98-000049 Division Of Alcoholic Beverages And Tobacco vs. M And W Enterprises Of Key West, Inc., D/B/A Stick N Stein Status: Closed Recommended Order on Tuesday, May 26, 1998.

Summary: Methodology employed by the agency to audit and assess surcharge tax liability was unreliable. Therefore, vendor appropriately declined to pay tax and its license was not subject to disciplinary action.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BUSINESS AND )

PROFESSIONAL REGULATION, DIVISION )

OF ALCOHOLIC BEVERAGES AND )

TOBACCO , )

)

Petitioner , )

)

vs. ) Case No. 98-0049

)

M & W ENTERPRISES OF KEY WEST , )

INC., d/b/a STICK N STEIN , )

)

Respondent. )

__________________________________)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings,

by its duly designated Administrative Law Judge, William J.

Kendrick, held a formal hearing in the above-styled case on

May 6, 1998, in Key West, Florida.

APPEARANCES

For Petitioner : George G. Lewis, Esquire

Department of Business and

Professional Regulation

1940 North Monroe Street

Tallahassee, Florida 32399-1007

For Respondent : Stephen R. DeGrave, Vice President

M & W Enterprises of Key West, Inc.

2922 North Roosevelt Boulevard

Key West, Florida 33040

STATEMENT OF THE ISSUE

At issue in this proceeding is whether Respondent committed

the offense set forth in the Administrative Action and, if so,

what penalty should be imposed.

PRELIMINARY STATEMENT

On September 23, 1997, the Department of Business and

Professional Regulation, Division of Alcoholic Beverages and

Tobacco (Department), filed an Administrative Action against the

Respondent, the holder of a 5COP alcoholic beverage license,

which charged that "[d ]uring the period of September 1, 1992,

through October 29, 1996, you, M & W Enterprises of [Key West],

Inc. d/b/a Stick and Stein, failed to pay the audit performed on

above dates for the tax liability of $11,641.64, penalty of

$52,512.93, and interest of $2,549.10 for a total liability of

$66,703.67, which has not been paid to the Florida Department of

Business [and Professional] Regulation, contrary to section

561.501, Florida Statutes." Based on such allegations, the

Department proposes to impose penalties against Respondent under

the provisions of Section 561.29, Florida Statutes.

Respondent disputed the Department's charges, including the

accuracy of the Department's audit, and the matter was referred

to the Division of Administrative Hearings for the assignment of

an administrative law judge to conduct a formal hearing.

At hearing, Petitioner called Raquel Silvosa, a tax auditor

employed by the Department, and Petitioner's Exhibits 1 through 4

were received into evidence. Respondent called Stephen R.

DeGrave, Jack Moyer, and Bettina Brumwell as witnesses, and

Respondent's Exhibits 1 and 2 were received into evidence.

The transcript of the hearing was not ordered. Therefore,

at the conclusion of the hearing, it was announced on the record

that the parties were accorded ten days from the date of hearing

to file proposed recommended orders. Petitioner elected to file

such a proposal and it has been duly considered.

FINDINGS OF FACT

1. At all times material hereto, Respondent, M & W

Enterprises of Key West, Inc., held license number 54-00200,

series 5COP, authorizing the sale of alcoholic beverages for

consumption on and off the premises known as Stick N Stein,

located at 1126 C & D Key Plaza, Key West, Florida (hereinafter

"the licensed premises").

2. In October 1996, the Department undertook a beverage

surcharge audit of the licensed premises for the period of

September 1, 1992, through October 29, 1996. 1 At the time, the

premises had elected the "sales method" 2 of reporting, and the

Department proposed to determine whether the monthly reports

submitted by the vendor were accurate by application of the

"sales depletion method," as prescribed by Rule 61A-4.063(9),

Florida Administrative Code. This formula uses beginning

inventory, plus purchases for the period, less ending inventory,

less spillage allowance, prescribed by Rule 61A-4.063(6), Florida

Administrative Code, to ascertain sales for the period.

3. Application of the formula to this vendor was

complicated by a number of factors, including the nature of the

vendor's business, the vendor's inventory practices, and the

vendor's failure to maintain appropriate records. In this

regard, the proof demonstrates that the licensed premises

includes a liquor store, where alcoholic beverages are sold for

consumption off-premises, and a bar area, where alcoholic

beverages are sold for consumption on-premises. Alcoholic

beverages are purchased for the premises in bulk, and stored in

the liquor store or the storeroom (also referred to as the beer

room or cooler). As need dictates, alcoholic beverages are

transferred from the liquor store or the storeroom to replenish

the bar's stock; however, no record is made to reflect this

transfer or addition to the bar's inventory. Consequently, there

are no records from which one can derive the data needed to drive

the Department's formula or, stated otherwise, there are no

records from which the quantities of alcoholic beverages sold for

consumption on or off the premises may be reliably calculated.

