Reflections on a Vetoed Bill
On June 24, Gov. Ron DeSantis vetoed Senate Bill 1382, preventing the Department of Revenue from moving forward with sweeping changes that would have expanded the department’s authority while simultaneously tying taxpayers’ (and tax practitioners’) hands when abuses of authority occur. Months later, the bill that came and went in six short months still haunts state and local tax practitioners. Will the Department of Revenue try to pass a similar bill again? It seems likely when less than 10% of the legislature voted against S.B. 1382. With that type of success in the legislature, and nothing short of the right to operate a business at stake, the implications of this bill are still worth careful consideration today.
Tipping the Scales: Audit Procedure
One of the primary problems S.B. 1382 attempted to address was the failure of taxpayers to produce records. Noncooperative taxpayers were primarily targeted in two ways: 1) direct punishment for the failure to supply records during audit; and 2) presumptions that department estimates of tax due are correct. Additionally, the bill loosened restrictions on the statute of limitations, allowing a tolling of F.S. §95.091(3) and §215.26(2), in various cases.
Cooperation or Punishment: Suspension of Licenses
Senate Bill 1382 expanded the department’s authority to suspend the dealer licenses of businesses that are uncooperative during the audit process. Currently, the department generally handles the audits of uncooperative taxpayers by estimating tax due based on the “best available information.” Taxpayers without records may have to pay top dollar, as these estimated assessments can be high, but businesses can continue operating as normal during and after the audit.
However, in addition to estimating tax due, S.B. 1382 would have allowed the department to suspend resale certificates. Failure to comply would result in the revocation of the resale certificate and the triggering of proposed F.S. §212.13(2)(b)3, which added:
If a dealer’s resale certificate is suspended under this subsection in the course of the dealer’s first audit before the department for sales and use tax, the failure of a dealer to comply is deemed sufficient cause under s. 561.29(1)(a) for the division [Department of Business & Professional Regulation] to suspend the dealer’s license and the department shall promptly notify the division and the dealer of such failure for further appropriate action by the division.
For those in the heavily audited alcohol and tobacco or convenience store industries, the revocation of licenses further extended to those from the Department of Business and Professional Regulation. Not only would businesses no longer be able to purchase inventory tax exempt for resale, but convenience stores would not be able to purchase or sell alcohol or tobacco. The inability to purchase alcohol and tobacco products would shutter a convenience store almost immediately. This would all occur before an audit was finalized under the proposed legislation.
Preventing a business from operating before an audit has concluded is a severe consequence for the failure to produce records, particularly when the Department of Revenue may rely on third-party records from other governmental agencies to estimate tax due. However, not only were businesses to face this type of punishment for failure to produce records, but they were given a limited time frame in which to comply before license revocation was initiated. Senate Bill 1382 proposed to update F.S. §212.13(2)(b)2 as follows:
Dealers shall maintain records of all monthly sales and all monthly purchases of alcoholic beverages and produce such records for inspection by the department. During the course of an audit, if the department has made a formal demand for such records and a dealer has failed to comply with such a demand, the department may issue a written request for such records to the dealer, allowing the dealer an additional 20 days to provide the requested records or show reasonable cause why the records cannot be produced. If the dealer fails to produce the requested records or show reasonable cause why the records cannot be produced, the department may issue a notice of intent to suspend the dealer’s resale certificate. The dealer shall then have 20 days to file a petition with the department challenging the proposed action pursuant to s. 120.569. If the dealer fails to timely file a petition or the department prevails in a proceeding challenging the notice, the department shall suspend the resale certificate.
Under this new law, sellers of alcohol and tobacco would have had only 20 days to provide requested documentation, a very short period when compared to the 60-day waiting period, which is supposed to occur at the beginning of an audit for taxpayers to gather and evaluate records.
