Texas Comptroller of Public Accounts    STAR System


200606750H




HEARING NO.  44,048

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: JULY 1, 1998 THROUGH MARCH 31, 2002

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

ROY G. SCUDDAY
Administrative Law Judge

ROBERT E. SCOTT
Representing Tax Division

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


COMPTROLLER’S DECISION UPON REHEARING

On February 24, 2006 Petitioner timely filed a Motion for Rehearing concerning 
the February 2, 2006 Comptroller's Decision issued in the above referenced 
matter. On  March 15, 2006 the Tax Division filed its response agreeing in part 
with Petitioner’s Motion.

Having considered the Petitioner's Motion and the Response of the Tax Division, 
it was determined that the Motion for Rehearing should be, and the same was 
thereby GRANTED on March 21, 2006. 

Rehearing was granted in order for the final figures to be amended in 
accordance with the Tax Division’s Response to Petitioner’s Motion for 
Rehearing.

Except as modified by this Decision, the Comptroller's Decision in this case, 
issued February 2, 2006, is incorporated herein and reaffirmed.

Signed June 27, 2006.


ROY G. SCUDDAY
Administrative Law Judge


HEARING NO. 44,048

ORDER OF THE COMPTROLLER

The above decision of the Administrative Law Judge, resulting in Taxpayer's 
liability as set out in Attachment "A" which is incorporated by reference, is 
approved and adopted in all respects.  This decision becomes final twenty-three 
(23) days from the date of this Order, and the total sum of the tax, penalty, 
and interest amounts is due and payable within twenty (20) days thereafter.  If 
such sum is not paid within such time, an additional penalty of ten percent of 
the taxes due will accrue, and interest will continue to accrue.

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 June 27, 2006.


CAROLE KEETON STRAYHORN
Texas Comptroller




HEARING NO.  44,048

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: JULY 1, 1998 THROUGH MARCH 31, 2002

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

ROY G. SCUDDAY
Administrative Law Judge

ROBERT SCOTT
Representing Tax Division

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


COMPTROLLER'S DECISION


PRELIMINARY DISCUSSION:

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

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

On October 18, 2005, Petitioner filed Exceptions to the Proposed Comptroller’s 
Decision issued October 3, 2005.  The Tax Division filed its Response on 
November 1, 2005.  The Comptroller and Administrative Law Judge have reviewed 
the Exceptions and Response thereto, and this Comptroller’s Decision is the 
result of that review.

AGREEMENT OF THE PARTIES:

The Tax Division agreed to certain adjustments to the audit as set forth in 
Exhibit CPA 01-29 to its Position Letter dated September 15, 2004.  In its 
August 19, 2005 Response, the Tax Division agreed to delete the COMPANY P 
invoices from the audit.  The Tax Division also agreed to adjust the 
************** (COMPANY I) charges for data processing services in relation to 
the catalogs incurred after October 1, 1999 scheduled in Exam 1 of the audit 
upon verification of the invoices.  The Tax Division further agreed to delete 
the COMPANY Q charges from Exam 1 of the audit, and reschedule them as sales 
based on the percentage of catalogs shipped to Texas upon verification of the 
invoices.

PETITIONER’S CONTENTIONS:

1. Petitioner contends that catalogs mailed to customers via United States 
Postal Service are not subject to use tax.

2. Petitioner contends that its purchases of industrial solid waste removal are 
not subject to sales tax.

3. Petitioner contends that its purchases of photography services and 
Petitioner freight charges related to those services are not subject to sales 
tax.

4. Petitioner contends that samples placed in inventory were purchased for 
resale.

5. Petitioner contends that third-party installation services are not subject 
to sales tax.

6. Petitioner contends that penalty should be waived.

GENERAL FINDINGS OF FACT:

1. ************** (Petitioner) is a specialty retailer offering home furnishing 
and gifts.

2. Petitioner was audited for sales and use tax compliance for the period July 
1, 1998, through March 31, 2002.  As a result of the audit, on January 16, 
2003, the Comptroller sent Petitioner a Texas Notification of Audit Results, 
showing an amount due that included tax, penalty on late-filed returns, and 
interest through the date of the Notice.  Petitioner’s timely filed request for 
redetermination resulted in this proceeding.

PETITIONER’S FIRST CONTENTION:

FINDING OF FACT NO. 3.

During the audit period ************** (COMPANY A), located in Mississippi, and 
************** (COMPANY B), located in Texas, printed catalogs for Petitioner.  
The invoices from the vendors did not include sales tax.  The charges were 
scheduled in Exam 1 of the audit based on the percentage of catalogs shipped to 
Texas.

