Texas Comptroller of Public Accounts    STAR System


200908494H



HEARING NO.  46,333

RE: *************
TAXPAYER NO.: *************
AUDIT OFFICE: *************
AUDIT PERIOD: September 1, 2000 THROUGH January 31, 2004

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

ROBERT E. SCOTT
Representing Tax Division

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


COMPTROLLER'S DECISION UPON REHEARING

On May 22, 2009, Petitioner timely filed a Motion for Rehearing concerning the 
May 1, 2009, Comptroller's Decision issued in the above-referenced matter.  On 
May 29, 2009, the Tax Division filed its Reply to Petitioner’s Motion agreeing 
in part with the Motion for Rehearing.

On August 3, 2009, Rehearing was granted in order for interest to be waived as 
detailed in the Tax Division’s Response of May 29, 2009.  The revised final 
figures have been calculated in accordance with the Tax Division’s Response and 
the resulting liability is set forth in Attachment A, which is incorporated 
herein by reference and approved and adopted in all respects.  Except as 
modified by this Decision, the Comptroller's Decision in this case, issued May 
1, 2009, is incorporated herein and reaffirmed.

This decision becomes final twenty (20) days from the date of notification of 
this Order, and the total sum of the tax, penalty, and interest amounts is due 
and payable within twenty (20) days thereafter.  Notification is presumed to 
occur on the third day after the date of this Order.  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 a rehearing is desired, a Motion for Rehearing must be filed no later than 
twenty (20) days after the date of notification of this Order and must state 
the grounds upon which the motion is based.

Signed on this 12th day of August 2009.


SUSAN COMBS
Comptroller of Public Accounts


by: Martin A. Hubert
Deputy Comptroller



HEARING NO. 46,333

RE: *************
TAXPAYER NO.: *************
AUDIT OFFICE: *************
AUDIT PERIOD: September 1, 2000 THROUGH January 31, 2004

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

ROBERT E. SCOTT
Representing Tax Division

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


COMPTROLLER’S DECISION

PRELIMINARY DISCUSSION:

An oral hearing in the captioned matter was held on September 20, 2006.  
************* appeared on behalf of the Petitioner and presented the
testimony of INDIVIDUAL A, Petitioner’s Chief Executive Officer.  Robert
E. Scott appeared on behalf of the Tax Division and presented the testimony
of Catherine Neidhart, CPA, an Audit Team Leader employed by the Comptroller.

The Administrative Law Judge took official notice of all records of the 
Comptroller's office that pertain to Petitioner and the issues involved in the 
case.  Unless otherwise indicated, all Section references are to Title 2, Texas 
Tax Code Ann. (Vernon 2002).  References to Rules are to sections of Title 34, 
Texas Administrative Code.

PETITIONER'S CONTENTIONS:

1. Certain equipment purchases scheduled in the audit, in particular the 
Omniscan Scanners and the Kodak 4500 Scanner, are exempt manufacturing 
equipment.

2. Certain equipment purchases included in the audit qualify for the sale for 
resale exemption.

FINDINGS OF FACT, GENERAL:

Both parties submitted proposed findings of fact, and the findings of fact set 
forth below represent the ruling thereon.

1. *************, Petitioner, is a domestic for-profit corporation.  
************* (INDIVIDUAL A) is Petitioner’s Chief Executive Officer.

2. Petitioner scans and images documents at its *************, Texas location, 
in addition to providing consulting services, selling hardware and software, 
and leasing out equipment. 

3. Petitioner was audited for Texas sales and use tax compliance for the period 
September 1, 2000 through January 31, 2004, as a result of which a Texas 
Notification of Audit Results dated October 20, 2004 was issued, reflecting a 
tax deficiency, late payment penalties, and statutory interest as of the date 
of the Notification.  Petitioner’s timely request for redetermination resulted 
in the instant proceeding.

4. Petitioner’s audit liability was the result of additional taxable purchases 
of capital assets on which no tax was paid (Exam 1).

