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SOAH DOCKET NO. 304-22-05852.26
CPA HEARING NO. 117,264
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2014 THROUGH June 30, 2015
Sales And Use Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
KIMBERLY LAFLAIR
Representing Respondent
**************
Representing Petitioner
COMPTROLLER’S DECISION
This decision is considered final on December 9, 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 14th day of November 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. 304-22-05852.26
CPA HEARING NO. 117,264
**************
TAXPAYER NO: **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARING
Proposal for Decision
The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) audited ************** (Petitioner) for sales and use tax compliance and made an assessment that included tax, 10% penalty, 50% additional penalty, and accrued interest. Petitioner requested redetermination of the assessment, contending sales to one customer, COMPANY A, were not taxable, sales tax was collected in error, and all the tax collected was refunded to COMPANY A. Petitioner also disputes the applicability of the 50% penalty. Staff argues Petitioner’s evidence is insufficient to support its contention regarding the audit assessment and does not support the removal of the 50% penalty from the assessment. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends affirming the audit assessment and the additional penalty.
I. NOTICE, JURISDICTION, AND PROCEDURAL HISTORY
Staff referred the contested case to the State Office of Administrative Hearings (SOAH) and, on July 29, 2022, issued a Notice of Hearing by Written Submission to Petitioner. On August 15, 2022, ALJ Trevor Moore issued Order No. 1, which set the written submission hearing. ************** of the COMPANY B firm represented Petitioner. Kimberly LaFlair represented Staff. The contested case record closed on October 10, 2022.
There are no contested 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
Staff submitted the pleadings the parties exchanged prior to referring the matters 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; and
5. Audit Plan.
Petitioner offered the following exhibits, attached to the pleadings filed with Staff prior to the hearing being referred to SOAH:
1. Affidavit of INDIVIDUAL; and
2. Business Plan Summaries.
All exhibits were admitted without objection.
B. Staff Agreed Adjustments
Staff did not agree to adjust the audit assessment. Staff agreed to interest waiver for the periods of September 1, 2020, through March 3, 2021, and March 1, 2022, through July 31, 2022.
C. Material Facts Established by the Evidence
During the period at issue, ************** (Petitioner) sold, installed, and serviced aquariums and aquarium equipment for both residential and commercial customers. In August 2017, Staff initiated a sales and use tax compliance audit of Petitioner for the period of January 1, 2014, through June 30, 2015. Petitioner provided sales invoices, resale and exemption certificates, general ledgers, bank statements, and federal income tax returns for the audit. A detailed audit was performed using Petitioner’s records and resulted in assessments for tax that was collected from customers but not remitted to the Comptroller (Exam 100) and a tax reconciliation comparing audited taxable sales to reported taxable sales (Exam 100A).
On April 24, 2019, Staff issued a Texas Notification of Audit Results to Petitioner assessing tax, 10% penalty, 50% penalty, and accrued interest. The overall error rate for the audit was 44.93%. Petitioner requested redetermination of the audit assessment, citing an alleged error regarding sales to one customer, COMPANY A.
Petitioner does not dispute that it collected amounts identified as sales tax from COMPANY A and did not remit those amounts to the Comptroller. However, Petitioner argues the collection of the sales tax on the invoices issued to COMPANY A was in error. Petitioner explains the charges at issue represent contributions made to a joint business venture with COMPANY A wherein Petitioner would build large aquariums that COMPANY A could offer to install in aircraft that COMPANY A customized, with the parties sharing profits.
Petitioner asserts a 1000-gallon “demo tank” was prepared to be displayed at COMPANY A’s place of business as advertising. While on display at COMPANY A, Petitioner contends it maintained the aquarium while the coral in the tank grew to an appropriate size. Petitioner argues the tank was never the property of COMPANY A and it did not bill COMPANY A for the tank or the related services. Petitioner asserts its charges to COMPANY A were instead for contributions to the business venture. Therefore, Petitioner maintains, the charges to COMPANY A recorded in its books were not taxable sales, the sales tax collected on the invoices was an “accounting error,” and all of the tax amounts collected were credited back to COMPANY A. In support of its contentions Petitioner submitted the affidavit of its owner and managing member, INDIVIDUAL, as well as a summary of predicted profits to be shared with COMPANY A under the proposed joint business venture.
Petitioner also argued the additional 50% penalty was not applicable to the assessment, as it did not intend to defraud the state and, as stated above, the tax amounts collected were credited back to COMPANY A. Petitioner did not dispute the balance of the tax assessed in Exam 100. [5]
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. Tex. Tax Code §§ 151.009, .010. All gross receipts of a seller are presumed to have been subject to the sales tax unless a properly completed resale or exemption certificate is accepted by the seller. Id. § 151.054(a). A taxpayer is required to keep records to substantiate each claimed deduction or exclusion authorized by law. Tex. Tax Code § 151.025(a)(3).
An audit that is based on a taxpayer’s substantially complete books and records and conducted pursuant to established audit methodologies is entitled to a presumption of correctness, and Petitioner bears the burden of proof to demonstrate that the audit results are incorrect. See, e.g., Comptroller’s Decision No. 110,187 (2017).