FINDING OF FACT NO. 4.

During the audit period, **************, (COMPANY C), located in Massachusetts, 
invoiced Petitioner for the preparation of catalog order forms.  The forms were 
sent to COMPANY A in Mississippi for incorporation into the catalogs.  The 
charges were scheduled in Exam 1 of the audit based on the percentage of 
catalogs shipped to Texas.

FINDING OF FACT NO. 5.

In February 1999, **************, (COMPANY D), located in Texas, invoiced 
Petitioner for the preparation of catalog inserts and the freight charges for 
shipping the inserts to by COMPANY D to COMPANY A in Mississippi for 
incorporation into the catalogs.  The charges were scheduled in Exam 1 of the 
audit based on the percentage of catalogs shipped to Texas.

FINDING OF FACT NO. 6.

In April and July 2001, ************** (COMPANY E), located in Texas, invoiced 
Petitioner for the preparation of catalog color separations.  To print 
full-color photos with an offset printing press, the photo has to be separated 
into four basic ink colors.  Each single color layer is then printed 
separately, one on top of the other, to give the impression of infinite colors. 
 These layers or set of negatives are used by the printer in the printing of 
the catalogs.  The separations at issue were sent by COMPANY E to COMPANY A in 
Mississippi.  The charges were scheduled in Exam 1 of the audit based on the 
percentage of catalogs shipped to Texas.

FINDING OF FACT NO. 7.

The auditor scheduled charges from ************** (COMPANY F), located in 
Colorado, ************** (COMPANY G), located in Illinois, and ************** 
(COMPANY H), located in California, for mailing lists.  The mailing lists were 
sent to COMPANY I in California, which then shipped the lists to Petitioner in 
Texas, and then sent to printers located out of state for use in addressing 
catalogs.  The charges to Petitioner from the mailing list vendors were 
scheduled in Exam 1 of the audit based on the percentage of catalogs shipped to 
Texas. 

DISCUSSION AND CONCLUSIONS OF LAW:

Petitioner’s first contention should be granted in part and denied in part.

Petitioner first asserts that the use of out-of-state printers to produce its 
catalogs makes those catalogs not subject to sales or use tax under Comptroller 
Rule 3.346(a)(2).  Petitioner argues that it does not exercise any right or 
power over the catalogs because the out-of-state printers mail the catalogs 
directly to its customers by United States Postal Service. 

The Tax Division responds that this issue was settled by May Department Stores 
v. Strayhorn, 2004 Tex. App. LEXIS 7681 (pet. den.)  In that case the taxpayer 
used out-of-state printing, which produced advertising materials.  The court of 
appeals held that this use “constituted ‘the exercise of a right or power 
incidental to the ownership of tangible personal property over tangible 
personal property’" under Tex. Tax Code 151.011(a)  The court further held that 
after the taxpayer purchased the printing from a retailer, it “directed the 
advertising materials to prospective customers in Texas, used the advertising 
to encourage purchases in Texas, and took physical possession of some of the 
advertising materials in the form of coupons that customers returned to its 
stores in Texas.”  The court held that this use was subject to Texas use tax.  
Following this decision, it is clear that Petitioner used the printing of the 
catalogs, subjecting the COMPANY A charges for the catalogs shipped into Texas 
to Texas use tax.  Petitioner also purchased catalogs from COMPANY B located in 
Texas and the COMPANY B charges for catalogs shipped to Texas locations are 
subject to Texas sales tax.  Accordingly those items should remain in the audit 
schedules.

Petitioner next argues that the transactions regarding the color separations, 
color proofs, order forms, catalog inserts, and mailing lists are not subject 
to sales and use tax because the items were first shipped out-of-state and, 
eventually, consumed out-of-state.  Specifically, Petitioner argues that the 
color separations, color proofs, order forms, and catalog inserts were 
component parts of the catalogs, while the mailing lists were used by the 
printers to address the catalogs, and, therefore, the charges for those items 
are exempt pursuant to Section 151.011(a).  

Effective October 1, 2003, Section 151.011 was amended to exclude from the term 
“use” in regard to transactions subject to use tax, printed material that has 
been “processed, fabricated, or manufactured into other property transported 
into this state.”  This exclusion has been construed to retain the holding of 
Sharp v. Morton Buildings, Inc. 953 S.W.2d 300 (Tex. App.—Austin, 1997, pet. 
den.) for printed materials.  As stated in Comptroller Decision No. 44,577 
(2005), “transactions that qualify for the exclusion effective October 1, 2003 
were not subject to use tax before October 1, 2003.”  Under longstanding 
policy, the purchase of printing brought into the State is taxable pursuant to 
Section 151.005(4).  See STAR Accession No. 200403794L (letter from Comptroller 
Strayhorn to Representative Brian McCall explaining that the agency’s 
understanding of the October 1, 2003 amendment means use tax is still due on 
charges for printing.) 