5. The auditor used Petitioner’s federal income tax returns and the 
accompanying depreciation schedules to make the adjustments in Exam 1.  
Petitioner was unable to provide copies of tax-paid invoices for the assets 
scheduled therein, which include printers, scanners, and other equipment.  Exam 
1’s “description” of each contested item, the amount depreciated, and the date 
of purchase were taken directly from Petitioner’s depreciation schedules, as 
follows:

Rec. ID: 1 [ENDNOTE: (1)]
Description: Printers
Taxable Amount: $*************
Date: 9/21/00

Rec. ID: 0-2
Description: B & H 8080 3
Taxable Amount: $*************
Date: 5/17/01

Rec. ID: 0-3
Description: B & H 8080 4
Taxable Amount: $*************
Date: 5/17/01

Rec. ID: 0-7
Description: Omniscan Scanners
Taxable Amount: $*************
Date: 5/20/01

Rec. ID: 0-8
Description: Xerox 8830-line 31
Taxable Amount: $*************
Date: 9/21/01

Rec. ID: 0-6
Description: Kodak 4500
Taxable Amount: $*************
Date: 11/01/01

Rec. ID: 0-5
Description: Juke Box System
Taxable Amount: $*************
Date: 12/7/01

Rec. ID: 0-10
Description: Xerox 8830-Line 53
Taxable Amount: $*************
Date: 9/30/02

Rec. ID: 0-11
Description: Xerox 8830-Line 54
Taxable Amount: $*************
Date: 9/30/02

Rec. ID: 0-12 
Description: Xerox 8830-Line 55
Taxable Amount: $*************
Date: 9/30/02

Rec. ID: 0-13
Description: Kofax 1700 V3
Taxable Amount: $*************
Date: 12/20/02

FINDINGS OF FACT, CONTENTION ONE:

6. Petitioner’s website states that it is “a full service document conversion 
firm,” with an emphasis on “image quality, indexing accuracy and turnaround.”  
Petitioner is able to take “input” media, including bound materials, 
engineering and large format documents, microfiche, microfilm, magnetic tape, 
and CD-ROM, and convert the data to optical disks, electronic formats (e.g., 
“JPG” and “TIFF” files), computer, and CD-ROM.  Petitioner also advertises 
“quality control procedures” that include “automatic image enhancement during 
scanning,” “automatic document indexing,” and “100 percent visual verification 
for completeness and legibility of converted images.”

7. Petitioner charges its customers on a “per image” basis.  During the audit 
period, Petitioner collected sales tax on 100 percent of the charges and 
remitted the tax to the state.

8. According to INDIVIDUAL A, the majority of Petitioner’s work involves 
scanning data to create “image” files, usually JPG or TIFF files.  JPG and TIFF 
files cannot be word (text)-searched, nor can the data in the files be 
manipulated by the user.  But Petitioner typically uses directory file names 
that contain a numbered indexing system, e.g., 0001.JPG, 0002.JPG, 0003.JPG, 
which allows the user to view a particular file by searching for its 
identifying number in the directory name.

9. According to INDIVIDUAL A, Petitioner provides document conversion services 
with the following equipment: (a) various scanners, including an Omniscan 
Scanner, a Sunrise Film Scanner, a Vidar Engineering Document Scanner, a Kodak 
4500 Scanner, six Bell & Howell 6338 Scanners; and (b) multiple laser jet 
printers.

10. Equipment used by Petitioner to provide document conversion services is not 
inventoried separately from equipment that Petitioner leases or sells.

11. An Omniscan 7000 is a scanning system for books, newspapers, and large 
format documents (e.g., maps, drawings, posters).  It produces high-quality 
images through a digital scanner with a high-resolution lens; the images are 
usually placed on a CD-ROM.  INDIVIDUAL A described the Omniscan as simply a 
large “digital camera,” but acknowledged that the equipment is capable of image 
“enhancements,” which include manipulating the contrast and brightness, 
cropping the image, and “de-skewing” crooked pages.

12. Petitioner depreciated Omniscan Scanners valued at $*************on May 20, 
2001 (see Finding of Fact No. 5).  This item is scheduled as Record ID No. 0-7 
in Exam 1 because there was no evidence establishing that Petitioner paid sales 
tax paid to the vendor.  The auditor rejected Petitioner’s manufacturing 
exemption claim with respect to the equipment.

13. Petitioner depreciated a Kodak 4500 Scanner valued at $************* on 
November 1, 2001.  This item is not supported by a tax-paid invoice, and the 
auditor rejected the claim that the equipment was subject to the manufacturing 
exemption.

