9107H1121C08



HEARING NO. 26,904


IN RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: October 1, 1985 through July 31, 1989

SALES TAX

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

JOHN R. NEEL
Chief
Administrative Law Judge

ALVIN STOLL
Representing Tax Division

**************
Representing Taxpayer


AMENDED COMPTROLLER'S DECISION


PRELIMINARY COMMENTS:

This case was heard at an oral hearing on April 10, 1991. Petitioner was 
represented by **************, **************. Testifying for the Petitioner 
were **************, Treasurer, and **************, Tax Manager. Petitioner's 
representative also called, as adverse witnesses, Comptroller employees Mr. 
Allen G. Van Allen and Mr. John Love. Representing the Tax Division was Mr. 
Alvin Stoll, Hearings Attorney. Mr. Henry Flynt testified for the Tax Division. 
The Administrative Law Judge (ALJ) officially noticed all records of the 
Comptroller's office pertaining to the Petitioner and the issues involved in 
the case.

Subsequent to the filing of Petitioner's Statement of Grounds, the Tax Division 
agreed to either delete or adjust a significant number of items which were 
scheduled by the auditor. These agreements are referred in the Tax Division's 
Position Letter of September 14, 1990.

This proposed decision will only address the issues which remain in dispute 
between the parties.

PETITIONER'S CONTENTIONS:

1. Tax is not due on Petitioner's purchases of equipment which is utilized to 
provide its "free-to-guest" television services to hotels and motels.

2. Even if tax is due on such equipment purchases, the tax should be waived 
because of Petitioner's "detrimental reliance" on advice from the Comptroller's 
office that tax was not due.

FINDINGS OF FACT

1. Petitioner was audited for compliance with the provision of the Limited 
Sales, Excise and Use Tax Act for the period October 1, 1985 through July 31, 
1989.

2. On April 3, 1990, a Texas Notice of Tax Due totaling $************** in 
State and Local Taxes, penalty, and interest was communicated to Petitioner.

3. Petitioner, which is headquartered in CITY, Texas, is in the business of 
providing closed circuit telecasting of movies and television programs to 
guests in hotels and motels in Texas, 48 other states, and various countries 
throughout the world.

4. Petitioner provides the hotel or motel and its guests with two basic types 
of service, i.e., "guest-pay" movie services and "free-to-guest" television 
services.

5. With respect to its "guest-pay" movie services, Petitioner obtains the right 
to telecast the movies for a limited period of time from the movies 
distributors. The late-release movie cassettes are played over equipment placed 
in the hotels/motels by Petitioner. The movies are screened according to a 
pre-determined schedule, with the hotel/motel guests being charged only for the 
movies which they select to view in their room. The hotel/motel collects the 
charges from their guests, retain 10% of the charge as an agency fee, and 
remits the remainder to Petitioner. Petitioner remits from 25% -42% of the 
charge to the movie distributor for the right to screen the movies.

6. With respect to its "free-to-guest" television services, Petitioner provides 
satellite-delivered television programming such as Home Box Office, Cable New 
Network, the Disney Channel, etc. Petitioner obtains the right to show these 
channels from various companies, receives the signals over satellite dish 
antennas it purchases and places on the hotel/motel premises, and then 
transmits the signals for viewing by the hotel or motel guests in their rooms. 
Petitioner owns, controls, maintains, and operates the equipment utilized to 
provide its "free-to-guest" television services. The hotel/motel guest is not 
charges for such services; rather, the hotel or motel is charged a per-room 
monthly fee by the Petitioner which is based upon the particular channel 
package selected by the hotel/motel.

7. Petitioner has been providing its "free-to-guest" television services to 
hotels and motel since at least August 5, 1983.

8. On August 5, 1983, in response to an inquiry received from Petitioner about 
the taxability of its "free-to-guest" television services, Petitioner was 
advised as follows in a letter to Petitioner from the Comptroller's office:

". . . . . PETITIONER is providing a service to its customers which is not 
taxable. All tangible personal property used in providing the service is 
taxable to PETITIONER at the time of the purchase, . . . . ."

9. Subsequent to receipt of the August 5, 1983 letter referenced in Finding of 
Fact No. 8, Petitioner began (or continued) according tax on its purchases of 
the satellite dish antennas and other equipment used to provide its 
"free-to-guest" television services.

10. Subsequent to changes in the law regarding the taxability of certain 
services which became effective on October 2, 1984, Petitioner once again 
inquired of the Comptroller about the taxability of its services, including its 
"guest-pay" movie services and "free-to-guest" television services, in a letter 
to the Comptroller dated September 25, 1985. The letter did not specifically 
make any inquiries about the taxability of equipment purchases used to provide 
the various enumerated services.

