200803274H


SOAH DOCKET NO. 304-07-2182.27
CPA HEARING NO. 44,870

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: July 1, 1993 THROUGH February 28, 1997

Direct Payment Permit Sales Tax/RFD

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

JOHN D. BOSTICK
Representing Tax Division

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


COMPTROLLER’S DECISION

************** (Petitioner) was the subject of an audit by the Texas 
Comptroller of Public Accounts (the Comptroller) of its sales tax direct 
payment permit for the period July 1, 1993 through February 28, 1997. The audit 
resulted in a net credit or refund to Petitioner. Petitioner requested a 
redetermination hearing contending that additional credits or refunds were due. 
The Administrative Law Judge (ALJ) recommends that the claim for additional 
credits or refunds be granted for purchases designated as Item19. The remainder 
of the items should be denied. While the redetermination hearing was pending, 
Comptroller Staff issued an Amended Notification of Audit Results that 
disallowed certain credits that Petitioner had taken during the audit period, 
thus reducing the net credit or refund due to Petitioner. Petitioner objects to 
the amended notice on the grounds that it is barred by the applicable statute 
of limitations. The ALJ finds that the amended notice was timely. Finally, the 
ALJ recommends that Petitioner’s contentions regarding interest assessment be 
denied.

I. PROCEDURAL HISTORY, NOTICE & JURISDICTION

There are no issues of notice or jurisdiction in this proceeding and those 
matters are set out in the Findings of Fact and Conclusions of Law without 
further discussion here.

Petitioner elected to have the case decided based on the written submissions of 
the parties. Petitioner was represented by **************. Assistant General 
Counsel John D. Bostick represented the Comptroller. The record closed on April 
19, 2007.

A Proposal for Decision was issued on June 6, 2007. Petitioner timely filed 
Exceptions, and Comptroller Staff filed a Response. This Amended Proposed 
Decision is the ruling on the Exceptions and the Response.

II. CONTENTIONS, EVIDENCE PRESENTED, AND BURDEN OF PROOF

A. Agreed items

Comptroller Staff agreed to certain adjustments as stated in its Response to 
Reply on Written Submission of December 11, 2006, and in the pleadings 
referenced in that Response. The audit should also be amended as stated in the 
Position Letter issued by Staff.

B. Matters in Contention

1. Petitioner contends that purchases of electrical equipment, items for a 
Regenerative Thermal Oxidizer Unit (RTO), and other equipments were exempt as 
tangible personal property used in manufacturing.

2. The Comptroller’s Amended Notification of Audit Results issued on October 6, 
2006, disallowing certain credits that Petitioner had taken during the audit 
period, was barred by the four-year statute of limitations for assessing taxes.

3. Interest computations should take tax overpayments into account, and 
interest should be waived during periods of undue delay by Comptroller 
personnel.

4. Tax was incorrectly assessed on an invoice in the amended audit.

C. Evidence Presented

Petitioner submitted schedules identifying the purchases for which refunds are 
claimed, and invoices and purchase orders for the various transactions. For 
several purchases, Petitioner submitted affidavits from its employees.

Staff submitted the audit schedules, an audit plan and an amended audit plan, a 
Texas Notification of Audit Results, and a Texas Notification of Amended Audit 
Results.

D. Burden of Proof

Petitioner seeks credits or refunds for sales tax accrued on purchases that are 
claimed exempt under TEX. TAX. CODE ANN. 151.318, as in effect during the audit 
period, as tangible personal property used in manufacturing. Taxpayers claiming 
such exemptions must prove exempt status by clear and convincing evidence, and 
doubts concerning exemption should be resolved in favor of taxability. See 
North Alamo Water Supply v. Willacy County Appraisal Distr., 804 S.W. 2d 894, 
(Tex. 1991); Sharp v. Tyler Pipe Industries, Inc. (919 S.W. 2d 157, 161 (Tex. 
App. – Austin 1996, writ denied) (statutes exempting property from taxation 
should be strictly construed in favor of taxation, but should not be 
interpreted unreasonably). See also 34 TEX. ADMIN. CODE 140(2)(A). For most of 
the transactions at issues, the evidence of record consists of the invoice and 
the purchase order. In several instances, Petitioner has also submitted 
affidavits. Petitioner’s contentions can be allowed only to the extent the 
evidence submitted constitutes clear and convincing evidence that the items 
were used in an exempt manner.

Petitioner also contests the interest calculations, denial of interest waiver, 
and whether an amended audit notice was timely under the applicable statute of 
limitations. With regard to those contentions, Petitioner bears the burden of 
proof to show by a preponderance of the evidence that the audit results are 
incorrect. 34 TEX. ADMIN. CODE 140(2)(B). A Comptroller audit is entitled to a 
presumption of validity, and bare assertions are insufficient to show 
otherwise. Baker v. Bullock, 529 S.W. 2d 279 (Tex. Civ. App. – Austin 1975, 
writ ref’d n.r.e.). 

