Texas Comptroller of Public Accounts STAR System
200512526H
HEARING NO. 43,240
RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: JUNE 1, 1996 THROUGH FEBRUARY 29, 2000
SALES AND USE TAX/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
ELEANOR H. KIM
Chief Administrative Law Judge
ROBERT L. FREDERICK
Representing Tax Division
**************
Representing Petitioner
COMPTROLLER'S DECISION
PRELIMINARY DISCUSSION:
An oral hearing was held on May 16, 2005. ************** and **************
represented Petitioner and presented the testimony of **************, the
Director of Performance and Management with Petitioner. Assistant General
Counsel Robert Frederick represented the Tax Division and presented the
testimony of Tracy Hargrove, a supervising auditor with the **************
audit office.
At the oral hearing, Petitioner presented evidence on Contention No. 3 and
requested that the decision for the remaining contentions be based on the
written submission of the parties. Petitioner and the Tax Division filed
post-hearing submissions, and the record of this case closed on August 12,
2005. In all of the pleadings filed in this proceeding, both parties presented
the contested transactions in the same order, but this decision does not follow
the parties’ order of presentation. The contested transactions have been
grouped under a particular contention that more accurately reflects the issue
and/or subject matter.
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 sections of Title 34, Texas Administrative Code.
RULING ON THE TAX DIVISION’S OBJECTION:
The Tax Division objected to the entire testimony of INDIVIDUAL A based on the
best evidence rule, but a ruling on the objection was left pending based on
INDIVIDUAL A’s stated willingness to search Petitioner’s data center for
documentation that would corroborate the places of use of the COMPANY L America
software program and Petitioner’s agreement to provide any additional
documentation found by its post-hearing submission deadline. After considering
both parties’ post-hearing submissions, the Tax Division’s objection is
sustained, but only to the extent INDIVIDUAL A’s testimony was offered to prove
any content of the license agreement or other documents.
AGREEMENTS:
The parties have reached numerous agreements, and those agreements are noted
and included in the Recommendation Section of this decision.
FINDINGS OF FACT – GENERAL:
Petitioner filed proposed findings of fact, and the findings of fact set forth
in this decision represent the ruling on each proposed finding of fact.
1. Petitioner, **************, was audited for sales and use tax compliance for
the above-captioned period, and as a result of the audit, on April 16, 2002,
the Comptroller issued a Texas Notification of Audit Results reflecting an
amount due that included tax, penalty, and interest as of the date of the
notice. On May 16, 2002, Petitioner filed a request for redetermination,
resulting in the docketing of this proceeding.
2. Petitioner is the parent or holding company that handles various
administrative functions for numerous subsidiaries. During the audit period,
Petitioner’s place of business was in CITY A, Texas.
3. The auditor made adjustments for taxable purchases in Exam Nos. 1 through
24. All exams, except for Exam Nos. 4, 9, 19 and 24, were based on a sample
and projection.
4. In October of 1999, Petitioner filed a refund claim for sales and use tax
paid during the same reporting periods in the audit. Source: Audit Plan.
5. On October 28, 2002, and November 26, 2002, Petitioner submitted schedules
that contained comments and statements regarding certain transactions. The
auditor created a spreadsheet dated January 21, 2003, and stated his position
or response to each contested transaction. In 2004, the auditor created four
schedules, which were attached as exhibits to the Tax Division’s Position
Letter as follows: (a) Exhibit 1: Items auditor agreed to withdraw from
audit; (b) Exhibit 2: Audit Assessed Exam – Refund items; (c) Exhibit 3: Add
52 items submitted on June 23, 2003, and (d) Exhibit 4: Audit items in
disagreement.
6. Both assessed items and disallowed refund items are contested in this
hearing.
7. Petitioner maintains check requisition forms, which are internal documents
that authorize payments for products or services.
PETITIONER’S CONTENTION NO. 1:
Petitioner contends that the auditor erroneously scheduled a transaction for
which it has already paid tax.
FINDINGS OF FACT ON CONTENTION NO. 1:
8. Petitioner contests the audit assessment of Record No. 2733-872 in Exam No.
19 in connection to the purchase made by Petitioner from COMPANY A in March of
1997. The transaction was for remodeling services performed on a leased
building. Pursuant to Petitioner’s check requisition, Petitioner made payment
of $**************, which consists of $************** plus tax of
$**************. The certificate of payment signed by Petitioner and the
service provider was for a lump-sum amount of $**************, and the
certificate neither separately stated a charge for tax nor contained a
statement that the payment includes tax. There is a handwritten note of “Tax
$**************” on the certificate.
9. Petitioner submitted other certificates of payment with COMPANY A dated
January 1997 and February 1997. Petitioner also submitted form documents
titled “Tax Information (To be submitted with Certificates for Payment)” and
each contains the following statement: “************** has requested that an
attachment accompany all Certificates of Payment indicating the amount of state
sales tax, which is included in each certificate. Tax shall be included on the
Certificate as normally submitted.” The form was drafted by Petitioner to aid
the service provider. Petitioner did not submit a similar form document for
the contested transaction.
CONCLUSIONS OF LAW AND DISCUSSION ON CONTENTION NO. 1:
Petitioner’s contention should be denied.
The transaction at issue involved remodeling services performed on a leased
building. Real property repair and remodeling is among those services that are
made taxable by statute. See Sections 151.0101(a)(13) and 151.0047(a); also,
Rule 3.357. Petitioner concedes the transaction was subject to tax, but
contends that the transaction should be deleted because tax was paid to the
seller. According to Petitioner, the transaction was tax-inclusive. The Tax
Division contends no deletion can be made because the handwritten note of “tax”
on the certificate of payment is insufficient to prove that tax was actually
paid. Likewise, the Tax Division contends the check requisition that carries
forward the handwritten tax amount is also inadequate because it is an internal
document that is not supported by the vendor’s documentation.
The contested transaction occurred in March 1997. Instead of submitting
additional documents relevant to March 1997, Petitioner submitted documents for
January and February 1997 transactions with the same service provider in
connection to the same remodeling job. Petitioner relies on form documents,
stating that Petitioner requires payments to include tax. Because Petitioner
had such forms for two of the three transactions with the service provider,
Petitioner argues that the contested transaction (i.e., March 1997) also
included tax. The Tax Division responds that the forms available for January
and February transactions do not prove that tax was included in the assessed
transaction.
The January and February 1997 transactions have the tax information sheet,
indicating what the business practice between Petitioner and the service
provider was, but they do not establish that the remodeling contract between
Petitioner and the service provider was a tax-inclusive contract. Rule
3.286(d)(3) provides in part that, “[t]he amount of the sales tax must be
separately stated on the bill, contract or invoice to the customer or there
must be a written statement to the customer that the stated price includes
sales and use taxes.” The certificates of payment between Petitioner and the
service provider do not separately state the charge for tax and do not contain
an express written statement that the amount includes tax. The form documents,
drafted by Petitioner, merely provide “tax shall be included on the
Certificate,” but the purchaser’s demand that tax should be included does not
satisfy the requirements of Rule 3.286(d)(3). That is, the purchaser’s forms
do not establish that the contract was a tax-inclusive contract. Petitioner,
therefore, has not rebutted the presumption that no tax was paid on the
contested transaction.
PETITIONER’S CONTENTION NO. 2:
Petitioner contends that audit assessment should be reduced or that partial
refund is due based on multi-state benefits.
FINDINGS OF FACT ON CONTENTION NO. 2:
10. The auditor scheduled several purchases made from COMPANY B in Exam No. 9,
but Petitioner contests only one of those purchases -- Record No. 2733-941, in
the amount of $************** (Voucher No. **************). COMPANY B is
located in New Jersey. Petitioner’s check requisition dated March 14, 1999,
contains the following description: “advanced voice services user group.”
