200904347H



SOAH DOCKET NO. 304-07-2258.26
CPA HEARING NO. 47,841

RE: **************
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

SUSAN COMBS
Texas Comptroller of Public Accounts

LIAT GROSZ
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). 
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 
Eleanor Kim.

II. REASONS FOR DECISION

A. Evidence

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 
Exam 7.

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 
products.

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/software agreements.

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 
audit.”

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 
undue delay.

F. Conclusion

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 
INDIVIDUAL A.

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 
agreements.

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 
the assessment.

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 
151.010.

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 
(b).

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 
151.0101(a)(5).

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 
taxable.

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 
by Staff.

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.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller

ENDNOTE(S):
(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 
30,461 (1994).
(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).
(22) Id.




ACCESSION NUMBER: 200904347H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 04/16/2009
TAX TYPE: SALES