200510385H



HEARING NO.  43,887

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: JANUARY 1, 1994 THROUGH DECEMBER 31, 1997

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

ELEANOR H. KIM
Chief Administrative Law Judge

JOHN D. BOSTICK
Representing Tax Division

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

COMPTROLLER'S DECISION UPON REHEARING


On May 24, 2005, Petitioner timely filed a Motion for Rehearing concerning the 
May 13, 2005 Comptroller's Decision issued in the above referenced matter.  On 
June 10, 2005, the Tax Division filed its Response to the Petitioner’s Motion 
agreeing with same.

On June 17, 2005, rehearing was granted for the limited purpose of amending the 
audit.

Except as modified by this Decision, the Comptroller's Decision in this case, 
issued May 13, 2005, is incorporated herein and reaffirmed.

Signed October 28, 2005.


ELEANOR H. KIM
Chief Administrative Law Judge


HEARING NO:  43,887

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 this October 28, 2005.


CAROLE KEETON STRAYHORN
Texas Comptroller




HEARING NO.  43,887

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: JANUARY 1, 1994 THROUGH DECEMBER 31, 1997

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

ELEANOR H. KIM
Chief Administrative Law Judge

JOHN D. BOSTICK
Representing Tax Division

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

COMPTROLLER'S DECISION

PRELIMINARY DISCUSSION:

At Petitioner’s request, this Decision is based on the written submissions of 
the parties.

Official notice has been taken of all records of the Comptroller's office that 
pertain to Petitioner and the issues involved in the case. Unless otherwise 
indicated, all Section references are to Title 2 of Texas Tax Code and all 
references to Rules are to Title 34, Texas Administrative Code. 

On December 21, 2004, Petitioner filed Exceptions to the Proposed Comptroller’s 
Decision issued on December 7, 2004.  The Tax Division filed its Response to 
these Exceptions on January 5, 2005.  Petitioner’s Exceptions and the Tax 
Division’s Response have been considered, and this Comptroller’s Decision 
represents the ruling thereon.  

PETITIONER'S CONTENTIONS:

1.  Petitioner contends that several exams should be deleted because the 
auditor improperly issued the notifications of sampling and estimation 
procedures.

2.  Petitioner contends that Exam No. 6 should be deleted because the auditor 
used an improper error rate in computing disallowed credits.

3.  Petitioner contends numerous local tax transactions should be deleted from 
the audit.

4.  Petitioner contends that the auditor erred by not including negative 
transactions in the sample base and the population.

5.  Petitioner contends that the auditor erroneously scheduled transactions 
with exempt customers.

6.  Petitioner contends that certain transactions were miscoded as Texas sales.

7.  Petitioner contends that some of its customers were audited and paid taxes 
that are assessed against Petitioner.  

8.  Petitioner contends that transactions with direct payment permit holders 
should be deleted from the audit.

9.  Petitioner contends penalty should be waived.

10.  Petitioner contends interest should be waived.

FINDINGS OF FACT:

1.  Petitioner, **************, was audited for sales and use tax compliance 
for the period beginning January 1, 1994 through December 31, 1997.  As a 
result of the audit, on February 4, 2003, the Comptroller issued to Petitioner 
a Texas Notification of Audit Results reflecting tax, penalty, and interest due 
as of the date of the Notification.  Petitioner sought redetermination, 
resulting in this proceeding.

2.  On January 26, 1998, Petitioner sent a letter notifying the assigned 
auditor that the audit could not commence until the week of April 5, 1999.  In 
early part of 1999, the auditor requested Petitioner to provide data tapes for 
a CAMS audit, but Petitioner initially objected to a CAMS audit and only later 
acquiesced to provide data tapes for a CAMS audit.  In February of 2000, 
Petitioner notified the auditor that not all data could be downloaded.  On 
March 22, 2000, the auditor issued a letter to Petitioner stating the 
estimation procedure to be used for periods where computer data was missing.  

3.  Subsequent to a meeting held on July 10, 2000, the auditor sent a letter 
dated July 19, 2000 to Petitioner, which began as follows:  “Pursuant to our 
last week’s meeting, please find a copy of the Sample Items Report outlining a 
random sample selection of 6 months for sales items, where data was not 
available on computer tapes for a CAMS application.  I would like to confirm 
our agreement reached, by restating the procedures to be implemented for the 
sales portion of the audit….”  The auditor restated the sampling procedures to 
be used for each division.  On July 31, 2000, Petitioner acknowledged the 
receipt of the July 19, 2000 letter and responded that the procedures stated 
therein generally reflected the agreement reached, except for certain noted 
discrepancies, which she enumerated.  

