry Fuchs, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399-0100

Linda Lettera, Esquire

General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399-0100

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 one copy of a notice of appeal with the Agency Clerk of the

Division of Administrative Hearings and a second copy, accompanied by filing

fees prescribed by law, with the District Court of Appeal, First District, or

with the district court of appeal in the appellate district where the party

resides. The notice of appeal must be filed within 30 days of rendition of the

order to be reviewed.