200304926H   



HEARING NO. 38,931


RE:  ************** 
TAXPAYER NO.:  **************
AUDIT OFFICE:  ************** 
AUDIT PERIOD:  02/01/93  THROUGH  12/31/96 

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

ROY G. SCUDDAY
Administrative Law Judge

DIANE BROWN
Representing Administrative Hearings Section

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


COMPTROLLER'S DECISION


PRELIMINARY DISCUSSION:

As a result of reallocation of workloads, this case has been transferred from 
the docket of Administrative Law Judge Anne Perez to my docket.  At 
Petitioner's request, the Decision in this case is based on the written 
submissions of the parties.  

Unless otherwise indicated, Section references are to Title 2 of the Texas Tax 
Code, and Rule references are to sections of Title 34, Texas Administrative 
Code.  The Administrative Law Judge took official notice of all records of the 
Comptroller's Office that pertain to the Petitioner and the issues involved in 
this case.  

On November 15, 2002, the Administrative Hearings Section (AHS) filed 
Exceptions to the Proposed Comptroller's Decision issued November 1, 2002.   
Petitioner filed its Reply on December 2, 2002.  The AHS filed its Response on 
December 19, 2002.  The Comptroller and Administrative Law Judge have reviewed 
these pleadings, and this Comptroller's Decision is the result of that review.

AGREEMENT OF THE PARTIES:

The Administrative Hearings Section (AHS) agreed in its January 24, 2002 
Response to the audit adjustments and credits set forth in Exhibits I and II of 
Petitioner's Supplemental Reply of December 6, 2001, with the exception of 
Items # 402, 403, 404, 530, 534, 541, 371, 379, and 380 of Exhibit I, and the 
three ************** items, the ************** item, and the ************** 
item of Exhibit II.  In addition, the AHS agreed to delete Exam 500 of the 
audit.  Finally, the AHS agreed to the Statement of Agreed Items dated October 
24, 2002.

In its December 19, 2002 Response, the AHS agreed to delete Item Nos. 566, 568, 
579, and 571 of Exam 170, No. 573 of Exam 120, and No. 574 of Exam 140.

PETITIONER'S CONTENTIONS:

1.  Petitioner contends that its purchases of janitorial and building 
maintenance services pursuant to its airport terminal lease agreements were 
exempt transactions. 

2.  Petitioner contends that its purchases of airport terminal security 
services constituted exempt transactions.

3.  Petitioner contends that its purchases of bloody mary mix constituted 
exempt purchases for resale.

FINDINGS OF FACT:

1.  ************** (Petitioner) is a commercial airline.

2.  Petitioner was audited for sales and use tax compliance for the audit 
period of February 1, 1993, through December 31, 1996.  On October 9, 1998, the 
Comptroller issued Petitioner a Texas Notification of Audit Results showing an 
amount due that included tax, penalty, and interest through the date of the 
notice.  Petitioner's timely request for redetermination resulted in this 
proceeding.

3.  Petitioner has entered into terminal lease agreements for both the AIRPORT 
and the INTERNATIONAL AIRPORT.  Pursuant to those agreements, Petitioner was 
required to keep the leased premises in good repair and clean condition.

4.  Petitioner purchased janitorial cleaning services from ************** 
(COMPANY A), ************** (COMPANY B), and ************** (COMPANY C).  The 
auditor scheduled these services for which Petitioner did not pay sales tax in 
the audit exams.

5.  On August 1, 1992, Petitioner entered into an agreement with ************** 
(COMPANY D) for the operation and maintenance of mechanical systems, electrical 
systems, fire protection, plumbing, roof drainage system, and general 
maintenance including minor repairs to walls, ceilings, roofs, fencing, and 
overhead doors, of FACILITY A, FACILITY B, FACILITY C, and FACILITY D, all 
located at the AIRPORT.  The auditor scheduled these purchases for which 
Petitioner did not pay sales tax in the audit exams.

6.  Sales tax returns of COMPANY D indicate that it remitted tax on ten of its 
invoices to Petitioner.  Four of those invoices scheduled as # 569 in Exam 130, 
570 in Exam 140, 562 in Exam 150, and 572 in Exam 160 correlate to the backup 
for the sales tax report, showing that the tax was remitted on those invoices.  
As noted above, the AHS has agreed to delete four of the remaining six invoices 
scheduled in Exam 170, an invoice scheduled in Exam 120, and an additional 
invoice scheduled in Exam 140.  The remaining two invoices scheduled in Exam 
170 do not correlate to the sales tax report.

