FICPA - FL DOR LIAISON MEETING 2013 SUMMARY

FLORIDA BAR TAX SECTION / FL DOR LIAISON MEETING 2013

On November 14, 2013, about 40 members of the Florida Institute of Certified Public Accountants ("FICPA") participated in a meeting with high ranking officials from the Florida Department of Revenue ("FL DOR") and the General Counsel's office to discuss current topics involving various Florida tax matters. The meeting lasted 8 hours including lunch, with long breaks to allow for good one on one conversations. Of particular note, four of the international CPA firms were present this year, including E&Y, PWC, Grant Thornton, and Crowe Horwath. Two members of our law firm, James Sutton and Jerry Donnini had the privilege of attending and we wanted to give the public a brief update of the topics discussed. If you want to learn more details, then please do not hesitate to James or Jerry at the number above.

We would also like to give special thanks to Joe Handy of Joseph P Handy CPA, Rivers Buford and his staff from the FICPA, and all of individuals involved from the FL DOR for coordinating to make this meeting possible as well as Kenneth Rios of Crowe Horwath LLP, for sharing his very detailed notes, which helped to make this update possible.

LEGISLATIVE UPDATES

Marshall Stranburg, Executive Director of the Florida Department of Revenue made introductions and briefly discussed the need for FICPA members to be part of a focus group to perform testing of the new Business Portal before launch. After introductions of everyone in the room (55+ people), the state updated and discussed with everyone on their current legislative concepts (11) including the following topics as presented by Vincent Aldrige, the Legislative and Cabinet Services Director and Rivers Buford, FICPA Director of Government Affairs:

Confidentiality of Data Security
Corporate Income Tax Piggyback
Delinquent Taxpayers: Security Requirement for New Registration
Floating Interest Rate for Reemployment Tax
Extension of Employer Protest Period
Standard Rate for Non-Compliance with Audit Record Request
Zappers
Clerks of the Court Remittances – Conforming Amendment
Increase Compromise Authority

You can find more specific detail on each of these legislative topics HERE (handout not given in the FICPA session, but provided at the Florida Bar Tax Section liaison meeting). There was also a brief discussion on the governor's recent inclination to lower taxes in some areas, including several proposed pieces of legislation that might reduce or fade out the tax on commercial rent and a potential rolling back of the taxes/fee on car tags and vehicle registration. The discussion mentioned that the Governor was calling for a $500 million dollar reduction in taxes.

There was a discussion in the room regarding the Certified Audit Program by Rivers Buford. The FICPA with the FL DOR's support has been pushing toward a public-private partnership with the FL DOR to complete audits. The proposed legislation would expand the Certified Audit Program to allow taxpayers to elect to use a certified auditor AFTER receiving an audit notice, something not currently allowed in the program. The proposed legislation passed the house with little or no opposition, but failed to pass the Senate. Apparently, the Florida Senate was concerned that allowed private Certified Audits would actually have a fiscal impact of about $2 million on Florida's revenue. This is due largely to the proposed interest abatements to extremely large taxpayers in the program. Proponents of the bill point to the increased audit coverage of the state and more quality audits which would generate more revenue for the state. It is hard to imagine that interest reductions and significantly more audits would cost the state money, however, that seems to be the Senate's concern. You can read more about the legislation by reading HB 495.

controversy UPDATE

Tammy Miller, Senior Attorney, Office of General Counsel, gave a brief overview on the latest cases against the Florida Department of Revenue in the areas of sales/use tax, corporate income tax, communication services tax, and one case involving insurance premium tax. Rhinehart Equipment, American Airlines, Direct TV and Verizon Purchasing were the most interesting discussions. There is an article on our website already concerning Rhinehart Equipment that can be found HERE. There are two articles on our website regarding the Verizon Purchasing case that can be found HERE. Direct TV dealt with whether cable and satellite TV should be similarly taxed. Unfortunately, all four cases were victories for the Department; however, Ms. Miller suggested that the Department was expecting notices of appeal on all of the cases at issue. It will be interesting to follow the appeals in the coming year.

Tammy Miller also noted that there were approximately 560 cases pending, with 138 pending revocations (or in process), and 40 to 45 new controversy issues arising per month (including revocations). The cases are closing at an average rate of 10 per month, with the majority of cases being settled. Bank freezes continue to increase with about 10 bank freezes a month. The majority of the litigations issues involved sales and use tax matters. Tammy also noted that her office reviews TAAs before they are issued.