4.  On January 4, 2001, the auditor sent the sample selection to Petitioner.  
The population was divided into two groups (sales invoices showing sales tax 
was billed and sales invoices showing no sales tax).  In his audit plan, the 
auditor separately noted events and activities for each division.  On January 
22, 2001, the auditor noted that Petitioner indicated that it could not 
retrieve the invoices in the selected in the sample for Facsimile Division 
because its system only kept invoices for two years.  Petitioner asked for 
modification to the sample selection and the auditor made changes and in the 
months following that, the auditor noted that he did field work.  On January 25 
and 26 of 2001, the auditor generated a sample for the Copier Division and 
evaluated it.  When the sample evaluated perfectly, the auditor provided a copy 
of the sample pages (clusters) to Petitioner with a request that customer 
profiles and certificates be provided.  On January 26, 2001, the auditor noted 
that he examined information related to the six-month sample selection 
previously provided by Petitioner (per July 10, 2000 agreement) for the 
Equipment Maintenance adjustments.  On April 25, 2001 through November 1, 2001, 
the auditor noted his activities related to the six-month sample selection 
previously provided by Petitioner (per July 10, 2000 agreement) for Manual 
Sales Adjustments.  On September 26 and 27 of 2001, the auditor noted that he 
examined information related to the six-month sample selection previously 
provided by Petitioner (per July 10, 2000 agreement) for Mechanized 
Adjustments, LPC Billings and Vocam Billings.  On December 6, 2001, the auditor 
noted that he sent the sample selection for Mailing System Division to 
Petitioner with a request that resale/exemption certificates be pulled for the 
invoices in the sample.  All of these letters were included in the auditor’s 
audit plan.

5.  The auditor issued five Notifications of Sampling Procedures, which were 
all dated March 15, 2002.  The auditor issued six Notifications of Estimation 
Procedures, which were all dated January 22, 2003.  The notifications summarize 
the procedures outlined in the auditor’s letters dated March 22, 2000 and July 
19, 2000.  See Finding of Fact Nos. 3 and 4.  These notifications were included 
as exhibits to the audit.

6.  The auditor held an exit conference with Petitioner on March 15, 2002.

7.  Exam No. 6 is identified as “Manual Adjustments” and contains the 
disallowance of credits in connection to the Mailing System Division’s sales.  
During the audit, Petitioner was unable to provide credit memos, invoices, and 
resale or exemption certificates to support the credits taken.  Credits issued 
for each of the Texas locations were manually added from the Gross Receipts 
reports for Manual Sales Adjustments and were totaled based on quarters.  
Quarterly totals were forwarded as Population base.  Monthly amounts for the 
sample periods of 9402, 9502, 9507, 9611, 9705, and 9708 were forwarded as 
positive amounts to Exam No. 6.  The auditor used the error rate calculated for 
Exam Nos. 201 and 202, both of which are exams for disallowed tax-free sales 
for Mailing System Division, to compute the disallowance of credits that were 
scheduled in Exam No. 6. 

8.  Petitioner charged local taxes at incorrect rates, and the auditor made 
adjustments in numerous exams.  In Exam Nos. 101 through 104 and Exam Nos. 
10001 through 10004, the auditor made adjustments for local taxes based on a 
sample and projection.  In Exam Nos. 105 and 10005, the auditor scheduled local 
tax assessments based on detailed examination of records.  For the following 
exams, the auditor estimated local tax adjustments due to the unavailability of 
records: 111 through 114, 11001 through 11005, 201, 202, and 20001 through 
20004.

9.  Petitioner submitted a summary schedule identifying 92 items relating to 
local tax adjustments made in Exam Nos. 10001 through 10005.  Petitioner later 
conceded three items, leaving 89 items as the contested items.  Petitioner’s 
records did not retain the identities of the local jurisdictions for which 
local taxes charged, and the auditor scheduled the additional net local tax 
due.  

10.  The auditor included negative transactions in the sample, but disallowed 
some of negative transactions that were not supported by resale or exemption 
certificates.  The disallowed negative transactions were scheduled as positive 
transactions.  

11.  The Comptroller’s office sent a letter dated March 13, 2003 notifying 
Petitioner to submit all certificates within 60 days.

12.  During the audit, Petitioner provided a data file that the auditor used 
for audit purposes.  After testing the accuracy of that data, the auditor used 
the file and scheduled tax-free sales made in Texas that were not supported by 
exemption or resale certificates.  Adjustments included transactions with 
COMPANY A, COMPANY B, COMPANY C, and COMPANY D. 

13.  Petitioner identified the following five customers that were audited by 
the Comptroller: (i) COMPANY E, (ii) COMPANY F, (iii) COMPANY G (iv) COMPANY H, 
and (v) COMPANY J.  