III. MANUFACTURING EQUIPMENT

A. Electrical Equipment and Supplies

Petitioner contends that it purchased electrical wiring, breakers, switches, 
instruments, transformers, and similar items that were exempt manufacturing 
machinery and equipment. The invoice dates for the items range from January of 
1994 to September of 1996. For periods through December 31, 1994, under TEX. 
TAX. CODE ANN. 151.318(g) and (h), a graduated refund or reduction in sales tax 
was allowed for qualifying manufacturing machinery and equipment with a useful 
life in excess of six months. After January 1, 1995, qualifying manufacturing 
machinery and equipment was 100% exempt from sales tax. All the purchases were 
made before September 1, 1997, when TEX. TAX. CODE ANN. 151.318(a)(2) was 
amended to narrow the manufacturing exemption to machinery and equipment that 
is directly used or consumed in manufacturing and that directly makes or causes 
a chemical or physical change to the product being manufactured.

During the relevant periods electrical equipment and supplies qualified for the 
manufacturing exemption under certain circumstances. STAR Document No. 
9010L1062A01 (October 30, 1990) states that electrical equipment used in and 
essential to a manufacturing process, or in the operation of manufacturing 
equipment, is exempt. The qualifying equipment included electrical wiring, 
breakers, switches, instruments, transformers, and similar items that directly 
control or operate machinery and equipment used directly in the production 
process. The qualifying equipment also included control panels and wiring to 
the motors or other devices that consume electricity used in processing. 
However, electrical equipment used in and essential to the general distribution 
of electric power such as generators, rectifiers, bus bars, meters, transformer 
substations, and devices that monitor the electrical system did not qualify. 

In addition, under 34 TEX. ADMIN. CODE 3.300(j) as effective during the 
relevant periods, manufacturing machinery and equipment purchased on or after 
January 1, 1995, for which sales tax exemption was claimed was subject to a 
divergent use rule, whereby sales tax was due on the fair market rental value 
or on the full purchase price for any period during which the machinery and 
equipment was used for a purpose other than manufacturing or processing. For 
machinery and equipment purchased during January 1, 1990 through December 31, 
1994, to qualify for the reduction in sales tax, the machinery and equipment 
had to be used primarily or predominantly in the manufacturing process. 

The specific items in contention are:

Item 1: COMPANY A Invoice No. 201189001, May 21, 1996. The invoice and 
manufacturer’s brochure describes a reverse vacuum starter. Petitioner states 
the item is a reversing vacuum starter with an amplifier for the LOCATION B 
particle board plant that was used in manufacturing as a start motor to power 
manufacturing equipment. Comptroller Staff states that there is insufficient 
evidence that the vacuum starter was used on exempt manufacturing equipment.

Item 2: COMPANY B Invoice No. GM95130, September 27, 1995. The invoice 
references a liquid power transformer. Petitioner states the item is a liquid 
power transformer for the LOCATION A Oriented Strand Board (OSB) plant that 
distributes power for processing equipment. Comptroller Staff states the 
invoice contains insufficient information to establish that the transformer 
distributes power for manufacturing equipment.

Item 3: COMPANY C Invoice No. 6869, August 15, 1996. The invoice references 
conductor wires and fuses. Petitioner states the purchase is conductor wires 
and fuses used for the LOCATION C Plywood plant to power processing equipment. 
Comptroller Staff states that the only evidence, the invoice, is insufficient 
to establish that the wires and switches were used to power processing 
equipment.

Item 4: COMPANY D Invoice No. 17310, May 22, 1996. The documentation that 
Petitioner submitted describes this item as payment for supplying a used Cat 
D349 standby power generators in lieu of another standby unit originally 
scheduled. Petitioner states that it as an emergency industrial grade generator 
for the LOCATION A OSB plant to provide a standby power generator to distribute 
power to processing equipment. Comptroller Staff states there is insufficient 
proof that the generator was used in an exempt manner. In the alternative, 
Comptroller Staff suggests that the photos Petitioner submitted indicate the 
generator was installed as an improvement to real property.

Item 5: COMPANY E Invoice No. 4806-NW, May 8, 1995. The invoice and purchase 
order reference arrestors and a “hy-press connectors” and charges for “trouble 
call, change out transformer bank at final pond LOCATION D, take transformers 
to LOCATION E and replace bad transformer bank at LOCATION E Boiler.” 
Petitioner states it purchased arrestors and hy-press connectors for the 
LOCATION E sawmill, and that the items were used for processing equipment. 
Comptroller Staff states that invoices and descriptions provided by 
Petitioner’s employees are insufficient to prove exemption for this invoice and 
for the following COMPANY E Invoices.

Item 6: COMPANY E Invoice No. 4818-COR, May 15, 1996. The purchase order states 
“inspect all switches, connections, and breakers, replace bad ABS switches, 
FCOs and bad crossarms at LOCATION F complex.” There are charges for 
superintendent, foreman, lineman, operator, and helpers, and charges for trucks 
and equipment. Petitioner states it purchased insulators, pins, and anchors for 
the LOCATION F OSB plant transformer to distribute power to the processing 
equipment.

