SOAH DOCKET NO. 304-23-02386.26
CPA HEARING NO. 117,644

RE:  **************
TAXPAYER NO:    **************
AUDIT OFFICE:    **************
AUDIT PERIOD:   April 1, 2015 THROUGH October 31, 2018

Sales And Use Tax/RDT

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

GLENN HEGAR
Texas Comptroller of Public Accounts

PERRY HEITMAN
Representing Respondent

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

 

COMPTROLLER’S DECISION

This decision is considered final on 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 result from this Decision is Attachment 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.

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 24th day of February 2023

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, Corrected Proposal for Decision as changed

 

 

ATTACHMENT B

 

 

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

February 16, 2023

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

RE: SOAH Docket: 304-23.02386.26
TCPA Hearing No.:  117,644 Taxpayer No.: **************
************** v. Texas Comptroller of Public Accounts

 

Dear Comptroller Hegar:

Please be advised that Staff filed exceptions to the Proposal for Decision (PFD) in this matter on January 18, 2023. Petitioner did not file a response.

In its exceptions Staff states that the PFD misstates the law applicable to transit taxes, as the distinction between transit taxes and other local sales and use taxes was nullified by statute in 2007. The reasoning in the PFD is quoted from 34 Tex. Admin Code 3.356(k). However, it appears Rule 3.356(k) is partially incorrect, as identified by the part underlined by Staff in its exceptions, after the statutory amendments in 2007. The ALJ agrees with Staff’s exceptions and has corrected the PFD to reflect the law applicable to local sales and use taxes.

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
Administrative Law Judge

 

 

ATTACHMENT C

 

 

SOAH DOCKET NO. 304-23-02386.26
CPA HEARING NO. 117,644

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

v.

TEXAS COMPTROLLER OF PUBLIC ACCOUNTS

BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS

 

Corrected Proposal for Decision

The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) audited ************** (Petitioner) for compliance with sales and use tax laws and made an assessment that included tax, 10% late penalty, and accrued interest. Subsequently, Petitioner provided additional documentation and Staff agreed to amend the audit, but disputes remain. Staff argues that Petitioner’s documentation fails to establish error in the amended audit. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends affirming the amended assessment.

I.  NOTICE, JURISDICTION, AND PROCEDURAL HISTORY

Staff referred the contested case to the State Office of Administrative Hearings (SOAH) and, on October 6, 2022, issued a Notice of Hearing by Written Submission to Petitioner. On October 17, 2022, ALJ Kathy Pickup issued Order No. 1, which set the written submission hearing. Petitioner’s president, **************, represented Petitioner. Perry Heitman represented Staff. The record closed on January 9, 2023.

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

1. 60-Day Letter;

2. Texas Notification of Audit Results;

3. Penalty and Interest Waiver Worksheet;

4. Audit Report;

5. Audit Plan;

6. Amended Audit Report; and

7. Amended Audit Plan.

Petitioner offered the following exhibits:

1. Evidence Submission Spreadsheet Indexing Submissions to Auditor for Review with Notes and Letter of Question;

2. Additional Source Documents[5];

3. Evidence Submission E-Mail Correspondence; and

4. Auditor’s Reply to Submission.

The parties’ exhibits are admitted into the record without objection.

B.  Agreements

Staff did not agree to adjust the amended audit.

C.  Facts Established by the Evidence

During the period at issue, Petitioner provided construction services as well as pest control and extermination services. In January 2019, Staff initiated an audit of Petitioner’s business for sales and use tax compliance for the period April 1, 2015, through October 31, 2018.

In response to the auditor’s request for business records, Petitioner provided bank statements and federal income tax returns. The auditor reconciled Petitioner’s collection of sales tax from customers and amounts reported to the Comptroller. Tax collected but not remitted (“TCNR”) is scheduled in Exam 100. Due to incomplete records, the auditor estimated Petitioner’s taxable sales using Petitioner’s bank statements and federal income tax returns and scheduled additional taxable sales in Exam 200.

On July 17, 2019, Staff issued a Texas Notification of Audit Results to Petitioner, assessing sales and use tax, 10% penalty, and accrued interest. Petitioner requested redetermination of the assessment and provided additional documentation establishing that the audit included assessments of nontaxable real property construction services and nontaxable pest control services performed for independent school districts. The auditor reviewed the documentation related to independent school districts and traced invoices and payments from the exempt entities to the customer deposit detail reports as proof of deposit. The auditor scheduled approximately 200 payments from the exempt entities and reduced additional taxable sales in Exam 200 for the payments from the school districts.

The auditor also reviewed a construction contract and discovered that the work was performed under a separated residential contract to replace a roof. The contract indicated that no tax was charged on the separated cost of materials. The auditor therefore adjusted additional taxable sales for July 2016 in Exam 200 for the $4,865.00 charge for residential labor. No adjustments were made to Exam 100.

