FL DOR ABUSES CONVENIENCE STORE INDUSTRY

FL DOR ABUSES CONVENIENCE STORE INDUSTRY

Around 2009, the major players in the Florida gas station industry approached the Department of Revenue (FL DOR) complaining about the small, single owner convenience stores around the state. The complaint was that these convenience stores could not be selling beer and cigarettes for such low prices. They must be playing unfair somehow and the suggestion was that they were not remitting all the sales tax. So you have the big chain store owners with multiple stores in the best locations complaining about the small, single store owner. After 2 years of research and political maneuvering, in 2011 the Department of Revenue started a "campaign" against the small convenience store industry in Florida. You have to understand, these small, community convenience stores are usually run buy the owner of the business working 80+ hours a week to support their family. The resulting situation is akin to David fighting Goliath, except Goliath (the multi-store gas station industry) brought along a pack of money hungry lions trained to tear small business owners from limb to limb. This article is about how the lions (FL DOR) have stacked the odds so heavily against the industry that it can't be considered anything but draconian, which is exactly what Goliath (the big chained stores) wanted.

The lions planned their attack very carefully, stalking their prey for almost two years before pouncing. First, they approached the legislature to grant themselves the power to demand records on the wholesale sale of alcohol and tobacco from the wholesalers to the retailers by type of product, by month, and by retailer. Second, the lions asked Goliath for help in the form of information about the industry. Goliath directed the FL DOR to the National Association of Convenience Stores (NACS), which provided mega-chain gas station industry averages based on a "magazine survey." Third, the FL DOR developed a formula for estimating taxable sales using the wholesale purchase information and magazine survey industry averages. Fourth, the FL DOR structured their audits of these small business owners to give the FL DOR the automatic authority to ignore the requested records and use the Department's own highly inflated estimates. Fifth, if the store doesn't defend themselves timely, then the FL DOR will start freezing the business bank accounts (effectively closing the business down). Finally, if the owners do not agree to pay the overestimated tax, then the FL DOR will start imposing 200% personal penalties on the owners or start criminal investigations (threats of jail). Notice that this final result is an all-out attack on the small, one owner convenience store industry, which is exactly what the mega-chain gas stations covertly asked the FL DOR to do in the first place. Below we will discuss how each of these tactics, when combined, results in a complete devastation to the small community convince store owners and their families.

UNRELIABLE WHOLESALE DATA FROM THE DBPR

First, they approached the legislature to grant themselves the power to demand records on the wholesale sale of alcohol and tobacco from the wholesalers to the retailers. In truth, the FL DOR approached the Florida Department of Business and Professional Regulations (DBPR) for this information because, as strange as this might sound, the wholesale taxes on alcohol and tobacco is managed by the DBPR instead of our state's primary taxing agency, the FL DOR. However, the DBPR refused to give the FL DOR the wholesale data. So the FL DOR approached the legislature with the idea of absorbing the responsibility for managing wholesale taxes on these products, which freaked out everyone in the DBPR who regulated these wholesale taxes. So a deal was struck, a new law was written, and the DBPR was required to give the wholesale data to the FL DOR.

The wholesale data, broken down by type of product, by month, by retailer, gave the Department of Revenue a great deal of information about the beer, cigarettes, and other alcohol/tobacco products these small business owners were buying. Unfortunately, it took almost two years of audits before the FL DOR was willing to admit that the wholesale data taken from the Department of Business and Professional Regulation was rather unreliable. A very common problem was that SAMs Club would report beer or cigarette purchases by a single c-store around $5,000 a month for several months, then report the same store purchased $450,000 of beer/cigarettes for several months, then back down to $5,000. Hundreds of audit assessment were made based on completely false information. The FL DOR accused these store owners of stealing, referring many of them to criminal investigations to have them prosecuted – all based on completely false data. It was not until 2014 that the DOR began to adjust its estimates to account for the false data. The FL DOR has been extorting millions of dollars out of these poor community small business owners based on false information. (I'm actually surprised that no one sued SAMs for the false reporting with evidence of direct harm being the over assessed tax.)

