Texas Comptroller of Public Accounts STAR System
SOAH DOCKET NO. 304-07-2258.26
CPA HEARING NO. 47,841
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: June 1, 2000 THROUGH December 31, 2003
Limited Sales, Excise, And Use Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
Texas Comptroller of Public Accounts
Representing Tax Division
************** (Petitioner) seeks the redetermination of the sales and use tax
assessment made by the Texas Comptroller of Public Accounts (Comptroller).
Petitioner raised three contentions, and Comptroller Staff agreed to provide
partial relief on one of the contentions, but denied all further relief sought
by Petitioner. In her proposal for decision, the Administrative Law Judge (ALJ)
recommends that no relief be granted to Petitioner other than the adjustments
agreed to by Staff.
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 **************, a tax consultant, and
Comptroller Staff was represented by Kaci J. Price, an attorney with the
Comptroller’s Administrative Hearing Section. ALJ Anne Perez issued an order
closing the record on June 19, 2007. This case was thereafter reassigned to ALJ
II. REASONS FOR DECISION
Comptroller Staff presented the following evidence: (1) the audit plan; (2) the
audit report; (3) the Texas Notification of Audit Results; (4) the penalty and
interest waiver worksheet; and (5) the voluntary disclosure agreement executed
by the Comptroller and Petitioner.
Petitioner offered the following evidence: (1) invoices from INDIVIDUAL A; (2)
a flowchart titled “Marketing Campaign Flow Chart”; (3) a purchase and sale
agreement between Petitioner and **************, (COMPANY A); (4) invoices,
invoice summaries, and other documentation related to transactions with COMPANY
A; (5) correspondence between Petitioner and COMPANY A; and (6) correspondence
between COMPANY A and COMPANY B.
B. Background Facts and Issues Presented
Petitioner offers a range of insurance services and is doing business as
COMPANY C in Texas. The Comptroller audited Petitioner for sales and use tax
compliance for the period June 1, 2000 through December 31, 2003, and assessed
Petitioner a tax deficiency and interest pursuant to a Texas Notification of
Audit Results dated December 1, 2005. [ENDNOTE: (1)] The auditor, Mary Lou
O’Ferrall, made adjustments to taxable purchases (Exams 1, 2, 3, 4 and 7) and
tax refunds/ credits (Exams 9 and 10). Petitioner timely requested
redetermination and raised the following three contentions:
1. Petitioner contends that the transactions with INDIVIDUAL A should be
deleted from Exam 1.
2. Petitioner contends that transactions with COMPANY A should be deleted from
3. Petitioner contends that interest should be waived.
Comptroller Staff denied each contention and referred the case to the State
Office of Administrative Hearings on March 26, 2007. Petitioner filed
additional documents, and Staff agreed to delete three transactions (Record Id
Nos. 1919-117, 1919-118, and 1919-350) from Exam 7. [ENDNOTE: (2)]
C. Issue 1: Preliminary Art or Final Art
1. Facts Established from Documentary Evidence
Petitioner made purchases from ************** (INDIVIDUAL A). The invoices from
INDIVIDUAL A show that she was located in CITY A, Texas, and reflect sales for
design and layout for holiday cards, invitation postcards, mailing stuffers,
insert cards, banners, t-shirts, brochures, flyers, trade show inserts, ads,
and notebooks. INDIVIDUAL A did not collect sales tax from Petitioner. The
auditor scheduled 16 transactions with INDIVIDUAL A in Exam 1.
2. Arguments of the Parties
Petitioner cites to STAR Accession Nos. 9004T0997D06 (March 30, 1990) and
8210T0469E05 (October 6, 1982), both of which address preliminary and finished
artwork sold by advertising agencies. [ENDNOTE: (3)] In the taxability letters,
the Comptroller determined that no sales tax is due on the design and layout of
preliminary art unless the preliminary arts are incorporated into a final
design. Petitioner contends that it purchased preliminary art from INDIVIDUAL
A. Petitioner asserts that INDIVIDUAL A designed and laid out a concept and
then electronically forwarded the preliminary draft for approval in a PDF form.
