|
|
SOAH DOCKET NO. 304-22-0140.26
CPA HEARING NO. 116,947
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: April 1, 2015 THROUGH March 31, 2018
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 27, 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) Trevor Moore 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.[3]
The total sum of the tax, penalty, and interest is due and payable 20 days after a comptroller’s decision becomes final.[4] If such sum is not timely paid, an additional penalty of 10 percent of the taxes due will accrue.
SIGNED on this 31st 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 changed
ATTACHMENT C
SOAH DOCKET NO. 304-22-0140.26
TCPA DOCKET NO. 116,947
**************
Taxpayer No. **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
PROPOSAL FOR DECISION
The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) made an assessment against ************** (Petitioner) following a sales and use tax compliance audit. Petitioner asked for redetermination, contending its sales of security services performed by off‑duty police officers were not taxable, and that its purchases of uniforms were exempt from sales tax. Staff argues the security services at issue are taxable because Petitioner is a licensed security contractor and it provided the services. Staff also maintains the purchases of uniforms were not exempt. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends that the audit should be affirmed.
I. PROCEDURAL HISTORY, NOTICE, AND JURISDICTION
On September 14, 2021, Staff referred the case to the State Office of Administrative Hearings (SOAH), and a hearing was set on the same date. Staff issued a Notice of Hearing to Petitioner, and, on October 8, 2021, Administrative Law Judge (ALJ) Trevor Moore issued Order No. 1, setting out pre-hearing requirements. On April 20, 2022, the ALJ convened a hearing on the merits. Petitioner was represented by **************, COMPANY A. Staff was represented by Perry Heitman. 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 auditor Joshua Blunt and offered the following exhibits:
1. Sixty-Day Letter;
2. Texas Notification of Audit Results;
3. Penalty and Interest Waiver Worksheet;
4. Audit Report;
5. Audit Plan; and
6. Texas Notification of Exam Results, Petitioner’s Prior Audit.
Petitioner presented the testimony of INDIVIDUAL and offered the following exhibits:
1. Audit Documentation (September 1, 2011, through March 31, 2015);
2. 37 Texas Administrative Code § 35.14; and
3. Bond Documentation.
Staff’s exhibits and Petitioner’s Exhibits 1 and 2 were admitted without objection. Staff objected to Petitioner’s Exhibit 3, arguing that it was not relevant as it was offered in support of a request for penalty and interest waiver, an issue not previously raised by Petitioner and not included in the Notice of Hearing. The objection was sustained, and Petitioner’s Exhibit 3 was not admitted.
A. Agreed Adjustments
Staff did not agree to make adjustments to the audit.
B. Facts Demonstrated by the Evidence and Issues Presented
Petitioner is licensed as a security services contractor and, during the period at issue, was the exclusive security provider for COMPANY B in CITY, Texas. In April 2018, Staff initiated a sales and use tax compliance audit of Petitioner for the period April 1, 2015, through March 31, 2018. Petitioner had been audited for the prior period, September 1, 2011, through March 31, 2015.
Petitioner provided its business records for the audit and the auditor performed a detail audit of both purchases and expenses. During the audit period, Petitioner engaged both licensed security officers and off-duty police officers in providing its services. The auditor determined Petitioner erred when it failed to collect and remit sales tax on its charges for its security services performed by off-duty police officers. See Exam 210. The auditor also found that Petitioner did not pay tax on several purchases of uniforms. See Exam 500.
On April 24, 2019, Staff issued a Texas Notification of Audit Results to Petitioner. The assessment included liabilities related to tax and interest. Penalty was waived except for one late‑filed period. Petitioner requested redetermination, contending charges for its services performed by off-duty police officers were not taxable. In the alternative, Petitioner maintained that, if the security services were taxable, the assessments should be deleted due to Petitioner’s reliance on Comptroller advice to the contrary. Petitioner also argued purchases of uniforms for its security personnel were exempt as purchased for resale or as manufacturing equipment.