ECONOMIC UPDATE

Amy Baker, Coordinator of the Office of Economic and Demographic Research of the Florida Legislature, gave a fantastic 60 minute presentation on the economic state of affairs in Florida, with graphics for almost every point of conversation. Specific details discussed were as follows:

Florida's Economic Drivers : Tourism and new home construction
GDP in 2012 ranked as 14^th in the nation (2.4% growth)
Personal income data showed 3.2% growth slightly below the national average of 3.5%
US unemployment rate in August 2013 was 7.3% while Florida was a 7% (656,000 unemployed in FL)
The highest unemployment in FL was 11.4% in 2009-2010
Population growth is estimated make Florida surpass 20 million, making it the 3^rd most populous state, surpassing New York.
Foreclosure activity remains daunting, with 3^rd quarter 2013 revealing FL as 1# in foreclosure filings, with no end in sight in the near future.

We were all glad to see that most areas of tax revenue have already reached pre-recession levels and that the state estimates a little over $21 billion in revenue this fiscal year. Ms. Baker also made note of several interesting nuances in the statistical data, such as the fact that our state has current revenue growth over the past year of about 7%.

GENERAL TAX ADMINISTRATION UPDATE

Maria Johnson, Director of the General Tax Administration Program, provided an update on general issues when the administration of taxes, including the following:

Registration portal/user acceptance testing/improvements to collection efforts
Consistency focus – collection analytics/audit process – DOR looking at things on a case by case basis and achieving a level of reasonableness/ stipulation agreements considered
Remote processing – 60% of returns e-filed. One of strategic initiatives is to have remote processing at the regional offices for those paper filed returns (reduce in-transit issues from regional office to Tallahassee).
Credit cards as a payment option – looking to implement this initiative as well as mobile apps.
Pay disparities between various DOR employees - - more trained tax professionals in DOR.
The DOR was looking into providing more flexibility for settlement agreements after the audit and during collections.

One topic that sparked discussion was the auditor's instruction to apply overpayments during the audit period. That's right, auditors are supposed to look for tax overpayments and apply them to the audit period. Members of the FICPA had raised the topic prior to the meeting that many auditors were refusing to apply credits. This can have a significant effect on audits and the interest components of an audit. It is worth reminding your or your client's auditor of the new directive from the Department. Peter Steffens, Auditor Coordinator, chimed in that he had specifically instructed all regional supervisors and audit managers over the past few months that credits and refunds were to be applied during the audit.

RULES UPDATE

Ellen Wolfgang, Deputy Director of Technical Assistance and Dispute Resolution, provided the audience with a brief update of the administrative code rule changes in process including:

Rule 70 - Real Property Rentals is due out for a revised proposed rule to reflect the Ruehl case (read more about the Ruehl case HERE). There was an inquiry whether the current draft of the proposed rule include the presumption that a tenant improvement was rent if the improvement was required in the lease. Ellen said that we would have a chance to review the proposed rule in a couple of weeks, but that is was changed substantially from the previous version.
R&D Tax Credit – gone through rule making – follows federal credit - $9MM that gets distributed on a first come first serve basis – application due around March 20th.
Rule 7 - titled property rules – looking to rework some of these titled property rules – looking to follow GM case. There was a question whether the DOR would follow the GM case regarding the taxability of goodwill repairs on autos, i.e. do they owe use tax if fix for free? DOR said they ruled "no" use tax – not subject to tax (for retail dealerships) is the specifics of the rule are met.

TECHNICAL ISSUES INCLUDING FABRICATION

Gary Gray of TADR and Mark Zych, Director of Technical Assistance and Dispute Resolution, and Tammy Miller created a panel in the front of the room to discuss various issues coming up before TADR, which ended up a discussion of two topics. Fabrication for real property contractors and the audits on retailers of alcohol and tobacco retainers. Both were very interesting topics, discussed in more detail below.

The first issue deals with the fabrication of tangible personal property for the contractors use in a real property contract somewhere other than Florida. The panel discussed a fact pattern of a cabinet maker who also sells installed cabinets. The cabinet maker does not sell cabinets at retail. The cabinet maker sells improved real estate, which is not subject to sales tax in Florida. Instead, as the panel explained, the cabinet maker is using those cabinets to improve the customer's real property. As such, the cabinet maker becomes the final user of those cabinets before they became real property and he consequently owes use tax on the cost price of the materials. There is a conflict in Florida statutes and the administrative rules. Specifically, the statute speaks to an exemption for property committed to export. Conversely, the FL DOR has a rule that states if tangible personal property is purchased to be installed in a real property contract in another state. However, the FL DOR takes the position that if a manufacturer fabricates property in this state for use in a non-Florida real property contract, then it is subject to Florida use tax. It is worth pointing out that this issue is being litigated and it will be interested to see the outcome or to see if the legislature steps in.

