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On August 27, 2012, Administrative Law Judge W. David Watkins issued a recommended order in the Division of Administrative Hearings ("DOAH") case Rhinehart Equipment Co, vs. Department of Revenue, Case No. 11-2567. The case, argued by Ayman F. Krizkalla, Esq. and Richard L Winston, Esq. of K and L Gates, LLP, did not go well for the taxpayer. However, the issues discussed in the case are worthy of note for companies doing business in Florida from outside Florida's borders, as well as for state tax practitioners who are not perfectly clear on the nuances surrounding Florida's statute of limitations. In a perfect world, I'd prefer to be writing about cases that the Florida Department of Revenue lost, but we often learn from our losses more than our victories. As such, shall we raise our glasses in solute to John Mika, Esq. for his success in this case on behalf of the Office of the Attorney General.


Rhinehart Equipment Co. ("Rhinehart") is seller or retailer of heavy tractor equipment based out of Rome, Georgia. Since at least July of 2002, Rhinehart has been selling heavy tractor equipment into the state of Florida. However, Rhinehart does not own or maintain a sales office or a show room in Florida nor does Rhinehart directly provide financing to any Florida resident or company for any of its sales. Furthermore, Rhinehart does not provide any after-sale services to customers such as assembly, technical advice, or maintenance. Finally, Rhinehart does not even have a single employee in the state of Florida. Rhinehart does, however, deliver trucks to Florida customers with Rhinehart employees and hauling equipment as well as pick up trade-in vehicles from Florida customers with the same employees and equipment. Rhinehart also engaged a Florida based magazine to provide for advertising to the Florida market for potential customers interested in heavy tractor equipment.

With these base facts, the story in which our taxpayer wishes it was not a character begins with a "tipster" calling into the Florida Department of Revenue tax hotline (yes there is actually a "tax hotline") alleging that Rhinehart was selling equipment into Florida without charging sales and use tax on the selling price even though the taxpayer was delivering the equipment using Rhinehart trucks. The tipster further alleged that Rhinehart was advertising in a commercial publication, Heavy Equipment Trader, Florida Edition. The tipster, who one can only guess was likely a Florida based competitor, caused a Florida Nexus Questionnaire to be sent to Rhinehart within a few weeks of the tip.

Of course, the taxpayer responded to the Florida Nexus Questionnaire without consulting legal counsel or their accounting firm, which was signed by none other than the company president. As the questions on the Questionnaire are designed to trick the taxpayer into admitting even the slightest possibility of nexus creating activity, it should surprise no one that the president of Rhinehart got a friendly letter from the Florida Department of Revenue claiming that the company had nexus with Florida. The letter specifically stated the reason for the finding was as follows:

[A finding of Nexus] based on the fact that your company makes sales to Florida customers and uses the company's own truck to deliver goods to customers in the State of Florida.

Rhinehart registered to collect and/or remit sales and use tax to the State of Florida effective July 1, 2005, two months after the FL DOR's latest letter. However, before the taxpayer registered, the FL DOR invited Rhinehart to self-disclose any tax liability it may have incurred during the 3 year period prior to its registration and thereby be absolved of any penalties. Rhinehart began filing the required tax returns after July 2005 "under protest," but declined to provide any information for sales made prior to July 1, 2005.

If you have ever dealt with the Florida Department of Revenue, then you know that refusing to provide any information usually has undesirable consequences. It may not happen immediately, but the consequences eventually surface. In this case, Rhinehart's refusal to provide any sales information resulted in Notice of Intent to Make an Assessment to be issued on May 23, 2009 and a Notice of Final Assessment to be issued on September 11, 2009 for a whopping total of $354,829.30 comprised of $229,695 in taxes and $125,144.30 in interest. Since no sales data was provided, the assessment was purely an estimate based on the company's reported sales into Florida after the company registered to collect/remit Florida sales and use tax.

The taxpayer challenged the Notice of Proposed Assessment through informal administrative review (Protest/Petition for Reconsideration) and eventually ended up before the Division of Administrative Hearings. As is usually the case when the FL DOR takes a shot across the taxpayer's bow using estimates, Rhinehart produced the records revealing the actual Florida sales during the audit period of 2002 through 2005 totaling $2.9 million dollars in equipment sales and trade-ins totaling $168,915 in value.


