201002629H



SOAH DOCKET NO. 304-09-3853.26
CPA HEARING NO.   101,897

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2004 THROUGH August 31, 2007

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

KARI HONEA
Representing Tax Division

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


COMPTROLLER’S DECISION

************** (“Petitioner”) manufactures, sells, and repairs oil and gas 
production equipment, and seeks redetermination of a tax assessment made by the 
Texas Comptroller of Public Accounts (“Comptroller”).  Comptroller Staff 
(“Staff”) has agreed to amend the audit, but disagreements remain. [ENDNOTE: 
(1)] Specifically, Petitioner contends local tax assessments were scheduled in 
error.  In his Proposal for Decision (“PFD”), the Administrative Law Judge 
(“ALJ”) recommends that the audit liability be upheld, except as agreed by 
Staff.  

I.  PROCEDURAL HISTORY, NOTICE & JURISDICTION

On April 28, 2009, Staff referred this case to the State Office of 
Administrative Hearings (“SOAH”) for a PFD based on the parties’ written 
submissions.  Staff was represented by Kari Honea, and Petitioner was 
represented by **************.  After referring the matter Staff filed a Motion 
for Summary Disposition.  Petitioner filed a reply and disputed Staff’s legal 
arguments.  ALJ Victor John Simonds closed the record on June 8, 2009.

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.

II.  REASONS FOR DECISION

A. Evidence

Staff presented the audit, the audit plan, and the Texas Notification of 
Hearing Results.  Petitioner provided a copy of a direct pay exemption 
certificate, a copy of Audit Policy Memo 117, and certain sections of the 
Comptroller’s Auditing Manual.

B. Undisputed Material Facts and Issue Presented

The material facts related to this matter are not disputed.  Petitioner 
manufactures, sells, and repairs oil and gas production equipment.  During the 
period from January 1, 2004 through August 31, 2007 (the “audit period”), 
Petitioner did business with ************** (“COMPANY A”), a company 
headquartered in CITY A, Oklahoma.  COMPANY A, a direct payment permit holder, 
purchased certain equipment from Petitioner.  The purchase orders were received 
at Petitioner’s corporate headquarters (also in CITY A) and, when appropriate, 
relayed to Texas offices in CITY B and CITY C.  Petitioner’s Texas offices 
filled the orders, and sent the equipment to Texas oil well sites, as directed 
by COMPANY A.  When COMPANY A paid for the equipment it chose to include 6¼ 
percent of the equipment sales price as tax.  Petitioner subsequently remitted 
the tax monies to the Comptroller.

The Comptroller audited Petitioner’s businesses for compliance with sales and 
use tax laws for the audit period, and issued a Texas Notification of Audit 
Results assessing Petitioner a sales tax liability, a 10 percent late penalty, 
and interest accrued as of the statement date.  Among other things, the auditor 
concluded Petitioner had erroneously charged local sales tax based on the 
destination of the equipment being purchased. [ENDNOTE: (2)]  After the audit 
began Petitioner obtained a direct payment exemption certificate from COMPANY 
A, and provided it to the auditor.  Though it was timely presented, the auditor 
did not agree that the certificate covered transactions in the audit period.  
Exams 1 and 2 make local tax assessments based on the auditor’s conclusion that 
the transactions at issue were consummated at Petitioner’s CITY B and CITY C 
offices.

On redetermination Petitioner contends the local tax assessments on COMPANY A 
transactions should be deleted.  Petitioner argues the exemption certificate, 
issued on January 4, 2008, should be accepted as evidence of COMPANY A’s intent 
to act in accordance with its direct payment permit.  According to Petitioner, 
the tax monies COMPANY A included with purchase payments was use tax, not sales 
tax.  Petitioner states it was merely collecting and remitting the use tax to 
the Comptroller as a courtesy to COMPANY A.  Lastly, Petitioner argues Audit 
Division policy in effect during the audit states Petitioner should not be 
assessed for the local tax.

