Texas Comptroller of Public Accounts    STAR System


AP 117

Date: May 13, 2008
To: Audit Staff
From: David Rock
Subject: Treatment of Sales to Direct Pay Permit Holders

If a seller is under audit, resale or exemption certificates are the only 
acceptable proof for sales deductions.  In the past, if the seller was under 
audit, our policy was not to assess tax to the seller for sales made to a valid 
direct payment permit (DPP) holder, even if the seller did not have a 
certificate on file.

We have had two hearings decisions (H 42,761 and H 46,101) which state that 
direct pay permit holders should be treated the same as all other taxpayers 
claiming an exemption under the tax code. When auditing a seller, sales to a 
DPP holder should be assessed unless the seller has a DPP exemption certificate 
on file with the seller at the time of audit, or acquires one within the 
statutory 60 day requirement.

Direct payment permit holders make a choice when they elect to issue their DPP 
exemption certificate, and it will affect the tax due on the transaction.  If 
the DPP holder elects to pay the sales tax to the vendor instead of issuing a 
DPP exemption certificate, sales tax is due based on the location of the 
seller.  If they elect to issue their DPP exemption certificate, USE tax is due 
based on the location of the DPP holder.  The DPP holder is not allowed to 
change their election after it is made, and we should not be making that 
decision for them.

The Auditing Fundamentals Manual is currently being revised to correctly 
reflect this policy. If you have any questions on this policy, please contact 
the Area Manager of Technical Support or the supervisor of Technical Support in 
Audit Headquarters.

As STAR is the Comptroller's research system for Texas tax policy issues,
only tax-specific audit policy memos (AP Memo) are included here. AP memos
not on STAR can be found on Window on State Government on the
Audit Memos web page.

DATE: 05/13/2008