USING MAGAZINE SURVEYS FOR INDUSTRY AVERAGES

Second, the lions asked Goliath for help in the form of information about the industry. Goliath directed the FL DOR to the National Association of Convenience Stores (NACS). Here is where the unfairness really begins. The NACS, whose members are overwhelmingly the giant, chained gas stations, puts out a magazine survey every year asking for information about their member's stores. They want to know general mark-up and sales mix data at their member's chain of stores. Remember – these are not confirmed answers, but merely what the chained stores want to put on a magazine survey.

Does it occur to you that the owner of multiple gas stations might have an incentive to inflate their prices in the survey, so their competitors might raise their prices after reading the survey? These chain store owners might have given into basic human nature and respond with their best case scenario answers for mark-ups, wishing that their stores could sell goods with top prices all the time. I can't think of any reason for a store owner to understate mark-ups on a magazine survey. In other words, how reliable is the data on the industry when it comes from a magazine survey? Worse yet – how reliable is the data coming from a magazine survey almost entirely derived from the biggest chained gas stations in the best locations across the country? Even if the survey statistics were reliable for the big stores, just how applicable are these statistics for tiny, community based convenience stores with no gas, in poor areas of town, with several other small convenience stores and gas stations within a quarter mile of each other. These little community convenience stores are barely surviving, with sometimes as little as 5% mark upon beer or cigarettes just to compete against the other stores.

Not only are these statistics unverified and questionable to begin with, but also the 2011 survey provided by the NACS and used by the FL DOR to develop the campaign model was derived from responses that compressed of less than 1% single store owner responders. Think about this, almost every c-store being attacked by the FL DOR has been small, single store owners, but the "industry averages" used to come up with the campaign model against these single store owners are 99% from the mega-chain stores in the best locations, with the best mark-ups. Does this sound like a reasonable estimate to you? The industry averages used by the FL DOR do not even come close to reality. Now combine inflated estimated mark-ups with completely false purchase information – and we have an exponentially growing problem with the Department of Revenue's estimated assessments.

Here is another kicker in the blatant abuse of the industry. The NACS has a completely separate survey that they give to single store owners. The Florida Department of Revenue, acting like mafia thugs for the big chained stores, conveniently ignored the "best available information" about the taxpayers they are auditing because it doesn't produce as high an assessment. If the purpose of the audits were to find out what the industry really owed, then wouldn't logic (and even the most basic morality) direct the campaign managers in the Department of Revenue to at least use the statistics for the segment of the industry they are auditing? Heaven forbid the FL DOR produce an estimate that might actually match reality. There might be one flagrant cheater that slips through the cracks if their estimates were not inflated through the roof. So, instead, hundreds and hundreds of honest, hardworking small business owners get slapped with outrageous estimates and are forced to hire someone to fight back. I also find it appalling that most of the FL DOR employees using these industry averages do not even realize the statistics are from magazine surveys. But wait, this is not the end of the draconian practices. It gets much worse.

HOW THE FL DOR OVER ESTIMATES TAXABLE SALES

Third, the FL DOR developed a formula for estimating taxable sales using the wholesale purchase information and magazine survey industry averages. Here is a quick primer on how the FL DOR estimates taxes on these c-stores. Using both the wholesale data on alcohol and tobacco purchases and the contrived industry averages, the Florida Department of Revenue developed a flawed business model for the industry that says 48% of the store's purchases are alcohol and beer (ABT), 5%[i] are exempt products, such as water, leaving 47% to be "other" taxable products. Then the FL DOR used the magazine survey information (from the mega-chain stores in the best locations) to determine what the typical mark ups will be. The FL DOR started out with estimated mark-up of 25% for cigarettes, 27% for beer, 39% for wine, & 45% for other tobacco products. Using the ABT wholesale purchase information, the DOR then estimated the other taxable and exempt purchases and grossed up the total estimated purchases to arrive at their own estimate of taxable (and tax exempt) sales. Then they take the taxable sales number multiplied by the average tax rate for the store's location and the FL DOR has magically created the store's estimated taxes collected. The DOR then takes this gross tax amount and subtracts out the amount the convenience store remitted with it tax returns to determine what is usually a $100,000+ tax assessment that this struggling business owner must defend against or pay.

