SOAH DOCKET NO. 304-22-2729.26
CPA HEARING NO. 117,674

RE:  **************
TAXPAYER NO:   **************
AUDIT OFFICE:   **************
AUDIT PERIOD:  September 1, 2014 THROUGH March 31, 2017

Sales And Use Tax/RFD

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

GLENN HEGAR
Texas Comptroller of Public Accounts

DANIEL NEUHOFF
Representing Respondent

**************
Representing Claimant

 

COMPTROLLER’S DECISION

This decision is considered final on November 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) 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 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 zero amount due.

SIGNED on this 31st day of October 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. 304-22-2729
TCPA HEARING NO. 117,674

**************
Taxpayer No. **************

v.

TEXAS COMPTROLLER OF PUBLIC ACCOUNTS

BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS

 

Proposal for Decision

************** (Claimant) requested a refund of sales and use tax, and the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) granted the refund in part. Claimant requested a refund hearing, contending the request for a refund of sales tax paid on chemicals purchased for use in oil field drilling operations was improperly denied. Staff argues the evidence in the record is insufficient to support a refund of the tax that remains at issue. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends affirming the partial refund denial.

I.  PROCEDURAL HISTORY, NOTICE, AND JURISDICTION

Staff referred the contested case to the State Office of Administrative Hearings (SOAH) and, on May 17, 2022, issued a Notice of Hearing by Written Submission to Claimant. On May 26, 2022, ALJ Trevor Moore issued Order No. 1, which set the written submission hearing. ************** of COMPANY A represented Claimant. Daniel Neuhoff represented Staff. The record closed on August 1, 2022.

There are no additional issues of notice or jurisdiction in this proceeding. Those matters are set out in the Findings of Fact and Conclusions of Law without further discussion.

II.  REASONS FOR DECISION

A.  Evidence

Staff submitted the pleadings the parties exchanged prior to referring the case to SOAH and offered the following exhibits for admission as evidence:

1. 60-Day Letter;

2. Refund Audit;

3. Refund Audit Plan; and

4. Refund Claim.

Claimant submitted the following exhibits, attached to its pleadings:

1. Email from Claimant’s Employee Regarding Corrosion Inhibitor Coding;

2. Summary of Purchases;

3. Sample Invoices; and

4. Email from Vendor’s Employee Regarding Chemical Solubility.

The exhibits are admitted into the record without objection.

B.  Agreements

Staff did not agree to additional refunds or credits.

C.  Facts Established by the Evidence

During the refund period at issue, Claimant owned and operated an independent oil and gas acquisition, development, operator, and production company located in CITY, Texas. In August 2018, Claimant requested a refund of sales and use tax for the period September 1, 2014, through March 31, 2017. The claim included tax paid on purchases of manufacturing equipment and repair of that equipment, nontaxable services, and chemicals. The claim was granted in part. Claimant subsequently requested a refund hearing, contending the refund was improperly denied for its purchases of chemicals. Claimant cited three distinct bases for its contention.

The chemicals in question are described by Claimant as “corrosion inhibitor, paraffin dispersant, and other chemicals used to treat the oil.” Claimant argues that the chemicals at issue were injected at the well head and mixed with the oil in the hole to assist in the flowing of the crude oil to the surface. Claimant contends the chemicals became a part of the oil and, therefore, were exempt under Texas Tax Code § 151.318(a)(1) as tangible personal property that became a component part of the oil. Claimant also cites the exemption in Texas Tax Code § 151.318(a)(6), contending the chemicals at issue were used or consumed during the actual manufacturing of the oil and their use was necessary to prevent the decline, failure, lapse, or deterioration of other exempt manufacturing equipment. Finally, Claimant argues the chemicals were incorporated into the oil and, therefore, were exempt purchases for resale, citing 34 Texas Administrative Code § 3.324(h)(1). Staff maintains Claimant’s evidence is insufficient to support its exemption claims.

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. In this case, taxable tangible personal property, chemicals, are at issue.