Petitioner submitted the related invoice, but the top portion of the invoice is
illegible. The bottom portion of the invoice contains the description that it
is for “advanced voice service” and references contract 8FTE01. The contract
was not provided. Petitioner seeks to reduce the taxable amount of the
transaction by 82.64925%. The percentage purports to be based on central
offices located outside of Texas in 1998 and is derived from a spreadsheet
created April 26, 2001, indicating the number of central offices in each state
from 1993 through 2001 and the date in which the central offices were sold.
11. Petitioner’s purchase from COMPANY C is scheduled as Record No. 2733-4593
in Exam No. 24, and the taxable amount assessed is $**************. COMPANY C
is located in Illinois. The auditor noted that the purchase was unknown and
that a copy of the voucher was not provided. Petitioner’s check requisition
indicates Petitioner paid the vendor $************** for maintenance services
“on initial 300 chassis for 7/1/97 – 6/30/98.” The pertinent invoice contains
the same description. Petitioner submitted an e-mail exchange between an
employee and its representative whereby the employee explains his involvement,
but concludes that he does not know where the 300 hub locations were in 1997.
The employee recalls that “some were in Texas.” Petitioner seeks to reduce the
taxable amount of the transaction by 82.67081%. The percentage purports to be
based on central offices located outside of Texas in 1997 and is derived from
the same spreadsheet noted in Finding of Fact No. 10.
12. Petitioner purchased information services from COMPANY D, a vendor located
in New Jersey, and paid sales tax pursuant to Voucher No. **************.
Petitioner’s check requisition dated October 1998 describes the purchase as
being a “continuation of services under license agreement **************.” The
pertinent invoice shows a charge of $************** plus a separately-stated
charge for tax in the amount of $**************. The invoice reflects the
purchaser’s address to be in CITY A, Texas. Petitioner seeks a refund of
88.485632% of the tax paid on the transaction. The percentage purports to be
based on non-Texas sales in 1998 and is derived from spreadsheets for years
1996 through 1998. The spreadsheets were created October 18, 2004, are titled
“Sales Apportionment,” and list various related companies and their respective
sales by states. No supporting documentation or explanation was submitted.
13. Petitioner made payments to ************** (“COMPANY E”), a vendor located
in California, and seeks a refund of taxes paid pursuant to Voucher Nos.
************** and **************. One invoice dated March 21, 1998, contains
various charges for the following items: “SalesTrak S, SalesTrak C, BIS Explr,
Client Ency, [and] Sales tax.” Petitioner’s check requisition dated May 1998
indicates COMPANY E issued two additional invoices, but those invoices were not
submitted. According to Petitioner, it purchased software, maintenance and
consulting services. Petitioner seeks a refund of 67.52% of the taxes paid on
three invoices. The percentage purports to be based on the number of personnel
in Petitioner’s Branch Sales Department located outside of Texas and is derived
from a spreadsheet that lists the employees of Branch Sales Department by
states. The spreadsheet itself is not dated, nor does it establish the origins
of the information from which it is derived.
14. Petitioner contests six (6) transactions with COMPANY F, a vendor located
in Massachusetts. Three of the six transactions relate to maintenance
services, and those invoices describe the work performed as “ESP/EXT Support
Services.” The remaining three contested transactions relate to server
enabling keys, which are connected to software, and these invoices reference
“Server Platforms **************.” ************** is a software program of
COMPANY F. Petitioner provided a copy of an Addendum No. 2 (dated November 26,
1997) to the Collateral License Agreement, but the Collateral License Agreement
was not provided. All invoices show a “shipped to” address located in CITY A,
Texas. Petitioner seeks a refund of 70.2% of the taxes paid on the
transactions. This percentage purports to be the number of servers located
outside of Texas as of June 1998. Of the 1,446 servers itemized, Petitioner
purports that 431 (or 29.8%) were located in Texas. Petitioner submitted an
affidavit from INDIVIDUAL B stating that the ratio of Texas servers with the
COMPANY F system to servers at locations nationwide was the same during 1996
through 1998. INDIVIDUAL B, however, also states that “From 1994 through 1998
the total number of servers with the COMPANY F system increased, although at a
slower pace in the latter periods than in the earlier periods.” No information
was provided as to how the information was obtained or how the invoices tie to
any of the servers.
15. Petitioner made payments to COMPANY G, a vendor located in Washington, and
the related invoices indicate Petitioner purchased warranty services on 11,554
hardware units. An internal purchase order inquiry printout reflects that the
warranty was for “CZT” Laptop maintenance agreement per attachment 2 [and] Per
terms and conditions of agreement #C941408P0001 between COMPANY HH and COMPANY
G. Effective 1/1/97 – 12/31/97.” The printout states “Equipment location and
address to send invoices: … CITY A, Texas.” Petitioner seeks a refund of
82.32% of the tax paid on the transaction(s). This percentage purports to be
based on Petitioner’s headcount of employees of Telco Operations located
outside of Texas in 1998. Petitioner submitted a one-page summary sheet titled
“Multistate Benefit Allocation – Employee Headcount” for 1996 through 1999, but
that summary sheet is not supported by any documentation.
16. Petitioner made payments to COMPANY H, and two related invoices dated
January 12, 1999, and April 21, 1999, describe the product sold as “Quarterly
Software Fees.” The invoices were sent to Petitioner’s address in CITY A,
Texas and also show COMPANY H’s address to be in CITY A, Texas. Petitioner
submitted a spreadsheet titled “2000 COMPANY H Hardware/Software/COMPANY HH
H/W. and S/W Snapshot Totals.” The spreadsheet was prepared on March 27, 2001,
and purports to allocate the costs of COMPANY H hardware and software to
regional areas. It contains a handwritten notation that 34.8921% is for
hardware and 33.2677% is for software. The supporting documentation attached
to the spreadsheet is another spreadsheet prepared on February 8, 2000, and
contains extensive handwritten figures. The summary cover sheet contains a
handwritten notation that Texas percentages were 34.8921% for hardware and
33.2677% for software. No explanation or source records were provided to
establish how the percentages were calculated or how they relate to Texas.
Petitioner seeks a refund of 66.7323% of the tax paid on the transactions.
17. Petitioner seeks a refund of 82.62% of the tax that it allegedly paid to
COMPANY J, pursuant to Voucher Nos. 9NM611EP000252 and 9NM612EP000940. The
percentage purports to be based on central offices located outside of Texas in
the year 1996 and is derived from the same spreadsheet noted in Finding of Fact
No. 10. No invoices or other supporting documentation were submitted.
18. Petitioner made payments to COMPANY K, a vendor located in Georgia, and
Petitioner seeks a credit of taxes paid on Voucher Nos. 9NM610XAKQ0014 and
9NM610XAKQ0015. Petitioner’s check requisition dated October 5, 1999, is for
$************** and it describes the expenditure for “software development.”
The related invoice describes the item sold as “sw development CKIN/CKOUT,”
“Tech support,” “ACD/MIS Release,” and references agreement #C951203P0016. No
contract was provided. Petitioner seeks a credit of 82.62% of the taxes paid,
and the percentage purports to be based on central offices located outside of
Texas in 1996. The percentage is derived from the same spreadsheet noted in
Finding of Fact No. 10.
CONCLUSIONS OF LAW AND DISCUSSION ON CONTENTION NO. 2:
Petitioner’s contention should be denied.
Petitioner does not dispute that the purchased services were taxable, but
contends the taxable amounts assessed in the audit should be reduced or a
partial refund of the tax paid should be granted based on multi-state benefits.
The Tax Division asserts that Petitioner has not provided sufficient
documentation to show whether it purchased tangible personal property or
taxable services from some of the vendors. And, if taxable services were
purchased, the Tax Division contends that insufficient documentation has been
presented to show where the use of the services occurred. The record of
evidence supports the Tax Division.
