200212766H



HEARING NO. 37,063
RE:  **************
TAXPAYER NO.:  **************
AUDIT OFFICE:  **************
AUDIT PERIOD:  10/01/89 through 03/31/93 


HEARING NO.  37,064
RE:  **************
TAXPAYER NO.:  **************
AUDIT OFFICE:  **************
AUDIT PERIOD:  01/01/91 through 03/31/93


SALES AND USE TAX/RDT 

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS 

ELIZABETH WILSON DAVIS 
Administrative Law Judge 

DIANE BROWN 
Representing Administrative Hearings Section 

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


COMPTROLLER'S DECISION


PRELIMINARY DISCUSSION:

At Petitioner's request, the Administrative Law Judge ("ALJ") based this 
Comptroller's Decision on a review of the parties' written submissions.

The ALJ took official notice of all records of the Comptroller's office that 
pertain to the Petitioner and the issues involved in the case.  Unless 
otherwise indicated, all Section references are to Title 2, Texas Tax Code Ann. 
(Vernon 1992).  References to Rules are to sections of Title 34, Texas 
Administrative Code.

On April 26, 2001, the Petitioner filed Exceptions to the Amended Proposed 
Comptroller's Decision of March 28, 2001.  The AHS(AHS) filed its Response to 
Petitioner's Exceptions on May 11, 2001. The ALJ and the Comptroller have 
considered the Petitioner's Exceptions and the AHS's Response, and this 
Comptroller's Decision represents the ruling thereon.

AGREEMENTS OF THE PARTIES:

The parties have reached the following agreements:

1.  The parties have agreed to refund amounts, as set out in the Administrative 
Hearing Section's Response dated June 21, 2000.

2.  The AHS has agreed in its Response to Exceptions filed on May 11, 2001, to 
delete from the audit Petitioner's purchases of paper that were shipped 
directly to the out-of-state printer to be changed into a book or publication 
before entering Texas.

CONTENTIONS OF PETITIONER:

1.  "The Comptroller incorrectly assessed municipal use tax for the City of 
CITY A, Texas on the purchase of a corporate aircraft."

2.  "The Comptroller incorrectly assessed sales and/or use tax on mailed 
catalogs and other direct mailed advertisings."

AGREED FINDINGS OF FACT:

1.  This represents [Petitioner's] appeal of the Comptroller's sales and use 
tax assessments against [Petitioner] for the relevant periods.

2.  [Petitioner] filed Texas sales and use tax returns for the relevant taxable 
periods and paid the taxes shown thereon as due.

3.  After the audit, the Comptroller issued an audit assessment to [Petitioner] 
for additional sales and use taxes.

4.  [Petitioner] is a Delaware corporation with its principal office and place 
of business located in CITY B, Texas.

5.  [Petitioner] conducts a retail merchandising business by operating retail 
stores in all 50 states, including Texas; in addition [Petitioner] conducts a 
direct mail catalog business.

6.  During the relevant taxable periods, [Petitioner] operated approximately 
140 retail stores and had approximately 18,528 employees in Texas.

7.  [Petitioner] fabricates promotional materials [catalogs and other 
promotional materials, including direct mailed advertising] from materials that 
are purchased and fabricated outside of Texas and mailed directly from a 
location outside of Texas to Texas residents. All references to catalogs 
include both catalogs and other promotional materials.

8.  [Petitioner's] catalog division is separate from its retail division; the 
catalog division maintains its own profit and loss report, formulates and 
implements its own advertising and marketing programs, and prepares its own 
strategic plan; incentive compensation paid to associates in the catalog 
division is determined separately from that paid to associates in the retail 
division.

9.  The catalog division sells merchandise, which it illustrates and describes 
in catalogs.

10.  [Petitioner] produces three major catalogs a year [Spring/Summer, 
Fall/Winter, Christmas] and various smaller catalogs.

11.  The catalogs advertise to potential customers a broader selection of 
merchandise than would be available in most [Petitioner] retail stores.

12.  [Petitioner's] objective in sending catalogs to its customers is to market 
and sell its catalog merchandise.

13.  [Petitioner] sent the catalogs at issue in this appeal to the homes of 
Texas addressees, without charge to the addressees, as described below.

14.  [Petitioner] determined the persons to whom its catalogs should be sent 
using customer purchasing history records and other information and criteria.

15.  [Petitioner] determined how the catalogs were to be sent to potential 
customers by either third or fourth class mail.

16.  [Petitioner] employees determine the artwork to use and design the page 
layout and content of each of the catalogs.  These layouts are digital images.

