200907488H



SOAH DOCKET NO. 304-09-2364.27
CPA HEARING NO.   48,091

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 1998 THROUGH December 31, 2002

Direct Payment Sales Tax/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

ROBERT E. SCOTT
Representing Tax Division

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


COMPTROLLER’S DECISION

The ************** (Petitioner) was audited for Direct Payment sales and use 
tax compliance under a managed audit agreement between Petitioner and the Texas 
Comptroller of Public Accounts (Comptroller).  The audit resulted in a net 
credit or refund to Petitioner.  Petitioner timely filed for redetermination 
contending that the Comptroller’s methodology for calculating credit interest 
in the managed audit was contrary to the tax statutes.  In his Proposal for 
Decision, the Administrative Law Judge (ALJ) recommends that Petitioner’s 
contention be denied and that the audit be upheld without change.

I.  PROCEDURAL HISTORY, NOTICE & JURISDICTION

The case was submitted for hearing based on the written submissions of the 
parties.  Petitioner was represented by **************.  The Comptroller was 
represented by Assistant General Counsel Robert E. Scott.  The record closed on 
March 23, 2009.

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

II. REASONS FOR DECISION

A. Background and Issues Presented

Under a Managed Audit Agreement between the Comptroller and Petitioner, and 
pursuant to Tax Code Section 151.0231, the auditor was authorized to perform a 
managed audit for the period January 1, 1998 through December 31, 2002.  
Purchase transactions were stratified and examined through sample and 
projection methods.  Taxable purchases for which Petitioner failed to pay or 
accrue sales tax were considered tax errors and tax was assessed.  Petitioner 
also paid or accrued sales tax on purchases that were exempt.  Such 
transactions were treated as tax overpayments.  Tax overpayments were offset 
against tax underpayments within a reporting period, and if the result was a 
net credit for a reporting period, the credit was applied to any deficiencies 
in earlier reporting periods.  For reporting periods due and payable after 
January 1, 2000, credit interest was allowed for reporting periods for which 
there was a net credit remaining after earlier deficiencies were paid.  Since 
tax overpayments exceeded tax underpayments, Petitioner received a tax credit 
of $************** for the entire audit period.  No penalties were assessed as 
agreed in the Managed Audit Agreement, and interest was waived that would 
otherwise have accrued for those reporting periods within the audit for which 
there were net tax underpayments.

Petitioner contends that the Comptroller’s interest computation methods are 
incorrect and that it is entitled to additional credit interest.  Petitioner 
contends that credit interest should have been computed on the entire amount of 
any tax overpayment, without any netting against underpayments occurring in the 
same reporting period or in earlier periods.  Staff disagrees and takes the 
position that tax overpayments are entitled to credit interest only to the 
extent overpayments exceed underpayments within a reporting period, and only 
after deficiencies in prior periods have been paid, including penalty and 
interest if not waived.

B. Evidence Submitted

Petitioner submitted the Sales and Use Tax Managed Audit Agreement.  Staff 
submitted the audit schedules and audit plan, a Texas Notification of Audit 
Results, and an affidavit executed by the Comptroller auditor. 

C. ALJ’s Analysis and Recommendations

The parties agree that credit interest was not available for reporting periods 
that were due and payable before January 1, 2000, because there was no 
statutory provision for credit interest during that time.  The parties further 
agree that Petitioner is entitled to credit interest for reporting periods due 
and payable after that date under Tax Code Section 111.064, effective January 
1, 2000.  The parties disagree on the methodology for calculating credit 
interest.  In the managed audit, credit interest was calculated through the use 
of the Comptroller’s computerized and automated system for processing tax 
overpayments and underpayments.  Tax overpayments were first netted against 
underpayments occurring in the same reporting period.  A net overpayment for 
any reporting period was then applied to any deficiencies in earlier periods, 
until all tax and interest for the earlier periods was paid.  Credit interest 
was allowed only on the remaining amount.  Petitioner contends this method is 
contrary to the Managed Audit Agreement and to the statutes.  Petitioner 
contends that credit interest should accrue on the entire amount of any tax 
overpayment for any reporting period, without any reduction for deficiencies in 
prior periods.

