200308232H  



HEARING NO. 39,895

RE:  **************
TAXPAYER NO.:  **************
AUDIT OFFICE:  **************
AUDIT PERIOD:  01/01/92  THROUGH  09/ 30/97

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

TIMOTHY MASHBURN
Administrative Law Judge

JAMES P. MATHIESON
Representing Administrative Hearings Section

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




HEARING NO. 39,896

RE:  **************
TAXPAYER NO.:  **************
AUDIT OFFICE:  **************
AUDIT PERIOD:  07/01/91  THROUGH  09/30/97

DIRECT PAYMENT SALES TAX/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

TIMOTHY MASHBURN
Administrative Law Judge

JAMES P. MATHIESON
Representing Administrative Hearings Section

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


COMPTROLLER'S DECISION


PRELIMINARY DISCUSSION:

These consolidated cases were the subject of oral hearing in Austin, Texas, 
before the undersigned Administrative Law Judge (ALJ) on December 19, 2002.  
Petitioners appeared through counsel************** and **************, and 
presented the testimony of INDIVIDUAL A, Team Leader, COMPANY, PETITIONER A.  
The Administrative Hearings Section (AHS) appeared through Assistant General 
Counsel James P. Mathieson, and presented the testimony of Auditor Sheila 
Natho.

The ALJ took official notice of all records of the Comptroller's office that 
pertain to the Petitioners and the issues involved in the cases.  Unless 
otherwise indicated, all Section references are to TEX. TAX CODE ANN. (Vernon 
2002) and all references to Rules are to Title 34, Texas Administrative Code 
(2002).  

PRELIMINARY MATTERS:

During the course of the oral hearing audit deletions and adjustments were 
agreed to by the AHS, which are specifically identified and confirmed in the 
Post-Hearing Brief of the AHS herein, filed on January 31, 2003.  All of such 
deletions and adjustments as set forth at pages 2-3 of the Post-Hearing Brief 
of the AHS are appropriate and are recommended for adoption.

In addition, at the commencement of the oral hearing Petitioners moved for 
severance of their respective contentions having to do with services performed 
by constructive employees (contract labor), which motion was unopposed by the 
AHS and granted by the ALJ by Order entered December 23, 2002.  Hearing Nos. 
39,895A and 39,896A have been assigned to those severed contentions of 
Petitioners and they have been placed on indefinite hold status pending further 
order of the ALJ.

Petitioners' pleadings in these proceedings identify nine contentions for 
consideration.  Contention Four [that audit deletions are required for tax paid 
to vendors in error] and Contention Five [that audit deletions are required for 
carrier devices acquired beyond Texas] were withdrawn at the commencement of 
the oral hearing.  Contention Seven [that audit deletions are required for tax 
accruals] and Contention Eight [that audit deletions are required for 
electricity consumption exempt under Section 151.317(a)(4) and its predecessor] 
are satisfied by the AHS agreement referred to above.  As noted, Petitioner's 
Contention Six has been severed.

This decision considers and sets forth the ALJ's recommendations concerning 
Petitioners' four contentions that remain in dispute, re-numbered, identified 
and discussed hereinafter.

PETITIONERS' CONTENTIONS:

1.  Petitioners contend that installations by third party vendors of cathodic 
protection devices to control pipeline corrosion constituted nontaxable new 
construction or, alternatively, nontaxable real property maintenance.

2.  Petitioners contend that separately stated charges for excavation and 
backfill services by third party vendors providing taxable pipeline repair 
services should be deleted.

3.  Petitioners contend that pipe replacement and recoating during the audit 
period constituted nontaxable scheduled and periodic maintenance or nontaxable 
new construction.

4.  Petitioners contend that penalty and interest should be waived.

FINDINGS OF FACT:

1.  Petitioners are affiliated common carriers by pipeline.

2.  ************** (PETITIONER B) was audited for Texas sales and use tax 
compliance for the period January 1, 1992, through September 30, 1997, as a 
result of which a Texas Notification of Audit Results dated October 6, 1998, 
and a Texas Notification of Amended Audit Results dated June 30, 2000, were 
issued, reflecting a deficiency, penalty and interest as of the date of the 
notices.  PETITIONER B timely requested redetermination, resulting in Hearing 
No. 39,895.

3.  ************** (PETITIONER A) was audited for Texas Direct Payment sales 
and use tax compliance for the period July 1, 1991, through September 30, 1997, 
as a result of which a Texas Notification of Audit Results dated October 6, 
1998, and a Texas Notification of Amended Audit Results dated June 30, 2000, 
were issued, reflecting a deficiency, penalty and interest as of the date of 
the notices.  PETITIONER A timely requested redetermination, resulting in 
Hearing No. 39,896.

4.  By Order entered July 9, 2002, Hearing Nos. 39,895 and 39,896 were 
consolidated due to the common issues of fact and law presented.

5.  During the audit period, except as shown by Petitioners' Exhibit 13, 
Petitioners made purchases without payment or accrual of sales or use tax to 
the extent and in the amounts reflected by the respective Amended Audit Reports 
dated June 30, 2000. 

6.  Sample and projection audits were performed due to the volume of 
transactions.  Petitioners were duly notified of the sample and projection 
procedures and do not challenge the same.

Cathodic Protection Installations

7.  During the audit period third-party vendors ************** (COMPANY B) and 
************** (COMPANY C) installed anode ground beds for Petitioners to 
assist in controlling corrosion of pipelines of Petitioners in Texas.

8.  The cathodic protection devices installed for Petitioners by COMPANY B and 
COMPANY C were magnesium or graphite anodes placed either in horizontal 
trenches (conventional ground beds) or in new vertical well bores (deep well 
ground beds).  Whether conventional or deep well ground beds are installed 
depends on right-of-way circumstances.

9.  Anodes are affixed to the pipeline by means of copper cable that, with the 
assistance of a rectifier, conducts electrical current and deflects potential 
corrosion from the pipeline to the anodes.

10.  The anode installations were additional ground beds that augmented the 
corrosion protection provided by existing anodes for the involved pipeline 
segments.  Petitioners' anode installations do not generally involve 
replacement of existing anodes. [FOOTNOTE: Petitioners' documentation relating 
to cathodic protection installations confirms Petitioners' oral testimony to 
this effect with exceptions not deemed material to disposition of the cathodic 
protection installation issue.  See Finding of Fact No. 15 and Exhibit 3, Vol. 
3, Contract 1707 (relating to Petitioners' scheduled and periodic maintenance 
contention) ["The existing cathodic protection anodes are to be disconnected 
from the existing pipeline and new anodes installed."].]  The anodes installed 
by the involved vendors were in new trenches or well bores.