14.  COMPANY E was audited for sales and use tax for the period of July 1, 1996 
through August 31, 2000, and COMPANY F was audited for sales and use tax 
compliance for the period of September 1, 1993 through June 30, 1997.  
Comptroller records indicate both taxpayers’ purchases were estimated, and 
neither audit contains specific scheduling of Petitioner’s sales. 

15.  COMPANY G was audited for sales and use tax compliance for the period of 
January 1, 1994 through June 30, 1997.  Petitioner’s sales were not scheduled 
in COMPANY G’s audit schedules for taxable purchases.  COMPANY H was audited 
for sales and use tax compliance for September 1, 1993 through May 31, 1997, 
but no audit adjustments were made for taxable purchases.

16.  Petitioner rented postage meter to COMPANY K on November 16, 1997 and the 
transaction was scheduled as Record No. 2983-1625 in Exam No. 201.  COMPANY K 
is owned by COMPANY J, and the Comptroller audited COMPANY J for sales and use 
tax compliance for August 1, 1997 through May 31, 1999.  Transactions with 
Petitioner are scheduled in COMPANY J’s audit, but all of the scheduled 
transactions were credits for over accruals of taxes and fall within 1998 
through 1999.  

17.  During this proceeding, the auditor verified Petitioner’s claim that some 
of its customers hold a direct payment permit and agreed to delete numerous 
transactions.  The auditor refused to delete transactions if Petitioner was 
unable to provide evidence that the customers were direct payment permit 
holders.  In this proceeding, Petitioner submitted evidence that COMPANY L and 
COMPANY M accrued and remitted tax on invoice numbers 486351 and 21932, 
respectively. 

18.  Petitioner sold taxable items to COMPANY N and COMPANY O, both are direct 
payment permit holders.  Certain invoices reflected taxable amounts and 
credits.  The auditor allowed credits up to the taxable amounts, but disallowed 
credits that were in excess of the taxable amounts.  

19.  Petitioner was previously audited for the period of February 1, 1990 
through December 31, 1993.  The audit adjustments were for tax-free sales 
unsupported by valid certificates and additional taxable sales and failure to 
report tax on taxable fixed assets.  The overall error rate was 3.88%.

20.  In the current audit, adjustments were made for tax-free sales unsupported 
valid resale/exemption certificates and additional taxable sales.  Additional 
adjustments were made for failure to report taxable purchases of fixed assets.  
The original overall error rate was 5.44%, but the rate will be lower after the 
Tax Division’s proposed adjustments are made.  Neither party presented what the 
revised overall error rate would be. 

21.  Petitioner had no delinquent returns in the audit period.

22.  Petitioner had no delinquency in other taxes.

23.  Petitioner did not maintain all records, necessitating estimation.  See 
Finding of Fact No. 5

24.  Petitioner is a large sophisticated taxpayer. 

CONCLUSIONS OF LAW AND DISCUSSION:

I.  Notification of Sampling

Petitioner’s contention should be denied.

The auditor used both sampling and estimation procedures.  The Comptroller has 
the authority to use sampling methods to audit a taxpayer under certain 
enumerated circumstances.  See Section 111.0042(b); Rule 3.282(b) and (c).  The 
Comptroller also has the authority to estimate tax based on best information 
available if the taxpayer has no or incomplete records.  See Section 
111.0042(d); See also, Rule 3.282(k).  Petitioner does not challenge the 
applicability of those authorities to its audit, but instead contends all exams 
based on sampling or estimation should be deleted because the auditor did not 
timely issue the official written notifications of sampling and estimation, as 
required by Rule 3.282 and the Audit Division’s Sampling Manual.  
Alternatively, Petitioner contends two exams, Exam No. 6 and Exam No. 21005, 
should be deleted because they were not included in any of the official written 
notifications.  The Tax Division contends that the Comptroller gave the 
required written notifications.  After reviewing the arguments and evidence in 
the record, it is concluded that Petitioner’s contentions should be denied.

Section 111.0042(c) requires the Comptroller to notify the taxpayer in writing 
of the sampling procedures to be used.  This requirement is restated in Rule 
3.282(d).  The auditor sent numerous written letters to Petitioner stating the 
sampling and estimation procedures that the auditor intended to use.  See 
Finding of Fact No. 2, 3 and 4.  Petitioner dismisses the relevancy of the 
auditor’s letters and argues that the standardized notification form is the 
only document that can give notice under the statute.  However, Petitioner’s 
argument runs counter to existing case law.  