The taxpayer challenged the assessment on two grounds. First, the taxpayer challenged whether the statute of limitations period barred the assessment, which I find to be the more interesting and educational of the two arguments. Second, the taxpayer challenged whether the company's activities in Florida constituted "substantial nexus" under the U.S. Supreme Court and Florida Supreme Court's interpretations of what has become known as the Dormant Commerce Clause in the U.S. Constitution. Both of these arguments will be briefly summarized below.

STATUTE OF LIMITATIONS CHALLENGE: Section 95.091(3)(a), Florida Statutes ("F.S."), provides the statute of limitation rules for Florida sales and use tax with regards to both taxpayer refunds and Florida Department of Revenue assessments. The general rule is the statute of limitations for assessments or refunds is 3 years from the later of the date the return is due or the return is filed. Sec. 95.091(3)(a)1.b., F.S. However, the statute of limitations for assessment increases to 6 years from the when the taxpayer either makes a "substantial underpayment" or files a "substantially incorrect return." (For sales and use tax purposes, then 6 year rule does not get enforced very often). Most of the time, this leaves a taxpayer that has not filed a return with the daunting notion that the statute of limitations never began to run. To some extent, this makes sense because the taxing authority has to be put on notice of the tax liability before it can be expected to determine whether additional taxes are due. This same logic leads to another little known quirk in the statute of limitations law in Florida, which Rhinehart's legal counsel very creatively tried to use. Section 95.091(3)(a)5, F.S. provides that the Department of Revenue has the authority to assess any tax, penalty, or interest due:

At any time after the taxpayer has failed to make any required payment of the tax, has failed to file a required return, or has filed a fraudulent return, except that for taxes due on or after July 1, 1999, the limitations prescribed in subparagraph 1. [i.e. 3 years] applies if the taxpayer has disclosed in writing the tax liability to the department before the department has contact the taxpayer.

Most of us in the state and local tax arena are familiar with the second half of section 95.091(3)(a)5, F.S., in the context of a voluntary disclosure proceeding. What is interesting here is that the taxpayer tried to use this statute to say that the taxpayer put the state on notice in writing of the tax liability in mid-2005, more than 3 years before the Notice of Proposed Assessment became final. The problem is the statute specifically provides that the taxpayer has to put the state on notice in writing BEFORE the Department of Revenue contacts the taxpayer about the potential liability. In this case, Administrative Law Judge W. David Watkins held for the state on this issue because the state contacted the taxpayer more than once before the taxpayer provided any information to the state. Rhinehart's receipt of the Florida Nexus Questionnaire letter likely kills the idea of utilizing the prior disclosure statute of limitation as a loophole. Once the state has properly assessed the taxpayer, Florida law allows the state 20 years to enforce the assessment.

SUBSTANTIAL NEXUS: As with any question of 'substantial nexus,' the administrative law judge cites National Bellas Hess, Inc. V. Illinois Dep't of Revenue, 386 U.S. 753, (1967), Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992) as the seminal cases on the subject that stand for the proposition that if an out-of-state vendor's only connection with a state (customers) is by common carrier or mail used to deliver goods to customers, then the customer's state may NOT force the out-of-state vendor to collect sales or use tax on behalf of the state. According to Quill Corp., the vendor must have some type of "physical presence" in the state, at a minimum, to be considered to have substantial nexus. Otherwise, the Supreme Court has held, it would be too much of a burden on interstate commerce, which has indirectly been forbidden by the Commerce Clause of the United States Constitution.

We Floridians enjoy the even more state limiting precedence set by Florida Dep't of Revenue v. Share International, Inc., 667 So. 2d 226 (Fla. 1st DCA 1995), (U.S. Sp. Ct. cert. denied), which allowed significantly more leeway to convention participants who were not only in the state three times during the year, but also sold goods at the convention and, believe it or not, collected and remitted Florida sales tax on the sales. Despite this purposeful and direct commercial physical presence in the state, the court held that the convention going taxpayer did NOT have substantial nexus and was NOT required to collect Florida sales tax on other sales to Florida customers made from outside the state.

Rhinehart attempted to argue that the delivery of goods into and back out of the state via company employees and company vehicles was, like Share International, not enough continuous and systematic presence in the state to allow for a finding of substantial nexus. The court, while not spelling out how many times equipment was sold and delivered into Florida during the three year period, did put a fair amount of attention on the number of times Rhinehart retrieved trade in equipment from Florida customers. The court appears to give heavy weight to the state's argument that the trade-in equipment was property owned by the taxpayer before it was retrieved, thereby creating a type of inventory presence in the state.