The Managed Audit Agreement states that the Comptroller may waive all or part 
of the interest that would otherwise accrue. [ENDNOTE: (1)] There was no 
interest to waive with regard to the audit as a whole, since the overall result 
was a credit due to Petitioner.  However, the Comptroller waived interest on 
reporting periods within the audit that resulted in net underpayments, while 
also allowing credit interest on reporting periods that resulted in net 
overpayments and which were due and payable after January 1, 2000.  The Managed 
Audit Agreement contains nothing regarding the method for calculating interest, 
other than general statements that the agreement is to be governed and 
construed in accordance with state laws and the rules and regulations adopted 
by the Comptroller. [ENDNOTE: (2)] It is clear from Staff’s pleadings and 
evidence that the interest computations used in this managed audit are the same 
computations used in audits generally. [ENDNOTE: (3)] Since interest 
computations were not specified in the agreement, the question presented is 
whether the interest computations used by the Comptroller are contrary to 
applicable tax statutes. 

The Tax Code imposes interest on taxpayers who have failed to timely pay taxes 
that were due.  For periods after January 1, 2000 the Tax Code also allows 
credit interest to taxpayers who have overpaid their taxes.  Interest is 
imposed on unpaid or delinquent taxes beginning 60 days after the due date.  
The interest rate is determined by reference to the published prime rate on the 
first day of each calendar year.  TEX. TAX CODE ANN. Section 111.060.  Credit 
interest is paid on taxes that have been erroneously paid by or collected from 
taxpayers.  Credit interest accrues beginning 60 days after the due date of the 
tax payment or the due date of the tax report, whichever is later.  TEX. TAX 
CODE ANN. Section 111.064(a).  Before September 1, 2005, the interest rate for 
tax refunds or credits was the same as that on unpaid or delinquent taxes.  
After that date, the interest rate for tax refunds or credits is the rate on 
unpaid taxes or the annual rate of interest on deposits in the state treasury 
during December of the previous year, whichever is lower.  TEX. TAX CODE ANN. 
Section 111.064(c).

Tax Code Section 151.508 provides for offsetting tax overpayments against tax 
underpayments in sales and use tax audits, and for credit interest on tax 
overpayments.  The Tax Code does not state the precise methods to be used for 
computing tax overpayments.  Tax Code Section 111.064(a), regarding interest on 
a claim for refund or in an audit for all state taxes, states that interest 
accrues on “the amount found to be erroneously paid for a period” (emphasis 
provided).  Tax Code Section 151.508, regarding overpayments as offsets in 
sales tax audits, provides: “Any interest accrued on the overpayment shall be 
included in the offset” (emphasis provided).  Petitioner points to the 
emphasized statutory language as support for its contention that interest must 
be allowed on the full amount of any overpayment on a stand-alone basis.  
Petitioner also cites the administrative rule that states that interest “will 
be paid on tax amounts found to be erroneously paid for reports due on or after 
January 1, 2000, whether claimed on a request for refund or claimed in the 
audit” (emphasis supplied).  34 TEX. ADMIN. CODE ANN. Section 3.282(j)(4).

Staff cites Tax Code Section 111.104(a) which states:

If the Comptroller finds that an amount of tax, penalty, or interest has been 
unlawfully or erroneously collected, the Comptroller shall credit the amount 
against any other amount when due and payable by the taxpayer from whom the 
amount was collected.  The remainder of the amount, if any, may be refunded to 
the taxpayer from money appropriated for tax refund purposes. 

The statute explicitly states that refunds claims are allowed only after 
netting the overpaid amounts against other taxes due and payable.  Staff 
contends the same methods were intended for calculating overpayments within an 
audit.  Staff further cites Tax Code Section 151.508, which states: 

In making a determination, the Comptroller may offset any overpayment for one 
or more periods against an underpayment, penalty, and interest accrued on the 
underpayment for the same period or one or more other periods.  Any interest 
accrued on the overpayment shall be included in the offset.

The first sentence of Tax Code Section 151.508 contemplates that overpayments 
may be offset against underpayments in the same period or in one or more other 
periods.  Staff contends that the overpayment which accrues interest, 
referenced in the second sentence, also means an overpayment net of 
underpayments in one or more other periods, and that this view is consistent 
with the Tax Code provisions taken as a whole.

