Texas Comptroller of Public Accounts    STAR System


201008903H




SOAH DOCKET NO. 304-10-2491.26
CPA HEARING NO. 102,623

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: April 1, 2005 THROUGH July 31, 2008

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

DEANNE Z. CUMMINGS-SCOTT
Representing Tax Division

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


COMPTROLLERíS DECISION

************** (Petitioner) seeks a redetermination of the sales and use tax 
assessment made by the Comptroller of Public Accounts (Comptroller).  
Petitioner contends that its purchases of coin cases and holders are not 
taxable because they are integral to the coins sold.  Although Comptroller 
Staff (Staff) has agreed to make some adjustments to the audit assessment, 
Staff rejects Petitionerís arguments that the purchases of the coin cases and 
holders were nontaxable.  In his Proposal for Decision, the Administrative Law 
Judge (ALJ) recommends that the assessment be affirmed subject to the 
adjustments agreed to by Staff.

I. PROCEDURAL HISTORY, NOTICE, AND JURISDICTION

On February 2, 2010, the case was referred to the State Office of 
Administrative Hearings for an oral hearing.  The hearing was convened by ALJ 
Peter Brooks on April 22, 2010.  Staff was represented by Assistant General 
Counsel DeAnne Z. Cummings-Scott.  Petitioner was represented by 
**************.  The ALJ closed the record on June 10, 2010, to allow the 
parties to file post-hearing briefs.

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

II. REASONS FOR DECISION

A. Evidence Presented

Staff offered the following exhibits for admission into the record:

1. Audit Report;
2. Notification of Audit Results;
3. Sixty-Day Letter;
4. Penalty and Interest Waiver Worksheet;
5. Audit Plan;
6. Audit Work Papers for Prior Audit (January 1, 2001, through March 31, 2005);
7. Penalty and Interest Waiver Worksheet for Prior Audit; and
8. Audit Plan for Prior Audit.

Staff also presented the testimony of Georgina Chen, the Comptroller auditor 
who conducted the audit of Petitioner.  Petitioner presented the testimony of 
**************, Petitionerís controller.

B. Background and Issues Presented

Petitioner operates a jewelry store, from which it sells collectible coins.  A 
majority of its sales are made to out-of-state customers.  Petitioner was 
audited for sales and use tax compliance for the period April 1, 2005, through 
July 31, 2008.  The Comptroller issued a Texas Notification of Audit Results to 
Petitioner on December 12, 2008, assessing a deficiency of $************** 
consisting of tax, the standard 10% penalty, and interest accrued through the 
date of the Notification.  Petitioner timely requested a redetermination.  
Staff agreed to make adjustments to Exams 600 and 700 of the Audit Report. 
[ENDNOTE: (1)] 

Petitionerís contentions were reduced to the transactions in Exam 700 that 
involved three vendors, COMPANY A, COMPANY B, and COMPANY C, from whom 
Petitioner purchased coin cases and coin holders.  Petitioner contends that the 
auditor erred in scheduling these purchases as taxable shipping supplies.  
Petitioner contends that the coin cases and coin holders become an integral 
part of the coins their customers purchase.  Petitioner argues that these 
containers are not simply packaging material used to ship the coins but are 
necessary to preserve the value of the coins.  Coins placed in the cases and 
holders are considered uncirculated coins.  If the coins are removed from the 
cases they are no longer considered uncirculated and, thus, drop in value.  In 
addition, Petitioner claims that coins that are removed from the containers 
will deteriorate over time compared with coins that remain encased.

Staff, in turn, rejects Petitionerís contention that the coin cases and coin 
holders are nontaxable.  Staff contends that the cases and holders are taxable 
because Petitioner used the cases and holders to repackage the coins for 
shipping.  Staff questions both Petitionerís assertion that the cases and 
holders are necessary to preserve the coinsí value as uncirculated coins and 
its assertion that the cases and holders prevent deterioration from exposure to 
the air, [ENDNOTE: (2)] but primarily relies on TEX. TAX CODE ANN. Section 
151.302(c) and (b), which treat packaging that is used to further the sale of a 
taxable item as subject to tax.

C. ALJís Analysis and Recommendation

Wrapping and packaging supplies are not exempt when purchased by persons who 
are not manufacturers, such as wholesalers or retailers, and used for the 
purpose of furthering the sale of tangible personal property.  TEX. TAX CODE 
ANN. Section 151.302(c).  This subsection further provides, with regard to the 
resale of tangible personal property, that internal or external wrapping, 
packing, and packaging supplies used in wrapping, packing, or packaging 
tangible personal property for the purpose of furthering the sale of the 
tangible personal property may not be purchased for resale.  The Tax Code 
exempts wrapping and packaging supplies only if sold to or used or consumed by 
a manufacturer.  TEX. TAX CODE ANN. Section 151.318(a).  The rule governing the 
taxability of wrapping packaging also distinguishes between purchases of 
wrapping and packaging by manufacturers versus retailers:

Sales or use tax is due on the sale of packaging supplies, including gift 
wrapping supplies, to persons who repack tangible personal property prior to 
sale, produce shippers who are not original producers, wholesalers, retailers, 
and service providers other than laundry and dry cleaners for use in 
delivering, expediting, or furthering in any way:  (1) the performance of a 
taxable or nontaxable service; (2) the rental of tangible personal property; or 
(3) the sale of tangible personal property.

