SOAH DOCKET NO. 304-22-2601.26
CPA HEARING NO. 116,890

RE:  **************
TAXPAYER NO:    **************
AUDIT OFFICE:    **************
AUDIT PERIOD:   January 1, 2016 THROUGH December 31, 2016

Sales And Use Tax/RFD

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

GLENN HEGAR
Texas Comptroller of Public Accounts

KIMBERLY LAFLAIR
Representing Respondent

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

 

COMPTROLLER’S DECISION

This decision is considered final on January 30, 2023, 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) Keneshia Washington 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 zero amount due.

 SIGNED on this 5th day of January 2023

GLENN HEGAR
Comptroller of Public Accounts

By: Lisa CravenDeputy
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. 304-22-2601.26
CPA HEARING NO. 116,890

**************
TAXPAYER NO: **************

v.

TEXAS COMPTROLLER OF PUBLIC ACCOUNTS

BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS

 

Proposal for Decision

************** (Claimant), a telecommunications provider, filed a claim for a sales and use tax refund, contending it erroneously accrued or remitted tax on tax exempt purchases used in the provision of cable television, internet access, or telecommunications services. The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) partially granted the claim. Claimant requested a refund hearing to contest the partial denial and provided additional documentation. Staff did not agree to any additional refund amounts, asserting that Claimant did not establish that any remaining purchases were tax exempt. In this Proposal for Decision, the Administrative Law Judge (ALJ) finds Claimant’s evidence is insufficient to support additional refund amounts and, therefore, the partial refund denial should be upheld.

I.  PROCEDURAL HISTORY, NOTICE, & JURISDICTION

Staff referred the contested case to the State Office of Administrative Hearings (SOAH) and, on May 10, 2022, issued Claimant a Notice of Hearing by Written Submission. On May 24, 2022, ALJ Keneshia Washington issued Order No. 1, which set the written submission hearing. Claimant was represented by ************** of COMPANY A. Kimberly LaFlair represented Staff. The record closed August 3, 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

Staff provided the pleadings the parties exchanged prior to referring the matter to SOAH and offered the following exhibits:

1. 60-Day Letter;

2. Refund Audit Report; and

3. Refund Audit Plan.

Claimant offered the following exhibits:

1. Approved Refund Schedules;

2. Contested Refund Schedules;

3. Contested Invoices; and

4. Auditor Position Email.

B.  Agreed Adjustments

Staff did not agree to any adjustments to the partially denied refund.

C.  Facts Established and Issues Presented

During the period at issue, Claimant was a telecommunications provider headquartered in CITY, STATE with operations throughout the United States, including significant presence in Texas. Claimant provides communications infrastructure services, including fiber and bandwidth connectivity, colocation, and cloud services. Claimant’s primary customer segments include wireless carriers, national carriers, internet service providers, enterprises, and government agencies. Claimant filed a refund claim with the Comptroller for the period January 1, 2016, through December 31, 2016, and Staff conducted a refund audit to verify the claim. The auditor observed that the refund claim was based on a combination of taxes paid to vendors and use tax accruals. Using a sampling method, he verified that Claimant remitted the requested use tax to the Comptroller. The auditor scheduled the taxable amount of the tax refund requested and removed the amounts attributable to purchases that did not facilitate signal transmission based on the purchase invoices provided.

The auditor removed purchases of high-density poly pipe conduits, high-density polyethylene, polymer concrete, concrete assemblies, wire cage enclosures, precast shelters, handholes, corner clamp kits, panel rise frame kits, retracting bar, panels, cable managers, and cabinets. High-density conduits protect fiber optic cables and coaxial cables used for telecommunication services and prevent their damage by corrosive moisture, chemicals and physical destruction from construction and ground movements. Concrete assemblies and handholes provide the versatility needed to protect cable connections and provide access to transmission controls. The larger, above ground precast shelters and cabinets are facilitate distribution of the telecommunications services where necessary to business and individuals. The power supply equipment functions to keep the telecommunications equipment running continuously if the power supply fails.

