200808170H


SOAH DOCKET NO. 304-08-1334.26 & 304-08-1333.26
CPA HEARING NO. 46,281 & 46,282

HEARING 46,281
RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: July 1, 1999 THROUGH March 31, 2003

Limited Sales, Excise, And Use 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 Claimant



HEARING 46,282
RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: April 1, 2003 THROUGH July 31, 2003

Limited Sales, Excise, And Use 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 Claimant


COMPTROLLER’S DECISION

************** (Claimant) filed a refund claim for tax paid in error.  The 
Texas Comptroller of Public Accounts (Comptroller) has separated the claim into 
two periods and denied the claim.  Claimant has appealed the denials.  
Comptroller Staff (Staff) contends the denial should be upheld, subject to the 
agreed-to adjustments.  In this Proposal for Decision, the Administrative Law 
Judge (ALJ) recommends that Staff’s agreement should be adopted, that an 
additional refund be granted as set out in the ALJ’s Recommendation, and that 
the remaining refund amount claimed by Claimant be denied. 

I.  PROCEDURAL HISTORY, NOTICE & JURISDICTION

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

On January 10, 2008, Staff referred the cases to the State Office of 
Administrative Hearings for hearing on written submissions.  The above 
captioned cases were joined pursuant to an order of ALJ Peter Brooks.  Claimant 
was represented by **************, and the Comptroller was represented by 
Assistant General Counsel John D. Bostick.  The record closed on March 13, 
2008, by order of the ALJ.

II.  REASONS FOR DECISION

A.  Background and Issues Presented

Claimant’s main business consists of the production and sale of aggregates and 
ready mix concrete.  Claimant operates various quarries and mines and uses 
dredges to obtain sand, gravel, and rock aggregate.  As part of its daily 
operations, Claimant makes purchases of equipment, supplies, and repair parts 
for their dredges and plants.  

On August 20, 2003, Claimant filed a refund claim for the period July 1, 1999 
through July 31, 2003 requesting a refund in the amount of $************** for 
sales tax paid in error on certain purchases.  Due to the restrictions imposed 
by Rider 11 of House Bill No. 1, Appropriations Bill, 78th Reg. Leg. Session 
(2003), the Comptroller divided the refund claim into two periods: July 1, 1999 
through March 31, 2003, and April 1, 2003 through July 31, 2003, and performed 
two separate refund verification audits.  The Comptroller on March 1, 2005, 
issued letters denying the refund claims in part.  The Comptroller approved a 
refund in the amount of $************** for the period July 1, 1999 through 
March 31, 2003, and a refund in the amount of $************** for the period 
April 1, 2003 through July 31, 2003.  On March 30, 2005, Claimant filed 
requests for refund hearings, appealing the denials of the refund claims.  
Comptroller Staff asserts that the denial should be affirmed, subject, however, 
to the agreed adjustments set out in its Response to Claimant’s Supplemental 
Reply dated December 11, 2006.  

Claimant originally pled sixty-four (64) contentions in its Statement of 
Grounds. However, there is only one remaining contention in dispute involving 
equipment purchased for Claimant’s dredges.   Claimant contends that certain 
equipment purchased for its dredges constitutes exempt vessel component parts 
under TEX. TAX CODE ANN. 151.329, and, therefore, tax was paid in error on the 
purchases.  There are five purchases of equipment that are in dispute:

1. Sand and gravel pump packing,
2. Wire rope,
3. Engine,
4. Cable, and 
5. Suction pipe.

B. Evidence Presented

Staff presented the administrative record consisting of the Claimant’s claim 
for refund,  the refund audit reports and audit plans, and Claimant’s requests 
for refund hearings, as well as the multiple filings made by the parties before 
the Comptroller.  The administrative record also included affidavits executed 
by Claimant’s employees, as well as Claimant’s invoices and accounting records. 
 Claimant also presented photographs and additional invoices and purchase 
orders.  

