95-001450 Joseph Del Vecchio vs. Department Of Revenue Status: Closed Recommended Order on Monday, February 17, 1997.

Summary: Petitioner failed to satisfy burden of proof that proposed assessment was improper.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

JOSEPH DELVECCHIO d/b/a MONTEREY )

GLASS AND MIRROR DISTRIBUTORS )

)

Petitioner, )

)

vs. ) CASE NO. 95 -1450

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

____________________________________)

RECOMMENDED ORDER

An administrative hearing was conducted in this proceeding

on November 7, 1996, in Fort Pierce, Florida, before Daniel

Manry, Administrative Law Judge, Division of Administrative

Hearings.

APPEARANCES

For Petitioner: Eugene Nail, Qualified Representative

Post Office Box 442

Port Salerno, Florida 34992

For Respondent: Olivia P. Klein

Assistant Attorney General

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The issue for determination is whether Petitioner owes sales

tax of $15,230.15 plus interest from October 15, 1993.

PRELIMINARY STATEMENT

O n January 20, 1995, Respondent issued a Notice of Decision

sustaining an assessment of $15,230.15 in taxes, interest, and

penalties. Petitioner timely requested an administrative

hearing.

At the hearing, Petitioner testified in his own behalf and

submitted no exhibits for admission in evidence. Respondent

presented the testimony of three witnesses and submitted eight

exhibits for admission in evidence.

The identity of the witnesses and exhibits, and the rulings

regarding each, are set forth in the transcript of the formal

hearing filed on December 4, 1996. Petitioner timely filed his

proposed recommended order ("PRO") on January 27, 1997

Respondent timely filed its PRO on January 24, 1997.

FINDINGS OF FACT

1. Petitioner is a sole proprietorship organized in this

state and doing business at 851 Monterey Road, Stuart, Florida.

Respondent is the governmental agency responsible for

administering the state sales tax in accordance with Chapter 212,

Florida Statutes. 1

2. In 1992, other businesses locat ed at Petitioner's

address reported to Respondent that they paid rent to Petitioner.

However, Petitioner did not collect and remit sales tax on the

rental income and was not registered as a dealer.

3. On February 3, 1992, Respondent mailed a Notice of

Intent to Audit Petitioner's books and records ("Notice of Intent

to Audit") for the tax period February 1, 1987, through January

31, 1992. The Notice of Intent to Audit included a detailed list

of the books and records needed for Respondent to conduct a

detailed audit. The Notice also requested that Petitioner

provide Respondent with a date on which it would be convenient to

begin the audit.

4. On February 11, 1992, Respondent had not heard from

Petitioner. The auditor contacted Petitioner to schedule a date

on which the audit could begin. At that time, Petitioner stated

that he would not provide the auditor with any books and records.

5. Petitioner refused to make available the books and

records for 1990 through 1992 because Petitioner incorrectly

suspected that Respondent maintained a secret "blacklist."

Petitioner based his suspicion, in part, on the fact that he had

refused to respond to a questionnaire Respondent had mailed to

taxpayers throughout the state prior to the Notice of Intent to

Audit.

6. Petitioner also based his suspicion on the erroneous

assumption that Respondent's audit was part of a criminal

investigation by the Internal Revenue Service ("IRS") into

Petitioner's federal taxes for 1987 and 1988. Petitioner refused

to make available the books and records for 1987 through 1989

because those records were in the possession of the IRS.

7. Petitioner maintained that the proposed audit was

illegal. Respondent sent Petitioner copies of its statutory

authority to audit Petitioner and made numerous attempts to

arrange a mutually convenient time to begin the audit.

Respondent did not commence the audit until March 10, 1993.

8. On March 10, 1993, the auditor and audit group

supervisor met with Petitioner and Mr. Eugene Nail, Petitioner's

paralegal. Petitioner stated that he did not have the books and

records Respondent needed to conduct a detailed audit because the

IRS had confiscated them in connection with the pending criminal

case.

9. Respondent conducted the audit using the information

Petitioner made available to the auditor. Petitioner made

available: sales invoices for 1990 and 1991 and one month in 1992

grouped together by calendar month; sales and use tax return

booklets; resale and exemption certificates; and commercial lease

agreements. No journals and ledgers were available.

10. Respondent determined Petitioner's tax deficiency by

sampling the available information. Pursuant to Petitioner's

request, the auditor used a six month sample period.

