200809234H



SOAH DOCKET NO. 304-07-4011.26
CPA HEARING NO. 49,141

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: July 1, 2002 THROUGH December 31, 2003

Limited Sales, Excise, And Use Tax/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

TREVOR MOORE
Representing Tax Division

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


COMPTROLLER’S DECISION

************** (Petitioner) seeks the redetermination of the sales and use tax 
assessment made by the Texas Comptroller of Public Accounts (Comptroller). The 
assessment at issue relates to transactions that occurred between July 1, 2002 
through December 31, 2002. In addition, Petitioner seeks a refund of tax paid 
to the state during January 1, 2003 through December 31, 2003. Comptroller 
Staff (Staff) agrees to delete Record No. 1919-6 from the audit, but it 
contends that the remaining audit liability should be affirmed and that the 
refund claim should be denied. In this proposal for this decision, the 
Administrative Law Judge (ALJ) recommends that Staff’s agreed deletion be 
adopted and that the remaining assessment be upheld. The ALJ further recommends 
that the refund claim 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.

Petitioner requested a decision based on the written submissions of the 
parties. Petitioner was represented by attorney **************. The Comptroller 
was represented by Assistant General Counsel Trevor Moore. The record closed 
September 28, 2007. 

II. REASONS FOR DECISION

A. Background Facts and Issues Presented

Petitioner was audited for sales and use tax compliance by the Comptroller for 
the period July 1, 2002 through December 31, 2003. The Comptroller issued a 
Texas Notification of Audit Results, which was amended upon Petitioner’s 
provision of additional documentation. The Comptroller issued a Texas 
Notification of Amended Audit Results on December 13, 2006, and assessed 
Petitioner a tax deficiency of $**************, plus penalty and interest. 

The audit adjustments at issue assessed tax on Petitioner’s use of two 
airplanes during the first six-month period of the audit period (i.e., July 1, 
2002 through December 31, 2002). The Comptroller auditor scheduled each item in 
Exam 3 as “divergent use” and described the scheduled items as “plane rental” 
or “estimated amount [for] personal use.” 

Petitioner contends that the audit adjustments in Exam No. 3 should be deleted. 
According to Petitioner, it owes no tax for any use of the airplanes in 2002, 
because it never issued a resale certificate to acquire the aircrafts, nor did 
it assert any sales tax exemption. For the same reasons, Petitioner contends 
that a refund is due on tax that it erroneously reported and remitted in 2003.

B. Evidence

Staff offered the following documentary evidence: (1) the amended audit report; 
(2) the amended audit plan; (3) the Texas Notification of Amended Audit 
Results; (4) the assignment and assumption agreement between COMPANY and 
Petitioner; and (5) a letter dated May 10, 2002, from Petitioner’s attorney to 
Donna Halbert of the Comptroller’s office.

Petitioner presented the following documentary evidence: (1) the Texas 
Notification of Amended Audit Results; (2) the amended audit schedules for Exam 
3; (3) sales tax payment information; (4) a Texas Notice of Tax Due dated April 
11, 2003 for estimated sales and use tax liability for the fourth quarter of 
2002; (5) quarterly sales and use tax returns filed with the Comptroller in 
2003; and (6) STAR Accession No. 9112L1146D10 (December 10, 1991).

C. Facts Obtained from Documentary Evidence

The Comptroller audited Petitioner for sales and use tax compliance for the 
period April 1, 2000 through June 30, 2002 (the first audit). Petitioner did 
not hold a sales and use tax permit. During the first audit period, Petitioner 
acquired two aircrafts, a 1975 Dassault Falcon 10 (the Falcon) and a 1985 
Cessna Citation II (the Citation). Petitioner paid no sales or use tax when it 
acquired the airplanes. The Comptroller auditor did not schedule the aircraft 
acquisitions in the first audit, but she assessed tax on each use of the 
airplanes by Petitioner. Petitioner later became permitted for sales and use 
tax and began filing sales and use tax returns. After the first audit, 
beginning in 2003, Petitioner reported and remitted tax on its use of the two 
airplanes. 

Petitioner was audited sales and use tax compliance by the Comptroller for the 
period July 1, 2002 through December 31, 2003 (the audit at issue). The 
adjustments made in the audit at issue are similar to the adjustments made in 
the first audit. 

D. Applicable Authorities, Arguments, and Analysis

Petitioner used two airplanes to perform airplane chartering services. Based on 
the taxability letter issued by the Comptroller stating that “[s]ales tax is 
not due on the charter of an aircraft for the purpose of transporting 
passengers,” [ENDNOTE: (1)] Staff agrees that Petitioner’s chartering services 
were not subject to tax. Consequently, the taxability of the receipts from the 
chartering services is not in dispute. What is in dispute is the tax assessed 
on Petitioner’s use of the airplanes to perform its non-taxable chartering 
services or other use. The auditor scheduled each use as taxable divergent use.