Item 7: COMPANY E Invoice No. 5237, July 1, 1996. Petitioner describes the 
purchase as a transformer for the LOCATION B particle board plant main 
sub-station to supply power to processing equipment. The invoice references a 
main sub-station change out.

Item 8: COMPANY E Invoice No. 5297, July 29, 1996. Invoice describes the 
project as building double lines behind plant and main line, relocating 
temporary line at plant, and hauling and setting steel at ************** 
Substation, LOCATION A OSB. The purchase order references complete construction 
of substation power line from substation to plant and primary side connections 
to plant transformers.

Item 9: COMPANY F, Invoice No. 114125-00, January19, 1995. The invoice lists 
numerous marker tapes and other electrical items. Petitioner describes the 
items as conduits, connectors, wire marker tape, and wires used on and by 
processing equipment at the LOCATION A OSB plant. Comptroller Staff states 
that, according to the purchase order for this and the other purchases from 
COMPANY F, the items were for substation type transformers, and that such 
transformers may have been installed as real property, and that proof of exempt 
use has not been established.

Item 10: COMPANY F Invoice No. 124696-01, January 31, 1996. The invoice 
describes substation transformers and other items. Petitioner describes the 
items as transformers and related equipment for the LOCATION A OSB plant to 
distribute power to processing equipment.

Item 11: COMPANY F Invoice No. 124697-01, March 14, 1996. The invoice describes 
substation transformers and other items. Petitioner describes the items as 
transformers and related equipment for the LOCATION E OSB plant to provide 
power to processing equipment

Item 12: COMPANY F Invoice No. 132014-01, August 15, 1996. The invoice 
references a Cutler Hammer/Nema 3R outdoor enclosure. Petitioner describes the 
items as an enclosure and provision for a future electrical breaker for the 
LOCATION G Plywood plant related to the Regenerative Thermal Oxidizer unit, a 
pollution control system required by the Environmental Protection Agency.

Item 13: COMPANY G Invoice No. 494712, January 6, 1995. The invoice contains 
technical descriptions. Petitioner describes the purchase as an exterior head 
push button and selector switches for the LOCATION G plywood plant used to 
operate processing equipment. Comptroller Staff states that the purchase is 
coded to general maintenance supplies and expense, and that insufficient 
evidence was provided to prove the claimed exemption.

Item 14: COMPANY H Invoice No. 745179-01, January 19, 1994. The invoice 
contains only technical descriptions. Petitioner describes the items as relays 
for processing equipment in the LOCATION A plywood plant. Comptroller Staff 
states that the purchase is coded to general maintenance supplies and expense, 
and that insufficient evidence was provided to prove the claimed exemption.

Item 15: COMPANY H Invoice No. 745645-00, January 12, 1994. The invoice 
references heater elements, limit switches and other items with technical 
descriptions. Petitioner describes the items as relays, heater elements, and 
limit switches for processing equipment in the LOCATION H plywood plant. 
Comptroller Staff states that the purchase is coded to general maintenance 
supplies and expense, and that insufficient evidence was provided to prove the 
claimed exemption.

Item 16: COMPANY J Invoice No. 73-004019, September 19, 1996. The invoice 
contains technical descriptions. Petitioner describes the purchase as powerline 
boards with breakers and transformers for the LOCATION A OSB plant to 
distribute power for processing equipment. Comptroller staff states that 
insufficient evidence provided to support the claimed exemption.

No credits or refunds should be allowed for these items because Petitioner has 
not proved exemption by clear and convincing evidence. The Statements in 
Petitioner’s pleadings are not evidence and do not establish the factual 
predicate necessary to support a refund claim. The invoices, purchase orders, 
in some instances, manufacturers’ descriptions, do not prove that the 
electrical equipment was used to control or operate manufacturing equipment. 
The evidence does not exclude use of the items for general plant electricity 
distribution or other nonexempt use. 

For Item 12, exemption is claimed for electrical equipment on the grounds that 
it relates to a pollution control system. Comptroller Staff only states that 
exemption has not been proved. Exemption was allowed under TEX. TAX. CODE ANN. 
151.318(g) for qualifying machinery or equipment used in a pollution control 
process. That provision remained in effect through September 1, 1997. However, 
the evidence submitted does not provide a factual basis for concluding that the 
enclosures were pollution control equipment or component parts of such 
equipment.

Some of the items (for example, Items 5 and 6) appear to reference repair or 
maintenance services. Such services were exempt if performed on exempt 
property. See TEX. TAX. CODE ANN. 151.3111. But for the reasons already noted, 
Petitioner has not proved by clear and convincing evidence that the equipment 
was exempt manufacturing equipment. Comptroller Staff also objects that some 
items may be real property. In view of the conclusion that there has been no 
showing of exempt use, that issue need not be resolved.