11. On October 18, 1985, Petitioner's September 25, 1985 inquiries were 
responded to by letter from a Comptroller employee. In response to Petitioner's 
inquiry about its "free-to-guest" television services, it was stated that 
"PETITIONER would charge tax to the hotel on the monthly charge." The letter 
did not address the taxability of equipment purchased to provide the 
"free-to-guest" television services, but did address the taxability of 
equipment purchased to provide one of Petitioner's other services, i.e. its 
In-Room Video Checkout Services.

12. Petitioner was audited for compliance with the provisions of the Limited 
Sales, Excise and Use Tax Act for the period July 1, 1983 through September 30, 
1985.

13. On January 8, 1986, Petitioner was advised by letter of the results of its 
audit referenced in Finding of Fact No. 12. The letter indicated that 
Petitioner would receive a tax credit or refund totaling $**************. The 
letter stated that "Audit adjustments were made for taxable purchases of 
equipment on which Use Tax was accrued in error. This equipment was transferred 
in the performance of a rental agreement or taxable service . . . . ." The 
audit letter also contained the standard disclaimer language, as follows: "The 
conclusions of this audit are not to be taken as approval of your tax reporting 
system. You are cautioned that in the future you will still be held liable for 
all taxes owing and due."

14. Subsequent to receipt of the letter of January 8, 1986, Petitioner stopped 
accruing tax on its purchases of equipment utilized to provide both its 
"guest-pay" movie services and its "free-to-guest" television services.

15. Prior to contracting with a hotel or motel to provide its services, 
Petitioner prepares an estimated installation budget and profitability 
statement in order to determine whether the potential project will meet its 
three-year payback criteria. Any use taxes are factored into such analyses and 
considered prior to making the decision to invest in the project and contract 
with the particular hotel or motel. If any of the estimated expense items, 
including use taxes, prove later to have been too low, it could make an 
expected profitable project, unprofitable.

16. Petitioner's pricing for its "free-to-guest" television services is based 
upon the cost charged to Petitioner for the particular channel package 
provided. Such pricing does not vary by geographical area.

CONCLUSIONS OF LAW AND DISCUSSION:

Petitioner's contentions should be denied.

Regarding Petitioner's first contention (i.e. that tax is not due on its 
purchases of equipment used to provide its "free-to-guest" television 
services), it appears that the argument is based upon the holdings in 
Comptroller's Decision No. 16,106 (1985) and the fact that some of the 
equipment purchased by Petitioner is utilized to provide both its "guest-pay" 
and "free-to-guest" services.

Comptroller's Decision No. 16,106 involved the issue of whether Petitioner's 
provision of its "guest-pay" movie services was taxable as the sale (rental) of 
tangible personal property pursuant to Section 151.005, Texas Tax Code 
Annotated, or was not taxable since it constituted the provision of a service, 
and services which were not a part of the sale of tangible personal property 
did not become taxable until October 2, 1984 (Section 151.0101, Texas Tax Code 
Annotated). The hearing was based upon a Petition for Redetermination filed as 
a result of an audit of Petitioner for the period October 1, 1979 through June 
30, 1983. The holding in Comptroller's Decision No. 16,106 was that the 
provision of Petitioner's "guest-pay" movie services was taxable since the 
"object or essence of the transaction" was the transfer of possession of 
tangible personal property for consideration. In so holding, the decision also 
resulted in making the Petitioner's purchase of equipment used to provide its 
"guest-pay" movie services not taxable, since such equipment was considered 
purchased for resale and, thus, exempt from taxation.

Petitioner argues that the manner in which it conducts its business has not 
changed since the 1979-83 audit period and since some of the equipment it 
purchases in used to provide both "guest-pay" and "free-to-guest" services, it 
owes no tax on such equipment purchased.

Petitioner's argument must be rejected. It ignores the fact that the law has 
been changed subsequent to the period which was the subject of the audit 
challenged in the hearing which was the subject of Comptroller's Decision No. 
16,106. Specifically, effective October 2, 1984, the law was amended to tax 
certain services, including "cable television services." (Sections  151.0101 
(a)(2) and 151.0033, Texas Tax Code Annotated) While initially questioning the 
taxation of its "free-to-guest" television services (as well, perhaps, as its 
"guest-pay" movie services), Petitioner made it clear at the oral hearing that 
it no longer, for purposes of this proceeding, disputes the taxation of such 
services as "cable television services." Thus, any ability to argue for the 
tax-free purchase of equipment used to provide its services was lost when 
"cable television services" became taxable on October 2, 1984, unless 
Petitioner could demonstrate that "the care, custody, and control of the 
tangible personal property is transferred to the purchaser of the service." 
(Section 151.302, Texas Tax Code Annotated, Comptroller's Rule 3.13(f), and 
Comptroller's Decision No. 25,655 (1990)). Petitioner has not done so and has, 
therefore, not met its burden of proof. (Comptroller's Rule 1.40).

