200706958H



HEARING NO.  46,844

RE: ************** 
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: JUNE 1, 2000 THROUGH DECEMBER 31, 2003

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

ELEANOR H. KIM
Administrative Law Judge

STANLEY K. COPPINGER
Representing Tax Division

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


COMPTROLLER'S DECISION UPON REHEARING


PRELIMINARY DISCUSSION:

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

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

The parties filed Exceptions to the Proposed Decision Upon Rehearing issued on 
October 27, 2006, and Petitioner filed its Response to the Tax Division’s 
Exceptions.  The parties essentially agreed that the audit should be adjusted.  
The Comptroller and the Administrative Law Judge have considered the Tax 
Division’s Exceptions and Petitioner’s Response, and this decision reflects the 
ruling thereon.

AGREEMENT:

In its Exceptions, the Tax Division agrees that the assessment in Exam 400 
should be reduced by 79.51% and agrees that the assessment in Exam 500 should 
be reduced by 83.85%, except Record ID Nos. 0-1, 0-411, and 0-412, which should 
be reduced by 79.51%.

PETITIONER’S CONTENTION:

Petitioner contends that the assessment should be reduced based on the 
multi-state benefit of the services.

FINDINGS OF FACT:

1. Petitioner was audited for sales and use tax compliance for the 
above-captioned period and was assessed a tax deficiency, penalty, and interest 
pursuant to a Texas Notification of Audit Results dated April 28, 2005.  
Petitioner’s request for redetermination resulted in the docketing of 
above-captioned hearing.

2. The audit adjustments consisted of additional taxable purchases (both 
expenses and assets).  Exam Nos. 100 and 200 were based on sampling whereas 
Exam Nos. 300, 400, and 500 were based on detailed examination.

3. Scheduled in Exam No. 400 are transactions with COMPANY B.  The auditor 
noted in the audit schedule that some of the invoices were consulting service 
“billed to COMPANY A” but Petitioner was the purchaser.  The consulting 
services identified in Exam No. 400 include installation and implementation 
services.

4. The auditor scheduled maintenance and software purchased from COMPANY B in 
Exam No. 500.  The transactions were identified by Petitioner pursuant to the 
amnesty payment that it made on March 30, 2004.  

5. COMPANY B refers to **************, a company located outside of Texas.  In 
June 1998, Petitioner and COMPANY B executed a Software End-User License 
Agreement (“License Agreement”) wherein COMPANY B granted Petitioner a license 
to use COMPANY B software.  Petitioner signed the License Agreement on June 4, 
1998, and COMPANY B executed it on June 28, 1998.  The software was delivered 
to Petitioner.  Section 2.2 of the License Agreement specifically authorizes 
Petitioner’s affiliates to use the software but only if the following 
conditions are met: (a) that each affiliate signs and delivers an agreement to 
COMPANY B that the affiliate agrees to be bound by the terms of the License 
Agreement, and (b) that Petitioner as the licensee indemnifies COMPANY B for 
losses or damages suffered by COMPANY B arising from an affiliate’s breach of 
the License Agreement.  Section 4.1 of the License Agreement provides that 
Petitioner shall pay the license fee and the maintenance fee as set forth in 
the License Agreement.

6. Petitioner executed both the License Agreement and Service Agreement.  The 
services were performed in Texas, and the auditor scheduled invoices issued by 
COMPANY B under the Service Agreement.  Charges for software were also 
scheduled.  

7. Petitioner has offices in Alaska, California, Colorado, Hawaii, North 
Dakota, Texas, Utah, and Washington.  Petitioner’s corporate headquarters is 
located in CITY A, Texas.

8. The software purchased from COMPANY B served two functions: (i) assisted 
Petitioner’s human resource departments in processing employee payroll 
information, and (ii) assisted to account for oil that was being produced and 
traded by Petitioner at each refinery or location owned or operated by 
Petitioner.

9. COMPANY B conducted extensive analysis of Petitioner’s server, memory 
capacity, network connections, and overall operations and thereafter conducted 
all of the necessary configurations and modifications to the software in order 
to modify the software for Petitioner’s specialized use of the software.  The 
configurations and modifications were performed by Petitioner’s own employees 
and outside consultants.  COMPANY B charged Petitioner for implementation.  
Petitioner had the option to purchase the COMPANY B software without employing 
COMPANY B to perform the implementation, but made the decision to hire COMPANY 
B to perform the implementation because of numerous configurations and 
modifications.  