B. Regenerative Thermal Oxidizer Unit (RTO)

Item 17 is a Regenerative Thermal Oxidizer Unit (RTO) (REECO Invoice No. 7125, 
May 18, 1994) purchased from an out-of-state vendor for Petitioner’s plant at 
LOCATION F, Texas. The parties agree that the purchase was exempt as pollution 
control equipment under former TEX. TAX. CODE ANN. 151.318(g), which exempted 
machinery, equipment, and replacement parts with a useful life in excess of six 
months that were purchased by a manufacturer and that were necessary and 
essential for a pollution control process. The parties disagree, however, on 
the exempt percentage to be applied to the purchase. Under the phased-in 
exemption for manufacturing machinery and equipment in former TEX. TAX. CODE 
ANN. 151.318 (h), the exempt percentage for items purchased in 1994 was 75%, 
and that is the percentage agreed to by Comptroller Staff, based on the invoice 
date of May 18, 1994. Petitioner contends 100% exemption should be allowed 
because that the RTO unit was not accepted until after January 1, 1995.

The invoiced amount on May 18, 1994 was $**************. Petitioner states that 
amount, which was 15% of the total purchase price for the unit, had been earned 
by the invoice date. Petitioner contends that because the unit was not accepted 
until after January 1, 1995, the exempt percentage should be 100%. However, 
under 34 TEX. ADMIN. CODE 3.300(f)(1) as effective February 5, 1992, the tax 
reduction rate for items purchased from out-of-state vendors was determined by 
the date that the items were brought into the state. Even though the completed 
unit may not have been accepted until a later date, Petitioner has provided no 
evidence that the items for which payment was made were brought into the state 
after January 1, 1995. For that reason, the request for additional credit or 
refund must be denied.

Petitioner contends air handlers, drive kits, low ambience controls, and 
condenser units purchased for an air conditioning unit were exempt as a 
component part of the RTO unit (Item 17: COMPANY V Invoice No. 1171, February 
14, 1995). Petitioner states the purchases were for the air conditioning unit 
at the LOCATION F OSB plant, which is a required part of the RTO. Petitioner 
references the purchase order, which states that item is “To Be used For” the 
RTO.  Comptroller Staff states that the invoice indicates “AC units,” and that 
this notation is insufficient to show that the items were component parts of 
the air condition units in the RTO. The parties appear to agree that if the air 
conditioners were a component part of the RTO unit they would be exempt. 
However, an air conditioning unit used for human comfort at the structure where 
the RTO unit was housed would not be exempt. A review of the documentation 
reveals no information that shows by clear and convincing evidence that the 
items are component parts of exempt equipment. and the contention must for that 
reason be denied.

C. Other Manufacturing Equipment 

Item 19 (COMPANY K Invoice No. 30241201, October 1, 1996) consists of purchases 
of double palm leather work gloves. Petitioner states the gloves are used by 
employees at the LOCATION J sawmill plant. Petitioner submitted an affidavit by 
its employee INDIVIDUAL A stating that the gloves are worn at the planer mill 
where sizing occurs, and that the double gloves protect the employees from the 
wood splinters during the process. Sizing is a process whereby the outer 
surface of each piece of wood is shaved off to make it smooth to meet required 
dimensions. Mr. INDIVIDUAL A states that the employees wear the gloves to 
inspect, sort, and grade the lumber as part of a quality control process, and 
that the gloves are required by OSHA regulations. Staff takes the position that 
the double gloves only protect the employees from the wood splinters during the 
sorting process, and that the manufacturing process could be done without the 
gloves. Staff states exemption should be denied because there is no proof that 
the manufacturing process would not be possible without the use of the gloves.

Under 34 TEX. ADMIN. CODE 3.300(d)(7)(B), as effective March 13, 1996, work 
clothing such as safety goggles, gloves and similar items having a useful life 
when new of six months or less that are necessary and essential to the 
manufacturing process when purchased by the manufacturer were exempt. The rule 
further stated that work clothing was exempt only if the manufacturing 
operation would not be possible without its use. At the time when the items 
were purchased, gloves and other safety equipment having a useful life in 
excess of six months were also considered exempt equipment, if the gloves were 
necessary and essential to a manufacturing operation. See STAR Document No. 
9606L1512A09 (June 6, 1996). Petitioner’s evidence that the gloves were 
necessary and essential to sawmill operations and were required by safety 
regulations is accepted, and the exemption should be allowed. 

Exemption for the following three items should be denied because the 
information in the invoices and purchase orders does not provide clear and 
convincing proof that the items were exempt equipment, or component parts of 
exempt equipment:

Item 20: COMPANY L Invoice No. 3278, September 28, 1995. Petitioner submitted 
invoices and vendor web pages that describe the purchase as a computer with 
tape drive and modem, two monitors, two glare screens, and a printer desk jet. 
Petitioner states the equipment is used to control processing equipment. Staff 
states the invoice and information on the vendor’s web page is insufficient to 
establish the claimed exemption.

Item 21: COMPANY M Invoice No. 74905, November 23, 1994. The invoice and 
purchase order reference red rubber gaskets. Petitioner states the purchases 
are gaskets for processing equipment at the LOCATION K Plywood plant. 
Comptroller Staff states that the purchase is coded to plant overhead, and 
there is insufficient evidence to support the claimed exemption.