A consideration of the statutory directives regarding interest calculations 
logically begins with the most specific statute – Tax Code Section 151.508 
regarding offsets in sales tax audits.  That section is clear that any interest 
accrued on the overpayments must be included in the offsets.  The statute is 
less specific, however, as to what constitutes an overpayment that is entitled 
to interest.  Petitioner’s view that it means any tax overpayment considered in 
isolation is not stated in the statute.  Tax Code Section 111.104(a) regarding 
refund claims explicitly provides for offset against any other amounts due and 
payable in determining the amount that is refunded and that is eligible for 
credit interest.  Petitioner points out that Tax Code Section 111.104(a) 
applies to all state taxes, and suggests that the language regarding crediting 
erroneously collected tax amounts against other amounts due and payable means 
other tax types, such as franchise taxes, that are due and payable.  The 
statute however, states that amounts erroneously collected shall be credited 
against “any other amount” due and payable from the taxpayer; it does not state 
that the amounts must relate to a different tax type.

The statutes do not exactly say how interest on overpayments is to be computed. 
 However, the methods used by the Comptroller do appear consistent with the 
guidance that is given in the statutes.  The language of Tax Code Section 
111.064(a) indicates that tax overpayments are to be determined for a period 
and not on a transaction-by-transaction basis.  Tax Code Section 111.104(a) 
clearly provides that, with regard to refunds, interest is computed on the net 
amount after credits are applied against any other amounts due and payable.  
There is nothing in Tax Code Section 151.508 that requires a different result, 
and it should be considered in the context of the other statutes.  The 
construction placed upon a statute by the agency charged with its 
administration should be given weight if it is reasonable and does not 
contradict the plain meaning of the statute.  Tarrant Appraisal Dist. v. Moore, 
845 S.W.2d 820 (Tex. 1993).

Statutory construction may also take into account the legislative history and 
the object sought to be obtained.  TEX. GOV’T CODE ANN. Section 311.023.  
Although the parties have not specifically briefed the history or purpose of 
the credit interest statute, Comptroller decisions have stated that the purpose 
of the corresponding interest imposition statute is to impose on unpaid taxes a 
time charge for the use of money.  See, e.g., Comptroller’s Decision No. 32,839 
(1995).  The Tax Code previously contained provisions for payment of credit 
interest to taxpayers until repealed as of December 4, 1986.  See discussion in 
Comptroller’s Decision No. 39,537 (2001).  Credit interest was not allowed 
during the intervening period until the enactment of Tax Code Section 111.064, 
effective January 1, 2000.  The interest imposition and credit interest 
statutes are not intended as exact parallels in all respects, as can be seen 
from the fact that the interest rates under the two provisions may vary for 
periods after 2005.  But the purpose of the statutes taken as a whole is to 
compensate both the state and taxpayers for the time value of money with regard 
to tax errors.

Having considered the Comptroller’s automated system for processing tax 
overpayments and underpayments as described in this case, in particular the 
affidavit evidence, the ALJ does not perceive that those procedures are 
inequitable or that they fail to account for interest similarly with respect to 
both taxpayers and the state. Tax overpayments are first netted against 
underpayments for the same reporting period.  Any credits for a reporting 
period are applied against outstanding tax underpayments in earlier reporting 
periods, including interest on the underpayments.  The only interest that must 
be offset is the interest that accrued during the time lapse between the 
underpayment and the overpayment.  In an audit context, that period is 
typically measured in months, particularly since interest does not begin to 
accrue until 60 days after the due and payable date.  The taxpayer incurs 
interest because the underpayment preceded the overpayment.  Once a net tax 
overpayment has been established for a reporting period on a carry-forward 
basis, that net overpayment does accrue interest, and is included in the offset 
against any tax deficiencies in later periods.  The taxpayer is paid credit 
interest because the overpayment preceded the underpayment. 