4. Notwithstanding the vendor's failure to maintain

appropriate records, the Department agreed to accept the vendor's

estimate of the percentage of each class of alcoholic beverage

purchased during the audit period that it would attribute to

NON-COP (non-consumption on premises) sales, and subtract those

volumes from the volumes purchased during the audit period to

derive the total gallons available for sale under the formula.

Here, the deduction (credit) accorded the vendor for NON-COP

sales as a percentage of purchases was, as follows: draft beer,

10 percent; bottle/can beer, 15 percent; wine coolers, 50

percent; wine, 90 percent; and liquor, 70 percent. 3

5. To further drive the formula, the Department did an

audit on October 29, 1996, to calculate the vendor's ending

inventory. Notably, that audit (Petitioner's Exhibit 4)

encompassed only the alcoholic beverages in the bar area, and

failed to include an inventory of the alcoholic beverages in the

liquor store and storeroom.

6. By letter of June 24, 1997, Respondent was advised of

the results of the audit, and the Department's conclusion that it

owed $14,960.82, as beverage surcharge, penalties, and interest.

Respondent, because the audit did not include the liquor store

and storeroom inventory as part of the ending inventory

calculation, disputed the results of the audit. 4

7. Given the failing of the first audit, the Department

performed an additional audit of Respondent's inventory on

August 1, 1997. (Petitioner's Exhibit 3). That audit was

restricted to the inventory in the liquor store and the

storeroom, and did not include an inventory of the bar area.

8. On August 8, 1997, the Department issued a new retail

beverage surcharge audit report for the licensed premises.

(Petitioner's Exhibit 2). That report reflected a total tax

liability (beverage surcharge, penalties, and interest) of

$12,279.76. Notably, the report was based on the August 1, 1997,

inventory and not the vendor's inventory at the end of the audit

period (October 29, 1996). Moreover, the audit that was used

considered only liquor store and storeroom inventory, and omitted

bar inventory. Respondent again disputed the results of the

audit.

9. Since the report did not apply the vendor's inventory at

the end of the audit period (October 29, 1996) to drive the

formula, the result reached could not be an accurate reflection

of sales or surcharge liability for the audit period. Moreover,

by omitting bar inventory as a component of ending inventory, the

report overstated sales, and, therefore, overstated surcharge

liability. Consequently, as Respondent argues, the audit does

not provide a reliable indication of what, if any, surcharge is

due.

CONCLUSIONS OF LAW

10. The Division of Administrative Hearings has

jurisdiction over the parties to, and the subject matter of,

these proceedings. Sections 120.569, 120.57(1), and 120.60(5),

Florida Statutes.

11. Where, as here, the Department proposes to take

punitive action against a licensee, it must establish grounds for

disciplinary action by clear and convincing evidence. Section

120.57(1)(h), Florida Statutes (1997), and Department of Banking

and Finance v. Osborne Stern and Co. , 670 So. 2d 932 (Fla. 1996).

"The evidence must be of such weight that it produces in the mind

of the trier of fact a firm belief or conviction, without

hesitancy, as to the truth of the allegations sought to be

established." Slomowitz v. Walker , 429 So. 2d 797, 800 (Fla. 4th

DCA 1983).

12. Pertinent to this case, Section 561.29, Florida

Statutes, provides the Division of Alcoholic Beverages and

Tobacco with full power and authority to revoke or suspend the

license of any person holding a license under the Beverage Law,

or to impose a civil penalty against a licensee for any violation

mentioned in the Beverage Law, or any rule issued pursuant

thereto, not to exceed $1,000 for violations arising out of a

single transaction, when it is determined that, inter alia , the

licensee or, if a corporation, any officers thereof, have

violated any laws of this state. Section 561.29(1)(b), Florida

Statutes.

13. Pertinent to the perceived violation of Section

561.29(1)(b), Florida Statutes, are the provisions of Section

561.501, Florida Statutes, which impose a surcharge on the sale

of alcoholic beverages for consumption on the premises. That

provision of law provides:

(1) . . . a surcharge of 10 cents is

imposed upon each ounce of liquor and each

4 ounces of wine, a surcharge of 6 cents is

imposed on each 12 ounces of cider, and a

surcharge of 4 cents is imposed on each

12 ounces of beer sold at retail for

consumption on premises licensed by the

division as an alcoholic beverage vendor.