The Tax Code provides that any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable for the full amount of the tax collected plus any accrued penalties and interest on the amount collected. Tex. Tax Code § 111.016(a); Comptroller’s Decision No. 117,071 (2021). The statute applies to all instances in which a retailer collects an amount represented to be tax from its customer. See Comptroller’s Decision Nos. 117,071 (2021), 110,954 (2016). If amounts are collected as tax in transactions on which tax is not due, the Comptroller requires the amounts be remitted to the state or be refunded to the customers from whom they were collected. See 34 Tex. Admin. Code § 3.2(c). In this case, Petitioner argues that it collected amounts represented to be sales tax on its invoices to COMPANY A and did not remit those amounts to the Comptroller, but that the tax was collected in error on nontaxable payments related to a joint business venture.
Petitioner offered argument and affidavit testimony regarding a joint venture with COMPANY A, but no corroborating documentary evidence of the venture, such as a contract or agreement. In addition, there is no documentary evidence, such as the invoicing for the charges at issue, referred to by INDIVIDUAL in his affidavit. Petitioner cannot satisfy its burden of proof with uncorroborated testimony on the ultimate issue to be proven. See Tex. Tax Code § 151.025152.063; see also, e.g., Comptroller’s Decision Nos. 114,570 (2019), 109,188 (2017), 104,278 (2012). Consequently, the ALJ concludes the evidence is insufficient to support Petitioner’s contention regarding the taxability of the transactions.
If Petitioner had proven the sales tax at issue was collected from COMPANY A in error, Petitioner was required to remit the tax to the Comptroller or refund the tax to COMPANY A. See 34 Tex. Admin. Code § 3.2(c). Though Petitioner contends the tax was “credited back” to COMPANY A, there is no evidence, beyond the uncorroborated affidavit testimony, of those credits or refunds. The ALJ concludes that Petitioner did not establish audit error; therefore, the audit assessment should be affirmed.
Texas Tax Code § 111.061(b) authorizes a 50% penalty when the failure to pay the tax or file a report when due is the result of fraud or intent to evade the tax. Staff bears the burden to prove by clear and convincing evidence that the imposition of additional penalty for willful or fraudulent failure to pay tax is warranted. Id. § 1.26(b)(1). Clear and convincing evidence is evidence demonstrating that the thing to be proved is highly probable. See Black’s Law Dictionary (11th ed. 2019); see also Comptroller’s Decision No. 101,773 (2011).
Gross underreporting, along with other factors or no plausible explanation, is sufficiently indicative of intent to evade the tax to warrant the assessment of the fraud penalty. See, e.g., Comptroller’s Decision No. 111,804 (2015). The Tax Code defines gross error to mean that, after correction of the error, the amount due and payable exceeds the amount initially reported by at least 25%. Tex. Tax Code § 111.205(b). In this case, the error overall error rate for the audit was over 44%.
Petitioner argues the fraud penalty is unwarranted; however, it collected sales tax and did not remit it to the Comptroller. Moreover, though it claims the transactions were not taxable, that the tax was collected due to accounting mistakes, and the tax was credited or refunded to COMPANY A, the evidence in the record is insufficient to support such a conclusion. Therefore, based on the gross underreporting and the lack of a plausible explanation for such underreporting, the ALJ finds that Staff met its burden of proof to show fraud or intent to evade the tax.
In the case of corporate taxpayers, the Comptroller recognizes that a corporation is a separate legal entity that is controlled by its officers and directors and that the requisite intent of a corporation is determined from the actions of the officers or directors. See, e.g., Comptroller’s Decision No. 103,756 (2011). The same principle applies to a limited liability company. See Comptroller’s Decision Nos. 112,305, 112,307, and 112,308 (2016). The Comptroller may impute to the taxpayer the acts or omissions of: (1) any officer, director, manager, or governing authority of the taxpayer; and (2) any agent or employee with the actual or apparent authority to prepare information for or submit information to the comptroller. 34 Tex. Admin. Code § 3.15(a). To avoid imputing the acts or omissions of a person to the taxpayer, the taxpayer may present evidence that the person was engaged in an independent course of conduct that did not further any purpose of the taxpayer. Id. § 3.15(b).
In this case, there is no evidence that INDIVIDUAL or employees of Petitioner were engaged in an independent course of conduct that did not further any purpose of Petitioner and, therefore, INDIVIDUAL’s actions are properly imputed to Petitioner. The ALJ concludes that the fraudulent underreporting can be attributed to the company and that the 50% penalty should be upheld.
III. FINDINGS OF FACT
1. During the period at issue, ************** (Petitioner) sold, installed, and serviced aquariums and aquarium equipment for both residential and commercial customers.
2. In August 2017, The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) audited Petitioner for sales and use compliance for January 1, 2014, through June 30, 2015.
3. Petitioner provided sales invoices, resale and exemption certificates, general ledgers, bank statements, and federal income tax returns for the audit.
4. A detailed audit was performed using Petitioner’s records and resulted in assessments for tax that was collected from customers but not remitted to the Comptroller (Exam 100) and a tax reconciliation comparing taxable sales to reported taxable sales (Exam 100A).