At this point, I will point out that we have defended well over 300 convenience stores against the FL DOR since this campaign started. I can say – without even a shadow of doubt – no community, single owner convenience store in the state of Florida makes these kind of profit margins on alcohol or tobacco. In fact, the most consistent thing I hear from prospective clients in my office is:

"I wish I made those kind of mark-up. I'd be retired by now!"

A much more accurate method of determining a convenience store's sales is to review the actual records from the store's point of sale system. Many, if not most, convenience stores have monthly reports that depict exactly what their sales are. Alternatively, the FL DOR might use common sense to realize that almost every convenience store that uses competent counsel to challenge the grossly over estimated assessment received dramatic reductions in the tax assessment. One might consider that a reasonable taxing authority would adjust their estimating model to match the results they have found from reviewing actual business in the industry. From our experience, a the typical small, community convenience store has at least 15% exempt sales, at least 55% alcohol and tobacco sales, and dramatically smaller mark-ups on products.

The slight differences between these two methods reflects that the DOR's estimating model result in anywhere from 100% to over 500% exaggerated assessments, completely victimizing the industry. The FL DOR has been bragging about the results, announcing in accounting conventions that within the first 12 month of the campaign, the Florida Department of Revenue assessed in excess of $81 MILLION DOLLARS against our community convenience stores. The average community convenience store owner was accused of under reporting over $110,000 in sales tax over a 3 year period of time.

The next segment of this article explains why the assessments were so high despite the taxpayers giving the DOR exactly what they asked for.

STRUCTURE THE AUDIT TO IGNORE TAXPAYER INFORMATION

Fourth, the FL DOR structured their audits of these small business owners to give the FL DOR automatic authority to ignore the requested records and use their own highly inflated estimates. To understand just how sneaky the FL DOR was when they designed this David vs Goliath (and the lions) campaign against the community convenience store industry, you need to understand a little bit about Florida laws providing when the FL DOR can use "best available information" and when they are required to use the taxpayer's records to determine an audit liability. Sec. 212.12(6)(b) requires an auditor to sample taxpayer records to determine a potential audit assessment. However, Sec. 212.12(5)(b), F.S., gives the auditor the statutory right to use the "best available information" if the taxpayer does not provide sufficient records for the audit period. Most Florida sales tax audits cover 36 months. You would expect a sales tax audit on any business to ask for records during this 36 month period, right? However, if a convenience store owner provided sufficient records during the 36 month audit period, then the auditor would be required by Sec. 212.12(6)(b), F.S., to sample the taxpayer's records. Apparently the FL DOR think tank realized this concept and designed a significant portion of their audits to side step this little pesky requirement to actually use the taxpayer's records. These "Desk Audits" included a specific set of questions and asked for certain documents. Let's ignore, for a minute, that the audit notice requires the business to respond with records within 60 days, a direct Florida Taxpayer Rights Violation under Sec. 213.015, which gives all taxpayers the right to not have an audit start during the first 60 days after the audit notice. Let's instead focus on the questions and records request and, more importantly, not requested – in the audit notice.

The audit "Questionnaire" sent with the audit notice asks for the taxpayer to write on a simple form what their business' average sales are by type of product as a percentage of total sales (aka "sales mix") and what the average mark-ups are on each of these types of products (aka "mark-up"). They ask for a total purchases number for alcohol and tobacco for one year during the audit (a year that matches the wholesale ABT data), but do not ask for the details or for actual purchase records. Then they curiously ask for the "most recent month's z-tapes and purchase records." This is the sneaky part, because by the time the audit notice arrives, the "most recent month" of z-tapes and purchase records will almost always fall just outside the audit period. In other words, the audit questionnaire, by design, very specifically avoids asking for sales records and purchase records during the audit period. Even if the taxpayer complies with every question on the questionnaire, the DOR still would not have any direct purchase or sales records during the audit period from the taxpayer. So, under Sec. 212.12(5)(b), F.S., the FL DOR is arguably allowed to use the "best available records" to estimate the taxpayer's liability. Then, the DOR has the audacity to tell the taxpayer that they refused to give records, which resulted in the estimates. The practice is abhorrent and the designers of this campaign should be ashamed of themselves for how they are treating this industry.

