ALERT: Tax Rates, Compensation Deduction Limits, No Tax Due Thresholds, and Total Revenue Thresholds for EZ Franchise Tax Reports may have changed due to legislative action.  See STAR 202112002L or STAR 202308006L for current information.

 

 

SOAH DOCKET NO. 304-22-06454.13
CPA HEARING NO. 117,167
RE:  **************
TAXPAYER NO:      **************
AUDIT OFFICE:      **************
AUDIT PERIOD:     January 1, 2013 THROUGH December 31, 2013

SOAH DOCKET NO. 304-22-06455.13

CPA HEARING NO. 117,168
RE:  **************
TAXPAYER NO:      **************
AUDIT OFFICE:      **************
AUDIT PERIOD:     January 1, 2014 THROUGH December 31, 2014

Franchise Tax/RDT

SOAH DOCKET NO. 304-22-06456.13
CPA HEARING NO. 117,169
RE:  **************
TAXPAYER NO:      **************
AUDIT OFFICE:      **************
AUDIT PERIOD:     January 1, 2013 THROUGH December 31, 2013

Franchise Tax/RFD

SOAH DOCKET NO. 304-22-06457.13
CPA HEARING NO. 117,170
RE:  **************
TAXPAYER NO:      **************
AUDIT OFFICE:     **************
AUDIT PERIOD:     January 1, 2015 THROUGH December 31, 2015

SOAH DOCKET NO. 304-22-06458.13
CPA HEARING NO. 117,171
RE:  **************
TAXPAYER NO:      **************
AUDIT OFFICE:      **************
AUDIT PERIOD:     January 1, 2012 THROUGH December 31, 2012

Franchise Tax/RDT

SOAH DOCKET NO. 304-22-06459.13
CPA HEARING NO. 117,172
RE:  **************
TAXPAYER NO:     **************
AUDIT OFFICE:     **************
AUDIT PERIOD:     January 1, 2014 THROUGH December 31, 2014

Franchise Tax/RFD

SOAH DOCKET NO. 304-22-06460.13
CPA HEARING NO. 117,173
RE:  **************
TAXPAYER NO:     **************
AUDIT OFFICE:     **************
AUDIT PERIOD:    January 1, 2012 THROUGH December 31, 2012

SOAH DOCKET NO. 304-22-06461.13
CPA HEARING NO. 117,174
RE:  **************
TAXPAYER NO:      **************
AUDIT OFFICE:      **************
AUDIT PERIOD:     January 1, 2015 THROUGH December 31, 2015

Franchise Tax/RDT

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

GLENN HEGAR
Texas Comptroller of Public Accounts

JANICE CAHALANE
Representing Respondent

**************
Representing Petitioner

 

COMPTROLLER’S DECISION

This decision is considered final on March 21, 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) Kathy Pickup of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision (PFD) that includes Findings of Fact and Conclusions of Law.  SOAH served the PFD on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure.  The ALJ corrected the PFD.  The ALJ recommended that the Comptroller adopt the Corrected PFD as written.

After review and consideration, IT IS ORDERED that the Corrected PFD is adopted as changed.[2] 

The results from this Decision are Attachments A.  The ALJ’s letter to the Comptroller is Attachment B.  The Corrected PFD as changed is Attachment C.  Attachments A, B, and C are incorporated by reference.

Attachments A reflect liabilities[3] in Hearing Nos. 117,167-168; 117,171; 117,174 and a zero amounts due in Hearing Nos. 117,169-170; 117,172; 117,173. 

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 24th day of February 2023

GLENN HEGAR
Comptroller of Public Accounts

By: Lisa Craven
Deputy Comptroller

Attachments A, Texas Notifications of Hearing Results
Attachment B, ALJ’s letter to the Comptroller
Attachment C, Corrected Proposal for Decision as changed

 

 

ATTACHMENT B

 

State Office of Administrative Hearings
Kristofer S. Monson
Chief Administrative Law Judge

February 13, 2023

The Honorable Glenn Hegar
Comptroller of Public Accounts
LBJ Building
111 E. 17th Street, 1st Floor
Austin, TX 78701

RE: SOAH Docket: 304-22.06454.13; -06461.13
CPA Hearing No.:  117,167- 117,17174
Taxpayer No.: **************
************** v. Texas Comptroller of Public Accounts

 

Dear Comptroller Hegar:

The deadline to file Exceptions to the Proposal for Decision in these matters was extended to January 20, 2023. On December 28, 2022, Petitioner filed exceptions to the Proposal for Decision (PFD) issued on December 13, 2022, and Staff filed a response on January 9, 2023. Staff then filed its own exceptions on January 10, 2023 and Petitioner filed its response to those exceptions on January 25, 2023.