The sale between COMPANY H and Petitioner, who were both located in Texas at
the time of the transaction, was subject to Texas sales tax. All other vendors
were located outside of Texas and their invoices indicate they sold or shipped
items to Petitioner in Texas. It is presumed that the sale of a taxable item,
including taxable services, in Texas is for use in this state. See Sections
151.104(a) and 151.105(b). That presumption may be overcome, and Petitioner
attempts to overcome the taxability of the transactions by claiming the
exemption provided by Section 151.330(f). This statute provides that if a
taxable service is performed for use both within and outside this state, then
the sale of the service is exempt to the extent the service is for use outside
this state. Section 151.330(f) applies only to services that became taxable on
or after September 1, 1987.
For those transactions in which the documentation is insufficient to establish
whether Petitioner purchased tangible personal property or taxable services,
Petitioner has not demonstrated the applicability of Section 151.330(f), and
its contention for adjustments must be denied. For transactions for which
Petitioner purchased taxable services, the issue presented is whether the
documentation submitted is sufficient to establish the applicability of Section
151.330(f).
In its administration of Section 151.330(f), the Comptroller has articulated
the service benefit location test (also known as the multi-state benefit test),
which is promulgated in the agency’s rules relating to certain services. See
e.g., Rules 3.330 (Relating to Data Processing Services), 3.342 (Relating to
Information Services), and 3.343 (Relating to Credit Reporting Services).
Under the test, a multi-state customer must establish that the taxable service
in question supports a separate, identifiable segment of the customer’s
business, and that the separate, identifiable segment is located both within
and outside of Texas. For example, the agency has applied the service benefit
location test if there has been a showing or representation that a division,
store, or office existed out of state, and that the service purchased in Texas
was for the benefit of all divisions, stores, or offices. See e.g.,
Comptroller’s Decision No. 26,321 (1990). The threshold requirement must be
established to meet the rule presumption that Section 151.330(f) applies, but
if that threshold cannot be met, then the statutory presumption that the use
was in Texas will control.
The agency’s multi-state benefit rules require that the assignment of the
service to an identifiable segment of a business, the determination of the
location(s) of use of the service, and the allocation of the charges must be
supported by Petitioner’s books and records. See e.g., Rule 3.330(f)(4). In
this case, Petitioner has made no or little effort to establish, through its
books and records, that each service in question supports a separate,
identifiable segment of its business that is located within and outside of
Texas. Petitioner simply relies on the fact that it has business operations
that cover numerous states. However, the mere fact that Petitioner operates a
business in multiple states does not mean that all services purchased by
Petitioner in Texas were partly used outside of Texas.
Petitioner’s documents fail to demonstrate that the services were for the
benefit of an identifiable segment of its business or that the percentages
derived are reasonable allocations of the charges based on in-state and
out-of-state uses. For example, Petitioner presented an invoice from COMPANY E
indicating that Petitioner purchased software and maintenance services and that
it paid tax on the invoice. The invoice is the only record evidence of that
transaction, yet Petitioner contends that the software and maintenance services
were purchased for its Branch Sales Department and that the charges should be
allocated based on the number of Texas and out-of-state employees of the Branch
Sales Department. But, no evidence was presented to demonstrate the
eligibility under the first part of the multi-state benefit test – i.e., that
the purchase from COMPANY E was for Petitioner’s Branch Sales Department.
Rather than establishing by evidence the assignment of an identifiable segment
for each of the contested transactions, Petitioner makes various assertions as
to what items were purchased, the locations of their use, and/or the benefit
derived in other states. The establishment of such facts requires the
submission of competent evidence. Pleadings, in general, are not evidence.
For the most part, Petitioner’s documentary evidence sets forth various
methodologies of allocating charges. The methodologies are based on central
office locations, sales, or employee headcounts, but a determination concerning
the reasonableness of the proffered methodologies is premature when Petitioner
has not met the threshold requirement that the services in question were
purchased for use of an identifiable segment of its business.
Moreover, the lack of evidence on the threshold requirement makes it impossible
to determine the reasonableness of the methodologies Petitioner has employed.
For example, the documents submitted for the COMPANY G transactions indicate
the equipment location to be in Texas, but Petitioner simply asserts a refund
is due on the maintenance service based on the number of employees located
outside of Texas. That is, Petitioner’s methodology assumes that each employee
obtained a laptop, but no evidence was presented to show that to be a fact.
Its transaction with COMPANY C is another example that illustrates the weakness
of Petitioner’s case. Petitioner presented an e-mail from its employee who
states he cannot recall where the 300 hubs purchased from COMPANY C were
dispersed, but knows “some were in Texas.” No evidence was presented to
establish the accuracy of the number of central offices in Texas and
out-of-state or to demonstrate the correlation between central offices and
hubs. But the e-mail is relied on to support Petitioner’s claim that 82.67081%
of the tax paid on maintenance services should be refunded because the services
were performed at hubs. The e-mail is neither persuasive nor competent to
support Petitioner’s claim. Similarly, Petitioner presented spreadsheets or an
affidavit to allocate the taxable charges, but did not provide supporting
source records or other documentation that withstand verification. Petitioner
simply asserts that all of the methodologies that it has proffered are
reasonable, but the Tax Division contends that the percentages based on central
offices, employees located in Texas or sales in Texas are purely speculative
methods of allocation and cannot be allowed. The Tax Division is correct.
Assumptions or assertions that are not supported by competent evidence cannot
be verified. The various spreadsheets created by Petitioner or Petitioner’s
representatives that are not supported by source documentation are tantamount
to bare assertions.
Petitioner has not established by its books and records any of the following
elements: the assignment of the service to an identifiable segment of a
business, the determination of the location(s) of use of the service, and the
allocation of the charges. Thus, Petitioner cannot avail itself of the rule
presumption that the exemption of Section 151.330(f) applies, and therefore, it
has failed to rebut the statutory presumption that the services were for use in
Texas. Moreover, the multi-state benefit test in the agency rules provides
that if there is no establishment that the service in question supports a
separate, identifiable segment of a business, then the service is presumed to
be for use to support the administration or operation of the customer’s
business and is presumed to be for use at the customer’s principal place of
business, which means where the trade or business is directed or managed.
Petitioner’s principal place of business during the audit was Texas; hence, the
application of the multi-state benefit test is consistent with the statute –
i.e., the use was in Texas. No adjustments are warranted.
PETITIONER’S CONTENTION NO. 3:
Petitioner contends that partial refunds are due on taxes paid on software that
was used outside of Texas.
FINDINGS OF FACT ON CONTENTION NO. 3:
19. At the oral hearing, Petitioner presented evidence of its transactions with
************** (“COMPANY L”). Two invoices dated June 28, 1996, contain the
description that COMPANY L’s charge is “in accordance with the above-order” and
“due and payable net 30 per the Agreement issued June 20, 1996.” Tax was
separately stated. Petitioner’s check requisitions for the two invoices
describe the expenditure as “COMPANY L Software Acquisition” and contain a
total of three charges.
20. COMPANY L is located in Pennsylvania and has been permitted for Texas sales
and use tax since January 1, 1990.
21. On June 20, 1996, COMPANY L and COMPANY M executed the following agreements
with the listed attachments: (a) R/3 End-User Value License Agreement
effective June 20, 1996, Exhibit A; Exhibit B; Exhibit C; Appendix 1 issued
June 20, 1996; Schedule 1 to Appendix 1 issued June 20, 1996, and (b)
Consulting Agreement effective June 20, 1996, Exhibit A; Exhibit C, Letter
Agreement Dated June 20, 1996. Under Section 2.1(a), the license agreement
grants a non-exclusive, non-transferable, perpetual license to use the
software, documentation, third-party database, and other COMPANY L proprietary
information at designated site(s) for productive and non-productive uses.