Staff contends the COMPANY A exemption certificate cannot be accepted, because 
the direct payment permit holder made a non-reversible election when it paid 
tax on the purchases.

C. ALJ’s Analysis

Exams 1 and 2 assess local tax because the auditor determined the transactions 
at issue were consummated at Petitioner’s CITY B and CITY C offices.  That 
conclusion is based on the fact that the Tax Code provides that if a retailer 
has more than one place of business in this state, then a sale of a taxable 
item is consummated at the retailer’s place of business from which the retailer 
ships the item if the retailer ships it to a place designated by the purchaser. 
[ENDNOTE: (3)]

Petitioner contends the auditor’s conclusion is incorrect because COMPANY A is 
a direct payment permit holder that used the equipment at issue at oil well 
sites located outside municipalities.  As Petitioner points out, the holder of 
a direct payment permit who becomes liable for tax by reason of the storage, 
use or consumption of a taxable item purchased in this state under a direct 
payment exemption certificate allocates tax to the municipality in which the 
item was first used or consumed after transportation. [ENDNOTE: (4)] If COMPANY 
A purchased the items at issue under a direct payment exemption certificate, 
then no local tax is due.

Petitioner first points to the fact that COMPANY A issued a direct payment 
exemption certificate that was timely presented to the auditor.  The COMPANY A 
certificate, issued January 4, 2008, covers all future sales of taxable items 
and relieves Petitioner of the obligation of collecting taxes on transactions 
going forward from that date.  The certificate was timely presented for 
consideration in this matter, but as with any exemption certificate, it was 
subject to verification because it was presented after the audit began. 
[ENDNOTE: (5)] Settled Comptroller policy clearly prohibits allowing a direct 
payment certificate to relate back in time to cover transactions in which the 
permit holder has already paid tax. [ENDNOTE: (6)] A direct pay permit holder 
can elect the manner in which they will proceed on any given transaction, but 
once the election is made the permit holder must live with its choice. 
[ENDNOTE: (7)]

Petitioner argues it collected and remitted use tax, not sales tax, and that it 
did this as a courtesy to its customer.  When COMPANY A accepted the privilege 
of having a direct payment permit it agreed that when it acted as a permit 
holder it would pay use tax due directly to the Comptroller. [ENDNOTE: (8)] 
COMPANY A cannot delegate its direct payment responsibilities to Petitioner or 
any other retailer.  Even if that were not the case, Petitioner has provided 
nothing to show there was an agreement between the parties such that it would 
collect and remit use tax on behalf of COMPANY A.  Petitioner also argues that 
COMPANY A’s intent is shown by the fact that it did not pay local tax on its 
purchases, but the preponderate evidence shows local tax was not collected 
because Petitioner erroneously concluded the sales at issue were consummated at 
the well sites, not because the parties viewed the tax it collected as use tax 
Petitioner was to remit on COMPANY A’s behalf. [ENDNOTE: (9)]

Lastly, Petitioner argues that Audit Division policies in effect during this 
audit state that auditors are not to assess tax in a seller’s audit if the 
purchaser was a direct payment permit holder. [ENDNOTE: (10)] However, the 
Comptroller previously held those portions of the Auditing Fundamentals manual 
cited by Petitioner refer to auditing procedures for audits in which no tax has 
been collected from direct payment permit holders. [ENDNOTE: (11)] In that 
circumstance the policy was to assess tax directly to the purchaser, but that 
is not what is presented by this case.

COMPANY A paid tax when it purchased Petitioner’s equipment rather than issuing 
a direct payment exemption certificate.  According to the Comptroller’s policy, 
COMPANY A chose not to act as a direct permit holder, and the transactions at 
issue are correctly deemed to have been consummated at the retailer’s place of 
business from which the items were shipped. [ENDNOTE: (12)]  Therefore, 
Petitioner has failed to meet its burden to show audit error and, except as 
agreed by Staff, the audit should be upheld.