17.  To fabricate its catalogs, [Petitioner] out sources the labor [printing 
services] to ************** [COMPANY A]. COMPANY A assisted in the fabrication 
of [Petitioner's] three major catalogs at its plant located in Indiana.

18.  [Petitioner] sends the digital page layout to the printer, located out of 
state, who creates the photographic plates, sheets, and other mechanical 
devices that are ultimately used in the printing process to produce the 
catalogs.

19.  Smaller companies located outside of Texas, in South Carolina or 
Wisconsin, performed printing services similar to those provided by COMPANY A 
for [Petitioner's] smaller catalogs.

20.  [Petitioner's] contracts with its printers provided that [Petitioner] 
would supply the paper, shipping wrappers, and address labels for [Petitioner] 
catalogs, and the printer would supply the ink and binding materials.  In the 
case of some of the promotional materials that are not catalogs, the printer 
also provides the paper.

21.  None of the materials for the [Petitioner] catalogs were purchased in 
Texas.

22.  [Petitioner] stores the paper used for the catalogs in a warehouse at or 
near the printer's location outside of Texas.  As the fabrication process for 
each catalog is begun, [Petitioner] supplies the printer with paper from this 
stock of paper.

23.  The contract between [Petitioner] and COMPANY A provided:  "COMPANY A 
shall deliver completed work to carriers at COMPANY A's PLANT LOCATION in 
accordance with [Petitioner's] shipping instructions.  Title and possession 
shall pass to [Petitioner] upon delivery f.o.b. trucks, or railroad cars at the 
PLANT LOCATION."  The PLANT LOCATION is located in Indiana.

24.  In most cases where the catalogs are shipped to the Post Office by common 
carrier, [Petitioner] does not hire the carrier directly, but uses a third 
party broker, such as COMPANY B or COMPANY A.  The brokers arrange for the 
shipping of the catalogs from the printer's plant to the Post Office.  In these 
cases, [Petitioner] may never be aware of the identity of the individual 
carrier who carries the load from the printer to the Post Office until after 
delivery of the catalog is completed.

25.  [Petitioner] paid the common carriers and U.S. Postal Services for all 
transportation costs and postal fees relating to its catalogs.

26.  The U.S. Postal Services offered its third and fourth class mail customers 
various options for the handling of undeliverable mail.  [Petitioner] chose the 
option of having its catalogs undeliverable to Texas addresses returned to a 
catalog distribution center in CITY C, Kansas.

27.  Major catalogs with address labels and postage affixes were picked up at 
the printer's plant by a common carrier hired by [Petitioner].  The common 
carrier shipped the catalogs to U.S. Post Offices, where Post Office employees 
sent the catalogs by fourth class mail to Texas addresses.

28.  Small catalogs with address labels and postage affixed were deposited in 
the U.S. Post Office at or near the printer's plant.  Post Office employees 
sent the catalogs by third class mail to Texas addressees.

29.  Other promotional materials were mailed first class directly to the 
recipient.

30.  Once delivered to the U.S. Postal Service, delivery of the catalogs are 
subject to U.S. Postal Regulations.

31.  Recipients of [Petitioner] catalogs were free to use or discard the 
catalogs.

32.  [Petitioner] did not attempt to recall a shipment of catalogs after the 
catalogs were delivered by the printer to the common carrier or to the U. S. 
Postal Service.

33.  [Petitioner] did not attempt to change the time or method of delivery or 
persons to whom a catalog was to be delivered after the catalogs left the 
printer's plant.

34.  At no time did [Petitioner] have physical possession of the catalogs 
mailed to Texas addressees.

35.  This appeal concerns the Comptroller's assessment of use tax on charges 
for paper, ink, and printing labor incorporated into [Petitioner] catalogs 
whose creation, production, and mailing are described in the above paragraphs.

36.  [Petitioner] also shipped catalogs to its stores in Texas and 
self-assessed or collected sales/use tax on these catalogs, which were given 
away or sold to customers; this appeal does not concern these shipped catalogs.

37.  [Petitioner] collected and paid over to the Comptroller Texas sales or use 
tax on all taxable sales of merchandise.  This appeal does not concern 
sales/use tax on sales of merchandise.

38.  In July of 1992, [Petitioner] purchased a Canadair Challanger aircraft 
[aircraft] and took title in CITY D, Canada.  When [Petitioner] took title to 
the aircraft, it was sufficiently finished to be able to fly, but the interior 
was unfinished and contained no instruments or seats.  At the time of purchase, 
the aircraft had a Canadian Certificate of Air Worthiness.

39.  The aircraft was flown to CITY E, Vermont, where it passed through U.S. 
Customs and received a U.S. Certificate of Air Worthiness.