Order forms were printed materials purchased outside of Texas that were 
incorporated into the catalogs outside of Texas, and the charges were paid to 
COMPANY C, located out of state, by Petitioner and given to the printer for use 
out of state.  The charges are not part of the printer’s sales price of the 
catalogs.  As a result, the purchases of those items fall within the exclusion 
of Section 151.011 and were not subject to Texas use tax.  The COMPANY C 
transactions should be deleted from the audit.

In regard to the catalog inserts purchased from COMPANY D, Section 151.330(a) 
provides that the sale of tangible personal property in Texas that is shipped 
out of state is exempt from sales tax.  Inasmuch as COMPANY D was located in 
Texas, and the inserts were shipped to the printer out of state, the purchase 
of the inserts that remained outside of Texas are exempt.  However, Comptroller 
Rule 3.346(c)(5) provides that tangible personal property purchased in Texas, 
shipped out of state, and then returned to the state by the purchaser within 
one year are subject to sales tax.   The COMPANY D inserts were purchased in 
Texas by Petitioner for incorporation into the catalogs in Mississippi while 
retaining their identity as catalog inserts, and it is clear that Petitioner 
intended for a portion of those inserts to be returned to Texas as part of the 
catalogs.  As a result, sales tax is due on the portion of the purchase price 
of the inserts equal to the percentage of catalogs shipped into Texas.  
Accordingly, the COMPANY D transactions should remain in the audit.

In regard to the color separations, these do not appear to be components of the 
catalogs as asserted by Petitioner, but, rather, tools used by the printer to 
print the catalogs.  Inasmuch as they were purchased by Petitioner and not the 
printer, their cost was not part of the printer’s sales  price of the catalogs. 
 Because the color separators were purchased in Texas and shipped to the 
printer in Mississippi, the items were exempt from sales tax pursuant to 
Section 151.330(a).  Accordingly, the COMPANY E transactions should be deleted 
from the audit.

As for the mailing lists, Comptroller Rule 3.342(a)(6)(C) specifically includes 
mailing lists as an example of a taxable information service and provides that 
“only that percentage which represents names of persons located in Texas is 
taxable.”  As a result, the mailing list transactions should remain in the 
audit as scheduled.

PETITIONER’S SECOND CONTENTION:

FINDING OF FACT NO. 8.

During the audit period Petitioner purchased waste disposal services from 
************** (COMPANY J).  Petitioner paid sales tax to COMPANY J on those 
purchases.

DISCUSSION AND CONCLUSIONS OF LAW:

Petitioner’s second contention should be denied.

Section 151.0101(a)(11) defines a real property service as a taxable service.  
Section 151.0048(a)(3) includes in the definition of real property service the 
“removal or collection of garbage, rubbish, or other solid waste other than” 
industrial solid waste.  Comptroller Rule 3.356(a)(3)(E) excludes from the 
definition of garbage or other solid waste “industrial solid waste, as that 
term is defined in Health and Safety Code, Chapter 361.”  Section 361.003(16) 
of the Health and Safety Code defines “industrial solid waste” as “solid waste 
resulting from or incidental to a process of industry or manufacturing, or 
mining or agricultural operations.”  Section 361.003(20) of the Health and 
Safety Code defines “municipal solid waste” as “solid waste resulting from or 
incidental to municipal, community, commercial, institutional, and recreational 
activities, including garbage, ashes, street cleaning, dead animals, abandoned 
automobiles, and all other solid waste other than industrial waste.”

Petitioner is not a manufacturer, but, rather, a commercial enterprise.  Solid 
waste generated by a commercial enterprise falls within the definition of 
“municipal solid waste,” and the removal of municipal solid waste is taxable as 
a real property service.  See Comptroller Decision No. 42,841 (2003), and 
Petitioner’s request for refunds on those transactions was appropriately 
denied.

PETITIONER’S THIRD CONTENTION:

FINDING OF FACT NO. 9.

From March through November 2000, Petitioner purchased color photography 
services from ************** (COMPANY K), located in CITY A.  The invoices 
included sales tax, which Petitioner paid.  The photographs were for use in 
catalogs, both mailed to customers and placed on the internet.  Nothing in the 
invoices indicates to where the photographs were delivered. 