In its exceptions, Petitioner contends that the PFD contains factual misstatements regarding source records and revenue streams. However, Petitioner’s exceptions state that it provided “a report generated directly from its accounting records system” and a “revenue summary.” As stated in the PFD, the Comptroller has held that summary documents that are created by the taxpayer and submitted without underlying support are tantamount to bare assertions, i.e., they are not considered evidence. See, e.g., Comptroller’s Decision Nos. 112,108, 112,109, 112,110, and 112,111 (2022), 116,274 (2021), 115,535 (2020), 102,488 (2010). In addition, although Petitioner submitted affidavit evidence, it cannot satisfy its burden of proof with uncorroborated testimony on the ultimate issue to be proven. See Tex. Tax Code §§ 111.0041, 171.211, see, e.g., Comptroller’s Decision Nos. 119,214 (2022), 117,668 (2022), 102,386 (2014), 104,278 (2012), 105,892 (2012), 30,461 (1994). Petitioner’s exceptions emphasize arguments made in its written submission, which were considered when issuing the PFD. Furthermore, Petitioner does not cite to a single Finding of Fact (FOF) or Conclusion of Law (COL) that it contends is erroneous. Petitioner raised nothing in its exceptions that demonstrates that any FOF or COL is incorrect or not supported by the evidence in the record.

Staff does not state in its exceptions that any of the FOFs and COLs are erroneous, but requests that several paragraphs and the corresponding FOF or COL be amended with its preferred and suggested language. Staff raised nothing in its exceptions that demonstrates that any FOF or COL is not supported by the evidence in the record. Staff does point out that on Page 8, within the last full paragraph, the term “whole trade” should be changed to “wholesale trade.” The ALJ agrees to correct this typographical error but declines to revise the PFD other than the correction on page 8. This change does not constitute a substantive amendment that would afford the parties an opportunity to file exceptions. A copy of the Corrected PFD is attached. The ALJ recommends that the Corrected PFD be adopted as written.

Sincerely,

Kathy Pickup
Presiding Administrative Law Judge

 

 

ATTACHMENT C

 

SOAH DOCKET NO. 304-22-06454.13
CPA HEARING NO. 117,167
**************
TAXPAYER NO: **************

SOAH DOCKET NO. 304-22-06455.13
CPA HEARING NO. 117,168
**************
TAXPAYER NO: **************

SOAH DOCKET NO. 304-22-06456.13
CPA HEARING NO. 117,169
**************
TAXPAYER NO: **************

SOAH DOCKET NO. 304-22-06457.13
CPA HEARING NO. 117,170
**************
TAXPAYER NO: **************

SOAH DOCKET NO. 304-22-06458.13
CPA HEARING NO. 117,171
**************
TAXPAYER NO: **************

SOAH DOCKET NO. 304-22-06459.13
CPA HEARING NO. 117,172
**************
TAXPAYER NO: **************

SOAH DOCKET NO. 304-22-06460.13
CPA HEARING NO. 117,173
**************
TAXPAYER NO: **************

SOAH DOCKET NO. 304-22-06461.13
CPA HEARING NO. 117,174
**************
TAXPAYER NO: **************

v.

TEXAS COMPTROLLER OF PUBLIC ACCOUNTS

BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS

 

Corrected Proposal for Decision

************** (Petitioner) submitted amended franchise reports for report years 2012 through 2015 claiming additional cost of goods sold (COGS) deductions, which generated a refund audit for each report year. Staff agreed with Petitioner’s claimed COGS deductions, but Petitioner disagreed with the amount of interest refunded. Upon review of Petitioner’s refund claims, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) disagreed with the franchise tax rate reported by Petitioner, which caused Field Verified Adjustment Reports (FVAR) to be generated for each report year. Detailed examinations resulted in adjustments of the franchise tax rate reported by Petitioner and assessments of additional tax and interest for each report year. Penalty was waived.

Petitioner requested a redetermination hearing and a refund hearing for each of the report years. Petitioner disagreed with the franchise tax rate applied and contended that it is a contractor for purposes of COGS deductions; that it is a retailer or a wholesaler eligible to calculate its Texas franchise tax rate using the lower retailer/wholesaler rate; that interest is incorrectly calculated; and that the refund denial violates its state and federal rights to equal and uniform taxation. Staff agrees that Petitioner is a contractor for purposes of COGS deduction but disagrees that it is a retailer or wholesaler entitled to the lower franchise tax rate. In this Proposal for Decision, the Administrative Law Judge (ALJ) finds that interest was calculated in accordance with the relevant statutes and that Petitioner is not a retailer or wholesaler entitled to the lower franchise tax rate. Therefore, the ALJ recommends that the assessments be affirmed, except as agreed by Staff, and Petitioner’s claim for interest adjustments be denied.