40.  Once it had cleared customs, the aircraft was flown to CITY F, Wisconsin, 
where the interior of the plane was outfitted by COMPANY C to [Petitioner's] 
specifications.  The completion work took approximately six months, and the 
aircraft remained in Wisconsin for that time.

41.  Once COMPANY C had completed the work, it flew the aircraft to CITY G, 
Delaware, where title to the improvements was transferred to [Petitioner].  The 
plane was then flown back to Wisconsin for the performance of some warranty 
work.

42.  After the warranty work was completed, the aircraft was flown to CITY A, 
Texas, where the [Petitioner] pilots received training on the operation of the 
aircraft.  After the training was completed, the plane was flown to CITY H, 
Texas, which is its permanent service location.

43.  The first use of the aircraft by [Petitioner] took place in CITY F, 
Wisconsin.

44.  The Comptroller assessed CITY A local use tax on the aircraft.

45.  [Petitioner] paid Wisconsin state use tax on the total purchase price of 
the plane, for which the Comptroller gave [Petitioner] credit for Wisconsin 
state use tax on Texas' state use tax assessment. [FOOTNOTE: ALJ's footnote:  
Credit was given based on Section 151.303(c) and Chapter 141 (Multistate Tax 
Compact) and the applicable rules.]  No credit was given against the CITY A 
local use tax assessed.

ADDITIONAL FINDINGS OF FACT:

46.  The Comptroller audited Petitioner for sales and use tax compliance for 
the period from October 1, 1989, through March 31, 1993.  On January 21, 1997, 
the Comptroller issued the Petitioner a Texas Notice of Tax Due, which included 
tax, penalty, and interest through the date of the Notice.  The Petitioner 
timely requested a redetermination hearing.

47.  The Comptroller audited Petitioner for sales and use tax compliance for 
the period from January 1, 1991, through March 31, 1993.  On January 21, 1997, 
the Comptroller issued the Petitioner a Texas Notice of Tax Due, which included 
tax, penalty, and interest through the date of the Notice.  The Petitioner 
timely requested a redetermination hearing.

48.  The audit for Hearing No. 37,064, covering the period from January 1, 
1991, through March 31, 1993, includes in exam 2 the adjustments contested by 
Petitioner relating to purchases of catalogs shipped to Texas customers of 
Petitioner.

49.  Additional contested audit adjustments for Hearing No. 37,064 were made in 
audit exams 503 - 507 relating to direct mail advertising materials other than 
catalogs.[FOOTNOTE:  The ALJ is unclear regarding which transactions in the 
audit schedules for Hearing No. 37,063 that Petitioner is contesting.]

50.  Also, in the audit for Hearing No. 37,064, the auditor included in audit 
exam 6 record nos. 2495-3962 through 2495-3968.  These record numbers relate to 
CITY A city tax imposed on Petitioner's purchase of the corporate aircraft.

CONCLUSIONS OF LAW AND DISCUSSION:

Petitioner's first contention should be denied.

Petitioner contends that the Comptroller incorrectly assessed municipal or 
local use tax for the CITY A, Texas, on the purchase of a corporate aircraft.  
Petitioner argues that  321.205(a) is applicable under these facts, and local 
tax for the CITY A should not be assessed because the aircraft was first used 
in a municipality outside of Texas, specifically CITY F, Wisconsin.  Further, 
Petitioner argues that the application of the local tax would also discriminate 
against interstate commerce in violation of Article I, Section 8, Clause 3 of 
the United States Constitution by failing to give credit for the out-of-state 
first use of the aircraft in CITY F, Wisconsin.

The AHS takes the position that local tax for the CITY A was correctly assessed 
based on  321.205(c), which is applicable to the facts in this hearing.  
Further, the AHS argues that "[r]ead within the complete context of  
321.205(a), that portion of subsection (a) Petitioner cites that exempts the 
imposition of the use tax clearly refers to Texas municipalities that have not 
adopted the tax.  For taxable items, such as Petitioner's airplane shipped from 
outside the State to a customer within the State, 321.205(c) is the applicable 
provision."  

Section 321.205(a) provides as follows:

In determining the incidence of the use tax authorized by this chapter the name 
of the municipality adopting the tax is substituted in Subchapter D, Chapter 
151, for "this state" where those words are used to designate the taxing entity 
or delimit the tax imposed.  However, the excise tax authorized by this chapter 
on the use, storage, or consumption of a taxable item does not apply if the 
item is first used, stored, or consumed in a municipality or area that has not 
adopted the taxes authorized by this chapter.  