Petitioner’s issue is similar to the issue that was addressed by the court of 
appeals in Formosa Plastic Corporation of Texas v. Sharp, 979 S.W.2d 410 (Tex. 
App. – Austin, 1998, pet. denied).  In that case, the Comptroller’s auditor 
sent a letter that notified the taxpayer of the audit determination and of the 
right to appeal, but the standardized notification of audit results that the 
agency uses was never issued.  One of the arguments raised in that court case 
was whether the auditor’s letter legally constituted a deficiency determination 
under Section 111.008.  Formosa Plastic argued that no deficiency determination 
had been issued by the agency because the standardized notice form was not 
used.  The court of appeals rejected Formosa Plastic’s argument and held that 
Section 111.008 “does not require the Comptroller to use a particular form or 
specific language to properly notify the taxpayer of the deficiency 
determination.”  Likewise, Section 111.0042 does not require a particular form 
or specific language, and the auditor’s written letters adequately satisfied 
the statutory notice requirement of Section 111.0042(c).  Petitioner received 
adequate notice and had knowledge of the auditor’s procedures for sampling and 
estimation before the auditor began his fieldwork.  

Moreover, with regard to estimation, Section 111.0042 does not contain an 
express requirement mandating the Comptroller to issue a written notification 
of estimation procedures, even though the agency does so as a matter of 
standard practice.  See Comptroller’s Decision No. 37,262 (1999) (The 
requirements of Section 111.0042(c) do not apply to estimated audits.)  And if 
no statutory requirement exists for such written notification, then there is no 
legal basis to support Petitioner’s request for deletion of the estimated 
exams.  

Section 111.0042 provides that the written notice of sampling procedures must 
be given “before using a sampling technique to establish a tax liability.”  In 
Comptroller’s Decision No. 21,201 (1988), the Comptroller concluded that the 
statutory requirement of Section 111.0042 was met because the official written 
notification was issued long before the notice of deficiency determination, 
“which arguably establishes the tax liability.”  Thus, Comptroller’s Decision 
No. 21,201 seems to suggest that the written notification requirement is 
satisfied as long as the official notification is issued before the deficiency 
determination.  As mentioned by the Tax Division, Petitioner received the 
official notifications on March 15, 2002, almost a year before the Notification 
of Audit Results was issued on February 4, 2003.  Also, even if Petitioner had 
been able to establish that the agency failed to provide the written 
notification as required by Section 111.0042(c), the remedy for improper 
notification would be for the agency to conduct a new audit, an approach that 
is consistent with the provision of Section 111.0042(e) (If the sampling method 
is not in accordance with generally recognized sampling techniques, the audit 
will be dismissed as to that portion, and a new audit may be performed.)  

II.  Disallowed Credits

Petitioner contention should be denied.

Petitioner did not have credit memos, invoices, and resale or exemption 
certificates related to credits taken for sales related to Petitioner’s Mailing 
Systems Division.  In reviewing the audit schedules for Exam No. 6, the auditor 
selected six months, and itemized the credits for each of the selected months 
per Petitioner’s gross receipts report for Mailing System Division.  Because 
Exam Nos. 201 and 202 relate to disallowed deductions for Mailing System 
Division, the auditor applied the error rate from those exams to compute 
credits that were attributed to disallowed deductions and scheduled the 
disallowed credits in Exam No. 6.  Petitioner complains that the error rate for 
sales deductions is not representative of the sample base for credits and 
contends Exam No. 6 should be deleted because the sample was not in accordance 
with standard sampling procedures.  The Tax Division responds that the auditor 
did not use a sample, but instead used an estimated procedure.  According to 
the Tax Division, Petitioner failed to maintain records that would allow the 
auditor to verify credits taken, and the estimation procedures benefited 
Petitioner because the credits could have been disallowed in their entirety.

The Tax Division is correct that taxpayers are required to maintain records to 
support credits taken, and when no documents exist to substantiate claimed 
credits, the disallowance of those credits have been upheld.  See Comptroller’s 
Decision No. 39,906 (2001) (Credits not substantiated by records were 
disallowed); Comptroller's Decision No. 34,221 (1998) (Taxpayer must provide 
evidence to support allowance of credits).  It appears that the auditor 
exercised his auditor judgment and gave Petitioner the benefit of the doubt by 
estimating the credits based on the best information available.  The auditor 
assumed that Petitioner gave credits to customers only upon the receipt of a 
resale or exemption certificate.  To the extent the auditor disallowed tax-free 
sales that were not supported by certificates, the auditor also disallowed 
credits in correlation to those disallowed tax-free sales.  Given that the 
auditor could have disallowed all credits claimed, the auditor’s partial 
disallowance was to Petitioner’s benefit.  No adjustments can be made unless 
Petitioner can prove that the disallowance of the credits was in error by 
proving up the allowance for the credits.

III.  Local tax

Petitioner’s contention should be sustained to the extent agreed to by the Tax 
Division, but otherwise denied.

