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SOAH DOCKET NO. 304-21-3179.26
CPA HEARING NO. 117,422
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: October 1, 2011 THROUGH February 28, 2019
Sales And Use Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
KAREN MATLOCK
Representing Respondent
**************
Representing Petitioner
COMPTROLLER’S DECISION
This decision is considered final on January 28, 2022, unless a motion for rehearing is timely filed; this date of finality is calculated based on the Administrative Procedure Act (APA).[1] The failure to timely file a motion for rehearing may result in adverse legal consequences.
Administrative Law Judge (ALJ) Kathy Pickup of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision (PFD) that includes Findings of Fact and Conclusions of Law. SOAH served the PFD on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure. The ALJ recommended that the Comptroller adopt the PFD as written.
After review and consideration, IT IS ORDERED that the PFD is adopted as changed.[2]
The result from this Decision is Attachment A. The ALJ’s letter to the Comptroller is Attachment B. The PFD as changed is Attachment C. Attachments A, B, and C are incorporated by reference.
Attachment A reflects a liability.
The total sum of the tax, penalty, and interest is due and payable 20 days after a comptroller’s decision becomes final.[3] If such sum is not timely paid, an additional penalty of 10 percent of the taxes due will accrue.
SIGNED on this 3rd day of January 2022.
GLENN HEGAR
Comptroller of Public Accounts
By: Lisa Craven
Deputy Comptroller
Attachment A, Texas Notification of Hearing Results
Attachment B, ALJ’s letter to the Comptroller
Attachment C, Proposal for Decision as changed
ATTACHMENT B
State Office of Administrative Hearings
Kristofer Monson
Chief Administrative Law Judge
December 1, 2021
The Honorable Glenn Hegar
Comptroller of Public Accounts
LBJ Building
111 E. 17th Street, 1st Floor
Austin, TX 78701
RE: SOAH Docket: 304-21-3179.26
TCPA Hearing No.: 117,422
Taxpayer No.: **************
************** v. Texas Comptroller of Public Accounts
Dear Comptroller Hegar:
On November 12, 2021, Petitioner filed exceptions to the Proposal for Decision (PFD) issued on October 29, 2021, in the above-referenced matter. Staff did not file a response. Petitioner’s exceptions reassert arguments made in the hearing and although Petitioner does not agree with the PFD, he does not cite error in any particular Finding of Fact or Conclusion of Law. Having reviewed Petitioner’s exceptions and finding no errors in the Findings of Fact or Conclusions of Law, I recommend that the PFD be adopted as written.
Sincerely,
Kathy Pickup
Administrative Law Judge
ATTACHMENT C
SOAH DOCKET NO. 304-21-3179.26
TCPA DOCKET NO. 117,422
**************
Taxpayer No. **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
PROPOSAL FOR DECISION
The Business Activity Research Team (BART) of the Texas Comptroller of Public Accounts (Comptroller) examined **************’s (Petitioner) business activities in Texas and determined that Petitioner had nexus with Texas for sales tax. The Comptroller’s Tax Division (Staff) issued a Texas Nexus Questionnaire to Petitioner. Petitioner returned the questionnaire but did not provide any other documentation. BART requested that Petitioner self-determine the owed tax and provide certain documentation. When Petitioner did not comply, Staff made an assessment including estimated sales tax due, late penalties, and interest. Petitioner requested redetermination, contending he was providing nontaxable professional paralegal services and was therefore not subject to Texas sales and use tax. Petitioner alternatively contends he was assessed tax on non‑Texas sales and/or exempt sales for resale, and also requested penalty and interest waiver. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends affirming the assessment.
I. PROCEDURAL HISTORY, NOTICE, AND JURISDICTION
Staff referred the contested case to the State Office of Administrative Hearings (SOAH) and, on August 17, 2021, issued a Notice of Hearing to Petitioner. On August 20, 2021, ALJ Kathy Pickup issued Order No. 1, setting out the pre-hearing requirements. Karen Matlock represented Staff, and Petitioner was represented by ************** of COMPANY A. The hearing convened via videoconference on October 27, 2021, and the record closed at the conclusion of the hearing.
There are no issues of notice or jurisdiction; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion.