Section 321.205(c) states the following:  

If a taxable item is shipped from outside this state to a customer within this 
state and the use of the item is consummated within a municipality that has 
adopted the tax authorized by this chapter, the item is subject to the 
municipality's use tax and not its sales tax.  A use is considered to be 
consummated at the first point in this state where the item is stored, used, or 
consumed after the interstate transit has ceased.  A taxable item delivered to 
a point in this state is presumed to be for storage, use, or consumption at 
that point until the contrary is established.  

The ALJ concludes that CITY A local or municipal tax was correctly assessed in 
the audit in Hearing No. 37,064 on the contested record numbers relating to the 
purchase of Petitioner's corporate aircraft based on the provisions of  
321.205(c) and Rule 3.375(b)(1).

Regarding Petitioner's constitutional arguments, the Comptroller cannot rule on 
the constitutionality of statutes that it administers.  Texas State Board of 
Pharmacy v. Walgreen Texas Company, 520 S.W.2d 845 (Tex. Civ. App. --Austin 
1975, writ ref'd n.r.e.).  Further, the Texas Supreme Court in Central Power 
and Light v. Sharp, 960 S.W.2d 617, 618 (Tex. 1997) has cited the Walgreen case 
with approval regarding an agency's lack of authority to rule on the 
constitutionality of statutes that it administers.

Petitioner's second contention should also be denied.

Petitioner contends that the Comptroller incorrectly assessed use tax on mailed 
catalogs and other direct mailed advertising.  Petitioner argues that the 
Comptroller incorrectly assessed use tax on the total cost of the catalogs.  It 
contends that the "raw materials are not taxable; the services purchased to 
fabricate the catalogs are not taxable, nor are the finished catalogs taxable 
in Texas for the following reasons."  Petitioner's second contention can be 
broken down into several sub-contentions, which are set out below:

"A.  The catalogs are merely raw materials that are converted into another item 
outside of Texas - therefore the case of Sharp et al v. Morton Buildings, Inc., 
953 S.W.2d 300 [Texas Ct. of Appeals I997] writ denied, supports [Petitioner's] 
position that the catalogs are not subject to Texas sales or use tax."

"B.  The only service that is performed for [Petitioner] is printing service.  
The printing services are performed outside of Texas and therefore are not 
subject to sales and use tax in Texas."

"C.  "Distribution" is not included in the definition of the word "Use" in the 
Texas Tax Code."

"D.  The Texas legislature never intended that sales and/or use tax apply to 
catalogs and other direct mailed advertising, and the Comptroller cannot change 
the law by promulgating rules or deciding cases contrary to legislative 
intent."

"E.  The catalogs were fabricated by [Petitioner] and were given to customers.  
Since there was never a "sale" of the catalogs under Texas law, the catalogs 
are not subject to Texas sales tax."

"F.  The assessment of sales and use tax on the mailed catalogs and other 
mailed promotional materials violates the Commerce Clauses, the Due Process 
Clauses and the Equal Protection Clauses of the United States and/or Texas 
Constitutions and the Equal and Uniform Taxation Clause of the Texas 
Constitution."

Set out below are the applicable statutory and rule provisions:

Section 151.005(1), (4), and (8):

"Sale" or "purchase" means any of the following when done or performed for 
consideration:

(1)  a transfer of title or possession of tangible personal property;

*     *     *     *

(4)  the production, fabrication, processing, printing, or imprinting of 
tangible personal property for consumers who directly or indirectly furnish the 
materials used in the production, fabrication, processing, printing, or 
imprinting;

*     *     *     *

(8)  a transfer of the title or possession of tangible personal property that 
has been produced, fabricated, or printed to the special order of the customer.

Section 151.009:

"Tangible personal property" means personal property that can be seen, weighed, 
measured, felt, or touched or that is perceptible to the senses in any other 
manner, and for the purposes of this chapter, the term includes a computer 
program.

Tax Code Section 151.010:

"Taxable item" means tangible personal property and taxable services.

Section 151.011(a) & (c):

(a)  Except as provided by Subsection (c) of this section, "use" means the 
exercise of a right or power incidental to the ownership of tangible personal 
property over tangible personal property and, except as provided by Section 
151.056(b) of this code, includes the incorporation of tangible personal 
property into real estate or into improvements of real estate whether or not 
the real estate is subsequently sold.

(c)  "Use" does not include the sale of tangible personal property . . . in the 
regular course of business . . . .

Section 151.051(a):

A tax is imposed on each sale of a taxable item in this State.

Section 151.101(a):

A tax is imposed on the storage, use, or other consumption in this state of a 
taxable item purchased from a retailer for storage, use, or other consumption 
in this state.