Petitioner erroneously charged local tax rates and the auditor created numerous 
audit exams to make adjustments for local taxes.  In its Statement of Grounds, 
Petitioner’s sole argument was that any state tax assessments should be removed 
from the various exams relating to local taxes, and the Tax Division agreed in 
the Position Letter that no state tax should be assessed.  However, subsequent 
pleadings indicate Petitioner contests 89 items in Exam Nos. 10001-10005.  
According to Petitioner, these items should be removed for one of the following 
reasons: (1) the items were reversed in the general ledger; (2) the tax rate 
charged was not equal to the actual jurisdiction rate; (3) the tax charged on 
the taxable rate did not equal the total jurisdiction tax rate.  After 
reviewing the documentation provided, the Tax Division has agreed to adjust 10 
items, but contends no adjustments should be made to the remaining 79 contested 
items.  

Local sales and use tax is imposed on each taxable sale made in this state, and 
the amount subject to local sales and use tax is the same tax base as the 
state’s sales and use tax base.  Thus, when taxpayers make tax errors, it is 
the general practice for auditors to schedule taxable amounts to which both 
state and applicable local tax rates are applied.  Transactions are scheduled 
in a way that the appropriate local jurisdiction would get the local tax 
assessment.  In this case, Petitioner erroneously collected local taxes, but 
Petitioner’s records did not identify the local jurisdictions to which 
Petitioner reported erroneously collected local taxes.  Hence, the auditor was 
unable to schedule full taxable amounts and then to give credits for amounts 
erroneously collected.  Instead, the auditor determined additional net local 
taxes due.  

To address Petitioner’s noted discrepancies, the Tax Division agrees that the 
contested items should be modified by grossing up the net tax due to compute 
the taxable amounts so that the assessed local tax is allocated to the 
appropriate local jurisdiction.  According to the Tax Division, even if the 
adjustments were modified, tax assessed would remain the same because the end 
result is that Petitioner erroneously collected local taxes and the audit 
assesses net local tax due.  

Petitioner’s contention that the contested items should be deleted from the 
audit would result in zero assessment for transactions in which Petitioner 
under or erroneously collected local taxes.  The Tax Division’s proposed 
modification to gross up the taxable amounts using the tax amount appears to 
address the discrepancies noted.  Petitioner’s contention should be sustained 
to the extent of the Tax Division’s agreement to eliminate any state tax 
assessed on the exams relating to local tax adjustments and to adjust the 
taxable amounts, but otherwise denied.

IV.  Negative transactions

Petitioner contends that the auditor erred by not including negative 
transactions in the sample base and the population.  According to Petitioner, 
the auditor’s action was improper because it makes the sample unrepresentative. 
The Tax Division urges the rejection of Petitioner’s contention because the 
auditor’s approach was consistent with existing guidelines and procedures and 
cites to Comptroller’s Decision No. 32,318 (1997) for support.

The record indicates that the auditor did in fact include negative transactions 
in the sample base, but excluded certain negative transactions that were 
determined to be credits given in error.  When no resale or exemption 
certificates were on file, the auditor scheduled those negative transactions as 
positive transactions.  That is, a determination was made that Petitioner had 
no documents to substantiate taxes were collected in error, which means any 
credits subsequently given to the customers were in error.  The auditor’s 
action was proper, and Petitioner failed to establish that the auditor 
erroneously excluded negative transactions in error.  Petitioner’s contention 
should be denied.

V.  Sales to Exempt Customers 

Petitioner contends that the auditor erroneously scheduled transactions with 
eight purchasers that were exempt from sales and use tax.  The Tax Division 
agrees to delete all transactions relating to COMPANY P and to delete Record 
Nos. 2983-458 and 2983-459 relating to COMPANY Q from Exam No. 2005.  The Tax 
Division contends that all other contested transactions should remain in the 
audit.  

A retailer who sells taxable items in this state is required to collect sales 
tax or accept a properly completed exemption or resale certificates from a 
purchaser. See Sections 151.051, 151.052, and 151.054(a).  A sale is exempt if 
the seller receives an exemption certificate in good faith from the purchaser.  
See Section 151.054(c); Rule 3.287(d)(2).  Except for COMPANY R, Petitioner did 
not submit exemption certificates to support the deductions; hence, the Tax 
Division is correct that Petitioner’s sales are presumed to be subject to sales 
and use tax.  See 151.054(a).  