22. Section 1 of the license agreement defines “Designated Unit” as each
individual computer located at a designated site in which the software and
third-party database are installed. The term “Designated Site” means the
licensee’s facilities identified in the agreement’s appendices. Appendix 1
issued June 20, 1996, provides that the software is to be installed at a
specific licensee designated site and that the parties agree to execute
Schedule 1 to the Appendix prior to the delivery of such software to such
Designated Site. Schedule 1 to Appendix 1, however, does not specify a
designated site, and there is a blank space in the portion of the schedule
where that information should be. Schedule 1 does provide that COMPANY L will
deliver one set of CD-ROM to the designated site(s) upon execution. The
software was contained in two compact disks, which constitute one set, and that
set was sent to CITY B, Texas.
23. The software was installed on Petitioner’s server in Texas.
24. COMPANY L agreed to provide pre-installation support, installation,
support, training, and consulting services, and the parties agreed that
installation “will be deemed to be successful and completed when COMPANY L has
demonstrated to Licensee that the Software is loaded on a Designated Unit and
is ready for Use in accordance with COMPANY L’s standard installation
procedures.”
25. The license agreement permits the licensee to make modifications and
extensions to the software for use on the designated units at designated
site(s). Petitioner made modification or reconfiguration to the original base
product software in Texas. As an example, if the software was viewed as a
matrix with dots, to make that matrix useful to its business operations,
Petitioner had to flip dots (i.e., reconfigure) during the implementation
process route. The base product has what is called a “user exit” from which
Petitioner could pop out of the product and write a custom routine (i.e.,
modification or extension) and then re-enter the COMPANY L base product and
continue the implementation process flow. The custom routines interface with
various functions and make the software useful to Petitioner’s needs. After
the implementation process, the base product software remained the same, but it
had customized changes. That is, if the original software had been COMPANY L
1.0 version, the software, after modification and configuration, was still
COMPANY L 1.0 version, but with customized changes.
26. Petitioner made two sets of copies of the software and sent one set to CITY
C, Florida for use in Petitioner’s testing environment. The second set was
shipped to CITY D, Indiana, where the majority of Petitioner’s production data
centers are located. The original set remained on the Texas server during the
audit period, and is still located in Texas.
27. The software was a substantial purchase for Petitioner, and extensive
negotiations took place between Petitioner and COMPANY L. The license
agreement provides that the agreement and each attached appendix “constitute
the complete and exclusive statement of the agreement between COMPANY L and
Licensee, and all previous representations, discussions, and writing are merged
in, and superseded by, this Agreement. This Agreement may be modified only by
a writing signed by both parties … [and it] shall prevail over any additional
conflicting, or inconsistent terms and conditions….”
28. Appendix 1 to the agreement provides that if there are provisions in
Appendix 1 that contradict or are inconsistent with the provisions of the
license agreement, then the provisions in Appendix 1 shall prevail and govern.
Appendix 1 identifies the software license to include general function blocks
(e.g., financial accounting, cash management, investment management, project
system, etc.), number of users, database, and human resourcess. The agreement
specifies that the use is restricted to no more than four (4) productive copies
of the software, and if additional copies are needed, it can be agreed to at no
additional license fee as long as the number of users does not increase and the
parties execute a schedule. Appendix 1 provides that Petitioner shall have up
to three (3) designated sites in connection with the warranty and maintenance
support provided through the agreement. Schedule 1 to Appendix 1 contains the
same information as to the software licensed, but specifies that delivery by
COMPANY L of the software is to take place in June 1996.
29. The consulting agreement executed by Petitioner and COMPANY L provides that
COMPANY L will perform services as set forth in the Statement of Work(s), which
is Exhibit B to the agreement, but Exhibit B was not attached to the agreement.
CONCLUSIONS OF LAW AND DISCUSSION ON CONTENTION NO. 3:
Petitioner’s contention should be denied.
A computer program is considered to be tangible personal property, which is
defined as personal property that can be “seen, measured, felt, or touched or
that is perceptible to the senses in any other manner.” See Section 151.009.
The licensing of software programs is considered the equivalent of leases or
rentals of tangible personal property. Rule 3.294(a)(C)(2); Comptroller’s
Decision No. 36,237 (1998). Petitioner purchased a software license from
COMPANY L America and paid Texas use tax on the license. Now, Petitioner
contends that it erroneously paid Texas use tax on the entire price. According
to Petitioner, it had three licenses, and because two sets of the licensed
software were shipped and used outside of Texas, it is entitled to a refund of
two-thirds of the tax paid to COMPANY L.
The license agreement expressly states that the software will be installed at
“designated site(s)” as set forth in the appendix, but the space where that
information should be is blank. Schedule 1 to Appendix 1 provides that the
software will be delivered to the designated site, and the software in question
was in fact delivered to and installed in Texas, indicating Texas was the sole
designated site. The Tax Division accordingly argues that a presumption exists
that use tax is due on the entire charge and that Petitioner has failed to
rebut that presumption.
Petitioner’s contention that two-thirds of the tax paid to COMPANY L should be
refunded is based on its assertion that it negotiated and purchased three
licenses and that the total charge should be divided equally among them.
Petitioner relies solely on INDIVIDUAL A’s testimony as support for its
position. The Tax Division’s objection based on the best evidence rule was
sustained; thus, INDIVIDUAL A’s testimony concerning the content of the license
agreement is stricken from the record, and the license agreement speaks for
itself.
The license agreement executed between Petitioner and COMPANY L does not
establish that the total charge was specifically attributed to three licenses
or that each license, if more than one, has equal value. Both Appendix 1 and
Schedule 1 to Appendix 1 of the license agreement provide that Petitioner has
licensed software and that license includes various functions and packages.
The agreement uses “license” in the singular form and provides that the use is
restricted to making four productive copies of the software and to three sites
for warranty and maintenance purposes. Rather than purchasing three separate
licenses, as asserted by Petitioner, the license agreement suggests that the
parties contemplated one license and restricted the use to the number of copies
that could be made. That is, under the license agreement, the lump-sum charge
would not change whether Petitioner decided to use the original software, made
the election to make four copies, or requested additional copies in excess of
four, so long as there were no changes in the number of users. If the parties
had in fact negotiated the charge for each copy and each copy was of equal
value, as contended by Petitioner, then there were five licenses, not three.
Petitioner does not make that argument and instead focuses on the locations of
use. Regardless, the license agreement indicates that the entire charge paid
to COMPANY L was attributed to a single license.
The purchase of a license constitutes the purchase of tangible personal
property for sales and use tax purposes. Schedule 1 to Appendix 1 provides
that one set of CD-ROM will be delivered to the designated site, and that set,
in fact, was delivered to and installed in Texas, supporting the Tax Division’s
contention that Texas was the designated site. The license agreement provides
installation will be complete if “COMPANY L demonstrates to the Licensee that
the software is loaded and is ready for use in accordance with COMPANY L’s
standard installation procedures.” Petitioner installed the tangible personal
property on a server in Texas and the software was ready for use to allow
Petitioner to modify and/or configure it for its specific needs. The
modification and reconfiguration were performed in Texas. Under Section
151.011(a), the term “use” means “the exercise of a right or power incidental
to the ownership of tangible personal property over tangible personal
property….” Under Section 151.011(d), the term “storage” means “keeping or
retaining for any purpose in this state of tangible personal property sold by a
retailer.” Petitioner’s activities of installing, modifying and reconfiguring
the software fall squarely within the definitions of “use” or “storage.”
Petitioner’s purchase, therefore, was subject to use tax under Section
151.101(a). (Use tax is due on "the storage, use, or other consumption in this
state of a taxable item purchased from a retailer for storage, use, or other
consumption in this state.")
Petitioner’s facts are similar to the facts of Comptroller’s Decision No.
36,957 (1999). In that decision, a taxpayer purchased a license from an
out-of-state vendor and intended to use the software in Texas and
Massachusetts. The software was first brought into Texas, testing was
performed in Texas, and additional development work was performed in Texas
before the software was shipped to locations within Texas and to Massachusetts.