C. ALJ’s Analysis and Recommendation
When a contested issue involves the propriety of the imposition of a tax on the person or object of the tax, any doubts are resolved against the taxing entity and in favor of the taxpayer. See, e.g., Bullock v. Ramada Texas, Inc., 586 S.W.2d 651, 653 (Tex. App.—Austin, 1979, writ ref’d n.r.e.). Thus, the burden of establishing, prima facie, a basis for imposition of tax is upon the taxing entity. See Comptroller’s Decision Nos. 30,461 (1994) and 102,386 (2014).
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. When tax is imposed on tangible personal property, the taxing entity’s prima facie burden of proof is easily met because, unless an exemption applies, all sales of tangible personal property in this state are taxable. Id. However, the Legislature has elected to tax only those services that are specifically enumerated in Texas Tax Code § 151.0101. Thus, the Comptroller has long held that, to impose tax on a service, Staff must demonstrate not only that a service was sold but that the service is taxable. See, e.g., Comptroller’s Decision No. 102,386. If Staff demonstrates, prima facie, that a service is taxable, it becomes the taxpayer’s burden to prove, by a preponderance of the evidence, that Staff is incorrect (e.g., that the disputed sales were not security services), or by clear and convincing evidence that the taxable service was exempt from taxation. 34 Tex. Admin. Code § 1.26(c), (e).
Security services are taxable. Tex. Tax Code § 151.0101(a)(14). For taxability purposes, a “security service” is a service for which a license is required by Section 1702.101 or 1702.102 of the Texas Occupations Code (Private Security Act or Act). Id. § 151.0075. Moreover, unless a person holds a license as a security services contractor, a person may not act as an alarm systems company, armored car company, courier company, guard company, guard dog company, locksmith company, or private security consultant company. Tex. Occ. Code § 1702.102(a)(1).[5] The Act defines a “person” to include an individual, firm, association, company, partnership, corporation, nonprofit organization, institution, or similar entity. Id. § 1702.002(16). Additionally, the Act states that a guard company is anyone who contracts to provide a private watchman, guard, or street patrol service to prevent entry, larceny, vandalism, abuse, fire, or trespass on private property; prevent, observe, or detect unauthorized activity on private property; control, regulate, or direct the movement of the public, whether by vehicle or otherwise, only to the extent and for the time directly and specifically required to ensure the protection of property; protect an individual from bodily harm including through the use of a personal protection officer; or perform a function similar to a function listed in this section. Id. § 1702.108.
It is undisputed that Petitioner is licensed as a security services contractor and employed or otherwise contracted with individuals to undertake services that fit within the Act’s definition of guard services. Therefore, the ALJ finds that Staff met its prima facie burden, and Petitioner must demonstrate audit error by a preponderance of the evidence.
Petitioner argues that the auditor erred by scheduling charges for its services that were performed by off-duty police officers. Petitioner states it did not mark-up the charges for its services that were performed by police officers, except for payroll fees, and the officers were employed as independent contractors, not regular employees. Therefore, it reasons, the services were not taxable.
Persons excepted from the licensing requirements of the Act are not providing security services subject to the sales tax because they are not required to hold a license to provide their services. See 34 Tex. Admin. Code § 3.333(i). The Act was written to exempt police officers from its licensing requirements, stating that it does not apply to:
(1) a person who has full-time employment as a peace officer and who received compensation for private employment on an individual or an independent contractor basis as a patrolman, guard, extra job coordinator, or watchman if the officer:
(A) is employed in an employee-employer relationship or employed on an individual contractual basis:
(i) directly by the recipient of the services, or
(ii) by a company licensed under this chapter.
(B) is not in the employ of another peace officer;
(C) is not a reserve peace officer; and
(D) works as a peace officer on the average of at least 32 hours a week, is compensated by the state or a political subdivision of the state at least at the minimum wage, and is entitled to all employee benefits offered to a peace officer by the state or political subdivision;
Tex. Occ. Code § 1702.322.
