Texas Comptroller of Public Accounts STAR System
SOAH DOCKET NO. 304-07-1798.73
CPA HEARING NO. 48,186
TAXPAYER NO.: **************
AUDIT OFFICE: Advanced Collections Processing- Revenue Accounting
AUDIT PERIOD: August 1, 2000 THROUGH March 31, 2003
Mixed Beverage Gross Receipts Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
Texas Comptroller of Public Accounts
JOHN D. BOSTICK
Representing Tax Division
Staff of the Texas Comptroller of Public Accounts (Staff or Comptroller)
imposed successor liability against ************** (Petitioner) for the mixed
beverage gross receipts tax liability owed by another company. Petitioner
requested redetermination to appeal Staffís action. In this proposal for
decision, the Administrative Law Judge (ALJ) recommends that the successor
liability imposed against Petitioner be upheld, but that the amount assessed be
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.
The hearing convened March 20, 2007, before ALJ Eleanor Kim in the William P.
Clements Building, 300 West 15th Street, Austin, Texas. Petitioner appeared
and was represented by **************, the president of the company. Staff
appeared and was represented by Assistant General Counsel John D. Bostick. The
parties were given the opportunity to submit evidence post hearing, and the
record closed on April 13, 2007.
II. REASONS FOR DECISION
The Comptroller audited ************** (CLUB) for mixed beverage gross receipts
tax for the period of August 1, 2000 through March 31, 2003, and issued a tax
deficiency to CLUB for $************** in tax plus $************** in penalty
and $************** in accrued interest as of November 20, 2003. CLUB
requested redetermination, and the audit assessment was eventually upheld by
the Comptroller. The liability became final on September 9, 2005. Because
CLUB has not paid the audit liability to the state, additional interest has
accrued since the assessment date.
B. Tax Assessment at Issue
On May 2, 2006, the Comptroller assessed Petitioner for $**************. The
amount is the sum of $************** in tax, $************** in penalty, and
accrued interest of $**************. The Notice of Tax Due indicates the
period of liability as August 1, 2000 through March 31, 2003, and states the
reason for the assessment as: ďSuccessor Liability due to the acquisition of a
previously owned business, CLUB, with outstanding liabilities.Ē
C. Comptrollerís Evidence
Staff called no witnesses and presented the following two items of documentary
evidence: the Texas Notice of Tax Due issued by the Comptroller to Petitioner,
and the Contract of Sale between Petitioner and CLUB.
On February 6, 2003, Petitioner and CLUB executed the sales contract whereby
CLUB agreed to sell and Petitioner agreed to buy the business operated by CLUB
at **************, Texas, for $**************. The contract provided that
Petitioner obtains all rights, title and ownership of CLUB's physical assets
located at the club, including the following items: two cash registers; two
television sets; all tall tables; all bar stools without backs; DJ equipment
and speakers; a microwave oven; all office furniture and equipment; all
glassware and other items used to mix and serve drinks; all cleaning equipment,
such as mops, brooms, mop bucket and supplies; and all inventory on the list
prepared from physical count for Texas Alcoholic Beverage Commission (TABC).
D. Petitionerís Evidence
1. Testimony of INDIVIDUAL A
Petitioner presented the testimony of INDIVIDUAL A who is the president and the
sole shareholder of Petitioner. INDIVIDUAL A testified that Petitioner was
formed on February 1, 2003, and entered into the sales agreement with CLUB on
February 6, 2003. According to INDIVIDUAL A, Petitioner did not buy the name
right to CLUB or its inventory and had no intent to open and operate the new
club as CLUB. Petitioner obtained its liquor license from TABC in May 2003,
and took occupation of the premises thereafter. Petitioner operated its own
club at the same location as CLUB's club, but under a different name.
Petitioner eventually closed the club in September 2005.
INDIVIDUAL A stated that Petitionerís sales contract with CLUB is misleading.
Petitioner did intend to buy everything identified in the contract agreement,
but after the contract was signed, he discovered that CLUB did not own all of
the assets. CLUB had rented the tables, bar stools, and furniture from
COMPANY. As a result, Petitioner obtained the following items, according to
INDIVIDUAL A, from CLUB: two cash registers, televisions, the DJ equipment and
speakers, glassware, and a microwave oven. Petitioner, however, did not
rescind or modify the contract with CLUB because the sellerís president was
terminally ill at the time, and because Petitioner wanted the location for its
own club. Petitioner knew that CLUB was an alternative club that had been
around for awhile and that it offered a place for the people in the area to
On cross examination, INDIVIDUAL A was asked about the contractís reference
that all alcoholic beverages from CLUB were to be sold to Petitioner.