Section 151.102(a):

(a)  The person storing, using, or consuming a taxable item in this state is 
liable for the tax imposed by Section 151.101 of this code . . . .

Section 151.104(a) [FOOTNOTE: Section 151.104(a) was amended effective 
September 1, 1993, to read as follows:  A sale of a taxable item by a person 
for delivery in this state is presumed to be a sale for storage, use, or 
consumption in this state unless a resale or exemption certificate is accepted 
by the seller.]:

A sale of tangible personal property by a person for delivery in this state is 
presumed to be a sale for storage, use, or consumption in this state unless a 
resale or exemption certificate is accepted by the seller.

Section 151.105(a):

Tangible personal property that is shipped or brought into this state by a 
purchaser is presumed, in the absence of evidence to the contrary, to have been 
purchased from a retailer for storage, use, or consumption in this state.

Rule 3.346.  Use Tax. (adopted effective December 21, 1990)

(a)  Definitions.

(1)  Storage - Any keeping or retention of tangible personal property in Texas 
for any purpose, except as provided in subsection (c) of this rule.

(2)  Use - The exercise of any right or power over tangible personal property, 
except as provided in subsection (c) of this rule.  With respect to a taxable 
service, use means the derivation in this state of direct or indirect benefit 
from the service.

(3)  Use tax - A nonrecurring tax, complementary to the sales tax, which is 
imposed on the exercise or enjoyment of any right or power over taxable items 
incident to the ownership, possession, or custody of that item.

(b)  Imposition of the use tax.

(1)  Out-of-state purchases and direct payment permit purchases.

(A)  If taxable items are purchased out of state for use in Texas and are 
brought or shipped into Texas for storage, use, or consumption, use tax is due. 
. . . 

(B)  The basis of the tax is the purchase price, and the tax should be reported 
in the period in which the taxable items are first stored, used, or otherwise 
consumed in Texas. 

*     *     *     *

(3)  Shipments of taxable items from out-of-state suppliers to purchaser's 
designees.

(A)  Use tax is due on taxable items purchased outside this state by a person 
engaged in business in this state if the taxable items are delivered at the 
direction of the purchaser to recipients in Texas designated by the purchaser.  
The purchaser owes use tax based on the purchase price of the items delivered 
to Texas.

(B)  For the purposes of this rule, a person is engaged in business in Texas if 
the person is required to collect sales or use tax under the Tax Code, Chapter 
151.  If the purchaser is not a seller of taxable items, the person is engaged 
in business in Texas if the person has some physical presence in Texas in 
connection with a commercial enterprise.

*     *     *     *

(c)  Exceptions.

*     *     *     *

(4)  Credit will be allowed against the use tax liability to the extent a 
similar sales or use tax is legally due and paid to another state under the 
conditions provided in the Tax Code, Chapter 141 and Chapter 151, sec. 151.303. 
See Rule 3.340 concerning Multistate Tax Credits.

*     *     *     *

The ALJ concludes that Petitioner's contentions should be denied.  In 
Comptroller's Decision No. 32,835 (1998) and Comptroller's Decision Nos. 34,331 
and 35,423 (1998), the Comptroller ruled against the taxpayers on the issues 
that Petitioner has raised.  The ALJ in Decision Nos. 34,331 and 35,423 
discusses in detail the same issues raised by Petitioner.

Additionally, the Comptroller has considered these issues in other Decisions, 
including Decision Nos. 36,175 (1998), 37,473 (1998), and 35,790 (1999) and 
also ruled against the taxpayers in those cases.  

The remaining contested purchases were correctly included in the audit 
assessment pursuant to  151.011(a), 151.101(a), and 151.104(a), and Rule 
3.346(b)(3)(A).  Accordingly, Petitioner's second contention should be denied.

RECOMMENDATION:

Based upon the findings of fact, conclusions of law, and discussion contained 
herein, the ALJ recommends the following:

1.  The audit be amended to delete the agreed items as set out in the Agreement 
of the Parties section above, and the agreed refunds noted in the Agreement of 
the Parties section should also be granted.

2.  The remainder of the assessment should be upheld.

SIGNED December 17, 2002.


ELIZABETH WILSON DAVIS
Administrative Law Judge


HEARING NOS. 37,063 & 37,064


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 December 17, 2002.  


CAROLE KEETON RYLANDER 
Comptroller of Public Accounts
of the State of Texas




ACCESSION NUMBER: 200212766H    
SUPERSEDED: N  
DOCUMENT TYPE: H 
DATE: 12/17/2002 
TAX TYPE: SALES