Petitioner either requested changes or recommended that she forward the draft
to the printer designated by Petitioner. Petitioner asserts that INDIVIDUAL A
maintained the draft on her server and that the printers received the
electronic files and made changes to match the plates. Because the printers
made the final approvals Petitioner contends the artwork produced by INDIVIDUAL
A were non-taxable preliminary arts.
Staff contends that STAR Accession Nos. 9004T0997D06 and 8210T0469E05 are
inapplicable to Petitioner because those policy letters addressed advertising
agencies and INDIVIDUAL A did not operate an advertising agency. According to
Staff, INDIVIDUAL A was a graphic artist who sold artwork to Petitioner. Staff
contends that sales tax is due on the sale or purchase of graphic arts and
cites STAR Accession No. 200011925L. In the taxability letter, the Comptroller
stated that designing logos, business stationary, display items, marketing
materials, and miscellaneous corporate identity items are considered graphic
arts and are subject to tax. Staff contends that the letter ruling is
consistent with Comptroller’s Rule 3.312. Staff further contends that even if
INDIVIDUAL A had operated an advertising agency, the invoices are insufficient
to show that the design and layouts that occur prior to the client’s approval
are not physically incorporated into the final design.
3. Legal Authorities, Analysis, and Recommendation
Sales tax is due on each sale of a taxable item in this state, and use tax is
due on the storage, use, or other consumption of a taxable item purchased for
storage, use, or other consumption in Texas. [ENDNOTE: (4)] The term “taxable
item” means tangible personal property and taxable services. [ENDNOTE: (5)]
Petitioner contends that it purchased non-taxable services from INDIVIDUAL A,
whereas Staff contends the purchased items were taxable items.
Petitioner relies on STAR Accession Nos. 9004T0997D06 and 8210T0469E05, and
Staff relies on STAR Accession No. 200011925L. Though both parties attempt to
distinguish the facts of this case from the facts addressed by the taxability
letter(s) relied on by the opposing side, all three taxability letters
essentially address the same fundamental issue - whether the item sold or
purchased was tangible personal property or a service. With respect to graphic
arts, the Comptroller considers a graphic artist to sell tangible personal
property (e.g., the drawing or art) and requires the graphic artist to collect
tax on the total charge for the art. [ENDNOTE: (6)] Similarly, the Comptroller
considers an advertising agency to sell tangible personal property and requires
it to collect sales tax on all employee-fabricated property, such as finished
artwork for print advertising, photographs, records, and other similar items.
[ENDNOTE: (7)] As evidenced by the rules relating to graphic artists and
advertising agencies, the Comptroller consistently views art as tangible
personal property, and the seller of art, whether classified as an advertising
agency or as a graphic artist, must collect sales tax on the sale of the
tangible personal property.
INDIVIDUAL A produced artwork, yet Petitioner argues that the items produced
were non-taxable preliminary arts. Petitioner points to the policy reflected in
STAR Accession Nos. 9004T0997D06 and 8210T0469E05, and they indicate a
taxability difference between preliminary arts and final arts. The policy on
preliminary arts is formally recognized by the Comptroller in 34 Texas
Administrative Code Section 3.321, relating to advertising agencies.
Preliminary art is defined as “roughs, visualizations, layouts, and
comprehensives submitted by an advertising agency to its clients for the
client’s approval of the advertising concept or message prior to the
preparation of finished art.” [ENDNOTE: (8)] An advertising agency’s charge to
its customer for preliminary art is not subject to tax, but any portion of
preliminary art that becomes physically incorporated into a finished art is
taxable. [ENDNOTE: (9)] The reading of the advertising agencies rule provisions
suggests that if a preliminary art does not become part of the finished art for
any reason (e.g., it was rejected by a client), but the client must still pay a
charge for the preliminary art, then the Comptroller will consider the charge
for the preliminary art as the purchase of a non-taxable design service, not
for tangible personal property. However, if a portion of the preliminary art is
incorporated into a finished art, the charge for the incorporated portion is
subject to tax as the sale of tangible personal property.