Although the proposed F.S. §212.13(b)(3) provided a mechanism for lifting the suspension, businesses that could not provide “necessary” records to conduct the audit could have been permanently closed. One underlying assumption in the legislation is that taxpayers are not producing records that exist. Many small business owners simply do not have the types of records the department requests. While large businesses with their own tax departments can generally comply with document requests, there are no modified record requests for small businesses. Therefore, the proposed resolution in S.B. 1382 would not have resulted in the turning over of records in the cases where such records do not exist. Instead, the legislation would just close the businesses of taxpayers with unsophisticated recordkeeping systems.
Presumption of Correctness
While on one hand, S.B. 1382 sought to enforce taxpayer cooperation during audits through license revocation, the bill also created a rebuttable presumption of correctness for proposed final agency actions in cases in which the department was unsuccessful in obtaining taxpayer cooperation after a subpoena was issued. Under the proposed additional language in F.S. §206.14(4):
The failure of a taxpayer to provide documents available to, or required to be kept by, the taxpayer and requested by a subpoena issued under this section creates a rebuttable presumption that the resulting proposed final agency action by the department, as to the requested documents, is correct and that the requested documents not produced by the taxpayer would be adverse to the taxpayer’s position as to the proposed final agency action. If a taxpayer fails to provide documents requested by a subpoena issued under this section, the department may make an assessment from an estimate based upon the best information then available to it for the taxable period of retail sales of the taxpayer, together with any accrued interest and penalties. The department shall inform the taxpayer of the reason for the estimate and the information and methodology used to derive the estimate. The assessment shall be considered prima facie correct, and the taxpayer shall have the burden of showing any error in it…
Currently, in cases where a taxpayer provides no documentation, the department is already authorized to rely on the best available information under F.S. §212.12(5)(b). The revised language of S.B. 1382 created a presumption of correctness that would resultingly increase the difficulty of challenging estimated assessments.
Furthermore, the proposed legislation also created a rebuttable presumption that the requested documents not produced by the taxpayer would be adverse to the taxpayer’s position. This is problematic in cases in which an unsophisticated taxpayer does not have records and it is unambiguous that such records would show less tax due. Imagine the consequences of such a presumption on a small restaurant owner who failed to keep proper track of gratuities. While it is obvious a restaurant would have gratuities, the presumption would be that no gratuities existed as documents not produced are presumed adverse to the taxpayer’s position that the assessment improperly assessed gratuities.
Senate Bill 1382 proposed legislation that would grant the department greater authority to estimate assessments. Although we will never know the effectiveness of S.B. 1382, as it will never go into effect, it is possible that future legislation will similarly try to tackle the problem of taxpayers who fail to produce records under audit.
Taking Time from Taxpayers: Statute of Limitations
Whether an audit is simple or complex, the department has a one-year tolling period during which it must complete it. However, in practice, this period is cut short by waiting periods both at the beginning and end of an audit. Specifically, there are five months in the tolling period during which the auditor is not able to work on the audit. In the beginning, there are two months for the taxpayer to gather documents. Meanwhile, at the end, there is a 30-day waiting period for an exit conference followed by a 60-day period before a proposed assessment becomes final. Senate Bill 1382 sought to ease the time crunch on auditors.
The Start: 60-Day Waiting Period
The department is currently required to give taxpayers a 60-day notice before starting a routine sales and use tax or communications services tax audit. This notice comes in the form of a DR-840, Notice of Intent to Audit Books and Records. Should the taxpayer prefer to waive the 60-day period, its representative can sign and return the notice so the audit can commence. However, it is rarely beneficial for taxpayers to waive this 60-day period as this is time during which records are gathered, evaluated, and prepared for the auditor. Commonly, it is after receipt of this notice that a taxpayer will consult with and engage counsel. From the tax practitioner’s perspective, this time is an opportunity to get ahead of an assessment by identifying any problems upfront and strategizing on how to approach them.
