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INDEXED BY TAX TYPE ONLY
SOAH DOCKET NO. 304-22-1283.26
CPA HEARING NO. 115,242
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: October 1, 2013 THROUGH November 30, 2016
Sales And Use Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
PERRY HEITMAN
Representing Respondent
**************
Representing Petitioner
COMPTROLLER’S DECISION
This decision is considered final on June 17, 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 written.
The result from this Decision is Attachment A. The ALJ’s letter to the Comptroller is Attachment B. The PFD as written is Attachment C. Attachments A, B, and C are incorporated by reference.
Attachment A reflects a liability.[2]
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 23rd day of May 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 written
ATTACHMENT C
SOAH DOCKET NO. 304-22-1283.26
TCPA DOCKET NO. 115,242
**************
Taxpayer No. **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
PROPOSAL FOR DECISION
************** (Petitioner) was audited for sales and use tax compliance by the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller). Petitioner was assessed tax, a 10% late penalty, and interest. It requested redetermination, challenging the assessment, asserting detrimental reliance, and seeking insolvency relief. Staff disagrees with Petitioner’s assertions and contends it did not provide the documentation required for insolvency relief. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends affirming the assessment, except as agreed by Staff. In addition, the ALJ finds that Petitioner failed to submit the required documentation with its insolvency settlement request.
I. PROCEDURAL HISTORY, NOTICE & JURISDICTION
Staff referred the contested case to the State Office of Administrative Hearings (SOAH) and, on January 12, 2022, issued Petitioner a Notice of Hearing by Written Submission. On January 20, 2022, ALJ Kathy Pickup issued Order No. 1, which set the written submission hearing. Petitioner was represented by **************, Petitioner’s president. Perry S. Heitman represented Staff. The record closed April 11, 2022.
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 here.
II. REASONS FOR DECISION
A. Evidence Presented
Petitioner did not offer any exhibits for the hearing. Staff provided the pleadings the parties exchanged prior to referring the matter to SOAH and offered the following exhibits:
1. 60-Day Letter;
2. Texas Notification of Audit Results;
3. Penalty and Interest Waiver Worksheet;
4. Audit Report;
5. Audit Plan;
6. Insolvency Settlement Proposal and Supporting Documents; and
7. Certified Insolvency Settlement Report.
Staff’s exhibits were admitted into the record without objection.
B. Agreed Adjustments
Staff did not agree to make any adjustments to the audit. However, Staff agreed to waive interest for the period from October 1, 2018, through December 31, 2021.
C. Facts Established and Issues Presented
During the period at issue, October 1, 2013, through November 30, 2016, Petitioner operated a business-to-business advertising agency in CITY, Texas. In January 2017, Staff initiated a sales and use tax compliance audit of Petitioner’s business. Petitioner provided the auditor with tax work papers, federal income tax returns, bank statements, chart of accounts, sales invoices, general ledgers, financial statements, resale and exemption certificates, sales journals, purchase invoices, and accounts payable journals. The auditor scheduled disallowed deductions in Exam 300, which are the transactions that Petitioner disputes. The auditor scheduled taxable purchases of capital assets and expenses in Exam 500 and credits for tax paid in error on purchases in Exam 600.
Petitioner’s invoices were reviewed, which named or described the event and its location. Out-of-state events were deemed not taxable, but if the event was held in Texas, the auditor scheduled it as taxable. Petitioner did not contest the auditor’s findings, but contests some or all of the transactions scheduled in Exam 300 on the basis that it was advised during a previous audit that it did not have to charge sales tax on sales to customers located outside of Texas, regardless of the location of the event. Petitioner contends that it relied on this information to its detriment and did not charge sales tax on booths and exhibits related to events held in Texas if the customer was located outside of Texas. Petitioner also contends that collection of the total liability would make it insolvent. Staff argues that the disputed transactions involve sales of tangible personal property in Texas, and that Petitioner did not provide documentation to prove its detrimental reliance claim or that it is eligible for insolvency relief.
On July 11, 2017, Staff issued a Texas Notification of Audit Results to Petitioner. The assessment included tax, 10% penalty, and interest. Petitioner timely requested redetermination. Staff did not agree to any adjustments to the audit but agreed to waive interest for the period from October 1, 2018, through December 31, 2021. Staff then referred the matter to SOAH.
D. ALJ’s Analysis and Recommendation
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. All gross receipts of a seller are presumed to have been subject to sales tax unless a properly completed resale certificate is accepted. Id. § 151.054(a). Tangible personal property that is shipped or brought into this state by a purchaser is presumed, in the absence of evidence to the contrary, to have been purchased for storage, use, or consumption in this state. Id. 151.105(a).