14. No verifiable documentary evidence establishes that the Omniscan Scanners 
or the Kodak 4500 Scanner were shipped to and used by Petitioner in Louisiana 
prior to Petitioner’s use of the items in Texas.

FINDINGS OF FACT, CONTENTION TWO:

15. Petitioner’s second contention involves the following asset purchases 
scheduled in Exam 1 (again, the descriptions come from its depreciation 
schedules): (a) B&H 8080 3 (Rec. Id. No. 0-2); (b) B&H 8080 4 (Rec. Id. No. 
0-3); (c) Xerox 8830-Line 31 (Rec. Id. No. 0-8); (d) Juke Box System (Rec. Id. 
No. 0-5); (e) Xerox 8830-Line 53 (Rec. Id. No. 0-10); (f) Xerox 8830-Line 54 
(Rec. Id. No. 0-11); and (g) Xerox 8830-Line 55 (Rec. Id. No. 0-12). 

16. During the audit period, Petitioner leased equipment and software to the 
************* (“COMPANY A”), acting as agent for the ************* 
(“COMPANY B”).  COMPANY B is jointly owned by tax-exempt municipalities and
************* Lighting & Power, a direct pay permittee.  Petitioner was not
required to collect sales tax on equipment leased to COMPANY B.

17. On January 7, 1999, Petitioner issued a “List of Equipment Quoted for Lease 
to COMPANY A,” which included:

Model No.: 8080D
Manufacturer: Bell & Howell
Description: 80 PPM Deluxe Scanner
Quantity: 2

Model No.: 1700V
Manufacturer: Kofax
Description: Adrenaline Video Interface Card
Quantity: 4

Model No.: SC-1012-000
Manufacturer: Kofax
Description: High speed communication interface cables
Quantity: 2

Model No.: 303933
Manufacturer: FileNet
Description: V2.0 High Volume Capture
Quantity: 2

Model No.: Scan Partner 10
Manufacturer: Fujitsu
Description: 38 Bit color flatbed scanner incl. SCSI interface 
controller/cables
Quantity: 1

Model No.: 500235
Manufacturer: FileNet
Description: V2.0Low volume capture
Quantity: 1

Model No.: 500155
Manufacturer: FileNet
Description: Print Flo Server
Quantity: 1

Model No.: 500156
Manufacturer: FileNet
Description: Add on Printer
Quantity: 2

Model No.: 5000-E2
Manufacturer: JDL
Description: Engineering large format 2 roll printer includes Postscript II 
support for FileNet images
Quantity: 1

The referenced document, which was executed by INDIVIDUAL A, provided for an 
annual fee of $************* and contained the following terms: (a) a 
three-year lease term beginning on February 1, 1999 and ending on December 1, 
2002, with the terms renegotiable in year four; (b) annual renewal of the 
lease; (c) equipment delivered to COMPANY A’s site on February 1, 1999, with 
payment in full due at that time; and (d) the annual fee included Shipping, 
Installation, Training, and Documentation.

18. On November 10, 1999, COMPANY B’s Requisition No. 11694 requested funding 
of $*************for an “Equipment Lease for Optical Disk equipment from 
1-1-2000 through 12-31-2000,” with Petitioner as the vendor.

19. On December 13, 1999, Petitioner and COMPANY B executed “Blanket Contract” 
*************, which states that Petitioner will provide COMPANY B with 
“Optical Disk Storage Programming” and other consulting services for calendar 
year 2000.

20. Revisions 001 through 013 to COMPANY B Contract No. **************, which 
were issued between September 11, 2000 and January 6, 2004, reflect that 
Petitioner provided COMPANY B with services including: (a) media conversion; 
(b) updating, archiving, and restoring software files; (c) programming support; 
and (d) consulting services.  Revision 003 (dated November 20, 2000) added 
funding “for programming support for the FileNet Level 1 Procedure Project.”  
Revision 006 (dated December 21, 2001) was issued to revise “the Scope of Work 
for the Optical Disk Storage/Retrieval - Business Continuation Plan” and 
required Petitioner, in part, to “store all secondary disks at the above 
address and make them available [to COMPANY B] upon request.”  Revision 007 
(dated December 27, 2001) extended and funded the Contract “for programming and 
system support for the Records Management System (RMS) Optical Disk Storage and 
Imaging Retrieval System” for calendar year 2002.  Revision 012 (dated December 
31, 2002) accomplished the same purpose for calendar year 2003.

