Texas Comptroller of Public Accounts    STAR System


9711H1441F05



HEARING NO. 34,923


IN RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: 02/01/90  THROUGH  01/31/94

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

JOE GRECO
Administrative Law Judge

KAREN D. LEE
Representing Tax Division

**************
Representing Petitioner


COMPTROLLER'S DECISION UPON REHEARING


On February 6, 1997, pursuant to an agreement between the parties, rehearing 
was granted to allow Petitioner the opportunity to acquire and submit 
additional information relating to its second contention.  On  October 20, 
1997, Petitioner filed a Reply and Motion To Dismiss indicating that, because 
of its inability to acquire the additional information, Petitioner was 
effectively moving to dismiss its the rehearing.  The Tax Division does not 
oppose Petitioner's motion.

Accordingly, the rehearing in this case should be, and same is hereby, 
dismissed.

Except as modified by this decision, the Comptroller's Decision issued in this 
case, on November 12, 1996, is incorporated herein and reaffirmed.

Signed this 10th day of November, 1997.


JOE GRECO
Administrative Law Judge


HEARING NO.:  34,923


ORDER OF THE COMPTROLLER

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 (20) days from the date of the Order, 
and must state the grounds upon which the motion is based.

RENDERED and ISSUED this 10th day of November, 1997.


JOHN SHARP
Comptroller of Public Accounts
of the State of Texas




HEARING NO. 34,923


IN RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: 02/01/90 THROUGH 01/31/94

SALES TAX/RDT

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

JOE GRECO
Administrative Law Judge

KAREN D. LEE
Representing Tax Division

**************
Representing Petitioner


COMPTROLLER'S DECISION


PRELIMINARY DISCUSSION:

Order Granting Motion to Convert to Written Submissions Hearing

Initially, at the request of Petitioner, an oral hearing was scheduled for 
January 24, 1996. However, on January 23, 1996, the parties filed a Joint 
Motion To Convert To Written Submission. The parties' Motion is Granted and 
this hearing is hereby converted to one decided on the basis of the written 
submissions by the parties.

Section references are to Title 2 of the Texas Tax Code, and Rule references 
are to Title 34, Texas Administrative Code. Notice has been taken of all 
Comptroller's records pertinent to this case.

On April 4, 1996, Petitioner timely submitted Exceptions to the Proposed 
Comptroller's Decision in this case. The Tax Division timely filed its Response 
to Petitioner's Exceptions. The Administrative Law Judge and the Comptroller 
have considered Petitioner's Exceptions and the Tax Division's Response, and 
this Decision represents the ruling thereon.

PETITIONER'S CONTENTIONS:

1. In Exam 2 of the audit work papers, the auditor scheduled adjustments for 
************** County SPD sales tax (SPD), which became effective January 1, 
1991. Upon analyzing these sales transactions and the auditing procedures of 
the Comptroller's auditor, it was discovered that certain customers of the 
Petitioner were direct payment permit holders as described by Texas Tax Code 
151.417 annotated (Vernon's 1992, Supp. 1994).

Although the Tax Division is of the opinion that the Comptroller's policy is to 
'allow direct pay permit holders to elect the manner in which they will proceed 
on any given transaction' this is contrary to both Texas law and the actual 
auditing procedures established and distributed by the Comptroller.

2. Exam 2 adjustments should be further reduced by deleting sales to customers 
who have been audited for sales and use tax by the Comptroller for the same 
periods covered by the Comptroller's sales and use tax audit of Petitioner.

FINDINGS OF FACT:

1. Petitioner manufactures steel and fiberglass storage tanks. Petitioner is 
located in **************, Texas. The City of ************** is located in 
************** County, Texas.

2. Petitioner was audited for sales and use tax compliance for the 
above-referenced period. Initially, $************** in tax adjustments were 
scheduled as a result of the audit. Later, Petitioner provided additional 
information, and the audit was amended, thereby reducing the audit assessment 
to $**************.