11.  Relevant contracts between PETITIONER A and COMPANY B were (i) Contract 
C8A1-117-93 dated May 4, 1993, relating to installation of ground beds at or 
near **************, Texas, between May 15, 1993, and April 30, 1995; and (ii) 
Blanket Procurement Agreement ************** dated March 8, 1995, relating to 
the provision by COMPANY B of "all labor, materials, equipment and supervision 
necessary to perform Miscellaneous Groundbed Installations for PETITIONER A as 
requested by Company in writing on Company's Work Authorization forms."  
Neither of such agreements provided for installations or maintenance at 
periodic intervals, or for the same on a specific scheduled basis; they provide 
for service only "as requested" by PETITIONER A.

12.  The relevant contract between PETITIONER A and COMPANY C is Procurement 
Agreement ************** dated November 14, 1994, relating to the provision of 
"all labor, materials, equipment and supervision necessary to perform 
Miscellaneous Cathodic Protection Services for PETITIONER A as requested by 
Company on Company Work Authorization forms."  Such agreement does not provide 
for periodic service or for the same on a specific scheduled basis; the service 
is performable only "as requested" by PETITIONER A.

13.  COMPANY B performed three installations of conventional or deep well 
ground beds for PETITIONER A and three such installations for PETITIONER B 
during the audit period.

14.  COMPANY C performed three installations of conventional or deep well 
ground beds for PETITIONER A and one such installation for PETITIONER B during 
the audit period.

15.  COMPANY B replaced a surface ground bed and rectifier in ************** 
County, and replaced a rectifier and "AC service disconnect" in ************** 
County, Texas, for PETITIONER B, represented by Invoice No. 06493 dated June 
11, 1993 [REC ID 2107-107 of PETITIONER B Exam 4].

16.  No evidence was presented that any of the anode installations by COMPANY B 
or COMPANY C were performed in connection with the original construction of 
pipelines to be protected.

17.  No evidence of any scheduled installations was presented. 

Excavation And Backfilling

18.  Excavation and backfilling work was performed by ************** (COMPANY 
D), during the audit period pursuant to Contract No. 1405-WUB dated May 1, 
1991, which incorporated specifications entitled "Pipeline Recoating", and 
under which COMPANY D performed the following work in ************** and 
************** Counties, Texas for PETITIONER A:  "Furnish labor, equipment & 
materials necessary to make coating repairs on 20( W.T.G. pipeline as per 
contract."  

19.  COMPANY D performed excavating at PETITIONER A's LOCATION Station during 
the audit period pursuant to Contract No. ************** dated August 9, 1993, 
entitled "Sandblasting, Painting and Coating", which required such work "as 
requested by Company in writing on Company's Work Authorization forms."  

20.  For its work performed under Contracts 1405 and 244-93, COMPANY D invoiced 
PETITIONER A on the same invoice separately for "recoating," "excavation" and 
"backfilling."  

21.  PETITIONER A's work authorization documents relating to the LOCATION work 
performed by COMPANY D indicate "Furnish labor to excavate, coat, and backfill 
14( LPG line" and "Furnish labor, equipment & materials necessary to make 
coating repairs on the 14( L.P.G. Pipeline as per contract."

22.  The following lineal footages for recoating and excavation/backfilling by 
COMPANY D are shown by the non-duplicative documentation presented by 
Petitioners:  Recoating - 37,680 feet; Excavation/Backfilling - 37,789 feet.

23.  During the audit period, ************** (COMPANY E) performed excavation 
and backfilling "for the installation of sleeves on the twenty inch (20() 
************** to ************** line" pursuant to Contract No. ************** 
with PETITIONER A dated November 24, 1992, entitled 'Phase II - Sleeve 
Installation", which reflected a unit price for "full encirclement sleeve 
installation" that included "to excavate, clean pipe, install full encirclement 
sleeve, coat sleeve and all visible pipe, and install anodes" as well as a unit 
price for excavation without installation of sleeves that included "to 
excavate, clean pipe, coat visible pipe and install anodes."

24.  COMPANY E also performed excavation services for PETITIONER A pursuant to 
Procurement Agreement No. ************** dated November 10, 1994, which 
provided:  "Contractor shall furnish all labor, supervision, equipment and 
materials necessary to perform Miscellaneous Maintenance Services for 
PETITIONER A as requested by Company in writing on Company Work Authorization 
forms."  No scheduled performance at intervals or otherwise on a scheduled 
basis is reflected by Procurement Agreement 11246X.

25.  During the audit period, ************** (COMPANY F), performed excavation 
in connection with pipe replacement at or near ************** for PETITIONER 
A's "Phase III Pipe Maintenance for the ************** to ************** 20( 
project" pursuant to Contract ************** dated October 29, 1993, and for 
PETITIONER A's "************** to ************** Crude Oil Maintenance Project 
Phase V-Pipe Maintenance" pursuant to Contract ************** dated June 27, 
1994.  The scope of the work under Contract ************** was "all materials, 
construction equipment, labor including supervision, utilities, tools, and all 
items of consumable nature that are required for construction, installation and 
testing of the pipeline system facility."  The scope of the work identified in 
connection with Contract ************** was the furnishing of all labor, 
supervision, tools, equipment, transportation, and materials "required to 
perform maintenance on a twenty (20() pipeline."  

26.  Neither Contract ************** nor ************** required any 
installation, recoating, maintenance or other work on any specific scheduled 
basis, at intervals or on any basis other than as requested by PETITIONER A and 
as authorized in work authorization forms.

27.  COMPANY E invoiced PETITIONER A on Invoice ************** dated January 
26, 1993, for 611 feet of full encirclement sleeve installation [defined under 
Contract ************** to include excavation, pipe cleaning, sleeve 
installation, coating and anode installation] and 23 feet of excavation without 
sleeve installation [defined by Contract ************** to include excavation, 
pipe cleaning, coating and installation of anodes].  

28.  COMPANY E Invoice ************** reflects per foot charges to "excavate, 
clean and sandblast pipe" and to apply primer and backfill.

29.  COMPANY F invoiced PETITIONER A on June 9, 1993, November 30, 1993, 
September 10, 1994, and October 31, 1994, for "************** to ************** 
Crude Oil Maintenance Project," reflecting separate charges for pipe 
replacement, tie-in of previously laid pipe, excavation, dry bore, and 
installation of rock shield.

30.  No evidence was presented that established any performance of excavation 
or backfilling by a vendor separate, apart and independent of pipe recoating, 
replacement or other pipeline work.

Periodic Inspections; Pipeline Recoating or Replacement

31.  Petitioners' pipeline operations are subject to the jurisdiction of the 
United States Department of Transportation - Office of Pipeline Safety and 
Petitioners are required to comply with corrosion control regulations set forth 
in 49 CFR 195.551 et. seq., which prescribe minimum requirements for protecting 
steel pipelines against corrosion.

32.  Cathodic protection is required for all buried or submerged pipelines 
constructed, relocated, replaced or otherwise changed after applicable 
construction dates not relevant for purposes of this decision as set forth in 
49 CFR 401(c).

