Texas Comptroller of Public Accounts STAR System
201107191H
SOAH DOCKET NO. 304-11-3822.26
CPA HEARING NO. 104,832
RE: ************
TAXPAYER NO.: ************
AUDIT OFFICE: ************
AUDIT PERIOD: January 1, 2006 THROUGH May 31, 2009
Limited Sales, Excise, And Use Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
SUSAN COMBS
JOHN D. BOSTICK
Representing Tax Division
************
Representing Petitioner
COMPTROLLER’S DECISION
************ (Petitioner) was audited for sales and use tax compliance and an
assessment was made by the (Comptroller).
Subsequently, Petitioner provided additional documentation, and an amended
assessment was issued. Petitioner contends the amended audit erroneously
assesses tax on nontaxable referral fees. In the alternative, Petitioner
contends it is entitled to relief based on the Comptroller’s detrimental
reliance policy. In his Proposal for Decision (PFD), the Administrative Law
Judge (ALJ) recommends that each of Petitioner’s contentions be denied.
I. PROCEDURAL HISTORY, NOTICE & JURISDICTION
On March 23, 2011, Comptroller Staff (Staff) referred the above-referenced
matter to the State Office of Administrative Hearings (SOAH) and issued a
Notice of Hearing that contained a statement of the date, time, and location of
the hearing; 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, as required by the Administrative Procedure
Act. SEE TEX. GOV’T CODE ANN. Section 2001.052. The Comptroller has
jurisdiction over this matter pursuant to TEX. TAX CODE ANN. ch. 111, and SOAH
has jurisdiction over the hearing, including the authority to issue a PFD,
pursuant to TEX. GOV’T CODE ch. 2003.
ALJ Victor John Simonds presided at a hearing on the merits that convened on
May 25, 2011. Petitioner was present and represented at the hearing by
************. Staff was represented by Assistant General Counsel John D.
Bostick. The ALJ closed the contested case record at the conclusion of the
hearing.
II. REASONS FOR DECISION
A. Evidence Presented
Petitioner presented the testimony of its president, INDIVIDUAL A, and offered
several documents into evidence. Petitioner’s documents consisted of two
documents related to its direct pay program, the cover letter and Texas
Notification of Audit Results related to a prior audit, several taxability
determination letters, and a copy of COMPTROLLER’S DECISION NO. 35,677 (2000).
Each of Petitioner’s exhibits was admitted without objection.
Staff presented the testimony of Alan Chaboki, an auditor assigned to the
Comptroller’s CITY Audit Office. Staff offered the following documents into
evidence: the 60-day notification letter; the Texas Notification of Amended
Audit Results; the penalty and interest waiver worksheet; the audit report; the
audit documentation report; and the amended audit report. Each of Staff’s
exhibits was admitted without objection.
B. Staff Agreed Adjustments
Staff did not agree to any amended audit adjustments.
C. Facts Established by the Evidence
For over 20 years, Petitioner has offered its CITY customers services such as
home cleaning, window cleaning, pressure washing, and carpet cleaning. A
portion of Petitioner’s revenue comes from customers that purchase a one-time
cleaning service, but most of its revenue comes from long-term customers that
want ongoing cleaning services. These customers work with Petitioner to make
arrangements for a maid to perform the desired cleaning services twice weekly,
once a week, or once every two weeks. Petitioner schedules the service
appointments, which can be either a half day or a whole day, and discounts its
fees if customers agree to enter into a direct pay program. Under the program,
Petitioner charges the customer’s credit card a one-time set-up fee that ranges
from $************* to $*************, and a reoccurring monthly fee that
ranges from $************* to $*************. The more frequent the service,
the higher the fees. In addition, direct pay customers also agree to pay their
housekeeper, with cash or a check, at the rate of $************* per hour.
That payment is due on the day services are provided. Petitioner collected and
remitted sales tax for one-time cleaning service customers, but did not collect
or remit tax on its direct pay program fees. Petitioner advertises to attract
customers and housekeepers. Petitioner did not provide any documentation to
establish the relationship or agreements it had with its housekeepers, but
INDIVIDUAL A testified that the housekeepers are independent contractors, not
Petitioner’s employees, for federal tax purposes.
Petitioner was audited for compliance with sales and use tax laws in the period
from April 1, 1993, through March 31, 1997 (the prior audit). Petitioner’s
president, INDIVIDUAL A, testified that the assigned auditor, INDIVIDUAL B,
reviewed her records and agreed that the revenue Petitioner generated under its
direct pay program was a nontaxable referral fee. The Texas Notification of
Audit Results stated that the results of the audit should not be taken as
approval of Petitioner’s tax reporting.
Petitioner was also audited for the period January 1, 2006, through May 31,
2009 (the current audit). Petitioner did not initially provide the auditor,
Alan Chaboki, with any sales invoices, but did provide a general ledger and
documents related to its direct pay program. After reviewing the documents,
the auditor determined the revenue Petitioner obtained under the program was
payment for taxable housekeeping services. Additional taxable sales were
estimated based on Petitioner’s general ledger and reported tax history. The
audit was completed and issued on January 27, 2010. Subsequently, Petitioner
provided the auditor with an exemption certificate and certain sales receipts.
