200403704H



HEARING NO. 43,999 

RE:  **************
TAXPAYER NO.:  **************
AUDIT OFFICE:  N/A
AUDIT PERIOD:  June 1, 1995  THROUGH  December 31, 1998

SALES AND USE TAX/RFD 

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

TIMOTHY MASHBURN
Administrative Law Judge

TREVOR MOORE
Representing Tax Division

**************
**************
Representing Claimant 


COMPTROLLER'S DECISION


PRELIMINARY COMMENTS:

At Claimant's request, this Comptroller's Decision is based on the written 
submissions of the parties.

The Administrative Law Judge (ALJ) took official notice of all records of the 
Comptroller's office that pertain to the Claimant and the issues involved in 
the case.  Unless otherwise indicated, all Section references are to TEX. TAX 
CODE ANN. (Vernon 2002) and all references to Rules are to Title 34, Texas 
Administrative Code (2002). 

CLAIMANT'S CONTENTIONS:

1.  Claimant contends that purchases of telecommunications network equipment 
during the involved period were exempt purchases of manufacturing equipment 
under Section 151.318(a)(2).

2.  Claimant contends that electricity purchased during the involved period was 
for resale as an integral part of the telecommunications it provides and was 
therefore exempt under Section 151.302. 

3.  Claimant contends that the care, custody and control of payphones purchased 
during the involved period were transferred to the payphone customer and 
therefore such purchases were for resale and exempt under Section 151.302. 

4.  Claimant contends that it is entitled to refund of all taxes on equipment 
installations during the involved period.

FINDINGS OF FACT:

1.  Claimant, **************, is a provider of telecommunications. 

2.  On November 19, 2002, Claimant filed the instant refund claim, seeking 
refund of $************** in sales and use taxes paid during the involved 
period.  The claim was filed in connection with Claimant's pending audit for 
the period involved, and at Claimant's request was separated therefrom and made 
the subject of a separate refund hearing, resulting in this proceeding.

3.  Utilizing central office equipment, switching equipment, transmission 
interface equipment, interoffice, feeder and distribution cables (copper wire, 
coaxial and fiber optic), connecting terminal equipment and subscriber 
terminating equipment, Claimant provides voice telecommunications and 
information processing and transmission within Texas and elsewhere.  Such 
equipment, considered as a whole, is "network equipment."  

4.  The network equipment receives, converts, transmits, amplifies and 
reproduces sound and information.  Electrical impulses are involved with the 
process.  Conversions from analogue to digital and back to analogue signals are 
performed by the network equipment. 

5.  Whether considered singularly or collectively, the network equipment does 
not produce an item of tangible personal property for ultimate sale, nor does 
it generate electricity for sale and use as such.

6.  No evidence identifying any purchases of network equipment or electricity 
during the relevant period, nor tax payment or accrual and remittance 
information related to any such purchases, was provided. 

7.  No evidence establishing the transfer of care, custody and control of 
Claimant's payphones to Claimant's payphone customers was presented.

8.  No documentary evidence of any kind was presented in support of the claim.

CONCLUSIONS OF LAW AND DISCUSSION:

Claimant's first contention should be denied.

As it existed from the commencement of the involved period to October 1, 1997, 
Section 151.318(a)(2) exempted from Texas sales or use tax tangible personal 
property used or consumed in or during the actual manufacturing, processing, or 
fabrication of tangible personal property for ultimate sale if necessary or 
essential to the manufacturing, processing or fabrication operation.  Effective 
October 1, 1997, the exemption was narrowed to include only such necessary or 
essential tangible personal property that is directly so used or consumed, 
provided that it also directly makes or causes a chemical or physical change to 
"the product" being manufactured or "any intermediary or preliminary product" 
becoming an ingredient or component of such product.  See Acts 1997, 75th Leg., 
ch. 1390, eff. Oct. 1, 1997.  

Claimant contends that in so limiting the exemption to tangible personal 
property that causes chemical or physical changes to a "product," (as 
contrasted to "tangible personal property") the Legislature actually expanded 
the exemption to include the entirety of its network equipment, since the 
telecommunications it provides are "products."  Alternatively, even without 
this legislative change, telecommunications are visible to the senses and are 
thus within the definition of tangible personal property in Section 151.009, 
according to Claimant, thus qualifying the network equipment for exemption 
under Section 151.318(a)(2).  Finally, telecommunications commence with 
electrical impulses and since electricity is tangible personal property under 
Rule 3.295, Claimant's telecommunications must also be tangible personal 
property in Claimant's view.  Claimant notes in this connection that Section 
151.318(a)(4) exempts equipment used in the manufacture of electricity, and 
urges that its equipment, which processes electricity, should also be exempt.

