201105067H




SOAH DOCKET NO. 304-11-2322.13
CPA HEARING NO. 103,786

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2008 THROUGH December 31, 2008

Franchise Tax/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

JAMES D. ARBOGAST
Representing Tax Division

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


COMPTROLLER’S DECISION

************** (Petitioner), in filing its 2008 franchise tax report, 
determined that it was subject to the franchise tax rate of one-half percent of 
taxable margin that applies to taxable entities primarily engaged in retail 
trade.  The Texas Comptroller of Public Accounts (Comptroller) determined that 
Petitioner was primarily engaged in automobile servicing and repair and was 
subject to the one percent tax rate.  Accordingly, tax and interest was 
assessed by Texas Notification of Audit Results dated September 25, 2009.  
Petitioner timely requested redetermination.  In his Proposal for Decision, the 
Administrative Law Judge recommends that the assessed tax and interest should 
be upheld without change.

I. PROCEDURAL HISTORY, NOTICE, AND JURISDICTION

Comptroller Staff (Staff) referred the case to the State Office of 
Administrative Hearings on January 18, 2011, for a written submission hearing.  
There are no contested issues of notice or jurisdiction and those matters are 
set out in the Findings of Fact and Conclusions of Law without further 
discussion here.

Staff was represented by Assistant General Counsel James D. Arbogast.  
Petitioner was represented by **************, Attorney at Law.  The record 
closed on April 8, 2011, by order of Administrative Law Judge Alvin Stoll.

II. REASONS FOR DECISION

A. Evidence Presented

Staff submitted a 60-day notice letter, a Texas Notification of Exam Results, 
the audit schedules, and an Audit Documentation Report.  Staff forwarded the 
pleadings of the parties filed while the case was pending before the 
Comptroller.  Petitioner submitted an affidavit by its president, INDIVIDUAL A, 
and as an attachment to a Stipulation of the Parties, a Combined Operations 
Income Statement for the period ending December 31, 2007.  All submissions were 
without objection admitted into the record.

B. Stipulation of the Parties

Petitioner and Staff stipulated and agreed that the case may be heard upon the 
following agreed facts:

1. During all times pertinent to this case, Petitioner, a Texas Corporation, 
owned and operated 13 business locations catering primarily to retail 
customers.  The locations provided a variety of automotive services, such as 
brakes, alignment, suspension, batteries, mufflers, and tires, as well as the 
sale of automotive parts and supplies to their retail customers.

2. Petitioner maintained an inventory of parts and supplies that it purchased 
and resold to its retail customers, some of which it installed on customers’ 
vehicles, and some of which it sold “over the counter” to its retail customers, 
who took the uninstalled items with them.

3. Petitioner also purchased and resold automotive accessories, such as trailer 
hitches and automotive lamps, some of which it installed on customers’ vehicles 
and some of which it sold “over the counter” to its retail customers who took 
the uninstalled items with them.

4. The revenue from the “over-the-counter” sales may be considered retail sales 
and classified under SIC Code 5531, which is a Division G:  Retail Trade under 
the 1987 Standard Industrial Classification (SIC) Manual.

5. Petitioner distinguished between parts and labor in its accounting.  
However, it did not maintain statistics indicating the percentage of sales of 
parts which were sold “over the counter” to customers for later use, and parts 
which were installed on the vehicles of Petitioner’s customers pursuant to 
automotive repair and maintenance services. 

6. No single type of service or repair, or sales items, accounted for a 
majority of Petitioner’s revenue.  For example, exhaust systems accounted for 
6.3% to 18.1% of the sales (parts and labor) of the various locations.  Also, 
Petitioner was neither primarily engaged in the sale and installation of 
transmissions, mufflers, brake lines, and glass, nor primarily engaged in the 
installation, repair, or sale and installation of automotive exhaust systems.

7. As shown in the Combined Operations Income Statements for the 13 locations 
for the tax report in question, the revenue from the sales of parts accounted 
for 51.4% of Petitioner’s total revenue. 

C. Analysis and Recommendation

The franchise tax is imposed on each taxable entity that does business in the 
state.  TEX. TAX CODE ANN. Section171.001(a).  The franchise tax rate generally 
is one percent of taxable margin.  TEX. TAX CODE Section 171.002(a).  However, 
the rate is one-half percent of taxable margin for those taxable entities 
primarily engaged in retail or wholesale trade. TEX. TAX CODE Section 
171.002(b).  A taxable entity is primarily engaged in retail or wholesale trade 
only if the total revenue from its activities in retail or wholesale trade is 
greater than the total revenue from its activities in trades other than the 
resale and wholesale trades.  TEX. TAX CODE Section 171.002(c).  Petitioner 
contends that it is primarily engaged in a retail trade and therefore qualifies 
for the one-half percent rate.  Staff disagrees and contends that Petitioner is 
primarily engaged in a service trade and is subject to the one percent rate.

During the 2008 franchise tax report period, Petitioner provided automotive 
repair services such as the sale and installation of automotive exhaust 
systems, transmissions, mufflers, brake linings, glass, and other items from 
various outlets in Texas.  Petitioner also made “over-the-counter” sales of 
automobile parts and supplies, in which the parts or supplies were sold to the 
customers for subsequent installation by the customers.  Petitioner did not 
perform installation services when the parts or supplies were directly sold to 
the customers.  For franchise tax purposes a retail trade is defined as “the 
activities described in Division G of the 1987 Standard Industrial 
Classification Manual published by the federal Office of Management and 
Budget.”  TEX. TAX CODE Section 171.0001 (12).  Division G is the SIC for 
retail trade.  The parties agree that the activities involved in 
over-the-counter sales of automobile parts and supplies are properly classified 
within Division G, and specifically under SIC 5531 for the retail sale of new 
automobile tires, batteries, and other automobile parts and accessories.