The auditor agreed the certificate was valid and deleted those sales. [ENDNOTE]
On December 30, 2010, the Comptroller issued a Texas Notification of Amended
Audit Results assessing Petitioner tax, a 10% late penalty, and interest
accrued as of the statement date. Petitioner asked for redetermination.
D. Issues, ALJ Analysis & Recommendations
Retailers are required to keep records that reflect the total gross receipts
from sales, and the total purchases of taxable items. SEE 34 TEX. ADMIN. CODE
Section 3.281(b). When records are inadequate to reflect the taxpayer’s
business operations, the Comptroller is authorized to estimate a taxpayer’s
liability based on the best information available. SEE TEX. TAX CODE
Section 111.0042(d). Staff’s evidence is sufficient to establish that
Petitioner did not provide complete and reliable records and that the amended
audit was based on the best information available.
Petitioner agrees that housekeeping services are taxable real property
services. SEE TEX. TAX CODE Section 151.0101(a)(11) and 151.0048(a)(4). SEE
ALSO 34 TEX. ADMIN. CODE Section 3.356. Petitioner also agrees that tax is due
on amounts it collects for one-time cleaning services. However, Petitioner
contends the amounts it receives under the direct pay program are nontaxable
referral fees. Staff disagrees, and cites COMPTROLLER’S DECISION NO. 31,351
(1994). In that case the Comptroller held that a taxpayer that placed
housekeepers was acting as a general contractor providing taxable housekeeping
services even though the housekeepers actually performing the cleaning were not
the taxpayer’s employees, therefore the amounts the taxpayer retained were
subject to sales tax. Though some of the facts presented by the instant matter
differ from those presented by the 1994 taxpayer, the legal principle is on
point.
None of the documents in the record expressly state what the monthly fees
Petitioner collected are for, but it is clear they are not simply a referral
fee as Petitioner suggests. First, Petitioner’s moniker is “***********,” and
the phone numbers also spell out the word “*************.” Second, the fee
Petitioner collects under the direct pay program is tied to the frequency of
the cleaning service, which is a strong indication that the fee is not simply a
referral fee as Petitioner suggests. Petitioner’s advertising states that “our
profit is reduced” under the direct pay program but “we want long-term
customers and housekeepers.” The advertising also states: “Thank you for
choosing [Petitioner] for all your domestic needs and home services.”
Customers are advised not to solicit “our housekeepers.” Additionally, the
program itself is identified as a direct pay program, not as a referral fee
payment plan. Moreover, as the auditor stated, the fact that Petitioner
charges its fee every month is also an indication that this is not simply a
referral fee. In short, it is abundantly clear that the monthly fee customers
pay for recurring services is part of the charge they pay for the provision of
cleaning services. All gross receipts of a seller are presumed to have been
subject to sales tax. SEE TEX. TAX CODE Section 151.054(a). Therefore,
Petitioner failed to meet its burden of demonstrating audit error, and its
contention should be denied. SEE 34 TEX. ADMIN. CODE Section 1.40(2)(B).
Petitioner also contends that if it made a sales tax error, it is because it
relied on its prior audit. The Comptroller provides relief to a taxpayer who
has relied on erroneous advice given by a Comptroller employee if the taxpayer
can establish by evidence the following four elements: (1) that erroneous
advice was given, (both as to the substance thereof and its direct
communication to the taxpayer), meaning that it usually must be in writing; (2)
that the taxpayer gave sufficient information to enable the employee to provide
correct advice; (3) that the taxpayer followed the advice; and (4) that the
taxpayer has suffered or will suffer harm unless the Comptroller adheres to the
advice. SEE COMPTROLLER’S DECISION NO. 29,827 (1993). However, since the
early 1980’s, the agency has included a standard disclaimer in the notification
of audit results that cautions taxpayers that an audit result cannot be relied
on as an approval of the taxpayer’s reporting system. It is well settled that
a taxpayer who receives the standard disclaimer cannot use the audit result to
assert detrimental reliance in future audits. SEE, E.G., COMPTROLLER’S
DECISION NOS. 30,108 (1994) and 31,985 (1995). Therefore, Petitioner’s
contention should be denied.
III. FINDINGS OF FACT
1. For over 20 years, ************ (Petitioner) has offered its CITY customers
services such as home cleaning, window cleaning, pressure washing, and carpet
cleaning.
2. A portion of Petitioner’s revenue comes from customers that purchase a
one-time cleaning service, but most of its revenue comes from long-term
customers that want ongoing cleaning services. These customers work with
Petitioner to make arrangements for a maid to perform the desired cleaning
services twice weekly, once a week, or once every two weeks. Petitioner
schedules the service appointments, which can be either a half day or a whole
day, and discounts their fees if customers agree to enter a direct pay program.