The term “divergent use” is found in Tax Code Section 151.154 (relating to 
resale certificate) and Tax Code Section 151.155 (relating to exemption 
certificate). Both statutes impose tax liability on a purchaser who purchases a 
taxable item tax free by claiming an exemption from tax, but who subsequently 
uses the item in a non-exempt manner. The “person making the divergent use” is 
liable for tax on the fair market rental value of the taxable item that the 
purchaser would pay on the open market to rent or lease the item. [ENDNOTE: 
(2)] The purchaser may at any time elect to pay tax on the original purchase 
price and cease paying tax on the fair market rental value. [ENDNOTE: (3)] If 
there is no fair market rental value of the item, the purchaser must pay tax on 
the original purchase price. [ENDNOTE: (4)] 

Staff asserts that Petitioner purchased the airplanes tax free under the sale 
for resale exemption and then used the aircrafts to perform non-taxable 
chartering services. According to Staff, such use under such facts requires 
Petitioner to pay tax on each divergent use of the airplanes based on the fair 
market rental value of the aircraft. Staff cites 34 Texas Administrative Code 
(TAC) Section 3.294(c)(3)(B) and Section 3.285(e). Both rules essentially 
provide that a person who purchases tangible personal property tax free under a 
resale certificate owes tax on the fair market rental value of the tangible 
personal property if the tangible personal property is removed from a tax-free 
inventory for use in Texas. The rules are consistent with Tax Code Section 
151.154. 

Petitioner contends that 34 TAC Section 3.285(e)(1) and Section 3.294(c)(3)(B) 
apply only to inventory items for which a resale exemption was claimed by the 
purchaser under a valid resale certificate.  Petitioner attacks the assessment 
on the basis that it never issued a resale certificate when it acquired the 
airplanes and relies on the fact that it was not even permitted for sales and 
use tax at the time of acquisition. Petitioner further contends that it never 
claimed an exemption from tax when it acquired the airplanes, which is 
Petitioner’s apparent attempt to disavow the applicability of Tax Code Section 
151.155, in addition to challenging Staff’s application of Tax Code Section 
151.154. Petitioner argues that statutes and rules that impose tax must be 
strictly construed against the state. [ENDNOTE: (5)] This statutory 
construction argument is the main thrust of Petitioner’s contention that it is 
entitled to relief. 

Tax Code Section 151.154(a) imposes tax on divergent use by a purchaser “who 
gives a resale certificate.” Tax Code Section 151.155(b) holds a purchaser 
liable for divergent use if the purchaser “certifies in writing” that the item 
will be used in an exempt manner. The Comptroller’s rules provide tax is due on 
divergent use by a purchaser who purchased the item “under a resale 
certificate” or “under a valid exemption certificate.” [ENDNOTE: (6)] Thus, 
Petitioner’s argument that it cannot be held liable for tax on divergent use 
follows the literal reading of the pertinent statutes and rules. Staff responds 
that “the fact that no exemption or resale certificate was issued for the 
original purchase does not affect the taxability of the aircraft.” Staff cited 
no authority in support of its position. Petitioner responds that Staff’s 
interpretation is too expansive and violates the strict construction principle.

Petitioner is correct in stating the basic principle of construction of tax 
statutes. However, the cardinal rule of any statutory interpretation is to give 
effect to the legislature’s intent. [ENDNOTE: (7)] Even when the language of a 
statute is unambiguous, other factors may be considered to determine the 
legislature’s intent, including the object sought to be obtained, the 
legislative history, the consequences of a particular construction, and any 
administrative construction of the statute. (ENDNOTE: (8)] Moreover, the 
statute to be construed should be considered in context and as a whole, with an 
attempt to harmonize its various provisions. [ENDNOTE: (9)]