7.  Petitioner purchased security services, including gate security, satellite 
security, door guards, and baggage and passenger screening for its facilities 
at the AIRPORT from ************** (COMPANY E).  The auditor scheduled these 
purchases for which Petitioner did not pay sales tax in the audit exams.

8.  According to an affidavit of MANAGER, Manager for Airport Customer Service 
Security and International Facilitation Division of Petitioner, the Federal 
Aviation Administration (FAA) requires Petitioner to adopt and maintain a 
security program and dictates the general contents of that program.  
Petitioner's security program, the AOSSP, sets out the security measures 
Petitioner has taken to ensure compliance with federal law and regulations.  
The FAA prohibits Petitioner from disclosing the contents of the AOSSP.  
MANAGER attests that the FAA dictates that Petitioner must provide security to 
areas that the public is not allowed to access such as the Air Operations Area 
(AOA), where aircraft operate while moving toward and away from terminal gates 
and where baggage is loaded and unloaded, the Security Identification Display 
Area (SIDA) where only authorized personnel with security identification are 
allowed, and satellite terminals to which only ticketed passengers and 
authorized employees are admitted.  The FAA does not require Petitioner to 
provide security to areas that the public has access to, such as gate areas 
inside the terminals, curbside in front of terminals, parking lots, and parking 
garages. 

9.  Petitioner purchased bloody mary mix from ************** (COMPANY F), which 
mix was used to provide mixed drinks to its passengers, those in first class as 
a perk, those in coach class at a fixed price.  The auditor scheduled these 
purchases for which Petitioner did not pay sales tax in the audit exams.

DISCUSSION AND CONCLUSIONS OF LAW:

PETITIONER'S FIRST CONTENTION:

Petitioner's first contention should be denied.

Petitioner first argues that the janitorial and building maintenance services 
it purchased were exempt purchases for resale under Sec. 151.302.  Petitioner 
points out that its leases with the airport authorities required that it 
provide janitorial and building maintenance services.  Petitioner argues that 
the services were provided to the airport authority as a component of the 
consideration it transferred to the airport authorities under the lease 
agreements.

The AHS responds that there was no sale of the janitorial and building 
maintenance services to the airport authorities.  I agree with the AHS that 
this was not a purchase for resale of services, but, rather, a purchase by 
Petitioner of services that Petitioner needed to be able to perform its 
responsibilities under the lease.  As a result, the use of the services was 
made by Petitioner, not the airport authorities.

Petitioner next asserts that the services it purchased from COMPANY D were 
exempt as taxable services purchased in the performance of a real property 
contract for an exempt entity pursuant to Sec. 151.311. 

Section 151.311 provides as follows:

(a) The purchase of tangible personal property for use in the performance of a 
contract for an improvement to realty for an organization exempted under 
Section 151.309 or 151.310 of this code is exempt if the tangible personal 
property is incorporated into realty in the performance of the contract.

(b) The purchase of tangible personal property, other than machinery or 
equipment and its accessories and repair and replacement parts, for use in the 
performance of a contract for an improvement to realty for an organization 
exempted under Section 151.309 or 151.310 of this code is exempt if the 
tangible personal property is:

(1) necessary and essential for the performance of the contract; and

(2) completely consumed at the job site.

(c) The purchase of a taxable service for use in the performance of a contract 
for an improvement to realty that is performed for an organization exempted 
under Section 151.309 or 151.310 of this code is exempt if the service is 
performed at the job site and if:

(1) the contract expressly requires the specific service to be provided or 
purchased by the person performing the contract; or

(2) the service is integral to the performance of the contract.

(d) For purposes of this section, tangible personal property is completely 
consumed if after being used once for its intended purpose it is used up or 
destroyed. Tangible personal property that is rented or leased for use in the 
performance of the contract cannot be completely consumed for purposes of this 
section. 

Rule 3.357 provided during the audit period as follows:

(a) Definitions.  The following words and terms, when used in this section, 
shall have the following meanings, unless the context clearly indicates 
otherwise.

. . . . . . . . . .