10. Petitioner hired third party vendors for consulting services because 
COMPANY B consultants were generally more expensive.  Petitioner hired COMPANY 
B consultants to provide consulting services and maintenance services that 
included continuous upgrade to the software, such as security upgrades, 
patches, etc.

11. Petitioner provided a list of licensed users located inside of Texas and 
outside of Texas for 2000 through 2003.

CONCLUSIONS OF LAW AND DISCUSSION:

Petitioner’s contention should be denied.

Petitioner purchased software from COMPANY B, and the contested transactions 
involve services connected to that software.  Initially, Petitioner contended 
that the COMPANY B transactions should be deleted from Exam Nos. 400 and 500 
because the services were purchased by its affiliated company, COMPANY A, on a 
stand-alone basis, but later abandoned that contention in the rehearing 
process.  Petitioner now contends that the assessment should be reduced based 
on the multi-state benefit exemption provided by Section 151.330(f).

Exam No. 400 includes transactions identified as consulting services, but the 
charges for consulting services include installation and implementation 
services.  The services consisted of analysis, configurations and modifications 
to the software in order to modify the software for Petitioner’s specialized 
use of the software.  Exam No. 500 includes maintenance services.  All of the 
contested services (installation and implementation services, consulting 
services, and maintenance services) were purchased from COMPANY B.  Petitioner 
contends that each service was purchased from COMPANY B on a stand-alone basis, 
and therefore, each service is subject to the multi-state benefit exemption.  
The stand-alone argument was presented to counter the Tax Division’s position 
that some of the services were taxable as part of the sales price of the 
software.  According to Petitioner, it had the option to use a third party to 
perform the services, and had in fact used its own employees or third-party 
consultants to perform similar services performed by COMPANY B when it was 
necessary to save costs.

Petitioner’s argument that it could have hired a third party other than COMPANY 
B to perform the services ignores tax statutes that impose tax on certain 
services performed by the vendor that sold the tangible personal property.  For 
example, the charge for installing tangible personal property is part of the 
sales price of tangible personal property.  SECTION 151.007(a)(3); see also, 
Comptroller’s Decision Nos. 30,191 (1993) and 40,794 (2005).  The fact that the 
purchaser could have hired a third party to install the purchased item does not 
alter the taxability of the installation charge.  For sales and use tax 
purposes, software is tangible personal property.  SECTION 151.009.  Thus, 
COMPANY B’s installation of the software is taxable under Section 
151.007(a)(3).  Similarly, Section 151.007(b) provides that the total amount 
for which a taxable item is sold includes a service that is a part of the sale. 
 Certain consulting services and implementation services, such as customized 
configuration work, even if performed under an agreement separate from the 
software license agreement, are connected to the software and are taxable as 
part of the sales price.  See, Comptroller’s Decision No. 44,040 (2005) (citing 
Comptroller’s Decision Nos. 34,697 (1996) and STAR Accession No. 9904412L 
(April 14, 1999)).  To the extent any of the charges scheduled in the audit 
relate to installation, consulting services and implementation services that 
are part of the sales price, the multi-state benefit exemption provided by 
Section 151.330(f) is inapplicable.

Some of the implementation services performed by COMPANY B include development 
and modifications to the software.  COMPANY B also provided maintenance 
services.  Thus, the audit adjustments at issue include modification and 
maintenance services to a computer program, which are taxable services if they 
are performed by the vendor who sold the computer program.  Repair, 
maintenance, and restoration of tangible personal property are taxable services 
under Section 151.0101(a)(5), but excluded from tax are the repair, 
maintenance, creation, and restoration of a computer program, including its 
development and modification, if performed by a person who did not sell the 
computer program.  SECTION 151.0101(a)(5)(D).  The operation of the two 
provisions makes clear the legislative intent to impose tax on the enumerated 
services only if performed by the person who sold the computer program.  And, 
that construction has been consistently applied by the agency, and the 
taxability or non-taxability determination of services has been made based on 
the factual determination as to who performed the service.  See e.g., STAR 
Accession Nos. 8801L0900C05 (January 28, 1988), 8911L1024C11 (November 15, 
1989) and 200204978L  (April 12, 2002); see also, Comptroller’s Decision Nos. 
39,918 (2002), 35,013 (1999), 33,041 (1995), 29,191 (1993), and 27,833 (1991).  