According to INDIVIDUAL A, the inventory list was prepared for TABCís benefit
and that Petitioner did not receive the alcoholic beverages noted on the list
because TABC informed Petitioner that CLUB could not legally sell the alcoholic
beverages to Petitioner. The inventory list was prepared on February 6, 2003,
and submitted to TABC for TABCís purposes. When Petitioner received its TABC
liquor permit and moved into the premises in May 2003, the identified liquors
were not there, except for a couple of bottles of Budweiser beer.
Petitioner did not request a certificate of no tax due when it signed the
agreement with CLUB in February 2003. INDIVIDUAL A testified that he called
the Comptrollerís office and was told that CLUB had no outstanding liability.
INDIVIDUAL A stated that the liability for which Petitioner is being assessed
arose due to a subsequent audit that was performed on CLUB.
2. Documentary Evidence
Petitioner presented the alcoholic beverage inventory list referenced in the
sales contract with CLUB. The inventory list is the completion of a TABC form
stating that CLUB with permit number **************, located at **************,
Texas, certifies that the listed alcoholic beverages were on hand and
inventoried at the close of business on January 14, 2003, and sold to
Petitioner, permit number ďApplied forĒ or stored at **************, Texas.
CLUB signed the inventory form as the seller and Petitioner signed the form as
the purchaser, and the signatures are notarized. Attached to the inventory
form are four pages containing the itemized list of the quantities, sizes, and
brand names of the alcoholic beverages.
Petitioner offered its rental agreement with COMPANY that was executed on
February 7, 2003. Petitioner rented machines and furnishing at **************,
Texas, on a weekly basis and agreed to be responsible for maintaining and
repairing everything at the location, such as bar stools, chairs, and
Applicable Legal Authorities
If a person who is liable for payment of tax sells the business, or the stock
of goods of the business, to a purchaser, the purchaser becomes liable for the
sellerís tax liability, unless the purchaser withholds an amount of the
purchase price to pay the liability due or obtains a certificate of no tax due
from the Comptroller. [ENDNOTE: (1)] The amount that the purchaser must
withhold at the time of the purchase must equal tax, penalty, and interest
assessed or to be assessed against the seller. [ENDNOTE: (2)] The successor of
the business is only liable to the extent of the value of the purchase price.
In determining whether a business was sold, the Comptroller considers ďwhat the
parties to the transaction intended to buy and sell.Ē [ENDNOTE: (4)] The sale
of a business can occur even if few assets are transferred. [ENDNOTE: (5)]
Depending on the type of business, the Comptroller may consider a business to
have been sold if the seller sells: (1) a building, land, furniture, fixtures,
inventory, and the right to use the sellerís trade name; (2) all the capital
assets of a business; (3) the name and goodwill of a business; (4) all the
inventory of a business; or (5) fixed assets and realty necessary to operate a
similar business as the seller at the same location. [ENDNOTE: (6)]
The Comptroller may assess the successor of the business within four years from
either the date the seller sells the business or the date the Comptrollerís
assessment is made against the seller, whichever event occurs later. [ENDNOTE:
(7)] Based on the prescribed limitation period, the Comptroller has held that
the successor may be held liable for the predecessorís audited tax liability
even though predecessor had not been audited at the time of the purchase.
[ENDNOTE: (8)] The purchaserís failure to pay the assessed successorís
liability in a timely fashion or to request a hearing will result in the
imposition of penalty under the Tax Code, which is in addition to any penalty
that was previously assessed against the seller. [ENDNOTE: (9)] In this case,
Petitioner timely requested a hearing. [ENDNOTE: (10)]Because Staff is imposing
tax on Petitioner, Staff must establish a prima facie case that Petitioner
falls within the class of purchasers on whom the Legislature intended to impose
liability under Tax Code Section 111.020. [ENDNOTE: (11)] Once a prima facie
case has been made by Staff, Petitioner bears the burden to establish by a
preponderance of the evidence that no Section 111.020 liability exists.