II. REASONS FOR DECISION
A. Evidence Presented
Staff presented the testimony of accounts examiner Anthony Ferrera and offered the following exhibits into evidence:
1. 60-Day Notification Letter;
2. Texas Notification of Exam Results;
3. Business Activity Research Team Documents;
4. Website Screenshot COMPANY B Home Page;
5. Website Screenshot COMPANY B Legal Services;
6. Website Screenshot COMPANY B Transport Services;
7. Website Screenshot COMPANY B Truck/Semi Recovery Services; and
8. Website Screenshot COMPANY B Aircraft Recovery Services.
Petitioner testified on his own behalf and submitted the following exhibits: [4]
1. Sample Invoices and Customer Agreements; and
2. 2019 and 2020 Financial Summary for Petitioner.
The parties’ exhibits were admitted into the record without objection.
B. Agreed Adjustments
Staff did not agree to make any adjustments.
C. Material Facts and Issues Presented
In the period at issue, October 1, 2011, through February 28, 2019, Petitioner owned and operated a sole proprietorship dba COMPANY B, based in CITY, Texas. Petitioner’s services included legal services, transport services, truck and semi-truck recovery, aircraft recovery, skip tracing, filing court orders in Texas and nationwide, locating property for litigation, and property recovery services.
BART determined that Petitioner had nexus with Texas and should have submitted completed sales and use tax reports to the Comptroller during the exam period. BART instructed Petitioner to self-determine the tax owed and provide certain documentation. When Petitioner did not comply, BART estimated the tax owed at the rate of $1,000 for each month of the exam period.
On August 1, 2019, Staff issued Petitioner a Texas Notification of Exam Results assessing tax, penalty, and interest. Petitioner requested redetermination, contending he was providing nontaxable professional paralegal services and was therefore not subject to Texas sales and use tax. Petitioner alternatively contends he was assessed tax on non-Texas sales and/or exempt sales for resale, and also requested penalty and interest waiver. Staff contends Petitioner is providing taxable debt recovery services and referred the matter to SOAH.
D. ALJ’s Analysis and Recommendation
1. Debt Collection Services
Texas imposes a tax on each sale of a taxable item in this state. Tex. Tax Code § 151.051. The term “taxable item” includes tangible personal property and taxable services. Id. § 151.010. Debt collection services are included among the taxable services listed in Texas Tax Code § 151.0101(a)(8). Debt collection services include activities “to collect or adjust a delinquent debt, to collect or adjust a claim, or to repossess property subject to a claim.” Id. § 151.0036(a). The applicable rule further defines a debt collection service as including “any activity performed in furtherance of the satisfaction or compromise of a debt or claim.” 34 Tex. Admin. Code § 3.354(a)(4).
Where the contested case issue in dispute involves the taxability of a service, Staff must demonstrate, prima facie, that the service is taxable. See, e.g., Comptroller’s Decision No. 111,530 (2015). If that burden is satisfied, Petitioner must demonstrate by a preponderance of the evidence that that tax was paid, accrued, or assessed on a service in error. See 34 Tex. Admin. Code § 1.26(e).
The law requires retailers to keep records that reflect the total gross receipts from sales and the total purchases of taxable items. Tex. Tax Code § 151.025; 34 Tex. Admin. Code § 3.281(b). If a taxpayer fails to keep accurate records of gross receipts, gross purchases, deductions, and exclusions, the Comptroller may take actions that include estimating the person’s tax liability based on any available information. Tex. Tax Code § 111.008(a). Staff’s evidence is sufficient to establish, prima facie, that Petitioner was providing a taxable service, that the estimated assessment was authorized by statute, and that the best information available was utilized. Therefore, it is Petitioner’s burden to show the assessment is in error by a preponderance of the evidence. 34 Tex. Admin. Code § 1.26(e).
Petitioner disputes he provided taxable debt collection services because he did not personally collect a debt or repossess property. Rather, Petitioner contends he provided paralegal services and is not subject to Texas sales and use tax. Petitioner’s argument suggests his services are unrelated to debt collection or repossession, but he did not submit any explanation or evidence to establish that assertion. To the contrary, Staff’s exhibits show Petitioner’s website states Petitioner provides skip tracing, property recovery assistance service, and asset transporting. It also states “the first thing in repossessing property is to locate it. We save you money and time with our professional skip tracing and legal services providing assistance for banks, credit unions, and financial institutions. We also handle regular non-skip repossessions as well.”