A tax is imposed on the storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state. Id. § 151.101(a). The person storing, using, or consuming a taxable item in this state is liable for use tax until the person pays the tax to the state or a retailer engaged in business in this state or other person authorized by the comptroller to collect the tax and receives from the retailer or other person a purchaser’s receipt. Id. § 151.102(a), (b).
An audit based on a taxpayer’s substantially complete books and records and conducted pursuant to established audit methodologies is entitled to a presumption of correctness. See, e.g., Comptroller’s Decision No. 110,187 (2017). Once Staff’s initial burden is met, Petitioner bears the burden to establish audit error by a preponderance of the evidence or that an exemption applies by clear and convincing evidence. 34 Tex. Admin. Code § 1.26(c), (e). Sellers of taxable items and purchasers who store, use, or consume taxable items in this state shall keep books, papers, and records in the form the Comptroller requires. Tex. Tax Code § 151.025(a); 34 Tex. Admin. Code § 3.281(a)(1). For example, records must reflect total purchases of taxable items and must substantiate any claimed deductions or exclusions authorized by law. Tex. Tax Code § 151.025(a)(3); 34 Tex. Admin. Code § 3.281(b). The Comptroller has consistently treated missing invoices as 100% taxable. Tex. Tax Code §§ 151.025, .054; Comptroller’s Decision No. 113,163 (2018). Pursuant to Texas Tax Code § 111.0041, the taxpayer must produce contemporaneous records and supporting documentation appropriate to the tax or fee for the transactions in question to substantiate and enable verification of the taxpayer's claim related to the amount of tax, penalty, or interest to be assessed, collected, or refunded. 34 Tex. Admin. Code § 1.26(a).
The audit is based on Petitioner’s source records and established audit methodologies and is entitled to a presumption of correctness. Because Petitioner has not provided any documentation to support its contentions, it has not met its burden to establish audit error. Therefore, the ALJ recommends that Petitioner’s contentions be denied, and the audit upheld.
1. Detrimental Reliance
The Comptroller has long held that if the Comptroller’s office “by certain communications or conduct directed to a given taxpayer has induced that taxpayer to act in a particular manner, the Comptroller should not later adopt a contrary position or course of conduct that will cause the taxpayer loss, harm, or detriment as a result of its reliance on the earlier Comptroller action.” See, e.g., Comptroller’s Decision No. 27,506 (1991). Pursuant to the Comptroller’s administrative rule, he will consider giving relief to a taxpayer who was harmed by following erroneous advice given by an agency employee, if the taxpayer provided complete and accurate information to the employee. 34 Tex. Admin. Code § 3.10(c). The taxpayer’s evidence must demonstrate: (1) the substance of the information or advice and that it was communicated directly to the taxpayer in a private letter ruling; (2) that the taxpayer followed the information or advice; (3) that the taxpayer gave sufficient information to have resulted in correct advice and did not misrepresent information, or withhold or conceal information that would affect the advice; and (4) the taxpayer has suffered, or will suffer, harm based on the erroneous advice unless the Comptroller provides the requested relief. Id. § 3.10(c)(1).
Petitioner contends it was advised during a previous audit that it was not required to charge sales tax on sales to customers located outside of Texas, regardless of the location of the event. Petitioner contends that it relied on this information to its detriment and did not charge sales tax on booths and exhibits related to events held in Texas if the customer was located outside of Texas, which is the majority of the audit liability. Oral communication alone is insufficient to support tax relief based on a claim of detrimental reliance. 34 Tex. Admin. Code § 3.10(c)(1). The ALJ concludes that the substance of the advice was not communicated in a private letter ruling and there is no evidence of the information provided by Petitioner to the Comptroller. Therefore, the ALJ recommends denying detrimental reliance relief.
2. Insolvency
At the time of Petitioner’s request for an insolvency settlement, 34 Tex. Admin. Rule § 1.2 applied to a Petitioner’s request to settle an assessment of tax, penalty or interest based on insolvency.[4] A taxpayer is insolvent when liabilities exceed assets or when the taxpayer is unable to pay its debts as they become due. 34 Tex. Admin. Code § 1.2(a)(1). Before the Comptroller can exercise his discretionary authority, a taxpayer must demonstrate that he meets the statutory requirements for insolvency relief. Id. § 1.40(2)(B)[5]; see also Comptroller’s Decision No. 27,821 (1992).