21. On January 30, 2002, the Petitioner and COMPANY B executed “Blanket 
Contract” No. **************, wherein Petitioner agreed to lease “FileNet 
Equipment” to COMPANY B for a three-year period commencing on February 17, 
2002.  Descriptions of the disputed leased equipment and lease costs [ENDNOTE: 
(2)] are contained in Schedule A of the contract as follows:

Leased Equipment: High Volume Capture System
3 Years/monthly: $*************
3 Years/Yearly: $*************

Leased Equipment: High Volume Capture System
3 Years/monthly: $*************
3 Years/Yearly: $*************

Leased Equipment: Xerox Printer
3 Years/monthly: $*************
3 Years/Yearly: $*************

Leased Equipment: Xerox Printer
3 Years/monthly: $*************
3 Years/Yearly: $*************

Leased Equipment: FileNet 50 HTS 30G OSAR
3 Years/monthly: $*************
3 Years/Yearly: $*************

22. According to INDIVIDUAL A, COMPANY B was responsible for providing 
maintenance on the equipment for the lease term.  However, Schedule B of the 
COMPANY B contract contains Petitioner’s estimated prices for maintenance of 
leased equipment.

23. Schedule B lists an estimated annual maintenance fee of $************* for 
two “B&H 8080D Scanners.”  But neither inventory records nor equipment serial 
numbers establish that (a) the two “High Volume Capture Systems” described in 
COMPANY B Contract No. ************** include the B&H 8080D Scanners, or that 
(b) the “B&H 8080 3” and “B&H 8080 4” items depreciated by Petitioner and 
scheduled in the audit (Exam 1, Rec. ID Numbers 0-2 and 0-3) are the same 
scanners alleged to be part of the High Volume Capture Systems described in the 
referenced contract.

24. A “Xerox 8830 Engineering Printer” is a high-powered digital printer 
marketed as being “50 percent faster than other mid-volume digital printers” 
and “designed to print all of your documents from A-size specification sheets 
to E-size engineering drawings.” [ENDNOTE: (3)]

25. Schedule B of the COMPANY B contract estimates an annual maintenance fee of 
$*************for two “Xerox Printers.”  But neither inventory records nor 
equipment serial numbers establish that the two Xerox Printers described in 
COMPANY B Contract No. ************** are the same equipment listed in 
Petitioner’s depreciation schedules as “Xerox 8830-Line 31” (and scheduled as 
Rec. ID No. 0-8, with a taxable amount of $*************).

26. A FileNet “OSAR jukebox” or “MSAR” is an optical storage and retrieval 
device.  The jukebox stores data on an optical disk and permits its retrieval. 
[ENDNOTE: (4)] INDIVIDUAL A estimates that the cost to purchase this equipment 
is about $*************.

27. Schedule B of the COMPANY B contract estimates an annual maintenance fee of 
$************* for a “FileNet 123 GTL OSAR.”  But neither inventory records nor 
equipment serial numbers establish that the FileNet 123 GTL OSAR described in 
COMPANY B Contract No. ************** is the same piece of equipment listed in 
Petitioner’s depreciation schedules as a Juke Box System (Exam 1, Rec. ID No. 
0-5). 

28. On January 29, 2002, Petitioner invoiced COMPANY B $************* for the 
2002 annual lease payment; this total matches the total amount set forth in 
Finding of Fact No. 21.  The invoice specifically references the following 
equipment: (a) a “FileNet OSAR 50HTS,” (b) “Xerox 8830 Plotters,” and (c) “Bell 
and Howard 8080D Scanners w/Kofax Interface Cards.”  Again, the $************* 
billed includes charges for other equipment/software not disputed herein.  
COMPANY B paid the invoice by check dated February 28, 2002. 

29. On October 15, 2002, Blanket Contract No. ************** between Petitioner 
and COMPANY B was amended (Revision No. 001) to include the lease of “3 Xerox 
8830 3 Roll Large Format Printers” at $************* per month each.  The lease 
term was for only a three-month period (October through December 2002), 
according to INDIVIDUAL A, because the annual term of Contract No. 
************** was about to expire.