(8) Remodeling or modification - To make over, rebuild, replace, or upgrade 
existing real property. However, the replacement of an item within an operating 
and functioning unit in accordance with paragraph (4) of this subsection is not 
taxable remodeling or modification. Finish out work performed after initial 
finish out has been done is remodeling even though the improvement has not been 
occupied. An example would be a shopping complex completely finished by the 
developer prior to renting to tenants. A prospective tenant wants a different 
color scheme before taking possession. The repainting by the developer is 
remodeling.

(9) Repair - To mend or bring back as near as can be to its original working 
order real property which was broken, damaged, or defective.  However, minor 
repair work performed on operational and functional improvements to realty 
within the meaning of paragraph (4) of this subsection is not taxable repair.

. . . . . . . . . .

(b) Tax responsibilities of persons who repair, remodel, or restore 
nonresidential real property.

. . . . . . . . . .

(2) All persons who repair, restore, or remodel nonresidential real property 
must collect tax on the total sales price to their customers less separately 
stated charges for unrelated services or accept valid resale, exemption or 
direct payment exemption certificates in lieu of tax. Previously, lump-sum and 
separated contracts were treated differently for tax purposes. This distinction 
is no longer valid when the contract is for the repair, remodeling, or 
restoration of real property.

. . . . . . . . . .

Petitioner cites Comptroller Decision No. 28,141 (1991) to support its position 
that real property repair services provided for exempt entities are not subject 
to sales tax.  However, that Decision concerns real property remodeling 
services.  The services purchased from COMPANY D were merely minor repairs and 
building maintenance, not remodeling or construction modification services that 
could be considered to be improvements to real property.   As a result, Sec. 
151.311 does not apply to this issue as framed by the facts in this case.

Finally, Petitioner contends that it paid tax on certain of the COMPANY D items 
scheduled in the audit.  In support thereof, Petitioner has submitted COMPANY D 
tax reports to show that tax was remitted by COMPANY D on the services it 
provided Petitioner.  As set forth in Finding of Fact No. 6, eight of the 
scheduled invoices do correlate to COMPANY D' sales tax reports, and those 
eight invoices should be deleted.  However, there is nothing in the COMPANY D 
documentation to correlate to the other two invoices scheduled in Petitioner's 
audit.  Accordingly, no additional deletions can be made.

PETITIONER'S SECOND CONTENTION:

Petitioner's second contention should be granted in part.

Petitioner contends that the security services purchased from COMPANY E were 
exempt because the federal law preempted state law regulating security services 
provided at airports.

Sec. 151.0075 defines "security service" that is subject to sales tax as a 
"service for which a license is required under Section 1702.101 or 1702.102, 
Occupation Code."   Rule 3.333(i) provides that persons who are exempted from 
the licensing requirements "are not providing security services subject to the 
sales tax because they are not required to hold a license to provide their 
services."

Petitioner cites the case of Huntleigh Corporation v. Louisiana State Board Of 
Private Security Examiners, 906 F. Supp. 357; 1995 U.S. Dist. LEXIS 18077 (U. 
S. Dist. Ct. Middle District Of Louisiana, 1995).  That case held that the 
provisions of the Louisiana Private Security Regulatory and Licensing Law are 
preempted by 49 U.S.C. 41713(b)(1) formerly 1305(a)(1) of the Airline 
Deregulation Act (ADA), and that with regard to its employees who perform 
pre-departure screening at airports, plaintiff is not bound by that state law.  

The AHS responds that this case only applies to passenger screening services 
and baggage tag matching services, not the other services described by MANAGER. 
 In addition, the AHS makes the argument that it is unable to determine the 
specific services preempted without being able to review the AOSSP.  

49 U.S.C. 41713(b)(1), formerly 49 U.S.C. 1305(a)(1) provides that a State "may 
not enact or enforce a law, regulation, or other provision having the force and 
effect of law related to a price, route, or service of an air carrier that may 
provide air transportation under this subpart."  14 C.F.R. 108.7 sets forth the 
requirements for the security program that Petitioner is required to have in 
place, as well as restrictions on the disclosure of that program.  Among the 
areas required to be addressed in that security program are:

(1) The procedures and a description of the facilities and equipment used to 
perform the screening functions specified in 108.9. 

(2) The procedures and a description of the facilities and equipment used to 
perform the airplane and facilities control functions specified in  108.13. (to 
prevent unauthorized access to the airplane and baggage)

(3) The procedures used to comply with the applicable requirements of  108.15 
regarding law enforcement officers. 

(4) The procedures used to comply with the requirements of 108.17 regarding the 
use of X-ray systems. 