The auditor requested that Claimant provide detailed documentation which may include invoices, purchase orders, lease agreements, equipment schedules and any additional documentation to support its contention that the denied transactions were tax exempt. On July 31, 2017, Staff notified Claimant that its refund claim was granted in part. Claimant timely requested a refund hearing.  Claimant contends that the purchases at issue are tax exempt as property directly used or consumed by a telecommunications services provider in the transmission, conveyance, routing, or reception of telecommunications services. Staff disagreed and referred the matter to SOAH. In its final reply, Claimant withdrew its refund request relating to the universal power supply equipment purchased from COMPANY B in Invoice Nos. 11602500002 and 11602500003.

D.  ALJ’s Analysis and Recommendation

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., 34 Tex. Admin. Code § 1.26(e); Comptroller’s Decision No. 109,787 (2015). If a claimant relies on an exemption to establish the error, then it must provide clear and convincing evidence. 34 Tex. Admin. Code § 1.26(c); Comptroller’s Decision No. 100,477 (2012). Furthermore, exemptions from taxation are subject to strict construction since they are the antithesis of equality and uniformity and because they place a greater burden on other taxpaying businesses and individuals. See Bullock v. National BancShares Corp., 584 S.W.2d 268 (Tex. 1979). An exemption cannot be raised by implication, but must affirmatively appear, and all doubts are resolved in favor of the taxing authority and against a claimant. See, e.g., Comptroller’s Decision Nos. 41,522, 44,260 (2010).

Texas imposes 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. §§ 151.009, .010. Unless an exemption applies, all sales of tangible personal  property  in  this  state  are  taxable.  Tex. Tax Code § 151.051; Comptroller’s  Decision No. 116,506 (2020).

A provider is entitled to a refund of sales or use tax on the sale, lease, or rental or storage, use, or other consumption of tangible personal property if the property is sold, leased, or rented to or stored, used, or consumed by a provider or a subsidiary of a provider; and the property is directly used or consumed by the provider or subsidiary in or during the transmission, conveyance, routing, or reception of telecommunications services. Tex. Tax Code § 151.3186(b)(1),(2)(C); see also 34 Tex. Admin. Code § 3.345(a)(7)(B)(iii). Qualifying purchases do not include supporting or ancillary functions, such as office operations, field operations, marketing, transportation, warehousing, data storage, or similar operations that do not directly result in the distribution of cable television services; the provision of Internet access services; or the transmission, conveyance, routing, or reception of telecommunications services. 34 Tex. Admin. Code § 3.345(a)(7)(C).

“Provider” means a provider of cable television service, internet access service, or telecommunications services. Tex. Tax Code§ 151.3186(a). The Comptroller Rule further explains that a provider is a seller, as defined by 34 Texas Administrative Code Section 3.286 (relating to Seller’s and Purchaser’s Responsibilities, including Nexus, Permits, Returns and Reporting Periods, Collection and Exemption Rules, and Criminal Penalties) and 34 Texas Administrative Code Section 3.344 (relating to Telecommunications Services), who supplies or otherwise makes available cable television services, Internet access services, or telecommunications services to the public, or a segment of the public, for consideration. 34 Tex. Admin. Code § 3.345(a)(6).

“Telecommunications services” means the electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information utilizing wires, cable, radio waves, microwaves, satellites, fiber optics, Voice over Internet Protocol (VoIP), or any other method now in existence or that may be devised, including but not limited to long-distance telephone service. 34 Tex. Admin. Code §§ 3.344(a)(13), 3.345(a)(11); See also Tex. Tax Code § 151.0103.

The Comptroller has interpreted “in or during” to mean within the course of an actual activity, such as transmission or routing. 34 Tex. Admin. Code § 3.345(a)(3). For example, a cable carrying a cable television services’ signal to a customer’s home is used in or during the conveyance of the signal in order to provide cable television services. Id. In contrast, equipment merely used while the cable is carrying the signal, such as office furniture or an air conditioning system, is not used in or during the conveyance of the services. Id. The Comptroller has also issued guidance on its website, explaining that “[i]n general, the [tangible personal property] must directly carry the signal for the service provider.”[3]

The auditor denied Claimant’s refund request for tax paid on purchases of high-density poly pipe conduit, high-density polyethylene, polymer concrete, and other equipment based on a determination that the denied items are not used to directly to carry the signal during provision of Claimant’s telecommunication services.