Rule 1.2(e) required that an insolvency settlement request include copies of the following records: (1) federal income tax returns for the three years immediately prior to the date of the insolvency settlement request; (2) financial statements for the three years immediately prior to the date of the insolvency settlement request and year-to-date financial statements for the period following the taxpayer’s last federal income tax return filing; (3) bank statements for the six months immediately prior to the date of the insolvency settlement request, and (4) documentation of assets (including inventory of all property owned, wherever located), liabilities, ongoing financial obligations of the taxpayer, and proof of any claimed insolvency, liquidation, or business cessation.
Petitioner provided federal income tax returns, financial statements, bank statements, an accounts payable aging statement as evidence of outstanding liabilities, and a spreadsheet file indicating the estimated value of assets. However, Petitioner did not provide year-to-date financial statements or a properly completed Insolvency Settlement Request Form. The ALJ finds Petitioner’s request for insolvency settlement did not include all of the required documentation at the time the request was submitted and therefore did not comply with the requirements of 34 Texas Administrative Code § 1.2. In light of this deficiency, the ALJ concludes Petitioner failed to demonstrate, by a preponderance of the evidence, that it met the definition of insolvent and is eligible for insolvency settlement.
III. FINDINGS OF FACT
1. During the period at issue, October 1, 2013, through November 30, 2016, Petitioner operated a business-to-business advertising agency in CITY, Texas.
2. In January 2017, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) initiated a sales and use tax compliance audit of Petitioner’s business.
3. Petitioner provided the auditor with tax work papers, federal income tax returns, bank statements, chart of accounts, sales invoices, general ledgers, financial statements, resale/exemption certificates, sales journals, purchase invoices, and accounts payable journals.
4. The auditor scheduled disallowed deductions in Exam 300, which are the transactions that Petitioner disputes. The auditor scheduled taxable purchases of capital assets and expenses in Exam 500 and credits for tax paid in error on purchases in Exam 600.
5. The auditor reviewed Petitioner’s invoices that named or described the event and its location. Out-of-state events were deemed not taxable, but if the event was held in Texas, the auditor scheduled it as taxable.
6. On July 11, 2017, Staff issued a Texas Notification of Exam Results to Petitioner. The assessment included tax, 10% penalty, and interest.
7. Petitioner timely requested redetermination.
8. Staff did not agree to any adjustments to the audit but agreed to waive interest for the period from October 1, 2018, through December 31, 2021.
9. Staff referred the above-referenced case to the State Office of Administrative Hearings (SOAH) and on January 12, 2022, issued Petitioner a Notice of Hearing by Written Submission. The notice 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 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 January 20, 2022, the Administrative Law Judge issued Order No. 1, which set the written submission hearing.
11. The record closed on April 11, 2022.
IV. CONCLUSIONS OF LAW
1. The Comptroller has jurisdiction over these matters. See Tex. Tax Code ch. 111.
2. SOAH has jurisdiction over matters related to the hearing, including the authority to issue a proposal for decision with findings of fact and conclusions of law. See Tex. Gov’t Code ch. 2003.
3. Staff provided a proper and timely notice of hearing. See Tex. Gov't Code ch. 2001; Tex. 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. All gross receipts of a seller are presumed to have been subject to sales tax unless a properly completed resale certificate is accepted. Tex. Tax Code § 151.054(a).
7. Tangible personal property that is shipped or brought into this state by a purchaser is presumed, in the absence of evidence to the contrary, to have been purchased for storage, use, or consumption in this state. Tex. Tax Code § 151.105(a).
8. A tax is imposed on the storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state. Tex. Tax Code § 151.101(a).
9. The person storing, using, or consuming a taxable item in this state is liable for use tax until the person pays the tax to the state or a retailer engaged in business in this state or other person authorized by the comptroller to collect the tax and receives from the retailer or other person a purchaser’s receipt. Tex. Tax Code § 151.102(a), (b).
10. An audit based on a taxpayer’s substantially complete books and records and conducted pursuant to established audit methodologies is entitled to a presumption of correctness. See, e.g., Comptroller’s Decision No. 110,187 (2017).
11. Once Staff’s initial burden is met, Petitioner bears the burden to establish audit error by a preponderance of the evidence or that an exemption applies by clear and convincing evidence. 34 Tex. Admin. Code § 1.26(c), (e).
12. Sellers of taxable items and purchasers who store, use, or consume taxable items in this state shall keep books, papers, and records in the form the Comptroller requires. Tex. Tax Code § 151.025(a); 34 Tex. Admin. Code § 3.281(a)(1).