34 TEX. ADMIN. CODE Section 3.314(c).

The exemption for wrapping and packaging supplies was formerly available to 
retailers, until the Legislature eliminated it by enacting Tax Code Section 
151.302(c) effective October 1, 1991.  See COMPTROLLERíS DECISION NO. 43,519 
(2005).  The Tax Code in its present form contains separate and distinct 
provisions regarding wrapping, packing, and packaging supplies used to complete 
a manufacturing process, and such supplies when used to further the sale of 
tangible personal property.

Regardless of Petitionerís contentions regarding the protective functions 
performed by the cases and coin holders, Petitioner as a retailer is not 
eligible for the exemption for the wrapping and packaging supplies it purchased 
from COMPANY A, COMPANY B, and COMPANY C.  The applicable statute and rule 
cited above strictly prohibit the application of the exemption to retailers.  
Consequently, the ALJ cannot recommend any further adjustments to the audit 
assessment.

III. FINDINGS OF FACT

1. ************** (Petitioner) was audited for sales and use tax compliance for 
the period April 1, 2005, through July 31, 2008.  The Comptroller of Public 
Accounts (Comptroller) on December 12, 2008, issued a Texas Notification of 
Audit Results to Petitioner assessing a deficiency of $************** 
consisting of tax, the standard 10% penalty, and interest accrued through the 
date of the Notification.  Petitioner timely requested a redetermination.  
Comptroller Staff (Staff) agreed to make adjustments to Exams 600 and 700 of 
the Audit Report.

2. On February 2, 2010, the case was referred to the State Office of 
Administrative Hearings for an oral hearing.

3. Staff provided a notice of hearing to Petitioner.  The notice contained the 
date, the time, and 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 hearing was convened by Administrative Law Judge Peter Brooks on April 
22, 2010.

5. Petitioner operates a jewelry store, from which it sells collectible coins.  
It purchased the coins from various vendors.

6. Petitioner purchased cases and coin holders in which it placed the coins for 
shipment to its customers.

7. Petitioner is a retailer and not a manufacturer.

8. Petitioner did not pay tax on the purchase of the cases and holders.

9. The Comptroller auditor scheduled the purchase of cases and holders as 
taxable wrapping and packaging.

IV. CONCLUSIONS OF LAW

1. The 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. GOVíT CODE ANN. ch. 2003.

3. The Comptroller provided proper and timely notice of the hearing pursuant to 
TEX. GOVíT CODE ch. 2001 and TEX. TAX CODE ANN. Section 111.009.

4. Wrapping and packaging supplies are not exempt when purchased by persons who 
are not manufacturers, such as wholesalers or retailers, and used for the 
purpose of furthering the sale of tangible personal property.  TEX. TAX CODE 
ANN. Section 151.302(c).

5. Tax Code Section 151.302(c) further provides, with regard to the resale of 
tangible personal property, that internal or external wrapping, packing, and 
packaging supplies used in wrapping, packing, or packaging tangible personal 
property for the purpose of furthering the sale of the tangible personal 
property may not be purchased for resale. See also 34 TEX. ADMIN. CODE Section 
3.314(c).

6. The Tax Code exempts wrapping and packaging supplies only if sold to or used 
or consumed by a manufacturer.  TEX. TAX CODE ANN. Section 151.318(a).

7. Based on Findings of Fact Nos. 5 Ė 9 and Conclusions of Law Nos. 4 - 5, the 
auditor did not err in scheduling the purchase of the coin cases and coin 
holders as taxable wrapping and packaging.

8. Based on the foregoing Findings of Fact and Conclusions of Law, the 
Administrative Law Judge recommends that the audit be affirmed, subject to the 
adjustments agreed to by Staff.


Hearing No. 102,623

ORDER OF THE COMPTROLLER

On June 18, 2010, the State Office of Administrative Hearingsí (SOAH) 
Administrative Law Judge, Peter Brooks, 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 Judgeís Proposal for 
Decision, except for minor changes to correct typographical or clerical errors, 
should be adopted as written.

The above Decision resulting in Petitionerís liability as set out in 
ďAttachment A,Ē 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 30th day of August 2010.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller


ENDNOTE(S):

(1)  The adjustments are set out in Attachment A to Staffís Post-Hearing Brief.

(2)  Staff points out that the coins would have, according to Petitionerís 
reasoning, decreased in value when they were shipped without the protection of 
the cases and holders from the vendors.  In addition, Staff doubts that coins 
made of gold, silver, or platinum would physically deteriorate while exposed 
outside of a case or coin holder.




ACCESSION NUMBER: 201008903H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 08/30/2010
TAX TYPE: SALES