FL Sales Tax – Like Texas, FL's DOAH Getting Flooded
This article is a nice follow up to a prior article which talked about the lack of protection from the FL Taxpayer Bill of Rights and the lack of real "rights" it affords taxpayers in the great state of Florida. The naïve portion of me continues to believe that the DOR will recognize the error and unfairness of its ways and change, but continued dealings with them are showing that isn't likely to occur in the foreseeable future.
I previously lived and worked in the Dallas-Fort Worth metroplex so I have some fondness for the area. So, I watch the current flooding conditions with sadness and hope they will receive relief soon. But, I see the same kind of "storm" brewing for the Florida Division of Administrative Hearings (DOAH). This situation is a product of the inherent flaw of the FL DOR's protest process and the mindset involved in that flawed process. The easiest example involves an audit involving the heavily reviewed convenience store industry.
This example starts with what is now becoming a popular tool with the DOR – a desk audit or limited self-analysis letter. These are "audits" that are initiated by a letter from Tallahassee that goes to a taxpayer anywhere in the state. As such, there is no auditor in the local area so the contact is limited to telephone or "written" communications. This is a huge procedural issue because the audit notice might not get to the proper person to alert them to participate in the audit process. Assuming it is received, then the process is controlled by the desk auditor in Tallahassee. In many cases, I have seen very limited efforts to pursue information in the case.
The most common result in these cases is that the desk auditor indicates limited or no information was provided (according to the Explanation of Items which "explains" the assessment exhibit(s)). This common conclusion is explained by the "power" it gives the desk auditor. Once this has occurred, we have seen that the desk auditors constantly make decisions that have little to no support and only serve to inflate estimated findings of unreported sales and associated additional tax due. The desk auditors follow DOR procedure and use information that has tenuous (at best) support for accuracy. More telling, the "support" has not been detailed or independently reviewed or disclosed. In the protest process, the information used to support the audit is cited as supportable for what it is claimed to be. In other words, the information used is reliable because it is what the DOR says it is – with no additional verifiable support. This basis is what permeates the protest process.
I understand a protest process to be a method to challenge the accuracy of contested findings. But, it is hard to see how that is true with the DOR's protest process. Upon filing a protest, you essentially enter a system where the "judge" is the opposing party's "relative". The initial position in the process is that a taxpayer has to prove the audit errors. This is understandable in theory. But, the application is where the flax is. The DOR cites to a position where it gives deference to the audit findings. And, this level of deference greatly exceeds the traditional understanding of deference and goes beyond humble respect. In too many cases, the DOR requires an inordinate level of proof to overcome the "deference" it affords the audit findings.
I believe this results from a DOR prejudice that is fostered in its employees. When I worked there, I saw this thinking become too common. If an employee stays long enough, they take on the mindset that every taxpayer is trying to cheat on their taxes and they are guilty until proven innocent. I must disclaim that not every single person is this way. But, even with the fairest of employees I have worked with, they still show that level of thinking to some degree. And, I will admit there unfortunately are sales tax "thieves" out there who try to beat the system and incorrectly report their return information. But, this guilt by association continuously deprives innocent taxpayer of their rights in being subjected to this prejudice.
The most egregious case of this involves the ABT reports used in convenience store audits. I stop to note an alarming trend that our firm has noticed which is that criminal investigations appear to have increased for the convenience store industry that are based on these ABT reports. The danger of this results from the related error that is evidenced in the protest process involving these ABT reports. As my firm's articles addressed when these reports became required, third party vendors are to provide alcohol and tobacco purchases to the state. It sounds innocent enough but is actually a significant problem that leads to a multitude of costs to taxpayers.
The DOR takes the position that the ABT third party purchase information is gospel. Meaning the taxpayer must prove that information is wrong. This leads into the inherent unfairness of the process because the DOR has taken different approaches for disproving its ABT data. I was told in the last few days that detailed taxpayer information would be accepted to show purchase discrepancies. But, when that has been provided in other cases, the information has been ignored because the DOR says that the information is unreliable since it is less than what the ABT data shows which means invoices were (or could have been) omitted. So, a taxpayer must provide vendor reports showing ABT purchases from vendor reports.