3. In the direct pay program, Petitioner charges the customer’s credit card a
one-time set-up fee that ranges from $************* to $*************, and a
reoccurring monthly fee that ranges from $************* to $*************. The
more frequent the service, the higher the fees. In addition, direct pay
customers also agree to pay their housekeeper, with cash or a check, at the
rate of $************* per hour. That payment is due on the day services are
provided.
4. Petitioner collected and remitted sales tax for one-time cleaning service
customers, but did not collect or remit tax on its direct pay program fees.
5. Petitioner advertises to attract customers and housekeepers.
6. Petitioner did not provide any documentation to establish the relationship
or agreements it had with its housekeepers, but INDIVIDUAL A testified that the
housekeepers are independent contractors, not Petitioner’s employees, for
federal tax purposes.
7. Petitioner was audited for compliance with sales and use tax laws in the
period from April 1, 1993, through March 31, 1997 (the prior audit).
8. The Texas Notification of Audit Results stated that the results of the
audit should not be taken as approval of Petitioner’s tax reporting.
9. Petitioner was also audited for the period January 1, 2006, through May 31,
2009 (the current audit).
10. Petitioner did not initially provide the auditor, Alan Chaboki, with any
sales invoices, but did provide a general ledger and documents related to its
direct pay program.
11. Petitioner did not provide complete records.
12. After reviewing the documents, the auditor determined the revenue
Petitioner obtained under the program was payment for taxable housekeeping
services. Additional taxable sales were estimated based on Petitioner’s
general ledger and reported tax history.
13. The audit was completed and issued on January 27, 2010. Subsequently,
Petitioner provided the auditor with an exemption certificate and certain sales
receipts. The auditor agreed the certificate was valid and deleted those
sales.
14. On December 30, 2010, the
(Comptroller) issued a Texas Notification of Amended Audit Results assessing
Petitioner tax, a 10% late penalty, and interest accrued as of the statement
date.
15. Petitioner asked for redetermination.
16. On March 23, 2011, Comptroller Staff referred the case to the State Office
of Administrative Hearings, and issued a Notice of Hearing.
17. The hearing notice contained the date, time, and place of the hearing, 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.
18. On May 25, 2011, the Administrative Law Judge (ALJ) convened a hearing on
the merits, and closed the contested case record at the conclusion of the
hearing.
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.
4. Retailers are required to keep records that reflect the total gross
receipts from sales and the total purchases of taxable items. SEE 34 TEX.
ADMIN. CODE Section 3.281(b).
5. When records are inadequate to reflect the taxpayer’s business operations,
the Comptroller is authorized to estimate a taxpayer’s liability based on the
best information available. SEE TEX. TAX CODE Section 111.0042(d).
6. The estimated audit was authorized and was based on the best information
available.
7. Housekeeping services are taxable real property services. SEE TEX. TAX
CODE Section 151.0101(a)(11) and 151.0048(a)(4). SEE ALSO 34 TEX. ADMIN. CODE
Section 3.356.
8. All gross receipts of a seller are presumed to have been subject to sales
tax. SEE TEX. TAX CODE Section 151.054(a).
9. Petitioner failed to demonstrate that the audit was erroneous. SEE 34 TEX.
ADMIN. CODE Section 1.40(2)(B).
10. The Comptroller provides relief to a taxpayer who has relied on erroneous
advice given by a Comptroller employee if the taxpayer can establish by
evidence the following four elements: (1) that erroneous advice was given,
(both as to the substance thereof and its direct communication to the
taxpayer), meaning that it usually must be in writing; (2) that the taxpayer
gave sufficient information to enable the employee to provide correct advice;
(3) that the taxpayer followed the advice; and (4) that the taxpayer has
suffered or will suffer harm unless the Comptroller adheres to the advice. SEE
COMPTROLLER’S DECISION NO. 29,827 (1993).
11. A taxpayer who receives the standard audit disclaimer cannot use the audit
result to assert detrimental reliance in future audits. SEE, E.G.,
COMPTROLLER’S DECISION NOS. 30,108 (1994) and 31,985 (1995).
12. Petitioner is not entitled to relief under the Comptroller’s detrimental
reliance policy.
13. Based upon the above Findings of Fact and Conclusions of Law, the ALJ
recommends each of Petitioner’s contentions be denied.
Hearing No. 104,832
ORDER OF THE COMPTROLLER
On May 31, 2011, the State Office of Administrative Hearings’ Administrative
Law Judge (ALJ), Victor John Simonds, issued a Proposal for Decision in the
above-referenced matter to which Petitioner filed Exceptions on June 14, 2011.
Staff filed a Response on June 16, 2011. The Comptroller has considered the
Exceptions, Response, and the ALJ’s recommendation letter and determined that
the ALJ’s Proposal for Decision, except for minor changes to correct
typographical or clerical errors, should be adopted without change and this
Decision represents the ruling thereon.
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 July 2011.
SUSAN COMBS
by: Martin A. Hubert
Deputy Comptroller
ENDNOTE
(1) The auditor also noted a local tax error that resulted in tax collected
not remitted being scheduled in Exam 2, but that exam is not contested.
ACCESSION NUMBER: 201107191H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 2011-07-01
TAX TYPE: SALES