94-006644 Nickels And Dimes, Inc. vs. Department Of Revenue Status: Closed Recommended Order on Friday, June 28, 1996.

Summary: Taxpayer failed to prove that purchases were exempt from taxation or that penalties should not be imposed.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

NICKELS AND DIMES, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 94-6644

)

STATE OF FLORIDA, DEPARTMENT )

OF REVENUE, )

)

Respondent. )

___________________________________)

RECOMMENDED ORDER

This dispute was referred to the Florida Division of Administrative

Hearings and assigned to its duly designated Hearing Officer, Claude B.

Arrington. No formal hearing was conducted because the parties stipulated to

all facts that underpin this proceeding and waived the opportunity to present

oral argument.

APPEARANCES

For Petitioner: William E. Keadle, Tax Manager

Ernst and Young LLP

200 South Biscayne Boulevard, Suite 3900

Miami, Florida 33131-5313

For Respondent: Charles Catanzaro, Esquire

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

The petition that initiated this proceeding challenged the taxes, interest,

and penalties assessed against Petitioner by Respondent following an audit and

identified the following four issues:

Issue One. Does the sale of obsolete games at

the "annual game sale" qualify for exemption from

sales tax as an occasional or isolated sale?

Issue Two. Are the purchases of video games

exempt from Florida sales and use tax as sales

for resales?

Issue Three. Are the purchases of plush exempt

from Florida sales and use tax as sales for resale

or, alternatively, does taxation of the vending

revenues and taxation of purchases of plush

represent an inequitable double taxation?

Issue Four. Should penalties be assessed based

upon the facts and circumstances [of this proceeding].

PRELIMINARY STATEMENT

Respondent audited Petitioner for the period December 1, 1986, through

November 30, 1991. As a result of that audit, Respondent asserted that

Petitioner owed sales and use tax, transit surtax, and infrastructure tax.

Petitioner timely challenged the assessment and made certain payments pursuant

to Section 120.575(3), Florida Statutes. The dispute was referred to the

Division of Administrative Hearings, and this proceeding followed. The parties

stipulated to the facts that underpin this dispute and thereafter declined the

opportunity for oral argument. Both parties submitted a proposed recommended

order which contained the stipulated facts and the respective arguments on the

issues. The findings of fact contained in this Recommended Order are based

completely on the stipulation of the parties. Consequently, the proposed

findings of fact submitted by the parties are adopted by the Recommended Order.

FINDINGS OF FACT

1. Petitioner is an Illinois Corporation headquartered in Texas and

licensed to do business in Florida.

2. Petitioner owns and operates video and arcade game amusement centers,

hereafter referred to as centers.

3. Petitioner sells to center customers the opportunity to play the games

in the centers.

4. Petitioner purchases the games from sources outside itself; it does not

manufacture the games it makes available in its centers.

5. Petitioner paid sales tax upon the purchase of machines purchased in

Florida and use tax upon the purchase of machines outside Florida and imported

for use inside Florida.

6. The Florida Department of Revenue (DOR) is the State of Florida agency

charged with the enforcement of Chapter 212, Florida Statutes, Tax on Sales, Use

and Other Transactions, the Transit Surtax, and the Infrastructure Surtax -- the

state and local taxes at issue in this case.

7. The DOR audited Petitioner for the period December 1, 1986 through

November 30, 1991, hereafter referred to as the audit period.

8. During the audit period, Petitioner operated 12 centers in the State of

Florida. For purposes of the instant litigation, references to the centers will

mean only the centers located in Florida.

9. The audit determined that Petitioner owed $51,593.37 in sales and use

tax, $440.81 in transit surtax, and $1,459.80 in infrastructure surtax. Each of

the sums assessed included penalty and interest accrued as of September 13,

1994.

10. In accordance with section 120.575(3), Florida Statutes, Petitioner

paid $32,280 as follows:

a. sales and use tax $22,411

b. interest 8,575

c. charter transit surtax 234

d. interest 64

e. infrastructure surtax 750

f. interest 246

11. The centers make available three types of games. The games are

activated either by a coin or a token that is purchased at the center.

a. Video games include pinball machines and electronic games which do not

dispense coupons, tickets or prizes.

b. Redemption games include skeeball, hoop shot and water race which

dispense coupons or tickets which the player earns according to his or her

skill.

c. Merchandise games include electronic cranes which the operator or

player maneuvers to retrieve a prize directly from the machine. Merchandise

games do not dispense coupons or tickets.

12. The tickets earned in the course of playing redemption games can be

exchanged for prizes displayed at the centers.