C. Summary of Parties’ Argument

Claimant contends that the equipment purchased for its dredges constituted 
exempt vessel component parts under TEX. TAX CODE ANN. 151.329.  Claimant 
argues that under Comptroller policy, a piece of equipment constitutes a 
component part of a vessel if it “serves to make-up the vessel” and is 
physically attached to the vessel, regardless of whether the part is 
permanently affixed and cites Comptroller’s Decision Nos. 41,245 (2002) and 
15,809 (1984).  For evidence, Claimant relies principally on the affidavit of 
an employee, INDIVIDUAL A  , who oversees the production and operations of 
seven sand and gravel mines, including the dredges used in the mining of the 
sand and gravel.  Claimant insists that the affidavit was executed by the 
person best qualified to explain how the equipment is used as INDIVIDUAL A   
directly oversees Claimant’s dredging operations and has direct, personal 
knowledge of the dredges and the various items of equipment that make up a 
dredge.  Claimant asserts that the affidavit clearly establishes that disputed 
pieces of equipment are necessary for a dredge to mine sand and gravel, and, 
thus, qualify as a component part of an exempt vessel.  

Staff agrees in its Response to Second Supplemental Reply that Claimant’s 
quarry dredges are exempt vessels under Tax Code 151.329, but Staff argues the 
refund denials should be upheld because Claimant’s evidence is not clear and 
convincing evidence that the purchased tangible personal property actually 
became components of a specific dredge.  Staff objects to the affidavit because 
the testimony regarding the specific items explains in general terms how 
dredges typically operate.  Furthermore, Staff contends that Claimant did not 
provide business records or other evidence that sufficiently establishes a 
clear and convincing connection between the contested purchases and a specific 
dredge. 

Staff takes special exception to the evidence offered by Claimant to support 
its claim that the purchase of the diesel engine qualifies for the exemption.  
Staff takes the position that the e-mail descriptions provided by Claimant’s 
representative are not, in combination with the records, photographs, and 
affidavit testimony, sufficient to show by clear and convincing evidence that 
the diesel engine actually became a component of a dredge during the refund 
request period.  In fact, Staff, in its Response to Claimant’s Brief (Brief) 
filed with SOAH, rejects in very pointed terms each item of evidence offered by 
Claimant in support of its claim that the purchase of the diesel engine is 
exempt.  Although Staff objected to the evidence offered by Claimant, Staff did 
not request that the ALJ rule on the objections, and, therefore, the documents 
and photographs are part of the record. It appears that Staffs objects to the 
weight to be given the documents and photographs offered by Claimant.

D.  ALJ’s Analysis

The Comptroller may refund or credit tax if she determines that tax was 
unlawfully or erroneously collected.  TEX. TAX CODE ANN.  111.104(a).  When a 
refund claim is filed, the claimant is arguing that tax was “unlawfully or 
erroneously collected,” and the Comptroller has firmly placed the burden on the 
claimant to prove the matter asserted, especially in light of the fact that the 
refund claim is based on documents in the claimant’s possession.  Comptroller’s 
Decision Nos. 43,649 (2006), 42,247 (2004), 42,842 (2003), 40,946 (2003), and 
36,971 (1998).  However, the burden of proof differs depending on whether the 
refund claim is based on a non-exemption claim or an exemption claim.  The 
Comptroller has recognized that a claimant must prove that the Comptroller 
erred in denying its refund claim by a preponderance of the evidence in a 
non-exemption claim and by clear and convincing evidence if the claim is based 
on an exemption. 34 TEX. ADMIN. CODE  1.40; See e.g., Comptroller’s Decision 
Nos. 45,573 (2006) and 36,149 (1999).  In the instant case, Claimant’s 
entitlement to the refund rests on establishing that the equipment purchased 
qualifies for the exemption afforded component parts of an exempt vessel under 
Tax Code 151.329.  Thus, Claimant must show by clear and convincing evidence 
that the disputed pieces of equipment qualify for the exemption in order to 
receive the claimed refund.

Both parties agree that Claimant’s dredges are exempt vessels under Tax Code 
151.329.  Consequently, the question that must be settled in this case is 
whether the pieces of equipment purchased by Claimant qualify as component 
parts of Claimant’s dredges.  Little attention has been paid by the parties to 
addressing the legal basis for determining whether the equipment qualifies as 
an exempt component part.  Claimant limits its discussion to a recital in the 
most general of terms of the statutory and regulatory basis for the exemption, 
and an equally sweeping reference to several Comptroller’s hearings decisions.  
Staff, in turn, focuses no attention on the legal issues involved, but rather 
chooses to focus solely on the weight to be given the evidence offered by 
Claimant.  