Petitioner provided a blank sample invoice, an undated, blank customer agreement, and tax analysis summaries, but did not provide any contracts, invoices, or other source documentation. Settled Comptroller policy provides that a taxpayer cannot defeat an assessment based on the burden of proof by not providing the necessary documents. See, e.g., Comptroller’s Decision No. 107,078 (2015). The long-standing law in Texas is that the party in possession of evidence peculiarly within its control has the burden of producing that evidence. See Watson v. Brazos Elec. Power Corp., Inc., 918 S.W.2d 639, 643 (Tex. App.—Waco 1996, writ denied) (failure to produce evidence within a party’s control raises the presumption that if produced it would operate against him, and every intendment will be in favor of the opposite party); Brewer v. Dowling, 862 S.W.2d 156, 159 (Tex. App.—Fort Worth 1993, writ denied); H. E. Butt Grocery Co. v. Bruner, 530 S. W. 2d 340, 343 (Tex. App.—Waco 1975, writ dism’d). This presumption arises whenever the party not in possession of the evidence has introduced evidence harmful to the party who had control of the evidence. See Brewer, 862 S.W.2d at 159. “Under such circumstances, the failure of the [party in control of the evidence] to rebut the harmful evidence with evidence within its control raises a presumption that the unpresented evidence would also be unfavorable to the nonproducing party.” Id.
The ALJ concludes that Petitioner’s services were for services directly related to and incurred while providing taxable debt collection services and are not excluded from the tax base. Petitioner’s contention should be denied.
2. Non-Texas Sales and/or Exempt Sales for Resale
Petitioner alternatively argued that if the services he provided are considered to be taxable, they are non-Texas sales and/or exempt sales for resale. However, Petitioner provided very limited evidence for the hearing, none of which supports his alternative contentions. Although Petitioner referred to contracts during his testimony, he did not provide any contracts, invoices, or other source documentation in support of his alternative contentions. Therefore, Petitioner’s alternative contentions should also be denied.
3. Validity of 34 Texas Administrative Code Section 3.354(a)(4)
Petitioner also contends that 34 Tex. Admin. Code § 3.354(a)(4) is invalid because it seeks to expand the definition of “debt collection service” beyond the services listed in Texas Tax Code § 151.0036, and that expansion is invalid. The ALJ does not have authority to make a determination on the validity of a rule. See Comptroller’s Decision Nos. 115,973 (2020), 110,905, 111,342, 111,343 and 111,344 (2016). Additionally, the Tax Code gives the Comptroller exclusive jurisdiction to determine the scope of taxable services. Tex. Tax Code § 151.0101(b). This contention should be denied.
4. Penalty and Interest Waiver
Late penalties are automatically imposed on delinquent taxes. Tex. Tax Code § 111.061. The Comptroller has the discretionary authority to waive late penalties if a taxpayer has exercised reasonable diligence to comply with tax laws. Id. § 111.103. A taxpayer must establish reasonable diligence by a preponderance of evidence. See Comptroller’s Decision No. 102,695 (2010). In making the reasonable diligence determination, the Comptroller considers the following factors: the taxpayer’s audit history, the tax issues involved, whether a change in Comptroller policy occurred during the audit period, whether changes in the law took effect during the audit period, the size and sophistication of the taxpayer, whether tax was collected but not remitted, whether returns were timely filed, the completeness of the taxpayer’s records, the taxpayer’s efforts to comply with the recordkeeping requirements of this state, delinquencies in other taxes, reliance on advice provided by the Comptroller’s office, and the error rate in the current audit. 34 Tex. Admin. Code § 3.5(b)(3), (d). To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that penalty waiver is warranted. See id. § 1.26(e); see also Comptroller’s Decision No. 102,268 (2014). Petitioner did not provide any evidence establishing reasonable diligence.
Delinquent taxes draw interest beginning 60 days after the date due. Tex. Tax Code § 111.060(c). The Comptroller has discretionary authority to waive interest assessments and may exercise his discretion if interest was imposed as a result of undue delay caused by Comptroller personnel, reliance on advice provided by the Comptroller’s office, or natural disaster. Id. § 111.103; 34 Tex. Admin. Code § 3.5(e). To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that interest waiver is warranted. See 34 Tex. Admin. Code § 1.26(e); see also Comptroller’s Decision Nos. 102,268 and 109,069 (2014). Petitioner failed to provide any support for waiving interest.