Petitioner contends that the artwork that it purchased from INDIVIDUAL A were
preliminary arts, but by Petitioner’s own admission, the artwork that
INDIVIDUAL A produced were incorporated into the cards, t-shirts, inserts, and
other similar items that Petitioner purchased from various printers. Such fact
demonstrates that the artwork that Petitioner purchased from INDIVIDUAL A were
finished arts. Petitioner’s argument that it only viewed the design
electronically is irrelevant. Sales tax is due when there is a transfer of
possession or title of the tangible personal property to the purchaser for
consideration. [ENDNOTE: (10)] The sale of tangible personal property in
electronic form does not alter the item’s tax status. [ENDNOTE: (11)] The fact
that the printers hired by Petitioner may modify the artwork in order to place
them into the printing plates actually supports the assessment rather than
supporting Petitioner’s contention. It demonstrates Petitioner’s right to alter
the art to fit Petitioner’s needs. Because the artwork produced by INDIVIDUAL A
and purchased by Petitioner were final artwork, Petitioner is liable for sales
tax on the purchases of tangible personal property. The ALJ concludes that the
transactions were properly scheduled in the audit.
D. Issue 2: Services related to Hardware/Software
1. Facts Established from Documentary Evidence
In October 1999, ************** (COMPANY A), a business located in
Massachusetts, provided cost estimates to Petitioner for COMPANY A to support
Petitioner’s IT organization, which entailed performing various services, such
as developing projects, performing selected data center functions, providing
additional IT staff, and maintaining the performance of the IT organization.
The cost estimates break out the costs of the core team, web redesign and
extranet development, infrastructure stabilization, and web hosting. With
respect to the redesign of Petitioner’s web and extranet development, the cost
estimates reflected a cost line item for the COMPANY B software and noted that
the number of license users was under negotiation.
COMPANY A negotiated with COMPANY B, a software company, to provide software
and services to Petitioner. An unsigned draft letter dated November 22, 1999,
from COMPANY B to COMPANY A shows that COMPANY B intended to enter into a
software license agreement directly with Petitioner and to provide to COMPANY A
the development software licenses, training, and professional services needed
for COMPANY A to customize the COMPANY B software for Petitioner. The draft
letter between COMPANY A and COMPANY B stated that the invoices issued by
COMPANY B for the license fees will be sent to COMPANY A and that payments by
Petitioner will be made to COMPANY B through COMPANY A. The draft letter
indicated that the invoice billing and payment structure will not make COMPANY
A the purchaser or licensor of COMPANY B software and will not alter the
license agreement between COMPANY B and Petitioner. The draft letter indicated
that COMPANY A and COMPANY B contemplated COMPANY B providing professional
services for six months and for maintenance services for one year. The letter
contains the statement that the “offer is contingent on COMPANY B’s having
received the Agreement, signed by [Petitioner], by November 30, 1999.” There is
no evidence that Petitioner signed a software license agreement directly with
COMPANY B, or that COMPANY A and COMPANY B actually entered into an agreement
consistent with the terms reflected in the unsigned draft letter.
Petitioner has internal documents reflecting that it purchased the software in
December 1999, but the internal documents identify COMPANY A as the primary
vendor of the software. Invoices issued by COMPANY A to Petitioner contain the
following description: “professional fees and expenses incurred for service
dates: [stated period] Associated with project: Hardware/Software equipment
[stated number]” and charges for “Hardware/Software.” Petitioner did not submit
copies of any of the agreements identified in the invoices.
On January 4, 2000, Petitioner entered into an agreement with COMPANY A to
purchase four servers. Three of the four servers were delivered to California
and the fourth server was delivered to Oregon. The agreement contained an
expressed term stating that COMPANY A was the authorized reseller of certain
products manufactured and supplied by third parties. Under the purchase
agreement, COMPANY A was not obligated to provide maintenance or support for
the items purchased under the agreement and directed Petitioner to obtain
maintenance and support directly from the manufacturer or suppliers of the
The auditor scheduled 12 COMPANY A transactions in Exam 7, and Staff has agreed
to delete three scheduled transactions. [ENDNOTE: 12)]
2. Arguments of the Parties
Petitioner asserts that the remaining nine COMPANY A transactions should be
deleted because it purchased non-taxable professional services from COMPANY A.
According to Petitioner, it acquired software from COMPANY B, a third party,
and hired COMPANY A to install and implement the software for various projects.
Staff contends that it declined to delete all COMPANY A transactions, except
three, because it was unable to verify that the professional services provided
to Petitioner were non-taxable. According to Staff, Petitioner has the burden
of proving that the transactions are not taxable and it failed to carry its
burden of proof.