Petitioner's second contention, i.e. that any tax found due on its purchases of 
equipment used to provide its "free-to-guest" television services should be 
waived because of Petitioner's "detrimental reliance" on earlier advice from 
the Comptroller's office that tax was not due, should likewise be rejected.

As was noted by the Tax Division, the Comptroller's policy of "detrimental 
reliance" (which is equivalent to the doctrine of equitable estoppel) is not 
mandated by either state law or judicial decision. It was simply adopted by the 
Comptroller in order to promote fairness and justice in the agency's dealings 
with taxpayers. As was stated in Comptroller's Decision No. 26,615 (1991), "The 
basic notion is that where the Comptroller's Office by certain communications 
or conduct directed to a given taxpayer has induced that taxpayer to act in a 
particular manner, the Comptroller should not later adopt a contrary position 
or course of conduct that will cause the taxpayer loss, harm, or detriment as 
the result of its reliance on the earlier Comptroller action."

Comptroller's Decision No. 21,014 (1988) sets out the four elements or 
conditions which a taxpayer must successfully meet in order to be able to 
successfully rely on the policy of "detrimental reliance." These are as 
follows:

(1) the "information or advice" is satisfactorily proven (both as to the 
substance thereof and its direct communication to the taxpayer), meaning that 
it usually must be in writing; (2) the taxpayer followed it; (3) the taxpayer 
gave sufficient information to have resulted in correct advice and did not 
misrepresent information or deliberately withhold or conceal information which 
would affect the advice; and (4) taxpayer has suffered, or will suffer, harm 
unless the Comptroller adheres to the advice.

These four elements have been affirmed in several subsequent Comptroller 
Decisions, e.g. Nos. 25,430 (1990), 26,320 (1990), and 26,434 (1990).

In this case, the Petitioner relies primarily on two communications from the 
Comptroller in support of its "detrimental reliance" argument. First, it points 
to the letter of October 18, 1985 (see Finding of Fact No. 11). While 
Petitioner concedes that the letter did not specifically address the taxability 
of equipment purchased to provide its "free-to-guest" services, it argues that 
it had broadly inquired about all its tax responsibilities, in its letter of 
September 25, 1985 (see Finding of Fact No. 10), and since the Comptroller did 
not affirmatively state that tax should be paid or accrued on such purchases, 
it was justified in relying on the Comptroller's silence as an indication that 
tax was not due.

Even assuming that Petitioner is correct that its September 25, 1985 inquiry 
letter could be reasonably interpreted as inquiring about any tax 
responsibilities regarding its equipment purchases for its "free-to-guest" 
services (which the ALJ does not agree with), the simple fact remains that the 
Comptroller's response letter of October 18, 1985 did not address the issue 
and, therefore, the first element in the four-part "detrimental  reliance" test 
has not been met regarding this first communication.

The second communication, however, warrants closer scrutiny. That second 
communication was, in essence, the action of the Comptroller following its 
audit of Petitioner for the period July 1, 1983 through September 30, 1985 (see 
Finding of Fact Nos. 12, 13 and 14). In sum, Petitioner had been accruing tax 
on its purchases of equipment used to provide its "free-to-guest" services 
since, at least, receipt of the Comptroller's letter of August 5, 1983. (See 
Finding of Fact No. 9). Petitioner was erroneously told in January, 1986, that 
its accrual of tax on such purchases was in error. Subsequent thereto, 
Petitioner ceased accruing such tax. Now, the auditor in the instant case has 
scheduled as taxable such equipment purchases. Should the Petitioner prevail on 
the basis of "detrimental reliance"?

The Tax Division urges two primary reasons why it should not. First, it was 
pointed out that a number of past Comptroller Decisions have held that relief 
from a "detrimental reliance" claims will not be afforded based upon a prior 
audit mistake. (Comptroller Decision Nos. 25,430 (1990), 26,086 (1990), 26,099 
(1990), 26,287 (1990), and 26,615 (1991)). The underlying rationale for these 
decisions, which the ALJ reviewed, seems to be based largely upon the fact that 
the prior "erroneous" audits had contained the standard disclaimer language 
quoted in Finding of Fact No. 13. Such standard disclaimer language has been 
used in audits since 1983, and was utilized in the audit which Petitioner 
relies on in this case to support its "detrimental reliance" claim.

