Texas Comptroller of Public Accounts    STAR System


HEARING NO. 22,959

IN RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 1983 through June 30, 1986


Administrative Law Judge

Representing Tax Division

Representing Petitioner



An oral hearing was held April 28, 1989. The Tax Division presented Cynthia 
Leddon (the Comptroller's auditor) as its sole witness. Petitioner presented 
three witnesses: **************, a tax consultant, **************, Supervisor 
of Production Taxes, and **************, Manager of Purchasing and Material.

The parties submitted a document containing certain agreements they had reached 
prior to the hearing. The document and its attachment were accepted and will be 
used during the audit amendment process.

The parties stipulated some of the facts set out below.

After the Proposed Decision was issued, the parties resolved the issue 
involving unprocessed dirt, sand, gravel and similar materials. Therefore, that 
issue it withdrawn from contention.

After the Amended Proposed Decision was issued, the parties met and agreed on a 
method of resolving the Second Contention.

Petitioner's exceptions to the Conclusions of Law under the First Contention 
have been considered and overruled.


Petitioner, a direct pay permit holder, should be allowed to obtain a refund of 
certain local tax it paid as a result of electing not to issue its direct pay 
permit to certain vendors.


1. Throughout the audit period, Petitioner was the holder of a direct pay 

2. Petitioner purchased taxable items for its own use from various vendors 
during the audit period. Petitioner could have, but did not, issue a direct 
payment certificate in lieu of paying tax. Instead, Petitioner paid state and 
local sales tax to its vendors.

3. Petitioner's use of the materials in question occurred outside of any local 
tax jurisdictions. If Petitioner has issued direct payment certificates to its 
vendors, it would have not been required to accrue and remit local tax.

4. In July and August, 1988, Petitioner issued a "Texas Certificate of 
Exemption" to certain vendors, and requested refunds of the local tax from 
those vendors. Some vendors complied. Others, after consulting with Comptroller 
personnel, refused. Petitioner also requested refund assignments from its 
vendors and is now requesting a refund of the local tax directly from the 


Petitioner contends local tax was erroneously collected by its vendors and that 
it has a right under Tax Code Section 111.104, applied through Section 321.301, 
to a credit or refund. I disagree, and will recommend that this contention be 

Petitioner cannot use the refund/credit provisions of Tax Code Section 111.104 
because no amount of tax was erroneously or unlawfully collected. A direct pay 
permit holder has an election to make when purchasing goods for its own use. It 
can tender its direct payment exemption certificate to a vendor, obtaining the 
goods tax-free, and later accrue and remit tax on its own return. 
Alternatively, it can forego its certificate and simply pay sales tax to its 
vendors at the point of sale. Either procedure is acceptable not the 

Tax Code Section 111.104 requires tax be unlawfully or erroneously collected 
before a taxpayer has a right to request a refund or credit. Because Petitioner 
did not issue its direct payment certificate, sales tax was due at the point of 
sale. There was no erroneous, or unlawful collection. Petitioner cannot now ask 
for a refund or credit because the tax it paid initially was, in fact, due.

There is nothing in the law or the Rules that affords a direct payment permit 
holder the right to go back and handle certain transactions under its direct 
payment permit after having previously chosen to treat those transactions as 
though it did not hold a direct payment permit.

The policy of the Comptroller is to allow direct pay permit holders to elect 
the manner in which they will proceed on any given transaction. However, the 
policy also provides that, once the election is made, the permit holder must 
live with its choice.

Lastly, any local tax already refunded to Petitioner's by its vendors must be 
returned to the state.


Credit should be given for tax on pipe that was purchased tax-paid, stored for 
a period of time in Texas, and then transferred for use in drilling operations 
outside the State of Texas or in federal offshore waters.


5. Petitioner purchased pipe and other tubular goods ("materials") in the years 
1978 through June 30, 1986. The materials were stored in Texas warehouses. 
Petitioner subsequently removed some of the materials from Texas storage and 
first used them out-of-state or in federal offshore waters.