I'm sure the FL DOR's response is uniformly the same. It goes something like this: "We give the taxpayer every opportunity during the audit and during administrative protest to prove that the estimate is wrong." The problem is that when the taxpayers send actual records from the audit period and the numbers to not match the Department's infamous industry averages, the auditors and conferees decide the records must be unreliable and just ignore the actual records. The auditors and conferees have not been told that the estimates are from a magazine survey. The auditors are not told that most protests that are fought with competent counsel (and good records) reveal how grossly overestimated the "industry averages" are. I personally have gotten so many phone calls from c-store owners or their accountant telling me the same fact scenario. "We provided everything they asked for but the completely ignored all the records." "Our store is not where near large enough to handle that kind of volume of sales." "The SAM's data is completely wrong." The variations are numerous, but the theme is the same – there is no way that our sales were anywhere close to what the FL DOR is estimating. There are probably over a thousand small, family owned convenience stores that have been complete victimized by the FL DOR's campaign on this industry. Remember, this is something the mega-chained gas stations love to hear…. the news that David is losing miserably to Goliath and his pet lions.

HELP! – THE FL DOR JUST FROZE MY BANK ACCOUNT

Fifth, if the store doesn't defend themselves timely, then the FL DOR will start freezing the business bank accounts (effectively closing the business down). Once the audit is finished and the DOR has chosen to ignore the actual records provided by the taxpayer, the Department of Revenue turns the matter over a local collection agent. The Department of Revenue thinks of these grossly over estimated tax assessments as nothing more than an "accounts receivable" and the collection agent is tasked with collecting the money from the helpless business owner. This person's job is simple – collect the money. The first volley of shots across the bow comes as a "Notice of Final Assessment" stating that hundreds of thousands of dollars are due and payable immediately. The notice warns of all the things that could happen to the business and the business owner if the business does not pay immediately. The collector does not care that the assessment is an overestimate or the sob story of flagrant government abuse that occurred up to this point. Their job is to talk the taxpayer into paying the money. If the taxpayer does comply within a very short amount of time, then the collector will issue a Tax Warrant against the business. The tax warrant is a lien against the business assets. The taxpayer only has 20 days to legally challenge the warrant, or the collection agent will start freezing the business' bank accounts and, occasionally, the merchant accounts as well. No matter your relationship with the bank, the bank has no choice but to comply. You can imagine how quickly a high volume, very low profit margin business could survive when they can't touch their cash – or any of the sale revenue coming in the business. Most of the time, the collector will refuse to release the bank account unless a substantial portion of the amount due is paid (usually 25%) and the taxpayer agrees to enter into a stipulated payment agreement for the remainder of the amount due. The payment plan is usually structured as the 25% down payment followed by 11 equal monthly payments that will pay off the full, overestimated assessment. The Taxpayers are forced into signing agreements, under duress, or their business is done. Worse yet, the FL DOR will not enter into a stipulated payment agreement unless one of the officers of the business personally guarantees the fictitious tax assessment.

Remember, this was a business tax liability, not a debt of the owners. However, by forcing the taxpayer to enter a stipulated payment agreement to keep their business open, the FL DOR has turned this into a personal liability of one of the officers. This is a flagrant overreaching by the FL DOR and it is abusive. When we starting complaining to the FL DOR that they had no authority to force this personal liability on business owners merely to enter into a payment agreement, the FL DOR immediately created a rule purporting to give themselves this power. I am personally working with Florida TaxWatch on a legislative fix to stop this practice, but it is going to take time.