33.  49 CFR 195.573(a)(1) generally requires that tests be conducted on 
protected pipelines once each calendar year, with intervals not exceeding 15 
months.

34.  49 CFR 195.573(b) requires Petitioners to determine areas of active 
corrosion of unprotected pipe by electric survey or other means at intervals of 
at least once every five calendar years, intervals not exceeding 63 months, for 
periods prior to December 29, 2003.  Corrective action is required by 49 CFR 
401(b).

35.  Petitioners maintain and abide by formal Maintenance and Inspection 
Procedures that require, at intervals not to exceed 15 months, but at least 
once every calendar year, testing of the cathodic protection level of all trunk 
lines, buried station facilities and storage tank bottoms.

36.  Petitioners also perform tests of the internal integrity of their 
pipelines (wall thickness and anomalies) utilizing a linalog tool known as a 
"smart pig."  Linalog surveys are not conducted annually due to their expense.  
They are performed without interruption of pipeline operations.

37.  The 1992-1994 maintenance performed on PETITIONER A's 20( ************** 
to ************** crude oil pipeline resulted from a November 1990, smart pig 
internal body wall inspection, which was preceded by body wall surveys in 1972, 
1975 and 1983.

38.  Linalog inspections and subsequent maintenance is exemplified by linalog 
surveys of a 10( LPG line in 1970, 1981, 1988 and 2000, followed by maintenance 
of an unspecified nature in 1972-1975, 1982-84 and unidentified "proposed 
repairs" in 1989.

39.  Petitioners expect there to be maintenance inevitably required in 
connection with their pipeline operations and budgets an annual amount in 
advance in their respective business plans.

40.  In addition to cathodic protection by anode ground bed installations, 
recoating is a means by which Petitioners seek to prevent and limit or control 
corrosion.

41.  The decision to recoat, or to install additional anode ground beds, 
depends on the results of annual surveys.  Cathodic protection, recoating and 
other pipeline work is prioritized for scheduling over a period of years, and 
work authorizations are issued as so prioritized, predicated on results of the 
surveys and inspections that are mandated by the regulations and performed 
pursuant to Petitioners' company practices and procedures.

42.  If surveys or inspections fail to demonstrate a need, no additional 
cathodic protection through additional ground beds or re-coating, sleeve 
installations, pipe replacements or other work is performed.

43.  The transactions for which documentation was provided in Exhibit 3 relate 
to pipe replacements and/or pipe recoating, or repairs, resulting from 
prioritization and scheduling resulting from surveys and inspections required 
by company procedures or Title 49 regulations.  No documentation evidences any 
required performance on any scheduled basis.

44.  Procurement Agreement ************** with COMPANY G concerned various 
maintenance services "per work authorization as directed by company 
representative."

45.  Relevant pipe replacement agreements with COMPANY E were (i) Contract 
************** dated   November 24, 1992 [************** to ************** 
Phase II - Sleeve Installation; see also Finding of Fact No. 23]; (ii) 
Procurement Agreement ************** dated November 10, 1994 [Miscellaneous 
Maintenance Services "as requested by Company in writing on Company Work 
Authorization forms"; see also Finding of Fact No. 24]; (iii) Procurement 
Agreement ************** dated December 6, 1996 [************** to 
************** Line Repair/Replacement Project]; and (iv) Procurement Agreement 
************** dated May 2, 1997 [Repair Work on ************** 20].

46.  Pipe replacement by COMPANY F during the audit period was pursuant to (i) 
Contract C811-035-91 dated May 30, 1991 [************** to ************** LPG 
Reconditioning Project - Phase II - Pipe Replacement"]; (ii) Contract 
************** dated March 12, 1993 [Phase III Pipe Maintenance for 
************** to ************** 20( Project]; and (iii) ************** dated 
June 27, 1994 [Phase V - Pipe Maintenance ************** to **************].

47.  None of the COMPANY E or COMPANY F agreements provide for any scheduled 
performance of services.  See also Findings of Fact 23-26.

48.  Agreements under which work was provided by COMPANY H, were (i) 
Procurement Agreement ************** dated March 18, 1996, [8( Feedstock 
Upgrade Project]; and (ii) Contract ************** dated June 19, 1992 [10( 
Ethylene Pipeline Replacement], neither of which required scheduled work.

49.  Procurement Agreement ************** dated March 29, 1993, governed 
************** general maintenance services to be performed by COMPANY J, on an 
"as needed basis."

50.  COMPANY K, provided pipe replacement during the audit period pursuant to 
Procurement Agreement ************** dated March 15, 1996, entitled "12( 
Feedstock Maintenance Project - ************** to **************," which did 
not provide for any scheduled replacement or other maintenance.

51.  COMPANY L, provided 20( pipe general maintenance services during the audit 
period pursuant to Contract ************** dated October 12, 1993, "as 
requested by Company in writing on Company Work Authorization forms."

Penalty And Interest

52.  The audits of Petitioners commenced in July 1997, were simultaneously 
processed and proceeded through the documentation provision and review process 
until August 26, 1998, at which time the final write up by the Comptroller's 
assigned auditor occurred.

53.  The initial Audit Report and Texas Notification of Audit Results for each 
audit was issued on October 6, 1998, and redetermination requests were filed on 
November 5, 1998.

54.  Additional documentation was provided by Petitioners to the Comptroller's 
assigned auditor and review thereof commenced on January 26, 1999, and 
continued as additional documentation and audit amendment issues were raised by 
Petitioners through June 6, 2000.

55.  An amended Audit Report and Texas Notification of Amended Audit Results 
was issued in each audit on June 30, 2000.

56.  Petitioners' filed requests for redetermination on July 31, 2000, the 
cases were assigned to the AHS on September 1, 2000, and to an Assistant 
General Counsel on October 25 and 30, 2000.

57.  After transfer to another Assistant General Counsel, Position Letters were 
issued on January 4, 2002 (PETITIONER A) and January 7, 2002 (PETITIONER B).  
Motions to Set were returned on January 10, 2002.

58.  Separate orders setting the cases for oral hearing on May 28, 2002, were 
entered on February 5, 2002.  A motion to consolidate was filed and thereafter 
granted by Order entered March 27, 2002, which left the setting undisturbed.

59.  Petitioners' Reply To Position Letter was filed on March 28, 2002.

60.  The cases were transferred to another Assistant General Counsel on April 
9, 2002, who filed a motion for continuance on April 17, 2002, because of a 
military leave that conflicted with the setting, which motion was not opposed 
by Petitioners and was granted on May 2, 2002.  The cases were reset for 
September 11, 2002.