The Comptroller held that the charge for the software was subject to Texas use
tax because the activities in Texas constituted “use” and rejected the
taxpayer’s assertion that part of the use occurred in Massachusetts. The
holding of Comptroller’s Decision No. 36,957 is applicable here.
Petitioner contends that it processed the software in Texas and such activity
is excluded from “use” or “storage” under Section 151.011(f)(2). This statute
provides that “use” or “storage” does not mean “the exercise of a right or
power over or the keeping or retaining of tangible personal property for the
purpose of … processing, fabricating, or manufacturing the property into other
property … to be transported outside the state for use solely outside the
state.” However, the plain meaning of Section 151.011(f)(2) is that an item is
excluded from “use” or “storage" if it comes into Texas from out of state,
becomes a part of other property, and the manufactured property is transported
outside of Texas for use solely outside of Texas. In this case, the tangible
personal property (i.e., the software) that Petitioner paid for came into Texas
and never left Texas. What left Texas were copies of the software, and those
copies had no separate charges. Thus, the facts of Petitioner’s case do not
fit within the parameters of Section 151.011(f)(2). No refund should be
granted.
PETITIONER’S CONTENTION NO. 4:
Petitioner contends that it was erroneously assessed tax or paid tax on items
used outside of Texas.
FINDINGS OF FACT ON CONTENTION NO. 4:
30. Petitioner made payments to ************** (“COMPANY N”), located in CITY
E, Texas, and seeks a refund of tax paid on two vouchers 9NM812XAFC0512
(December 1998) and 9NM906XAEC0008 (May 1999). The related invoice dated
December 3, 1998, contains the description “ASAP Software maintenance, Base
Software for August 1998 thru December 1998.” It references APO #S1577369.
Another invoice, dated March 2, 1999, also refers to software maintenance and
indicates the charge is “for the period of 1/1/99 through 12/31/99.” Both
invoices show “ship to” address in CITY A, Texas. Tax was separately charged
on the invoice. An incomplete copy of the Master Software License agreement
was submitted, but Section 3.1 of the agreement provides that COMPANY N will
deliver the “License Work” (computer programming code) to a COMPANY HH facility
located in California. The cover letter accompanying the agreement indicates
that the agreement was executed on July 1, 1996.
31. Petitioner made payment to COMPANY O, headquartered in California. The
invoice dated December 9, 1996, itemized charges for “**************,” “500
Named User Parallel Server Option,” “10 Named User SOL Plus,” “developer,” and
“1 year silver annual support.” The invoice indicates a “shipped to” address
in CITY A, Texas. Petitioner’s check requisition form describes the
expenditure to be for “**************.” Tax at 8.25% was separately charged on
the invoice.
32. The auditor scheduled two transactions with ************** (“COMPANY P”) as
Record No. 2733-4465 (8/31/1996) and Record No. 2733-855 (12/31/96) in Exam No.
24. COMPANY P is located in California. The related invoice submitted by
Petitioner shows that the charge was for work performed on “Subscription
Services and System Service maintenance in accordance with the ATP dated June
14, 1996”). The invoice was mailed to an address in Florida. The audit
schedules show that the auditor determined Record No. 2733-855 to be “SS
maintenance.” ATP agreement was not provided, despite the Tax Division’s
request that it be produced.
33. Petitioner submitted an invoice from COMPANY Q dated September 10, 1997.
It reflects a “shipped to” address in CITY A, Texas, and contains the following
description: “Media Client/Server Seats: primary license, full site support.”
E-mail exchanges between Petitioner’s employee and Petitioner’s representative
indicate that the support was for the server application located in Indiana and
for the development software installed on PCs located in CITY A, Texas. There
is a separately-stated charge for Texas sales and use tax on the invoice.
34. COMPANY R is located in CITY F, Texas, and the invoice issued to Petitioner
has a “shipped to” address in CITY A, Texas. The invoice contains a charge for
software license and a separately-stated charge for “Tx sales tax” at 8.25%.
In the e-mail exchanges between Petitioner’s employee and Petitioner’s
representative during this hearing process, the employee states “my source
tells me the only place this software was loaded is CITY C, our COMPANY L
development environment.” No evidence was presented to show where the license
was initially used.
35. The auditor scheduled payment of $************** made to COMPANY S in Exam
No. 9 as Record No. 2733-749 and noted it to be “E911 Location Technology
Trial.” Petitioner’s check requisition and invoice describe “project E9-1-1
Location Technology Trial.” In e-mail exchanges between Petitioner’s employee
to Petitioner’s representative during the audit, the employee indicates “as I
recall we had a contract to complete a wireless 911 location detection study”
on software and hardware in Massachusetts. The auditor relied on Petitioner’s
account code for the item which states it is “[o]ther non-labor contractor cost
not provided for elsewhere, such as equipment warranties, maintenance
agreements, and service contracts….” The invoice notes the customer address to
be in Texas. Petitioner did not submit a contract or other documentation
requested by the Tax Division.
CONCLUSIONS OF LAW AND DISCUSSION ON CONTENTION NO 4:
Petitioner’s contention should be denied.
Petitioner contends that it purchased software from COMPANY N, and the master
license agreement dated 1996 provides that software was delivered to
California. According to Petitioner, if the software was delivered to a
location in California, then the maintenance services purchased from COMPANY N
in December 1998 and May 1999 must have been performed in California, making
the charges non-taxable in Texas. Similarly, because it purchased software
license and development work from COMPANY O in connection to the COMPANY N
project, Petitioner contends that the software purchased from COMPANY O was
also used in California. The Tax Division contends that the fact the software
may have been delivered to California in 1996 does not determine the taxability
of the maintenance services purchased from the vendor in 1998 and 1999. The
Tax Division contends that additional documentation is needed to determine
where the services were actually performed. Likewise, the Tax Division
contends that Petitioner cannot claim a refund on tax paid to COMPANY O based
on the 1996 COMPANY N license agreement.
The Tax Division is correct. Petitioner has not carried its burden to prove
that a refund is due on maintenance services purchased from COMPANY N. At the
time of the transaction, COMPANY N and Petitioner were both located in Texas,
and the invoice reflects a separately-stated charge for tax and the item was
shipped to Texas. In order for Petitioner to prove that the maintenance
services were performed in California, Petitioner should provide a copy of the
maintenance service agreement or other documentation that evidences where the
services were performed.
Petitioner purchased software from COMPANY O and COMPANY R. For sales and use
tax purposes, software is tangible personal property. Both vendors charged
8.25% tax, and there is no evidence that the vendors had shipped the software
directly to a location outside of Texas. In fact, both invoices show Texas
“shipped to” addresses. COMPANY O software may have been related to the
************** project, but such fact by itself does not prove that the
software was shipped to California. To prove that it is entitled to a refund,
Petitioner must show that the software was delivered outside of Texas by the
vendor or that it came into Texas for temporary storage and was transported
outside of Texas for use solely outside of Texas. See Section 151.330(a) and
(b). Petitioner has not presented any evidence to prove its contention that
refund is due. With regard to COMPANY R, Petitioner relies on an e-mail from
one of its employees stating that his source tells him that the software was
loaded in Florida. This e-mail is not competent evidence.
Petitioner purchased maintenance services from COMPANY P and COMPANY Q and
contends that both vendors performed the services outside of Texas. On COMPANY
P transactions, Petitioner simply relies on the invoice that was mailed to
Florida, and for COMPANY Q transaction, Petitioner relies on an e-mail from one
of its employees. The Tax Division contends that no deletions can be made for
COMPANY P transactions because it requested Petitioner to produce the ATP
agreement referenced in the invoice, but it was not provided. The Tax Division
also contends an e-mail from an employee, without corroborating documentation,
is inadequate to support a refund claim. The Tax Division is correct.
Petitioner’s evidence is neither persuasive nor competent to establish that the
services were performed outside of Texas.