Claimant's contention concerning the effect of the 1997 amendment to Section 
151.318(a)(2) has not been heretofore presented.  In construing the amendment 
and determining its effect, the provisions of the Code Construction Act, TEX. 
GOVT. CODE ANN., Chapter 311 (Vernon 1998) are applicable, including Section 
311.021 thereof, under which it is presumed that the entire statute is intended 
to be given effect; and Section 311.023 thereof, under which the object sought 
to be attained, the legislative history, the circumstances under which the 
amendment was enacted and the administrative construction are among the matters 
to be considered.  Fundamental also to such determination is that statutory 
exemptions from taxation are subject to strict construction because they place 
a greater burden on other taxpayers.  See North Alamo Water Supply Corp. v. 
Willacy County Appraisal Dist., 804 S. W. 2d 894, 899 (Tex. 1991); Bullock v. 
National Bancshares Corp., 584 S. W. 2d 268, 271-272 (Tex. 1979).  These 
principles, which govern ultimate judicial determination of legislative intent, 
necessarily also govern the Comptroller's statutory interpretations in the 
exercise of the Comptroller's administrative duties. 

The specific amendment to Section 151.318(a)(2) effective October 1, 1997, on 
which Claimant relies did not concern the end product that was manufactured by 
the equipment exempted thereunder, and particularly did not concern whether 
equipment used or consumed in manufacturing intangible products should be 
included.  The amendments were legislative responses to court decisions 
interpreting Section 151.318(a)(2) to exempt tangible personal property that 
the Comptroller had held to be indirectly involved with the manufacturing 
process and nonexempt (Sharp v. Tyler Pipe Industries, Inc., 919 S. W. 2d 157 
(Tex. App. - Austin 1996, writ denied)) and piping held by the Comptroller to 
be nonexempt intraplant transportation (Sharp v. Chevron Chemical Company, 924 
S. W. 2d 429 (Tex. App. - Austin 1996, writ denied)).  The additional language, 
plainly responsive to these holdings, left undisturbed all references to 
tangible personal property, including in the preceding clause of Section 
151.318(a)(2) that defines the extent of the exemption to be tangible personal 
property directly used or consumed in manufacturing "tangible personal property 
for ultimate sale" and in Section 151.318(d), which defines "manufacturing" 
specifically as each operation beginning with the first stage of tangible 
personal property production and ending with the completion of tangible 
personal property having the properties that it has upon transfer from the 
manufacturer to another.  No difficulty exists in concluding that the added 
reference to "product" utilized by the Legislature in 1997 in narrowing the 
exemption clearly relates back and refers to the "tangible personal property 
for ultimate sale" referred to previously in Section 151.318(a)(2) and does not 
broaden this exemption to include intangible products or services.

Thus, in order to qualify for exemption under Section 151.318(a)(2), whether 
prior to or after October 1, 1997, the equipment claimed for exemption must be 
necessary or essential tangible personal property used in the manufacturing, 
processing or fabrication of tangible personal property for ultimate sale.  

As noted, according to Claimant even if the product manufactured must be 
tangible personal property its network equipment nonetheless qualifies.  It 
qualifies first in Claimant's view because the telecommunications it ultimately 
delivers to the receiver are perceptible to the senses, which is the definition 
of tangible personal property under Section 151.009.  It qualifies also because 
its transmissions start with electrical impulses and Rule 3.295 defines 
electricity as tangible personal property.  These arguments are without merit 
for the following reasons.