6. Petitioner was the subject of prior audit by the Comptroller for the period 
July 1978 through December 1982. This prior audit made a full examination of 
Source 11 documents. Source 11 documents are cash vouchers evidencing purchases 
made by Petitioner from Texas vendors or from vendors outside the State of 
Texas with delivery to Petitioner into Texas. As a result of the prior and the 
current audit, Texas tax was paid or accrued on all Source 11 materials.

7. Not all of the materials warehoused in Texas were Source 11 materials. Some 
of the materials were purchased tax paid in other states and warehoused in 
those states. After they were transferred to Texas, Texas tax was not accrued 
and paid on the materials.

8. The materials identified by Petitioner that form the basis for the material 
transfer refund claim were first used in federal offshore waters or in other 

9. The auditor reviewed approximately $************** worth of Source 31 debits 
in Texas inventories and identified approximately $************** of that as 
being materials transferred from other states into Texas.

Of the $************** that were transferred into Texas from other states, 
Petitioner's refund or credit request included $************** of that total 
amount. Petitioner concedes that no refund or credit is due on that portion 
because no tax was ever paid to the State of Texas on those amounts.

Petitioner concedes that its refund or credit request should be decreased by a 
total amount of $************** in tax.

10. The percentage of total material inventories represented by materials that 
had been purchased outside the State of Texas and tax paid to another state, 
remained approximately the same during both the prior audit period and the 
present audit period. Therefore, the beginning inventory should reflect the 
same percentage of out-of-state tax paid purchases as was found by the 
Comptroller's auditor in the present audit. In this regard, the parties agree 
that Petitioner's credit or refund request should be decreased by 

11. Petitioner had more transfers from outside of state warehouses into Texas 
from 1983 forward than it had between 1978 and 1982. Prior to 1982, Petitioner 
(then **************) was very active in drilling (as was the entire industry). 
They tried to avoid expensive movement of materials around the state. In 1982, 
there was a downturn of drilling activity and Petitioner found itself in a 
surplus inventory position. Since that time, Petitioner has been moving 
materials around more, simply because it is not buying materials on, or near 
drilling sites, any longer.

In 1986, as inventories were reduced considerably, Petitioner began a more 
significant movement of materials from warehouse to warehouse because some 
warehouses were being closed and remaining materials, especially those that 
were not in prime condition, were consolidated at fewer warehouses to prepare 
them for use.


Petitioner's request for credit should be granted except on that portion on the 
credit or refund request attributable to goods purchased tax-paid in a state 
other than Texas.

Petitioner concedes that it has no right to a credit or refund on materials 
purchased tax-paid outside the State of Texas before being transferred into 
Texas, and thus agrees that its credit request should be decreased by 
$**************. It further concedes that its credit request should be 
decreased an additional $************** in accordance with Finding of Fact No. 

The evidence presented at the hearing and the methodology employed by 
Petitioner and its experts in calculating the claimed refund or credit, have 
convinced me that Petitioner's position is reasonable and should be accepted.


The audit should be amended on the basis of the Agreement of the Parties, the 
Supplemental Stipulation, the Joint Motion to Dismiss Exception and Resolve 
Issue, and the Conclusions of Law set out under the Second Contention. No 
relief should be granted under the First Contention.

Signed this 28th day of August, 1989.

Administrative Law Judge


The above decision of the Administrative Law Judge is approved and adopted in 
all respects. This decision becomes final twenty (20) days from the date of 
this Order.

If a rehearing is desired, a Motion for Rehearing must be filed with the clerk 
of the Administrative Law Judges twenty 920) days from the date of this Order, 
and must state the grounds upon which the motion is based.

RENDERED and ISSUED this 9th day of March, 1990.

Comptroller of Public Accounts
of the State of Texas

DATE: 03/09/1990