The statutory taxing scheme must be understood. Sales and use taxes are 
transactional taxes, and either the seller and the purchaser may be held liable 
for the tax. [ENDNOTE: (10)] The Tax Code presumes that all gross receipts of a 
seller are taxable unless the seller accepts a properly, completed resale or 
exemption certificate. [ENDNOTE: (11)] As a result, when a seller is audited, 
the Comptroller requires the seller to produce a resale or exemption 
certificate to prove tax-free sales. On the flip side, a purchaser issues a 
resale or exemption certificate when claiming an exemption. However, the 
purchaser is not required by law to keep a copy of the resale or exemption 
certificate, which means it must rely on a tax exemption statute to prove that 
its purchases were not taxable. As a result, the Comptroller states that the 
“[f]ailure on the purchaser’s part to give an exemption [certificate] at the 
time of purchase has never been considered a bar that would prevent the 
purchaser from showing that the purchase was in fact exempt.” [ENDNOTE: (12)] 
This policy incorporates the recognition that to require the actual issuance of 
a certificate to claim any statutory exemption would defeat the legislative 
intent behind the exemption. [ENDNOTE: (13)] The Comptroller’s policy of 
allowing a purchaser to claim an exemption even without the issuance of a 
certificate was extended to the construction of Tax Code Section 151.154 and 
Section 151.155. [ENDNOTE: (14)] The extension is logical. If a purchaser can 
claim an exemption, including the sale for resale exemption, without issuing a 
certificate, then the purchaser should be held liable for divergent use of the 
tax-free item, in order to treat the purchaser similarly to other purchasers 
who actually issued a resale or exemption certificate. Stated differently, the 
Comptroller’s policy treats similarly-situated taxpayers equally. As such, the 
Comptroller’s reading of Tax Code Section 151.154 and Section 151.155 to 
include purchasers who gave a resale or exemption certificat
e or who could have claimed an exemption is reasonable. Accordingly, the fact 
that Petitioner never actually issued a resale certificate does not prevent the 
Comptroller from assessing tax on divergent use if Petitioner purchased the 
airplanes tax free under an exemption. 

The purchase of an airplane is subject to tax unless an exemption applies. In 
this context, Petitioner’s statement that “no sales tax was due on such 
acquisitions” and that it never claimed any sales tax exemption, including the 
sale for resale, can only be construed to mean that Petitioner contends that 
its acquisitions were never subject to sales or use tax. Petitioner pleaded no 
specific basis for its claim, nor did it offer any evidence to prove its 
assertion. Staff assumes that Petitioner is arguing that no consideration was 
given for the aircrafts, an argument that Petitioner previously raised in 2002, 
during the first audit. Staff offered a letter written by Petitioner in 2002 to 
Donna Halbert, a Comptroller auditor, and the assignment and assumption 
agreement between Petitioner and COMPANY. According to Staff, the two documents 
prove that Petitioner gave consideration for the Citation and that Petitioner 
had asserted the airplane was acquired for resale. Petitioner responds that 
neither the agreement nor the letter expressly references the Falcon or the 
Citation. 

The audit assessment and the refund claim at issue involve tax on Petitioner’s 
divergent use of the airplanes. Petitioner bears the burden of proof to show 
that the audit is erroneous and that a refund is due. [ENDNOTE: (15)] 
Petitioner’s 2002 letter to a Comptroller auditor demonstrates that Petitioner 
alleged two grounds why the acquisition was not subject to tax: no 
consideration and the airplane was acquired with the intent to resell. The 
Comptroller auditor in the first audit assessed tax on divergent use. Had the 
Comptroller determined that the aircrafts were not subject to tax at all, no 
tax on divergent use would have been assessed in the first audit. Petitioner 
did not contest the first audit liability and complied with the audit findings 
by reporting and remitting tax on its divergent use. As a whole, the evidence 
establishes that the Comptroller determined that Petitioner’s acquisition of 
the airplanes were subject to tax, but that the purchases were exempt under the 
sale for resale exemption. Under such circumstances, Petitioner has the burden 
to demonstrate that the Comptroller’s prior tax determination upon which the 
divergent use was based was erroneous. Petitioner offered no evidence. Thus, 
the ALJ finds that Petitioner had purchased the airplanes and that the 
purchases were exempted by the Comptroller under the sale for resale exemption.

Once the airplanes were obtained tax free under the sale for resale exemption, 
Petitioner was required to pay tax on Petitioner’s use of the airplanes other 
than retention, demonstration, or display while holding them for sale. 
[ENDNOTE: (16)] The Comptroller has consistently held that a person who 
performs a non-taxable service is the consumer of tangible personal property 
used to perform that non-taxable service. [ENDNOTE: (17)] Accordingly, whenever 
Petitioner used the airplanes to perform non-taxable chartering services or for 
other use by Petitioner, a divergent use as contemplated by Tax Code Section 
151.154 was made of the airplanes. The ALJ recommends that the audit assessment 
be upheld and that Petitioner’s refund claim for tax remitted in 2003 be 
denied.

E. Conclusion

No relief should be granted to Petitioner other than the deletion of Record ID 
No. 1919-6 from the audit, as agreed to by Staff.

III. FINDINGS OF FACT

1. The Texas Comptroller of Public Accounts (Comptroller) audited 
************** (Petitioner) for sales and use tax compliance for the period 
July 1, 2002 through December 31, 2003. Petitioner was assessed a tax 
deficiency of $**************, plus penalty and interest pursuant to a Texas 
Notification of Amended Audit Results dated December 13, 2006.

2. Petitioner timely requested redetermination.

3. On August 23, 2007, the case was referred to the State Office of 
Administrative Hearings for a proposal for decision based on the written 
submissions of the parties. 