61.  The AHS filed its Response to Petitioners' Reply To Position Letter on 
July 12, 2002, and a second motion for continuance on August 6, 2002.  The AHS 
continuance request was unopposed by Petitioners and was granted by Order 
entered August 19, 2002, which reset the trial date for December 19, 2002, on 
which date the cases were heard.

62.  The overall error rate of PETITIONER B for the involved period was 40%, 
virtually all of which stems from disputed issues.  

63.  The overall error rate of PETITIONER A for the involved period was 24%.  
Not considering disputed issues (including the severed contract labor issue), 
the error rate is 2.4%.

64.  PETITIONER A holds a direct payment permit issued on February 4, 1991.

65.  Petitioners are highly sophisticated taxpayers.

66.  Petitioners did not collect and fail to remit taxes.

67.  Petitioners timely filed their reports.

68.  Petitioners maintained complete and organized records and were attentive 
and cooperative during the course of the instant and prior audits.

69.  Petitioners do not owe deficiencies in other taxes.

70.  The Comptroller's assigned auditor considers the issues on the merits to 
be "very difficult."

CONCLUSIONS OF LAW AND DISCUSSION:

Each of Petitioners' first three contentions involves the taxability, or not, 
of services provided by third party vendors for Petitioners during the audit 
period.  The burden to establish a prima facie case that the services provided 
are within those enumerated as taxable under Section 151.0101, and that no 
exclusion from taxation is applicable, rests on the AHS.  Comptroller's 
Decisions 30,461 (1994), 30,366 (1995) 33,240 (1996) and 33,649 (1997).  The 
ALJ concludes with respect to each of the services under review that the AHS 
has met its prima facie case burden, shifting the burden of proof to 
Petitioners.  Petitioners' documentation facially reflects the provision of 
real property repair and remodeling to the extent scheduled in the respective 
amended Audit Reports dated June 30, 2000, and fails facially to reflect any 
lawful exclusions.

Cathodic Protection Installations

Petitioners' first contention should be denied.

Section 151.0101(13) includes "real property repair and remodeling" as a 
taxable service.  As here pertinent, Section 151.0047 defines "real property 
repair and remodeling" to be "the repair, restoration, remodeling, or 
modification of an improvement to real property" other than residential real 
property. [FOOTNOTE: An additional exclusion relating to capacity-increasing 
improvements to a manufacturing or processing production unit in a 
petrochemical refinery or chemical plant was added effective October 1, 1995.  
Acts 1995, 74th Leg., ch. 1000, Section  7, eff. Oct. 1, 1995.  This exclusion, 
like the residential exclusion, is not applicable here.]  Section 151.0101(b) 
grants the Comptroller exclusive jurisdiction to interpret the provisions of 
Section 151.0101(a), including what does, and does not, specifically constitute 
"real property repair and remodeling."  Pursuant to such exclusive 
jurisdiction, the Comptroller has promulgated Rule 3.357, which provides the 
Comptroller's interpretation of Sections 151.0101(13) and 151.0047.  As most 
pertinent to Petitioners' first contention, Rule 3.357 as it currently exists 
[FOOTNOTE:  Rule 3.357 first became effective May 4, 1988, and was subsequently 
amended effective October 17, 1990, December 7, 1992, March 23, 1995, and 
February 17, 2002.  The quoted definitional provisions, though in differently 
numbered subparagraphs, have not changed in substance since initial enactment.  
Those quoted are set forth in the current rule as Petitioners have utilized 
such version for argument purposes.] provides:

"(a)  Definitions.  .  .  .

(8)  New Construction - All new improvements to real property including initial 
finish out work to the interior or exterior of the improvement.  .  .  .  New 
construction also includes the addition of new, useable square footage to an 
existing structure.  .  .  .

(11)  Remodeling or modification - To rebuild, replace, alter, modify, or 
upgrade existing real property.  .  .  ."  [Emphasis supplied].

The parties agree, and the ALJ concludes, that the underground pipelines of 
Petitioners constitute improvements to real property.  The first dispute 
relating to cathodic protection thereof is whether the installation of 
additional anodes in new trenches or new well bores is taxable repair and 
remodeling or nontaxable new construction.  Comptroller's Decision 28,327 
(1992) definitively answers this question.  As here, installation of cathodic 
protective anodes connected to the pipeline by copper wire for corrosion 
control, in new ground beds and without disturbing existing anodes, was the 
activity under review.  The Comptroller adopted the following:

"In the ALJ's opinion, after consideration of the relevant statutory and rule 
provisions in relation to the facts found herein, Petitioner's installation of 
the subject cathodic protection systems constitutes the modification of real 
property, i.e., the pipeline, in that it represents an upgrading of the 
pipeline by halting or reducing the pipeline's normal corrosive tendencies 
thereby enhancing the pipeline's physical and economic potential.  The ALJ has 
not been unmindful of the Petitioner's strenuous and, indeed, attractive 
argument that each SAS and/or ICS [anode] is an improvement unto itself, being 
installed in an area of realty (the soil) where no improvement previously 
existed, and only connected to an existing structure by a thin strand of copper 
wire.  While those facts are indeed true, they do not, in the ALJ's opinion, 
mandate a conclusion that the subject installations, for purposes of the Texas 
Sales and Use Tax Law, constitute new construction.  It cannot be ignored by 
the ALJ, or even denied by Petitioner, that the sole purpose for installing the 
systems is to connect same to the pipeline in order to control corrosion of the 
existing pipeline.  In short, they result in making the pipeline better and 
longer lasting, i.e., they upgrade it, and are, therefore, taxable as a 
modification of real property."

Petitioners' arguments here are the same as those considered in Comptroller's 
Decision 28,327 (1992).  The anodes have no purpose other than to protect and, 
as concluded in Comptroller's Decision 28,327 (1992), to upgrade the pipeline.  
No evidence of any independent purpose for the installations has been presented 
and nothing presented differentiates the facts here from those considered and 
made the basis of the Comptroller's interpretation set forth in Comptroller's 
Decision 28,327 (1992).  It has been consistently followed.  Comptroller's 
Decision 30,569 (1993), 31,694 (1997), 33,750 (1997) and 37,335 (1999).  

Petitioners' acknowledge the holding in Comptroller's Decision 28,327 (1992) 
that anode installations are considered pipeline upgrades and are aware from 
its progeny that the Comptroller has not wavered from its holding.  So 
recognizing, Petitioners urge that the concept of "upgrade" in real property 
repair and remodeling cases is overbroad and must be overturned.  Petitioners 
further say that the upgrade concept is inconsistent with the definition of 
"new construction" in Rule 3.357.  