The estimated assessment should be upheld in its entirety.
III. FINDINGS OF FACT
1. In the period at issue, ************** (Petitioner) owned and operated a sole proprietorship dba COMPANY B, based in CITY, Texas.
2. Petitioner’s services included legal services, transport services, truck and semi-truck recovery, aircraft recovery, skip tracing, filing court orders in Texas and nationwide, locating property for litigation, and property recovery services.
3. The Business Activity Research Team (BART) of the Texas Comptroller of Public Accounts (Comptroller) examined Petitioner’s activities in Texas and determined that Petitioner had nexus with Texas.
4. BART notified Petitioner that he should have submitted completed sales and use tax reports to the Comptroller during the exam period, October 1, 2011, through February 28, 2019.
5. BART requested that Petitioner self-determine the tax owed and provide certain documentation. When Petitioner did not comply, BART estimated the tax owed at the rate of $1,000 for each month of the exam period.
6. On August 1, 2019, the Comptroller’s Tax Division (Staff) issued Petitioner a Texas Notification of Exam Results assessing sales tax, penalty, and interest.
7. Petitioner timely requested redetermination.
8. Staff referred the contested case to the State Office of Administrative Hearings (SOAH).
9. On August 17, 2021, Staff issued a Notice of Hearing to Petitioner. The notice contained the date, time, and location 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 factual matters asserted, or an attachment that incorporated by reference the factual matters asserted in the complaint or petition filed with the state agency.
10. On August 20, 2021, Administrative Law Judge Kathy Pickup issued Order No. 1, setting out the pre-hearing requirements.
11. The hearing convened via videoconference on October 27, 2021, and the record closed at the conclusion of the hearing.
IV. CONCLUSIONS OF LAW
1. The Comptroller has jurisdiction over this matter pursuant to Texas Tax Code ch. 111.
2. SOAH 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 Texas Government Code ch. 2003.
3. Staff provided proper and timely notice of the hearing pursuant to Texas Government Code ch. 2001 and Texas Tax Code § 111.009.
4. Texas imposes a tax on each sale of a taxable item in this state. Tex. Tax Code § 151.051.
5. The term “taxable item” includes tangible personal property and taxable services. Tex. Tax Code § 151.010.
6. Debt collection services are included among the taxable services listed in Texas Tax Code § 151.0101(a)(8).
7. Debt collection services include activities “to collect or adjust a delinquent debt, to collect or adjust a claim, or to repossess property subject to a claim.” Tex. Tax Code § 151.0036(a).
8. A debt collection service includes “any activity performed in furtherance of the satisfaction or compromise of a debt or claim.” 34 Tex. Admin. Code § 3.354(a)(4).
9. Where the contested case issue in dispute involves the taxability of a service, Staff must demonstrate, prima facie, that the service is taxable. See, e.g., Comptroller’s Decision No. 111,530 (2015).
10. If that burden is satisfied, Petitioner must demonstrate by a preponderance of the evidence that that tax was paid, accrued, or assessed on a service in error. See 34 Tex. Admin. Code § 1.26(e).
11. The law requires retailers to keep records that reflect the total gross receipts from sales and the total purchases of taxable items. Tex. Tax Code § 151.025; 34 Tex. Admin. Code § 3.281(b).
12. If a taxpayer fails to keep accurate records of gross receipts, gross purchases, deductions, and exclusions, the Comptroller may take actions that include estimating the person’s tax liability based on any available information. Tex. Tax Code § 111.008(a).
13. Staff’s evidence is sufficient to establish, prima facie, that Petitioner provided a taxable service, that the estimated assessment was authorized by statute, and that the best information available was utilized.
14. It is Petitioner’s burden to show audit error by a preponderance of the evidence, or that transactions are exempt from tax by clear and convincing evidence. 34 Tex. Admin. Code § 1.26(c), (e).
Source: See PFD, p. 2 (Non-Texas Sales and/or Exempt Sales for Resale).
15. Settled Comptroller policy provides that a taxpayer cannot defeat an assessment based on the burden of proof by not providing the necessary documents. See, e.g., Comptroller’s Decision No. 107,078 (2015).