Item 22: COMPANY N Invoice No. 7002004, November 31, 1994. Petitioner describes 
the purchase as galvanized pipe for the LOCATION A plywood plant used as part 
of a log slip barker processing equipment. Staff states that Petitioner’s 
description and invoice information contain little information other than the 
purchase price and are insufficient to support exemption.

Item 24 (COMPANY O Invoice No. 38177, Mach 15, 1994) is the purchase from a 
Kansas vendor of an industrial dehydration system for Petitioner’s LOCATION E 
OSB plant. As with Item 16 above, the parties agree that the item qualified as 
manufacturing equipment. The parties disagree as to the exempt percentage, 
whether the 75% exemption for purchases made in 1994, as Comptroller Staff 
contends, or full exemption, as Petitioner requests. The invoice is dated March 
15, 1994, and bears shipping terms FOB the Kansas location. Both the invoice 
and the purchase order invoice show that the requested shipping date is “by 
November 1995.” An affidavit by Petitioner’s employee INDIVIDUAL B states that 
the first shipment was made on March 21, 1996. In the absence of any shipping 
documents or other records, the statement in the affidavit is deemed 
insufficient to establish that the purchase date was after January 1, 1995, 
particularly since the affidavit statement does not accord with dates specified 
on the invoice and the purchase order. For that reason, no additional exemption 
percentage is recommended. 

Item 25 (COMPANY P Invoice No. 60031003, November 5, 1993) also involves the 
purchase date for purchases from an out-of-state vendor. Petitioner purchased 
wet bins, metering bins, rotary drum screens, diverter gates, and conveyors 
that the parties agree were qualifying manufacturing equipment. Staff takes the 
position that, because of the invoice date, the exempt percentage is 50%, the 
percentage available under former TEX. TAX. CODE ANN. 151.318 (h) for property 
purchased between October 1, 1993 and on or before December 31, 1993. 
Petitioner contends that full exemption should be allowed because the equipment 
was not delivered until after January 1, 1995. Petitioner relies on the invoice 
and the purchase order. The invoice states that 10% of the price, or 
$**************, is due upon placement of the order. The purchase order 
indicates 10% was due at the time of order, 10% upon submittal of drawings and 
plans, 25% when fabrication was at least half completed, 45% upon delivery, and 
the final 10% upon completion and start-up. The invoice states that deliveries 
for the various plants were to begin in April 1994 and were to be completed in 
April 1995. A similar time frame is stated in a letter from the vendor to 
Petitioner dated October 31, 1993. Petitioner’s documentation indicates that 
the parties, in October of 1993, contemplated that shipments would occur at a 
later date. However, as no shipping documents or other records have been 
submitted to prove when the specific items at issue were delivered, and for 
that reason no exemption can be recommended other than that agreed to by 
Comptroller Staff.

The invoice for Item 26 (COMPANY Q Invoice No. 64388, December 6,1995) 
references wide flange beams. Petitioner states the beams are a part of 
processing equipment, a chipper at the LOCATION B OSB. Staff states that the 
purchases are steel beams used for a “chip bin job.” In view of the sparse 
available evidence, exemption should be denied because there is no proof that 
the bin is a component part of exempt processing equipment.

The next four items are purchases invoiced in September of 1993 (Item 27: 
COMPANY R Invoice No. 088373, September 29, 1993; Item 28: COMPANY S Invoice 
No. 51260, September 9, 1993; Item 29: COMPANY O Invoice No. 37615, September 
7, 1993; Item 30: COMPANY T Invoice No. I-02128-0, September 29, 1993). With 
regard to each item, Petitioner contends that it accrued tax during October 
1993, and for that reason is entitled to the 50% reduction in effect as of 
October 1, 1993. Comptroller Staff takes the position that exemption has not 
been proved, and in the alternative, that the applicable purchase date for 
determining the tax reduction is on or before September 31, 1993, a period when 
the phased-in reduction was zero.

The invoice for Item 27 describes 21 white R-panels in two different 
dimensions. The invoice contains the notation: “Attn.: Boiler.” Petitioner 
state that the items were for a boiler at the LOCATION D plywood plant, and the 
boiler produced steam to operate dryers that heated veneer layers, in order to 
remove moisture before gluing. The invoice indicates that the panels were in 
some way connected with the boiler, but it does not establish that the panels 
were component parts of exempt manufacturing equipment. As statements in 
pleadings are not evidence, exemption has not been proved by clear and 
convincing evidence. 

The same is true of the remaining three items. The invoices for Items 28 and 30 
reference repairs to motors, but there is no proof that the motors were 
manufacturing equipment. For Item 29, relating to freight charges for a 
dehydration drum, Petitioner has not specified a basis for the claimed 
exemption, much less proved it. Since exemption has not been proved, it is not 
necessary to decide whether the purchase date was on or after October 1, 1993.