Thus, the off-duty police officers at issue are not required to be licensed under the Act, and any security services provided to customers by the off-duty police officers are not taxable. See, e.g., Comptroller’s Decision No. 114,681 (2020). However, in this case, Petitioner is a licensed security service contractor, provided the security services to customers, and billed customers for the security services. The fact that Petitioner contracted with police officers to perform its security services and did not mark-up the charges is not determinative for purposes of sales tax analysis. Therefore, the ALJ finds that Petitioner failed to demonstrate that the assessment in Exam 210 is erroneous.
Petitioner argued that it served as an agent of its customers when it paid off-duty police officers, and therefore, the officers should be considered to have been providing the services to the customers. The following requirements must be met to establish that a principal-agent relationship exists: (1) one person acting for another; (2) both consenting to the arrangement; and (3) the agent [is] under the principal’s control. See, e.g., Comptroller’s Decision Nos. 110,655 (2016); 110,461 (2015); 36,187 and 36,188 (1999). The key factor is the right of the principal to control the acts of the agent. Id. Here, Petitioner offered no contracts or other evidence to support a conclusion that it was acting as an agent of its customers. The ALJ concludes Petitioner was not acting as an agent of its customers with regard to its provision of security services.
Petitioner also argued that it had relied on the auditor’s determination during the prior audit that the services it provided that were performed by off-duty police officers were not taxable, resulting in the current assessment in Exam 210. Petitioner proposes the assessments should be deleted from the audit.
Under the Comptroller’s “detrimental reliance” policy, the Comptroller 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). To support a claim of detrimental reliance, 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).
In this case, there is no question that the auditor who performed Petitioner’s audit for the September 1, 2011, through March 31, 2015, audit period considered the sales of security services provided by Petitioner using off-duty police officers and determined they were not taxable. However, Petitioner concedes that the substance of the information or advice was received solely through the audit and was not communicated directly to Petitioner in a private letter ruling, a requirement for a detrimental reliance claim. See 34 Tex. Admin. Code § 3.10(c)(1). In addition, since the early 1980s, the Comptroller 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. See Comptroller’s Decision No. 104,832 (2011). It is well settled that a taxpayer who receives the standard disclaimer cannot use the audit result to assert detrimental reliance in future audits. Id.; see also, Comptroller’s Decision Nos. 31,985 (1995), 30,108 (1994). Petitioner’s claim of detrimental reliance, and request that the assessments in Exam 210 be deleted from the audit, must be denied.
Petitioner also argued that its purchases of uniforms for use by its security officers were exempt because they were purchased for resale as an integral part of a taxable service. The ALJ disagrees. A seller of a security service may issue a resale certificate in lieu of tax to a supplier of tangible personal property only if care, custody, and control of the property will be transferred to the service provider’s client. 34 Tex. Admin. Code § 3.333(g)(1). There is no evidence to support a conclusion that the care, custody, and control over the uniforms at issue were transferred to Petitioner’s clients and, therefore, the claim of exemption must be denied.
Petitioner also argued the purchases of uniforms were exempt as used in manufacturing because its employees were required by the Department of Public Safety to wear a uniform while performing security services. See 37 Tex. Admin. Code § 35.14(a). The ALJ disagrees. Safety apparel or work clothing that is used during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale is exempt from sales tax if the manufacturing process would not be possible without the use of the apparel or clothing and the apparel or clothing is not resold to the employee. See Tex. Tax Code § 151.318(a)(9). In addition, tangible personal property used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale is exempt from sales tax if the use or consumption of the property is necessary and essential to comply with federal, state, or local laws or rules that establish requirements related to public health. See id. § 151.318(a)(10). Petitioner is not a manufacturer of tangible personal property and, therefore, the exemptions cited by Petitioner are not applicable to the purchases of uniforms. The exemption claim should be denied.
III. FINDINGS OF FACT
1. ************** (Petitioner) is licensed as a security services contractor and, during the period at issue, was the exclusive security provider for COMPANY B in CITY, Texas.