Prior to 1985, telecommunications providers were principally taxed based on 
their gross receipts under Chapter 182 (Sections 182.061-182.065) of the Tax 
Code and its predecessor statutes (since repealed).  The 69th Legislature 
recognized in enacting House Bill 1949, Acts 1985, 69th Leg., ch. 206, eff. 
Oct. 1, 1985, that technological, organizational and governmental changes in 
the telecommunications industry since the enactment of the gross receipts tax 
in 1907 rendered the gross receipts tax law impractical, requiring 
implementation of a restructuring of the taxation system for the industry.  See 
Teleprofits of Texas, Inc. v. Sharp, 875 S. W. 2d 748 (Tex. App. - Austin 1994, 
no pet.).  Accordingly, telecommunications were made taxable as a service in 
Section 151.0101(a), which shifted most taxation of the telecommunications 
industry to the sales tax.  See Section 151.0101(a)(6) as amended and effective 
Oct. 1, 1985.  Section 151.0103 was at the same time added to define 
"telecommunications services," to include "the electronic or electrical 
transmission, conveyance, routing, or reception of sounds, signals, data, or 
information, utilizing wires, cable, radio waves, microwaves, satellites, fiber 
optics, or any other method now in existence or that may be devised."  
Exemptions were rewritten and added in Section 151.323, not pertinent to this 
dispute.  During the next legislative session, the gross receipts tax on 
telecommunications providers was entirely repealed effective October 1, 1988.  
Acts 1987, 70th Leg., First C. S., ch. 5, art. 3, 1, eff. Oct. 1, 1988.

Telecommunications was thus legislated to be a service, not tangible personal 
property, in connection with reorganization of the tax laws affecting the 
telecommunications industry.  It was so legislated regardless of whether 
technically a telecommunications message by hearing or otherwise is perceptible 
to the senses, an issue not necessary for disposition in view of the foregoing. 
 In construing a statute, a later adopted specific provision controls over an 
earlier adopted general provision for interpretive purposes, which is the case 
as concerns Sections 151.0101(a)(6) and 151.0103 (specifically related to 
telecommunications services and adopted first in 1985) versus Section 151.009 
(generally defining tangible personal property and existent upon codification 
in 1981).  See TEX. GOVT. CODE ANN. 311.026 (Vernon 1998).  

Moreover, as the Tax Division aptly points out in responding to this argument, 
had the Legislature intended that telecommunications be considered tangible 
personal property for Texas sales tax purposes, no need would have existed for 
the addition of telecommunications as a taxable service in Section 151.0101(6) 
effective October 1, 1985.  Tangible personal property was obviously already 
taxable at such time.  

It should also be noted that though Claimant relies on the addition of "prepaid 
calling cards" as tangible personal property in Section 151.009 in 1997 (Acts 
1997, 75th Leg. Ch. 1040, eff. Oct. 1, 1997) as indicating recognition that 
electronic media may so qualify, what is significant from such addition as 
pertinent here is that telecommunications was not added and taxation of 
telecommunications as a service was not disturbed at such time.  Further, the 
addition of prepaid calling cards as tangible personal property in Section 
151.009 was by the same Legislature that utilized the "product" language in 
limiting the Section 151.318(a)(2) exemption on which Claimant relies.  That 
Legislature had a clear-cut opportunity to establish telecommunications 
generally as tangible personal property and to make equipment necessary or 
essential to produce the same subject to Section 151.318, and did not do so.  
For the same reasons, the Comptroller's treatment of digital photographs, music 
and graphic arts as tangible personal property in Accessions 200101965L 
(January 3, 2001) and 200101966L (January 3, 2001), also relied on by Claimant 
as indicative that electronic media can be tangible personal property, does not 
require that telecommunications be so treated.

The Courts of at least two states, Pennsylvania and Minnesota, have rejected 
the contention that telecommunications may be said to be tangible personal 
property and that network equipment to deliver telecommunications is exempt 
manufacturing equipment under statutes that, in substance, parallel the 
provision at issue here.  See Bell Atlantic Mobile Systems, Inc. v. 
Commonwealth, 799 A. 2d 902 (Pa. Commonw. Ct. 1998) and Qwest Corporation v. 
Commissioner of Revenue, 640 N. W. 2d 351 (Minn. Sup. 2002), affirming Qwest 
Corporation v. Commissioner of Revenue, 2001 Minn. Tax LEXIS 14 (2001). 
[ENDNOTE (i)] Both are persuasive opinions that consider and reject the 
substance of the fundamental arguments made by Claimant here.  Claimant does 
not acknowledge these states' holdings, instead relying on Southwestern Bell 
Telephone Company v. Director of Revenue, 78 S. W. 3d 763 (Mo. Sup. 2002), 
which held that telephone and related services are intangible products that are 
manufactured within the meaning of the Missouri statute that provides a sales 
tax exemption for machinery and equipment used directly for manufacturing or 
fabricating "a product."  In other words, the Missouri statute is written the 
way Claimant contends that Section 151.318(a)(2) should be construed, a 
construction that is rejected here.  Southwestern Bell is therefore inapposite 
in deciding this case.