I.  NOTICE, JURISDICTION, AND PROCEDURAL HISTORY

Staff referred the contested cases to the State Office of Administrative Hearings (SOAH) and, on July 22, 2022, ALJ Kathy Pickup issued an Order Scheduling the Hearing on the Merits, which set out the pre-hearing requirements. On July 27, 2022, Staff issued Petitioner Notices of Hearing. Petitioner subsequently filed an unopposed Motion to convert the hearings to written submission, which was granted. Janice Cahalane represented Staff and **************, of COMPANY A represented Petitioner. The contested case record closed on December 12, 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.

II.  REASONS FOR DECISION

A.  Evidence

Staff provided the pleadings the parties exchanged before referring the matter to SOAH and submitted the following exhibits:

Redetermination Hearings:

1. Sixty-Day Letter;

2. Texas Notification of Exam Results;

3. Penalty & Interest Waiver Worksheet;

4. Audit Package;

a. CPA Hearing No. 117,167 / Tax Year 2013;

b. CPA Hearing No. 117,168 / Tax Year 2014;

c. CPA Hearing No. 117,171 / Tax Year 2012;

d. CPA Hearing No. 117,174 / Tax Year 2015;

5. Audit Documentation Report / Audit Plan;

a. CPA Hearing No. 117,167 / Tax Year 2013;

b. CPA Hearing No. 117,168 / Tax Year 2014;

c. CPA Hearing No. 117,171 / Tax Year 2012;

d. CPA Hearing No. 117,174 / Tax Year 2015; and

6. Screenshots from the website of COMPANY B.

Refund Hearings:

1. Sixty-Day Letter;

2. Refund Audit;

a. CPA Hearing No. 117,169 / Tax Year 2013;

b. CPA Hearing No. 117,170 / Tax Year 2015;

c. CPA Hearing No. 117,172 / Tax Year 2014;

d. CPA Hearing No. 117,173 / Tax Year 2012;

3. Refund Audit Plan;

a. CPA Hearing No. 117,169 / Tax Year 2013;

b. CPA Hearing No. 117,170 / Tax Year 2015;

c. CPA Hearing No. 117,172 / Tax Year 2014;

d. CPA Hearing No. 117,173 / Tax Year 2012; and

4. Refund Claim.

Petitioner offered the following exhibits into evidence:

1.  Affidavit of INDIVIDUAL A with the following attachments:

a. Marketing Presentation for COMPANY C;

b. Marketing Presentation for COMPANY D;

c. Screenshot of Petitioner’s Website from September 26, 2011;

d. Screenshot of Petitioner’s Current Website;

e. Representative Floor Covering Estimates;

f. Subcontractor Agreement;

2. Affidavit of INDIVIDUAL B with the following attachments:

a. Revenue Summary by Product Code for Audit Period;

b. Electronic Spreadsheet Containing Detailed Listing of All Sales for Each Year during the Audit Period;

c. Invoice AAC00122 dated January 31, 2014;

d. Invoice DVY2471L dated September 15, 2014;

e. Invoice LTY8118D dated March 15, 2013;

f. Invoice DCT1105 dated July 28, 2014;

g. Invoice AC013537 dated February 2, 2011;

h. Amended Texas Franchise Tax Report for the 2012 Report Year;

i. Amended Texas Franchise Tax Report for the 2013 Report Year; Amended Texas Franchise Tax Report for the 2014 Report Year; and

j. Amended Texas Franchise Tax Report for the 2015 Report Year.

The parties’ exhibits were admitted without objection.

B.  Agreed Adjustments

Staff agreed to waive interest from August 1, 2020, to March 16, 2021, for each assessment.

C.  Material Facts and Issues Presented

Petitioner is the franchise tax reporting entity for an affiliated group that includes COMPANY B. Petitioner and its wholly owned subsidiary, COMPANY B, are in the business of selling and installing flooring products. Petitioner’s business is focused on the multifamily housing industry and its customers are primarily apartment complex owners or property managers who purchase the flooring products for use in individual residential apartment units. The flooring products sold by Petitioner are purchased from third-party manufacturers. Neither Petitioner nor COMPANY B provide utilities or produce any of the flooring products sold.

Petitioner also offers installation of the flooring products it sells, and its customers generally purchase flooring and installation, but have the option to purchase flooring products without installation. However, Petitioner does not offer installation on a stand-alone basis and over 99% of Petitioner’s sales involve installation. Most of Petitioner’s customers purchase flooring and installation for a lump-sum price.