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 
January 1, 2004 through August 31, 2007 (the “audit period”).

2. On April 28, 2009, Comptroller Staff referred the case to the State Office 
of Administrative Hearings for a Proposal for Decision based on the parties’ 
written submissions.

3. Comptroller Staff issued a notice of filing to Petitioner.  It 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.

4. The record closed on June 8, 2009.

5. During the audit period, Petitioner’s CITY B and CITY C offices sold 
equipment to ************** (“COMPANY A”), and shipped the orders to oil well 
sites located in Texas, per COMPANY A’s instructions.

6. During the audit period, COMPANY A was a direct payment permit holder.

7. During the audit period, when COMPANY A paid for the equipment from 
Petitioner, it included 6¼ percent of the equipment sales price as sales tax.

8. During the audit period, Petitioner remitted tax it received from COMPANY A 
to the Comptroller.

9. COMPANY A did not issue a direct payment exemption certificate to Petitioner 
until January 4, 2008, after it had paid tax on the purchases at issue.

10. For each of the transactions at issue, COMPANY A chose not to act as a 
direct payment permit holder.

IV.  CONCLUSIONS OF LAW

1. The Comptroller has jurisdiction over this matter pursuant to TEX. TAX CODE 
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 ch. 2003.

3. The Comptroller provided proper and timely notice of the hearing pursuant to 
TEX. GOV’T CODE ch. 2001.

4. If a retailer has more than one place of business in this state, a sale of a 
taxable item by the retailer is consummated at the retailer’s place of business 
from which the retailer ships the item if the retailer ships to a point 
designated by the purchaser.  TEX. TAX CODE SECTION 321.203(C)(1).

5. A properly completed direct payment exemption certificate should be in 
possession of the seller at the time a transaction occurs.  If the seller is 
not in possession of the certificate but delivers it to the Comptroller within 
60 days from the date written notice requiring possession of it is given by the 
Comptroller, then the Comptroller may verify the reason or basis for the 
exemption claimed.  TEX. TAX CODE SECTION 151.054(e).  See also Comptroller’s 
Decision Nos. 42,761 (2003) and 46,101 (2006).

6. Settled policy prohibits allowing a direct payment exemption certificate to 
relate back in time to cover transactions for which the permit holder has 
previously paid tax.  See, for example, Comptroller’s Decision Nos. 22,959 
(1990); 34,923 (1997); and 43,887 (2005).

7. Petitioner failed to provide preponderate evidence of audit error.  34 TEX. 
ADMIN. CODE  Section 1.40(2)(B).

8. Based on the foregoing Findings of Fact and Conclusions of Law, except as 
agreed by Staff, the audit should be upheld.


Hearing No. 101,897

ORDER OF THE COMPTROLLER

On June 9, 2009, the State Office of Administrative Hearings’ (SOAH) 
Administrative Law Judge, Victor John Simonds, 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, except for minor changes to correct typographical or clerical 
errors, 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 9th day of February 2010.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller


ENDNOTE(S):

(1) See Staff’s Position Letter.
(2) Audit Plan, page 7 of 18.
(3) TEX. TAX CODE Section 321. 203(c)(1). 
(4) TEX. TAX CODE Section 321. 205.
(5) TEX. TAX CODE Section 151.054(e).  See also Comptroller’s Decision Nos. 
42,761 (2003) and 46,101 (2006).
(6) Comptroller’s Decision Nos. 22,959 (1990); 34,923 (1997); and 43,887 
(2005).
(7) Id.
(8) TEX. TAX CODE Section 151.419(b).  
(9) Audit Plan, page 7 of 18.
(10) Comptroller’s Auditing Fundamentals, Chapter 5, and Audit Policy Memo 117.
(11) Comptroller’s Decision No. 34,923.
(12) TEX. TAX CODE Section 321.203(c).  




ACCESSION NUMBER: 201002629H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 02/09/2010
TAX TYPE: SALES