3. Applicable Legal Authorities, ALJ’s Analysis, and Recommendation
In its pleadings, Staff did not articulate a single legal basis for taxing the
services other than asserting Petitioner failed to carry its burden of proof to
show that the transactions are not taxable. Staff seems to place the initial
burden on Petitioner to prove that the services are not taxable, but it is
Staff who bears the initial burden. While all sales of tangible personal
property are presumed taxable in this state, only the services defined as
“taxable services” in Tax Code Section 151.0101 are subject to tax. For that
reason, it is well settled by the Comptroller that Staff has the burden to
establish a prima facie case that the services at issue are within those
enumerated as taxable in Section 151.0101 and that no exclusion from taxation
applies. [ENDNOTE: (13)] Though the pleadings do not state a basis for
taxation, the exam schedules prepared by the auditor contain the auditor’s
comments, and they indicate that the auditor scheduled the COMPANY A
transactions as services associated with the sale of hardware or software.
Among the evidence presented by Petitioner, the professional services at issue
were billed by COMPANY A to Petitioner, and the invoices reference specific
Hardware or software is tangible personal property, and the sale of each is
subject to tax. [ENDNOTE: (14)] There is no evidence establishing what
activities COMPANY A actually performed under “professional services,” but
Petitioner asserts that COMPANY A performed installation and implementation
labor. The sale of installation of tangible personal property performed by the
person who sold the property must be included in the taxable sales price of the
tangible personal property. [ENDNOTE: (15)] Implementation can encompass a
broad range of services, and some or all of the services, depending on what
they are, may be subject to tax under two taxing statutes, specifically, Tax
Code Section 151.007(b) or Section 151.0101(a)(5). Certain services that are
provided as a part of the taxable item sold are included in the sales price of
the taxable item. [ENDNOTE: (16)] The maintenance, creation, and restoration of
a computer program, including its development and modification performed by the
person who sold the computer program, are taxable services. [ENDNOTE: (17)]
However, the same services performed by a person who did not sell the computer
program are excluded from tax. [ENDNOTE: (18)] Thus, the services at issue may
fall within taxation only if a factual determination can be made that COMPANY A
sold the hardware or software to which the services were performed.
Petitioner contends that the services scheduled in the audit were services
performed on software sold by a third party. Petitioner provided one purchase
agreement between Petitioner and COMPANY A showing that COMPANY A sold four
servers to Petitioner without any services. Based on the purchase agreement,
Petitioner infers that all services that were scheduled in the exam relate only
to the COMPANY B software, but the invoices from COMPANY A refer to several
specific hardware/software agreements, which were not submitted into evidence.
The ALJ cannot accept one purchase agreement as establishing the truth of
Petitioner’s assertion when the agreements referenced by the invoices have not
been provided. Moreover, the evidence is deficient to prove Petitioner’s claim
that it acquired the software directly from a third party, rather than from
COMPANY A. The only document that lends any support to Petitioner’s claim is
the unsigned draft letter dated November 22, 1999, which indicate COMPANY B
will sign a software license agreement directly with Petitioner. However,
whether the software license agreement was actually signed between Petitioner
and COMPANY B is unknown. An unsigned draft letter is not credible evidence to
prove Petitioner’s factual allegation. What the limited evidence demonstrates
is that COMPANY A may resell third party’s products, that COMPANY A billed
Petitioner for hardware and software, that COMPANY A performed professional
services in connection to hardware and software, and that the services included
installation and customization labor. The preponderance of the evidence
supports a finding that COMPANY A was the seller and that the services may be
subject to tax as part of the sales price of tangible personal property or as a
taxable service. The evidence establishes a prima facie case of taxability, and
there is insufficient evidence prove the services were non-taxable.
E. Issue 3: Interest Waiver
1. Facts Established from Documentary Evidence
In March 2002, Petitioner and the Comptroller entered into a voluntary
disclosure agreement (VDA) covering sales and use taxes due for the period
January 1, 1998 through February 28, 2002. Under the VDA, Petitioner agreed to
report and remit sales and use taxes for periods beginning January 1, 1998 and
ending December 31, 2001, and further agreed to report and remit all taxes that
were collected prior to January 1, 1998. In return, the Comptroller agreed to
release Petitioner from any sales and use tax liability subsequently found due
for any periods prior to January 1, 1998. The Comptroller also agreed to waive
penalties and interest on taxes disclosed under the VDA. The assessment in the
sales and use tax compliance audit at issue constitutes delinquent sales and
use taxes not disclosed by Petitioner to the Comptroller under the VDA.