IV. STATUTE OF LIMITATIONS FOR AMENDED AUDIT NOTICE

Petitioner was audited for the period July 1, 1993, through February 28, 1997. 
The Comptroller auditor examined Petitioner’s books and records to determine 
whether Petitioner had properly paid or accrued sales tax on taxable purchases. 
The only tax assessments made by the auditor related to non-verified debit 
adjustments (Audit Exam 5000), which resulted in a tax assessment of 
approximately $**************. However, the auditor also found that Petitioner 
had paid or accrued tax on many exempt purchases, and allowed credits or 
refunds for tax paid or accrued in error. As a result, Petitioner received a 
net credit of $**************, as set forth in the Notice of Audit Results 
issued on March 10, 2000. The notice was timely for the entire audit period 
because the parties had filed several agreements to extend the limitations 
period. The last statute waiver for the audit period expired on April 20, 2000.

On April 7, 2000, Petitioner timely filed what was styled a petition for 
redetermination, claiming that additional refunds or credits were due for 12 
categories of purchases. Petitioner did not contest the $************** in tax 
that was assessed for disallowed debit adjustments. Petitioner was granted a 
hearing, and the hearing was pending for several years while Comptroller 
auditors and Staff reviewed documentation relating to the claims for refunds or 
credits. On June 2, 2003, Petitioner filed an Amended Statement of Grounds, 
setting forth 37 additional categories of purchases for which Petitioner 
believed refunds or credits may be due. Staff issued a Position Letter on 
December 14, 2005, stating the Comptroller’s position with regard to the items 
in contention. The Position Letter was followed by a series of responses and 
replies from both parties. At some point during this process, Comptroller Staff 
determined that Petitioner had taken credits during the audit period for 
transactions for which no credits were due, and that these erroneously taken 
credits should be offset against the credits and refunds that were allowed in 
the original Notice of Audit Results. Accordingly, on October 6, 2006, the 
Comptroller issued an Amended Notification of Audit Results, which reduced the 
allowed credits to $**************. Interest of $************** was assessed 
for interest that accrued during the time elapsed from when the credits or 
refunds had been originally paid until the time when they were disallowed.

Petitioner contends that the Amended Notification of Audit Results was barred 
by the statute of limitations. The Amended Notification of Audit Results was 
issued on October 6, 2006 and disallowed credits during the audit period 
extending from July 1, 1993, through February 28, 1997. Petitioner cites TEX. 
TAX CODE 111.2051, which states that, notwithstanding any other limitations 
period in the Tax Code, the Comptroller may assess tax if a taxpayer timely 
files a refund claim, but that such assessment is limited to the period and tax 
type for which refund is sought, and must be before the later of: (1) four 
years after the date the refund claim is filed with the Comptroller; or (2) the 
expiration of the applicable limitation period for making assessments as 
otherwise provided in the Tax Code.  Petitioner contends that its hearing 
request of April 7, 2000, resulted in a refund hearing because the audit found 
that a net credit or refund was due, and because Petitioner only sought 
additional credits and refunds. Petitioner contends that, since the Amended 
Notification of Audit Results was issued on October 6, 2006, a date more than 
four years after the hearing request of April 7, 2000, it was barred by the 
four-year statute of limitations.

Comptroller Staff contends that the notice of October 6, 2006 was timely 
because it was issued within four years from the date that Petitioner filed an 
Amended Statement of Grounds on June 2, 2003. Petitioner disagrees and takes 
the position that the amended claim should not be considered because it was 
only a general claim filed in advance of a law change that did not state any 
specific transactions, and because the refund or credit items now at issue were 
stated in the original refund claim of April 7, 2000. On August 25, 2006, 
Petitioner withdrew the Amended Statement of Grounds. Petitioner asserts the 
withdrawal of the amended claim is an additional reason for finding that the 
additional assessment made on October 6, 2006, was barred by limitations.

The parties disagree as whether the original hearing request filed by 
Petitioner on April 7, 2000, resulted in a redetermination hearing or in a 
refund hearing. Staff argued that because Petitioner styled its hearing request 
as a “request for redetermination,” and because the hearing was docketed as 
such by the Comptroller, this proceeding should be considered a redetermination 
hearing. Petitioner contends that the hearing request of April 7, 2000, 
specified only refund and credit items, and did not contest any part of the tax 
that was assessed, and should therefore be considered a refund claim, 
regardless of what it was originally called. Petitioner’s position appears 
correct. It is true that refund or credit items may be considered in a 
Comptroller redetermination proceeding. However, such claims for credits have 
the same legal status as refund claims that were separately filed. 
Comptroller’s Decision Nos. 44,406 (2005) and 45,369 (2005). In this hearing, 
the audit adjustments were not contested, and the hearing request related 
entirely to credits and refunds that were denied in the original audit or that 
were subsequently identified by Petitioner. Under TEX. TAX CODE 111.104(c), a 
refund claim must be written, state the grounds on which the claim is founded, 
and be timely filed. As stated in Strayhorn v. Lexington Ins. Co., 128 S.W. 3d 
772 (Tex. App. – Austin 2004), the statute does not explicitly require that the 
term “refund” be used; it is sufficient that the desire for a refund is 
apparent. Substance and not form should control, and Petitioner’s claim should 
be considered a refund claim for ascertaining the applicable limitations 
periods. [ENDNOTE]

Since Petitioner’s filing of April 7, 2000, is recognized as a refund claim, 
any additional assessment is subject to the four-year limitation on assessments 
stated in TEX. TAX CODE 111.2051. The assessment at issue, for the period July 
1, 1993, through February 28, 1997, was made on October 6, 2006, more than four 
years after the taxes were due and payable, and more than four years after a 
refund was requested on April 7, 2000. The amended assessment therefore would 
be barred by limitations, unless the Amended Statement of Grounds of June 2, 
2003, is regarded as an event that begins another four-year assessment period.