Claimant contends that neither Texas Tax Code Section 151.3186 nor 34 Texas Administrative Code Section 3.345 requires that the property purchased be used to directly transmit, convey, route, or receive telecommunications services. Claimant argues that the definition of “in or during” in the Comptroller Rule does not require that the property be directly used to transmit, convey, route, or receive telecommunications services. Claimant asserts that the Rule merely indicates that the property be used within the course of an actual activity, such as transmission or routing. Claimant argues that its purchases were used within the course of an actual telecommunications activity, such as transmitting, conveying, routing, or receiving the telecommunication services.

Claimant seeks to distinguish the contested purchases from the examples in 34 Texas Administrative Code Section 3.345(a)(7)(C) that are not qualifying purchases. Specifically, Claimant deems the listed items in the Comptroller Rule to be used for administrative or ancillary purposes versus the contested purchases that Claimant contends are necessary to provide power or to protect the cabling, connectors and other equipment from damage that would interrupt or altogether prevent the telecommunication service.

Staff contends that the contested items were properly disallowed because they are a step or multiple steps removed from the actual transmission of the signal for telecommunication services because the items do not have an immediate effect on  the  activity  of  transmission,  conveyance,  routing,  or  reception of telecommunication services without an intervening effect, namely the tangible personal property actually transmitting and/or carrying the signal.

Claimant contends that the statute and rule require a connection to the resulting telecommunications services and some link to actual telecommunications services, but not a direct use in performing any particular activity in any particular manner. Claimant advocates for a broad interpretation of the word “direct” as it is used in the statute and the Comptroller Rule. However, the present claim relies on a statutory refund category that operates to exempt the purchase of tangible personal property from tax, and it is well established that exemptions from taxation are subject to strict construction. See Bullock v. National BancShares Corp., 584 S.W.2d 268 (Tex. 1979).

Texas Administrative Code Section 3.345 defines the phrase “in or during;” however, the phrase “directly used or consumed” is undefined. In construing a statute, the “primary objective is to give effect to the Legislature’s intent, which we ascertain from the plain meaning of the words used in the statute, if possible.” Southwest Royalties, Inc. v. Hegar, 500 S.W.3d 400, 404 (Tex. 2016). Stated differently, “If a statute is worded clearly, we must honor its plain language, unless that interpretation would lead to absurd results.” Combs v. Health Care Servs. Corp., 401 S.W.3d 623, 629 (Tex. 2013). “Undefined terms in a statute are typically given their ordinary meaning, but if a different or more precise definition is apparent from the term’s use in the context of the statute, we apply that meaning.” TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011). “It is a fundamental principle of statutory construction and indeed of language itself that words’ meanings cannot be determined in isolation but must be drawn from the context in which they are used.” TGS-NOPEC Geophysical, 340 S.W.3d at 441.

The Texas Supreme Court considered the meaning of the phrase “directly makes or causes” in Texas Tax Code Section 151.318(a)(2) in the context of the manufacturing exemption in Southwest Royalties, 500 S.W.3d at 408 (Tex. 2016). Citing to an appellate court decision, Sabine Mining Co. v. Strayhorn, No. 13-06- 330-CV, 2007 WL 2390686, at 4 (Tex. App.—Corpus Christi–Edinburg Aug. 23, 2007, no pet.), the Texas Supreme Court explained, “a reasonable interpretation of ‘direct’ implies a close link with no intervening causes.” Southwest Royalties, 500 S.W.3d at 408. The Texas Supreme Court held that while the direct cause of the changes to the hydrocarbons was the natural pressure and temperature changes, the equipment at issue was an indirect cause of the changes. Furthermore, Black’s Law Dictionary (11th ed. 2019) defines “directly” as “in a straightforward manner; in a straight line or course; and immediately.”