3. A large portion of the adjustments were attributable to the assessment of 
the 1% ************** County Hospital District tax (hereafter, the Special 
Purpose District tax or SPD tax), effective January 1, 1991, on sales made by 
Petitioner. The additional taxable amounts are scheduled on Exam 2. Petitioner 
apparently had been collecting other applicable sales and use taxes on the 
relevant sales, but not the SPD tax. Petitioner's first and second contentions 
pertain to taxable amounts scheduled on Exam 2. The SPD tax was assessed on 
about 57% of Petitioner's reported taxable sales.

4. As an attachment to it Reply, Petitioner submitted a schedule of customers 
covered by its first and second contentions, and related sales invoices. Some 
of those customers are direct payment permit holders who apparently did not 
issue a direct pay permit certificate to Petitioner, but instead paid the tax 
invoiced by Petitioner (i.e., which included all applicable sales and use 
taxes, but not the SPD tax). And, some of the customers on Petitioner's 
schedule are non-direct payment permit holders from whom Petitioner also did 
not collect the SPD tax. (See Petitioner's second contention.) There are about 
36 customers on Petitioner's schedule. [FOOTNOTE: This is a combined listing of 
customers involved in both contentions.]

5. Audits of customers on Petitioner's schedule who were audited by the 
Comptroller's ************** audit office were examined in light of 
Petitioner's second contention. The Tax Division reports the results of its 
investigation as follows:

Customers whose audits were conducted by the ************** audit office were 
examined for payment of the ************** county SPD tax. Three of 
Petitioner's customers had local audits conducted: **************, 
**************, and **************. Of those customers, only two transactions 
might have been assessed ************** county SPD tax (HP, 6/15/92 and 
6/17/92). The remaining transactions either occurred beyond or prior to the 
customer's audit period or no audit assessment was made for the ************** 
county tax. The auditor is currently verifying the ************** transactions 
and will confirm by the hearing date whether any adjustments can be made.

6. No further information was received from the parties regarding the second 
contention.

DISCUSSION AND CONCLUSIONS OF LAW:

As to the first contention, at issue is whether Petitioner should be held 
accountable for the SPD tax assessed on sales to direct payment permit holders. 
This controversy arose as a result of the auditor's discovery that Petitioner 
had billed and collected state and other local tax (where applicable), but not 
the 1% SPD county sales tax on sales to direct payment permit holders, who had 
apparently not issued direct payment certificates to Petitioner on the sales in 
question.

Petitioner's representative has done an admirable job of compiling arguments in 
support of Petitioner's contention, which includes a blending of Section 
151.419(b) and Rule 3.288(a)(3), and also references to a Comptroller's audit 
manual. I have reproduced a substantial portion of Petitioner's argument below 
in order to accurately convey Petitioner's position:

Section 151.419 addresses the criteria for a taxpayer to qualify for a direct 
payment permit. Specifically, the law states the following with regard to the 
written application for a permit:

(b) The application must be accompanied with:

(1) an agreement that is signed by the applicant or a responsible officer of an 
applicant corporation, that is in a form prescribed by the comptroller, and 
that provides that the applicant agrees to:

(A) accrue and pay all taxes imposed by Subchapter D of this chapter on the 
storage and use of all taxable items sold to or leased or rented by the permit 
holder unless the items are exempted from the taxes imposed by this chapter; 
(Emphasis in original.)

The Comptroller's interpretation of this statute is provided in Comptroller's 
Rule 34 TAC 3.288. The Comptroller's support of this statute is established by 
Rule 3.288(b)(3), which states in pertinent part:

The applicant must agree to accrue and pay all taxes imposed by the Tax Code, 
151.101, on the direct payment return for items not specifically exempted.

In addition to the law and rules, the Comptroller has issued and distributed 
several other statements of policy with regard to sales to direct payment 
permit holders.

Additionally, Auditing Fundamentals, Chapter 5, Audit Procedures, states the 
following:

When scheduling unsupported deductions:

Review the list of Direct Payment Permit holders.

Determine if the deductions are sales to Direct Payment Permit holders.

Check the effective date of the Direct Payment Permit.

