200907489H



SOAH DOCKET NO. 304-09-0115.27
CPA HEARING NO. 49,371

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

STANLEY COPPINGER
Representing Tax Division

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


COMPTROLLER’S DECISION

************** (Petitioner) was audited for sales and use tax compliance 
pursuant to a managed audit agreement between Petitioner and the Texas 
Comptroller of Public Accounts (Comptroller).  The audit resulted in a net 
credit due to Petitioner.  Petitioner timely filed for redetermination 
contending that (1) additional credit interest is due for tax overpayments 
during the audit period and (2) tax should not have been assessed on 
scaffolding rentals.  In his Proposal for Decision, the Administrative Law 
Judge (ALJ) recommends that the contentions 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 Elizabeth Wilson Davis.  The record closed on December 30, 2008.

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

Petitioner was selected for a sales and use tax compliance audit of its direct 
payment permit for the period January 1, 1998, through December 31, 2002.  
Pursuant to an agreement between the Comptroller and Petitioner, Petitioner was 
authorized to perform a managed audit pursuant to Tax Code Section 151.0231.  
Petitioner’s purchase transactions during the audit period were stratified and 
examined in a sample and projection audit.  Taxable purchases for which 
Petitioner failed to pay or accrue sales tax were considered tax errors and tax 
was assessed.  The Comptroller waived all penalties and interest, except for 
interest from November 20, 2003 through the audit completion date.  The parties 
agreed that interest would not be waived for that period in return for the 
Comptroller’s extension of the audit completion date.  

The managed audit also determined that Petitioner paid or accrued sales tax on 
exempt purchases.  The resulting tax overpayments were offset against the tax 
errors, or tax underpayments, that occurred during the audit period.  Such 
offsets are allowed by Tax Code Section 151.508.  The tax overpayments exceeded 
the tax underpayments, with the result that Petitioner received a tax credit of 
$**************.  Because of a law change during the audit period, Petitioner 
was entitled to credit interest after January 1, 2000.  Accordingly, interest 
was computed for Petitioner’s monthly report periods that were due after that 
date.  Credit interest was allowed in an amount of $**************.

On redetermination, Petitioner contends that the Comptroller’s interest 
computation methods are contrary to the statutes and the managed audit 
agreement.  Petitioner contends that credit interest must be allowed on the 
entire amount of any tax overpayment, and that the Comptroller may not net 
overpayments and underpayments during a monthly reporting period and pay 
interest on the difference.  Staff takes the position that the audit interest 
computations are correct.

As a separate and unrelated issue, Petitioner contends that purchases of 
scaffolding labor during the audit period were exempt and should not have been 
scheduled as tax errors.  Staff takes the position that scaffolding purchases 
were taxable as the rental of tangible personal property.

B. Evidence Submitted

Petitioner submitted the Sales and Use Tax Managed Audit Agreement, and copies 
of vendor invoices regarding crane rentals.  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

1. Credit Interest

The dispute concerns credit interest computations for the 37 monthly report 
periods during the audit period for which statutory credit interest was 
available, beginning with December of 1999, which qualified for credit interest 
because the report was not due until January 20, 2000.  For those 37 periods, 
tax assessments as a result of tax errors were netted against credits for tax 
overpayments to determine the net tax assessment or credit due for that period. 
 Twenty-six of the report periods resulted in net credits.  Credits for a 
particular report period were applied to deficiencies in earlier periods.  
Since penalty and interest were waived, those deficiencies consisted entirely 
of tax amounts.  If a credit balance still remained after earlier tax 
deficiencies were paid, credit interest was allowed beginning on the 61st day 
after the due date of the report period.  It is clear from Staff’s pleadings 
and evidence that the foregoing interest computations, which were used in this 
audit, are also the same computations that are applied in field audits. 
[ENDNOTE (1)] Penalty and interest was waived in this managed audit, but that 
can and does occur in field audits as well.

In defending or attacking the interest computations, both parties invoke the 
same tax statutes.  The parties in their pleadings also at times discuss 
whether the Managed Audit Agreement requires or justifies that interest be 
computed in a certain manner.  These different grounds will be separately 
addressed.  The ALJ will first consider the audit interest computations in 
connection with the tax statutes that apply to both managed audits and all 
other audits.  For the reasons stated, the ALJ concludes that the audit 
interest computations are consistent with those statutes.  The ALJ then 
considers whether Comptroller policy regarding managed audits in general, or 
this one in particular, require a different result.  The ALJ finds that there 
is no basis in Comptroller policy or the parties’ agreement that requires any 
computations different from those provided by the statutes that apply to all 
audits. 

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.  For periods after January 1, 2000, credit interest is also allowed on 
tax refunds or credits due to taxpayers who have overpaid their taxes.  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.  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. 

