The biometric fingerprint industry in Florida has been in shock over the last year regarding a revelation that their services might be subject to Florida sales tax. Considering that almost no one in the industry has been charging sales tax to their customers, this means that practically everyone in the industry would be liable for the sales tax not collected from customers – IF biometric fingerprint services are subject to Florida sales tax. The Department of Revenue started auditing several service providers in 2015 and pronounced that biometric fingerprint services are a type of investigation service subject to sales tax. Just recently the Department issues a Taxpayer Information Publication, aka a TIP, proclaiming that biometric fingerprint services are subject to sales tax. However, there is a distinct problem with the Department's position, which will be discussed below. But first, let's discuss the background of this type of service and the legal position the department is taking.
What exactly is a "biometric fingerprint?" A biometric fingerprint is an electronically captured fingerprint (electronic image) for the purpose of submission to established authorities (such as the FBI and State databases) and replaces the outdated, inaccurate and messy process of recording fingerprint patterns with ink on cards. Often referred to as a "Live Scan," the biometric fingerprint is ideally suited for:
- Civil and criminal enrollment and identification
- Applicant background checks
- National voter registration programs
- Restricted licensing programs (such as firearms)
These types of biometric fingerprints are also required by several government agencies in Florida. So what does sales tax have to do with a pure "service" like biometric fingerprint services? Everyone knows that the sale of goods are subject to sales tax in Florida, with the exception of a few types of goods like food purchased at a grocery store. However, many people do not realize that there are a few types of services subject to sales tax in Florida – and that these services have been subject to tax for over two decades. Investigation services happens to be one of these select few types of services.
Turning to the law, section 212.05(1)(i)1.a., Florida Statutes (FS), provides that there will be a sales tax on charges for all:
Detective, burglar protection, and other protection services (NAICS National Numbers 561611, 561612, 561613, and 561621).
North American Industry Classification System, aka NAICS, provides that code 561611 applies to "investigation services" and further provides that "fingerprint services" is within the types of services covered under NAICS code 561611. Taking it one step farther, Rule 12A-1.0092(2)(a), Florida Administrative Code (FAC) provides a list of services that are taxable under Section 212.05(1)(i)1.a., FS, and it specifically mentions "fingerprint services."
So, "fingerprint services" are clearly subject to sales tax in Florida. But this leads us to the question – what are "fingerprint services?" It surprised even me to find that here was no definition for "fingerprint" in chapter 212, rule 12A-1, or even in the NAICS descriptions of code 561611. Perhaps when the statutes and rules were written, everyone knew what a fingerprint service was, rolling your ink stained finger on a card. So no one even considered that a clarifying definition was needed. I believe it surprised even the Department that there was no definition of "fingerprint services" when all this arose during several audits in 2015.
However, since investigation/fingerprint services became taxable more than 20 years, a new method of capturing the unique contours of a person's finger was invented – the biometric fingerprint. Either way, the lack of any definition of "fingerprint" in the statutes, rules, or even the NAICS code creates an ambiguity in the law – what does "fingerprint" mean? Even more important, how does this ambiguity affect the Department's position to subject biometric fingerprint services to tax?
When the legislature has not defined a term, then we must look to the common meaning of the term to determine the intent of the legislature. See, e.g., Nehme v. Smithkline Beecham Clinical Labs., Inc., 863 So.2d 201, 205 (Fla.2003) (stating that where the Legislature has not defined a term, its plain and ordinary meaning can be taken from a dictionary). Webster's dictionary defines fingerprint to be:
"an impression or mark made on a surface by a person's fingertip" or "an ink impression of the lines upon the fingertip taken for the purpose of identification."
Using the common meaning of the term "fingerprint," charging for the biometric scan of a person's hand is clearly not charging for fingerprints. The biometric scan merely takes a detailed photograph/scan of a customer's hand with no impressions on a surface or use of ink. Therefore, the industry's biometric services are outside the scope of NAICS code 561611 and consequently also outside the scope of Chapter 212.
To the extent that the Department would like to argue that biometric services are considered taxable fingerprint services under 212.05(1)(i)1.a. despite the common meaning of the word fingerprint, then we clearly have an ambiguous statute with no legislative guidance in chapter 212. At this point, it is extremely important to note that section 212.05(1)(i)1.a., F.S., is a taxing statute and not an exemption statute. As such, we resort to the long-standing, fundamental rule of statutory construction "that tax laws are construed strongly in favor of the taxpayer and against the government, and that all ambiguities or doubts are to be resolved in favor of the taxpayer." Mass Bros. v. Dickinson, 195 So.2nd 193, 198 (Fla. 1967). Applying this statutory rule of construction to what must be an ambiguous taxing statute requires the finding that biometric services are not subject to sales tax because the ambiguity of the statute must be ruled in favor of the taxpayer. As such, one could easily jump to the conclusion that the Department would be permanently prevented from taxing biometric services under this logic. However, this assumption would be putting the cart before the horse and I caution the industry not to jump to this conclusion.
The logic above gives a very good argument that biometric fingerprints should not be taxed back in time, but it is just an argument that has not been heard by a court and decided by a judge. The Department does not agree with this position and has expressed a willingness to fight the issue. The Department is so convinced that their position is right that they issued a Taxpayer Information Publication (TIP) (downloadable at the end of this article) on March 2, 2016 that provides:
"Businesses that capture and transmit fingerprints, whether transmitting digitalized fingerprints (e.g., live scan*) or traditional ink fingerprints (e.g., cardscan**), are providing a taxable service. If you charge for fingerprint services, you must register as a Florida dealer to collect and remit the sales tax to the Florida Department of Revenue."