Considering the foregoing, a reasonable interpretation of “directly used or consumed by the provider or the subsidiary in or during … the transmission, conveyance, routing, or reception of telecommunications services” is used or consumed within the actual transmission or routing with no intervening causes. In other words, eligibility for the exemption under Texas Tax Code Section 151.3186(b)(2)(C) and 34 Texas Administrative Code Section 3.345(a)(7)(B)(iii) requires direct use of the tangible personal property to carry the signal during the performance of the telecommunication services.

Based on record evidence, neither the high-density poly pipe conduit, high- density polyethylene, polymer concrete, nor any of the other denied purchases are directly used to actually transmit or route a signal during the performance of telecommunication services. Therefore, the purchases should remain denied, and the partially denied refund claim should be upheld.

III.  FINDINGS OF FACT

1. During the period at issue, ************** (Claimant) was a telecommunications provider headquartered in CITY, Colorado with operations throughout the United States, including significant presence in Texas. Claimant provides communications infrastructure services, including fiber and bandwidth connectivity, colocation and cloud services.

2. Claimant filed a refund claim with the Texas Comptroller of Public Accounts (Comptroller) for the period January 1, 2016, through December 31, 2016, and the Tax Division (Staff) conducted a refund audit to verify the claim.

3. The auditor observed that the refund claim was based on a combination of taxes paid to vendors and tax accruals. Using a sampling method, he verified that Claimant remitted the requested use tax to the Comptroller.

4. The auditor scheduled the taxable amount of the refund requested and removed the amounts attributable to purchases that did not facilitate signal transmission based on the purchase invoices provided. He removed purchases of high-density poly pipe conduits, high-density polyethylene, polymer concrete, concrete assemblies, wire cage enclosures, precast shelters, handholes, corner clamp kits, panel rise frame kits, retracting bar, panels, cable managers, and cabinets.

5. High-density conduits protect fiber optic cables and coaxial cables used for telecommunication services and prevent their damage by corrosive moisture, chemicals and physical destruction from construction and ground movements.

6. Concrete assemblies and handholes provide the versatility needed to protect cable connections and provide access to transmission controls.

7. The larger, above ground precast shelters and cabinets facilitate distribution of the telecommunications services where necessary to businesses and individuals.

8. The power supply equipment functions to keep the telecommunications equipment running continuously if the power supply fails.

9. The auditor requested that Claimant provide detailed documentation which may include invoices, purchase orders, lease agreements, equipment schedules and any additional documentation to support its contention that the denied transactions were tax exempt.

10. On July 31, 2017, Staff notified Claimant that its refund claim was granted in part.

11. Claimant timely requested a refund hearing and provided additional documentation.

12. Staff did not agree to any adjustments to the partial refund denial.

13. Staff referred the above-referenced case to the State Office of Administrative Hearings (SOAH) and on May 10, 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 asserted, or an attachment that incorporated by reference the factual matters asserted in the complaint or petition filed with the state agency.

14. On May 24, 2022, the Administrative Law Judge (ALJ) issued Order No. 1, which set the written submission hearing.

15. The record closed on August 3, 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 hearings, 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 §§ 111.105.

4. 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).

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

6. If a claimant relies on an exemption to establish the error, then it must provide clear and convincing evidence. 34 Tex. Admin. Code § 1.26(c); Comptroller’s Decision No. 100,477 (2012).

7. Exemptions from taxation are subject to strict construction since they are the antithesis of equality and uniformity and because they place a greater burden on other taxpaying businesses and individuals. See Bullock v. National BancShares Corp., 584 S.W.2d 268 (Tex. 1979).

8. An exemption cannot be raised by implication, but must affirmatively appear, and all doubts are resolved in favor of the taxing authority and against a claimant. See, e.g., Comptroller’s Decision Nos. 41,522, 44,260 (2010).

9. Texas imposes tax on each sale of a taxable item in this state. Tex. Tax Code § 151.051.

10. The term “taxable item” includes tangible personal property and taxable services. Tex. Tax Code §§ 151.009, .010.

11. Unless an exemption applies, all sales of tangible personal property in this state are taxable. Tex. Tax Code § 151.051; Comptroller’s Decision No. 116,506 (2020).