However, as was noted in Comptroller's Decision No. 26,615 (1990), "the normal 
situation is that something the taxpayer was not taxing was not picked up by 
the previous auditor but has been assessed in the current audit. In such 
situations the taxpayer was not induced by the earlier auditor to act in a 
particular manner . . . . . for the taxpayer was already acting in that manner 
during the period covered by the previous audit." (emphasis added) Each of the 
other Comptroller Decisions referenced by the Tax Division and reviewed by the 
ALJ appeared to present the "normal situation."

Here, however, we have just the opposite of the "normal situation." Here, we 
had a taxpayer who was properly accruing tax, was told following an audit that 
it was doing so in error, who subsequently quit accruing the tax, and is now 
told it should have never stopped. In such a circumstance, the ALJ is of the 
opinion that the fact that the audit letter contained the standard disclaimer 
language should not, in itself, be sufficient to disallow an otherwise valid 
"detrimental reliance" claim.

Returning, then, to the four required elements for "detrimental reliance," it 
seems clear to the ALJ that Petitioner has satisfactorily met the first three. 
Petitioner has not, however, met the fourth element, i.e., a showing of harm, 
which was the Tax Division's second primary argument for rejecting Petitioner's 
"detrimental reliance" claim.

As noted by the Tax Division, there have been a significant number of prior 
Comptroller Decisions which have held that the only harm which is suffered by a 
"detrimental reliance" claimant in situations where tax has erroneously not 
been accrued on purchases is the penalty and interest (see, e.g., Comptroller's 
Decision Nos. 21,048 (1987) and 23,079 (1989)).

As was stated in Comptroller's Decision No. 23,079 (1989), "The Petitioner has 
not been harmed by the present audit, for the simple reason that the tax which 
has been assessed is tax which should have been paid by it at the time the 
cylinders were purchased." The Decision also noted that "Penalty has already 
been waived in this case by the field office. The only harm which I can find, 
based upon the record in this case, is the imposition of interest." As was the 
case in Comptroller's Decision No. 23,079, the Tax Division has already agreed 
to waive penalty (relating to Exam 20) in this case. It has also agreed to 
waive the interest on Exam 20 and, therefore, argues that Petitioner would not 
be harmed by imposition of the tax itself.

Petitioner counters this argument by pointing to the holding in Comptroller's 
Decision Nos. 26,320 (1990) and 26,434 (1990). There, highway mower contractors 
were erroneously advised by the Comptroller that tax was not due on purchases 
of equipment used to perform mowing contracts with the State of Texas. The 
Decision held that tax should be waived as a result of the Petitioners' 
"detrimental reliance" and that harm had been demonstrated because the 
Petitioners had showed that (1) tax amounts were a specific component of the 
bids submitted by the Petitioners to obtain the mowing contracts, and (2) they 
had secured no competitive advantage over other bidders as a result of their 
tax-fee purchases of equipment.

While conceding that tax amounts do not constitute a specific component of its 
pricing for its "free-to-guest" television services (See Finding of Fact No. 
16), Petitioner argues that it will suffer harm in just as real a sense as the 
Petitioner mower contractors in the two decisions cited. Petitioner notes that 
tax amounts do constitute a component of its pre-investment analyses (see 
Finding of Fact No. 15) and that erroneous, understated expense projections can 
result in converting an expected profitable project into an unprofitable.

While the ALJ can understand, in theory, Petitioner's argument, the problem 
with it is that it amounts to just that, i.e. theory.

Petitioner did not demonstrate how the assessed taxes on any of the equipment 
purchases scheduled by the auditor would actually impact any of the investment 
decisions it had made; how such, if it had been considered originally, would 
have resulted in a  decision not to invest in a particular project; or how such 
would result in making an actual profitable project unprofitable. In sum, 
Petitioner has not demonstrated how it would be harmed by paying the tax it 
should have paid when the equipment was initially purchased and, therefore, has 
not met its burden of proof (Comptroller's Rule 1.40).

RECOMMENDATION:

Based upon the findings of fact, conclusions of law, and discussion contained 
herein, the ALJ recommends that the Petitioner's contentions be denied and that 
the audit be amended and finalized in accordance with the agreements between 
the parties which are referenced in the Tax Division's Position Letter of 
September 14, 1990.

SIGNED this the 15th day of July, 1991.


JOHN R. NEEL
Chief 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.

SIGNED this the 15th day of July, 1991.


JOHN SHARP
Comptroller of Public Accounts
of the State of Texas




ACCESSION NUMBER: 9107H1121C08   
SUPERSEDED: N 
DOCUMENT TYPE: H 
DATE: 07/15/1991
TAX TYPE: SALES