Petitioner submitted amended franchise reports for report years 2012 through 2015 claiming additional COGS deductions. An auditor was assigned to perform refund verification exams and agreed with Petitioner’s claimed COGS deductions, but Petitioner disagreed with the amount of interest refunded, which is the only issue remaining in the refund claims. Upon review of Petitioner’s refund claims, the auditor disagreed with the franchise tax rate reported by Petitioner on its original and amended reports and determined that Petitioner was not entitled to the reduced tax rate, as it is not a not a retailer or wholesaler. The franchise tax rates in effect for the periods at issue are: 2012 and 2013 - 1%, 2014 - 0.975%; and 2015 -0.95%. Staff contends Petitioner’s business is best characterized as SIC Code 1752, which is part of Division C and includes special trade contractors primarily engaged in the installation of flooring. The auditor determined that adjustments were warranted such that, on June 5, 2019, Staff issued Texas Notifications of Exam Results to Petitioner assessing liabilities for each report year. The assessments consisted of tax and interest accrued to the account. Penalty was waived on all assessments. Petitioner requested a redetermination hearing and a refund hearing for each of the report years.

Petitioner disagreed with the franchise tax rate applied and contended that it is a retailer or a wholesaler eligible to calculate its Texas franchise tax rate using the lower retailer/wholesaler rate; that interest is incorrectly calculated; and that the refund denial violates its state and federal rights to equal and uniform taxation. Petitioner argues that it is entitled to the 0.5% tax rate, and it points out that SIC Code 5713, which is part of Division G (retail trade), includes establishments primarily engaged in the retail sale of flooring products. Alternatively, Petitioner argues it should be classified as a wholesaler under SIC Code 5023 within Division F.

Petitioner’s evidence includes affidavits, marketing presentations, screenshots from Petitioner’s website, a subcontractor contract, spreadsheets, and selected invoices. It also provided copies of its amended returns.

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., Comptroller’s Decision No. 109,787 (2015); 34 Tex. Admin. Code § 1.26(e). Further, Petitioner must demonstrate, by a preponderance of the evidence, that audit assessments are incorrect. 34 Tex. Admin. Code § 1.26(e).

A franchise tax is imposed on each taxable entity that does business in this state or that is chartered or organized in this state. Tex. Tax Code § 171.001(a). Franchise tax is calculated by applying the applicable tax rate to the taxable entity’s taxable margin. The standard rate applicable to all taxable entities is a percentage of taxable margin, except for those entities that are “primarily engaged in retail or wholesale trade,” for which the rate is one-half percent of the taxable margin. See Tex. Tax Code § 171.002(a), (b). “Retail trade” is defined as activities described in Division G of the 1987 SIC Manual. Id. § 171.0001(12). “Wholesale trade” is defined as activities described in Division F of the 1987 SIC Manual. Id § 171.0001(18). The Tax Code also provides that a taxable entity is primarily engaged in retail or wholesale trade only if:

(1) the total revenue from its activities in retail or wholesale trade is greater than the total revenue from its activities in trades other than the retail and wholesale trades;

(2) less than 50 percent of the total revenue from activities in retail or wholesale trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group; and

(3) the taxable entity does not provide retail or wholesale utilities.

Id. § 171.002(c).

Petitioner contends that its activities should be classified under SIC Divisions G or F, retail and wholesale trade, respectively, while Staff contends Petitioner’s activities are more properly classified under SIC Division C, Construction. The general description of retail trade is found in the introductory section of the SIC Manual, Division G, which includes:

establishments engaged in selling merchandise for personal or household consumption and rendering services incidental to the sale of the goods. In general, retail establishments are classified by kind of business according to the principal lines of commodities sold (groceries, hardware, etc.), or the usual trade designation (drug store, cigar store, etc.).

The introduction to Division F of the SIC Manual states the “division includes establishments or places of business primarily engaged in selling merchandise ... or acting as agents or brokers in buying merchandise....” The introduction then identifies the “chief functions” of establishments included in Division F, which are:

selling goods to trading establishments, or to industrial, commercial, institutional, farm, construction contractors, or professional business users; and bringing buyer and seller together. In addition to selling, functions frequently performed by wholesale establishments include maintaining inventories of goods; extending credit; physically assembling, sorting, and grading goods in large lots; breaking bulk and redistribution in smaller lots; delivery; refrigeration; and various types of promotion such as advertising and label designing.

The descriptions in Divisions F and G require a finding that Petitioner was primarily engaged in making retail or wholesale sales of merchandise. Petitioner contends it falls under SIC classification 5713, Division G: Retail Trade. The description for 5713, Floor Covering Stores is:

Establishments primarily engaged in the retail sale of floor coverings. Establishments included in this industry may incidentally perform installation, but contractors primarily engaged in installing floor coverings for others are classified in Construction, Industry 1752.