If the Comptroller finds that an amount of tax, penalty, or interest has been unlawfully or erroneously collected, the Comptroller shall credit or refund the amount. Tex. Tax Code § 111.104(a). When a taxpayer requests a refund, it must establish by a preponderance of evidence that taxes were erroneously collected or paid. See, e.g., Comptroller’s Decision No. 109,787 (2015); 34 Tex. Admin. Code § 1.26(e). If a taxpayer relies on an exemption to establish the error, as in this case, then it must provide evidence that is clear and convincing. 34 Tex. Admin. Code § 1.26(c); Comptroller’s Decision No. 100,477 (2012). A taxpayer is generally required to support its contentions by source records and summary schedules, and assertions in pleadings are insufficient to meet the burden of proof. See, e.g., Comptroller’s Decision No. 105,892 (2012).

Claimant does not dispute the taxability of the chemicals at issue, but contends the chemicals are exempt from tax. In support of its exemption claims, Claimant provided a summary of the purchases at issue as well as sample invoices for the purchases. These documents are not in disagreement, as Staff does not dispute that the purchases of the chemicals were made or the fact that sales tax was paid. The inquiry turns to the facts regarding the use and purpose of the chemicals. Regarding that question, Claimant provided two email communications, one from an employee of Claimant and one from an employee of the vendor of the chemicals at issue.

The email from INDIVIDUAL A of Claimant identifies invoice code “505” as “Corrosion Inhibitor, Paraffin Dispersant, and Other Chemicals Used Tto Treat Oil” and code “506” as “Chemical Used for Treating Flowlines from Well to Battery and All Surface Equipment at Facilities.” The email from INDIVIDUAL B of vendor COMPANY B includes a document titled “Product Prefix Definitions” and identifies chemicals as oil or water soluble.

1.  34 Texas Administrative Code § 3.324(h)(1)

Claimant contends the chemicals it purchased from COMPANY B are oil soluble and remain in the oil after injection, and therefore were exempt as purchased for resale, citing 34 Texas Administrative Code § 3.324(h)(1). Under that section, the injection of maintenance-type chemicals such as corrosion inhibitors, bactericides, etc., into the wellbore is considered a taxable service. 34Tex. Admin. Code § 3.324 (h)(1). However, since certain chemicals are oil soluble and remain in the product flow after injection, the well operator may purchase those chemicals separately from the service provider and issue a resale certificate in lieu of tax on the charge for the chemicals. Id.

Though Claimant did not issue a resale certificate for the chemicals at issue, the failure of the purchaser to issue a certificate at the time of purchase has never been considered a bar that would prevent the purchaser from showing that the purchase was, in fact, purchased for resale. See, e.g., Comptroller’s Decision No. 48,030 (2009). However, claiming the exemption requires sufficient evidence of the facts surrounding the actual resale of the items purchased.

In this case, the two email statements describing the chemicals at issue are insufficient to establish, clearly and convincingly, that the chemicals were used in such a manner that they became an ingredient or component part of the crude oil that Claimant sold. The ALJ concludes the contention must be denied.

2.  Texas Tax Code § 151.318(a)(1)

Claimant contends the chemicals at issue were exempt as “tangible personal property that will become an ingredient or component part of tangible personal property manufactured, processed, or fabricated for ultimate sale.” See Tex. Tax Code § 151.318(a)(1). Petitioner contends oil soluble chemicals injected into oil downhole became an ingredient or component part of the oil and therefore qualify for exemption.

In this case, the evidence of how the chemicals at issue were used is scant, limited to two unsworn email responses acknowledging the significance of the prefix coding related to the chemicals and the invoice codeing. That evidence is insufficient to establish, clearly and convincingly, that the chemicals at issue were used in such a manner that they became an ingredient or component part of the crude oil that Claimant sold. The ALJ concludes the contention must be denied.

3.  Texas Tax Code § 151.318(a)(6)

Claimant contends the chemicals at issue were exempt as “used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if their use or consumption is necessary and essential to prevent the decline, failure, lapse, or deterioration of equipment.” See Tex. Tax Code § 151.318(a)(6).

Staff rejects this contention, arguing that, if the chemicals were injected to the oil wells “downhole” as described by Claimant, the oil was a “mineral in place,” and real property. See Texas Tax Code § 1.04(2) (real property includes land, an improvement, a mine or quarry, a mineral in place, and standing timber.) If the chemicals were used in treating real property, they were not used in the “actual manufacturing, processing, or fabrication” of tangible personal property as required for the claimed exemption.