In the case at hand, the auditor did not schedule any charges for modification 
or maintenance services performed by third-party consultants, but scheduled 
only charges billed by COMPANY B, the vendor of the software.  The auditor’s 
adjustments are consistent with the statutes as well as the agency’s 
long-standing construction, and the fact that Petitioner could have hired a 
third party does not alter the tax status of the services.  In brief, the 
charges paid to COMPANY B that are scheduled in the audit are purchases of 
software, services associated with the software, and taxable services.  Because 
a prima facie case of taxability has been established, the audit is presumed to 
be correct.  The burden is on Petitioner to prove by a preponderance of the 
evidence that the audit adjustments are erroneous.  Rule 1.40.

Petitioner appears to concede that the audit adjustments are subject to tax, 
but contends that the assessed taxable amounts should be reduced based on the 
multi-state benefit exemption provided by Section 151.330(f).  Because the 
software purchased from COMPANY B was customized software, Petitioner contends 
that each service provided by COMPANY B is subject to the multi-state benefit 
exemption and that it has offices in eight states.  Petitioner seeks the 
reduction of the assessed amounts using the pro-rata percentage based on the 
number of licensed users located outside of Texas to the total number of 
licensed users.  Petitioner cites to Comptroller’s Decision No. 44,127 (2005) 
for support.  In that hearing decision, the Comptroller granted the multi-state 
benefit exemption for maintenance services using a similar pro-rata percentage 
approach.  

Comptroller’s Decision No. 44,127 recognizes that the agency has promulgated a 
multi-state benefit location test in several rules, such as Rules 3.330 
(relating to Data Processing Services), 3.342 (relating to Information 
Services), and 3.343 (relating to Credit Reporting Services).  The test 
requires the initial determination that the purchaser operates in more than one 
state.  Comptroller’s Decision No. 35,785 (1997).  Once that determination is 
made, the multi-state benefit location test requires the purchaser to 
demonstrate that the purchased service supports a separate, identifiable 
segment other than general administration or operation of the business.  See 
e.g., Rule 3.330(f)(1).  Comptroller’s Decision No. 44,127 appears to have 
construed “a separate, identifiable segment” by looking at the locations of 
divisions, stores, or offices, thereby prompting Petitioner to present evidence 
of its out-of-state offices and the percentage of in-state users and 
out-of-state users.  However, Comptroller’s Decision No. 44,127 must be 
reconciled with other hearing decisions.

The Comptroller has generally held that the mere fact that a taxpayer operates 
a business in multiple states does not mean that all services purchased by the 
taxpayer in Texas were partly used outside of Texas.  See, Comptroller’s 
Decision No. 43,240 (2005).  Yet, the focus of Comptroller’s Decision No. 
44,127 appears to have been so limited.  That approach contravenes existing 
policy reflected in Comptroller’s Decision No. 36,649 (1998).  In that hearing, 
the Comptroller expressly held that neither a mere office location nor a mere 
physical location of the business should be equated automatically to a 
separate, identifiable segment.  Moreover, the Comptroller also held that “a 
separate, identifiable segment is not established by the fact that the customer 
has employees performing a specific function at a location.”  Id.  In other 
words, offices, divisions, or stores located outside of the state demonstrate 
that the purchaser operates in more than one state, but those offices, 
divisions, or stores, collectively, may not represent a separate, identifiable 
segment of a business.  Comptroller’s Decision No. 44,127 seems to suggest 
otherwise, so to reconcile Comptroller’s Decision No. 44,127 with Comptroller’s 
Decision No. 36,649, it is concluded that Comptroller’s Decision No. 44,127 
cannot and should not be read to hold that the existence of out-of-state 
offices, divisions, or stores is sufficient by itself to establish a separate, 
identifiable business segment.  Petitioner relies on Comptroller’s Decision No. 
44,127 to advance that proposition and that attempt must be rejected here. 