2. Petitioner provided the security services to customers, and billed customers for the security services.
3. Petitioner engaged both licensed security officers and off-duty police officers in providing its services.
4. In April 2018, the Tax Division (Staff) of the Texas Comptroller of Public Accounts initiated a sales and use tax compliance audit of Petitioner for the period April 1, 2015, through March 31, 2018.
5. Petitioner had been audited for the prior period, September 1, 2011, through March 31, 2015.
6. During the prior audit, the auditor considered the sales of security services provided by Petitioner using off-duty police officers and determined they were not taxable.
7. The substance of the information or advice regarding services provided by Petitioner was received solely through the prior audit of Petitioner and was not communicated directly to Petitioner in a private letter ruling.
8. The Texas Notification of Audit Results issued for Petitioner’s audit for the period September 1, 2011, through March 31, 2015, includes a statement that an audit result cannot be relied on as an approval of the taxpayer’s reporting system.
9. Petitioner provided its business records for the audit, and the auditor performed a detail audit of both purchases and expenses.
10. Petitioner did not collect and remit sales tax on its charges for its security services performed by off-duty police officers.
11. Petitioner did not pay tax on several purchases of uniforms provided to its security staff.
12. The care, custody, and control of the uniforms was not transferred to the Petitioner’s clients.
13. Petitioner was not a manufacturer of tangible personal property for sale.
14. On April 24, 2019, Staff issued a Texas Notification of Audit Results to Petitioner. The assessment included liabilities related to tax and interest. Penalty was waived except for one late‑filed period.
15. Petitioner requested redetermination of the audit.
16. Staff referred the contested case to the State Office of Administrative Hearings (SOAH) and issued Petitioner a Notice of Hearing. The notice contained a statement of the nature of the hearing; the date, time, and location 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.
17. On October 8, 2021, Administrative Law Judge (ALJ) Trevor Moore issued Order No. 1, setting out pre-hearing requirements.
18. On April 20, 2022, the ALJ convened a hearing on the merits.
19. The contested case record closed at the conclusion of the hearing.
IV. CONCLUSIONS OF LAW
1. The Comptroller has jurisdiction over this matter. See Tex. 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. See Tex. Gov’t Code ch. 2003.
3. Staff provided proper and timely notice of the hearing. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009.
4. When a contested issue involves the propriety of the imposition of a tax on the person or object of the tax, any doubts are to be resolved against the taxing entity and in favor of the taxpayer. See, e.g., Bullock v. Ramada Texas, Inc., 586 S.W.2d 651, 653 (Tex. App.—Austin, 1979 writ ref’d n.r.e.).
5. The burden of establishing, prima facie, a basis for imposition of tax is upon the taxing entity. See Comptroller’s Decision Nos. 30,461 (1994) and 102,386 (2014).
6. Texas imposes a tax on each sale of a taxable item in this state. Tex. Tax Code § 151.051.
7. The term “taxable item” includes tangible personal property and taxable services. Tex. Tax Code § 151.010.
8. To impose tax on a service, Staff must demonstrate not only that a service was sold but that the service is taxable. See, e.g., Comptroller’s Decision No. 102,386 (2014).
9. If Staff demonstrates, prima facie, that a service is taxable, it becomes the taxpayer’s burden to prove, by a preponderance of the evidence, that Staff is incorrect (e.g., that the disputed sales were not amusement services), or by clear and convincing evidence that the taxable service was exempt from taxation. 34 Tex. Admin. Code § 1.26(c), (e).
10. Security services are taxable. Tex. Tax Code § 151.0101(a)(14).
11. For taxability purposes, a “security service” is a service for which a license is required by Section 1702.101 or 1702.102 of the Texas Occupations Code. Tex. Tax Code § 151.0075.