[ENDNOTE: (12)] Petitionerís burden relates to the imposition of the tax
against Petitioner, and not to the Comptrollerís assessment against the seller.
The purchaser cannot challenge the validity of the underlying liability of the
seller. [ENDNOTE: (13)]
E. Arguments, ALJís Analysis, and Recommendation
Staff contends that the assessment against Petitioner should be upheld because
the contract between Petitioner and CLUB proves Petitioner purchased CLUB's
business and emphasizes the provision in the contract indicating that
Petitioner acquired the entire alcoholic beverage inventory of CLUB.
Petitioner challenges the assessment, arguing that it did not obtain the right
to use the name of CLUB, and that it never intended to, nor did it operate its
own club as CLUB.
Petitioner believes that it cannot be held liable as a successor unless it used
the business name of CLUB, but the imposition of tax under Tax Code Section
111.020 is not so restrictive. The Legislature enacted Tax Code Section
111.020 to protect state revenue by authorizing the Comptroller to recover
delinquent taxes from certain purchasers of a business or stock of goods.
Comptrollerís Decision No. 31,595 (1994). In construing the statute, the
Comptroller identifies the sale of certain assets as being evidence of a sale
of a business for the purpose of imposing successorís liability and does not
generally define the term ďbusinessĒ in recognition that the meaning can vary
depending on the type of business involved. [ENDNOTE: (14)] The examination of
Petitionerís contract with CLUB indicates that Petitioner acquired the club,
including the furniture, assets, and inventory, owned and operated by CLUB.
The contract facially supports Staffís claim that Petitioner acquired CLUB's
business. And, when Petitioner acquired the business, Petitioner did not
obtain a certificate of no tax due from the Comptroller. A prima facie case
has been made by Staff that Petitioner was the successor of CLUB's business and
is subject to tax under Tax Code Section†111.020.
Petitioner contends that the sales contract should not be the considered
because it does not accurately reflect what was actually acquired by Petitioner
from CLUB. INDIVIDUAL A testified that Petitioner did not receive many of the
assets expressly identified by the contract, including the inventory of
alcoholic beverages. According to INDIVIDUAL A, assets, such as the bar
stools, tables, and furniture, had been rented by CLUB, so CLUB had no right to
sell them to Petitioner. The alcoholic beverages that were identified as CLUB
inventory did not transfer to Petitioner, according to INDIVIDUAL A, because
the transfer would have been illegal. Staff did not refute any portion of
INDIVIDUAL Aís testimony, but contends that the contract speaks for itself.
CLUB and Petitioner certified to TABC that CLUB was selling the alcoholic
beverages listed in the TABC inventory form to Petitioner and that Petitioner
was purchasing the same, so INDIVIDUAL Aís testimony conflicts with the TABC
inventory form. However, TABC rule at 41 Texas Administrative Code Section
41.3 provides a means to reconcile the conflicting evidence. Under the TABC
rule, a TABC permittee or licensee whose permit or license is cancelled is
authorized within 30 days to sell or dispose of in bulk the stock of alcoholic
beverages on hand, but both the seller and the purchaser must acknowledge the
sale by a sworn inventory statement. [ENDNOTE: (15)] The seller cannot sell or
dispose of alcoholic beverages, except within the specified time period.
[ENDNOTE: (16)] When Petitioner signed the inventory form on February 6, 2003,
it was not a permittee or licensee of TABC; thus, under TABC rule, CLUB was
prohibited from selling the alcoholic beverages to Petitioner on the date of
the sales contract. Petitioner applied for a license with TABC, but it was not
issued until May 2003, a date beyond the deadline set by TABC rule, indicating
that the TABC inventory form served to record CLUB's disposal of its inventory.
Moreover, Petitioner signed a rental agreement with COMPANY on February 7,
2003, one day after the sales contract, to rent machines and furnishing, such
as bar stools, chairs, and refrigeration. The preponderance of the evidence
demonstrates that Petitioner acquired less items from CLUB than indicated by
the sales contract. The question presented then is whether such fact is
sufficient to refute Staffís prima facie case that Petitioner was the business
successor of CLUB. It is not.