Petitioner contends that the plain language of Tax Code Section 151.508 
requires that credit interest be allowed on the entire amount of an 
overpayment, without any offsets for tax underpayments in the same period or 
other periods, and that the interest accrued on that entire overpayment amount 
must also be carried back and applied against the earlier deficiency.  While 
Petitioner does not state over what period of time it considers the interest to 
accrue, the period could be many years because an overpayment continues to 
accrue interest potentially through the date of payment.  As a result, under 
the methods proposed by Petitioner, a taxpayer could claim interest computed on 
a gross amount over many years, while applying that interest to offset 
deficiency interest accrued during a period measured in months.  Petitioner’s 
method would not place the state and taxpayers on an equal footing with regard 
to compensation for the time value of money that is owed.  The Comptroller’s 
automated system does appear to treat both parties equally by computing 
imposition interest on net underpayments and credit interest on net 
overpayments by the same methods.  While some of a taxpayer’s net overpayments 
may be expended to extinguish interest on prior underpayments, that interest 
arose because of the time difference between the underpayment and the 
overpayment.  When there are net overpayments on a carry-forward basis, credit 
interest is paid to taxpayers.

In return for assisting with the managed audit, Petitioner received penalty 
waiver and interest waiver with regard to reporting periods for which there was 
a net underpayment.  Because the audit as a whole resulted in a credit or 
refund due to Petitioner, the amount of interest waived was less than had the 
audit resulted in a tax assessment.  However, Petitioner has not shown that the 
interest calculations are contrary to the Managed Audit Agreement or the Tax 
Code, and has for that reason not met its burden of proof under Texas 
Administrative Code Section 1.40(2)(B) to show by a preponderance of the 
evidence that the audit results are incorrect.

III. FINDINGS OF FACT

1. The ************** (Petitioner) was the subject of a managed audit for 
Direct Payment sales and use tax compliance for the period January 1, 1998 
through December 31, 2002.  The audit resulted in a credit due to Petitioner.  
Petitioner timely filed for redetermination.

2. On January 28, 2009, the case was referred to the State Office of 
Administrative Hearings for written submission hearing.  Comptroller Staff 
provided a notice of hearing to Claimant that contained a statement of the 
nature of the hearing; a statement of the legal authority and jurisdiction 
under which the hearing was to be held; a reference to the particular sections 
of the statutes and rules involved; and a short, plain statement of the matters 
asserted.

3. During the audit period, Petitioner purchased taxable items without paying 
or accruing the applicable sales tax.  Tax was assessed on those purchases in 
the managed audit as tax underpayments.

4. Petitioner accrued sales tax on purchases for which tax was not due.  These 
tax overpayments were offset against tax underpayments.

5. Credits for tax overpayments were applied against underpayments during the 
same monthly report periods, and against underpayments in prior periods until 
the credit was exhausted.

6. For report periods after January 1, 2000, credit interest was allowed for 
report periods for which Petitioner had a net credit after overpayments were 
applied against underpayments.

7. Credit interest was calculated in the managed audit in accordance with 
agency policy.

8. All penalties were waived in the managed audit.  Interest was waived on 
reporting periods within the audit for which there were net tax assessments. 

IV. CONCLUSIONS OF LAW

1. The Texas Comptroller of Public Accounts (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 ch. 2001.

4. Credit interest charges were calculated in accordance with the Managed Audit 
Agreement, the Comptroller’s procedures for computing interest, and consistent 
with Tax Code provisions.

5. Petitioner did not meet its burden of proof under 34 TEX. ADMIN. CODE 
Section 1.40(2)(B) to show by a preponderance of the evidence that additional 
interest should be allowed.

6. Based on the foregoing Findings of Fact and Conclusions of Law, the audit 
should be upheld without change.


Hearing No. 48,091

ORDER OF THE COMPTROLLER

On March 24, 2009, the State Office of Administrative Hearings’ Administrative 
Law Judge (ALJ), Alvin Stoll, issued a Proposal for Decision in the above 
referenced matter to which Petitioner filed Exceptions on April 9, 2009.  
Hearings Attorney filed a Response on April 20, 2009.  The Comptroller has 
considered the Exceptions, Response and the ALJ’s recommendation letter and 
determined that the ALJ’s decision should be adopted with minor changes to 
correct typographical or clerical errors and this decision represents the 
ruling thereon.

The above decision resulting in a zero amount due to Taxpayer as set out in 
“Attachment A,” which is incorporated by reference, is approved and adopted in 
all respects.  This decision becomes final twenty days after the date 
Petitioner receives notice of this decision.  If either party desires a 
rehearing, that party must file a Motion for Rehearing, which must state the 
grounds for rehearing, no later than twenty days after the date Petitioner 
receives notice of this decision.  Notice of this decision is presumed to occur 
on the third day after the date of this decision.