As noted, Rule 3.357 expressly defines "remodeling or modification" to include, 
inter alia, the upgrade of existing real property.  As also noted, the 
Legislature has provided that exclusive jurisdiction to interpret Section 
151.0101(13) reposes with the Comptroller.  The interpretation is by rule, duly 
adopted in accordance with the applicable rulemaking provisions of the Texas 
Government Code.  The ALJ is firmly persuaded that a rule should not be altered 
by ad hoc adjudication.  Sound administration of the law compels use of the 
rulemaking procedures provided in Subchapter B, Chapter 2001, Texas Government 
Code, with full opportunity for public comment, to alter rules, as opposed to 
case adjudications that may result in opinions required to be interpreted and 
potentially subject to inconsistency, a matter about which Petitioners bitterly 
complain.  As concerns Petitioners' argument that the rule is in conflict with 
"new construction" definitional provisions, suffice it to say that the ALJ does 
not agree.

Moreover, the ALJ does not find persuasive Petitioners' other arguments in 
support of the notion that the installations were new construction.  
Petitioners contend that the anodes, installed in new trenches or new well 
bores, should be considered "new improvements" within the meaning of Rule 3.357 
"because they were distinct structures that occupied their own space" and in 
the alternative suggests that if considered a part of the pipeline due to the 
copper wire attachment then the installations added new square footage.  The 
former argument was expressly rejected in Comptroller's Decision 28,327 (1992) 
and the latter ignores the purpose of the anodes, which is not to expand 
pipeline capacity but to upgrade through prevention of corrosion. 

Petitioners further challenge the rationality of adherence to Comptroller's 
Decision 28,327 here in the face of Comptroller's Decision 29,731 (1996) and 
Accession 200111656L (2001).  The former holds that the laying of new pipe in a 
new trench curved to tie into an existing pipeline constitutes nontaxable new 
construction.  Petitioners thus say, as they must, that new anodes are no 
different from the new pipe and as they too are installed in new, undisturbed 
soil, their installation is likewise new construction.  

Comptroller's Decision 28,327 (1992) was decided four years prior to 
Comptroller's Decision 29,731 (1996).  The Chief Administrative Law Judge 
authored the opinions adopted by the Comptroller in each case.  The 1992 
holding in Comptroller's Decision 28,327 that anode installations constitute an 
upgrade to the pipeline and thus were taxable under Rule 3.357 was not 
disturbed by the 1996 holding in Comptroller's Decision 29,731 that new pipe in 
a new trench to be tied in to an existing pipeline was new construction.  
Comptroller's Decision 28,327 (1992) represents the firmly established 
Comptroller law on the issue of taxability of installation of cathode 
protective devices. 

Likewise, Accession 200111656L (2001), the so-called "new pole - new hole - new 
construction" memorandum which Petitioners would have the Comptroller adopt 
here, [FOOTNOTE: The November 20, 2001, Memorandum provides:

"When poles in a transmission and distribution system were replaced with new 
poles, the Comptroller's office considered the labor charges to be taxable as 
repair and remodeling services.  See Comptroller's Decision 28,929 (1996).  The 
underlying basis of the policy was the view that the entire transmission and 
distribution system was the improvement to real property that was being 
repaired, restored or modified.  The Comptroller's office recently modified its 
policy by agreeing with a taxpayer's contention that each pole should be 
treated as an improvement to realty.  The policy change was necessary to be 
more consistent with our approach in other areas as to what constitutes an 
'improvement to real property.'"] does not supplant Comptroller's Decision 
28,327 (1992).  Apparently offered to establish inconsistency in treatment, 
such memorandum supersedes Comptroller's Decision 28,929 (1996), on the 
specific issue of whether a single transmission pole (versus the transmission 
system as a whole) is an improvement to realty.  Petitioners would have it 
that, in view of the memorandum's reference to the policy change respecting 
transmission poles being required "to be more consistent with our approach in 
other areas as to what constitutes an 'improvement to real property' ", each 
new anode or ground bed may now be considered a separate improvement to realty, 
which, when installed in a "new hole," is new construction.  No support for 
abandonment of the principles relating particularly to anode installations 
announced and applied in Comptroller's Decision 28,327 (1992) has been found by 
the ALJ in any decision, and Petitioners have cited none.  To the extent 
Accession 200111656L is relied on as replacing Comptroller's Decision 28,327 
(1992) particularly with respect to cathodic protection devices, such reliance 
is misplaced.

Petitioners alternatively contend that the cathodic protection installations 
constituted nontaxable maintenance.  Because under Comptroller's Decision 
28,327 (1992) the anodes upgrade the pipeline, under current Rule 3.357(a)(7) 
the installations are expressly excluded from the definition of maintenance.  
Prior versions of the rule in effect during the audit periods did not contain 
the express exclusion of work to upgrade from the maintenance definition; 
however, the ALJ concludes that the controlling precedent decisions are to the 
same effect and that the installations during the audit periods were not 
scheduled or periodic within the meaning of Rule 3.357 for the same reasons 
discussed hereinafter in connection with Petitioners' Third Contention. 
[FOOTNOTE: As pointed out by Petitioners at the oral hearing, Comptroller's 
Decision 28,327 (1992) did not involve a maintenance issue.  However, 
Comptroller's Decision 35,615 (1998) does consider such issue and holds that 
anode installations do not qualify as scheduled and periodic maintenance.]  

Unrelated Services

Petitioner's second contention should also be denied. 

This contention is that excavation and backfilling services required in 
connection with recoating of segments of Petitioners' pipelines in Texas, 
charges for which were stated separately on the involved vendor invoices, are 
"unrelated services" under Section 151.357(a)(15).  Petitioners concede the 
taxability of the recoating work as pipeline repairs.  Their point is that the 
separately stated excavation and backfilling services are "stand alone" 
services that are nontaxable under Rule 3.357(a)(15) [the provisions of which 
remained unchanged throughout the audit period]. [FOOTNOTE: During the audit 
periods, these provisions were contained in Rule 3.357(a)(10) until December 7, 
1992, were contained in Rule 3.357(a)(11) from such time to March 23, 1995, and 
were contained in Rule 3.357(a)(12) from that date until the current version of 
the rule became effective on February 17, 2002.  The renumbering of the 
subparagraphs effected no change in the provisions.]

Rule 3.357(a)(15) provides:

"(15)  Unrelated service.  A service is unrelated if:

(A) it is not the repair, remodeling, or restoration of nonresidential real 
property, nor a service or labor that is taxable under any other provision of 
the Tax Code, Chapter 151;

(B) it is of a type that is commonly provided on a stand-alone basis; and

(C) the performance of the service is distinct and identifiable.  Examples of 
unrelated services that may be excluded from the tax base are the creation of 
engineering plans or architectural designs, new construction, increased 
capacity, and maintenance on real property."

Petitioners' view of the record facts pertinent to determination of its second 
contention (Petitioners' Post-Hearing Brief, p. 6) is as follows:

"INDIVIDUAL A testified that the excavation and backfilling met each of these 
elements.  The excavation was done to expose the pipe so that inspections and 
repairs could be performed, and the backfilling then covered the pipe.  The 
excavation and backfilling was not the repair or remodeling of the pipeline - 
these services did not physically alter the pipe.  These services were distinct 
from the inspections and repairs.  And, the excavation and backfilling were 
commonly provided on a stand-alone basis.  Thus, all of the elements of the 
rule have been satisfied."