(2 ) The vendor shall report and remit

payments to the division each month by the

15th of the month following the month in

which the surcharges are imposed. For

purposes of compensating the retailer for the

keeping of prescribed records and the proper

accounting and remitting of surcharges

imposed under this section, the retailer

shall be allowed to deduct from the payment

due the state 1 percent of the amount of the

surcharge due. Retail records shall be kept

on the quantities of all liquor, wine, and

beer purchased, inventories, and sales. . .

Failure to accurately and timely remit

surcharges imposed under this section is a

violation of the Beverage Law.

14. The Department has adopted Rule 61A-4.063, Florida

Administrative Code, to implement the beverage surcharge imposed

by section 561.501. Pertinent to this case, the rule provides:

(4 ) The surcharge calculation methods are

as follows:

(a) Sales method -- Each month, the vendor

shall determine the amount of alcoholic

beverages sold by using sales records or any

alternate method approved in writing by the

Division of Alcoholic Beverages and Tobacco.

Requests for an alternate sales method must

be submitted within 20 days after the

issuance of a new license or transfer of an

existing license. The surcharge is

calculated by multiplying the units of

alcoholic beverages sold times the applicable

surcharge rate. . . .

* * *

(c) If the vendor chooses the sales

method, the vendor will bear the burden of

proof that the method used accurately

reflects actual sales. . . .

* * *

(8) Each vendor licensed in any manner for

consumption on premises shall maintain

complete and accurate records on the

quantities of all alcoholic beverage

purchases, inventories, and sales. Records

include purchase invoices, inventory records,

receiving records, cash register tapes,

computer records generated from automatic

dispensing devices, and any other record used

in determining sales. . . . All records must

be maintained for a period of 3 years.

(9 ) Employees of the division shall have

access to and shall have the right to examine

the accounting records, invoices, or any

other source documents used to determine a

vendor's compliance with this rule. Each

vendor is required to give the division the

means, facilities and opportunity to verify

the accuracy of the surcharge imposed by

section 561.501, Florida Statutes. In order

to determine whether the monthly reports

submitted by the vendor are accurate, the

division shall use the formula of beginning

inventory plus purchases for the period, less

ending inventory, less the spillage

allowance, to ascertain sales for the period.

Adjustments made to this formula in favor of

the licensee will be based on factual,

substantiated evidence. The results of the

formula will represent sales transactions as

defined herein and in section 561.01(9),

Florida Statutes, for the period under

review.

* * *

(15) When the division performs an audit

on the vendor, it shall determine the

surcharge due. If the division determines

that any amount of gross surcharge is due

from the vendor, it shall notify the vendor

in writing by personal service or U.S. Mail,

return receipt requested, stating that the

vendor has 30 days from the receipt of

written notification in which to correct the

findings of the audit and remit payment. If

the vendor does not correct the findings of

the audit or remit payment within the

allotted time then the division will notify

the vendor in writing by personal service or

U.S. Mail, return receipt requested, that it

intends to assess the proper amount due

including applicable penalties and begin

administrative proceedings.

15. Here, the Department proposes to take disciplinary

action against Respondent based on its allegation that Respondent

failed to pay a surcharge liability "for the audit period

beginning September 1, 1992, and ending October 29, 1996."

(Petitioner's Exhibit 2).

16. To determine whether Respondent's monthly reports were

accurate and, therefore, whether Respondent paid the appropriate

surcharge, the Department sought to apply the formula mandated by

Rule 61A-4.063(9), Florida Administrative Code. Gadsden State

Bank v. Lewis , 348 So. 2d 343 (Fla. 1st DCA 1977), (Agency must

apply its rule, as written, until amended or abrogated). Accord,

Decarion v. Martinez , 537 So. 2d 1083 (Fla. 1st DCA 1989).

However, the Department's audit did not comply with the formula

established by rule since it failed to subtract the vendor's

inventory at the end of the audit period (October 29, 1996), and,

moreover, the figure it did utilize for ending inventory failed

to include bar inventory. Consequently, the tax liability

calculated and assessed by the Department's beverage surcharge

audit report of August 8, 1997, is not a reliable assessment of

Respondent's liability, if any, for a surcharge deficiency. 5

Such being the case, it can not be concluded that, by failing to

pay the tax assessment, Respondent violated the provisions of

Section 561.501(2), Florida Statutes, and, therefore, Section

561.29(1)(b), Florida Statutes, as alleged in the Administrative

Action.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that a Final Order be entered dismissing the

Administrative Action.

