Texas Comptroller of Public Accounts STAR System
SOAH DOCKET NO. 304-09-3853.26
CPA HEARING NO. 101,897
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
Texas Comptroller of Public Accounts
Representing Tax Division
************** (“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
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
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
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.
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.
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’
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
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.
Texas Comptroller of Public Accounts
by: Martin A. Hubert
(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
(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
DOCUMENT TYPE: H
TAX TYPE: SALES