30. As noted in Finding of Fact No. 5, Petitioner began depreciating three 
Xerox 8830 printers on September 30, 2002.  While those three items are 
included in Exam 1 as Rec. ID numbers 0-10, 0-11, and 0-12, credit was allowed 
for the three-month rental period by applying a weighted average to the 
equipment’s taxable cost in Exam 1A.  The auditor allowed credit because unlike 
the other disputed equipment, the dates listed for the printers in the contract 
revision could be correlated with the dates and descriptions in Petitioner’s 
depreciation schedules.

31. On March 17, 2003, Blanket Contract No. ************** was amended 
(Revision No. 003) to include the second year of the lease term, commencing on 
February 17, 2003.  As relevant to Petitioner’s audit, the contract reflects 
Petitioner’s lease of the following equipment to COMPANY B: (a) two “High 
Volume Capture Systems,” each for $************* per month or $*************per 
year, (b) five “Xerox 8830 Plotters,” each for $************* per month or 
$*************per year, [ENDNOTE: (5)] and (c) a “FileNet 50 HTS 30G OSAR” at 
$*************per month or $*************per year.

32. As set forth in Finding of Fact No. 5, Petitioner began depreciating a 
“Kofax 1700 V3” valued at $************* on December 20, 2002; INDIVIDUAL A 
testified that the item was depreciated in error.  On December 19, 2002, 
Petitioner sold an “Adrenaline 1700V Video” card for $************* to COMPANY 
B.  INDIVIDUAL A testified that the descriptions are the same item, which 
Petitioner purchased in order to re-sell to COMPANY B.  But INDIVIDUAL A also 
testified that Petitioner purchased perhaps a dozen other video cards during 
the audit period, which do not appear in its depreciation schedules.

33. Equipment that Petitioner leased or sold to the COMPANY B was not 
maintained in a separate inventory from the equipment that Petitioner used to 
provide document conversion services.  The equipment moreover cannot be 
differentiated by another method, such as serial numbers.

CONCLUSIONS OF LAW AND DISCUSSION:

Petitioner’s first contention, that the Omniscan Scanners and the Kodak 4500 
Scanner are exempt manufacturing equipment, should be denied.

At issue is whether Petitioner is a manufacturer selling tangible personal 
property, as opposed to a provider of data processing services.  Both precedent 
and agency policy establish that a service provider is not eligible for the 
manufacturing exemption.  See Comptroller’s Decision No. 34,371 (1995) (a data 
processing service provider cannot qualify for the manufacturing exemption) and 
State Tax Automated Research System (STAR) Accession No. 9111L1140D06 (issued 
November 20, 1991) (service providers are not eligible for the manufacturing 
exemption because Section 151.318 is restricted to sellers who manufacture and 
process tangible property for sale).

The manufacturing exemption on which Petitioner relies is set forth in Section 
151.318(a)(2) of the Tax Code.  That provision exempts from tax certain 
qualifying purchases if the item (a) is directly used or consumed in the 
manufacture of “tangible personal property for ultimate sale” and is necessary 
and essential thereto, and (b) “directly makes or causes a chemical or physical 
change” to the product being manufactured for sale.  Petitioner’s entitlement 
to the claimed exemption must be shown by clear and convincing evidence. 
[ENDNOTE: (6)]

Petitioner bases its claim on the “essence of the transaction” test. [ENDNOTE: 
(7)]  That is, Petitioner’s customers pay for and are primarily interested in 
receiving the tangible personal property (e.g., a CD-ROM) produced by 
Petitioner; any services Petitioner provides are secondary.  Petitioner 
compares itself to a professional photographer.  Photographers selling their 
photographic images are treated as manufacturers.  And, under Section 151.318, 
equipment used by photographers to create photographs for sale is exempt from 
tax.  STAR Accession No. 9911852L (issued November 2, 1999).  Likewise, a 
taxpayer who sells a photograph album with 3-D ultrasound images of an 
expectant mother’s unborn child may issue an exemption certificate in lieu of 
paying tax to vendors when purchasing items “directly used in the production of 
images that will be sold,” (e.g., the 3-D ultrasound machine, printer, paper on 
which the image is produced, computers used to process the images, and monitors 
used to view the images).  STAR Accession No. 20040459L (issued April 29, 
2004).  In both situations, the exemption applies because the essence of the 
transaction is the sale of tangible personal property.