The court surprising gave the "perhaps most significant" weight to the advertising, and then goes on to quote section 212.0596, F.S., commonly known as the mail order sales statute, which provides that "purposeful and systematically exploiting the market by … magazine or newspaper advertisements … creates nexus within this state." The reason why this the weight given by the court is so surprising is that advertising alone cannot create substantial nexus for sales tax collection purposes under the precedence set by Quill. Section 212.0596, F.S., is simply another one of those overreaching statutes which cannot stand on its own, at least as long as Quill remains the law of the land. Worthy of note, the administrative law judge was so gracious as to point out that the taxpayer failed to make a constitutional challenge to the section 212.0596, F.S. The advertising, in my humble opinion, is merely icing on the proverbial cake to the state's firm position of having employees, vehicles, and inventory in Florida creates substantial nexus.

SALES TAX EXEMPTION FOR FARM EQUIPMENT: One last compliment to W. David Watkins, Administrative Law Judge, who pointed out that that much of the equipment sold was likely to farmers for agricultural purposes, for which there is an exemption for sales tax. The judge was gracious enough to allow the taxpayer 90 days to try to acquire as many exemption certificates from the customers as possible, to lessen the tax burden.


There are several interesting things to take from this case…

SPEND A PENNY NOW TO SAVE A DOLLAR LATER: If your company is going to start doing business in another state, it is always prudent to spend a small amount a money to consult with a professional that thoroughly knows that state's tax laws backwards and forwards. Not only will it save you a lot of money in the long run, but you likely will have a hired gun on retainer whenever your company has questions about how to structure the next transaction. Imagine how much money Rhinehart would have saved by simply hiring a common carrier to deliver the equipment instead of using its own employees and equipment.

ENTER ONE OR TWO TIMES A YEAR MAYBE OK, BUT MORE IS DANGEROUS: The court mentioned Florida Department of Revenue v. Share International, Inc., 667 So.2d 226 (Fla. 1st DCA 1995). This is one of the more interesting taxpayer favorable cases from around the country regarding what de minimis activity a company can do in a state without creating substantial nexus. Using this case, three days a year in a seminar is not enough to create substantial nexus for sales and use tax purposes in Florida, despite the fact that the taxpayer not only sold tangible personal property in the state, but he also collected and remitted Florida sales tax on those sales. Share is an extremely taxpayer friendly case, which the Florida Department of Revenue probably is not fond of. Also – the case herein turned primarily on the fact that deliveries were made by the company. If they used a common carrier, the taxpayer most likely would have walked away with no liability.

THE VALUE OF VOLUNTARY DISCLOSURE: The taxpayer's use of the special statute of limitations rule of section 95.091(3)(a)5, F.S., was creative, albeit unsuccessful. The lesson to learn is how valuable a Voluntary Disclosure can be for a taxpayer that realizes a mistake has been made, especially for an out of state taxpayer that has never filed a Florida tax return. The state could literally go back decades and assess the tax, penalties, and interest (which was 12.99% in 1999). However, this statute provides a statutory statute of limitations of only 3 years from the date the Voluntary Disclosure is filed. Furthermore, section 213.21(7)(a), F.S., provides for a waiver of the penalties and the potential for compromising tax and interest (if "it is in the best interest of the state"). The only exception is if the taxes were collected but not remitted, then there might be a 5% penalties if reasonable cause cannot be shown. So a company with potential tax issues going back more than three years should seriously consider going through the voluntary disclosure program BEFORE the state contacts you.

KEEP GOOD RELATIONSHIPS WITH YOUR CUSTOMERS: The one thing silent in this case that I would have expected to see is the taxpayer proffering some type of evidence that at least some of its customers paid use taxes on the equipment purchased. Although not written into any rule or statute, the Florida Department of Revenue (at the post audit level) has a policy not to double collect sales tax on a vendor if use taxes have been paid by the customer (or vice versa). I'm surprised that Rhinehart did not proffer any evidence of use taxes paid. Perhaps the issue was raised and addressed earlier in the process, but I still would have expected the dollar amounts to be mentioned in the administrative law judge's opinion. I'm curious whether this tactic was overlooked.

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Rhinehart Equipment v DOR - Case No 11-2567 - Initial Petition for Hearing with many additional documents (NOPA, Protest, NOD, Petition for Reconsideration, NOD, Etc.)

Rhinehart Equipment v DOR - Case No 11-2567 - Final Recommended Order

© 2012 All rights reserved - James H Sutton Jr