The lack of definition as to the meaning of the phrase “a separate, 
identifiable segment” was the crux of the dispute in Comptroller’s Decision No. 
36,649, and eight years later, the phrase is still undefined in the rules.  The 
Comptroller rejected the taxpayer’s attempt in Hearing No. 36,649 to define 
“separate, identifiable segment” using the definition provided by Section 
151.304 for the occasional sale exemption, and the basis for that rejection is 
still legitimate.  The Tax Division in Hearing No. 36,649 offered a definition 
that it argued was based on the common meanings of the words: the term 
“separate means ‘set apart,’ identifiable means ‘to establish the identify,’ 
and segment means ‘one of the constituents parts into which a body, entity, or 
quantity is divided.”  Using these definitions, the Tax Division in Hearing No. 
36,649 concluded that the phrase “separate, identifiable segment” meant “a 
constituent part of an entity whose identity can be established apart from that 
entity.”  The Comptroller ruled that “the dictionary definitions of the terms 
advanced by the Tax Division are themselves acceptable” but “should be 
interpreted within the context of the regulatory provisions” by considering 
whether “the function performed at a business location should be one that does 
more than generally support the administration or operation of the customer’s 
business ….”  Id.

Administrative rules are construed in the same manner as statutes.  Rodriguez 
v. Service Lloyds Ins. Co., 997 S.W.2d 248 (Tex.1999) (citing Lewis v. 
Jacksonville Bldg. & Loan Ass'n, 540 S.W.2d 307 (Tex.1976).  As a general rule 
of construction, when a word or term is not defined by a statute, the plain and 
common meaning of the word or term is used to ascertain intent.  TEX. GOV’T 
CODE 311.011(a).  Thus, the Tax Division’s approach in Hearing No. 36,649 
followed the standard construction rule, which was found acceptable by the 
Comptroller.  However, the proffered definition, and the admonition to read it 
in context noted by Comptroller’s Decision No. 36,649, can be rephrased to 
clarify what was intended.  Another common meaning of “segment,” which is 
consistent with “constituent part of an entity,” is a fragment or a part of the 
customer’s business that can be divided or marked off by or as if by natural 
boundaries.  Webster’s Ninth New Collegiate Dictionary.  That segment must have 
its own identity apart from and must perform a function that is separate from 
the general administration or operations of the purchaser’s business.  The 
existence of a separate, identifiable segment must be demonstrated by providing 
evidence of the organizational and operational structure of its customer’s 
business and the contested location’s place in that structure.  Comptroller’s 
Decision No. 36,649.   

Before addressing the merits of Petitioner’s case, some additional discussion 
of Comptroller’s Decision No. 36,649 is necessary to clarify the burden issue.  
The transactions in dispute in Comptroller’s Decision No. 36,649 were security 
services performed outside of Texas on behalf of Texas clients.  The Tax 
Division had the burden to prove a prima facie case of taxable services, and 
the Comptroller in Hearing No. 36,649 ruled that the Tax Division had failed to 
meet that burden.  In so ruling, the Comptroller applied a portion of the 
multi-state benefit test as if it was an imposition provision by ruling that 
“the Tax Division must show that assigning offices located in Texas constitute 
a separate, identifiable segment of a customer’s business.”  However, the 
multi-state benefit location test was promulgated to administer Section 
151.330(f), an exemption statute; thus, Comptroller’s Decision No. 36,649’s 
reliance on the rule for tax imposition seems at odds with the statutory 
imposition provisions found in the Tax Code.  Whether the ultimate outcome of 
Comptroller’s Decision No. 36,649 was appropriate or not is irrelevant to 
Petitioner’s case because there is a factual distinction.  The modification and 
maintenance services that are in dispute here were performed in Texas, and the 
services were determined to be subject to Texas.  Petitioner has the burden to 
prove its entitlement to the claimed exemption.

The taxpayer who is claiming the multi-state benefit exemption has the burden 
to prove that the service supports a separate, identifiable segment.  In 
Comptroller’s Decision No. 42,095 (2003), the taxpayer purchased information 
services that were reviewed at the taxpayer’s principal office and shared with 
consultants located outside the state.  The taxpayer claimed that the purchase 
was subject to the multi-state benefit exemption, and the Comptroller rejected 
the claimed exemption stating that the taxpayer had “failed clearly and 
convincingly to establish the use of the involved purchases to conduct a 
separate, identifiable segment of its business located out-of-state, the 
fundamental requirement for obtaining multi-state benefit.”  See also, 
Comptroller’s Decision No. 35,899 (1998) (Services used to determine whether 
the taxpayer should engage in exploration and production activities did not 
support the exploration activities, but instead supported business decisions 
made at the corporate headquarters.)
 