Another trend that we see all too often is that the FL DOR fails to send the taxpayer notices about the final assessment or the outcome of a protest. The notice will go to a bad address or even only to someone that represented the taxpayer, but the taxpayer never actually gets the notice. What happens all too often is that the first notice the business gets letting them know that their challenge to the audit assessment is over is when the business' bank accounts are frozen. From a legal standpoint, the taxpayer has lost all guaranteed appeal rights by the time the DOR has the power to freeze the account. There is a discretionary appeal process available, but it is purely discretionary on whether the FL DOR wants to hear the appeal or accept any evidence that the assessment should be changed. You would think that a governmental entity would take the concept of seizing a citizen's assets to be extreme and that the state would take every precaution to make sure the taxpayer received proper appeal right's notices. But that is very, very far from the reality at the moment. The FL DOR doesn't even track its "returned to sender – bad address" incoming mail, much less actually confirm appealable tax assessment notices reach business owners.

Finally, if the owners do not agree to pay the tax, then the FL DOR will start imposing 200% of tax personal penalties on the owners or start criminal investigations (threats of jail). Section 213.29, F.S. gives the FL DOR the power to impose 200% of tax penalties on each and every responsible party in a business when sales tax is intentionally under reported. Talk about adding insult to injury. The DOR intentionally over estimates your liability, structures the audit to legally be able to ignore the information you provided, closes down your business with bank freezes after failing to provide you appealable notice of the assessment, then when you can't pay the amount due – they hit each and every responsible party in the business with a 200% of tax penalty – personally. The collectors are supposed to make determinations whether an individual is really responsible and whether it appears to be intentional, but most just look at the list of officers and directors and hit them with the penalty. Then the accused parties must fight to prove that they are not responsible – often with their personal bank accounts frozen. This is almost the final straw in a deep pile of abuse on the small, community convenience store industry. But there is more …

It only takes $301 of collected but not remitted sales tax to become a 3^rd degree felony with up to 5 years in potential jail time. If the amount of tax collected but not remitted exceeds $20,000, then the responsible party could face up to 15 years in jail. Now, remember that the average assessment against these business owners was $110,000 during the first year of this campaign. Well, if there is over $100,000 of collected but not remitted sales tax, then Florida law provides for up to 30 years in jail. Seriously. That is more jail time than if you held up the convenience store at gun point – and shot someone in the process. If the small business owners to not agree to enter into a flagrantly one sided stipulated payment agreement for an estimated assessment that the business owner should never have owed in the first place, then the FL DOR threatens them with criminal prosecution.

Want to operate another business? If that business is required to collect sales tax, then the FL DOR will deny your registration until all sales taxes are paid from your previous business' over assessment.

What to sell your business to pay off the liability? Think again. The FL DOR will not sign off on the new business owner's sales tax registration or ABT license until the old liability is paid.

ABUSE OF DISCRETION vs AN INDUSTRY WIDE PROBLEM

For anyone that has actually made it this far through this article, I would wager you either are going through this yourself or a client/friend of yours is. Perhaps you work for the FL DOR and have questions about the legitimacy of your employer's policies. Either way, the whole "David vs Goliath and the Lions" scenario is as much of a collective government abuse of discretion as I have ever seen – all at the behest of the industry's direct competitors. However, anyone involved with this industry knows that there is one other side of this story. Far too many of the small, community convenience store owners have been under reporting their sales tax. Perhaps exempt sales have been over stated to some degree or some of the gross sales have been left off the sales tax return. Collectively – the small, community convenience store industry has been cheating the system to some extent. It may have only been $300 or $500 a month, but even these amounts add up over time. Sure, there are a very few extreme "cheaters," but the majority of the industry only has a small problem with reporting correctly. The FL DOR's estimating system probably catches and probably estimates the extreme under reporting convenience store. However, the vast majority of these family owned businesses are merely trying to make ends meet and feed their families. They are not under reporting hundreds of thousands of dollars like the FL DOR wants everyone to believe and the FL DOR's unwavering presumption that every store is at the extreme is killing the industry.

Remember, "the small c-store must be underreporting" is what the "Mega-Chained Stores" complained about it the first place. There was some legitimacy to their complaint. I believe the higher ups in the DOR are simply presuming that since the industry under reports some sales tax, the DOR's over estimating is ok because we don't want to let anyone finish an audit without catching all the underreporting. These higher ups presume that the more honest business owners will be able to prove what is actually owed. They just don't realize how much the campaign is set up from the planning stage through the collection process to make it almost impossible for a convenience store that might owe $20,000 to actually prove it in the appeals process. The DOR's collective inability to believe any of these c-store owners is pervasive and it is the reason why our firm has been hired by more than 350 convenience store owners just to try to get close to a fair result.