Tax Code 151.329(1) exempts from tax materials, equipment and machinery that 
enter into and become component parts of a ship or vessel that is of eight tons 
or more displacement, if the ship or vessel is used exclusively and directly in 
a commercial enterprise, including commercial fishing, or is used commercially 
as a vessel for pleasure fishing by individuals as paying passengers on the 
vessels.  The parties agree that dredges at issue in this case meet the 
definition of an exempt vessel under Section 151.329(1), i.e., that they are 
vessels of eight tons or more displacement used exclusively and directly in a 
commercial enterprise.  Consequently, Claimant does not have to show that the 
dredges qualify as exempt vessels.

A component part is defined at 34 TEX. ADMIN. CODE 3.297(b)(2)(B) as “all 
tangible personal property that is actually attached to and becomes a part of a 
vessel qualified under paragraph (1) of this subsection,” but “does not include 
furnishings of any kind that are not attached to the vessel, nor does it 
include consumable supplies.” A component part, “[f]or example, ... does not 
include bedding, linen, kitchenware, tables, chairs, ice for cooling, 
refrigerants for cooling systems, fuels or lubricants.”  Id.  

Staff argues that the affidavit should not be afforded any weight because 
INDIVIDUAL A   explains in general terms how dredges typically operate and does 
not testify to his personal knowledge that the specific purchased items were 
installed on a specific dredge.  Contrary to Staff’s arguments, INDIVIDUAL A   
speaks with both personal knowledge and sufficient specificity regarding the 
operation of the dredges and the function of the disputed equipment for his 
affidavit testimony to be afforded serious consideration, rather than the 
outright dismissal advocated by Staff.  During the refund period in question, 
INDIVIDUAL A   was employed as an area production manager and was responsible 
for overseeing the production and operation of Claimant’s seven sand and gravel 
mines, including the seven dredges used in mining the sand and gravel.  His job 
responsibilities included budgeting, staffing, capital projects, and project 
development.  He has first hand knowledge of the function and purpose of all 
the machinery and equipment used in the mining operations, including the 
operation and structure of the dredges. 

The remaining question is whether INDIVIDUAL A  ’ affidavit testimony meets the 
evidentiary standard of clear and convincing evidence to support the claimed 
exemption under Tax Code 151.329. 34 TEX. ADMIN CODE 1.40(2)(A).  The 
well-established definition of clear and convincing evidence followed by the 
Comptroller is set out in Comptroller’s Decision No. 34,499 (1997), and has 
continued to be followed by the Comptroller in such recent decisions as 
Comptroller’s Decision Nos. 44,891 (2005) and 45,556 (2006). 

“This evidentiary standard is described in State v. Addington, 588 S.W. 2d 569, 
570 (Tex. 1979), on remand from the U.S. Supreme Court, 435 U.S. 967: Clear and 
convincing evidence is defined as that measure of proof which will produce in 
the mind of the trier of fact a firm belief or conviction as to the truth of 
the allegations sought to be established. This is an intermediate standard, 
falling between the preponderance standard of ordinary civil proceedings and 
the reasonable doubt standard of criminal proceedings. While the State's proof 
must weigh heavier than merely the greater weight of the credible evidence, 
there is no requirement that the evidence be unequivocal or undisputed.” 
Emphasis added. 

In short, in order for Claimant to prevail in its contention that the disputed 
purchases were for exempt component parts, Claimant must prove by clear and 
convincing evidence that the individual pieces of equipment are actually 
attached to and become a part of the vessel. The first step of the analysis is 
to understand the function of the quarry dredges operated by Claimant. 

A quarry dredge is used to mine sand and gravel from seams located underwater.  
Quarry dredges are especially equipped for this purpose.  The front of a 
dredge’s hull is the ladder, which is a large metal structure that supports the 
cutterhead, which resembles a drill bit.  The basic operation of a dredge 
involves lowering the ladder beneath the water.  The cutterhead penetrates the 
sand and gravel seam, digging out sand and gravel.  The sand and gravel pump, 
which is attached either to the ladder or the hull, draws the sand and gravel 
into the suction pipe and pushes it through the discharge pipe, which is 
attached behind the dredge and runs into the land-based processing plant.  The 
dredge is equipped when purchased with most of the equipment required to 
operate it, including the ladder, the cutterhead, the sand and gravel pump, 
winches, and motors.  The discharge piping, however, is attached after 
purchase.  The next step in the analysis is to consider whether the disputed 
pieces of equipment are attached and part of  the dredges.  