The question then is whether Petitioner has met its burden to establish that 
the taxable maintenance and modification services support a separate, 
identifiable segment of Petitioner’s business.  The proposed decision held that 
Petitioner failed to provide sufficient evidence to prove its entitlement to 
the claimed adjustments, but during the exceptions stage, Petitioner provided 
documentary evidence, which resulted in the Tax Division’s agreement to adjust 
the audit.  See Agreement section. The Tax Division’s agreement should be 
affirmed, but no other adjustments should be made.  Petitioner presented no 
arguments or evidence to prove that it is entitled to any additional 
adjustments.

RECOMMENDATION:

Based upon the foregoing findings of fact, conclusions, and discussion, the 
audit should be amended to incorporate the adjustments agreed to by the Tax 
Division, but any remaining audit liability should be upheld.


ELEANOR H. KIM
Administrative Law Judge


HEARING NO. 46,844

ORDER OF THE COMPTROLLER

The above decision resulting in a credit to Taxpayer's as set out in 
“Attachment A,” which is incorporated by reference, is approved and adopted in 
all respects.  This decision becomes final twenty days after the date 
Petitioner receives notice of this decision.  If either party desires a 
rehearing, that party must file a Motion for Rehearing, which must state the 
grounds for rehearing, no later than twenty days after the date Petitioner 
receives notice of this decision.  Notice of this decision is presumed to occur 
on the third day after the date of this decision.

Signed on this 15th day of June, 2007.


SUSAN COMBS
Texas Comptroller of Public Accounts




HEARING NO.  46,844

RE: ************** 
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: JUNE 1, 2000 THROUGH DECEMBER 31, 2003

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

ELEANOR H. KIM
Chief Administrative Law Judge

STANLEY K. COPPINGER
Representing Tax Division

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


COMPTROLLER'S DECISION

PRELIMINARY DISCUSSION:

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

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

Petitioner filed Exceptions to the Proposed Comptroller’s Decision issued on 
July 6, 2006.  The Tax Division filed its Response to these Exceptions.  The 
Administrative Law Judge and the Comptroller have considered Petitioner’s 
Exceptions and the Tax Division’s Response, and this Comptroller’s Decision 
represents the ruling thereon.  

PETITIONER’S CONTENTIONS:

1. Petitioner contends that the auditor erroneously scheduled services 
purchased by an affiliated company in Petitioner’s audit.

2. Petitioner contends that the assessment should be reduced based on the 
multi-state benefit of the services.

FINDINGS OF FACT:

1. Petitioner was audited for sales and use tax compliance for the 
above-captioned period and was assessed a tax deficiency, penalty, and interest 
pursuant to a Texas Notification of Audit Results dated April 28, 2005.  
Petitioner’s request for redetermination resulted in this proceeding.

2. The audit adjustments consisted of additional taxable purchases (both 
expenses and assets).  Exam Nos. 100 and 200 were based on sampling whereas 
Exam Nos. 300, 400, and 500 were based on detailed examination.

3. Scheduled in Exam No. 400 are transactions with COMPANY B.  The auditor 
noted in the audit schedule that the invoices were consulting service “billed 
to COMPANY A” but Petitioner was the purchaser.

4. The auditor scheduled maintenance and software purchased from COMPANY B in 
Exam No. 500.  The transactions were identified by Petitioner pursuant to the 
amnesty payment that it made on March 30, 2004.  

5. COMPANY B refers to **************  In June 1998, Petitioner and COMPANY B 
executed a Software End-User License Agreement (“License Agreement”) wherein 
COMPANY B granted Petitioner a license to use COMPANY B software.  Petitioner 
signed the License Agreement on June 4, 1998, and COMPANY B executed it on June 
28, 1998.  The software was delivered to Petitioner.  Section 2.2 of the 
License Agreement specifically authorizes Petitioner’s affiliates to use the 
software but only if the following conditions are met: (a) that each affiliate 
signs and delivers an agreement to COMPANY B that the affiliate agrees to be 
bound by the terms of the License Agreement, and (b) that Petitioner as the 
licensee indemnifies COMPANY B for losses or damages suffered by COMPANY B 
arising from an affiliate’s breach of the License Agreement.  Section 4.1 of 
the License Agreement provides that Petitioner shall pay the license fee and 
the maintenance fee as set forth in the License Agreement.

6. ************** (“COMPANY A”) is an affiliate of Petitioner.  On June 24, 
1998, COMPANY B and COMPANY A entered into a Professional Services Agreement 
(“Service Agreement”).  The recital of the Service Agreement states that 
COMPANY B will provide installation and implementation of the software to 
COMPANY A, but the Statement of Work attached to the Service Agreement states 
the scope and objectives of Petitioner and makes references to COMPANY B’s 
understanding of Petitioner’s desire, plan, and current system and 
requirements.  