Tax Code Section 151.508 provides that, in making a tax determination, the 
Comptroller may offset a tax overpayment for one or more periods against any 
tax underpayments.  Under this statute, tax overpayment discovered during an 
audit need not be directly refunded to the taxpayer; instead, they may be used 
as offsets in making the tax determination.  Tax Code Section 151.508 further 
provides, “Any interest accrued on the overpayment shall be included in the 
offset” (emphasis provided).  Petitioner made tax overpayments during the 
managed audit period.  Petitioner contends under Tax Code Section 151.508 it is 
entitled to full credit interest on a transaction-by-transaction basis for all 
tax overpayments. If a tax overpayment was made by paying or accruing tax of 
$************** on an exempt purchase transaction during the audit period, 
Petitioner contends that under the plain, mandatory language of the statue it 
is entitled to an offset for both the tax overpayment and the interest 
associated with the amount of that payment.

Staff takes a different view of what constitutes an overpayment that qualifies 
for credit interest.  Staff contends that any tax over payments must first be 
netted against any tax underpayments for the same period, and second against 
tax delinquencies that may exist in prior periods; only the remaining amount, 
if any, accrues interest.  Tax overpayments are applied against tax 
underpayments during the same report period to determine the net tax due for 
that period.  If the tax overpayments for a particular report period exceed the 
amount of the tax underpayments, the net overpayments are applied as a credit 
against deficiencies in earlier periods, beginning with the earliest period in 
the audit in which underpayments occurred, until the credits are exhausted.  No 
interest is earned on tax overpayments until all deficiencies in prior periods 
are extinguished, such that there is a net credit on a carry-forward basis.  In 
this managed audit, credit interest was allowed only for those periods in which 
there were net overpayments, after the overpayments were netted against 
underpayments for the same or prior periods. [ENDNOTE: (2)]

In support of its position, Staff cites Tax Code Section 111.064(a), which 
states that credit interest accrues “on the amount found to be erroneously paid 
for a period” (emphasis provided), and Tax Code Section 151.508, which states 
that overpayments for “one or more periods” may be offset against underpayments 
“for the same period or one or more other periods.”  Staff points out that in 
determining tax refunds any amount of tax, penalty, or interest that has been 
erroneously paid is first credited against “any other amount due and payable” 
by the taxpayer; only the remaining amount, if any, is to be refunded to the 
taxpayer.  TEX. TAX CODE ANN. Section 111.104(a).  Interest that is included in 
the refund is based on the net amount that remains after other amounts due and 
payable have been paid.  Staff reasons that the same rule should apply when 
calculating interest on tax overpayments that are used as offsets in audits.

Petitioner contends these procedures are contrary to the tax statutes.  
Petitioner contends that the term “overpayment” as used in Tax Code Section 
151.508 means any amount of tax that is paid in error, before any offsets.  
Petitioner 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).  Tax 
Code Section 151.508 further states that any interest accrued on the 
overpayment shall be included in the offset.  Petitioner reasons that the plain 
language of the statute requires that it be allowed credit interest on the 
gross amount of any tax overpayments on any transaction during the audit 
period.

After extended consideration of the parties’ contentions, including two 
additional submissions at the request of the ALJ, the ALJ concludes that the 
interest computations in this audit were consistent with the controlling tax 
statutes and rules.  The statutes cited by Staff indicate that tax overpayments 
are determined by period and not on a transaction-by-transaction basis.  It is 
clear that under Tax Code Section 111.064 and 104(a), interest on refunds is 
computed on the net amount that is due  after tax that is erroneously paid is 
credited against any other amounts due and payable.  There is no basis under 
the statutes or rules for applying a different rule with regard to taxes paid 
in error that are used as offsets in an audit.   Tax Code Section 151.508 
contains nothing to the contrary, and it should be considered in the context of 
other statutes regarding refunds and tax overpayments.  That statute does not 
itself create any specific rights to interest amounts, as is clear from the 
fact that no credit interest at all was allowed before January 1, 2000, even 
though Tax Code Section 151.508 was in effect before that date.  The interest 
computations utilized by Staff in this audit are found to be consistent with 
the tax statutes cited by Staff.

Still remaining for discussion is whether there are any features of managed 
audits in general, or this one in particular, that require or justify different 
interest computations.  The Managed Audit Agreement states that it shall not be 
construed so that it conflicts with the laws or rules or regulations adopted by 
the Comptroller.  For the reasons already discussed, the ALJ concludes that the 
interest computations in the managed audit were consistent with the tax 
statutes and rules.  In defending the interest calculations, Staff at times 
invoked considerations regarding managed audits as authorized by Tax Code 
Section 151.0321(g).  In addition, Staff relies on Comptroller’s Decision No. 
44,848 (2005), a decision in which interest computations similar to those here 
were upheld, apparently on the basis of the Comptroller’s discretionary 
authority to waive interest in managed audits.  The decision here, however, is 
entirely based on the statues and rules that apply to audits in general, and 
not the Managed Audit Agreement or on policies that apply only to managed 
audits. 