Finally, Petitioner seeks the deletion of one transaction with COMPANY R from
the audit. The invoice references “E911 Location Technology Trial” but
contains no useful description of the service purchased. The Tax Division
contends that because no documentation was provided, the auditor relied on an
accounting code indicating that the service could be for equipment warranties,
maintenance agreements, and service contracts. Again, Petitioner relies on an
e-mail from one of its employees who states that his recollection was that the
invoice was for a study that took place in Massachusetts. The Tax Division
responds that the e-mail is wholly inadequate to prove the type of service or
the location of that service. The Tax Division is correct that the e-mail is
neither persuasive nor competent to establish the service performed or the
location where the service was performed. The Tax Division requested
Petitioner to provide a contract or other supporting documentation, but
Petitioner has not done so. Petitioner cannot defeat an assessment by
withholding documents.
PETITIONER’S CONTENTION NO 5:
Petitioner contends that it erroneously accrued or paid tax on services that
are not taxable or services that are exempt under the intercorporate services
exemption.
FINDINGS OF FACT ON CONTENTION NO. 5:
36. Petitioner seeks refund of tax paid on three transactions identified by
Voucher Nos. 9NM606HM002604, 9NM804HM002075, and 9NM706HM002736 to COMPANY S.
37. Petitioner’s check requisition for Voucher No. 9NM606HM002604 issued shows
a description of “FLA Video Services for Ceremony/Supplier Brunch Documentary”
and it covers expenditure for three invoices. The invoices related to the
requisition do not contain a description of the products or services sold, and
all are dated May 23, 1996. The invoices note the completion dates to be March
29, 1996, April 24, 1996, and May 15, 1996, but also do not contain a
description. The refund request was included in the auditor’s schedule
attached to the Tax Division’s Position Letter as Exhibit 4 and relates to
refund items submitted June 23, 2003. See Finding of Fact No. 5.
38. The check requisition for Voucher No. 9NM706HM002736 describes the
expenditure as “PLA 96 Final Installment for Production of Supplier Event and
PLA 96.” The invoice related to the requisition is dated May 14, 1997, and
does not provide any additional information of the product or service sold.
The check requisition for Voucher No. 9NM804HM002075 describes the expenditure
for “30-LM-Network Services Employee Video.” The invoice dated March 18, 1998,
contains the following itemization: pre-production, production, travel,
graphics, editing, duplication.
39. Petitioner’s check requisition for payment made to COMPANY T describes the
expenditure to be “for the consulting service of ************** engineers per
INDIVIDUAL D’s memo.” The related invoice contains the same description.
CONCLUSIONS OF LAW AND DISCUSSION ON CONTENTION NO. 5:
Petitioner’s contention should be denied.
Petitioner seeks a refund of tax paid to COMPANY S and COMPANY T. Petitioner
contends that it purchased non-taxable video production services from COMPANY S
and purchased non-taxable engineering consulting services from COMPANY T. The
Tax Division contends that the documents submitted to support the transactions
have either no or minimal description of the purchased items, such that they
are inconclusive to establish Petitioner’s contention that non-taxable services
were purchased. The evidence of record supports the Tax Division. The
documentation submitted to date is insufficient to establish the nature of the
items purchased, preventing the Tax Division from verifying the claimed
non-taxability of the purchase.
Section 111.104(a) authorizes the Comptroller to refund tax if the tax has been
“unlawfully or erroneously collected.” As the claimant, Petitioner has the
burden to prove that it is entitled to the refund claimed. See Comptroller's
Decision Nos. 36,971 (1998), and 37,961 (1999). Petitioner cannot meet its
burden by presenting some documents that merely suggest the likelihood of
something instead of relevant documents that would allow for a conclusive
determination. No refund can be granted.
Further, the refund of tax paid to COMPANY S pursuant to the May 23, 1996
invoices appeared to be barred by the statute of limitations. Petitioner filed
a refund claim for tax paid during the reporting periods covered by the audit,
and the refund claim was incorporated into the audit. The audit period begins
with reporting period June 1996, and thus, this transaction is prior to that
date. The original refund claim did not cover this transaction; thus,
Petitioner’s request for credit submitted during this hearing process is beyond
the four-year statute of limitations. Petitioner’s request for credit for tax
paid on those invoice must also be denied for that reason.
Petitioner’s inability to establish the nature of the items in question also
results in the rejection of Petitioner’s alternative contention that the
transactions, if taxable, qualify for the intercorporate service exemption
provided by Section 151.346 and Rule 3.331(c). The intercorporate service
exemption applies only to services that became taxable after September 1, 1987,
and because Petitioner has not provided sufficient evidence to determine the
nature of or type of the items purchased, no determination can even be made
whether the services qualify for the intercorporate service exemption.
PETITIONER’S CONTENTION NO. 6:
Petitioner contends that it erroneously accrued and paid tax on the rental
charge for real property.
FINDINGS OF FACT ON CONTENTION NO. 6:
40. Petitioner leased a generator from COMPANY U and accrued tax on the charge.
Petitioner submitted one picture of the generator.
41. Petitioner did not provide a copy of the lease contract.
CONCLUSIONS OF LAW AND DISCUSSION ON CONTENTION NO. 6:
Petitioner’s contention should be denied.
Petitioner leased a generator and contends that the generator became real
property. Because the lease of real property is not subject to tax, Petitioner
contends that tax accrued on the lease payments should be refunded. It cites
to a proposed decision that accepted a generator to be real property. The Tax
Division responds that one picture of the generator is insufficient to
establish that the generator in question is identical to the generator(s) in
the decision cited by Petitioner. The Tax Division contends that the lease
contract and other various equipment that demonstrate the parties’ intent are
necessary and that the disallowance of the refund should be upheld because
Petitioner has not provided sufficient evidence to prove real property. The
Tax Division’s contention should be sustained.
When a refund claim involves the issue of whether an item became real property
or remained tangible personal property, the claimant has the burden to produce
documents that will allow the Comptroller to make an independent determination.
See Comptroller’s Decision No. 40,100 et al. (2003). In this case, Petitioner
has not provided the extent of the annexation to real property and the intent
of the parties. Petitioner, therefore, has failed to carry its burden to prove
that it is entitled to a refund.
PETITIONER’S CONTENTION NO. 7:
Petitioner contends that it was erroneously assessed tax or it erroneously paid
tax on non-taxable services.
FINDINGS OF FACT ON CONTENTION NO. 7:
42. The auditor scheduled $************** in Exam No. 7 (Record No. 2733-951)
paid to COMPANY Ws and noted that transaction to be for “credit card process
fees.” Petitioner’s check requisition describes the expenditure to be for
“credit card call rating/processing fees.” The related invoice dated June 23,
1999, reflects charges for call rating/processing fee “for first 20,000,”
“20,001-50,000,” “50,001-100,000.” Additional fees were charged for
transactions with an error code report and reports to a second location.
Petitioner submitted a contract titled “General Agreement for Public Telephone
Credit Card Processing Services between COMPANY V and COMPANY W,” which was
executed in October 1996, and it provides that the vendor will provide public
credit card telephone call rating and data manipulation/transmission service to
customer’s specified credit card processing services.
43. Petitioner made a payment to COMPANY X and the related check requisition
dated September 17, 1997, contains four charges totaling $**************. One
of the supporting invoices (No. 6728) contains the description “**************
Registration Database” and itemizes under “management account” various charges
based on the number of hours, number of weeks, and price per hour. The invoice
also itemizes charges for “Data Processing/Front-End Registration Database,”
“Travel,” “************** attendance,” “Miscellaneous.” Petitioner seeks a
credit for $************** paid on the charges related to “management account.”