13. Records must reflect total purchases of taxable items and must substantiate any claimed deductions or exclusions authorized by law. Tex. Tax Code § 151.025(a)(3); 34 Tex. Admin. Code § 3.281(b).
14. Pursuant to Texas Tax Code § 111.0041, the taxpayer must produce contemporaneous records and supporting documentation appropriate to the tax or fee for the transactions in question to substantiate and enable verification of the taxpayer's claim related to the amount of tax, penalty, or interest to be assessed, collected, or refunded. 34 Tex. Admin. Code § 1.26(a).
15. The audit is based on Petitioner’s source records and established audit methodologies and is entitled to a presumption of correctness.
16. Because Petitioner has not provided any documentation to support its contentions, it has not met its burden to establish audit error.
17. The Comptroller has long held that if the Comptroller’s office “by certain communications or conduct directed to a given taxpayer has induced that taxpayer to act in a particular manner, the Comptroller should not later adopt a contrary position or course of conduct that will cause the taxpayer loss, harm, or detriment as a result of its reliance on the earlier Comptroller action.” See, e.g., Comptroller’s Decision No. 27,506 (1991).
18. Pursuant to the Comptroller’s administrative rule, he will consider giving relief to a taxpayer who was harmed by following erroneous advice given by an agency employee, if the taxpayer provided complete and accurate information to the employee. 34 Tex. Admin. Code § 3.10(c).
19. The taxpayer’s evidence must demonstrate: (1) the substance of the information or advice and that it was communicated directly to the taxpayer in a private letter ruling; (2) that the taxpayer followed the information or advice; (3) that the taxpayer gave sufficient information to have resulted in correct advice and did not misrepresent information, or withhold or conceal information that would affect the advice; and (4) the taxpayer has suffered, or will suffer, harm based on the erroneous advice unless the Comptroller provides the requested relief. 34 Tex. Admin. Code § 3.10(c)(1).
20. Petitioner did not establish a basis for detrimental reliance relief and the contention should be denied.
21. A taxpayer is insolvent when liabilities exceed assets or when the taxpayer is unable to pay its debts as they become due. 34 Tex. Admin. Code § 1.2(a)(1). Before the Comptroller can exercise his discretionary authority, a taxpayer must demonstrate that he meets the statutory requirements for insolvency relief. Id. § 1.40(2)(B); see also Comptroller’s Decision No. 27,821 (1992).
22. An insolvency settlement request include copies of the following records: (1) federal income tax returns for the three years immediately prior to the date of the insolvency settlement request; (2) financial statements for the three years immediately prior to the date of the insolvency settlement request and year-to-date financial statements for the period following the taxpayer’s last federal income tax return filing; (3) bank statements for the six months immediately prior to the date of the insolvency settlement request, and (4) documentation of assets (including inventory of all property owned, wherever located), liabilities, ongoing financial obligations of the taxpayer, and proof of any claimed insolvency, liquidation, or business cessation. 34 Tex. Admin. Code § 1.2(e).
23. Petitioner’s request for insolvency settlement did not include all of the required documentation and therefore did not comply with the requirements of 34 Texas Administrative Code § 1.2(e).
24. Petitioner failed to demonstrate, by a preponderance of the evidence, that it met the definition of insolvent and is eligible for insolvency settlement.
25. The audit assessment should be upheld, except as agreed by Staff.
SIGNED April 12, 2022.
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] At present, insufficient information is available to determine which items and amounts are disputed or undisputed for purposes of Tex. Tax Code, Ch. 112. In the absence of this information, the Comptroller will assume the entire amount of the assessment, as it appears in Comptroller’s Decision Attachment A, the Notification of Hearing Results, remains in dispute. If Petitioner intends to sue the comptroller to dispute an amount of tax, penalty, or interest assessed in a deficiency redetermination or jeopardy determination under Tex. Tax Code, Ch. 111, Petitioner is required to file a motion for rehearing that “states the specific grounds of error and the disputed amounts associated with the grounds of error.” Tex. Tax Code § 112.201(a)(3). Petitioner should refer to Tex. Tax Code, Ch. 112, for further guidance regarding a suit after redetermination.
[3] See Tex. Tax Code § 111.0081(c).
[4] The Comptroller amended Rule 1.2 effective January 1, 2019, and renumbered it Rule 1.30.
[5] The Comptroller amended Rule 1.40 effective January 1, 2019, and renumbered it Rule 1.26.