However, Petitioner’s total revenue is not primarily derived from 
over-the-counter sales.  Most of its revenue is derived from the sale and 
installation of automotive parts.  The description for SIC 5531 includes the 
following comment:  “Establishments primarily engaged in both selling and 
installing such automotive parts as transmissions, mufflers, brake linings, and 
glass are classified in Services, Industry Group 753.”  Industry Group 753 is 
within Division I for Services and is entitled Automotive Repair Shops.  
Therefore, when Petitioner sells and installs automotive parts, its activities 
fall under the SIC classification for services and not for retail trade.  Since 
most of Petitioner’s revenue is derived from services as defined in the SIC 
Manual, it is not primarily engaged in retail trade, and it does not qualify 
for the reduced tax rate that applies to retail or wholesale trades.

Petitioner contends that it is primarily engaged in retail trade, because its 
revenue from the sale of automotive parts and supplies exceeds its revenue from 
installation labor.  Petitioner’s 2007 Income Statement distinguishes between 
revenue from parts and labor.  The revenue from the sale of parts, including 
both over-the-counter sales and the portion attributable to parts in the 
charges for sale and installation, constituted 51.5% of Petitioner’s total 
revenue.  The remaining revenue consists of labor charges.  Petitioner contends 
that only the labor charges fall under the SIC Division for Services, and that 
the remaining charges fall under the SIC Division for Retail Trade.

The Legislature has defined the term “retail trade” solely by reference to the 
1987 SIC Manual.  That classification system does not support Petitioner’s 
contention that the sale of parts may be excluded from revenue derived from 
sale and installation services.  Establishments primarily engaged in both 
selling and installing automotive parts are considered to be engaged in 
services (see comments at SIC Code 5531).  Establishments primarily engaged in 
the sale and installation of automobile exhaust systems are classified as 
engaged in services, and the sale of mufflers, tail pipes, and catalytic 
converts is considered to be incidental to the installation of those products 
(see SIC Code 5533).  Similarly, establishments primarily engaged in the sale 
and installation of automotive transmissions are classified as engaged in 
services, and the sale of transmissions and related parts is considered 
incidental to the installation (see SIC Code 7537).  Petitioner’s primary 
activity was the sale and installation of automotive parts.  Petitioner may not 
exclude the value of parts and supplies from the revenue received from that 
service activity.  Petitioner therefore did not receive most of its total 
revenue from activities in retail trade, and its contention must for that 
reason be denied.

III. FINDINGS OF FACT

1. The Texas Comptroller of Public Accounts (Comptroller) assessed franchise 
tax and interest against ************** (Petitioner) for the 2008 report year.  
Petitioner timely requested redetermination. 

2. Comptroller Staff (Staff) referred the case to the State Office of 
Administrative Hearings.  Staff issued a Notice of Hearing by Written 
Submission 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 2008 franchise tax report period, Petitioner provided automotive 
repair services such as the sale and installation of automotive exhaust 
systems, transmissions, mufflers, brake linings, glass, and other items from 
various outlets in Texas. 

4. The sale and installation of automotive parts is classified within Standard 
Industrial Classification (SIC) Division I for Services, specifically Industry 
Group 753, entitled Automotive Repair Shops.

5. Petitioner also made “over-the-counter” sales of automobile parts and 
supplies, in which the parts or supplies were sold to the customers for 
subsequent installation by the customers.

6. Over-the-counter sales of automobile parts and supplies are properly 
classified within SIC Division G, and specifically under SIC 5531 for the 
retail sale of new automobile tires, batteries, and other automobile parts and 
accessories

7. Petitioner received most of its revenue from service trades and not from 
retail or wholesale trades.

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. 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 and TEX. TAX CODE ANN Section 111.009.

4. The franchise tax is calculated based on a taxable entity’s taxable margin.  
Tax is computed by applying the applicable tax rate to the taxable entity’s 
taxable margin.  The standard rate applicable to all taxable entities is one 
percent of taxable margin, except for those taxable entities that are primarily 
engaged in retail or wholesale trades, which are subject to a rate of one-half 
percent of taxable margin.  TEX. TAX CODE ANN. Section171.002(a) and (b).

5. Petitioner does not qualify for the one-half percent tax rate reserved for 
retailers and wholesalers.

6. Petitioner has not established by a preponderance of the evidence pursuant 
to 34 TEX. ADMIN. CODE Section 1.40(2)(B) that the tax assessment was 
incorrect.

7. Based on the foregoing Findings of Fact and Conclusions of Law, the tax 
assessment should be upheld without change.


Hearing No. 103,786

ORDER OF THE COMPTROLLER

On April 14, 2011, the State Office of Administrative Hearings’ (SOAH) 
Administrative Law Judge (ALJ), Alvin Stoll, 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 ALJ’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 10th day of May 2011.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller




ACCESSION NUMBER: 201105067H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 05/10/2011
TAX TYPE: FRANCHISE