44. Petitioner contests two transactions with ************** (COMPANY Y)
scheduled in Exam No. 9. Record No. 2733-641 is for $************** and
contains the description “OSRV SFTWR TECH S.” Record No. 2733-637 is for
$************** and the related invoice has the same description. One of the
invoices references Customer PO #C9780560APO. The contract provides that
COMPANY Y agrees to provide PC integration services identified as desktop
support and customer services and migration services. Included in these
services are PC hardware repair, upgrades, warranty work, software application
resolution and client operating system trouble resolution; the removal of
hardware and software.
45. The auditor scheduled the following eight transactions with COMPANY Z in
Exam No. 9: Record Nos. 2733-822, 2733-666, 2733-687, 2733-685, 2733-703,
2733-807, 2733-4220, and 2733-4219. They relate to “************** Project”
and the invoices contain references to “**************.” Two invoices dated
Aug. 31, 1998, itemize hourly charges for “SSCS Maint. Work.” Some of the
remaining six invoices describe the work as “Requirements, system design,
code/unit test, system test, software user acceptance test, production
deployment” and others do not have any description other than a reference to
“**************” project. In e-mail exchanges between from Petitioner’s
employee and Petitioner’s representative during the hearing process, the
employee writes that Petitioner contracted with Evolving to develop various
software systems and the software/code was then owned by COMPANY HH.
46. The auditor scheduled $************** paid to COMPANY AA as Record No.
2733-858 in Exam No. 22 and noted that additional documentation was requested.
Check requisition dated November 14, 1996, contains the description
“1058.1072.1040.COP11” and references four invoices dated April and March 1996.
The related invoices show no textual description. In e-mail exchanges between
Petitioner’s employee and Petitioner’s representative during the audit, the
employee writes “if memory serves correctly … I suspect that it was related to
some fashion to the training effort in deploying new laptops.”
47. The auditor scheduled a transaction with COMPANY BB as Record No. 2733-4587
in Exam No. 24. Originally, Petitioner provided no documentation, but during
this proceeding, Petitioner’s check requisition dated September 19, 1997,
describes the expenditure as “telemarketing.” The related invoices dated July
or August 1997 itemize the type of services performed per hour, including
program management, campaign design, campaign management, human resources,
quality assurance, etc.
48. The auditor scheduled a purchase made from COMPANY CC as Record No.
2733-944 in Exam No. 9 in the amount of $**************. Petitioner submitted
a fax cover sheet containing a handwritten note from ************** stating
that “we buy and sell lists + names” and that COMPANY HH purchased “names +
addresses” from these lists. Petitioner’s check requisition dated April 29,
1999, describes the expenditure as “contract work for ************** project.”
The related invoices contain the description of base price, run charges, home
address, zip, tape and reflects a handwritten notation of “list.”
49. A December 31, 1996 invoice issued by COMPANY F contains the description of
three “resident COMPANY F Engineers.” Petitioner seeks a credit. The invoice
shows Petitioner’s address in CITY A, Texas. Petitioner did not submit a
contract or other documentation.
CONCLUSIONS OF LAW AND DISCUSSION ON CONTENTION NO. 7:
Petitioner’s contention that the COMPANY BB transaction be deleted from the
audit should be granted, but Petitioner’s contention on the remaining items
should be denied.
The auditor assessed the COMPANY BB transaction in the audit because no
documentation was provided during the audit. However, the invoice submitted
during this proceeding shows the transaction to be for telemarketing. The
transaction should be deleted.
With regard to its transaction with COMPANY W, Petitioner initially requested a
reduction of the assessed tax amount based on multi-state benefit, but in
response to the Tax Division’s position that the entire amount was taxable
under Rule 3.300 and Comptroller’s Decision No. 38,036 (2000), Petitioner
modified its contention and now argues that the entire amount should be deleted
from the audit because the charges were for non-taxable services. According to
Petitioner, the vendor uses data generated during a phone call at a pay phone,
applies the appropriate rate to charge, format the information and to transmit
it for payment. Tables are used to determine the rate to be applied to the
call to determine the appropriate charges, the data is reformatted in a form
that can be processed by the merchant bank, and the reformatted data is
transmitted to the merchant bank for collection on the credit sale through the
settlement process. Petitioner distinguishes Comptroller’s Decision No. 38,036
on the basis that the taxpayer did not have multi-state operations, that the
hearing involved only call-rating, and that only an independent contractor used
the call rating services, not an employee of the taxpayer. According to
Petitioner, under the essence of the transaction test, at issue was credit card
settlement service, not call rating services.
The Tax Division contends that Petitioner’s contention is inconsistent with the
terms of the contract. The Tax Division points to the contract which provides
that the seller “will provide public credit card telephone call rating and data
manipulation/transmission services” as provided in Exhibits B, C, and D.
Exhibit B describes call rating services, Exhibit C describes call processing
services and Exhibit D describes call record services. The Tax Division
contends that the essence of the contract is for data processing services. The
record supports the Tax Division, and Petitioner’s contention that the audit
should be adjusted for that transaction should be denied.
Petitioner concedes that some of the charges paid to COMPANY X are taxable as
data processing services, but contends that COMPANY X also provided
advertising/marketing services to expand COMPANY HH’s customer base at various
universities. It seeks a partial refund of the tax paid on the transaction.
The Tax Division contends the invoice does not provide adequate information to
determine what “account management” charges are for, and that Petitioner has
not met its burden to show that a refund is due. The Tax Division’s contention
should be sustained. Petitioner has not provided sufficient evidence to
establish what activities were performed under “management account” and to show
that the items were not incidental to the taxable charges.
Petitioner contends that it purchased Windows 95 software from the manufacturer
and hired COMPANY Y to install the software. Because installation performed by
a seller who did not sell the software is non-taxable, Petitioner contends that
the two transactions should be deleted from the audit. According to the Tax
Division, the master service agreement provides that services would be
performed on both hardware and software. Maintenance of hardware is taxable,
and maintenance of software may be taxable. The record shows that the Tax
Division has met its prima face case that the contract is taxable and the
burden has shifted to show that the contract was not taxable. The Tax Division
is correct that Petitioner’s bare assertion that the work was performed on
Windows 95 is insufficient to establish that Petitioner bought the software
directly from the manufacturer or that it was not supplied by COMPANY Y.
Because no evidence was produced to demonstrate that the transactions were not
taxable, the transactions should remain in the audit.
The Tax Division also contends that the transactions with COMPANY Z, and
COMPANY DD should remain in the audit because the invoices are insufficient to
establish the nature of or the type of the items purchased. Petitioner
contends that it hired Evolving to modify the software that Petitioner owned or
alternatively that each assessed amount should be reduced by three-fourths
because software was used in its data centers located in Texas, California,
Florida and Indiana. With regard to COMPANY DD, Petitioner contends that it
purchased consulting services for training related to the deployment of new
laptops. Other than invoices, Petitioner relies on e-mails from its employees
to prove what was purchased, and the Tax Division contends that those e-mails
are inadequate to prove Petitioner’s contentions. The Tax Division’s
contention should be sustained. E-mails between Petitioner’s employees and
Petitioner’s representative during the audit or hearing process contain
equivocal statements and are neither persuasive nor competent evidence to
establish the items purchased.
Petitioner initially contended that it was assessed on charges related to
developing and performing telemarketing purchased from COMPANY CC. However,
based on additional documentation submitted, Petitioner modified its contention
and argues that Petitioner purchased list brokering services. The Tax Division
contends that Petitioner purchased lists, which are taxable as information
services, and because the transaction occurred prior to October 1, 1999, there
is no 20% exemption and the full purchase price is subject to tax. The
evidence of record supports the Tax Division, and no deletion is warranted.
With regard to the transaction with COMPANY F, Petitioner contends that a
credit should be given because it erroneously paid tax on non-taxable
engineering services. The Tax Division contends that no credit can be given
because no contract was provided and therefore, Petitioner has not established
the non-taxability of the service. The Tax Division is correct. Petitioner
purchased maintenance and software from COMPANY F (see Finding of Fact No. 14),
and Petitioner has not established that the engineering services were provided
on a stand-alone basis. Put differently, Petitioner failed to meet its burden
to prove that a refund should be granted, because the engineering service was
not incidental to or connected with the taxable maintenance or software.