In 2003, the Comptroller generated an audit on Petitioner, and the audit
questionnaire was completed by Petitioner on January 19, 2004. The auditor’s
audit plan indicates that the entrance conference was held on April 22, 2004.
During the audit, Petitioner and the auditor executed ten agreements to extend
the statute of limitations (extension agreements). The first agreement was
signed on June 2, 2004, and the last agreement was signed by the parties on
August 1, 2005. The auditor made two entries in her audit plan relating to the
extension agreements. One entry merely stated the extension agreement was
requested, and another entry indicates the extension agreement was requested
based on “outstanding issues.” Each of the ten extension agreements gave the
following reason for the extension: “either the taxpayer or Comptroller,
despite good faith efforts, requires more time to prepare for or complete the
The activities noted by the auditor in her audit plan reflect that the auditor
continually worked on Petitioner’s audit since the entrance conference. The
dispute resolution conference was held July 25, 2005, and the dispute
resolution officer (DRO) requested Petitioner to submit additional documents by
August 5, 2005. When Petitioner submitted the documents, the DRO requested
additional research be done on the outstanding issues and made his
recommendation to Audit Division on October 18, 2005. Petitioner was informed
of the DRO results on October 19, 2005.
2. Arguments of the Parties
Petitioner contends that interest should be waived on tax assessed for the
period June 1, 2000 through February 28, 2002, because the Comptroller agreed
to waive interest for that period under the VDA. Additionally, Petitioner
contends interest should be waived for other periods because the auditor
requested several limitations extensions and because there were other delays
caused by Comptroller employees, such as scheduling the dispute resolution
conference and issuing DRO’s finding.
Staff represents that the Comptroller waived interest pursuant to the VDA on
all delinquent tax disclosed by Petitioner and contends that no interest waiver
is warranted because the tax assessed in the audit was not disclosed by
Petitioner. Staff acknowledges that the auditor and Petitioner executed ten
limitations extension agreements, but argues that eight of the ten extension
agreements were necessitated by Petitioner’s need to locate and compile
additional documentation. Staff further argues Petitioner could have paid the
audit liability before the dispute resolution conference, and contends that
there was no undue delay in scheduling the conference or in issuing the result
of the conference.
3. Applicable Legal Authorities, ALJ’s Analysis, and Recommendation
When the Comptroller assesses delinquent tax, interest is automatically imposed
on delinquent tax. [ENDNOTE: (19)] Interest waiver is limited to three specific
circumstances, which are (1) undue delay caused by Comptroller personnel; (2)
reliance on advice provided by the Comptroller’s office; and (3) natural
disaster. [ENDNOTE: (20)] Petitioner seeks interest waiver on the ground of
undue delay, but also raises another ground for relief not found in the rule –
a contractual agreement.
Petitioner contends that interest should be waived for tax assessed during the
period June 1, 2000 through February 28, 2002, because the Comptroller
contractually agreed to waive interest for the period. However, Petitioner’s
reliance on the VDA is misplaced because at issue here is interest imposed on
non-disclosed delinquent tax. The VDA has no applicability to undisclosed
delinquent tax; therefore, Petitioner’s request for interest waiver based on
the VDA should be rejected.
Of the three factors enumerated in 34 Texas Administrative Code Section 3.5(d),
Petitioner asserts that Comptroller employees caused undue delay in processing
the audit. Petitioner and the auditor signed ten limitations extension
agreements. Petitioner concedes that the extension agreements allowed it to
obtain additional documents, but Staff asserts that eight of the ten waivers
were necessitated by Petitioner’s need, not the auditor’s. However, Staff
presented no evidence to support its factual claim. Regardless, the ALJ
concludes that it matters not which party’s action or inaction prompted the
necessity of the extension agreements. Each extension agreement constituted a
written agreement of the parties, authorized by the Tax Code. [ENDNOTE: (21)]
The statute requires the parties to state the reason for the extension in the
written agreement. [ENDNOTE: (22)] Each agreement that Petitioner and the
auditor signed states that the extension was necessary to prepare for or to
complete the audit despite good faith efforts made by the party requesting the
extension. Under the recitation of good faith efforts, the agreements facially
refute any claim of undue delay. Moreover, the extension agreement extended the
limitations period for refunds, so Petitioner received other benefits from the
agreements. There is no basis to claim undue delay when both parties contracted
for the extensions.