16. The long-standing law in Texas is that the party in possession of evidence peculiarly within its control has the burden of producing that evidence. See Watson v. Brazos Elec. Power Corp., Inc., 918 S.W.2d 639, 643 (Tex. App.—Waco 1996, writ denied) (failure to produce evidence within a party’s control raises the presumption that if produced it would operate against him, and every intendment will be in favor of the opposite party); Brewer v. Dowling, 862 S.W.2d 156, 159 (Tex. App.—Fort Worth 1993, writ denied); H. E. Butt Grocery Co. v. Bruner, 530 S. W. 2d 340, 343 (Tex. App.—Waco 1975, writ dism’d).
17. This presumption arises whenever the party not in possession of the evidence has introduced evidence harmful to the party who had control of the evidence. See H. E. Butt Grocery Co. v. Bruner, 862 S.W.2d at 159.
18. Under such circumstances, the failure of the [party in control of the evidence] to rebut the harmful evidence with evidence within its control raises a presumption that the unpresented evidence would also be unfavorable to the nonproducing party. See H. E. Butt Grocery Co. v. Bruner, 862 S.W.2d at 159.
19. Petitioner’s services were for services directly related to and incurred while providing taxable debt collection services and are not excluded from the tax base.
20. The ALJ does not have authority to make a determination on the validity of a rule. See Comptroller’s Decision Nos. 115,973 (2020), 110,905, 111,342, 111,343 and 111,344 (2016).
21. The Tax Code gives the Comptroller exclusive jurisdiction to determine the scope of taxable services. Tex. Tax Code § 151.0101(b).
22. Late penalties are automatically imposed on delinquent taxes. Tex. Tax Code § 111.061.
23. The Comptroller has the discretionary authority to waive late penalties if a taxpayer has exercised reasonable diligence to comply with tax laws. Tex. Tax Code § 111.103.
24. A taxpayer must establish reasonable diligence by a preponderance of evidence. See Comptroller’s Decision No. 102,695 (2010).
25. In making the reasonable diligence determination, the Comptroller considers the following factors: the taxpayer’s audit history, the tax issues involved, whether a change in Comptroller policy occurred during the audit period, whether changes in the law took effect during the audit period, the size and sophistication of the taxpayer, whether tax was collected but not remitted, whether returns were timely filed, the completeness of the taxpayer’s records, the taxpayer’s efforts to comply with the recordkeeping requirements of this state, delinquencies in other taxes, reliance on advice provided by the Comptroller’s office, and the error rate in the current audit. 34 Tex. Admin. Code § 3.5(b)(3), (d).
26. To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that penalty waiver is warranted. See 34 Tex. Admin. Code § 1.26(e); see also Comptroller’s Decision No. 102,268 (2014).
27. Petitioner did not establish reasonable diligence.
28. Delinquent taxes draw interest beginning 60 days after the date due. Tex. Tax Code § 111.060(c).
29. The Comptroller has discretionary authority to waive interest assessments and may exercise his discretion if interest was imposed as a result of undue delay caused by Comptroller personnel, reliance on advice provided by the Comptroller’s office, or natural disaster. Tex. Tax Code § 111.103; 34 Tex. Admin. Code § 3.5(e).
30. To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that interest waiver is warranted. See 34 Tex. Admin. Code § 1.26(e); see also Comptroller’s Decision Nos. 102,268 and 109,069 (2014).
31. Petitioner failed to establish that an interest waiver is warranted.
32. The estimated assessment should be upheld in its entirety.
SIGNED October 29, 2021.
KATHY PICKUP
ADMINISTRATIVE LAW JUDGE
STATE OFFICE OF ADMINISTRATIVE HEARINGS
ENDNOTES:
[1] The date calculated is 25 days after this decision is signed. See APA, Tex. Gov’t Code § 2001.146(a); S.B. 1095, Acts 2017, 85th Leg. For additional guidance, refer to the Frequently Asked Questions Related to Motions for Rehearing, found here: http://comptroller.texas.gov/taxes/publications/96-1789.pdf
[2] See Tex. Gov’t Code § 2003.101(e) and (f).
[3] See Tex. Tax Code § 111.0081(c).
[4] Petitioner’s exhibits have been identified numerically for purposes of consistency.