The sales transaction, including the partiesí intent, is examined to determine
whether a business has been purchased. The sales transaction at issue here
occurred on February 6, 2003, the date Petitioner and CLUB executed the sales
contract. The contract provided that CLUB agreed to sell its business,
including rights, title, and ownership of its physical assets, located at
************** to Petitioner. The contract and the testimony of INDIVIDUAL A
establish without a doubt that Petitioner intended to purchase the entire
business of CLUB. Despite not receiving all assets that were included in the
contract, Petitioner did in fact acquired every item that CLUB actually owned
at the club location and that could legally be transferred to Petitioner.
Petitioner did not rescind or modify the contract because the purchased items
ensured that it could operate a similar club at the same location. The
continuation of a similar business at the same location using the entire
assets, even if they are few, purchased from the predecessor, even under a
different name, is sufficient for Petitioner to be the successor under Tax Code
Petitioner verbally contacted the Comptrollerís office to ascertain whether
CLUB owed any tax, but the call does not satisfy either statutory requirement
that a certificate of no tax due be obtained or that an amount be withheld from
the purchase price. Petitioner is liable under Tax Code Section 111.020 for
CLUB's delinquent tax liability.
Though Petitioner is liable as the successor, Staff failed to establish the
appropriateness of the amount assessed. Under Tax Code Section 111.020, the
successor is liable only to the extent of the purchase price. Under the
express limitation imposed by the statute, the maximum amount that Petitioner
can be held liable is $**************, yet Staff assessed Petitioner for
$**************, as of May 2, 2006. The assessment should be reduced to
$**************. Moreover, CLUB was audited for the period of August 1, 2000
through March 31, 2003, and was assessed a tax deficiency for the period.
Petitionerís period of liability is the same as CLUB's audit period, but no
evidence was provided by Staff to establish that Petitioner was not assessed
any tax from February 7, 2003 to March 31, 2003. As the successor, Petitioner
is liable only for the amount of delinquent tax owed by CLUB for the reporting
periods prior to Petitionerís purchase of the business. Staff should verify
the underlying assessment and delete the assessment from February 7, 2003
through March†31, 2003 against Petitioner, if any.
III. FINDINGS OF FACT
1. ************** (Petitioner) was formed on February 1, 2003.
2. From May 2003 through September 2005, Petitioner operated a club known as
the CLUB at **************, Texas .
3. On May 2, 2006, the Texas Comptroller of Public Accounts (Comptroller)
issued a Notice of Tax Due to Petitioner assessing Petitioner for mixed
beverage gross receipts tax of $**************, penalty of $**************, and
accrued interest of $**************, as of the notice date. The total amount
assessed was $**************, and the period of liability was August 1, 2000
through March 31, 2003.
4. The stated basis for the assessment was: ďSuccessor liability due to the
acquisition of a previously owned business, CLUB, with outstanding
5. Petitionerís timely requested redetermination of the assessment.
6. On February 23, 2007, the Comptroller mailed a notice of hearing to
7. 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.
8. The mixed beverage gross receipts tax liability owed by **************
(CLUB) resulted from the audit performed by the Comptroller for the period of
August 1, 2000 through March 31, 2003. CLUB's audit liability became final on
September 9, 2005 and remains unpaid.
9. On February 6, 2003, Petitioner and CLUB executed a sales contract whereby
CLUB agreed to sell its business owned and operated at **************, Texas,
to Petitioner and to transfer all of its rights, title, and ownership of its
physical assets located at the club.
10. By the sales contract dated February 6, 2003, CLUB agreed to transfer its
physical assets, included the following items: two cash registers, two
television sets, all tall tables, all bar stools without backs, all DJ
equipment and speakers, one microwave oven, all office furniture and equipment,
all glassware, all cleaning equipment, and all inventory on the list prepared
for Texas Alcoholic Beverage Commission (TABC).
11. Petitioner paid $************** to CLUB under the sales contract.
12. Petitioner neither requested nor obtained a certificate of no tax due from
the Comptroller, and did not withhold any money from the purchase price.
13. On February 6, 2003, CLUB and Petitioner prepared a sworn statement
identifying the alcoholic beverages inventory at hand on January 14, 2003,
certifying to TABC that CLUB was selling and Petitioner was purchasing the
14. On February 6, 2003, Petitioner did not hold a license issued by TABC.
15. On February 6, 2003, Petitioner was not authorized to purchase liquor from
16. After February 6, 2003, Petitioner discovered that CLUB did not own the
tables, bar stools, and office furniture, but had rented them from COMPANY.