13. The prizes obtained directly from the merchandise games and exchanged

following receipt from redemption games are termed "plush."

14. Plush may be obtained only by seizing it in a redemption game or by

redeeming coupons earned during the play of redemption games; it may not be

purchased directly for cash.

15. A merchandise game does not dispense an item of plush upon the

insertion of a coin or token and activation of the crane's arm -- acquisition of

plush requires a certain level of skill on the player's part.

16. A redemption game does not dispense an item of plush upon the

insertion of a coin or token and the push of a button -- acquisition of tickets

requires a certain level of sill on the player's part.

17. Petitioner purchases plush in bulk and distributes it to the various

centers.

18. Each of the centers sells some of its games to individual buyers.

19. Petitioner's headquarters coordinates the sale.

20. For each of the years in the audit period, the centers sold games at

various dates.

21. Petitioner characterizes as its "annual sale" the period November 1

through January 10 when most of the sales took place.

22. The specific dates for the sales that took place during the audit

period follow; numbers in square brackets indicate the number of sales on a

particular date if there is more than one.

a. December 1986 through July 1987 -- no information available -- but more

than one sale was made during this time.

b. November 1987: 2, 5, 7, 10, 17, 18[2], 20, 22, 25, 28[3]

c. December 1987: 2, 4, 7, 15, 18, 23

d. November 1988: 4, 5, 7[2], 9, 10, 11, 17, 18, 20[2], 21[2], 25, 26, 28,

29

e. December 1988: 6, 7, 8, 10[2], 12[2], 16, 21, 22, 23[2], 24

f. January 1989: 3, 6, 7[4], 9, 12

g. November 1989: 6, 15, 16[2], 20

h. December 1989: 1, 6, 10, 22, 29[3], 31

i. January 1990: 26

j. March 1990: 26

k. April 1990: 26

l. June 1990: 12

m. November 1990: 3, 9, 13[2], 14, 16, 19, 24, 26

n. December 1990: 1, 2, 7, 20

o. January 1991: 8

p. May 1991: at least 1

q. November 1991: 4, 9, 10, 14, 15, 21

23. Petitioner did not provide its machine vendors resale certificates

upon Petitioner's purchase of the games.

24. Petitioner did not provide its plush vendors resale certificates upon

Petitioner's purchase of plush.

25. Petitioner did not apply for a refund of sales tax paid upon its

purchase of games in Florida.

CONCLUSIONS OF LAW

26. The Division of Administrative Hearings has jurisdiction of the

parties to and the subject matter of this proceeding. Section 120.57(1),

Florida Statutes.

27. Petitioner asserts that its sales of obsolete games are exempt from

taxation as occasional or isolated sales and that its purchases of plush and its

purchases of video games are exempt from taxation as sales for resale.

Petitioner has the burden of proving by a preponderance of the evidence that it

is entitled to the exemptions it claims. Rule 28-6.08(3), Florida

Administrative Code. See also, Florida Department of Transportation v. J.W.C.,

Co., 396 So.2d 778 (Fla. 1st DCA 1981). Petitioner also asserts that reasonable

cause exists for the Respondent to compromise the imposition of penalties

pursuant to Rule 12-13.007, Florida Administrative Code. It is Petitioner's

burden to establish that Respondent's refusal to compromise the penalties

imposed against Petitioner is contrary to law, rule, or policy, that it is

arbitrary or capricious, or that it is otherwise an abuse of agency discretion.

28. Section 212.05, Florida Statutes (1985), provides for the taxation of

the sale at retail of tangible personal property. This tax is either in the

form of a sales tax or a use tax. Section 212.05, Florida Statutes (1985),

provides, in pertinent part, as follows:

It is hereby declared to be the legislative intent

that every person is exercising a taxable privilege

who engages in the business of selling tangible

personal property at retail in this state . . .

29. A purchaser may be liable for the payment of sales and use taxes

pursuant to Section 212.07(9), Florida Statutes (1985), which provides, in

pertinent part, as follows:

(9) Any person who has purchased at retail,

used, consumed, distributed, or stored for use

or consumption in this state tangible personal

property . . . and cannot prove that the tax

levied by this chapter has been paid to his

vendor . . . is directly liable to the state

for any tax, interest, or penalty due on any

such taxable transactions.

30. Section 212.02(2)(a), Florida Statutes (1985), defined the term

"sale", in pertinent part, as follows:

(2) "Sale" means and includes:

(a) Any transfer of title or possession, or

both, exchange, barter, lease, or rental,

conditional or otherwise, in any manner or by

any means whatsoever, of tangible personal

property for a consideration.