The Department's presentation also focused somewhat heavily on Alcohol and Tobacco ("ABT") related audits, refunds, and communications services tax ("CST") issues. On the ABT front the Department spoke on the remaining non-compliance of ABT related industries. While the Department did not directly say it, it seemed to hint that it remains a great idea for CPA firms representing ABT audits to engage a lawyer. Such an engagement can protect a CPA from having to divulge information on a criminal investigation that is not otherwise protected by attorney client privilege.

The Department reiterated more of the same on refunds unless the documentation is 100% complete, the Department will work with the taxpayer to make it so. What 100% complete may or may not mean remains relatively elusive.

On the CST front, the Department is admittedly of the position that any prepaid arrangement that allows for a purchase of anything other than voice ONLY (text, internet use, etc) is subject to CST. Most current prepaid calling arrangements provide more items than sales of voice ONLY.

The conference concluded with a segment on collections and new sales tax registration. The discussion began by procedural type issues for registration. New items such as new application items and selecting whether the C or S corporation status applies were discussed. The Department also apprised the group that about 61% of returns are now being E-filed for sales and use tax. The ZT09 report was also discussed which shows all taxpayer liabilities but not outstanding credits.

From a collections perspective, there were many topics of discussion. Once it is determined a tax return is delinquent a call is made followed by a notice in 14 days. Some light was shed on the phone call and recommendations were made to change the call to suggest a tax lien would be filed as opposed to language speaking of a tax "warrant." Although both are the same from the FL DOR's perspective, many taxpayers believe a tax warrant connotes an arrest warrant which is very different than a lien.

E-filing and Compliance

Ed Philyaw, Kathryn Dickey, Toraino Owens and Deb Maddren of General Tax Administration led a comprehensive presentation segment on a myriad of compliance and filing updates from within the Department. Despite the movement towards e-filing, the DOR still manually reviews some 800 returns each year. The movement has taken shape, however, as approximately 60% of sales and use tax returns and reemployment returns are filed electronically in Florida. The Department informed the FICPA group by pointing out recurring issues with filing. One common error on the sales tax returns is that taxpayers errors in not making sure the taxable amounts yields the tax due shown on the return.

Collection and Enforcement

Bill Cumbie and Laura Gaffney from the general counsel's office led the final segment of the day. Of particular note to the audience was the concept of stipulate payment plan agreements. Stipulated payment agreements were discussed for taxpayers who are unable to make a full payment on past liabilities. Under Florida law, a taxpayer is entitled to request a stipulated payment agreement if full payment cannot be made as a result of undue hardship or lack of funds. James Sutton brought up numerous situations in which the boiler plate language does not apply. The Department hinted that it would modify language to eliminate personal liability on non-tax collected and not remitted situations. Another topic of contention was whether a stipulated payment could be bifurcated to allow a closing agreement on certain issues and not on others.

The meeting adjourned slightly after 4:00 pm with many handshakes, an exchange of business cards, and side bar conversations about particular issues. Overall, the liaison meeting was very projective. Personally getting to know the individual on the other side of a tax controversy breeds better resolutions for both taxpayers and the state. It was beneficial to not only meet the faces on the other end of the telephone at the FL DOR but also was great to meet other professionals in the Florida SALT community. In addition, it was beneficial to learn of the interworking's of the FL DOR as well of some of the new programs. We look forward to attending the event again next year!

ABOUT THE AUTHOR: Mr. Sutton is a Florida licensed CPA and Attorney and a shareholder in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Sutton is in charge of the Tampa office of the firm and his primary practice area is Florida sales and use tax controversy. Mr. Sutton worked in the State and Local Tax department of a "big five" accounting firm for a number of years and has been an adjunct professor at Stetson University College of Law since 2002 teaching State and Local Taxation, Accounting for Lawyers, and Federal Income Tax I. You can read more about Mr. Sutton in his firm BIO.

ABOUT THE AUTHOR: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law the Law Offices of Moffa, Sutton, & Donnini, P.A. based in Fort Lauderdale, Florida. Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. You can read more about Mr. Donnini in his firm BIO.

ADDITIONAL RESOURCES

FL BAR TAX SECTION / FL DOR LIAISON MEETING 2013, posted October 28, 2013, by James Sutton, CPA, Esq.

FL controversy ALERT – RHINEHART EQUIPMENT – SOL, NEXUS, & A TIPSTER, posted October, 15, 2012, by James Sutton, CPA, Esq.

FL tax controversy ALERT – NOPA – VERIZON VS FL DOR-STATE WINS AT TRIAL, posted June 7, 2012, by James Sutton, CPA, Esq.