Petitioner asserts that Comptroller personnel caused delays in scheduling the
dispute resolution conference, but it offered no evidence to support its claim.
The evidence indicates the conference was held July 25, 2005, but there is
nothing to show when Claimant requested the conference; thus, the alleged delay
in scheduling the conference has not been proven. Moreover, there is no
evidence to demonstrate that the time period between the date of the conference
and the date the DRO’s findings was unreasonable, thereby warranting a finding
of undue delay. The ALJ recommends no waiver of interest based on the claim of
The ALJ recommends that no relief be granted to Petitioner other than the
deletions agreed to by Staff.
III. FINDINGS OF FACT
1. Petitioner was audited by the Texas Comptroller of Public Accounts
(Comptroller) for sales and use tax compliance for the period of June 1, 2000
through December 31, 2003. Petitioner was assessed tax, penalty, and interest
pursuant to a Texas Notification of Audit Results dated December 1, 2005.
2. Petitioner requested redetermination of the sales and use tax assessment.
3. On March 26, 2007, the Comptroller referred the case to the State Office of
Administrative Hearings for decision on a written submission record.
4. On March 27, 2007, Staff provided a notice of hearing to Petitioner.
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 artwork from ************** (INDIVIDUAL A).
7. The artwork produced by INDIVIDUAL A were final arts that were used by
Petitioner to incorporate into products, such as cards, t-shirts, inserts, and
other similar items.
8. INDIVIDUAL A did not collect sales tax from Petitioner on the artwork.
9. Petitioner did not accrue and remit tax on the purchases made from
10. Petitioner purchased hardware and software from ************** (COMPANY A).
11. COMPANY A billed Petitioner for installation, customization, and other
services related to the hardware and software.
12. Petitioner failed to present evidence to show that the services were
related to hardware or software that Petitioner acquired from a third party.
13. Petitioner and the Comptroller signed a Voluntary Disclosure Agreement
(VDA) covering sales and use tax for the period of June 1, 2000 through
February 28, 2002.
14. Under the VDA, the Comptroller retained the authority to audit Petitioner
for sales and use tax compliance for any periods after January 1, 1998, subject
to the statute of limitations.
15. Under the VDA, the Comptroller agreed to waive interest for sales and use
tax disclosed by Petitioner under the VDA.
16. The audit adjustments were delinquent sales or use tax that Petitioner did
not disclose to the Comptroller under the VDA.
17. Petitioner and the Comptroller signed ten statute of limitations extension
18. Petitioner made the decision to sign the extension agreements and agreed
that the extension was needed in spite of good faith efforts made by the
parties to prepare for or complete the audit.
19. The extension agreements do not establish undue delay.
20. The Comptroller did not cause undue delay in processing Petitioner’s
assessment and a Comptroller employee did not give erroneous advice that led to
21. Petitioner failed to establish that Petitioner was in a natural disaster.
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. Tangible personal property is a taxable item. TEX. TAX CODE ANN. Section
5. Based on Findings of Fact Nos. 6 and 7, Petitioner purchased tangible
personal property from INDIVIDUAL A.
6. Sales of tangible personal property are subject to sales or use tax. TEX.
TAX CODE ANN. Section 151.051 and 151.101.
7. Sales of tangible personal property in electronic form do not alter the
item’s tax status. TEX. TAX CODE ANN. Section 151.010.
8. A seller of a taxable item must collect sales or use tax from the purchaser.
TEX. TAX CODE ANN. Section 151.052 and 151.103.
9. If the seller of a taxable item fails to collect sales or use tax, the
purchaser is liable for the tax. 34 TEX. ADMIN. CODE Section 3.286.