The AHS defends the assessment of separately stated excavation and backfilling 
charges based on Comptroller's Decisions 31,694 (1996) and 37,930 (1998), which 
held that excavation performed by the same vendor providing taxable pipeline 
repair services is taxable.  Putting it a different way, the AHS's position is 
that separate statement of the charges for excavation and backfilling does not 
render the services unrelated where, as here, the vendor is the same for all 
services provided.  Petitioners acknowledge these decisions but urge, as they 
do with respect to Comptroller's Decision 28,327 (1992), that their reasoning 
be reconsidered because it is overbroad. 

Comptroller's Decisions 31,694 (1996) and 37,930 (1998) are on point and 
control the disposition of this contention unless subsequent Comptroller 
decisions, or Court action, require a different result.  No Comptroller 
decision supportive of Petitioners' contention has been cited by Petitioners 
involving the factual circumstances here presented, that is, where the 
allegedly stand-alone service that is separately charged for is provided by 
same vendor as the taxable service.  Early on in the proceedings, Petitioners 
cited Rylander v. San Antonio S. M. S. A. Ltd., 11 S. W. 3d. 484 (Tex. App. - 
Austin 2000, no pet. h), wherein the Third Court of Appeals considered a "mixed 
transaction", involving the purchase of nontaxable line engineering service and 
new equipment, each of which were found to be of value and readily separable 
from the other.  The Court held (11 S. W. 3d 489):

"There was a need for the engineering assessment that was as important to the 
taxpayers as the equipment itself.  Where the services are distinct and 
identifiable, the existence of a single contract does not make the engineering 
services incident to the purchase of the equipment.  We hold that neither 
element of this mixed transaction was incident to the other.  The taxpayers had 
two real objectives:  to learn from the line-engineering services how to update 
their network without disrupting service to their customers, and to purchase 
equipment that would both update and interconnect smoothly with their existing 
facilities.  These two transactions were 'readily separable' and must be 
analyzed as distinct transactions for sales tax purposes.  The existence of a 
single invoice or a single contract will not affect taxability.  When 'readily 
separable' transactions have been provided, each transaction must be analyzed 
independently to determine if a sales tax shall be imposed."

Of course, the mixed transaction involved in San Antonio S.M.S.A. is not 
involved here.  Services are here at issue, as to which the Comptroller has 
promulgated a specific interpretive rule provision, interpretive authority that 
has been exclusively extended to the Comptroller by the Legislature in Section 
151.0101(b).  The question presented, when reduced to its essentials, is 
whether the provision of the excavation/backfilling services for which 
Petitioner asserts audit deletions are readily separable from the taxable 
pipeline repairs (recoating).  The Court in San Antonio S.M.S.A. looked to the 
purpose of the components of the mixed transaction, finding that the 
line-engineering services had an independent purpose.  The excavation and 
backfilling services performed for Petitioners had no purpose independent of 
the pipe recoating that is apparent from this record.  The testimony is that 
the services can be and have been performed on a stand-alone basis, sometimes 
by the same vendor and sometimes not.  They were not provided, or needed, on a 
stand-alone basis here.  From the standpoint of linear feet, excavation by 
COMPANY D, the principal vendor involved, virtually equaled recoating.  (See 
Finding of Fact No. 22).  All contracts made clear that recoating was the 
result to be achieved.  

Rule 3.357(a)(15) requires the establishment of three criteria:  (i) that the 
service not be taxable repair or remodeling or otherwise taxable; (2) that it 
be commonly provided on a stand-alone basis; and (3) that its performance is 
distinct and identifiable.  Here, the first two criteria are established, but 
not the third.  Ultimately, this criterion fundamentally is determined based on 
the essence of what is bought and sold.  The documentation provided evidences 
that the re-coating by the vendors was the essence of the work, in connection 
with which excavating and backfilling was incident and from which excavating 
and backfilling cannot logically be unbundled.  Thus, the ALJ concludes that 
this record fails to establish that the excavating and backfilling performed by 
the re-coating vendors were distinct, identifiable and readily separable 
services.  Comptroller's Decisions 31,694 (1996) and 37,930 (1998) control.

Scheduled And Periodic Maintenance

Petitioner's third contention should be denied.  

Petitioners contend that pipe replacement and recoating (and anode 
installation) that is prioritized and scheduled based on the results of the 
inspections that are performed on a periodic basis by Petitioners pursuant to 
their own company practices and procedures as well as by Title 49 regulations 
constitute nontaxable maintenance.  Rule 3.357(a)(7) provides the controlling 
definitions:

(7) Maintenance on real property - For operational and functioning improvements 
to realty, maintenance means scheduled, periodic work that is necessary to 
sustain or support safe, efficient, continuous operations, or to prevent the 
decline, failure, lapse, or deterioration of the improvement.  Taxable real 
property services that are described by 3.356 of this title (relating to Real 
Property Service) do not qualify as maintenance.  Maintenance does not include 
work to remodel, modify, upgrade, perform major repair, or restore, even if the 
work is scheduled or periodic.

(A) As it relates to maintenance, the term 'scheduled' means anticipated and 
designated to occur within a given time period or production level. 

(B) As it relates to maintenance, the term 'periodic' means ongoing or 
continual or at least occurring at intervals of time or production that are 
reasonably predictable."

It is not disputed and is clear from this record that inspections are scheduled 
and periodic.  The Comptroller's assigned auditor so conceded.  What is 
disputed is whether the actual maintenance that is prioritized and scheduled 
over a period of years based on the inspection results constitutes scheduled 
and periodic maintenance within the meaning of Rule 3.357.  Petitioners 
naturally contend that it qualifies.  On the other hand, the AHS contends that 
the actual maintenance, while inevitable, is prioritized and scheduled as 
needed.  Witness Reed testified that if inspections had gone well work would 
not have been done. 

Maintenance of an operational and functioning improvement to realty will always 
be inevitable.  The cases on the issue appear to make clear certain fundamental 
propositions.  As most pertinent here, to qualify the work must be set up in 
advance by the parties and cannot depend on the preexisting condition of the 
real property improvement at the time of the scheduling.  Comptroller's 
Decision 29,276 (1996).  The work must be designated to be performed at a fixed 
time prior to the time it is determined to be needed and performed.  
Comptroller's Decision 27,832 (1992).  And, the work must be performed at 
periodic intervals, not occasionally over the course of many years as needed.  
Comptroller's Decision 27,832 (1992).  Scheduled and periodic, in the context 
of pipeline operations, appears from the cases to mean contracting with the 
vendor to perform maintenance, whether it be re-coating, pipe replacement, 
sleeve installation, adding anode ground beds or otherwise, on a pre-determined 
fixed, periodic and scheduled basis, regardless of whether the pipeline or 
segment thereof has a particular, recognized need for the work.  It means work 
predetermined, in advance, not dependent on the need or condition revealed by 
surveys or inspections.