Signed on this 15th day of July 2009.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller


ENDNOTE(S):

(1) Sales and Use Tax Managed Audit Agreement, Section 7.

(2) Sales and Use Tax Managed Audit Agreement, Sections 10 and 11.

(3) In her affidavit, Comptroller auditor Martha Middleton describes how the 
Comptroller’s automated tax system computes tax refunds and offsetting audit 
tax overpayments and underpayments:

3. The software of the Comptroller’s computer system pays off any liability 
(tax, penalty, and interest) to calculate a refund.  The system for penalty and 
interest follows the same rules as the tax system.  Interest accrues on each 
report period beginning on the 61st day after the due date of the report 
period.  Interest continues to accrue through midnight of the payment postmark 
date.  Each payment will stop the interest on an equal amount of tax.  Any 
balance of tax not yet paid will continue to accrue interest until such time 
that it is paid.

4. In an audit, adjustments are summarized by report period, netting the 
liability adjustments with the credit adjustments.  If a period results in a 
net tax credit, the credit is treated as a payment and applied to the earliest 
deficiency period until all tax, penalty, and interest are paid or the credit 
is used up.  Once the deficiency period is paid, any remaining credit will be 
applied to the next earliest deficiency, then the next.  This process continues 
until all credits are used or until all liabilities are satisfied.  If a credit 
balance remains after application to all deficiency periods, credit interest is 
calculated.  Credit interest is paid on report periods due on or after January 
1, 2000.  After all audit credit periods are applied to deficiency periods, any 
remaining tax credit and credit interest will be refunded to the taxpayer.

5. When a credit from a later period is applied to an earlier deficiency 
period, the deficiency period will accrue interest through the due date of the 
credit period.  Any unpaid tax balance will continue to accrue interest through 
the due date of the next applied credit or through midnight of the payment 
postmark date.

6. When a credit from an earlier period is applied to a later deficiency 
period, the deficiency period will not accrue any interest on tax equal to the 
applied credit amount.  Any unpaid tax balance will continue to accrue interest 
through the due date of the next applied credit.  The credit will accrue credit 
interest, if applicable, from its interest start date through the due date of 
the deficiency period to which the credit was applied.  Any remaining credit 
tax balance will continue to accrue credit interest until applied to another 
deficiency or refunded.

7. The Audit Adjustment Report of Petitioner’s December 29, 2005 Audit Report 
“. . . reflects the calculations discussed above.  My review of the amounts is 
shown on [the attached report].  The filing period 9801 resulted in a net tax 
credit adjustment of $**************.  The earliest period in the audit with 
tax due was 9804, and the $************** of the 9801 adjustment was used to 
satisfy this liability.  The remaining credit balance of $************** for 
9801 was then applied to the tax liability for 9805, resulting in 
$************** tax due for this period.”  The four-digit period year is read 
in the following manner: the first two digits is a year during the audit, and 
the last two digits indicate the month.

8. Filing period 9802 resulted in a net tax credit adjustment of 
$**************.  This credit was used to satisfy the remaining liability for 
9805, resulting in a credit balance for 9802 of $**************.  The remaining 
9802 credit was enough to satisfy the tax adjustment for 9806, leaving a credit 
balance of $**************.  This remaining credit balance was applied to the 
next liability period in 9808.

9. Credit interest is paid on report periods due on or after January 1, 2000, 
staring with the 9912 period.  In Petitioner’s audit, period 9912 resulted in a 
net liability adjustment.  This period’s liability was satisfied by credit 
applications from 9812 and 9907.

10. The credit adjustment for 0001 is subject to credit interest starting 61 
days after the period’s due date.  Credit interest for period 0001 is 
calculated from April 25, 2000 through the due date of the liability period to 
which the credit was applied.  The $************** credit for 0001 was applied 
to the $************** liability in period 0012.  The due date for report 
period 0012 is January 22, 2001, so credit interest was calculated from April 
25, 2000 through January 22, 2001.




ACCESSION NUMBER: 200907488H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 07/15/2009
TAX TYPE: SALES