5. During the audit period, Petitioner issued invoices to COMPANY A.
6. Petitioner collected amounts identified as sales tax from COMPANY A.
7. The sales tax amounts received from COMPANY A were not remitted to the Comptroller or refunded to COMPANY A.
8. On April 24, 2019, Staff issued a Texas Notification of Audit Results to Petitioner assessing tax, 10% penalty, 50% penalty, and accrued interest.
9. The overall error rate for the audit was 44.93%.
10. Petitioner requested redetermination of the audit assessment.
11. Staff referred the cases to the State Office of Administrative Hearings (SOAH).
12. On July 29, 2022, Staff issued a Notice of Hearing by Written Submission to Petitioner. 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.
13. On August 15, 2022, the Administrative Law Judge issued Order No. 1, which set the written submission hearing.
14. The contested case record closed on October 10, 2022.
15. Staff agreed to interest waiver for the periods of September 1, 2020, through March 3, 2021, and March 1, 2022, through July 31, 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 § 111.009.
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 §§ 151.009, .010.
6. All gross receipts of a seller are presumed to have been subject to the sales tax unless a properly completed resale or exemption certificate is accepted by the seller. Tex. Tax Code § 151.054(a).
7. A taxpayer is required to keep records to substantiate each claimed deduction or exclusion authorized by law. Tex. Tax Code § 151.025(a)(3).
8. An audit that is based on a taxpayer’s substantially complete books and records and conducted pursuant to established audit methodologies is entitled to a presumption of correctness, and Petitioner bears the burden of proof to demonstrate that the audit results are incorrect. See, e.g., Comptroller’s Decision No. 110,187 (2017).
9. Any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable for the full amount of the tax collected plus any accrued penalties and interest on the amount collected. Tex. Tax Code § 111.016(a); Comptroller’s Decision No. 117,071 (2021).
10. The statute applies to all instances in which a retailer collects an amount represented to be tax from its customer. See Comptroller’s Decision Nos. 117,071 (2021), 110,954 (2016).
11. If amounts are collected as tax in transactions on which tax is not due, the Comptroller requires the amounts be remitted to the state or be refunded to the customers from whom they were collected. See 34 Tex. Admin. Code § 3.2(c).
12. Petitioner failed to meet its burden of proving, by a preponderance of the evidence, that it remitted the sales tax collected from COMPANY A to the Comptroller or refunded the sales tax to COMPANY A.
13. Petitioner did not establish audit error.
14. A 50% penalty is applicable when the failure to pay the tax or file a report when due is the result of fraud or intent to evade the tax. Texas Tax Code § 111.061(b).
15. Staff bears the burden to prove by clear and convincing evidence that the imposition of additional penalty for willful or fraudulent failure to pay tax is warranted. 34 Tex. Admin. Code § 1.26(b)(1).
16. Clear and convincing evidence is evidence demonstrating that the thing to be proved is highly probable. See Black’s Law Dictionary (11th ed. 2019); see also Comptroller’s Decision No. 101,773 (2011).
17. Gross underreporting, along with other factors or no plausible explanation, is sufficiently indicative of intent to evade the tax to warrant the assessment of the fraud penalty. See, e.g., Comptroller’s Decision No. 111,804 (2015).
18. The Tax Code defines gross error to mean that, after correction of the error, the amount due and payable exceeds the amount initially reported by at least 25%. Tex. Tax Code § 111.205(b).
19. Staff’s evidence demonstrates, clearly and convincingly, that Petitioner intended to evade the taxes due.
20. In the case of corporate taxpayers, the Comptroller recognizes that a corporation is a separate legal entity that is controlled by its officers and directors and that the requisite intent of a corporation is determined from the actions of the officers or directors. See, e.g., Comptroller’s Decision No. 103,756 (2011).
21. The same principle applies to a limited liability company. See Comptroller’s Decision Nos. 112,305, 112,307, and 112,308 (2016).
22. The Comptroller may impute to the taxpayer the acts or omissions of: (1) any officer, director, manager, or governing authority of the taxpayer; and (2) any agent or employee with the actual or apparent authority to prepare information for or submit information to the comptroller. 34 Tex. Admin. Code § 3.15(a).
23. To avoid imputing the acts or omissions of a person to the taxpayer, the taxpayer may present evidence that the person was engaged in an independent course of conduct that did not further any purpose of the taxpayer. 34 Tex. Admin. Code § 3.15(b).
24. The Comptroller may impose the additional penalty on the taxpayer without regard to whether an officer, manager, director, partner, or other person is personally liable for fraudulent tax evasion under the Tax Code. 34 Tex. Admin. Code § 3.15(c).
25. INDIVIDUAL’s actions are properly imputed to Petitioner.
26. The 50% penalty should be upheld.
27. The audit assessment should be upheld.
28. The interest waiver proposed by Staff should be applied.
SIGNED OCTOBER 11, 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] In the Notice of Hearing, Staff refers to an assessment of Petitioner’s managing member, INDIVIDUAL. However, any liability of INDIVIDUAL is not at issue in this hearing.