The Comptroller has recently re-emphasized that work performed as a direct 
result of regular inspections is not made ipso facto scheduled and periodic by 
the inspections.  Comptroller's Decision 40,681 (2002).  See also Comptroller's 
Decisions 30,366 (1995), 28,074 (1993) and 28,468 (1992).  Also, maintenance is 
not made scheduled and periodic by required compliance with regulations.  
Comptroller's Decision 33,649 (1997).  Here, while the work was periodic in the 
sense that it was responsive to the periodic inspections, it was not scheduled 
and periodic as between the vendors and Petitioners regardless of the condition 
of the pipeline revealed by the inspections.  The documentation concerning the 
work that is the subject of this contention contains no schedule of periodic 
work, scheduling the same for a fixed time or period.  On the contrary, the 
contracts universally called for work "as requested." [FOOTNOTE: For example, 
while Exhibit 10 reflects multiple surveys/inspections of the ************** to 
************** 20( line and multiple budgeted phases of maintenance and repairs 
ultimately performed by COMPANY F and COMPANY E, the exhibit also reflects that 
the work was directly responsive to the condition of the line.  No evidence was 
presented that this major repair and maintenance project during the involved 
period was scheduled to occur periodically over a time interval regardless of 
the pipeline's then-existing condition.]  Thus, while the work may be a regular 
occurrence, inevitably expected and continual because of inevitable and 
continual need, it has not been shown to be scheduled and periodic maintenance 
within the meaning of the rule.  Of utmost importance, if the inspection failed 
to identify a need, no work authorization was issued and no work was performed.

In GATX Terminals Corporation v. Rylander, 78 S. W. 3d 630 (Tex. App. - Austin 
2002) under consideration by the Third Court of Appeals was the sufficiency of 
the Trial Court's judgment that repainting of tank farms did not qualify as 
maintenance.  Noting the Comptroller's exclusive jurisdiction to interpret 
Section 151.0101(13), the Court observed (78 S. W. 3d at 635) with respect to 
the scheduled and periodic elements of the maintenance test:

"The Comptroller's previous decisions in this area have clarified both of these 
terms. [Footnote omitted]  These decisions have held that scheduled work is 
arranged in advance rather than on an as-needed basis.  See Tex. Comptroller of 
Pub. Accounts, Taxpayer Hearing on Disputed Audit, Docket No. 28,468 (Nov. 2, 
1992) (Comptroller's final decision amending audit).  As-needed work does not 
qualify as scheduled because it is not performed until someone directs that it 
be done.  Id.  Docket No. 30,911.  The Comptroller's administrative decisions 
have held that periodic service is that which is performed in repeated cycles 
or at regular intervals; work that is prompted by a subjective judgment is not 
periodic.  Id.  Docket 28,468.  In other words, the condition that maintenance 
be periodic requires the performance of some Task at regular intervals, not 
when someone exercises a judgment call.  Id.  Docket No. 30,911."

The evidence before the Court in GATX was, like here, that history demonstrated 
inevitably required work on the real property improvement, which were budgeted. 
 In upholding the Trial Court's judgment that maintenance had not been proven, 
the Court expressly noted the requirement of Rule 3.357(c)(2) [that the 
taxpayer "substantiate by way of maintenance schedules or work orders or other 
evidence that the services meet the definition"] and observed further that the 
painting was not on an arbitrary maintenance schedule, it was as needed, 
determined based on the subjective judgment of the taxpayer's decision-makers.  
The documentation that was proffered by Petitioners does not evidence any 
arbitrary work schedule.  It reflects performance of the work pursuant to work 
authorization forms to be issued by Petitioner, as the customer, to the vendor 
when the work is deemed needed (presumably when it had been prioritized).  
While Petitioners' deem the standard for prioritization "objective", no 
evidence exists in this record that explains, much less details, the 
prioritization process.  Rather, it establishes only that surveys/inspections 
are conducted and work is prioritized if needed.  As such, it fails to meet the 
scheduled and periodic test, requiring that Petitioners' maintenance contention 
be denied.

Petitioners alternatively urge with respect to the transactions at issue under 
this contention that they constitute nontaxable new construction.  "New pipe in 
old trenches" is the essential nature of the work.  Comptroller's Decision 
29,731 (1996) held installation of new pipe in new trenches to be new 
construction.  It further held installation of new pipe in old trenches to be 
real property repair.  Comptroller's Decision 29,731 (1996) is dispositive of 
Petitioners' alternative contention concerning these transactions.

Penalty And Interest

Petitioner's fourth contention (penalty and interest waivers) should be granted 
in part and denied in part.

Under Section 151.703, penalty is automatically imposed where, as here, sales 
and use tax is not paid when due.  Section 111.103 provides the Comptroller 
discretionary authority to waive penalty or interest upon determination that a 
taxpayer exercised reasonable diligence to comply.  Rule 3.5 sets forth the 
criteria to be considered in determining whether a taxpayer exercised 
reasonable diligence.  It is Petitioner's burden to so establish by a 
preponderance of the evidence.  Rule 1.40(2)(B).

Rule 3.5(c) sets forth the criteria to be considered in determining a request 
for penalty waiver.  Size and sophistication of the taxpayer (Rule 3.5(c)(4)) 
and the nature of the tax issues involved (Rule 3.5(c)(2)), are the most 
pertinent here.

The Comptroller's assigned auditor was clear, indeed emphatic, that Petitioners 
are both responsible and responsive taxpayers.    And, the Audit Division 
admits that the issues generally are complex.  The auditor terms the issues 
"very difficult."  When asked by the ALJ why, in view of the difficulty of the 
issues and her view of Petitioners' overall tax compliance responsiveness, she 
did not recommend penalty waiver, the Comptroller's auditor's response was "the 
error rate."