11. The auditor explained to Petitioner that she would use

Petitioner's invoices during the sample period to determine tax-

exempt sales. She compared the invoices to resale certificates

and calculated an error ratio based on discrepancies between the

sales invoices and the resale certificates.

12. Respondent determined the actual deficiency in sales

tax during the six month sample period based on actual invoices

that did not have a resale certificate and for which no sales tax

was remitted. Respondent estimated the additional deficiency in

sales tax by applying the error ratio to the balance of the audit

period. Respondent examined only those invoices provided by

Petitioner and previous sales tax returns filed by Petitioner.

13. On April 9, 1993, the auditor conducted a meeting with

Petitioner and discussed the audit procedures, results,

applicable law, and abatement rules. On June 15, 1993,

Respondent issued a Notice of Intent to Make Sales and Use Tax

Changes in the amount of $45,469.05 ("Notice of Intent"). The

Notice of Intent included a copy of all audit exhibits and

workpapers.

14. On August 30, 1993, Petitioner provided additional

invoices to Respondent in a meeting with the auditor and audit

group supervisor. On October 15, 1993, the auditor adjusted

certain items in the audit file, reduced the proposed assessment,

and issued a Revised Notice of Intent to Make Sales and Use Tax

Changes in the amount of $37,417.45 ("Revised Notice of Intent").

15. Petitioner requested additional time to provide more

information, including additional resale certificates. However,

Petitioner failed to provide the additional information.

16. By letter dated December 9, 1993, the audit group

supervisor notified Petitioner that she was closing the case and

sending it to the Tallahassee office as a contested case. On

December 23, 1993, Respondent issued a Notice of Proposed

Assessment to Petitioner assessing Petitioner for $37,417.45 in

tax, penalty, and interest through October 15, 1993.

17. On February 21, 1994, Respondent received Petitioner's

written protest dated February 10, 1994. Respondent revised the

audit figures again. On January 20, 1995, Respondent issued its

Notice of Decision reducing the assessment against Petitioner to

$15,230.15.

18. The Notice of De cision assessed Petitioner for taxes of

$8,900.55, penalties of $2,225.14, and interest of $4,104.46

through October 15, 1993. Interest accrues at the per diem rate

of $2.93 until paid. On March 16, 1995, Petitioner timely

appealed the Notice of Decision by filing a Petition for Formal

Hearing with Respondent.

1. Inadequate Records

19. Petitioner failed to maintain adequate books and

records within the meaning of Sections 212.12(6), 212.13(2),

212.35, and Florida Administrative Code Rules 12A-1.093(2) and

(5). 2 Petitioner failed to maintain adequate books and records

for the five year audit period prescribed in Section 213.34(2).

20. Petitioner failed to maintain general ledgers and

journals for the five year audit period. The only records

Petitioner maintained were sales invoices for 1990 and 1991 and

one month in 1992.

21. Petitioner was unable to produce adequate records for

1987 through 1989. Petitioner asserted that the IRS had those

records and that Petitioner could not obtain the records required

by Florida law.

22. The federal tax case has been pending against

Petitioner since 1990. 3 During those seven years, Petitioner was

unable to obtain copies of any records in the possession of the

IRS.

23. The journals and ledgers for 1987 and 1988 were

maintained on computer floppy disks. Petitioner asserts that the

floppy disks were lost.

24. Petitioner asserts that his attorney kept the books and

records for 1989 in an out-of-state location to avoid producing

those records for the IRS. The journals and ledgers for 1990

though 1992 are in the possession of Petitioner's accountants.

Petitioner did not produce those records during the audit or at

the administrative hearing.

25. Petitioner could have requested the journals and

ledgers for 1989 through 1991 from his attorney and accountants,

respectively, but chose not to do so. Petitioner made available

to Respondent only sales invoices for 1990 and 1991 and one month

in 1992.

26. Without the general ledgers and cash journals to cross-

reference the sales invoices, Respondent could not corroborate

the financial records available for audit. Respondent was

required by applicable law to conduct the audit by sampling

Petitioner's available records.