NOTE: It is department policy to audit all direct payment permit holders at 
least every four years. If the sales are to direct payment permit holders, do 
not assess tax in the audit of the vendor.(Emphasis in original.)

To summarize the Petitioner's position with regard to sales to direct payment 
permit holders, the current auditing method that has been utilized by the 
Comptroller is inconsistent with its own policy. Had the Petitioner been aware 
of a policy to the contrary, it may have been able to establish sales tax 
collection procedures to avoid exposure. As the assessment stands, because the 
Petitioner has relied on the Comptroller's written policies, the Petitioner has 
been placed in a tax position that could have been possibly avoided if the 
Comptroller would have established a policy similar to those discussed by the 
Tax Division.

Petitioner also asserts that to hold it responsible for the taxes contested 
under this contention would result in a non-uniform and unequal application of 
the tax laws, since the method used to audit Petitioner is allegedly different 
than the method ordinarily used to audit vendors who make sales to direct 
payment permit holders.

After reviewing Petitioner's Reply, the Tax Division's representative filed an 
equally impressive Response, part of which is set forth below:

While 151.419(b)(1)(A) and Rule 3.288(b)(3) set forth requirements for direct 
payment permit holders, these are not isolated provisions. Section 151.419 is 
only one of several in the Tax Code that pertain to direct payment permit 
holders. Section 151.417 of the Tax Code, "Direct Payment of Tax by Purchaser", 
provides that "[t]he holder of a direct payment permit issued by the 
comptroller may give a blanket exemption certificate to sellers who sell, 
lease, or rent taxable items to the holder of the direct payment permit." TAX 
CODE Section 151.417(a) (italics added). Comptroller's Rule 3.288, Direct 
Payment Procedures and Qualifications, states: "qualified consumers may give a 
direct payment blanket exemption certificate in lieu of the taxes imposed by 
the Tax Code, Chapter 151, for taxable items which they purchase for their own 
use and which items will not be resold in any manner." Rule 3.288(a) (italics 
added). The language of both the statute and rule is permissive with regards to 
use of the direct payment exemption.

Direct payment permit holders are not required to use the direct payment option 
when making purchases. However, if the direct payment option is utilized the 
holder of the permit is required to follow certain procedures, which are 
detailed by the Tax Code and Comptroller rules, including 151.419 and Rule 
3.288.

Those portions of Chapters 5 and 8 of Auditing Fundamentals cited by Taxpayer 
refer to auditing procedures for gross sales and deductions where no tax has 
been collected from direct payment permit holders. In such a circumstance the 
Comptroller will assess tax directly to purchasers identified as direct payment 
permit holders. The fact that a direct payment exemption may be maintained 
without an exemption certificate does not support Taxpayer's contention that 
"the Comptroller's policy is not to assess a seller sales and/or use tax on 
sales to a taxpayer who holds a direct payment permit." A direct payment permit 
holder who pays tax at the time of the transaction is no longer acting as a 
direct payment permit holder and thus the transaction is no longer treated as a 
direct payment exemption. Comptroller Decision No. 22,959 (1990).

Comptroller's Decision No. 22,959, which involved an unsuccessful effort on the 
part of a direct payment permit holder to obtain a refund of local tax paid 
directly to vendors, warrants a more detailed review because I believe it to be 
the controlling authority in view of the facts of this case. Pages 2 and 3 of 
Comptroller's Decision No. 22,959 include the following:

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 to the 
Comptroller.

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 by its vendors must be 
returned to the state. (Emphasis in original.)

Also relevant is the opening paragraph (i.e., subsection (a)) of Rule 3.288, 
which provides as follows:

(a) Qualified consumers may give a direct payment blanket exemption in lieu of 
the taxes imposed by the Tax Code, Chapter 151, for taxable items which they 
purchase for their own use and which items will not be resold in any manner. 
(Emphasis added.)

