Okaloosa County BOCC — March 1, 2016 — Okaloosa County Sales Tax Warren Averett.pdf — reading text

Wa rren 45 Eglin Parkway, N.E., Suite 301 Ave rett Fort Walton Beach, FL 32548 CPAs AND ADVISORS 850.244.5121 warrenaverett.com February 19, 2016 Mr. John Hofstad County Administrator Okaloosa County, Florida RE: Sales Tax Audit General Issues: The main issue of the audit is the Florida Department of Revenue (the Department) treating remuneration between Okaloosa County (the County) and its “tenants” as rent, and subjecting these payments to sales and use tax in the state. Some portions of the assessments merely relate to the County not having collected sales tax on rental payments (or parking fees as the case may be), whereas other portions of the assessment relate to charges/fees imposed by the County on its tenants that the Department deemed rent even though not necessarily classified as such between the County and the tenant. General Florida Guidance: ) Fla. Stat. Sec. 212.031 imposes a sales and use tax on the privilege of engaging in the business of renting, leasing, letting, or granting a license to use any real property. There exists two exceptions to this rule that are pertinent to the audit. They are: e Property used at an airport exclusively for the purpose of aircraft landing or aircraft taxiing or property used by an airline for the purpose of loading or unloading passengers or property onto or from aircraft or for fueling aircraft. e Bailments- a contractual agreement, whereby a person (the bailor) delivers tangible personal property to another (the bailee) and relinquishes exclusive possession, control and dominion over the property. For a bailment to exist, there must be a full transfer, so as to exclude the property from the possession of the owner and all other persons so that the bailee has sole custody and control. If the owner's control and dominion over the property is not dependent on the cooperation of the person on whose premises the property is left, then the owner will be a tenant, lessee or licensee of the space and not a bailor. An example of a bailment is a safe deposit box in a bank because the customer cannot obtain access to the box without the cooperation of the bank. In contrast, an airport locker is not a bailment, since the renter has sole access to the locker. For purposes of the tax, the term “rent” is deemed under Fla. Stat. § 212.031(1)(c) as “including payments for the granting of a privilege to use or occupy real property for any purpose and shall include base rent, percentage rents, or similar charges. “ Additionally, Fla. Admin. Code Ann. 12A-1.070(4) states that the sales tax is paid on all considerations due and payable by the tenant or other person actually occupying, using, or entitled to use any real property to his landlord or other person for the privilege of use, occupancy, or the right to use or occupy any real property for any purpose. However, Fla. Stat. § 212.031(1)(c) states the following in pertinent part: “..In the case of a contractual arrangement that provides for both payments taxable as total rent or license fee and payments not subject to tax, the tax shall be based on a reasonable allocation of such payments and shall not apply to that portion which is for the nontaxable payments.” There is an administrative court case addressing this issue, US Cardio Vascular v. Florida Department of Revenue, which although may be persuasive during a NOPA protest, it does not provide any precedential support. Assessment: The initial assessment by the Department issued December 29, 2015 included tax in the amount of $699,960.44 with interest through that date in the amount of $88,889.98 for a total assessment of $788,850. A significant portion of this assessment related to sales tax due on parking income reported by Republic Parking which was not previously collected, or if collected, not remitted. This is a taxable privilege under Fla. Stat. Sec. 212.03(6), and as such tax was due. The assessment (A04) was in the amount of $357,501.86. We advised the County to remit both the tax and interest payment related to this matter in order to limit the accruing of interest. As such, the County remitted a total of $404,408.22 related to this matter. The revised Notice of Intent to Make Audit Changes issued on February 12, 2016 contains a revised total tax assessment of $605,019 with corresponding interest in the amount of $79,586.32 resulting in a total assessment of $684,605.32. This does not factor in prior payments. Once the prior payment of $404,408.22 is taken in to consideration, the remaining balance is $280,197.10. The County now has until March 14, 2016 to protest the assessment at this level. What this means is that we have until this date to contact the auditor and try to resolve any items we do not agree with that have not already been discussed (more on that below). Once this date passes, the auditor will issue what is called a Notice of Proposed Assessment (NOPA) which will formalize the assessment at this level, and send it to the next level in Tallahassee. We then have sixty days to protest the assessment at that level. Itis our opinion that aside from some factual items that we are currently waiting for confirmation on, our best approach is to protest the assessment at the NOPA level. Please find below a listing of items included in the assessment and our position regarding whether to remit payment to the state or protest either a portion or the full amount of the assessment. For interest purposes, we are assuming a payment date of March 1, 2016. Interest is currently accruing at the rate of $38.37/day. Assessment AOL and A11 This portion of the assessment in the combined amount of $31,913.31 relates to the lease agreement between the County and Pier Associates. Based on the assessment, the County received monthly rental fees from the fishing pier and restaurant, and never collected or remitted taxes on these fees. Additionally, the assessment deemed the