This is where the level of unfairness is truly shown. As we have handled a plethora (always a fun word to use) or convenience store audits, we have provided countless examples of ABT errors. The most common situation is where reports show that information contains ABT and non-ABT purchase data. Despite the numerous examples of these errors, I am repeatedly told by DOR conferees that the information is accurate. The most offensive of these statements relate to a vendor who initially provided dramatically incorrect information. That vendor's information is now generally showing lower purchase totals. But, the DOR has not indicated that they have confirmed that the totals are accurate in any cases. Their position is that they are now providing correct information. Apparently, this conclusion is based solely on the numbers being less than the initial six figure monthly purchase totals it has initially reported. The problem here, that vendor is not the easiest to work with in trying to get purchase data to refute what has been provided to the DOR. And, those reports do not break out ABT purchases. If they are not provided to the customer in a segregated fashion, how can they be provided to the DOR in such a way? When asked this question, the DOR constantly takes the stand that the information is right or prove them wrong. As I have noted in prior articles, how easy is it (or fair) to prove an error is wrong when the truth is disregarded? You would think the Taxpayer Bill of Rights would protect a taxpayer from this.
But, that sadly isn't the case. In the protest process, the DOR is both judge and jury. The find the facts (correctly or not) through the audit and then judge how right they themselves are. The DOR as judge has seemingly set the burden of proof to beyond a reasonable doubt for taxpayers to overcome in the protest process. And I use "reasonable" with tongue in cheek with the DOR. Most of the audits involve taxpayers with small operations in sparsely populated areas. Yet, the DOR continuously takes the position that they have all failed to report millions of dollars in unreported taxable sales (not total sales) over a three year period. I have rarely seen a conferee actually admit that the pictures of a small physical store (like a drive thru or 800 sq. foot store) don't support the estimated unreported sales. When faced with facts that refute the audit estimations, DOR conferees have been making illogical arguments to hold onto the inflated audit estimates.
A recent example involves my production of mark-up information for low cost cigarettes. In showing a mark-up significantly less than the 18% used by the DOR, the conferee pointed to pictures of cigarettes sold at higher prices. I tried to point out that a higher priced item does not correlate to it being sold more often and that its mark-up being higher is an illogical leap. Yet, the conferee argued that the higher prices work against the lower mark-up shown through purchase invoices and sales receipts from the store. The conferee appeared to ignore the reality that lower income individuals would forsake higher cost items to purchase lower cost items. This same conferee also ignored the point that during a bad economy purchases generally would be lower. This typical behavior of disregarding proof from a taxpayer highlights the burden of proof that is essentially impossible to overcome in the protest process.
Which leads me to my title. The DOR's failure to provide any semblance of a fair and unbiased process removes any reason to engage in the informal protest. My recent example involved a petition for reconsideration. In not being able to explain the audit findings (and unsupported purchase adjustments) the conferee said we can agree to disagree and indicated the taxpayer can take advantage of its other protest rights. At this point, I see no reason to petition for reconsideration in future cases. In fact, I question the use of an informal protest because it is the same process. Therefore, DOAH is the most likely alternate venue. Frankly, I prefer to deal with them. They generally look at the audit findings with a more "neutral" perspective. In dealing with them, they appear to look at the findings as what is actually proven as opposed to estimated. This is all I hope for with the informal protest process – let's determine what is truly owed in light of the particular taxpayer's operations and not what you think the industry does on average. As this doesn't occur in the informal protest process, I think the DOR will catch up on its backlogged protest cases because there is no reason to go there. But, this means FL's DOAH better get ready to pick up the slack as a flood of contested audit findings are likely headed its way.
About the author: Mr. Parker is a sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., based in the firm's Tampa office. Mr. Parker's practice includes state tax audits and controversies involving sales and use tax and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Parker received his law degree and L.L.M. in Taxation from the University of Florida. To learn more about Mr. Parker, please visit his firm bio.
BURDEN OF PROOF & PERSUASION IN FL TAX CASES, published May 31, 2015, by James McAuley, Esq.
FL TAX AUDITS – TAXPAYER BILL OF RIGHTS PROTECTS NO RIGHTS, published May 5, 2015, by Matthew Parker, Esq.
WHEN SALES TAX AUDITORS MAY NOT PICK AND CHOOSE RECORDS TO USE, published April 19, 2015, by Joseph C Moffa, CPA, Esq.
FL DOR Sales Tax Audits – Beware the Electronic Records Requests, published December 12, 2014, by Matthew Parker, Esq.
FL DOR – THE MAGIC BEHIND THE CURTAIN, published November 10, 2014, by James Sutton, CPA, Esq.
TAXPAYER FORCED TO SIGN AWAY RIGHTS TO REMIT TAX?, published September 2, 2013, by James Sutton, CPA, Esq.
CRIPPLING PENALTIES UNDER FLORIDA SALES AND USE TAX LAW, published July 19, 2012, by James Sutton, CPA, Esq.