Similar to a photographer, Petitioner reasons that it merely images documents 
on a disk or other medium, and charges its client on a per-image basis.  
According to Petitioner, its production process is no different than the 
downloading of music or photographs to create a digital product which, when 
sold, is taxed by the Comptroller as a sale of tangible personal property.  
STAR Accession No. 200101966L (issued January 3, 2001).  In further support of 
its position, Petitioner observes that photocopying machines are viewed as 
exempt manufacturing equipment and the copies produced and sold are taxable 
tangible personal property.  STAR Accession No. 9404L1301F12 (issued April 13, 
1994).

Upon consideration of the statutory and rule provisions governing data 
processing, Petitioner’s argument does not withstand analysis.  Section 
151.0101 defines taxable services to include “data processing services,” which 
Section 151.0035 defines to include “… word processing, data entry, data 
retrieval, data search, information compilation, payroll and business 
accounting data production, and other computerized data and information storage 
and manipulation …”.

Rule 3.330(a) further provides that “data processing service” includes “… the 
processing of information for the purpose of compiling and producing records of 
transactions, maintaining information, and entering and retrieving information. 
 It specifically includes word processing, payroll and business accounting, and 
computerized data storage and manipulation …”.

Whereas the term “manufacturing” contemplates the production of tangible 
personal property with intrinsic value that is held for ultimate sale, the 
Comptroller has focused on the plain meaning and common usage of the term 
“data” to classify service transactions.  STAR Accession No. 200101965L (issued 
January 3, 2001).  (A standard dictionary definition of “data” is information 
in numerical form that can be digitally transmitted or processed.  The effect 
is that charges for entry of even a small amount of data are taxed as data 
processing services.) 

The nature and source of the data are moreover critical.  By definition, data 
processing is a service performed using the customer’s data.  STAR Accession 
No. 9701260L (issued January 16, 1997).  With data processing, the services 
performed in connection with the data are what are primarily valued by the 
customer, not the medium (tangible personal property) in which the data is 
received by the customer.

This rationale underlies the holding in several Comptroller decisions.  In 
Comptroller Decision No. 29,688 (1994), law firms provided source documents to 
the taxpayer, who used its expertise to consult, plan, and develop a document 
retrieval system to meet the firm’s particular needs.  Once it developed a 
system, the taxpayer used computers and other equipment to perform optical and 
image scanning; to profile, code, and index the documents; to store the images 
during and after input; and to provide retrieval of the images.  The 
Comptroller applied the essence of the transaction test and held that what the 
taxpayer’s clients contracted for, and what they received, was the creation of 
a customized database.  The taxpayer was performing taxable data processing 
services.

Similarly, in Comptroller’s Decision No. 34,371 (1995), the client provided the 
taxpayer with paper documents.  The taxpayer created electronic images of its 
client’s data and stored the images on magnetic tape, compact disk, worm 
drives, etc.  In addition to transferring paper and microfilm documents into 
electronic format for convenient computer system access, the taxpayer offered 
more complex services including “full text capture for text-only documents,” 
“proofs and edits of the converted data,” and, through the taxpayer’s 
customized software, “indexing, formatting, and [other] media requirements of 
the customer.”  Again, under the essence of the transaction test the 
Comptroller held that the client was purchasing the taxpayer’s data processing 
services, which “incidentally results in a database stored on magnetic tape, 
compact disk, worm drives, etc.”

Analogous reasoning applied here results in the same conclusion.  Petitioner 
holds itself out as a “full service document conversion firm,” with an emphasis 
on “image quality, indexing accuracy and turnaround.”  Petitioner typically 
takes its clients’ “input” media, which can include bound materials, 
engineering and large format documents, microfiche, microfilm, magnetic tape, 
and CD-ROM, and converts the data to optical disks, electronic formats (e.g., 
JPG and TIFF files), computer, and CD-ROM.  Petitioner’s “quality control 
procedures” include “automatic image enhancement during scanning,” “automatic 
document indexing,” and “100 percent visual verification for completeness and 
legibility of converted images.”  While the converted data cannot be 
text-searched or manipulated by the client, the indexing system employed by 
Petitioner permits the client to search the files by identifying number.