The parties have also discussed Comptroller Audit Policy Memo 108 (AP 108) of 
May 25, 2006.  That policy memorandum states, “Our policy is to not give credit 
interest on any refunds generated within a managed audit when the managed audit 
results in a deficiency.  The reason for this is that we are waiving all 
penalty and interest on any assessments, and will not allow credit interest on 
a refund for the same period.”  This provision appears to contradict the usual 
rule that credit interest is allowed for any periods in which there is a net 
credit on a carry-forward basis.  However, Staff, in its Response to Order No. 
2, states that AP 108 is “worded awkwardly” and that “the Comptroller 
interprets that memo to allow credit interest, after first applying credits 
backward, on a period by period basis on a net carry forward basis regardless 
of whether the entire audit is a net assessment or credit.”  This clarification 
removes what appears to be a different rule for managed audits.  In any event, 
in this audit, credit interest was allowed for net overpayments after 
underpayments in the same period or tax deficiencies in prior periods were 
paid.  As the Managed Audit Agreement contains nothing else that requires a 
different result in this case, the ALJ concludes that credit interest 
computations should be upheld on the basis of the statutes as previously 
discussed.

2. Scaffolding Rentals

Petitioner contends that tax was not due on its purchases of scaffolding 
because such services were determined to be non-taxable services in a District 
Court decision.  Staff notes that the decision is on appeal in the Third Court 
of Appeals as Combs v. Chevron USA, Inc., Cause No. 03-07-00127-CV.  The 
Comptroller has treated the provision of scaffolding as the rental of tangible 
personal property.  Since the essence of the transaction is a taxable rental, 
related labor charges are considered taxable as services that are part of the 
rental of tangible personal property.  See, e.g., Comptroller’s Decision No. 
44,297 (2005); TEX. TAX CODE ANN. Section 151.007(b).  The evidence submitted 
is limited to vendor invoices that reference labor charges on an hourly basis 
and charges for trucks.  Petitioner has submitted nothing to show that the 
charges were not for services that were part of a taxable rental and, 
accordingly, has not met its burden of proof under 34 Tex. Admin. Code Section 
1.40(2)(B) to prove by a preponderance of the evidence that the charges were 
non-taxable.

III. FINDINGS OF FACT

1. ************** (Petitioner) was the subject of a managed audit for 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 September 5, 2008, the case was referred to the State Office of 
Administrative Hearings for a 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 and interest on tax 
assessments was waived for periods prior to November 20, 2003. 

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 Comptroller 
policy and consistent with the provisions of the Tax Code.

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 scaffolding 
labor charges were non-taxable.

6. Based on the foregoing Findings of Fact and Conclusions of Law, except as 
agreed to by Staff, the audit deficiency should be upheld without change.


Hearing No. 49,371

ORDER OF THE COMPTROLLER

On January 16, 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 February 3, 
2009.  The  Tax Division filed a Response on February 18, 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 the change recommended by the ALJ and this decision represents the ruling 
thereon.
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.  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) The affidavit of Comptroller auditor Martha Middleton describes how the 
Comptroller’s automated tax system computes tax refunds as well as offsetting 
tax overpayments in an audit:

* * *

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. 

*  *  *

(2) The affidavit of Comptroller auditor Martha Middleton describes in detail 
how the tax overpayments and credit interest were applied in this audit:

* * *

10. Credit interest is paid on reported periods due on or after January 1, 2000 
starting with the 9912 [December 1999] period.  In this audit, 9912 resulted in 
a net credit adjustment.

11. The credit adjustment for 9912 is subject to credit interest starting 61 
days after the period’s due date.  Credit interest was calculated from 
03/21/2000 through the due date of the liability period to which the credit is 
applied.  The $************** credit for 9912 was applied to the 
$************** liability in period 0004 [April 2000].  The due date for report 
period 0004 is 5/22/2000, so credit interest was calculated from 3/21/2000 
through 5/22/2000.

12. The credit adjustment of $************** for 0001 [January 2000] accrued 
credit interest starting 4/25/2000 through 5/22/2000, which is the due date of 
filing period 0004.  A portion of the 0001 credit was used to satisfy the 
liability in 0004.  The remaining $************** tax credit balance for 0001 
accrued credit interest starting 5/23/2000 through 9/20/2000, the due date of 
the next liability period (0008).  The remaining tax credit balance, along with 
all accrued credit interest, was used to satisfy the 0008 audit liability.

13. Net credit adjustments for filing periods 0002, 0005, 0006, and 0007 were 
applied in this manner, thus satisfying all periods that resulted in a net tax 
liability adjustment.  All remaining credit periods in the audit accrued credit 
interest starting 61 days after the periods’ due date through the refund date.





ACCESSION NUMBER: 200907489H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 07/15/2009
TAX TYPE: SALES