That telecommunications signals may be electrical impulses likewise does not 
provide support for granting this claim.  Electricity has long been considered 
tangible personal property for State and local sales tax purposes.  See TEX. 
TAX.-GEN ANN. art. 20.04(Q) and Acts 1967, 60th Leg., Ch. 36, 6(B). [ENDNOTE 
(ii)] And, as Claimant notes, Rule 3.295(b) currently provides that the 
furnishing of electricity is a sale of tangible personal property.  Thus, in 
legislating telecommunications to be a taxable service, the Legislature made a 
clear distinction between electricity, which is tangible personal property, and 
telecommunications, which is a service.  What Claimant has to sell is not 
electricity governed by Rule 3.295.  Rather, it is telecommunications service 
as defined in Section 151.0103.  Its network equipment is not made tangible 
personal property by the involvement of electrical impulses in the process, nor 
is the network equipment exempt under Section 151.318(a)(4) as equipment that 
manufactures or processes electricity.  Telecommunications and electricity are 
distinct taxable items for sales tax purposes.  

It is Claimant's burden clearly and convincingly to establish its entitlement 
to an exemption.  See Bullock v. National Bancshares Corp., supra, and North 
Alamo Water Supply Corp. v. Willacy County Appraisal District, supra.  See also 
Rule 1.40(2)(A).  Since Claimant's network equipment does not produce tangible 
personal property for ultimate sale, and the exemption provided by Section 
151.318(a)(2) is limited to necessary or essential equipment that does so, the 
Section 151.318 exemption is not available to exempt Claimant's network 
equipment.  Whether the entirety of the network equipment otherwise qualifies 
as necessary or essential, and causes a chemical or physical change to 
telecommunications, are issues that need not be determined because no refunds 
are due to Claimant under Section 151.318(a)(2) for the foregoing reasons.

Claimant's second contention should also be denied.

Section 151.302 exempts sales for resale, which as pertinent here are defined 
by Section 151.006(1) as sales of tangible personal property for the purpose of 
resale in the normal course of business in the form or condition in which it is 
acquired or as an attachment to or integral part of other tangible personal 
property or taxable service.  Its purpose is to prevent double taxation.  
Strayhorn v. Raytheon E-Systems, Inc., 101 S. W. 3d 558 (Tex. App. - Austin 
2003, pet. denied).  Claimant asserts that electricity that it purchased during 
the period involved, which as noted has historically been considered tangible 
personal property for Texas sales tax purposes and currently is tangible 
personal property under Rule 3.295, is an integral part of its 
telecommunications service since its network equipment converts electronic 
impulses into sound waves and signals.  

There is no hard evidence of the use made by Claimant of any electricity 
purchased during this period.  There are assertions that Claimant's electricity 
purchases are, apparently in their entirety, integral to telecommunications but 
Claimant does not explain how this is so and in and of themselves those 
assertions do not satisfy Claimant's clear and convincing proof burden under 
Bullock v. National Bancshares Corp., supra, North Alamo Water Supply Corp. v. 
Willacy County Appraisal District, supra and Rule 1.40(2)(A).  

Claimant's Reply pleading herein suggests, variously, that Claimant's provision 
of telecommunications is nontaxable (Claimant's Reply, page 2) and taxable 
(Claimant's Reply, page 12).  Clearly, all else aside the sale for resale 
exemption does not apply and does not assist Claimant with respect to 
electricity used in provision of telecommunications that are not subject to tax 
(for example, the provision of local access exempt under Section 151.323).  See 
e. g., Comptroller's Decisions 36,344 (1998) and 29,588 (1995).  Moreover, with 
respect to telecommunications that Claimant provides that are taxable, Section 
151.302(b) expressly provides that tangible personal property used to perform a 
taxable service is not considered resold unless the care, custody and control 
of the tangible personal property is transferred to the purchaser of the 
service.  Thus, no sale for resale exemption possibility exists at all except 
with respect to electricity that relates to taxable telecommunications and then 
only if care, custody and control thereof were deemed transferred to the 
telecommunications consumer within the meaning of Section 151.302(b).  