The COMPANY A invoice no. 218292 included the purchase of packing for the sand 
and gravel pump.  The pump is bolted to the dredge, either to the hull or 
ladder.  The packing surrounds the pump shaft, which turns the impeller of the 
pump in order to keep the pump watertight.  The packing was clearly purchased 
for the proper functioning of the sand gravel pump.  The sand and gravel pump 
draws the sand and gravel into the dredge’s suction pipe and pushes it through 
the discharge pipe, which is attached behind the dredge and runs to the 
land-based processing plant.  Consequently, the packing itself qualifies as a 
component part since it is attached and is part of the dredge.  

The COMPANY B invoice no. 95556 is for the purchase of wire rope that is 
attached to winches that are bolted to the hull of the dredge.  The wire rope 
runs from the winches to the anchors on dry land.  The dredge operator uses the 
wire rope to maneuver the dredge on the lake or pond by releasing or pulling on 
the wire rope.  Thus, the wire rope is attached and is part of the dredge.

The COMPANY C invoice no. S167081 is for the purchase of an engine which is 
bolted to the dredge’s hull and used to power hydraulic winches and a water 
pump.  The hydraulic winches raise and lower the ladder, which in turn raises 
and lowers the cutterhead so that sand and gravel can be extracted.  In 
addition, the water pump, which is also powered by this diesel engine, injects 
water into the sand and gravel pump in order to keep the pump shaft cool.  This 
prevents overheating and expands the pump’s packing in order to create a 
watertight seal.  The engine is attached to the dredge and it is a part of the 
dredge because it is required for the operation of the cutterhead and of the 
water pump.

The COMPANY A invoice no. 216442 is for the purchase of cable for the swing 
winch, which is bolted to the dredge’s hull.  INDIVIDUAL A, in his affidavit, 
does not explain what function the cable serves.  Claimant’s representative in 
its Brief filed with SOAH makes the representation that the cable and winch are 
used together to maneuver the dredge.  Claimant provides no evidence to support 
its contention that the cable is a component part, and, consequently, has 
failed to meet its burden of proof with respect to this piece of equipment.  

COMPANY D invoice No. 15512 is for a purchase of 44.20 feet of 12 3/4 inch 
piping, and is used as the dredge’s suction pipe.  The suction pipe is placed 
between the cutterhead and the sand and gravel pump, and is welded or bolted to 
the dredge’s ladder. The sand and gravel are drawn into the dredge’s suction 
pipe and pushes it through the discharge pipe.  The suction pipes are attached 
to the dredges and are clearly a part of the vessel and therefore they are 
component parts of the dredges.

Staff argues that Claimant’s evidence failed to identify the specific dredge 
upon which the disputed items of equipment were installed and to establish that 
the equipment was actually installed during the refund period.  The degree of 
specificity demanded by Staff is not required for Claimant to satisfy its 
burden of proof. The definition of clear and convincing does not require that 
the evidence be unequivocal or undisputed.  Claimant established by clear and 
convincing evidence that the pieces of equipment were purchased for use on the 
dredges it operated.  There is no evidence to indicate or suggest that the 
purchased equipment was either resold by Claimant or returned to the vendor.  
The statute and rule require that the tangible personal property become a 
component part of the vessel.  And Claimant has demonstrated that the items in 
question, except the cable, qualified as component parts of the dredges.  

In summary, Claimant has shown by clear and convincing evidence that the sand 
and gravel pump packing, wire rope, diesel engine, and suction pipe qualify as 
exempt component parts under Tax Code 151.329(1) and, thus, that it is entitled 
to a refund of the sales tax paid on the purchases of said equipment, but 
failed to show by clear and convincing evidence that the cable qualified as an 
exempt component part.