7. There is no evidence that COMPANY A and COMPANY B signed an agreement to 
authorize COMPANY A to use COMPANY B software, as required by Section 2.2 of 
the License Agreement.

8. Both the License Agreement and Service Agreement were signed by INDIVIDUAL A 
on behalf of Petitioner and COMPANY A.  

9. Invoices issued under the Service Agreement were mailed to COMPANY A.  On 
those invoices, COMPANY B identified Petitioner as the “Sold-to-party” and 
COMPANY A as the “Billed-to-party.”  The auditor noted in her audit plan that 
Petitioner makes the payments to COMPANY B, even though the invoices are billed 
to COMPANY A.

10. Petitioner submitted a printout titled “Dynamic List Display” which 
purports to show the total number of COMPANY B users.  The printout reflects a 
total of 2,720 users and the combined total of Texas users in CITY B and CITY A 
of 526.  No supporting documentation was provided to establish the accuracy of 
the purported numbers.

CONCLUSIONS OF LAW AND DISCUSSION:

Petitioner’s contentions should be denied.

Petitioner purchased software from COMPANY B, and the contested transactions 
involve services connected to that software.  Petitioner contends that the 
COMPANY B transactions should be deleted from Exam Nos. 400 and 500 because the 
services were purchased by its affiliated company, COMPANY A, on a stand-alone 
basis.  The Tax Division contends that the COMPANY B transactions should remain 
in Petitioner’s audit because Petitioner purchased both the software and the 
services in question.  The Tax Division relies heavily on invoices that show 
Petitioner as the purchaser of the services and COMPANY A as the 
“Billed-to-party.” According to the Tax Division, “[t]he billing arrangement 
does not change the taxability of the goods and services.” 

Both parties make blanket arguments without any attempt to distinguish the 
taxability of the services scheduled in the audit.  The taxability distinction 
is critical because different facts are involved and because it affects the 
availability of the multi-state benefit exemption claimed by Petitioner.  The 
contested services are installation and implementation services scheduled in 
Exam No. 400 and maintenance services scheduled in Exam No. 500. 

Maintenance services are services made taxable by statute as the repair, 
remodeling, maintenance and restoration of tangible personal property.  SECTION 
151.0101(a)(5).  Excluded from taxable maintenance of tangible personal 
property is the maintenance of a computer program not sold by the service 
provider.  SECTION 151.0101(a)(5)(D).  The maintenance fees that were scheduled 
in Exam No. 500 were purchased by Petitioner pursuant to the License Agreement 
executed by Petitioner and COMPANY B.  See, Finding of Fact No. 5.  Thus, the 
exclusionary provision of Section 151.0101(a)(5)(D) has no applicability here 
because the maintenance services at issue were performed by the seller of the 
software.  In fact, Petitioner reported the transactions as taxable during the 
amnesty program in order to obtain penalty and interest waiver.  Petitioner’s 
contention that the maintenance services performed by COMPANY B for Petitioner 
should be deleted from Exam No. 500 has no merit and should be rejected.

Scheduled in Exam No. 400 are installation and implementation services, which 
Petitioner refers to as consulting services.  Consulting services are not 
subject to tax if purchased on a stand-alone basis.  However, the sales price 
of the software is the total amount for which the software is licensed and 
includes a service that is a part of the sale and the amount of credit given to 
the purchaser by the seller.  SECTION 151.007(b).  If the software purchaser 
also purchases consulting services in conjunction with the software from the 
same vendor, then the consulting services are incidental to the sale of the 
software, and the charges for the consulting services have been determined to 
be part of the sales price of the software.  See, Comptroller’s Decision Nos. 
44,127 (2005) and 34,697 (1996).  Because the Service Agreement was signed by 
COMPANY B and COMPANY A, Petitioner contends that COMPANY A purchased the 
consulting services, not Petitioner.  The question presented is whether the 
consulting services provided by COMPANY B were purchased by Petitioner or by 
COMPANY A.