17. Petitioner signed a weekly rental agreement with COMPANY on February 7,
2003, to retain the tables, bar stools, and other items at the premises.
18. Petitioner did not rescind or modify the sales contract with CLUB.
19. In executing the sales contract, Petitionerís main business objective was
to obtain the location where CLUB operated its club.
20. Petitioner acquired all assets that CLUB legally owned and could legally
21. TABC issued a license to Petitioner in May 2003, and in the same month,
Petitioner opened its own club at the same location.
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. GOVíT CODE ANN. ch. 2003.
3. The Comptroller provided proper and timely notice of the hearing pursuant to
TEX. GOVíT CODE ANN. ch. 2001.
4. The Comptroller is authorized to assess successor liability against the
purchaser of a business for the sellerís outstanding tax liabilities unless the
purchaser withholds an amount of the purchase prices sufficient to pay the
sellerís outstanding tax liabilities or obtains a certificate from the
Comptroller that no tax is due. TEX. TAX CODE ANN. Section 111.020(a).
5. The amount that the Comptroller may assess against a successor of a business
is limited to the purchase price. TEX. TAX CODE. ANN. Section 111.020(b).
6. Based on Findings of Fact Nos. 9, 11, and 19 - 21, Petitioner purchased the
business of CLUB.
7. Based on Findings of Fact Nos. 8 and 12, and Conclusions of Law Nos. 4 and
6, the Comptroller is authorized to assess CLUB's delinquent tax against
Petitioner as the successor of CLUB's business.
8. Petitioner did not meet its burden to prove that it was not the successor of
9. Staff of the Comptroller did not establish that Petitioner paid
consideration in excess of $**************; therefore, based on Conclusion of
Law No. 5, the amount assessed against Petitioner should be reduced to
10. Petitioner is liable for tax owed by CLUB for reporting periods up to the
purchase date of the business.
11. The Comptroller assessed Petitioner for the period of August 1, 2000
through March 31, 2003, but Staff did not establish what amount, if any,
Petitioner was assessed for the period of February 7, 2003 through March 31,
12. Based on Conclusions of Law Nos. 10 and 11, tax, penalty, and interest that
CLUB was assessed in its audit for the period of February 7, 2003 through March
31, 2003 should not be assessed against Petitioner, the successor.
13. Based upon the above Findings of Fact and Conclusions of Law, the
assessment of successor liability against Petitioner should be upheld, but the
amount assessed should be modified.
Hearing No. 48,186
ORDER OF THE COMPTROLLER
On April 27, 2007, the State Office of Administrative Hearingsí (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 Judgeís Proposal for
Decision should be adopted as written.
The above decision resulting in Taxpayer's liability as set out in ďAttachment
A,Ē 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 February 2009.
Texas Comptroller of Public Accounts
by: Martin A. Hubert
(1) TEX. TAX CODE ANN. Section 111.020(a).
(2) 34 TEX. ADMIN. CODE Section 3.7(a).
(3) TEX. TAX CODE ANN. Section 111.020(b); see also, 34 TEX. ADMIN. CODE
Section 3.7(a) and (b).
(4) 34 TEX. ADMIN. CODE Section 3.7(d).
(7) TEX. TAX CODE ANN. SECTION 111.020(e) and 111.201.
(8) Comptrollerís Decision No. 27,579 (1991).
(9) 34 TEX. ADMIN. CODE Section 3.7(g).
(10) If the assessment is upheld against Petitioner, the penalty for failure to
pay the sellerís liability will be imposed after the redetermination hearing
becomes final. TEX. TAX CODE ANN. Section 111.0081(c).
(11) See e.g., Comptrollerís Decision Nos. 38,247 (2000) and 32,202 (1995)
(12) See e.g., Comptrollerís Decision Nos. 40,036 (2002) and 37,711 (1999).
(13) 34 TEX. ADMIN. CODE Section 3.7(g).
(14) 34 Tex. Admin. Code Section 3.7(d).
(15) 41 TEX. ADMIN. CODE Section 41.3(a) and (d).
(16) 41 TEX. ADMIN. CODE Section 41.3(e).
ACCESSION NUMBER: 200902324H
DOCUMENT TYPE: H
TAX TYPE: BEVERAGE