For COMPANY R, Petitioner submitted an exemption certificate, but it was 
submitted after the expiration of the 60-day period.  During an audit, a seller 
is required to make available to the auditor all resale or exemption 
certificates to support the seller’s claim of tax-exempt sales.  An exemption 
certificate that is obtained on or after the date the auditor begins the audit 
is subject to verification.  Rule 3.282(l)(1).  At the beginning of a 
redetermination hearing process, the agency will issue a written notice that 
all certificates must be submitted within 60 days from the date of the notice.  
And if such written notice is issued, legal authorities are clear that all 
certificates not produced within that 60-day deadline cannot be considered to 
prove the existence of tax-exempt sales.  Section 151.054(e); Rule 3.282(l)(2); 
Rule 3.285(b)(4); and Rule 3.287(d)(4); See also, Comptroller’s Decision Nos. 
19,929 (1987), 18,220 (1987), 22,030 (1988), 25,388 (1990) and 38,811 (2001).  
Petitioner’s contention should be denied, except to the extent agreed to by the 
Tax Division.

VI.  Incorrectly Coded Sales

During the audit, Petitioner provided a data file to the auditor for audit 
purposes.  Using that data file, the auditor scheduled Texas sales for which no 
sales or use taxes were collected and for which no certificates were provided 
to support tax-free sales.  Petitioner contends that transactions with four 
customers (See Finding of Fact No. 12) should be deleted from the audit because 
those customers do not have any locations in Texas.  According to Petitioner, 
the transactions were simply miscoded as Texas sales.

Absent evidence to the contrary, tangible personal property that is shipped or 
brought into Texas by a purchaser is presumed to have been purchased for 
storage, use, or consumption in Texas.  See Section 151.105(a).  Petitioner 
admits that the items were delivered into Texas; thus, Petitioner, as the 
retailer, is required to collect use tax under Section 151.101 unless those 
sales were exempt from tax.  Petitioner submitted a letter from an accounts 
payable clerk explaining that some items were shipped to a forwarding agent 
located in Texas and asserts that this letter should be accepted as sufficient 
evidence to prove an exemption under Section 151.330.  The Tax Division asserts 
that more documentation is required, such as credible shipping documents, 
freight receipts, or bills of lading.   

Since Petitioner admits that the items were delivered into Texas, and because 
Petitioner provided no evidence to support its assertion that the four 
customers had no locations in Texas, the presumption that use tax is due 
applies.  The letter is insufficient to rebut that presumption.  Section 
151.330(b)(1) provides that the temporary storage of tangible personal property 
acquired outside of Texas is exempt from use tax if the tangible personal 
property is temporarily stored in Texas and is used solely outside Texas.  The 
evidence submitted is insufficient to prove that Section 151.330(b)(1) applies. 
At a minimum, Petitioner should submit copies of invoices and shipping 
documents to show that the items were temporarily stored into Texas but were 
subsequently shipped for use at a non-Texas location.  Petitioner’s contention 
must be denied.

VII.  Audited Customers 

When a seller fails to discharge its duty to collect and remit taxes, the 
Comptroller is authorized by statute, rule, and the Texas courts to proceed 
against the seller or purchaser or against both, until the tax, penalty, and 
interest have been paid. See Section 151.515; Rules 3.282(g) and (h); Bullock 
v. Foley Brothers Dry Goods Corporation, 802 S.W.2d 835 (Tex. App.-Austin, 
1990, writ denied).  Under these authorities, the auditor scheduled 
transactions in which no taxes were collected.  Petitioner contends that 
transactions with five customers  (See Finding of Fact No. 13) should be 
deleted from the audit because the customers paid the taxes in their audits.  
According to Petitioner, the items purchased were taxable items indicating that 
the comptroller would have assessed sales taxes against these customers in 
their audits.  The Tax Division responds that Petitioner has not provided 
sufficient evidence to prove that the contested transactions were included in 
the customers’ audits.  

Petitioner did not provide any evidence to indicate the specific transactions 
were scheduled (either detailed or included in a sample) in the customers’ 
audits.  However, a review of the Comptroller records reflects that the 
transactions at issue were not scheduled in any of the customers’ audits.  See 
Finding of Fact Nos. 14, 15, and 16.  Petitioner’s contention should be denied.

VIII.  Customers that hold Direct Payment Permits

In its pleadings, Petitioner separately identified three separate contentions 
that relate to sales to direct pay permit holders, but all of them share a 
common argument – that is, taxable sales made to direct payment permit holders 
should not be scheduled in Petitioner’s audit because direct payment permit 
holders are required by law to accrue and remit the taxes that are due.  

In its Statement of Grounds, Petitioner requested transactions with 21 
purchasers be deleted because they held direct payment permits.  Based on 
evidence presented in this proceeding, the Tax Division has agreed to delete 
transactions related to 12 of the 21 purchasers.  The proposed decision issued 
in this case held that contested transactions for the remaining nine purchasers 
should not be deleted, but on Exceptions, Petitioner provided evidence that 
additional deletions are warranted.  The Tax Division in its Response to the 
Exceptions agreed to delete transactions with COMPANY S, but a review of 
evidence shows that two invoices (Invoice Numbers 486351 and 21932) related to 
COMPANY L and COMPANY M should also be deleted.  The Tax Division’s contention 
with regard to Petitioner’s transactions with the remaining six purchasers 
should be sustained for the reasons noted below.  