The data is owned by Petitioner’s client, and Petitioner’s processing services 
reformat the customer’s existing data into a different form that serves the 
client’s purposes.  Data conversion is the benefit received by the client and 
it constitutes taxable data processing.  STAR Accession No. 9404L1301F12 
(issued April 13, 1994).  Petitioner’s creation of a numeric indexing system 
for the client is also taxable data processing.  STAR Accession No. 
8809L0904A10 (issued September 30, 1988).  In addition, Petitioner’s scanning 
of the client’s documents creates an electronic image, which allows the client 
easy computer access to the data; machine scanning is the equivalent of data 
entry and is a taxable data processing service.  STAR Accession Nos. 200009755L 
(issued September 27, 2000) and 9401L1282B08 (issued January 10, 1994).  Once 
scanned, Petitioner stores the client’s documents on the medium (tangible 
personal property) of the client’s choice.  From the client’s perspective, the 
medium is secondary; more important is the safe and permanent preservation of 
the data itself.  Data storage is taxable.  Finally, Petitioner’s services 
provide the client with a data retrieval system, another taxable data 
processing service.  STAR Accession No. 9701260L (issued January 16, 1997).

There is little doubt that Petitioner is providing taxable data processing 
services.  It is consequently not eligible to claim the manufacturing exemption 
for its equipment purchases.  Although not at issue in this case, it is worth 
noting that Petitioner may purchase tax-free items of tangible personal 
property that are integral to its provision of the taxable service, and which 
are transferred to its clients’ care, custody, and control.  Services purchased 
by Petitioner that are integral to its provision of the taxable service are 
afforded the same tax treatment.  See Rule 3.330(c); also Comptroller’s 
Decision No. 34,371 (1995).

One other matter should be mentioned.  Petitioner collected and remitted tax on 
100 percent of the charge to its client for taxable data processing.  But 20 
percent of the charge for data processing services purchased on or after 
October 1, 1999, is exempt from sales tax.  Section 151.351.  In other words, 
Petitioner overcharged its customers tax because the exemption applied 
throughout Petitioner’s audit period.  No corresponding adjustments appear in 
the audit because Petitioner remitted the error tax.  Section 111.016(a).

Petitioner’s second contention, that equipment purchases identified in Finding 
of Fact No. 15 qualify for the sale for resale exemption, should be denied.  
Simply put, Petitioner’s evidence is lacking.\

Assets such as computer equipment are tangible personal property and their sale 
or use in this state is subject to tax.  See, Sections 151.005, 151.007, 
151.009, and 151.010; also Sections 151.051(a) and 151.101(a).  However, 
Section 151.302(a) provides that the sale for resale of a taxable item is 
exempt from tax.  A “sale for resale” includes the sale of tangible personal 
property to a purchaser for the sole purpose of the purchaser’s leasing it in 
the form acquired to another person.  Section 151.006(2).  Again, Petitioner 
must show its entitlement to the claimed exemption by clear and convincing 
evidence.

Petitioner sells and leases equipment such as scanners and printers in the 
normal course of its business, as required by Section 151.006(1).  See also, 
Rule 3.285(a)(2)(A).  The issue is whether clear and convincing evidence 
demonstrates that the assets referenced in Finding of Fact No. 15 were leased 
by Petitioner to COMPANY B, an entity from whom Petitioner was not required to 
collect tax.  If so, Petitioner would be entitled to purchase the equipment tax 
free by issuing a resale certificate.  But Petitioner’s evidence falls short of 
this strict standard of proof.

Simply put, Petitioner’s evidence is lacking.  The Tax Division’s position, 
that identification of the equipment leased to COMPANY B requires documentation 
such as equipment serial numbers or inventory logs that can be correlated with 
the dates that appear in the COMPANY B contracts and the relevant revisions 
thereof, is not unreasonable.  And, based on the record evidence, the Tax 
Division’s concerns about divergent use – that Petitioner leases out the same 
type of equipment that it uses to provide document conversion services – is 
well-founded.