The Department's interpretation of what is meant by the term "fingerprint" in this TIP has statewide ramification that affects an entire industry. Such a wide ranging interpretation should not originate during audits or a TIP to catch an unsuspecting industry off guard. Instead, the Department's interpretation should be and is required to be vetted through the very public and required promulgation process. The issuance of an unpromulgated rule by the Department has no legal affect and is void. See, Department of Revenue of State of Fla. v. Vanjaria Enterprises, Inc, 675 So.2d 252 (Fla. 5th DCA 1996) ("An agency statement that meets the Chapter 120 definition of a rule, but which has not been promulgated … constitutes an invalid exercise of delegated legislative authority and, therefore, is unenforceable.")
The author of this article believes that the TIP quoted above is an attempt by the Department to issue an unpromulgated rule. That being said, the legislature did specifically give the Department the authority to issues rules to implement the statute that taxes fingerprint services. So it is not a stretch for the Department to issue a rule that provides a definition of "fingerprint services" that matches the definition provided for in the TIP quoted above – as long as it goes through the promulgation process. So, where does this leave the industry? If you have read this far into the article, then I'm guessing this question is exactly why you are reading the article in the first place.
It is worthy to note at this point that the biometric fingerprint industry in Florida has an association called the Coalition of Independent Live Scan Providers (COILSP). When the audits on the biometric fingerprint industry started in 2015, COILSP began discussing what the industry should do. What quickly became event was that the Department clearly thought the services should be taxed and the Department was on a path to hold each company liable for the taxes that were not collected from the customers. This would have been devastating to many providers – and completely fatal to providers that were not even registered because there is no statute of limitations to how far back the industry could go if the provider was not filing sales tax returns.
Let's just say - it was a very scary revelation for the industry, but was this outcome inevitable? Should the industry fight this battle together? Should each independent operators take their own chances? Should everyone start charging tax now? Is so, then what exactly should be taxed? Alternatively, should the industry start a lobbying effort to change the law? Is there any other solution? After much discussion, the association, for the most part, realized that collecting tax from customers on a go forward basis was not that difficult. It would be the customers paying the tax, after all, not the service provider. The biggest concern was whether the service provider would be liable for the taxes back in time, which were never collected from customers.
So… what to do? The litigation option was heavily discussed, especially given the unpromulgated rule logic mentioned above. There is a good chance that the industry could win either a particular service provider's challenge to an assessment or an industry declaratory challenge in court whether biometric services are taxable. However, litigation is very expensive and the Department could and likely would promulgate a rule taxing these services in time. It would be much, much cheaper for everyone if the Department could provide some type of relief to the industry. After several months, the association decided to try to negotiate a resolution with the Department.
The meeting between COILSP in early March 2016 went very well and the Department unofficially agreed to hold off on new audits on the industry until June 2016 in an effort to give biometric fingerprint service providers time to take advantage of the voluntary disclosure program. As noted in the TIP, the Department is encouraging biometric service providers to file voluntary disclosures to admit past activity, cut off the look back period to 36 months, and waive all penalties associated with the uncollected tax. Starting in June, the industry can expect the Department to initiate a campaign on the industry for anyone that doesn't take advantage of the Voluntary Disclosure program. I strongly encourage anyone that is in this industry or has clients in this industry to reach out to the author of this article, James Sutton(JamesSutton@FloridaSalesTax.com), or the COILSP president, Bruce Bernstein(Bruce@ParcelsPlus.net), to get a better understanding of the voluntary disclosure program and how this services should be taxed going forward.
For example, the Department is apparently conceding that the FDLE fees should not be subject to sales tax. Furthermore, service providers are required to separately break out the biometric fingerprint service fee for sales tax. Otherwise the entire fee could be subject to tax. The ultimate goal for any service provider is to minimize the damage going back in time and make sure that taxes are collected properly going forward. Again – It is in your best interest to learn more about the voluntary disclosure program and the COILSP/DOR meeting.
Moffa, Sutton, & Donnini, PA 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, voluntary disclosures, 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 8 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 Moffa, Gainor, & Sutton, PA. Mr. Sutton's primary practice is Florida tax controversy, with an 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 and is the State and Local Tax Chairman of the American Academy of Attorney – Certified Public Accountants, Inc. You can read more about Mr. Sutton in his firm bio.
AUTHORITY
Section 212.05, F.S. (the statute taxing specific services, including investigation/fingerprint services)
Rule 12A-1.0092, F.A.C. (the rule discussing sales tax on services)
Nehme v. Smithkline Beecham Clinical Labs., Inc., 863 So.2d 201, 205 (Fla.2003) (stating that where the Legislature has not defined a term, its plain and ordinary meaning can be taken from a dictionary)
Mass Bros. v. Dickinson, 195 So.2nd 193, 198 (Fla. 1967) (ambiguities in taxing statute in Florida are strictly construed against the taxing authority).
Department of Revenue of State of Fla. v. Vanjaria Enterprises, Inc, 675 So.2d 252 (Fla. 5th DCA 1996) ("An agency statement that meets the Chapter 120 definition of a rule, but which has not been promulgated … constitutes an invalid exercise of delegated legislative authority and, therefore, is unenforceable.")
TIP 16A01-02 – issued March 2, 2016 – "Fingerprint Services Are Taxable"
ADDITIONAL RESOURCES
WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA?, published May 1, 2012, by James Sutton, CPA, Esq.
FLORIDA SALES TAX ON PRIVATE INVESTIGATORS, published September 9, 2014, by Jerry Donnini, Esq.
CHALLENGING AGENCY STATEMENTS DEFINED AS A RULE, published October 6, 2015, by James McAuley, Esq.
BURDEN OF PROOF & PERSUASION IN FL TAX CASES, published May 31, 2015, by James McAuley, Esq.
FL DOR ABUSES CONVENIENCE STORE INDUSTRY, published October 4, 2015, by James Sutton, CPA, Esq.