Electricity as such is not transferred to Claimant's subscriber customers, 
rather it is converted by Claimant to a signal and thus consumed in providing 
telecommunications services, which is the essence of the transaction.  
Accordingly, the sale for resale exemption is not available even with respect 
to the portion of Claimant's services that are taxable.  See also Accession 
9201L1145G11 (January 8, 1992) [adopting the position that electricity is not 
purchased for resale in relation to the provision of the signal that produces 
cable television].  Thus, this contention is required to be denied.

Claimant's third contention should also be denied.

Purchases of payphones are claimed for refund under this contention.  Relying 
on Section 151.302 and Sharp v. Clearview Cable TV, Inc., 960 S. W. 2d 424 
(Tex. App. - Austin 1998, no pet.), Claimant asserts that such purchases were 
for resale because its payphones are used to perform a taxable 
telecommunications service under Section 151.0103 and the care, custody and 
control thereof are transferred to the purchaser of such service.

The contention made here by Claimant has been considered and rejected on 
multiple occasions.  See Comptroller's Decisions 25,036 (1989), 30,072 (1993), 
29,744 (1994), 32,054 and 33,201 (1994), 35,173 (1996), 38,980 (2001) and 
39,894 (2001).  For the same reasons there stated, no refund relief is proper 
under this contention.

Claimant's fourth contention must be denied.

Claimant presented no evidence in support of this contention.  Accordingly, it 
affords no basis for refund relief.  Rule 1.40(2)(A).

RECOMMENDATION:

The refund claim should be denied in its entirety.

Signed March 26, 2004. 


TIMOTHY MASHBURN 
Administrative Law Judge 


HEARING NO. 43,999


ORDER OF THE COMPTROLLER


The above decision of the Administrative Law Judge is approved and adopted in 
all respects.  This decision becomes final twenty-three (23) days from the date 
of this Order.

If a rehearing is desired, a Motion for Rehearing must be filed with the 
Administrative Law Judge no later than twenty-three (23) days after the date of 
this Order, and must state the grounds upon which the motion is based.

RENDERED and ISSUED March 26, 2004.


CAROLE KEETON STRAYHORN 
Texas Comptroller 


ENDNOTES: 

(i)  In Qwest, a telecommunications provider sought exemption from Minnesota 
sales and use tax for its network equipment.  Under review was a 1993 amendment 
to the Minnesota manufacturing exemption statute, which changed the scope of 
Minnesota's manufacturing exemption from capital equipment used for 
manufacturing, fabricating, mining or refining "a product" to be sold at retail 
to capital equipment used for manufacturing, fabricating, mining or refining 
"tangible personal property to be sold ultimately at retail."  The Court held 
that the terms "property" and "tangible personal property" had two different 
meanings and the 1993 amendment was intended to have the effect of narrowing 
the amendment to the latter, which the Court also found to have been the 
Minnesota Legislature's original intent all along.  The Court held that 
telecommunications was an intangible service, noting the distinction between 
taxable services and tangible personal property, and concluded that Qwest's 
telecommunications network equipment was therefore not exempt.

The Court expressly considered the argument that telecommunications was 
tangible personal property under the definition adopted by the Minnesota 
Legislature, which was "corporeal personal property of any kind."  The Court 
considered the Black's Law Dictionary definition of "corporeal" ["such as 
affects the senses"] and held that a product that can only be heard and not 
seen is not tangible personal property.  It further held that telephone 
service, as such, as contrasted to the actual communication that the service 
delivers, cannot even be heard.  Suffice it so say, in view of the disposition 
of Claimant's first contention as set forth hereinabove, no need exists to 
consider Claimant's identical argument here, and, in any event, insufficient 
evidence exists in this record to do so.

(ii)  Under these cited provisions, electricity except for residential or 
commercial use was exempt from sales and use tax at the time only tangible 
personal property was subject to such tax.  Electricity was thus considered 
tangible personal property long before the first taxability of services in 
Texas in 1984.




ACCESSION NUMBER: 200403704H   
SUPERSEDED: N 
DOCUMENT TYPE: H 
DATE: 03/26/2004 
TAX TYPE: SALES