“It is basic tenets of sales tax law that related legal entities are treated as 
separate, distinct entities for sales tax purposes.”  Comptroller’s Decision 
No. 16,702 (1986).  And, the separate entity doctrine is well established in 
Comptroller decisions.  See e.g., Comptroller’s Decision Nos. 10,004 (1979), 
13,876 (1983), 19,063 (1986), 19,705 (1987), and 42,142 (2005).  Thus, 
Petitioner’s argument that COMPANY A is the purchaser of the consulting 
services based on the Service Agreement, at first blush, seems to have some 
merit, but further analysis of the evidence disproves Petitioner’s claim.

First, the License Agreement signed by Petitioner authorizes COMPANY A to use 
the software that Petitioner purchased only if COMPANY A also signs the 
agreement to be bound by the terms of the License Agreement and Petitioner 
agrees to indemnify COMPANY B for damages caused by COMPANY A’s breach.  See, 
Finding of Fact No. 5.  There is no evidence that COMPANY A signed the 
requisite license agreement; thus, Petitioner has not established that COMPANY 
A had authorization to use the software.  Second, the License Agreement between 
Petitioner and COMPANY B was executed on June 28, 1998, yet the Service 
Agreement between COMPANY A and COMPANY B was executed on June 24, 1998.  Both 
agreements were signed by the same person on behalf of Petitioner and COMPANY 
A.  Because there is no evidence that COMPANY A obtained formal authorization 
to use the software prior to the execution of the Service Agreement, the 
contemporaneous execution of the License Agreement and Service Agreement 
indicates that the Service Agreement was directly related to the software 
purchased by Petitioner and for Petitioner’s direct benefit.  That conclusion 
is further bolstered by the scope of work attached to the Service Agreement, 
which makes numerous references to Petitioner’s desire, objective, plan, and 
requirements.  COMPANY B, the service provider and one of the parties to both 
the License and Service Agreements, appears to have had that understanding, as 
indicated by its invoices identifying Petitioner as the purchaser.  Even though 
the invoices were billed to COMPANY A, the invoices were paid by Petitioner.  
The evidence of record demonstrates that the consulting services were purchased 
by Petitioner, and that COMPANY A merely signed the Service Agreement as an 
agent on behalf of Petitioner. 

In its Reply to the Position Letter, Petitioner concedes the taxability of the 
services by characterizing the COMPANY B services as “data processing 
services.”  According to Petitioner, the COMPANY B transactions in both Exam 
Nos. 400 and 500 should be reduced based on the multi-state benefit exemption.  
However, Petitioner’s claim that data processing services are involved is not 
supported by any evidence, and in fact, it runs counter to existing documentary 
evidence.  Thus, Petitioner’s claim of the multi-state benefit exemption will 
be addressed in the context of maintenance and consulting services.  

Section 151.330(f), which is the exemption statute for the multi-state benefit 
service, reads: “Services performed for use both within and outside this state 
are exempt to the extent the services are for use outside this state and made 
taxable on or after September 1, 1987.”  Because the implementation services 
scheduled in Exam No. 400 were assessed as part of the sale price of the 
software, the charges do not relate to taxable services and Section 151.330(f) 
is inapplicable.  See, Comptroller’s Decision No. 44,127.

With regard to maintenance services scheduled in Exam No. 500, the multi-state 
benefit exemption applies only if the software is customized.  See, 
Comptroller’s Decision No. 44,127.  There is no evidence to establish the type 
of software involved, but even if customized software was purchased, Petitioner 
has presented insufficient evidence to prove its eligibility to the exemption.  


Petitioner merely presented a printout to allocate the taxable charges, but did 
not provide supporting source records or other documentation that withstand 
verification.  The printout is tantamount to a bare assertion.  Petitioner has 
not established 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 is supportable by 
Petitioner’s books and records.  Because Petitioner is contending for an 
exemption from taxation, it must establish the elements of its claim by clear 
and convincing evidence.  Bullock v. National Bancshares Corporation of Texas, 
584 S.W.2d 268 (Tex. 1979); Rule 1.40(2)(A).  Petitioner has failed to sustain 
its burden of proof; therefore, it has failed to rebut the statutory 
presumption that the maintenance services were for use in Texas.  No 
adjustments are warranted.

RECOMMENDATION:

Based upon the foregoing findings of fact, conclusions, and discussion, the 
audit should be upheld in its entirety.

Signed September 1, 2006.


ELEANOR H. KIM
Chief Administrative Law Judge


HEARING NO. 46,844

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 September 1, 2006.


CAROLE KEETON STRAYHORN
Texas Comptroller




ACCESSION NUMBER: 200706958H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 06/15/2007
TAX TYPE: SALES