E. Recommendation

Staff’s denial of the refund claim should be upheld, except for the purchases 
of the sand and gravel pump packing, wire rope, diesel engine, and suction 
pipe, and the adjustments agreed to by Staff in its Response to Claimant’s 
Supplemental Reply dated December 11, 2006.

III. FINDINGS OF FACT

1. ************** (Claimant) filed a claim for refund for sales tax paid in 
error on purchases it claimed were exempt from tax.  The Texas Comptroller of 
Public Accounts (Comptroller) denied each refund claim in part. 

2. Claimant timely requested refund hearings.

3. On January 10, 2008, the Comptroller issued Notices of Filing for written 
submission hearing that 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.

4. By order of the Administrative Law Judge, the two hearings were joined and 
the record closed on March 13, 2008.

5. The packing for the sand and gravel pump was attached to the dredge and that 
the packing was a part of the vessel.

6. The wire rope was attached to the dredge and that the wire rope was a part 
of the vessel.

7. The engine was attached to the dredge and that the engine was a part of the 
vessel.

8. The piping for the suction pipe was attached to the dredge and that the 
piping was a part of the vessel.

9. Claimant failed to provide evidence to prove that the cable was attached and 
a part of the dredge.  

10. The packing for the sand and gravel pump is a component part of the dredge.

11. The wire rope is a component part of the dredge.

12. The engine is a component part of the dredge.

13. The piping for the suction pipe is a component part of the dredge.

14. Claimant failed to provide evidence to prove that the cable is a component 
part of the dredge. 

IV. 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 this proceeding, including the authority to issue a proposal for 
decision, 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. 2003.

4. Pursuant to 34 TEX. ADMIN. CODE  1.40(2)(A), Claimant bears the burden to 
prove exemption by clear and convincing evidence. Pursuant to 34 TEX. ADMIN. 
CODE  1.40(2)(B). Claimant bears the burden to prove that the audit or refund 
verification were otherwise erroneous by a preponderance of the evidence.

5. Based on the foregoing Findings of Fact, Claimant  proved by clear and 
convincing evidence that refunds are due for tax paid on the exempt purchases 
for the packing for the sand and gravel pump, the wire rope, the engine, and 
the piping for the suction pipe, which became component parts of an exempt 
vessel under Tax Code 151.329.

6. Based on the forgoing Finding of Facts, Claimant did not prove by clear and 
convincing evidence that a refund is due for the tax paid on the purchase of 
the cable.  

7. Based on the foregoing Findings of Fact, Claimant, with respect to the 
purchases of the equipment for its dredges, proved by a preponderance of the 
evidence that the denial of the refund claim was incorrect, except as stated in 
Conclusion of Law No. 6. 

8. Based on the foregoing Findings of Fact and Conclusions of Law, except for 
Conclusion of Law No.6, and subject to the adjustments agreed to by Staff in 
its Response to Claimant’s Supplemental Reply dated  December 11, 2006, the 
denial of the refund claim should be upheld. 


Hearing No. 46,281 & 46,282

ORDER OF THE COMPTROLLER

On March 17, 2008, the State Office of Administrative Hearings’ (SOAH) 
Administrative Law Judge, Peter Brooks, issued a Proposal for Decision in the 
above referenced matter.  The parties were given fifteen days from the date of 
the Decision to file exceptions with SOAH.  No exceptions were filed, and the 
Comptroller has determined that the Administrative Law Judge’s Proposal for 
Decision should be adopted with changes in accordance with Texas Government 
Code  2003.101(e) because the Administrative Law Judge did not properly apply 
and interpret the law.  The amendments specifically change a conclusion of law 
so that equipment qualifies as a component part for purposes of the vessel 
exemption under Tax Code  151.329(1) if it meets the definition of a “component 
part” under 34 TEX. ADMIN CODE  3.297(b)(2)(B). The amendments also remove 
analysis pertaining to equipment and whether it is “reasonably essential to the 
functioning of the vessel” from the Decision because 34 TEX. ADMIN CODE  
3.297(b)(2)(B) does not address this requirement.  

The above decision resulting in a credit to Taxpayer 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 6th of August 2008.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller




ACCESSION NUMBER: 200808170H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 08/06/2008
TAX TYPE: SALES