PETITIONER’S CONTENTION NO. 8:
Petitioner contends that it accrued taxes on services that are excluded from
tax as temporary help service under Section 151.057(2).
FINDINGS OF FACT ON CONTENTION NO. 8:
50. Petitioner submitted a schedule titled “Temporary Help Service” and it
identifies three transactions with ************** (COMPANY EE) that are
scheduled in the audit.
51. The auditor scheduled one transaction with COMPANY EE as Record No.
2733-949 (7/31/99) in Exam No. 8, and the audit schedule reflects that the
purchase was for maintenance services. Petitioner’s check requisition form
describes the expenditure to be for “maintenance services” and all invoices
supporting the requisition form describe the charges as “Bill per list,” except
for one invoice that contains the description “To bill for maintenance service
provided under contract no. 120312-94-01.”
52. The auditor scheduled two transactions with COMPANY EE in Exam No. 9 -
Record Nos. 2733-747 (8/31/99) and 2733-765 (10/31/99), but the audit schedule
indicates the purchase was unknown. Petitioner submitted an internal printout
sheet for the voucher related to Record No. 2733-747, but no description is
contained therein. No supporting documentation was submitted. Petitioner
submitted a check requisition for the October 1999 transaction and it describes
the expenditure as being for maintenance and support. The attached invoices
are illegible.
53. Petitioner submitted another schedule titled “Temporary Help Service” which
contains 19 contested transactions. The schedule identifies the vendors,
invoice numbers, invoice dates, and tax accrued amounts. Petitioner seeks a
credit of tax paid to the following vendors: ************** **************,
**************, ************** and **************. Petitioner submitted no
documentation for any of these vendors.
CONCLUSIONS OF LAW AND DISCUSSION ON CONTENTION NO. 8:
Petitioner’s contention should be denied.
Petitioner’s transactions with COMPANY EE were for maintenance services, which
are taxable if performed on real property or tangible personal property. It is
unclear what services were performed by the other vendors, but what is known is
that Petitioner accrued and paid tax on services performed by those vendors.
Petitioner does not appear to contest that the services performed fell within
one of the enumerated taxable services, but contends that the contested
transactions were not subject to sales tax because the vendors provided
temporary help services, which are excluded from tax under Section 151.057(2).
The Tax Division contends that the submitted documents are insufficient to
establish that the vendors provided temporary help services. Petitioner
responds that similar transactions with these vendors were deleted or credited
in Petitioner’s prior audit and that similar treatment should be given in this
audit. The Tax Division contends that “[t]he fact that these items were agreed
to in a prior assignment does not release the Petitioner of the obligation to
provide sufficient documentation for this current assignment.”
During the audit period, Section 151.057(2) excluded from tax a “service
performed by an employee of a temporary help service for an employer to
supplement the employer’s existing work force on a temporary basis, when the
service is normally performed by the employer’s own employees, the employer
provides all supplies and equipment necessary, and the help is under the direct
or general supervision of the employer to whom the help is furnished.” The
minimal documentation in the record is insufficient to establish that the
statutory elements of Section 151.057(2) have been satisfied. No audit
adjustment or refund is warranted.
PETITIONER’S CONTENTION NO. 9:
Petitioner contends that it erroneously paid tax on third-party installation
services.
FINDINGS OF FACT ON CONTENTION NO. 9:
54. An invoice from COMPANY FF dated February 1, 1996, reflects three “labor
charges” for December 21, 1995 on the ************** Project. Sales tax was
separately charged.
55. Petitioner’s internal printout for the ************** Project indicates the
order date to be September 21, 1995, start date to be September 25, 1995, and
the completion date to be December 15, 1995. A comment under “special
instructions” is “contractor labor installation.”
CONCLUSIONS OF LAW AND DISCUSSION ON CONTENTION NO. 9:
Petitioner’s contention should be denied.
Petitioner contends that it paid tax on third-party installation, and the Tax
Division contends that Petitioner has not provided sufficient evidence to
establish what was bought. There is nothing in the record to establish what
the labor charges were for, and thus, the Tax Division is correct that
Petitioner had not carried its burden to prove its entitlement to the refund.
Another obstacle to Petitioner’s request for refund is that the transaction in
question appears to be outside the statute of limitations. Petitioner filed a
refund claim for tax paid during the reporting periods covered by the audit,
and the refund claim was incorporated into the audit. The first reporting
period in the audit is June 1996, and the transaction at issue occurred in 1995
and was billed in February 1996. Because the original refund claim did not
cover this transaction, there was no tolling, and the four-year statute of
limitations has expired.
PETITIONER’S CONTENTION NO. 10:
Petitioner contends that if the assessed tax and refund items are processed
separately, the refund should offset the liability under Section 151.508, and
no penalty should be imposed because credit exceeds assessment.
FINDINGS OF FACT ON CONTENTION NO. 10:
56. Petitioner and other related entities were previously audited and made
similar errors.
57. Petitioner is a sophisticated taxpayer and has a tax department.
CONCLUSIONS OF LAW AND DISCUSSION ON CONTENTION NO. 10:
The Tax Division declined to waive penalty because Petitioner is a
sophisticated taxpayer who had the experience of prior audits and failed to
correct similar errors. Petitioner does not challenge the Tax Division’s
denial of penalty waiver, but contends that any refund found due should be used
to offset penalty and interest on a period-by-period basis. The Tax Division
responds that the “results of the amended audit and separate refund will
automatically be offset for penalty and interest calculation purposes.” Thus,
this issue appears to have been resolved by the parties.
RECOMMENDATION:
Based upon the foregoing findings of fact, conclusions, and discussion, the
following adjustments should be made.
1. The Tax Division agreed to withdraw numerous transactions from the audit and
those transactions are identified in Exhibit 1 attached to the Tax Division’s
Position Letter. The Tax Division also agreed to additional deletions and
changes to the audit and those agreements are included in Exhibit Nos. 2 and 3
attached to the Tax Division’s Position Letter. The Tax Division agreed that
Exhibit A to Petitioner’s October 18, 2004 Reply to the Position Letter reflect
agreed adjustments.
2. The Tax Division agreed to refund portion of the tax paid on Voucher No.
9NM901XAMI0018 to COMPANY GG. Of the total invoice amount, the Tax Division
agreed that $************** is not taxable. The Tax Division also agreed to
delete COMPANY HH, Voucher Nos. 9NM806XAEK0077 and 9NM806XAEK0078, from the
audit.
3. In its Response to Supplemental Reply and Second Supplemental Reply, the Tax
Division agreed to the following:
(a) to delete **************, Voucher No. 9NM812XAFC0083;
(b) to delete and credit tax on **************, Voucher No. 9NM609XAWD0001;
(c) to refund 89.55% of the tax paid on five (5) vouchers issued to
**************;
(d) to delete **************, Voucher No. 9NM806XADT0010; **************
Voucher Nos. 9NM708XAEK0062 and 9NM806XADT0012; **************, Voucher No.
9NM806XADT0011; **************, Voucher No. 9NM806XADT0015; **************,
Voucher Nos. 9NM806XADT0013 and 9NM810HM001081; and
(e) to delete 14 transactions with **************.
4. Record No. 2733-4587 in Exam No. 24 with COMPANY BB should be deleted from
the audit; and
5. the remaining audit liability and the denial of the remaining refund claim
should be upheld.
SIGNED December 22, 2005.
ELEANOR H. KIM
Chief Administrative Law Judge
HEARING NO. 43,240
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 December 22, 2005.
CAROLE KEETON STRAYHORN
Texas Comptroller
ACCESSION NUMBER: 200512526H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 12/22/2005
TAX TYPE: SALES