2. Exempt Sales: Resale Certificates

27. Certain exempt sales claimed by Petitioner during the

six month sample period were not supported by resale

certificates. Respondent disallowed the exempt sales that were

not supported by resale certificates and allowed the invoices

that were supported by resale certificates. For the six month

sample period, Respondent assessed an actual sales tax deficiency

for those sales that did not have a corresponding resale

certificate. 4

28. Respondent prepared audit schedules for the six month

sample period that listed the invoices with a sales tax

deficiency due to the lack of a resale certificate. Based on the

audit schedules, Respondent determined an error ratio and applied

the error ratio over the five year audit period to determine the

estimated tax deficiency. 5

29. Respondent conducted the audit in accordance with

generally accepted audit procedures and with applicable state

law. Disallowed exempt sales were listed individually by

invoice, name of vendor, and the date and amount of the sale.

Disallowed exempt sales were listed for each of the six months in

the sample period.

3. Additional Taxable Sales

30. Sales invoices for the six month sample period showed

that Petitioner collected more sales tax than he reported to

Respondent on his monthly sales tax returns. Respondent treated

the collected, but unremitted, sales tax as "additional taxable

sales" rather than as an unremitted sales tax.

31. Respondent assessed Petitioner for the sales tax paid

on Petitioner's invoices but not remitted to Respondent by

Petitioner. The deficiency existed for May and June, 1990, and

for January and February, 1991.

4. Taxable Rent

32. Respondent reviewed lease agreements relating to

property rented by Petitioner at his business address.

Respondent determined that Petitioner failed to collect and remit

sales tax on the rental of his property.

33. Respondent assessed Petitioner for sales tax Petitioner

failed to collect and remit on taxable rent. Petitioner does not

contest that portion of the assessment.

CONCLUSIONS OF LAW

34. The Division of Administrative Hearings has

jurisdiction over the subject matter and parties in this

proceeding. The parties were duly noticed for the formal

hearing.

35. The ultimate burden of proof is on Petitioner.

Department of Revenue v. Nu-Life Health and Fitness Center , 623

So.2d 747, 751-752 (Fla. 1st DCA 1992). Respondent must first

make a prima facie showing that an assessment was made and the

factual and legal grounds supporting the assessment. Section

120.575(2). Petitioner must then show by a preponderance of the

evidence that: the audit was illegal; he maintained adequate

books and records; he is entitled to the sales tax exemption he

claims for resale certificates; and he should not be taxed for

additional taxable sales. Petitioner failed to satisfy his

burden of proof.

5. Audit Authority

36. Respondent properly conducted an audit of Petitioner's

available records for the five year audit period. Respondent is

statutorily authorized to conduct an audit within five years

after the later of: the date the tax is due; or the date the tax

return is filed. Sections 95.091(3); 213.34(2); Rule 12A-

1.093(7)(a)2.a. Respondent is also statutorily authorized to

audit and examine the accounts, books, or records of all persons

who are subject to the revenue law. Section 213.34(1).

6. Inadequate Records

37. Petitioner is statutorily required to maintain adequate

books and records relating to the tax at issue and to preserve

such books and records until the expiration of the time within

which Respondent may make an assessment with respect to the tax.

Sections 95.091(3); 213.35; 212.12(6); 212.13(2); Rule 12A-

1.093(2) and (5). Petitioner failed to comply with the statutory

requirement to maintain adequate records.

7. Audit By Sample

38. Petitioner failed or refused to make adequate records

available for audit. In such cases, Respondent is statutorily

required to assess taxes using an estimate based on the best

information available. Section 212.12(5)(b). Such an assessment

is considered prima facie correct, and Petitioner has the burden

of showing that the assessment is incorrect. Id .

39. The records provided by Petitioner were inadequate to

conduct a detailed audit for the entire audit period. In such

cases, Respondent is statutorily authorized to determine

Petitioner's sales tax deficiency by sampling Petitioner's

available records for a representative period and by applying an

error ratio to the entire audit period. Section 212.12(6)(b).

Respondent conducted the audit in accordance with applicable law.

8. Exempt Sales: Resale Certificates

40. Tax exemptions are matters of legislative grace. They

must be strictly construed against the taxpayer and in favor of

the state. State Department of Revenue v. Anderson , 403 So.2d

397, 399 (Fla. 1981); Green v. Pederson , 99 So.2d 292, 296 (Fla.

1957); Asphalt Pavers, Inc. v. Department of Revenue , 584 So.2d

55, 57 (Fla. 1st DCA 1991).

41. A resale certificate exempts the dealer from remitting

sales tax to Respondent. Section 212.02(14)(a), 212.07(1)(b).