repayment of submerged land fees as additional rent subject to sales and use tax. An additional part of the assessment (A11) deems the requirements in paragraph 8 of the lease agreement as additional rent because it is a condition of occupancy of the premises. Essentially taxing the tenant’s upkeep expenses as rent rather than considering them a nontaxable payment. The main issue in this instance is whether we would prevail at the NOPA level in arguing that the submerged land fees and upkeep fees should be deemed as nontaxable payments under Fla. Stat. § 212.031(1)(c). Gauging the position of the Department of Revenue, we don’t foresee being successful with this argument because the Department’s position is generally to deem a payment as taxable rent to the extent it is a requirement of occupancy. As such, we recommend remitting the liability and corresponding interest related to this portion of the assessment in the combined amount of $36,210.96. Please review attached schedule for support related to this amount. A02 This portion of the assessment in the amount of $5,100 relates to the lease agreement between the County and Island Sands Beach Service for the amount paid to provide beach concessions at county beaches. This is a taxable transaction not otherwise exempt under Fla. Stat. § 212.031(1)(a). As such, we recommend remitting the liability and corresponding interest related to this portion of the assessment in the combined amount of $5,786.80. Please review attached schedule for support related to this amount. A03 This portion of the assessment in the amount of $11,705.82 relates to the lease agreement between the County and Dominion Capital (d/b/a Wild Willy’s) and Aquagreen. A portion of the assessment relates to incorrect reporting in 2014 as well as certain payments deemed rental consideration. More specifically, the Department deemed the $35,000 of annual maintenance fee paid by Dominion Capital to Aquagreen as a condition of the lease, as taxable rent. Additionally, $28,750.63 associated with the shared cost of constructing a parking lot as a condition in the lease agreement was also deemed taxable rent. The main issue in this instance is whether we would prevail at the NOPA level in arguing that the maintenance fees should be deemed as nontaxable payments under Fla. Stat. § 212.031(1)(c). Gauging the position of the Department of Revenue, we don’t foresee being successful with this argument because the Department’s position is generally to deem a payment as taxable rent to the extent it is a requirement of occupancy. As such, we recommend remitting the liability and corresponding interest related to this portion of the assessment in the combined amount of $13,282.20. Please review attached schedule for support related to this amount. A04 This portion of the assessment relates to the parking income collected by Republic Parking. This portion of the assessment has already been addressed by the County through the remittance of the tax liability and corresponding interest in the combined amount of $404,408.22 A05 This portion of the assessment relates to the commercial rent payments charged to the airlines at VPS airport along with additional fees charged to the airlines deemed rental payments by the Department. In accordance with its initial assessment, the Department assessed a tax liability in the amount of $119,785.27 along with a corresponding interest liability (estimated) in the amount of $15,211.87 for a total amount due of $134,997.14. Florida provides an apportioned calculation for the leasing space. Common areas and space used specifically for the loading and unloading of passengers and cargo, are exempt from sales and use tax. Essentially that leaves only ATO space (and perhaps not all of the ATO space), maintenance space (all Delta) and storage space as subject to sales and use tax. The average taxable area during the audit period was about 9%. The Department also imputed security fees and environmental fees as rent and charged sales tax on the full amount. The Department initially assessed sales tax on the full amount of these charges and did not otherwise subject them to the apportionment mentioned above. We brought that error to their attention as well as arguing that those fees should not be deemed rent. The Department did not accept our argument that it was not rent, but has revised the assessment to only assess the sales tax on the taxable portion. Based on our discussions with the Department, this portion of the assessment was revised, and the current tax liability is $24,843.83 with a corresponding interest liability in the amount of $3,345.63 for a combined amount of $28,189.46. This represents a reduction of approximately 79% of the initial assessment. We are still waiting on some of the airlines to confirm their ATO space usage to determine whether there is still potential to decrease the taxable percentage. As such, we currently not paying this amount until we receive such correspondence. As far as taxation of the security fees and environmental charges, we previously made the argument under US Cardio Vascular that the security fees represent reimbursement of County employees’ wages, and that the court in US Cardio Vascular found that under the taxpayer’s facts those types of charges should not be considered taxable rent. The Department disagreed with our position. Given that the case although persuasive, does not provide any precedential value, and the fact that currently only 10% or so of the fees are subject to tax, we don’t believe we would be successful during a NOPA protest in making a similar argument, and as such recommend remitting the tax related to this fee once we have the complete data regarding ATO space usage. AO6 This portion of the assessment relates to payments received by commercial tenants of the VPS airport. This includes payment received by First Class Perks and Hudson News. These payments are based on a percentage of gross sales, and the County did not collect