FINDING OF FACT NO. 10:

The auditor scheduled invoices to Petitioner from ************** (COMPANY L), 
and ************** (COMPANY M), both located in CITY A, in Exam 3 of the audit. 
 Neither the invoices nor any other documentation is in the record showing that 
the purchased photographs were sent out of state.

FINDING OF FACT NO. 11:

From August 1998 through February 1997, ************** (COMPANY N) located in 
CITY B, Georgia, invoiced Petitioner for photography services, including 
digital photographs.  The COMPANY N charges were scheduled in Exam 1 of the 
audit based on the percentage of catalogs shipped to Texas.  The invoices 
referenced two job numbers, 4879 for the Spring/Summer catalog, and 4968 for 
the Summer Addendum.  The auditor also scheduled two COMPANY N invoices in Exam 
1 for freight charges, one for job number 4879, and one for job number 4753 for 
the Fall catalog.  

DISCUSSION AND CONCLUSIONS OF LAW:

Petitioner’s third contention should be granted in part and denied in part.

Petitioner first argues that the photography services were non-exclusive 
licenses exempt from sales tax.  Petitioner cited a Tax Policy Letter, STAR 
Accession No. 200111605L, which states that sales tax is not due on the 
copyright interests of a photograph when the photographer has reserved title to 
the photograph and the customer is required to either return or destroy its 
copies of the photograph.  The Tax Division responds the same policy letter 
makes clear that charges for photographs are subject to sales tax as the sale 
of tangible personal property.  Inasmuch as nothing in the COMPANY K or COMPANY 
N invoices indicates a copyright reservation, the photographs are subject to 
sales tax. 

Petitioner next asserts that the photographic services were consumed by 
out-of-state printers in the printing of the catalogs or placing them on 
Petitioner’s website.  

In regard to the COMPANY L and COMPANY M invoices scheduled in the audit, and 
the COMPANY K invoices for which Petitioner seeks a refund, Petitioner has 
provided no documentation to prove that those charges were for photographs used 
by out-of-state printers.  Nor has Petitioner shown that any photographs used 
on its website were placed on out-of-state servers or were shipped 
out-of-state.  As a result, the COMPANY L and COMPANY M charges should remain 
in Exam 3 of the audit, and no credit should be given for the tax paid on the 
COMPANY K invoices.  

Regarding the COMPANY N charges, the auditor only scheduled the percentage of 
the charges that represent catalogs shipped into Texas, indicating that the Tax 
Division acknowledges that the photographs were sent to out of state printers.  
The photographs were materials purchased outside of Texas and used outside of 
Texas in the printing of the catalogs.  The charges paid to the vendor by 
Petitioner were not part of the printer’s sales price of the catalogs.  As a 
result, the purchases of those items were not subject to Texas use tax, and the 
COMPANY N transactions should be deleted from the audit. 

PETITIONER’S FOURTH CONTENTION:

FINDING OF FACT NO. 12.

During the audit period, Petitioner maintained an account for items coded as 
“samples” that were removed from its tax-free inventory and photographed for 
use in the catalogs.  The account reflected credits and debits for items 
removed and subsequently returned to inventory and sold.  The reversing entry 
is not recorded in the account until the item is sold.  The auditor scheduled 
items that were removed from inventory but that were not shown by a reversing 
entry as having been sold in Exam 4 of the audit.  There is no evidence in the 
record to show that the scheduled items were actually returned to inventory 
and/or sold.

DISCUSSION AND CONCLUSIONS OF LAW:

Petitioner’s fourth contention should be denied.

Petitioner argues that the scheduled items were purchased for resale and, 
therefore exempt from sales tax pursuant to Section 151.302 of the Tax Code.

The policy of the Comptroller is that inventory items purchased under a resale 
certificate that are not used for any purpose other than “retention, 
demonstration, or display” while being held for sale are not considered to have 
been divergently used.  See Section 151.154(a) and STAR Accession No. 
200008661L.  In accordance with this policy, items removed from inventory 
merely to be photographed for demonstration or display purposes would not lose 
their status as items purchased for resale.

The problem in this case is that Petitioner has provided no evidence to prove 
that the scheduled items were returned to inventory and/or sold.  Without 
documentation showing that the scheduled items were actually returned to 
inventory, Petitioner has failed to show that they retained their exempt 
status.  As a result, those charges should remain in Exam 4 of the audit.  