In its summary (reproduced above), Petitioner indicated that had it been aware 
that the Comptroller's policy with respect to sales to direct payment permit 
holders was in fact consistent with the position advocated by the Tax Division 
that it would have "...been able to establish sales tax collection procedures 
to avoid exposure." Petitioner goes on to argue that because of the alleged 
inconsistency it has been placed in a position of harm. I understand the facts 
to be that Petitioner collected the state sales tax and other applicable local 
tax, except for the SPD tax, on sales to customers covered by its first 
contention. Therefore, since Petitioner already had a tax billing and 
collection procedure in place which caused the collection of most of the taxes 
due on a transaction (and which was apparently applied to both direct pay and 
non-direct payment customers), the facts simply do not support Petitioner's 
claim of somehow being misled to its detriment by Comptroller procedures.

As I have indicated earlier, Comptroller's Decision No. 22,959 is authoritative 
support for upholding the assessment of the SPD local tax against Petitioner. 
Apparently, Petitioner's customers elected not to issue direct pay certificates 
for the purchases from Petitioner. This behavior is permissible. Subsection (a) 
of Rule 3.288. Petitioner, in turn, billed and collected sales tax. 
Unfortunately, Petitioner did not bill enough tax. According to Comptroller's 
Decision No. 22,959, once the choice has been made to handle a transaction in a 
non-direct payment manner (i.e., to pay the tax to the vendor, as opposed to 
directly to the Comptroller) that decision is not reversible.

Petitioner's first contention also includes a claim of non-uniform and unequal 
treatment, but since Petitioner has not brought forward evidence demonstrating 
a pattern of dissimilar treatment in instances involving the partial collection 
of taxes from direct payment permit holders, this argument alone is not a 
satisfactory basis for relief. Petitioner has also included references to part 
of the audit procedures manual which indicate a preference for not scheduling 
sales to direct payment permit holders when auditing vendors. None of these 
provisions indicate how an auditor should react when confronted with an audit 
situation in which a vendor has collected most (but not all) of the tax due on 
a sale. Indeed, audit manuals cannot address every possible audit situation. 
When confronted with unique situations such as in this case, auditors must be 
resourceful in their efforts to arrive at the correct result. Given the facts 
presented, my view is that the auditor acted appropriately. Petitioner's first 
contention should be denied.

Petitioner's second contention should also be denied. Before recommending that 
sales to customers involved in Petitioner's second contention should be deleted 
from Petitioner's audit, I must be convinced, by a preponderance of the 
evidence, that the customers have in fact (1) been audited by the Comptroller 
(2) that the customer's audit included the assessment of the SPD tax in 
question, and (3) that the customer paid the assessment (or, of course, 
Petitioner would also be entitled to relief if it could prove that the customer 
self-accrued and remitted the SPD tax to the Comptroller). Petitioner's 
evidence falls short of the required proof. Therefore, the Tax Division's 
opposition to Petitioner's second contention should be sustained. (Rule 
1.40(2)(B).)

RECOMMENDATION:

Petitioner's contentions should be denied and the audit should be upheld as 
previously amended.

Signed this 12th day of November, 1996.


JOE GRECO
Administrative Law Judge


ORDER OF THE COMPTROLLER


The above decision of the Administrative Law Judge, resulting in Taxpayer's 
liability as set out in Attachment "A" which is incorporated by reference, is 
approved and adopted in all respects. This decision becomes final twenty (20) 
days from the date of this Order, and the total sum of the tax, penalty and 
interest amounts is due and payable within twenty (20) days thereafter. If such 
sum is not paid within such time, an additional penalty of ten percent of the 
taxes due will accrue, and interest will continue to accrue.

If a rehearing is desired, a Motion for Rehearing must be filed with the clerk 
of the Administrative Law Judges twenty (20) days from the date of this Order, 
and must state the grounds upon which the motion is based.

RENDERED and ISSUED this 12th day of November 1996.


JOHN SHARP Comptroller of Public Accounts
of the State of Texas




ACCESSION NUMBER: 9711805H   
SUPERSEDED: N 
DOCUMENT TYPE: H 
DATE: 11/10/1997 
TAX TYPE: SALES