31. Rule 12A-1.037, Florida Administrative Code, provided, at the times

pertinent to this proceeding, as follows:

(1)(a) Occasional or isolated sales of

tangible personal property made by a person

who does not hold himself out as engaged in

business are exempt (from sales and use tax).

(b) An occasional or isolated sale occurs

when the sale is made by the owner of tangible

personal property under the following circumstances:

1. The seller does not hold himself out as

engaged in business and such sales or series of

sales occur no more frequently than 2 times during

any 12 month period. The third sale or series of

sales of tangible items during any 12 month period

makes that person engaged in that business, and

that person is required to register as a dealer

and to collect and remit tax on the third sale or

series of sales and on all subsequent sales.

* * *

4. Sales by a person of his household furniture

or by a farmer or his farm machinery or equipment,

or by a grocery store of its fixtures are exempt

because such persons are not engaged in the business

of selling tangible personal property of a similar

type. An office equipment dealer cannot make an

exempt, occasional or isolated sale when he sells

his own furniture, fixtures and equipment because

of the definite similarity between the commodity

he handles and the equipment which he sells.

5. The sale of office equipment, furniture and

fixtures, etc., included in the sale of a business

by its owner who is not engaged in the business

of selling such office equipment, furniture and

fixtures, is exempt as an isolated sale.

6. When a road contractor purchases a piece of

equipment and pays the tax thereon and subsequently

sells it, the sale of such equipment is exempt.

Any rental of such equipment is taxable.

32. Petitioner relies on Rule 12A-1.037, Florida Administrative Code, in

asserting that the sales of its "obsolete" video games are occasional or

isolated sales. 1/ The parties stipulated that each of the twelve centers it

operated in Florida sells games to individual buyers. The various dates on

which sales of these video games occurred are set forth for each of the tax

years involved (Paragraph 22). These stipulated facts establish that these

sales of video games occurred many times more than twice during any tax year.

Because of the frequency of these sales, Petitioner is deemed to be in the

business of selling these video games pursuant to Rule 12A-1.037(1)(b)1.,

Florida Administrative Code, and not entitled to the claimed exemption. The

examples of exempt sales contained in the rule are not analogous to Petitioner's

sales of its video games and do not establish Petitioner's right to the

exemption.

33. Petitioner failed to establish that the sales of video games are

exempt from taxation as isolated or occasional sales. Consequently, Issue One

is answered in the negative.

34. Issues Two and Three involve whether Petitioner's purchases of video

games and its purchases of plush are exempt from Florida sales and use tax as

sales for resale.

35. Pursuant to Section 212.02(3)(a), Florida Statutes (1985), the terms

"retail sale" and "sale at retail" do not include a sale for resale. Section

212.03(3)(a), Florida Statutes (1985), provided, in pertinent part, as follows:

(3)(a) "Retail sale" or a "sale at retail"

means a sale to a consumer or to any person for

any purpose other than for resale in the form of

tangible personal property and includes all such

transactions that may be made in lieu of retail

sales or sales at retail. A resale must be in

strict compliance with the rules and regulations,

and any dealer making a sale for resale which is

not in strict compliance with the rules and

regulations shall himself be liable for and pay

the tax. . . .

36. Respondent relies on Rule 12A-1.038, Florida Administrative Code,

which provides, in part, as follows:

(1) It is the specific legislative intent that

each and every sale . . . is taxable under Chapter

212, F.S., unless such sale . . . is specifically

exempt. The exempt status of the transaction must

be established by the dealer. Unless the dealer

shall have taken from the purchaser a certificate

. . . to the effect that the property or service

was purchased for resale . . . the sale shall be

deemed to be a taxable sale at retail . . .

* * *

(3)(a) A resale certificate is required from

every purchaser who purchases tangible personal

property or service for resale, subject to the

provisions of subsection (1) of this rule.

37. The parties stipulated that Petitioner did not provide its vendors

resale certificates when it purchased the video games or the plush at issue in

this proceeding (Paragraphs 24 and 25).

38. While it may be that most, if not all, of the video games purchased by

Petitioner are subsequently resold, it is inferred from the stipulated facts

that Petitioner purchased the games to be played in its centers and not for the

purpose of reselling them to the consuming public. Petitioner did not establish

a factual basis upon which it can be concluded that the initial purchase of

these games is exempt as a sale for resale.