PETITIONER’S FIFTH CONTENTION:

FINDING OF FACT NO. 13.

On December 28, 2000, ************** (COMPANY O) invoiced Petitioner for the 
installation of new furniture.  There is nothing in the record to indicate that 
someone other than COMPANY O was the seller of the furniture.

DISCUSSION AND CONCLUSIONS OF LAW:

Petitioner’s fifth contention should be denied.

Section 111.104(a) provides that a refund can only be made if the Comptroller 
finds that the tax had been “unlawfully or erroneously collected.”  Unlike the 
situation where the Comptroller is seeking to assess a tax, a refund concerns a 
situation where the taxpayer is seeking to have the tax returned on the basis 
that its collection was in error.  In that case, the burden logically belongs 
with the Claimant to show that the tax was collected in error.

Petitioner asserts that the charge for installation labor was separate and 
independent of the charge for the furniture, and not taxable, citing the 
holding in Rylander v. San Antonio SMSA Limited Partnership, 11 S. W. 3d 484 
(Tex. App.—Austin, 2000, no writ).  In that case the Court held that the 
charges for line engineering services were not taxable even though provided 
with taxable sales of tangible personal property because they “had value that 
was not merely incident to the purchase of the new equipment.”  However, the 
court’s opinion additionally points out that installation charges are taxable, 
even when separately stated, because their exemption from the definition of 
"sales price" in Section 151.007(c) was specifically deleted in 1987.

In this case, the only documentary evidence in the record regarding this 
transaction was the invoice from COMPANY O regarding the installation of the 
furniture.  Although requested to do so, Petitioner presented no evidence 
regarding the invoice for the purchase of the furniture.  Petitioner has, 
therefore, failed to show that the installation was not part of the purchase of 
the furniture.  As a result, the installation was incidental to and a part of 
the purchase of the furniture, the purchase of the tangible personal property 
being the essence of the transaction, and the charge for the installation was 
part of the sales price under Section 151.007(b), thereby distinguishing the 
facts in this case from SMSA.

Despite the fact that the charge for the installation was invoiced separately, 
Petitioner has not shown that the installation was distinct from the provision 
of the furniture, and the charge for the installation was subject to sales tax 
as part of the sales price.  See Comptroller Decision No. 42,594 (2005).  
Accordingly, Petitioner is not entitled to a refund for tax paid on the COMPANY 
O transaction.

CLAIMANT’S SIXTH CONTENTION:

FINDING OF FACT NO. 14.

During the audit period, Petitioner had eight late-filed sales tax returns. 

DISCUSSION AND CONCLUSIONS OF LAW:
 
Petitioner’s sixth contention should be denied.

Comptroller Rule 3.5(c) sets forth the factors to consider in waiving penalty, 
which factors include whether returns were timely filed.  Penalty in this case 
was waived for all timely-filed periods.  As a result, at issue is only the 
penalty for the eight periods for which Petitioner did not file timely returns.

Petitioner contends that its underpayment of sales and use tax was not due to 
negligence, fraud, or intentional error.  

Section 111.103 authorizes the Comptroller to waive penalty if a taxpayer 
exercises reasonable diligence.  The Tax Division correctly responds that the 
Comptroller’s policy is not to waive penalty for periods for which returns are 
filed late, because such late filing demonstrates a lack of diligence.  
Comptroller Decision No. 42,604 (2003).  Based on this Comptroller policy, the 
remaining penalty for the eight periods for which Petitioner did not timely 
file returns should not be waived.

RECOMMENDATION:

The audit should be revised to make the agreed-upon adjustments, and delete the 
COMPANY C, COMPANY E, and COMPANY N transactions from the audit, in accordance 
with this decision, and the revised liability should then be upheld in its 
entirety. 

SIGNED February 2, 2006.


ROY G. SCUDDAY
Administrative Law Judge



HEARING NO. 44,048

ORDER OF THE COMPTROLLER

The above decision of the Administrative Law Judge, resulting in Taxpayer's 
liability as set out in Attachment "A" which is incorporated by reference, is 
approved and adopted in all respects.  This decision becomes final twenty-three 
(23) days from the date of this Order, and the total sum of the tax, penalty, 
and interest amounts is due and payable within twenty (20) days thereafter.  If 
such sum is not paid within such time, an additional penalty of ten percent of 
the taxes due will accrue, and interest will continue to accrue.

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 February 2, 2006.


CAROLE KEETON STRAYHORN
Texas Comptroller




ACCESSION NUMBER: 200606750H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 06/27/2006
TAX TYPE: SALES