COMPANY T – The name on the exemption certificate was not the purchaser’s name, 
and the auditor could not verify that Petitioner’s purchaser and the direct 
payment permit holder are the same entity.  Further, the contested item 
occurred on September 8, 1995, and the entity on the certificate became a 
direct payment permit holder, effective March 1, 1996, indicating the purchase 
was not made by the direct payment permit holder.

COMPANY U, COMPANY V, and COMPANY W – The submitted exemption certificates were 
issued by another entity, and not the purchaser.  

COMPANY X - No evidence was provided that the purchaser holds a direct payment 
permit. 

COMPANY Y – The exemption certificate was issued by a purchaser that is not a 
direct payment permit holder.  

In summary, Petitioner’s first contention related to direct payment permit 
holders should be sustained to the extent agreed to by the Tax Division and for 
two additional invoices noted above.

Another contention raised by Petitioner is that the auditor erroneously 
disallowed credits given to two direct payment permit holders (See Finding of 
Fact No. 18).  Petitioner’s invoices issued to each of the two customers 
identified a taxable amount and a credit.  Assuming a return of sale, the 
auditor allowed the credit to the extent of the taxable amount reflected in the 
particular invoice, but disallowed any credits that were in excess of the 
taxable amount.  The disallowed credits for both invoices were scheduled in the 
audit as assessments under Record Nos. 349 and 914 in Exam No. 10005.  
Petitioner contends that the credits were for taxes paid by those customers on 
earlier invoices; thus, the auditor erroneously denied the excess credits.  
According to Petitioner, credits were simply given on separate invoices and 
that the disallowed credits should be removed from the audit because the two 
customers were direct pay permit holders.  

If a purchaser with a direct payment permit does not issue a direct payment 
exemption certificate and the retailer collects tax on the sale, then the 
collected tax must be remitted to the state.  Direct payment permit holders are 
not allowed to subsequently issue a direct payment exemption certificate to the 
retailer to obtain a refund or credit on the transactions for which they paid 
sales taxes at the time of their purchases.  See Comptroller’s Decision No. 
22,959 (1990).  As stated therein, “[t]he policy … is to allow direct pay 
permit holders to elect the manner in which they will proceed on any given 
transaction …[but] once the election is made, the permit holder must live with 
its choice.”  See also, STAR Accession No. 9907606L (July 29, 1999).  That is, 
Petitioner’s customers elected to pay the sales taxes at the time of the 
transactions; hence, Petitioner properly collected sales tax, and there is no 
basis for the subsequent credits given.  In light of this policy, if 
Petitioner’s contention were accepted as true, it would directly contradict the 
auditor’s assumption that the credits were based on the return of sales, which 
could lead to additional disallowance of credits, and not the allowance of 
additional credits.  However, such a determination will not be made, given that 
the Tax Division does not advocate that argument.  At a minimum, Petitioner’s 
contention has no merit, and the auditor’s disallowance should be upheld. 

The third argument relates to additional local tax assessment.  Petitioner 
collected taxes from nine purchasers, but did not collect the appropriate local 
tax rates.  The auditor scheduled additional local taxes due on the 
transactions, and Petitioner contends that the items should be deleted because 
the purchasers were direct payment permit holders.  Similar to the argument 
made above, Petitioner argues that it cannot be held liable for additional tax 
on those transactions.  Based on the authorities cited above, Petitioner’s 
argument must be rejected.  Once the direct payment permit holders elected to 
pay the sales tax to their retailers, they were responsible for paying the full 
sales tax rate due on their transactions, and Petitioner, as the retailer, was 
responsible for collecting the state sales and the applicable local sales tax.  
The auditor’s adjustments should be upheld.  

IX.  Penalty waiver

Petitioner contends that penalty should be waived.  

Section 151.703(a) automatically imposes penalty on delinquent sales taxes.  
The same automatic penalty imposition is also provided in Section 111.061, 
which applies to all taxes in Title 2 of the Texas Tax Code, sales and use tax 
included.  The Comptroller has the discretionary authority to waive penalty if 
a taxpayer has exercised reasonable diligence to comply with tax laws.  See 
Section 111.103(a).  Petitioner has the burden to establish its reasonable 
diligence by a preponderance of the evidence.  See Rule 1.40(2)(B).  