Staff contends Petitioner does not fit within the description of a retailer and that Petitioner sells its services to businesses that own or manage multi-family properties. Staff further argues Petitioner does not make retail sales to customers for personal or household use and does not qualify as a business in the retail trade, because its business generally does not feature any of the hallmarks of retail trade as defined by Division G, or floor covering stores as defined for purposes of SIC Code 5713.

Staff further contends that Petitioner was primarily engaged in installing floor covering for others, and it did not concede that any of Petitioner’s revenue is associated with the retail or wholesale trade. Furthermore, the description of establishments included in the description of retail trade states those establishments “may incidentally perform installation.” However, Petitioner’s Exhibit 1c states “COMPANY B is the leading provider of flooring and carpet restoration services to the multifamily industry in the Southwest…” It also confirms Petitioner provides “flooring replacement” and “cleaning and restoration.” Petitioner’s Exhibit 1d states “Quality flooring installation service is what we’re all about here at COMPANY B….”

Petitioner asserts that, in the periods at issue, more than 70% of its revenue was derived from the sale of flooring (excluding labor or other services). The evidence demonstrates that Petitioner’s contracts were lump sum. The lump-sum charge consists of charges for the floor covering, as well as a “cost plus” amount for amounts paid to independent contractors who install the floor covering. The lump-sum invoices sent to a customer include separate line items for the floor covering, related materials, and installation labor. While the invoices do not include separate amounts for each of these line items, as the invoices are lump-sum, COMPANY B internally allocates amounts attributable to each line item based on negotiations with the customer and the cost-plus amount for installation. Each line item on an invoice is associated with an internal “product code” that allows COMPANY B to track its various revenue items. Although Petitioner provided a revenue summary by product code for each audit period and an electronic spreadsheet containing detailed listings of all sales for each year during the audit period, it did not provide source records or contracts with its customers. The Comptroller has held that summary documents that are created by the taxpayer and submitted without underlying support are tantamount to bare assertions, i.e., they are not considered evidence. See, e.g., Comptroller’s Decision Nos. 102,488 (2010). In addition, although Petitioner submitted affidavit evidence, it cannot satisfy its burden of proof with uncorroborated testimony on the ultimate issue to be proven. See Tex. Tax Code §§ 111.0041, 171.211151.025; 34 Tex. Admin. Code § 3.281(b); see, e.g., Comptroller’s Decision Nos. 116,326-116,329 (2022), 102,386 (2014), 104,278 (2012), 105,892 (2012), 30,461 (1994).

Petitioner relies on two Comptroller’s Decisions in support of its position, but the facts presented by those matters are distinguishable. Petitioner first relies bon Comptroller’s Decision Nos. 103,139 and 103,662 (2012). That combined case involved an entity that had three retail stores that were open to the public. The business sought to attract customers by advertising online, on radio, and on television. Its customers could purchase flooring with or without installation services, and the third-party installers were paid on a pass-through basis. The ALJ determined that the customer’s primary interest was in purchasing flooring product and that installation was a secondary consideration. The Comptroller concluded that the entity was entitled to the 0.5% tax rate because the evidence demonstrated that more than 50% of the taxable entity’s revenue was associated with the flooring materials. But those facts are distinguishable from those of the instant matter. Petitioner used third-party installers; but it did not have a showroom or retail stores. Although Petitioner indicated its customers had the option to purchase flooring products without installation, no evidence was presented to show that it sold flooring without installation services. And, as the ALJ has already discussed, there is an evidentiary distinction as well because the evidence presented in the instant matter does not segregate the revenue streams.

Petitioner also cites to Comptroller’s Decision No. 103,624 (2011). In that case, the taxpayer was engaged in the sale and installation of prefabricated windows and doors. It had a showroom that was open to the general public, and the taxpayer submitted evidence demonstrating that approximately 97% of its revenue was associated with the sale of replacement windows that cost approximately $900 each. When the customer wanted to have a replacement window installed, Petitioner added a $75 charge. Those factual findings were critical to resolving Comptroller’s Decision No. 103,624 because, as the SIC Manual stresses in the introductory language to Division C, when presented with difficult classifications involving products and installation, the classification ultimately depends on the analysis of the importance of the product sale versus the installation.

Petitioner’s business used lump-sum contracts, and it did not submit any documentation to identify separate revenue streams, other than its internal attribution of labor and material costs within its lump-sum contracts. Therefore, Petitioner has not met its evidentiary burden of establishing that the sale of flooring products was more important to Petitioner’s customers than the installation or that its revenue from the sale of flooring products was greater than its total revenue from activities in trades other than retail or wholesale trade. See Comptroller’s Decision No. 103,624. Generally, Petitioner’s customers were apartment complex owners or property managers. As similarly found in Comptroller’s Decision No. 102,259 112,259 (2017), the owners or property managers were not just purchasing flooring and they were not just purchasing installation. They were purchasing construction-job performance. No one element of the transactions was more important than the other. Thus, the ALJ finds that Staff properly described Petitioner’s business as a contractor primarily engaged in installing floor coverings, fitting within SIC Code 1752, a code within Division C of the SIC manual. Therefore, the ALJ recommends that the assessments be upheld and Petitioner’s claim for additional interest be denied.