(5) The procedures used to comply with the requirements of 108.19 regarding 
bomb and air piracy threats. 

(6) The procedures used to comply with the applicable requirements of  108.10.

(7) The curriculum used to accomplish the training required by  108.23. 

(8) The procedures and a description of the facilities and equipment used to 
comply with the requirements of  108.20 regarding explosives detection systems.

The AHS has not offered any evidence or documentation to refute the attestation 
made by MANAGER as to the FAA requirements, nor shown why the descriptions 
provided by MANAGER cannot be accepted as correct.  The areas described by 
MANAGER that are subject to the FAA security requirements are reasonably within 
the requirements of the Federal Regulations.  Accordingly, I conclude that the 
specific services in the AOA, SIDA, and satellite terminals as described by 
MANAGER would be preempted from the state licensing statute, thereby causing 
those services to be excluded from taxable security services by Sec. 151.0075 
and Rule 3.333(i).  As a result, the scheduled purchases of those specific 
security services should be deleted from the audit.
In its December 19 Response, the AHS points out that the FAA regulations in 
effect during the audit period (14 C.F.R. 108) were not the same as those 
relied upon by MANAGER in his affidavit (49 C.F.R 1542, 1544).  However a 
careful analysis of the language of 14 C.F.R. 108.13 indicates that it was 
broad enough to encompass all the regulations relied upon by MANAGER.  

AHS argues that the regulations in 108 only refer to airplane security and not 
to "the security of areas in the terminal areas." To the contrary, 108.13 is 
entitled "Security of airplanes and facilities.  Subsection (a) provides that 
the security program shall "Prohibit unauthorized access to the airplane," 
while subsection (c) provides that the program shall "Ensure that cargo and 
checked baggage carried aboard the airplane is handled in a manner that 
prohibits unauthorized access."  

The Air Operations Area (AOA), where aircraft operate while moving toward and 
away from terminal gates and where baggage is loaded and unloaded, the Security 
Identification Display Area (SIDA) where only authorized personnel with 
security identification are allowed, and satellite terminals to which only 
ticketed passengers and authorized employees are admitted, would all reasonably 
fall within either or both subsections (a) or (c) of 108.13. Accordingly, I 
conclude that the specific services in the AOA, SIDA, and satellite terminals 
as described by MANAGER would have been preempted from the state licensing 
statute during the audit period as well as currently, thereby causing those 
services to be excluded from taxable security services by Sec. 151.0075 and 
Rule 3.333(i).  As a result, those specific security services should be deleted 
from the audit.

PETITIONER'S THIRD CONTENTION:

Petitioner's third contention should be denied.

Petitioner contends that its purchase of bloody mary mix is exempt from sales 
tax because it resells the mix to its passengers.  Sec. 151.302 exempts the 
purchase of a taxable item for resale.  Sec. 151.006(1) defines "sale for 
resale" as a sale of tangible personal property to a purchaser who acquires the 
property as an "integral part of other tangible personal property or taxable 
service."  The basis for the exemption is that sales tax is owed by the 
ultimate consumer of the item.  However, the sale of alcoholic beverages is not 
subject to sales tax, but is normally subject to mixed beverage gross receipts 
tax.  

Rule 3.289 exempts from sales tax mixers used in mixed drinks the sale of which 
are subject to the mixed beverage tax.  However, Petitioner is not subject to 
the mixed beverage tax under Sec. 183, but rather is subject to an excise tax 
on its purchase of alcoholic beverages pursuant to Chapter 34 of the Alcoholic 
Beverage Code.  As a result, the exemption provided by the rule does not apply 
to these purchases.  Nor does it appear that the bloody mary mix would qualify 
as a food product under Sec. 151.314.  Accordingly, the items should remain in 
the audit.

RECOMMENDATION:

The audit should be adjusted as set forth in the Agreement of the Parties.  
Additionally, the scheduled COMPANY E invoices should be adjusted to delete the 
preempted services, and the COMPANY D invoices scheduled as # 569, 570, 562, 
and 572 should also be deleted.  The amended liability should then be upheld in 
its entirety.

SIGNED  April 28, 2003.


ROY G. SCUDDAY
Administrative Law Judge


HEARING NO.:  38,931


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 April 28, 2003.


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




ACCESSION NUMBER: 200304926H   
SUPERSEDED: N 
DOCUMENT TYPE: H 
DATE: 04/28/2003 
TAX TYPE: SALES