Petitioner contends that the amended claim has no legal affect because all of 
the refund or credit items now at issue were stated in the original refund 
claim, and because the amended claim stated only general issues, and did not 
identify any specific transactions. Comptroller Staff responds that the amended 
claim was filed for the purpose of protecting potential refund claims from the 
effect of an anticipated change in the law. The original refund claim filed on 
April 7, 2000, tolled limitations for future sales tax refund claims while the 
hearing was pending. Under TEX. TAX CODE 111.207(d), as then in effect, a 
refund claim tolled limitations during the period while an administrative 
proceeding was pending for the same period and the same type of tax. But TEX. 
TAX CODE 111.207(d) was repealed as of June 20, 2003. Under a new provision, 
TEX. TAX CODE 111.207(b), also effective on June 20, 2003, suspension of 
limitations was limited to “the issues that were contested.” 

The Amended Statement of Grounds, filed shortly before the new law went into 
effect, identified numerous new categories of purchases as grounds for 
potential refund claims. Although Petitioner failed to prove any specific 
transactions for those categories, the Amended Statement of Grounds effectively 
suspended the limitations period that would otherwise have applied. The Amended 
Statement of Grounds was a refund claim in its own right under TEX. TAX CODE 
111.104, and it marked the beginning of another four-year period in which a tax 
assessment for the same tax and period is allowed under TEX. TAX CODE 111.2051. 
Since the amended assessment on October 6, 2006, was made within four years 
from the date the second tax refund claim was filed, it was not barred by 
limitations.

There is a final matter that requires consideration. On August 25, 2006, 
Petitioner notified Comptroller Staff that it “withdraws in its entirety” the 
Amended Statement of Grounds filed on June 2, 2003. Petitioner contends this 
action in effect negates the filing of the Amended Statement of Grounds, with 
the result that there was no new four-year period for issuing a tax assessment. 
The statute, however, states that an assessment must be made before “four years 
after the date the refund claim is filed with the Comptroller.” The statute 
does not say that a refund claim must be actively pursued at the time the 
assessment is made. In cases of statutory construction, the first and foremost 
matter to be considered is the words of the statute. Lexington Insurance Co. v. 
Strayhorn, 209 S.W. 3d 83 (Tex. 2006). Petitioner’s interpretation is also not 
required by equity or policy considerations. The Amended Refund Claim was 
pending before the Comptroller for more than three years. During this time the 
limitations period was suspended for the identified categories, allowing 
Petitioner time to identify factual or legal grounds for refunds. Petitioner’s 
notice that it no longer wished to pursue those grounds for refund did not 
cancel the original filing of the refund claim. Taxpayers often choose not to 
prosecute a refund claim for many different reasons, but that does not mean a 
refund claim was never filed. In view of the foregoing reasons, the Amended 
Notification of Audit Results issued on October 6, 2006, was not barred by 
limitations.

V. INTEREST

Petitioner requests that interest be properly computed by offsetting any tax 
overpayments against tax due. Staff states that the interest calculations 
submitted to date were preliminary, and that more complete computations will be 
included with the figures to be attached to a final Comptroller’s decision. 
While Petitioner’s request is correct in principle, any ruling on this matter 
would be premature at this time.

Petitioner requests interest waiver under 34 TEX. ADMIN. CODE 3.5(d) on the 
grounds that there was undue delay by Comptroller personnel or otherwise during 
the course of the redetermination. Staff responds that no undue delay has been 
identified, and that during the extended redetermination period both parties 
were identifying disputed items, conducting meetings, and reviewing 
documentation. It is unquestionably true that this redetermination has been 
pending for a long time. The Notice of Audit Results was sent on March 10, 
2000. A Position Letter was not issued until December 14, 2005. The Comptroller 
issued an Amended Notification of Audit Results October 6, 2006. However, 
Petitioner has not identified any facts to establish that there was undue delay 
by Comptroller personnel. Interest is a time charge for monies owed to the 
state, and are only waived upon a showing of undue delay or other criteria set 
forth in the Comptroller’s rule. For these reasons, no interest waiver is 
recommended.

VI. AMENDED AUDIT ASSESSMENT ITEM

Petitioner contends that tax was incorrectly assessed in the Amended Audit, 
Exam 13000, on Invoice No. 9655 from COMPANY U In the exam, that invoice was 
assessed at $**************. Petitioner states that the taxable amount was only 
$**************, and requests that the amount be adjusted accordingly. 
Comptroller Staff explains that two invoices are involved from the same vendor, 
both in the amount of $**************, and that the invoice in question was 
treated correctly. As the necessary source documents have not been submitted or 
referenced, no resolution is possible, other than that Petitioner has not shown 
by the preponderance of the evidence that the audit results are incorrect. For 
that reason, no adjustment can be recommended.