The error rates shown by the foregoing findings (Finding of Fact Nos. 62 and 
63) are calculated by comparing the combined total of tax assessed to the 
combined total of reported and assessed tax.  They are significant (through 
substantially attributable to disputed issues).  Petitioners are highly 
sophisticated taxpayers, represented before this agency by able and experienced 
counsel.  Moreover, PETITIONER A is a direct payment permit holder.  As 
PETITIONER A and its counsel are undoubtedly well aware, the granting of a 
direct payment permit is a privilege bestowed on taxpayers expressly 
conditioned on the agreement of the taxpayer to accrue and pay "all taxes 
imposed by the Tax Code, 151.101, on the direct payment return for items not 
specifically exempted .  .  . ." [Emphasis supplied]  Rule 3.288(b)(3).  Direct 
payment permit holders are held to a stricter compliance standard in view of 
the prerequisite that they be responsible, their agreement to pay all taxes 
unless specifically exempted and the privilege they have been granted as a 
result.  See Comptroller's Decisions 37,203 (1998), 33,700 (1995), 32,184 
(1994), 31,378 (1994) and 20,133 (1987).  It is plain from the foregoing that 
to ensure avoidance of penalty on a matter that is uncertain to the taxpayer, 
the diligent course of action for a direct payment permit to follow is to pay 
any tax and seek refund thereof.  Their financial ability to do so is a virtual 
prerequisite to direct payment permit issuance in the first place.  
Alternatively, the availability of procedures to obtain written advice on 
uncertain subjects, and detrimental reliance thereon, is something of which 
these sophisticated taxpayers are or should be well aware. 

Ultimately, the penalty decision here requires a weighing of Petitioners' 
compliance performance in light of their sophistication and PETITIONER A's 
direct payment permit holder status, on the one hand, and, on the other, the 
complexity of the issues that the Comptroller's own auditor concedes to be 
"very difficult."  The ALJ concludes that in the circumstances shown by this 
record penalty should not be waived, in whole or in part, due to PETITIONER A's 
direct payment permit obligations, Petitioners' overall tax sophistication and 
the availability of procedures by which Petitioners' contentions could have 
been preserved and penalty avoided in the first place.

Rule 3.5(d) governs interest waivers and limits the criteria to be considered 
to the following:  (1) undue delay caused by Comptroller personnel; (2) 
reliance on advice provided by the Comptroller's office and (3) natural 
disasters.  Petitioners presented no evidence of reliance on advice by the 
Comptroller or existence of natural disasters.  Thus, the sole issue relating 
to interest is the time required to complete the audits and for the cases to 
wind their way through the hearings process.  The timeline for the cases does 
not reflect any undue delay during the audit process. The first phase appears 
to the ALJ to have been completed in reasonable time given the volume of work 
involved.  The second phase, commencing on January 26, 1999, and requiring 
until June 30, 2000, at first blush appears to be inordinately long; however, 
the Amended Audit Plan for each audit reflects with respect to the additional 
documentation review during this period:

1/26/99 - Petitioners mailed "a box full of information" to the Comptroller's 
assigned auditor; auditor commenced review.  

1/27-29/99 - Auditor review continued; questions e-mailed to Petitioners.

2/19/99 - Review completed; list of questions transmitted to Petitioners; Audit 
Headquarters consulted concerning sampling question.

5/10/99 - Auditor commenced audit editing and amendment.

5/13/99 - Additional Audit amendments items presented by Petitioners.

5/17/99 - Auditor "having a hard time understanding some of the items" and has 
"a bunch of questions."

5/21/99 - Petitioners mailed information on questionable remaining items, 
Auditor reviewed and responded.

6/15/99 - "I believe ************** and I have resolved all of my questions.  . 
 .  .  I e-mailed him final schedules.  .  .  .  He called me back and said my 
numbers are very close to his.  I did this before we start working on 
************** information so he and I could keep track of everything."

6/17/99 - Auditor imported refund set-up.

8/4/99 - Additional information from Petitioners.

10/12/99 - Petitioners "sent another batch of credit & amendment items."

10/13/99 - Auditor continued review of new items.

10/15/99 - Auditor finished latest items, updated credits and e-mailed list of 
questions and all schedules.

11/9/99 - Petitioners provided additional information and Auditor responded.

2/2/00 - Petitioners provided "some more information" and Auditor responded.

4/7/00 - Petitioners sent more information and Auditor reviewed and sent e-mail 
to Petitioners asking "when we would be done with these two amendments."

6/6/00 - Petitioners sent more information; Auditor reviewed and updated 
schedules; Petitioner indicated readiness to finalize."

From the foregoing, it is apparent that the process was ongoing between January 
26, 1999, and June 30, 2000, with Petitioners providing additional information 
as late as June 6, 2000.  Nothing in the Audit Plan indicates undue delay on 
the part of the Comptroller's assigned auditor during the additional document 
review process or before. [FOOTNOTE: There are only three significant time gaps 
reflected by the Comptroller's Audit Plan for the initial audit phase, the 
first between September 15, 1997, and December 1997, the second between 
December 1997, and May 18, 1998, and the last between July 22, 1998, and the 
commencement of the second audit phase on January 26, 1999.  With respect to 
the first two, the Audit Plan reflects for July 2, 1998:

"We will have one final meeting on 7/22 to finalize the audit.  I have reviewed 
all invoices and all scheduled items have credible questions.  Peter just has 
not had the time to try and supply answers but this audit has drug on way to 
[sic] long.  He has had most of the questions since 9/97.  Will turn in audit 
after 7/22 meeting."

During the last referred-to time gap, the final audit write-up occurred on 
August 26, 1998, the initial Audit Reports and Texas Notifications of Audit 
Results were issued on October 6, 1998, Redetermination Requests were filed on 
November 5, 1998, and the 60-day document provision period occurred.]  
Petitioners presented no evidence that identified undue delay on the part of 
the Audit Division during either phase.

There was delay once the matters reached the hearing process.  In view of the 
complexity of the issues (something Petitioners themselves assert in connection 
with penalty waiver), the normal time for issuance of a Position Letter could 
not be expected to be and was not achieved.  The Comptroller has held that 
eight months for issuance is not unreasonable.  Comptroller's Decisions 38,362 
(2000), 31,743 (1995), 32,699 (1995), 30,312 (1994), 30,018 (1993) and 28,790 
(1993).  The ALJ is persuaded that eight months would not have been an 
unreasonable time prior to issuance here.  The actual issuance did not occur 
until January 4 and 7, 2002.  Petitioners are not responsible for any delay 
that may have occurred as the cases were transferred within the AHS.  They 
agreed to any delay resulting from military leave of AHS counsel, but hardly 
could be expected to say otherwise and should not be assessed interest on 
account thereof.  Interest waiver should be granted from May 1, 2001, through 
January 3, 2002, and from May 28, 2002, through December 19, 2002, and 
otherwise denied.  

RECOMMENDATION:

Based upon the findings of fact, conclusions of law, and discussion contained 
herein, the ALJ recommends that the audits be amended in accordance with the 
Post-Hearing Brief of the AHS served January 31, 2003; that Petitioners' 
contentions be denied except that interest shall be waived as provided above; 
and that the audits be otherwise upheld in their entirety. 

Signed August 25, 2003.


TIMOTHY MASHBURN 
Administrative Law Judge 


HEARING NOS. 39,895 & 39,896


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 August 25, 2003.


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





ACCESSION NUMBER: 200308232H   
SUPERSEDED: N 
DOCUMENT TYPE: H 
DATE: 08/25/2003