39. The parties stipulated that the Petitioner sells to its customers the

opportunity to play the games in its centers (Paragraph 3). The parties also

stipulated that the games do not dispense plush upon the insertion of a coin or

a token and that the acquisition of plush, whether from a merchandise game or as

the result of a redemption game, requires a certain level of skill (Paragraphs

15 and 16). Because the player does not know what item of plush, if any, that

he or she will win, it cannot be concluded that the player inserts the coin or

token in the game with the notion that he or she is purchasing a prize. Based

on the stipulated facts, it is concluded that the player inserts the coin or

token in the game for the opportunity to play the game, not for the purpose of

purchasing plush. Petitioner failed to establish that its purchases of plush

are exempt from sales and use tax as sales for resale.

40. Issue Three also involves whether the imposition of tax on

Petitioner's vending revenues and the imposition of sales and use tax on its

purchases of plush represent an inequitable double taxation. Section

212.12(12), Florida Statutes (1985), provided as follows:

(12) It is hereby declared to be the

legislative intent that, whenever in the

construction, administration, or enforcement

of this chapter there may be any question

respecting a duplication of the tax, the end

consumer, or last retail sale, be the sale

intended to be taxed and insofar as may be

practicable there be no duplication or

pyramiding of the tax.

41. Petitioner's argument that the imposition of tax on its purchase of

plush and the imposition of tax on its vending revenues constitute an

impermissible pyramiding of sales and use tax is dependent on a finding that

Petitioner resells plush to the consuming public and that the taxes on its

vending revenues should be construed to be the imposition of sales or use tax on

that resale. Petitioner failed to establish the factual assertions that

underpin its argument. Petitioner did not establish that there was a resale of

plush to the consuming public, nor did it establish that the tax imposed on its

vending revenues should be construed to be pyramidally sales or use tax on its

resale of plush. Consequently, its argument that there was an impermissible

pyramiding of sales or use taxes must fail.

42. Issues Two and Three are answered in the negative. Since the

Petitioner is not entitled to these claimed exemptions, it is responsible for

paying the taxes at issue pursuant to Section 212.07(9), Florida Statutes

(1985).

43. Petitioner does not challenge Respondent's authority to impose

penalties in this proceeding. Instead, Petitioner asserts that reasonable cause

exists to compromise those penalties. Section 213.21, Florida Statutes (1985)

provides for the compromise of penalties as follows:

(2)(a) The executive director of the depart-

ment or his designee is authorized to enter into

a written closing agreement with any taxpayer

settling or compromising the taxpayer's liability

for any tax, interest or penalty . . .

(3) A taxpayer's liability for . . . penalties

. . . may be settled or compromised if it is

determined by the department that the noncomplaince

is due to reasonable cause and not to willful

negligence, willful neglect, or fraud.

44. Rule 12-13.003, Florida Administrative Code, sets forth the standards

under which tax, interest and penalties may be compromised. Succinctly stated,

the standard used in determining whether reasonable cause exists to compromise a

penalty is whether the taxpayer exercised ordinary care and prudence and was

nevertheless unable to comply with the provisions imposing the pertinent tax.

Having found little merit in Petitioner's rationale in support of its claimed

exemptions, it is concluded that the Respondent has failed to establish that the

Respondent's refusal to compromise the penalty should be reversed. Issue Four

should be answered in the affirmative.

RECOMMENDATION

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

RECOMMENDED that Respondent enter a final order that adopts the findings of

fact and the conclusions of law contained herein. The assessments against

Petitioner should be sustained to the extent the assessments are consistent with

the findings of fact and the conclusions of law contained in this Recommended

Order.

DONE AND ENTERED this 28th day of June, 1996, in Tallahassee, Leon County,

Florida.

____________________________________

CLAUDE B. ARRINGTON, 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 28th day of June, 1996.

ENDNOTE

1/ The parties did not stipulate that only obsolete video games are sold by the

various centers. The parties stipulated that "[e]ach of the centers sells some

of its games to individual buyers" (Paragraph 18). From that stipulation, it

will not be concluded that only "obsolete games" are sold. It would not change

the ultimate conclusions reached if the parties had stipulated that only

"obsolete" games are sold at the centers.

COPIES FURNISHED:

Charles Catanzaro, Esquire

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399-1050

Mr. William E. Keadle

Ernst and Young LLP

200 South Biscayne Boulevard, Suite 3900

Miami, Florida 33131-5313

Linda Lettera, Esquire

Department of Revenue

Post Office Box 6668

Tallahassee, Florida 32314-6668

Larry Fuchs, 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 ten 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.