4. On August 17, 2007, Staff provided a notice of filing to Petitioner.

5. The notice of filing 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. In the audit, the Comptroller assessed tax on Petitioner’s use of the 
airplanes to perform non-taxable chartering services during the period July 1, 
2002 through December 31, 2002. The Comptroller auditor scheduled each use as a 
“divergent use” in Exam 3 of the audit.

7. The Comptroller did not make any tax assessment based on divergent use for 
the period January 1, 2003 through December 31, 2003, because Petitioner 
reported and remitted tax on divergent use after the Comptroller’s sales and 
use tax compliance audit for the period April 1, 2000 through June 30, 2002 
(the first audit) was completed. 

8. Petitioner purchased two aircrafts tax free during the first audit period.

9. In the first audit, the Comptroller did not assess tax on the tax-free 
aircraft purchases.

10. Petitioner did not issue resale certificates when it acquired the 
airplanes, but it claimed the resale exemption during the first audit. 

11. Petitioner used the two airplanes to provide non-taxable chartering 
services.

12. Petitioner’s use of the airplanes served Petitioner’s pecuniary or private 
interests.

13. In its Petition for Redetermination, Petitioner incorporated a refund claim 
for tax paid on divergent use that occurred during January 1, 2003 through 
December 31, 2003.

14. The refund claim was denied by the Comptroller.

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 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. If a purchaser who gives a resale certificate makes any use of the taxable 
item other than retention, demonstration, or display while holding it for sale 
in the regular course of business, the purchaser shall be liable for payment of 
sales tax on the fair market rental value of the taxable item. TEX. TAX CODE 
ANN. Section 151.154(a) and (b).

5. The tax based on the fair market rental value of the taxable item applies 
even if the purchaser claimed the resale exemption without issuing a resale 
certificate.

6. Based on the above Findings of Fact and Conclusions of Law, Petitioner’s 
assessment should be affirmed and Petitioner’s refund claim should be denied.

Hearing No. 49,141

ORDER OF THE COMPTROLLER

On October 3, 2007 the State Office of Administrative Hearings’ (SOAH) 
Administrative Law Judge, Eleanor H. Kim, 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 as written. 

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 9th day of September 2008.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller


ENDNOTE(S):

(1) STAR Accession No. 9112L1146D10 (December 10, 1991).

(2) TEX. TAX CODE ANN. Section 151.154(b) and 151.155(b).

(3) TEX. TAX CODE ANN. Section 151.154(d) and 151.155(d).

(4) TEX. TAX CODE ANN. Section 151.154(c) and 151.155(c).

(5) Petitioner cites Bullock v. Statistical Tabulating Corp., 549 S.W.2d 166 
(Tex. 1977); Citizen Nat’l Bank v. Calvert, 527 S.W.2d 175 (Tex. 1975); Fleming 
Foods of Texas, Inc. v. Sharp, 951 S.W.2d 278 (Tex. App. - Austin 1997); and 
Sharp v. Direct Resources for Print, Inc., 910 S.W.2d 535 (Tex. App. - Austin, 
writ denied).

(6) 34 TEX. ADMIN. CODE Section 3.285(e)(1) and Section 3.287(e)(1).

(7) Fleming Foods of Texas, Inc. v. Rylander, 6 S.W.3d 278 (Tex. 1999).

(8) USAA v. Strayhorn, 124 S.W.3d 722 (Tex. App. - Austin 2003, pet denied).

(9) Fitzgerald v. Advanced Spine Fixation Sys., Inc., 996 S.W.2d 864 (Tex. 
1999); Helena Chem. Co. v. Wilkins, 47 S.W.3d 486 (Tex. 2001).

(10) Calvert v. Canteen Company, 371 S.W.2d 556 (Tex. 1963) and Bullock v. 
Foley Brothers Dry Goods, 802 S.W.2d 835 (Tex. App. - Austin 1990, writ 
denied).

(11) TEX. TAX CODE ANN. Section 151.054(a).

(12) Comptroller’s Decision No. 11,964 (1982).  See c.f., Comptroller’s 
Decision Nos. 29,172 (1993) and 18,940 (1987) (Taxpayers were not permitted, 
but attempted to claim the sale for resale exemption). 

(13) Id.

(14) See e.g., Comptroller’s Decision Nos. 20,286 (1987) and 32,517 (1994).

(15) 34 TEX. ADMIN. CODE Section 1.40(2)(B).

(16) TEX. TAX CODE ANN. Section 151.154(a).

(17) Comptroller’s Decision Nos. 47,857 (2006) and 34,958 (1996).  See also, 
STAR Accession Nos. 8605L0732A07 (May 19, 1986); 930396L (March 9, 1993): 
9304235L (April 19, 1993); 200011893L (November 7, 2000); 200107422L (July 31, 
2001); 200111607L (November 13, 2001); 200402388L (February 17, 2004);




ACCESSION NUMBER: 200809234H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 09/09/2008
TAX TYPE: SALES