Staff agreed with Petitioner’s claimed COGS deductions in its amended returns. However, Petitioner disagreed with the interest refunded, which is the only issue remaining in the hearings related to the refund claims. Petitioner contends that the interest refunded should be the same as the interest on the assessed delinquent assessment. Staff disagrees.

The rate of interest on delinquent tax is set by statute. The rates are subject to change annually and were not the same for any of the report years in issue. The rate of interest on delinquent tax is set by Tex. Tax Code § 111.060, which is the prime rate plus one percent. The rate of interest for a refund claim is set by Section 111.064, which is the lesser of the annual rate of interest earned on deposits in the state treasury during November of the previous calendar year, as determined by the comptroller, or the rate set in Section 111.060.

Each of Petitioner’s refund claims was approved in full, and Petitioner received credit interest on the amounts due. Credit interest was calculated, pursuant to Section 111.064, using the lower of the prime rate plus one percent or the annual rate of interest earned on deposits in the State treasury. The rate of interest earned on deposits in the State treasury was used, which varied during the subject tax period from .5 to 2 percent.

During verification of the refund claim, the auditor noted that Petitioner was not eligible to use the reduced tax rate available for taxable entities engaged in retail or wholesale trade. Therefore, FVARs were generated to correct the tax rate. Tax due was calculated using the standard franchise tax rate. Interest was assessed on the balance due, pursuant to Section 111.060, calculated using the prime rate plus one percent, which varied during the subject tax period from 4 to 6 percent. The refund and FVAR assignments were processed separately, which is standard procedure for all refund assignments with auditor identified adjustments. Petitioner has not identified error in computation of the interest on the assessed amounts or refunded amounts.

Petitioner’s final contention is that not allowing it to compute its franchise tax liability using the reduced franchise tax rate would violate Petitioner’s right to equal and uniform taxation under Article VIII, Section 1 of the Texas Constitution, and to equal protection and due process under the United States Constitution. To the extent Petitioner contends that the rules or the Tax Code provisions at issue are unconstitutional, the assertions fall outside of the jurisdiction of SOAH. See Comptroller’s Decision No. 112,377 (2018). In administering tax laws, an agency may not determine the constitutionality of a statute or rule. See Tex. State. Bd. of Pharmacy v. Walgreens Tex. Co., 520 S.W.2d 845 (Tex. Civ. App.—Austin 1975, writ ref'd n.r.e.) and Central Power & Light v. Sharp , 960 S.W.2d 617 (Tex. 1997); also see Comptroller's Decision No. 112,377 (2018). Thus, the ALJ lacks the authority to address these arguments. Petitioner’s constitutional claims must be denied.

III.  FINDINGS OF FACT

1. ************** (Petitioner) is the franchise tax reporting entity for an affiliated group that includes COMPANY B.

2. Petitioner and its wholly owned subsidiary, COMPANY B, are in the business of selling and installing flooring products.

3. Petitioner’s business is focused on the multifamily housing industry and its customers are primarily apartment complex owners or property managers who purchase the flooring products for use in individual residential apartment units.

4. The flooring products sold by Petitioner are purchased from third-party manufacturers.

5. Neither Petitioner nor COMPANY B provide utilities, and do not produce the products it sells.

6. Petitioner offers installation of the flooring products it sells, and its customers generally purchase flooring plus installation.

7. Petitioner does not offer installation on a stand-alone basis and over 99% of Petitioner’s sales involve installation.

8. Most of Petitioner’s customers purchase flooring and installation for a lump-sum price.

9. The lump-sum charge consists of charges for the floor covering, as well as a “cost plus” amount for amounts paid to independent contractors who install the floor covering.

10. The lump-sum invoices sent to a customer include separate line items for the floor covering, related materials, and installation labor. While the invoices do not include separate amounts for each of these line items, as the invoices are lump-sum, COMPANY B internally allocates amounts attributable to each line item based on negotiations with the customer and the cost-plus amount for installation. Each line item on an invoice is associated with an internal “product code” that allows COMPANY B to track its various revenue items

11. Petitioner submitted amended franchise reports for report years 2012 through 2015 claiming additional COGS deductions.

12. An auditor was assigned to perform refund verification exams. The auditor agreed with Petitioner’s claimed COGS deductions and approved the refunds in full.