Senate Bill 1382 proposed changes that loosened restrictions during the 60-day waiting period for both taxpayer and auditor. The proposed legislation provided:
Once the notification required…is issued, the department, at any time, may respond to contact initiated by a taxpayer to discuss the audit, and the taxpayer may provide records or other information, electronically or otherwise, to the department. The department may examine, at any time, documentation and other information voluntarily provided by the taxpayer, its representative, or other parties; information already in the department’s possession; or publicly available information. The department’s examination of such information does not mean an audit has commenced if the review takes place within 60 days after the notice of intent to conduct an audit. The [required notification] does not limit the department in making initial contact with the taxpayer to confirm receipt of the notification or to confirm the date that the audit will begin. If the taxpayer has not previously waived the 60-day notice period and believes the department commenced the audit prior to the 61st day, the taxpayer must object in writing to the department before the issuance of an assessment or the objection is waved….
Essentially, the proposed legislation rendered the 60-day waiting period optional for either party. The auditors could examine 1) documents and other information voluntarily provided by the taxpayer, its representative, or other parties; 2) information already in the department’s possession; or 3) publicly available information. In addition, auditors could respond to taxpayer-initiated contact. Meanwhile, taxpayers could provide records or other information to the department during the 60-day waiting period. This was all without executing a waiver of the 60-day period.
Finally, the requirement that violations of the 60-day waiting period be objected to in writing prior to the issuance of an assessment disadvantages the most vulnerable of all taxpayers, who may not be aware a violation has occurred or felt pressured by an auditor to produce documents early. Furthermore, many taxpayers do not engage counsel until after an assessment is issued based on the belief that they can handle the audit in-house. Under the S.B. 1382, counsel would have been barred from objecting to the 60-day waiting period violation if engaged after an assessment had been issued.
The End: 30-Day Exit Conference
The department has a one-year tolling period during which it must complete an audit, which includes the initial 60-day waiting period discussed above. However, as mentioned above, the statute of limitations is also limited by 90 days at the end of the audit period.
When an auditor issues a DR-1215 notice of intent to make audit changes, there is language under the notice of taxpayer rights, which provides: “If you do not agree with the changes: You have 30 days from the date of the Notice of Intent to Make Audit Changes, to request a conference with the auditor or auditor’s supervisor.” Therefore, the auditor must issue the DR-1215 notice of intent to make audit changes with a month to spare for taxpayers to evaluate the findings and discuss potential revisions with the auditor or their supervisor. Due to the limited time auditors have to conduct an audit, the 30-day period taxpayers are provided is often cut short. Instead of waiting 30 days to issue a notice of proposed assessment, auditors will issue the DR-1215 notice of intent to make audit changes and then shortly thereafter issue the notice of proposed assessment, thereby denying taxpayers the conference to which they are entitled.
If a notice of proposed assessment is issued less than 60 days before the end of the one-year tolling period, the entire assessment becomes invalid. Meanwhile, there is no correlating caselaw on point as to the consequences of an auditor violating the 30-day waiting period between the issuance of a notice of intent to make audit changes and a notice of proposed assessment. Senate Bill 1382 attempted to clarify the consequences of violating the 30-day waiting period, distinguishing the consequences for such a violation from that required by the Verizon case in its proposed amendment to F.S. §213.34(2):
(b) If an exit conference is timely requested in writing, the limitations in s. 95.091(3) are tolled an additional 60 days. If the department fails to offer a taxpayer the opportunity to hold an exit conference despite a timely written request, the limitations period in s. 95.091(3) may not be tolled for the additional 60 days. If the assessment is issued outside of the limitations period, the assessment must be reduced by the amount of those taxes, penalties, and interest for reporting periods outside of the limitations period, as modified by any other tolling or extension provisions.
(c) If a request for an exit conference is not timely made, the right to a conference is waived. A taxpayer may also affirmatively waive its right to an exit conference. Failure to hold an exit conference does not preclude the department from issuing an assessment.
Therefore, if a taxpayer exercised their right to a conference, the statute of limitations would have been automatically extended 60 days. Meanwhile, if the auditor failed to hold an exit conference, there would be no consequence, as it would not preclude the issuance of an assessment. Senate Bill 1382’s elimination of consequences for violating the 30-day period renders the 30-day period optional on behalf of the department.