Applicable law requires strict compliance with the requirements

for a resale certificate exemption. Section 212.07(1)(b).

42. A dealer, such as Petitioner, who can not produce a

resale certificate during an audit is liable for the tax.

Section 212.07(1)(b); Rules 12A-1.038(3)(a) and 12A-1.093(8)(a).

Petitioner has the burden of establishing the exempt status of

any sale. Rule 12A-1.038(1).

43. Petitioner had adequate time to produce the books and

records that Respondent needed to conduct a detailed audit for

the entire audit period. More than a year elapsed between the

Notice of Intent to Audit and the commencement of the audit.

Subsequent to the audit, Petitioner had numerous opportunities,

in internal conferences and appeals with Respondent, to produce

the records Respondent needed to conduct a detailed audit.

44. Federal rules of criminal procedure entitle Petitioner

to obtain copies of documents in the possession of the IRS. 6

Petitioner did not produce the books and records needed to

support his position in the administrative hearing.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that Respondent enter a Final Order and therein

UPHOLD Respondent's assessment of $15,230.15 plus interest

statutorily due from October 15, 1993, until paid.

RECOMMENDED this 17th day of February, 1997, in Tallahassee,

Florida.

___________________________________

DANIEL MANRY

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 -306 0

(904) 488 -9675 SUNCOM 278-9675

Fax Filing [phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 17th day of February, 1997.

ENDNOTES

1/ All statutory references to chapters and sections are to

Florida Statutes (1995) unless otherwise stated.

2/ All references to rules are to rules promulgated in the

Florida Administrative Code as of the date of this Recommended

Order.

3/ A criminal indictment was issued in the federal tax case in

1993.

4/ Respondent did not assess sales tax for those invoices that

showed sales tax collected or showed that a resale certificate

was provided.

5/ R.F. Crim P. 16(a)(1)(c) provides:

(C) DOCUMENTS AND TANGIBLE OBJECTS. Upon request of

the defendant the government shall permit the

defendant to inspect and copy or photograph books,

papers, documents, photographs, tangible objects,

buildings or places, or copies or portions thereof

which are within the possession, custody or control of

the government and which are material to the

preparation of evidence in chief at the trial, or were

obtained from or belong to the defendant.

COPIES FURNISHED:

Larry Fuchs, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399-0010

Linda Lettera, General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399-0010

Joseph DelVecchio

d/b/a Monterey Glass

and Mirror Distributors

851 Monerey Road

Stuart, Florida 34994

Eugene Mail, Qualified Representative

Post Office Box 442

Port Salerno, Florida 34992

Olivia P. Klein

Assistant Attorney General

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399-1050

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15

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

this Recommended Order should be filed with the agency that will

issue a final order in this case.

1/ All statutory references to chapters and sections are

to Florida Statutes (1995) unless otherwise stated.

2/ All references to rules are to rules promulgated in the

Florida Administrative Code as of the date of this

Recommended Order.

3/ A criminal indictment was issued in the federal tax case

in 1993.

4/ Respondent did not assess sales tax for those invoices

that showed sales tax collected or showed that a resale

certificate was provided.

5/ The audit file includes a detailed description of how the

error ratio was calculated and applied. Petitioner’s claim

that Respondent did not maintain an adequate “audit trail”

is not supported by competent and substantial evidence.

6/ F.R. Crim P. 16(a)(1)(c) provides:

(C) DOCUMENTS AND TANGIBLE OBJECTS. Upon request of the

defendant the government shall permit the defendant to inspect

and copy or photograph books, papers, documents, photographs,

tangible objects, buildings or places, or copies or portions

thereof which are within the possession, custody or control of

the government and which are material to the preparation of

defendant’s defense or are intended for use by the government

as evidence in chief at the trial, or were obtained from or

belong to the defendant.

COPIES FURNISHED:

Larry Fuchs, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399-0100

Linda Lettera, General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399-0100

Joseph DelVecchio

d/b/a Monterey Glass

and Mirror Distributors

851 Monterey Road

Stuart, Florida 34994

Eugene Nail, Qualified Representative

Post Office Box 442

Port Salerno, Florida 34992

Olivia P. Klein

Assistant Attorney General

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399-1050

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15

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

this Recommended Order should be filed with the agency that will

issue the final order in this case.