12. A provider is entitled to a refund of sales or use tax on the sale, lease, or rental or storage, use, or other consumption of tangible personal property if the property is sold, leased, or rented to or stored, used, or consumed by a provider or a subsidiary of a provider; and the property is directly used or consumed by the provider or subsidiary in or during the transmission, conveyance, routing, or reception of telecommunications services. Tex. Tax Code  §  151.3186(b)(1),(2)(C);  see  also  34  Tex.  Admin.  Code § 3.345(a)(7)(B)(iii).

13. Qualifying purchases do not include supporting or ancillary functions, such as office operations, field operations, marketing, transportation, warehousing, data storage, or similar operations that do not directly result in the distribution of cable television services; the provision of Internet access services; or the transmission, conveyance, routing, or reception of telecommunications services. 34 Tex. Admin. Code § 3.345(a)(7)(C).

14. “Provider” means a provider of cable television service, internet access service, or telecommunications services. Tex. Tax Code § 151.3186(a).

15. A provider is a seller, as defined by 34 Texas Administrative Code Section 3.286 (relating to Seller’s and Purchaser’s Responsibilities, including Nexus, Permits, Returns and Reporting Periods, Collection and Exemption Rules, and Criminal Penalties) and 34 Texas Administrative Code Section 3.344 (relating to Telecommunications Services), who supplies or otherwise makes available cable television services, Internet access services, or telecommunications services to the public, or a segment of the public, for consideration. 34 Tex. Admin. Code § 3.345(a)(6).

16. “Telecommunications services” include the electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information utilizing wires, cable, radio waves, microwaves, satellites, fiber optics, Voice over Internet Protocol (VoIP), or any other method now in existence or that may be devised, including but not limited to long-distance telephone service. 34 Tex. Admin. Code §§ 3.344(a)(13), 3.345(a)(11). See also Tex. Tax Code § 151.0103.

17. “In or during” means within the course of an actual activity, such as transmission or routing. For example, a cable carrying a cable television services’ signal to a customer’s home is used in or during the conveyance of the signal in order to provide cable television services. In contrast, equipment merely used while the cable is carrying the signal, such as office furniture or an air conditioning system, is not used in or during the conveyance of the services. 34 Tex. Admin. Code § 3.345(a)(3).

18. In construing a statute, the primary objective is to give effect to the Legislature’s intent, which we ascertain from the plain meaning of the words used in the statute, if possible. Southwest Royalties, Inc. v. Hegar, 500 S.W.3d 400, 404 (Tex. 2016).

19. If a statute is worded clearly, we must honor its plain language, unless that interpretation would lead to absurd results. Combs v. Health Care Servs. Corp., 401 S.W.3d 623, 629 (Tex. 2013).

20. Undefined terms in a statute are typically given their ordinary meaning, but if a different or more precise definition is apparent from the term’s use in the context of the statute, we apply that meaning. TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011).

21. It is a fundamental principle of statutory construction and indeed of language itself that words’ meanings cannot be determined in isolation but must be drawn from the context in which they are used. TGS-NOPEC Geophysical Co., 340 S.W.3d 432, 441 (Tex. 2011).

22. A reasonable interpretation of “direct” implies a close link with no intervening causes. Southwest Royalties, 500 S.W.3d at 408 citing to Sabine Mining Co. v. Strayhorn, No. 13-06-330-CV, 2007 WL 2390686, at 4 (Tex. App.—Corpus Christi–Edinburg Aug. 23, 2007, no pet.).

23. Black’s Law Dictionary (11th ed. 2019) defines “directly” as: in a straightforward manner; in a straight line or course; and immediately.

24. None of the denied purchases at issue are directly used to actually transmit or route a signal during the performance of telecommunication services.

25. Claimant has not established by clear and convincing evidence that any of the contested purchases are eligible for a refund under Texas Tax Code Section 151.3186 or are otherwise tax exempt.

26. The ALJ recommends upholding the partially denied refund.

SIGNED  August 30, 2022

KENESHIA WASHINGTON
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] The guidance can be found at Sales Tax Refund For Providers of Cable Television, Internet Access or Telecommunications Services Frequently Asked Questions (last visited August 24, 2022) https://comptroller.texas.gov/taxes/sales/refunds/cit-refund-faq.php.