13. Petitioner disagreed with the amount of interest refunded, which is the only issue remaining in the refund claims.

14. Credit interest was calculated, pursuant to Texas Tax Code § 111.064, using the lower of the prime rate plus one percent or the annual rate of interest earned on deposits in the State treasury. The rate of interest earned on deposits in the State treasury was used, which varied during the subject tax period from .5 to 2 percent.

15. Tax due was calculated using the standard franchise tax rate. Interest was assessed on the balance due, pursuant to Texas Tax Code § 111.060, calculated using the prime rate plus one percent, which varied during the subject tax period from 4 to 6 percent.

16. Petitioner calculated its franchise tax by multiplying its taxable margin by the reduced rate applicable in each year, a tax rate that is available for entities primarily engaged in retail or wholesale trades.

17. Petitioner classified its business activity under Standard Industrial Classification (SIC) Code 5713, which is part of Division G, retail trade.

18. SIC Code 5713 includes establishments primarily engaged in the retail sale of flooring products. The manual states that establishments included in this category may incidentally perform installation; however, contractors that are primarily engaged in installing floor coverings for others are classified in Division C (construction) as part of SIC Code 1752.

19. Upon review of Petitioner’s refund claims, the auditor disagreed with the franchise tax rate reported by Petitioner on its original and amended reports and determined that Petitioner was not entitled to the reduced tax rate.

20. The franchise tax rates in effect for the periods at issue are: 2012 and 2013 - 1%, 2014 - 0.975%; and 2015 -0.95%.

21. Field Verified Adjustment Reports (FVAR) were generated for each report year.

22. The refund and FVAR assignments were processed separately, which is standard procedure for all refund assignments with auditor identified adjustments.

23. According to the auditor, Petitioner’s business is best characterized as SIC Code 1752.

24. Petitioner provided affidavits, marketing presentations, screenshots from its website, a subcontractor contract, spreadsheets, and selected invoices. It also provided copies of its amended returns.

25. Detailed examinations resulted in adjustments of the franchise tax rate reported by Petitioner.

26. On June 5, 2019, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) issued Texas Notifications of Exam Results to Petitioner assessing liabilities for each report year consisting of additional tax and interest. Penalty was waived.

27. Petitioner requested a redetermination hearing and a refund hearing for each of the report years.

28. Division C includes establishments primarily engaged in construction, which includes new work, additions, alterations, reconstructions, and repairs. For example, the installation of prefabricated building equipment and materials by general or special trade contractors is classified in this division.

29. The introductory language to Division C of the SIC Manual states that establishments primarily engaged in the distribution and construction of equipment often present classification problems. According to the manual, the salient consideration requires distinguishing the relative importance of sales versus installation.

30. SIC Code 1752, related to floor laying and other floor work, is part of Division C. It includes special trade contractors primarily engaged in the installation of flooring.

31. SIC Manual, Division F includes the wholesale trade, i.e., establishments and places of business that are primarily engaged in selling merchandise to retailers; to industrial, commercial, institutional, farm, construction contractors, or professional business users; or acting as agents or brokers for those types of persons or companies.

32. The SIC Manual states that establishments that are primarily engaged in selling merchandise to construction contractors are included in the wholesale trade division, with a few exceptions related to businesses that make sales both the general public for personal or household use and to business, industrial, or construction contractors.

33. The general description of retail trade is found in the introductory section of the SIC Manual, Division G, which includes establishments engaged in selling merchandise for personal or household consumption and rendering services incidental to the sale of the goods. In general, retail establishments are classified by kind of business according to the principal lines of commodities sold (groceries, hardware, etc.), or the usual trade designation (drug store, cigar store, etc.).

34. The introduction to Division F of the SIC Manual states the “division includes establishments or places of business primarily engaged in selling merchandise ... or acting as agents or brokers in buying merchandise. ” The introduction then identifies the “chief functions” of establishments included in Division F, which are selling goods to trading establishments, or to industrial, commercial, institutional, farm, construction contractors, or professional business users; and bringing buyer and seller together. In addition to selling, functions frequently performed by wholesale establishments include maintaining inventories of goods; extending credit; physically assembling, sorting, and grading goods in large lots; breaking bulk and redistribution in smaller lots; delivery; refrigeration; and various types of promotion such as advertising and label designing.

35. The descriptions in Divisions F and G require a finding that Petitioner was primarily engaged in making retail or wholesale sales of merchandise.

36. The description for 5713, Floor Covering Stores, is establishments primarily engaged in the retail sale of floor coverings. Establishments included in this industry may incidentally perform installation, but contractors primarily engaged in installing floor coverings for others are classified in Construction, Industry 1752.

37. Staff referred the contested cases to the State Office of Administrative Hearings (SOAH) and, on July 22, 2022, ALJ Kathy Pickup issued an Order Scheduling the Hearing on the Merits, which set out the pre-hearing requirements.