The Comptroller reviews the factors set forth in Rule 3.5(c) in determining 
whether to exercise the discretionary authority to waive penalty.  Petitioner 
is able to show favorable factors – i.e., no tax collected but not remitted, no 
delinquent returns, no other delinquent taxes, and low overall error rate.  
However, it is well settled that the factors in Rule 3.5(c) are not equally 
weighted.  See Comptroller’s Decision No. 29,960 (1994), and Comptroller’s 
Decision No. 34,329 (1996).  One factor that carries significant weight in the 
waiver determination is the audit history of the taxpayer.  The Comptroller has 
consistently denied penalty waiver when presented with evidence that a taxpayer 
had recurring errors as those found in the prior audit(s) and that the error 
rate shows no substantial improvement in compliance.  See e.g., Comptroller’s 
Decision Nos. 40,034 (2001), 38,671 (2000) 37,556 (1999) and 31,019 (1994). 

Petitioner was previously audited and made the same errors in the current audit 
as it did in the prior audit.  This negative factor carries more weight 
especially in light of the fact that the issues are simple and Petitioner is a 
sophisticated taxpayer.  Petitioner has failed to demonstrate that substantial 
improvement in compliance was made to outweigh the audit history factor.  
Further, the denial of penalty waiver has been upheld based solely on 
inadequate records.  See Comptroller’s Decision No. 40,344 (2003) (Taxpayer’s 
failure to maintain records weighs heavily against penalty waiver).  In this 
case, Petitioner failed to maintain records requiring the utilization of 
estimation procedures.  In short, the noted negative factors support the denial 
of waiver.

X.  Interest waiver

Petitioner contends interest should be waived.

Section 151.703 (c) automatically imposes interest on delinquent sales taxes.  
The same automatic interest imposition is also provided in Sections 111.060, 
which applies to all taxes in Title 2 of the Texas Tax Code, sales and use tax 
included.  Interest waiver is granted only if a taxpayer can establish that 
there was undue delay, detrimental reliance or natural disaster.  See Rule 
3.5(d).  

Petitioner asserts that the audit should have taken a year and half to 
complete; thus, it contends that 50% of the interest should be waived.  Its 
contention implies that the auditor caused undue delay.  The Tax Division has 
agreed to waive interest for three months (September 24, 2000 through December 
29, 2000) because of the agency’s delay in uploading Petitioner’s data 
cartridges but takes the position that no additional interest waiver is 
warranted.  According to the Tax Division, Petitioner delayed the commencement 
of the audit for more than a year, and once the audit commenced, the auditor 
proceeded diligently to complete the audit.  The record supports the Tax 
Division’s representation.  Petitioner has not made a showing of further undue 
delay by the auditor or any other Comptroller personnel; therefore, no 
additional waiver of interest can be granted.

Citing Comptroller’s Decision No. 18,044 (1986) for the proposition that 
“[i]nterest is considered a time charge to the taxpayer for the use of the 
money which should have been remitted to the State…”, Petitioner also contends 
that this rationale supports the inappropriateness of the interest assessment 
against Petitioner.  According to Petitioner, it did not have the privilege of 
using the money because a large percentage of the audit liability relates to 
transactions for which no taxes were collected from customers.  Petitioner’s 
argument is without merit, and it is obvious that Petitioner has a fundamental 
misunderstanding as to basis for the imposition of interest.

Petitioner, as the seller, is required to collect sales tax on all sales of 
taxable items made in this state and can be held liable for failing to collect 
sales tax from its customers.  Calvert v. Canteen Co., 371 S.W.2d 556 (Tex. 
1963).  Petitioner’s failure to collect sales tax caused the state to receive 
less tax than it should have at the time the taxes were due; thus, interest is 
automatically imposed on the delinquent taxes assessed.  

Other than the waiver granted by the Tax Division, Petitioner’s contention 
should be denied.

RECOMMENDATION:

Based upon the foregoing findings of fact, conclusions and discussion, the 
audit should be amended to incorporate the Tax Division’s agreements noted in 
the Position Letter, the Tax Division’s Response to Reply to Position Letter; 
the Tax Division’s Response to Additional Documents or Evidence, and the Tax 
Division’s Response to Exceptions.  In addition, the audit should be amended to 
delete Invoice Numbers 486351 and 21932) related to COMPANY L and COMPANY M.  
Interest should be waived for the period of September 24, 2000 through December 
29, 2000, as agreed to by the Tax Division; and the remaining audit liability 
should be upheld.

Signed May 13, 2005.


ELEANOR H. KIM
Chief Administrative Law Judge


HEARING NO. 43,887

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 on May 13, 2005.


CAROLE KEETON STRAYHORN
Texas Comptroller




ACCESSION NUMBER: 200510385H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 10/28/2005
TAX TYPE: GENERAL RULES