There are many, many reasons why a c-store might not report based on the perceived industry averages. Some stores primarily sell cigarettes (a few stores sell more than 75% of their stock as cigarettes with a tiny, tiny markup) going for very high volume to hopefully make a living. Some stores might be selling 20% or more exempt sales because they live in a very poor area with high food stamp sales. There may not be a grocery store in the area, so the store has an abnormally high amount of exempt grocery sales. The store owner may choose to let beer or cigarettes to be the "loss leader" to draw in customers, asking for only a 5% mark-up instead of the 18% industry average. The store might reside near the beach and have an above average amount of beer and cigarette sales due to tourists, resulting in over 60% ABT sales. All of these are very real possibilities that the FL DOR auditors do not want to even consider because they all too often blindly believe in the industry averages. Business owners do not understand that they have the burden to prove the estimates are wrong when they are fighting a protest. These small business owners innocently believe that the conferee will take them at their word that there is no way the store had an extra $5,000,000 of taxable sales to justify a $300,000 tax assessment. It is just so ridiculous that the store owner expects the FL DOR employee to come to their senses and revise the assessment. Unfortunately, that is not how a tax protest works. You have to show real evidence and prove your case. Failure to do so can be devastating.

The outcome is heartbreaking and I have heard this overall scenario so many times over the last three years that I decided it was time to put the whole thing in writing. Short of litigating a case (with competent counsel) to show in open court just how egregious all of this is, I'm hoping that someone in the FL DOR will read this and actually do something about it. If you are an auditor (desk or field), then please remember what I have said here. Ask for proper records. Help these defenseless business owners get a fair audit with just results. If you are a conferee, then take the time to explain to the taxpayer what you really need to help them. If you are in the general counsel's office, then continue your very reasonable review of the records and effectively communicate to the campaign managers how they can improve upon the estimating and auditing techniques. Please take the time to care about these small business owners who are merely trying to survive. I implore you to try to correct the problems I have pointed out in this article from within. I would much rather bring in less clients because this industry is being treated fairly, than continue to see the industry be tortured as it has been.

the Law Offices of Moffa, Sutton, & Donnini, P.A. is a law firm dedicated to defending businesses against the Florida Department of Revenue, primarily for sales & use tax matters. With offices in Fort Lauderdale, Tampa, & Tallahassee, we represent taxpayers all over the state in audits, protests, petitions for reconsideration, before Division of Administrative Hearings, before Circuit Courts, in collections matters, during revocation hearings, and during criminal matters (with DOR investigators & before the State Attorney's office). Florida sales and use tax controversy is simply what we do. With 7 attorneys and 3 former Florida Department of Revenue agents, we help business owners truly understand their situation and how best to fight back. If you have questions about Florida sales & use tax, then please take advantage of our FREE INITIAL CONSULTATION by talking to one of our attorneys today.

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's primary practice is Florida tax controversy, with a almost exclusive focus on Florida sales and use tax. Mr. Sutton worked for in the State and Local Tax department of one of the Big Five accounting firms for a number of years and has been an adjunct professor of law at Stetson University College of Law since 2002 teaching State and Local Tax, Accounting for Lawyers, and Federal Income Tax I. Mr. Sutton is a frequent speaker on Florida sales and use taxes for the FICPA, Lorman Education, and Florida Society of Accountants. Mr. Sutton is also co-author of CCH's Sales and Use Tax Treatise. You can read more about Mr. Sutton in his firm bio.

ADDITIONAL RESOURCES

ARTICLES ABOUT CONVENIENCE STORES CAN BE FOUND HERE

ARTICLES ABOUT SALES TAX AUDITS CAN BE FOUND HERE

ARTICLES ABOUT SALES TAX CRIMINAL MATTERS CAN BE FOUND HERE

©2015 JAMES H SUTTON JR, ALL RIGHTS RESERVED