12. Under Chapter 1702 of the Texas Occupations Code, known as the Private Security Act (the Act), unless a person holds a license as a security services contractor, a person may not act as an alarm systems company, armored car company, courier company, guard company, guard dog company, locksmith company, or private security consultant company. Tex. Occ. Code § 1702.102(a)(1).
13. The Act defines a “person” to include an individual, firm, association, company, partnership, corporation, nonprofit organization, institution, or similar entity. Tex. Occ. Code § 1702.002(16).
14. A guard company is anyone who contracts to provide a private watchman, guard, or street patrol service to: prevent entry, larceny, vandalism, abuse, fire, or trespass on private property; prevent, observe, or detect unauthorized activity on private property; control, regulate, or direct the movement of the public, whether by vehicle or otherwise, only to the extent and for the time directly and specifically required to ensure the protection of property; protect an individual from bodily harm including through the use of a personal protection officer; or perform a function similar to a function listed in this section. Tex. Occ. Code § 1702.1081702.018.
15. Staff met its prima facie burden and demonstrated that Petitioner provided taxable security services in the audit period.
16. The Act provides that it does not apply to a person who has full-time employment as a peace officer and who received compensation for private employment on an individual or an independent contractor basis as a patrolman, guard, extra job coordinator, or watchman if the officer: is employed in an employee-employer relationship or employed on an individual contractual basis directly by the recipient of the services, or by a company licensed under this chapter. Tex. Occ. Code § 1702.322.
17. Persons excepted from the licensing requirements of the Act are not providing security services subject to the sales tax because they are not required to hold a license to provide their services. See 34 Tex. Admin. Code § 3.333(i).
18. Off-duty police officers are not required to be licensed under the Act, and any security services provided to customers by the off-duty police officers are not taxable. See, e.g., Comptroller’s Decision No. 114,681 (2020).
19. The following requirements must be met to establish that a principal-agent relationship exists: (1) one person acting for another; (2) both consenting to the arrangement; and (3) the agent [is] under the principal’s control. See, e.g., Comptroller’s Decision Nos. 110,655 (2016); 110,461 (2015); 36,187 and 36,188 (1999).
20. Petitioner was not acting as an agent of its customers with regard to its provision of security services.
21. Petitioner failed to demonstrate by a preponderance of evidence that the security services it provided that were performed by off-duty police officers were not taxable.
22. Under the Comptroller’s “detrimental reliance” policy, the Comptroller 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).
23. To support a claim of detrimental reliance, 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).
24. A taxpayer who receives the standard disclaimer included in the Texas Notification of Audit Results cannot use the audit result to assert detrimental reliance in future audits. Id.; see alsoSee, e.g., Comptroller’s Decision Nos. 31,985 (1995), 30,108 (1994).
25. Petitioner’s claim of detrimental reliance, and request that the assessments in Exam 210 be deleted from the audit, must be denied.
26. A seller of a security service may issue a resale certificate in lieu of tax to a supplier of tangible personal property only if care, custody, and control of the property will be transferred to the service provider’s client. 34 Tex. Admin. Code § 3.333(g)(1).
27. Safety apparel or work clothing that is used during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale is exempt from sales tax if the manufacturing process would not be possible without the use of the apparel or clothing and the apparel or clothing is not resold to the employee. Tex. Tax Code § 151.318(a)(9).
28. Tangible personal property used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale is exempt from sales tax if the use or consumption of the property is necessary and essential to comply with federal, state, or local laws or rules that establish requirements related to public health. Tex. Tax Code § 151.318(a)(10).
29. Petitioner’s exemption claims should be denied.
30. Petitioner failed to demonstrate that the audit was erroneous.
31. The audit assessment should be affirmed.
SIGNED May 2, 2022.
TREVOR MOORE
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] 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.
[4] See Tex. Tax Code § 111.0081(c).
[5] As of September 1, 2019, private security consultants and guard dog companies are no longer licensed under the Act and their services are not considered a taxable security service. See Acts 2019, 86th Leg., R.S., Ch. 595 (S.B. 616), Sec. 5.028, eff. September 1, 2019.