VII. FINDINGS OF FACT

1. The Texas Comptroller of Public Accounts (the Comptroller) audited 
Petitioner for compliance with its direct payment permit for the period July 1, 
1993 through February 28, 1997. The Notice of Audit Results issued on March 10, 
2000 allowed a net credit of $**************.

2. Because Petitioner had signed agreements to extend the statute of 
limitations, the Notice of Audit Results was timely for the entire audit 
period.

3. Petitioner timely filed a Request for Redetermination Hearing. Petitioner 
subsequently requested that the case be decided based on written submissions. 

4. The Comptroller provided a notice of hearing to Petitioner on March 22, 
2007.

5. The notice of hearing contained a statement of the nature of the hearing; a 
statement of the legal authority and jurisdiction under which the hearing was 
to be held; a reference to the particular sections of the statutes and rules 
involved; and a short, plain statement of the matters asserted.

6. Petitioner purchased gloves (Item 19) that were used by its employees at a 
sawmill plant to sort and grade lumber. The gloves were required by safety 
regulations.

7. For the remaining numbered items, the invoices, purchase orders, and other 
evidence Petitioner submitted did not establish that the items were used for an 
exempt purpose, or exclude the possibility that the items could have been used 
for a nonexempt purpose.

8. Petitioner filed an Amended Statement of Grounds on June 2, 2003, stating 
refund claims for additional categories of purchases.

9. On October 6, 2006, the Comptroller issued an Amended Notification of Audit 
Results, reducing the allowed credits to $**************. Interest was assessed 
for credits or refunds previously allowed, but that were disallowed in the 
amended notice.

10. Petitioner did not prove any periods of undue delay by Comptroller 
personnel.

VIII. CONCLUSIONS OF LAW

1. The Comptroller has jurisdiction over this matter pursuant to TEX. TAX CODE 
ANN. ch. 111.

2. The State Office of Administrative Hearings has jurisdiction over matters 
related to the hearing in this matter, including the authority to issue a 
proposal for decision with findings of fact and conclusions of law pursuant to 
TEX. GOV’T CODE ANN. ch. 2003.

3. The Comptroller provided proper and timely notice of the hearing pursuant to 
TEX. GOV’T CODE ANN. ch. 2001.

4. Other than for Item 19, Petitioner did not prove exemption by clear and 
convincing evidence for the purchases that were claimed exempt as required by 
TEX. ADMIN. CODE 140(2)(A).

5. The Amended Notification of Audit Results issued on October 6, 2006 was 
timely pursuant to TEX. TAX CODE 111.2051.

6. Petitioner did not prove the factors for interest waiver set forth in 34 
TEX. ADMIN. CODE 3.5(d).

7. Petitioner did not prove that the audit results were otherwise incorrect by 
a preponderance of the evidence as required by 34TEX. ADMIN. CODE 140(2)(B).

8. Based upon the above Findings of Fact and Conclusions of Law, the audit 
should be amended by allowing a refund for the purchase designated as Item 19. 
In all other respects, the audit results should be upheld.


Hearing No. 44, 780

ORDER OF THE COMPTROLLER

On July 17, 2007, the State Office of Administrative Hearings’ Administrative 
Law Judge, Alvin Stoll, issued an Amended Proposal for Decision in the above 
referenced matter to which Taxpayer filed Exceptions on August 1, 2007 and the 
Tax Division filed a Response on August 14, 2007. The Comptroller has 
considered the Exceptions, the Tax Division’s Response, and the ALJ’s 
recommendation letter dated August 21, 2007 and has determined that the ALJ’s 
decision should be modified only as recommended in the ALJ’s recommendation 
letter. Accordingly, the ALJ’s proposed decision has been modified as follows:

* The reference to “specific periods” has been deleted from the second 
paragraph in section V of the decision and the words “specify or” have been 
deleted from finding of fact number ten because the record indicates that 
Petitioner did specify a period of time in which it contended that undue delay 
occurred.

* All references to Taxpayer’s “Amended Claim for Refund” have been changed to 
“Amended Statement of Grounds,” which is the correct terminology.

The above decision resulting in Taxpayer's liability as set out in “Attachment 
A,” which is incorporated by reference, is approved and adopted in all 
respects. The decision becomes final twenty days after the date Petitioner 
receives notice of this decision, and the total sum of the tax, penalty, and 
interest amounts is due and payable within twenty 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 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 5th day of March 2008.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller

ENDNOTE:

The Comptroller docketed this hearing as a redetermination hearing.  Although 
it is considered a refund hearing for purposes of applying the limitations 
related to assessments, a formal reclassification of the hearing is not deemed 
necessary.





ACCESSION NUMBER: 200803274H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 03/05/2008
TAX TYPE: SALES