Agreement with Petitioner’s position would require the acceptance of certain 
assumptions, which is not generally permitted under the clear and convincing 
evidence standard.  For example, INDIVIDUAL A testified that the two “High 
Volume Capture Systems” described in COMPANY B Contract No. ************** 
include the scanners referenced in Schedule B of the agreement, and that the 
“B&H 8080 3” and “B&H 8080 4” scanners depreciated by Petitioner and scheduled 
in the audit (Exam 1, Rec. ID Numbers 0-2 and 0-3) were the same scanners as 
well.  But INDIVIDUAL A’s testimony, in the absence of corroborating 
documentary evidence, is simply insufficient under the standard of proof.

The same comments apply to the other disputed items.  INDIVIDUAL A’s testimony 
that the two “Xerox Printers” described in the COMPANY B lease agreement are 
the same two printers (cost combined, per INDIVIDUAL A) listed in Petitioner’s 
depreciation schedules as “Xerox 8830-Line 31” (and scheduled in Exam 1 as Rec. 
ID Number 0-8) cannot be confirmed through documentary evidence.  By the same 
token, it is impossible to verify INDIVIDUAL A’s testimony that the “FileNet 
123 GTL OSAR” described in the COMPANY B lease agreement is the same piece of 
equipment described in Petitioner’s depreciation schedules as a “Juke Box 
System” (Exam 1, Rec. ID Number 0-5).

In the final analysis, Petitioner’s argument fails because the sale for resale 
exemption must be supported by clear and convincing evidence.  The fact that 
Petitioner’s depreciation schedules contain no other equipment with similar 
descriptions is not clear and convincing proof that the items are the same 
equipment that was leased to COMPANY B.  Petitioner’s contention should be 
denied.

RECOMMENDATION:

Based upon the foregoing Findings of Fact, Conclusions of law, and Discussion, 
the audit should be affirmed.

Hearing No. 46,333

ORDER OF THE COMPTROLLER

On June 14, 2007, the State Office of Administrative Hearings’ Administrative 
Law Judge (ALJ), Anne K. Perez, issued a Proposal for Decision (PFD) in the 
above referenced matter to which Petitioner filed Exceptions on June 29, 2007.  
The Tax Division filed a Response on July 13, 2007.  The Comptroller has 
considered the Exceptions and Response and determined that the decision should 
be adopted with changes recommended by the ALJ in her recommendation letter 
dated July 25, 2007.  Accordingly, the decision has been modified as follows:

The third paragraph on page 10 of the PFD has been deleted in its entirety 
(this is reflected on page 14 of the Comptroller’s Decision).

The first sentence in the fourth paragraph of page 10 of the PFD has been 
revised to read, “Simply put, Petitioner’s evidence is lacking” (this is 
reflected on page 14 of the Comptroller’s Decision). 

All references to “Proposed Comptroller’s Decision” were changed to “Proposal 
for Decision” to reflect the terminology used by SOAH effective for all 
decisions issued after January 1, 2007 due to the Interagency Cooperation 
Contract between the Comptroller and SOAH.

Finding of Fact No. 21 has been modified for technical purposes by deleting the 
total amount of $************ because this total represents amounts that were 
not referred to in the decision.

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 1st day of May 2009.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller

ENDNOTE(S)
(1) The taxable amount is the amount depreciated (the cost of the equipment).
(2) Schedule A lists other leased equipment not disputed herein.  Also, for the 
sake of brevity, annual and monthly lease costs for a one-year period, which 
also appear in the contract, have been omitted.
(3) Petitioner’s Exhibit No. 3.
(4) Petitioner’s Exhibit No. 4.
(5) The yearly lease payment of $************ for each machine that is listed 
in the contract appears to be a typographical error.
(6) Bullock v. National Bancshares Corporation of Texas, 584 S.W.2d 268 (Tex. 
1979); Rule 1.40(2)(A).
(7) See Bullock v. Statistical Tabulating Corporation, 549 S.W.2d 166 (Tex. 
1977) (the essence of the transaction test was applied to determine that the 
sale of computer cards containing raw data was the sale of data processing 
services, and not the sale of tangible personal property).




ACCESSION NUMBER: 200908494H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 08/12/2009 
TAX TYPE: SALES