10. Based on Findings of Fact Nos. 8 -9, and Conclusions of Law Nos. 5 - 9, the
auditor properly scheduled the purchases from INDIVIDUAL A in the audit.
11. The sales price of a taxable item is the total amount for which a taxable
item is leased or rented, without the deductions of certain expenses,
transportation charges, or installation charges, and the total amount includes
a service that is a part of the sale. TEX. TAX CODE ANN. Section 151.007(a) and
12. The repair, maintenance, creation and restoration of a computer program,
including its development and modification, performed by the person who sold
the computer program are taxable services. TEX. TAX CODE ANN. Section
13. Based on Findings of Fact Nos. 10 - 11, and Conclusions of Law Nos. 11 -
12, a prima facie case has been met that the professional services provided by
COMPANY A fall within a taxing statute.
14. Based on Findings of Fact No. 12, Petitioner failed to prove by a
preponderance of the evidence that the services performed by COMPANY A were not
15. Interest is imposed on tax that is not paid within 60 days of the due and
payable date. TEX. TAX CODE ANN. Section 111.060 and 151.703(c).
16. Based on Findings of Fact No. 1, and Conclusions of Law No. 15, the
interest assessed in the audit was mandated by law.
17. Based on Findings of Fact Nos. 13 - 16, Comptroller Staff properly rejected
Petitioner’s request for interest waiver under the VDA.
18. The Comptroller waives interest only when there is a showing of undue delay
caused by Comptroller personnel, reliance on advice provided by the
Comptroller’s office, or natural disaster. 34 TEX. ADMIN. CODE SECTION 3.5(d).
19. Based on Findings of Fact Nos. 17 - 21, and Conclusions of Law No. 18,
Petitioner is not entitled to interest waiver because Petitioner failed to
prove that it satisfies any of the three criteria enumerated in 34 TEX. ADMIN.
CODE Section 3.5(d).
20. Based upon the above Findings of Fact and Conclusions of Law, Petitioner’s
requests for audit adjustments should be denied, except the deletions agreed to
Hearing No. 47,841
ORDER OF THE COMPTROLLER
On July 6, 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 16th day of April 2009.
Texas Comptroller of Public Accounts
by: Martin A. Hubert
(1) Penalties were waived by the Comptroller’s Audit Division.
(2) Response to Petitioner’s Reply filed on June 12, 2007.
(3) STAR refers to the Comptroller’s State Tax Automated Research system, which
can found at http://cpastar2.cpa.state.tx.us/index.html.
(4) TEX. TAX CODE ANN. SECTION 151.051 and 151.101.
(5) TEX. TAX CODE ANN. SECTION 151.009.
(6) 34 TEX. ADMIN. CODE Section 3.312 (a)(3).
(7) 34 TEX. ADMIN. CODE Section 3.322(c)(2) and (4); see also, Comptroller’s
Decision Nos. 45,573 & 45,599 (2006).
(8) 34 TEX. ADMIN. CODE Section 3.321(a)(6).
(9) 34 TEX. ADMIN. CODE Section 3.321(e)(3).
(10) TEX. TAX CODE ANN. SECTION 151.005(1).
(11) TEX. TAX CODE ANN. Section 151.010.
(12) The transactions are identified on page 3 of this decision.
(13) See e.g., Comptroller's Decisions 39,558 (2002); 35,995 (1999); 31,605
(1996); 32,141 (1996); 32,006, 31,342, 30,597, 30,637, 29,413, 30,548 and
(14) TEX. TAX CODE ANN. Section 151.051, 151.101, 151.009, and 151.010; 34
TEX. ADMIN. CODE Section 3.308.
(15) TEX. TAX CODE ANN. Section 151.007(a)(3).
(16) TEX. TAX CODE ANN. Section 151.007(b).
(17) TEX. TAX CODE ANN. Section 151.0101(a)(5).
(18) TEX. TAX CODE ANN. Section 151.0101(a)(5)(D).
(19) TEX. TAX CODE ANN. Section 151.703(c) and 111.060.
(20) 34 TEX. ADMIN. CODE Section 3.5(d).
(21) TEX. TAX CODE ANN. Section 111.203(a).
ACCESSION NUMBER: 200904347H
DOCUMENT TYPE: H
TAX TYPE: SALES