Exclusion of Evidence
In addition to modifying audit procedure, S.B. 1382 also sought to prevent taxpayers from providing their own records in court or administrative hearing when such records were being provided for the first time. For many businesses, the one-year tolling period for an audit is simply not enough time to identify all relevant records. For example, if an auditor assessed three-years of business purchases, it is a time-consuming and difficult job to track down every purchase to confirm proper tax paid on consumables. Alternatively, taxpayers may not realize the relevance of certain records until engaged by counsel, resulting in their exclusion from the audit process. While an auditor is supposed to look for both underpayments and overpayments of tax, the latter does not always occur. For these and many other reasons, it is common for records to be discovered and provided after the audit is completed.
Senate Bill 1382 limited how late in the assessment challenge process a taxpayer could provide new documentation:
A taxpayer may not submit records pertaining to an assessment or refund claim as evidence in any proceeding brought pursuant to this chapter as authorized by s. 72.011(1) if those records were available to, or required to be kept by, the taxpayer and were not timely provided to the Department of Revenue after a written request for the records during the audit or protest period and before submission of a petition for hearing under this chapter, unless the taxpayer demonstrates good cause to the presiding officer for its failure to previously provide such records to the department. Good cause may include, but is not limited to, circumstances where a taxpayer was unable to originally provide records under extraordinary circumstances as defined in s. 213.21(10)(d)2.
Therefore, taxpayers were barred under S.B. 1382 from providing new documentation on a filing in circuit court or in the Division of Administrative Hearings unless good cause was shown.
There were several problems with this proposed change in statute. First, it forced taxpayers to engage in the informal protest process, something that is currently not required and can cause immense delay. At the conclusion of an audit, when a notice of proposed assessment is issued, taxpayers have 60 days to file an informal protest or 120 days to file a petition for Chapter 120 hearing. Should taxpayers have additional documentation after the conclusion of the audit, they would have to file the informal protest in order to provide such documentation. Unfortunately, the informal protest process can take years. In contrast, F.S. Ch. 120 provides a strict timeline for cases filed in the Division of Administrative Hearings.
Furthermore, in cases in which material facts are under dispute, F.S. §120.57(1)(k) provides that all such proceedings must be de novo. Senate Bill 1382 appeared to conflict with the de novo requirement by barring new evidence. Furthermore, the restrictions on the taxpayer would produce an unequal playing field. Occasionally during litigation, the department presents certain evidence for the first time. In addition, new information can arise from discovery, and if the taxpayer cannot provide responsive documents at that time, they could be disadvantaged.
For example, imagine a taxpayer receives information from the department only upon a motion to compel. If the taxpayer could not obtain this information without a judge requiring it, how could the taxpayer reasonably have defended itself from such information prior to the filing of the petition for Chapter 120 hearing? While frustration with noncooperative taxpayers under audit is reasonable, the proposed solution created in S.B. 1382 is problematic.
Senate Bill 1382 proposed legislation would erode taxpayer rights during the audit process and even close businesses that did not, or could not, produce certain records during audit. The proposed restriction of evidence in court or administrative hearing was not only punitive but denied taxpayers the opportunity to defend themselves against estimated or otherwise erroneous assessments.
While tax practitioners and Florida businesses may hope they never see legislation like S.B. 1382 again, it would be prudent to prepare for it. Meanwhile, the best option may be to work directly with the department to identify opportunities for change that help the department accomplish its goals while also assisting taxpayers navigate the complex audit process. A more balanced bill that garners support from both sides may be more successful in the next legislative session.
 Fla. Stat. §212.12(5)(b).
 Fla. Stat. §213.345.
 Fla. Stat. §§212.13(5), 202.34(4).
 Fla. Stat. §213.345.
 Verizon Bus. Purchasing, LLC v. State, Dep’t of Revenue, 164 So. 3d 806 (Fla. 1st DCA 2015).
This column is submitted on behalf of the Tax Section, Mark R. Brown, chair, and Taso Milonas, Charlotte A. Erdmann, Daniel W. Hudson, and Angie Miller, editors.