DONE AND ENTERED this 26th day of May, 1998, in Tallahassee,

Leon County, Florida.

___________________________________

WILLIAM J. KENDRICK

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488- 9675 SUNCOM 278-9675

Fax Filing [phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 26th day of May, 1998.

ENDNOTES

1/ The surcharge is imposed on the volume (calculated in ounces)

of liquor, wine, and beer sold for consumption in the licensed

premises. Section 561.501(1), Florida Statutes.

2/ In general, a licensed vendor may elect one of two methods for

calculation of the surcharge, the sales method or the purchase

method. Under the sales method, the vendor calculates the

surcharge by multiplying the volume (stated in ounces) of

alcoholic beverages sold for consumption on the premises times the

applicable surcharge rate. Under the purchase method, the vendor

calculates the surcharge by multiplying the volume (stated in

ounces) of all alcoholic beverages purchased during the month

times the applicable surcharge rate, less the applicable spillage

allowance. Vendors reporting under the sales method are not

allowed any allowance for spillage. Rule 61A-4.063(4) and (6),

Florida Administrative Code.

3/ To derive the estimate, the Department's auditor, Raquel

Silvosa, asked Stephen DeGrave, Respondent's vice-president and

chief operating officer, what his best estimates were. According

to Ms. Silvosa, Mr. DeGrave initially advised her that his

estimate of NON-COP sales as a percentage of purchases was, as

follows: draft beer, 10 percent; bottled/can beer, 15 percent;

wine coolers, 50 percent; and wine, 90 percent. As for liquor,

Mr. DeGrave first estimated 50 percent, but then changed his mind

to 70 percent, as representing NON-COP sales. Subsequently,

Mr. DeGrave telephoned the auditor and suggested 90 to 95 percent

for liquor, and 25 percent for bottled/can beer, as an estimate of

the NON-COP percentage of purchases. The auditor advised

Mr. DeGrave that she was accepting his first estimate, absent

documentation or other proof to the contrary. Here, apart from

some anecdotal observations offered at hearing, Respondent offered

no proof to show, more likely than not, that a percentage rate

other than the one accepted by the Department more accurately

reflected off-premises sales. Under such circumstances,

Respondent has not demonstrated that the figures accepted by the

Department are unreasonable or, stated otherwise, that it is

entitled to any further credit for off-premises sales. See

Rule 61A-4.063(4)(c), Florida Administrative Code, ("If the vendor

chooses the sales method, the vendor will bear the burden of proof

that the method used accurately reflects actual sales."), and

Section 561.501(2), Florida Statutes, ("Retail records shall be

kept on the quantities of all liquor, wine, and beer purchased,

inventories and sales.").

At hearing, Respondent also contended that its deductions

(credits) for NON-COP sales should be larger because of charitable

contributions, free liquor accorded business associates, and other

off-premises uses. Respondent failed , however, to offer any

documentation or other competent proof that would permit a value

or volume to be placed on such transfers.

4/ By excluding the liquor store and storeroom inventory from the

ending inventory calculation, total gallons available for sale,

and, therefore, the surcharge on sales, was artificially inflated.

5/ Moreover, one could not simply add the audit of October 29,

1996, (for the bar area) and the audit of August 1, 1997, (for the

liquor store and storage room) to derive ending inventory because

they relate to two different time periods and, but for chance,

would not be expected to accurately reflect ending inventory as of

October 29, 1996. Moreover, Mr. DeGrave observed, and there is no

proof to the contrary, that inventory of the liquor store and

storeroom for October 1996 was much higher than in August 1997.

COPIES FURNISHED:

George G. Lewis, Esquire

Department of Business and

Professional Regulation

Division of Alcoholic Beverages

and Tobacco

1940 North Monroe Street

Tallahassee, Florida 32399-1007

Stephen R. DeGrave, Vice President

M & W Enterprises of Key West, Inc.

2922 North Roosevelt Boulevard

Key West, Florida 33040

Lieutenant John Szabo

Department of Business and

Professional Regulation

Division of Alcoholic Beverages

and Tobacco

Key West District Supervisor

Key West Professional Center

1111 12th Street, Suite 205-B

Key West, Florida 33040

Richard Boyd, Director

Division of Alcoholic Beverages

and Tobacco

Department of Business and

Professional Regulation

1940 North Monroe Street

Tallahassee, Florida 32399-0792

Lynda L. Goodgame, General Counsel

Department of Business and

Professional Regulation

1940 North Monroe Street

Tallahassee, Florida 32399-0792

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.