As established, the only evidence regarding the use of the chemicals at issue is contained in the cited email correspondence. Those statements do not constitute clear and convincing evidence regarding the use or consumption of the chemicals during the actual manufacturing, processing, or fabrication of tangible personal property. In addition, there is no evidence in the contested case record regarding the use or consumption of the chemicals as being necessary and essential to prevent the decline, failure, lapse, or deterioration of equipment used in the actual manufacturing process. The ALJ concludes the evidence in the record is insufficient to support the exemption claim under Texas Tax Code § 151.318(a)(6).

III.  FINDINGS OF FACT

1. During the period at issue, ************** (Claimant) owned and operated an independent oil and gas acquisition, development, operator, and production company located in CITY, Texas.

2. In August 2018, Claimant requested a refund of sales and use tax for the period September 1, 2014, through March 31, 2017.

3. The refund claim included tax paid on purchases of manufacturing equipment and repair of that equipment, nontaxable services, and chemicals

4. The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) granted the refund in part.

5. Claimant subsequently requested a refund hearing, contending the refund was improperly denied for its purchases made from vendor COMPANY B of certain oil soluble chemicals used as corrosion inhibitors, paraffin dispersants, and other chemicals used to treat the oil.

6. Staff referred the case to the State Office of Administrative Hearings (SOAH), and on May 23, 2022, issued Claimant 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 or an attachment that incorporated by reference the factual matters asserted in the complaint or petition filed with the state agency.

7. On May 26, 2022, Administrative Law Judge Trevor Moore issued Order No. 1, which set the written submission hearing.

8. The record closed on August 1, 2022.

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 § 111.105.

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. If the Comptroller finds that an amount of tax, penalty, or interest has been unlawfully or erroneously collected, the Comptroller shall credit or refund the amount. Tex. Tax Code § 111.104(a).

7.When a taxpayer requests a refund, it must establish by a preponderance of evidence  that  taxes  were  erroneously  collected  or  paid. See, e.g., Comptroller’s Decision No. 109,787 (2015); 34 Tex. Admin. Code § 1.26(e).

8. If a taxpayer relies on an exemption to establish the error, as in this case, then it must provide evidence that is clear and convincing. 34 Tex. Admin. Code § 1.26(c); Comptroller’s Decision No. 100,477 (2012).

9. A taxpayer is generally required to support its contentions by source records and summary schedules, and assertions in pleadings are insufficient to meet the burden of proof. See, e.g., Comptroller’s Decision No. 105,892 (2012).

10. The injection of maintenance-type chemicals such as corrosion inhibitors, bactericides, etc., into the wellbore is considered a taxable service. 34 Tex. Admin. Code § 3.324 (h)(1).

11. Since certain chemicals are oil soluble and remain in the product flow after injection, the well operator may purchase those chemicals separately from the service provider and issue a resale certificate in lieu of tax on the charge for the chemicals. 34 Tex. Admin. Code § 3.324 (h)(1).

12. The failure of the purchaser to issue a certificate at the time of purchase has never been considered a bar that would prevent the purchaser from showing that the purchase was, in fact, purchased for resale. See, e.g., Comptroller’s Decision No. 48,030 (2009).

13. Tangible personal property that will become an ingredient or component part of tangible personal property manufactured, processed, or fabricated for ultimate sale is exempt from sales tax. Tex. Tax Code § 151.318(a)(1).

14. Tangible personal property used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if their use or consumption is necessary and essential to prevent the decline, failure, lapse, or deterioration of equipment is exempt from sales tax. Tex. Tax Code § 151.318(a)(6).

15. Real property includes land, an improvement, a mine or quarry, a mineral in place, and standing timber. See Tex. Tax Code § 1.04(2).

16. Claimant failed to demonstrate, by clear and convincing evidence, the applicability of a sales tax exemption with regard to the purchases of the chemicals from COMPANY B.

17. Claimant failed to establish error in the partial refund denial and, therefore the denial should be upheld with regard to the chemicals purchased from COMPANY B.

SIGNED AUGUST 16, 2022

TREVOR MOORE
ADMINISTRATIVE LAW JUDGE
STATE OFFICE OF ADMINISTRATIVE HEARINGS

 

 

 

ENDNOTE:

[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