38. On July 27, 2022, Staff issued Petitioner Notices of Hearing. The notices contained the date, time, and location of the hearings; a statement of the nature of the hearings; a statement of the legal authority and jurisdiction under which the hearings were 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.

39. Petitioner subsequently filed an unopposed Motion to convert the hearings to written submission, which was granted.

40. The contested case record closed on December 12, 2022.

41. Staff agreed to waive interest from August 1, 2020, to March 16, 2021, for each assessment.

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 hearings in these matters, 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 hearings. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009; .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., Comptroller’s Decision No. 109,787 (2015); 34 Tex. Admin. Code § 1.26(e).

6. Petitioner must demonstrate, by a preponderance of the evidence, that audit assessments are incorrect. 34 Tex. Admin. Code § 1.26(e).

7. A franchise tax is imposed on each taxable entity that does business in this state or that is chartered or organized in this state. Tex. Tax Code § 171.001(a).

8. Franchise tax is calculated by applying the applicable tax rate to the taxable entity’s taxable margin. The standard rate applicable to all taxable entities is a percentage of taxable margin, except for those entities that are “primarily engaged in retail or wholesale trade,” for which the rate is one-half percent of the taxable margin. See Tex. Tax Code § 171.002(a), (b).

9. “Retail trade” is defined as activities described in Division G of the 1987 SIC Manual. Tex. Tax Code § 171.0001(12).

10. “Wholesale trade” is defined as activities described in Division F of the 1987 SIC Manual. Tex. Tax Code § 171.0001(18).

11. A taxable entity is primarily engaged in a retail or wholesale trade only if: (1) the total revenue from its activities in retail or wholesale trade is greater than the total revenue from its activities in trades other than the retail and wholesale trades; (2) less than 50% of the total revenue from activities in retail or wholesale trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group to which the taxable entity also belongs; and (3) the taxable entity does not provide retail or wholesale utilities. Tex. Tax Code § 171.002(c).

12. The Comptroller has held that summary documents that are created by the taxpayer and submitted without underlying support are tantamount to bare assertions, i.e., they are not considered evidence. See, e.g., Comptroller’s Decision Nos. 102,488 (2010).

13. Petitioner cannot satisfy its burden of proof with uncorroborated testimony on the ultimate issue to be proven. See Tex. Tax Code §§ 111.0041, 171.211151.025; 34 Tex. Admin. Code § 3.281(b); see, e.g., Comptroller’s Decision Nos. 116,326-116,329 (2022), 102,386 (2014), 104,278 (2012), 105,892 (2012), 30,461 (1994).

14. The rate of interest on delinquent tax is set by Texas Tax Code § 111.060, which is the prime rate plus one percent.

15. The rate of interest for a refund claim is set by Section 111.064, which is the lesser of the annual rate of interest earned on deposits in the state treasury during November of the previous calendar year, as determined by the comptroller, or the rate set in Section 111.060.

16. To the extent Petitioner contends that the rules or the Tax Code provisions at issue are unconstitutional, the assertions fall outside of the jurisdiction of SOAH. See Comptroller’s Decision No. 112,377 (2018).

17. In administering tax laws, an agency may not determine the constitutionality of a statute or rule. See Tex. State. Bd. of Pharmacy v. Walgreens Tex. Co., 520 S.W.2d 845 (Tex. Civ. App.—Austin 1975, writ ref'd n.r.e.) and Central Power & Light v. Sharp, 960 S.W.2d 617 (Tex. 1997); also see Comptroller's Decision No. 112,377 (2018).

18. The ALJ lacks the authority to address Petitioner’s constitutional claims and they must therefore be denied.

19. Petitioner’s evidence does not support a conclusion that more than 50% of its total revenue was associated with retail or wholesale-trade.

20. Based on the evidence presented, Petitioner has not has not met its evidentiary burden to establish that the sale of flooring products was more important to Petitioner’s customers than the installation.

21. Petitioner’s evidence is insufficient to establish audit error.

22. Interest was calculated in accordance with the relevant statutes.

23. Petitioner’s claim for an interest adjustment should be denied.

24. The audit assessments should be affirmed, except as agreed by Staff.

Signed February 10, 2023.

KATHY PICKUP
ADMINISTRATIVE LAW JUDGE
STATE OFFICE OF ADMINISTRATIVE HEARINGS

 

 

 

ENDNOTES:

[1] The date calculated is 25 days after this decision is signed. See APA, Tex. Gov’t Code § 2001.146(a); S.B. 1095, Acts 2017, 85th Leg.   For additional guidance, refer to the Frequently Asked Questions Related to Motions for Rehearing, found here: http://comptroller.texas.gov/taxes/publications/96-1789.pdf

[2] 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).