Petitioner contends that the amended assessment is based on deposits only and does not take into consideration all owner capital investment, capital infusion, sales of assets, or loans deposited into the bank accounts; that the amended assessment did not take into consideration all nontaxable services sold in the course of business; and that the amended assessment is incorrect because TCNR was calculated using erroneous local tax rates. Staff disagreed with Petitioner’s contentions, arguing Petitioner has not presented documentation to support further adjustments to the amended audit, and referred the matter to SOAH.

D.  ALJ’S Analysis and Recommendation

Texas imposes a tax on each sale of a taxable item in this state. Tex. Tax Code § 151.051. The term “taxable item” includes tangible personal property and taxable services. Id. § 151.010. To impose tax on a service, Staff must demonstrate not only that a service was sold but also that the service was taxable. See, e.g., Comptroller’s Decision No. 102,386 (2014). If Staff meets it initial prima facie burden, Petitioner must establish by a preponderance of the evidence that the service is not taxable, or by clear and convincing evidence that the work was exempt from taxation. 34 Tex. Admin. Code § 1.26; see also Comptroller’s Decision Nos. 100,933 (2009); 102,792 (2010). A taxpayer is generally required to support its contentions with source records, and assertions in pleadings are insufficient to meet the burden of proof. See, e.g., Comptroller’s Decision No. 105,892 (2012).

Sellers of taxable items, including persons who perform taxable services, are required to keep records that reflect total gross receipts and total purchases, as well as records to substantiate any claimed deductions or exclusions. Tex. Tax Code § 151.025(a)(3); 34 Tex. Admin. Code 3.281(a), (b). If a taxpayer fails to keep accurate records of gross receipts, gross purchases, deductions, and exclusions, the Comptroller may take actions that include estimating the person’s tax liability based on the best information available. Tex. Tax Code § 111.0042(d).

The ALJ concludes that the audit was based on the best information available, Petitioner’s records. Although Petitioner argues the amended audit did not take into consideration all owner capital investment, capital infusion, sales of assets, or loans deposited into the bank accounts, it failed to provide complete records. Petitioner also contends in its written submission that it provided over 150 contracts to the auditor and only one was considered during the redetermination period. However, those contracts were not provided in this hearing and no information was provided by Petitioner to identify contested transactions to which the contracts correspond.

Petitioner does not dispute that it sold taxable pest control services. See Tex. Tax Code §§ 151.0101(a)(11), .0048(a)(5); see also 34 Tex. Admin. Code § 3.356(a)(8). Petitioner also provided taxable real property repair and remodeling services. Tex. Tax Code §§ 151.0101(a)(13), .0047. When performing real property services, a properly completed resale certificate may be used to purchase tangible personal property tax free if the care, custody, and control of the property is transferred to the customer as part of the real property service. 34 Tex. Admin. Code § 3.356(c)(1). In such cases, tax is due on the total amount charged the customer, including amounts for the tangible personal property and for the services. Id.

Due to the changes made by the Texas Legislature to the statutes governing the imposition and allocation of sales taxes for local mass transit authority (MTA) jurisdictions, local MTA taxes are now collected in the same manner as all other local sales and use taxes, i.e., based on the location of the seller’s place of business. See Acts 2007, 80th Leg., R.S., ch. 823, Section 1, H.B. 142, repealing Tex. Tax Code Sections 322.105(d) and .107. Therefore, effective September 1, 2007, local transit sales taxes are collected on all sales of taxable items shipped or delivered to a location in Texas from a place of business located within a transit tax jurisdiction, including sales shipped or delivered to a location outside the boundaries of the transit taxing jurisdiction. Comptroller’s Decision No. 110,238 (2015).

Petitioner charged its customers 8.25% tax on all sales regardless of the service location based on available invoices but remitted only 6.75%. 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 to the state for the full amount collected plus any accrued penalties and interest on the amount collected. Tex. Tax Code § 111.016(a). If amounts are collected as tax in transactions on which tax is not due, the Comptroller will require, under the doctrine of unjust enrichment, that these amounts be remitted to the state or be refunded to the customers from whom they were collected. 34 Tex. Admin. Code § 3.2(c). Because Petitioner has not provided documentation to show that it did not collect 8.25% tax, that it remitted more than 6.75% tax, or that it refunded excess tax collected to its customers, Petitioner’s contention should be denied.

Considering the evidence in the record, Staff met its initial burden to demonstrate that Petitioner sold taxable pest control services and real property repair and remodeling services during the audit period. Therefore, it is Petitioner’s burden to prove audit error, by a preponderance of the evidence(e.g., that the disputed transactions were not taxable), or by clear and convincing evidence that the disputed transactions were exempt from taxation. See 34 Tex. Admin. Code § 1.26(c), (e).

In a hearing, a taxpayer must produce contemporaneous records and supporting documentation appropriate to the tax or fee for the transactions in question to substantiate and enable verification of its claim of audit error. Tex. Tax Code § 111.0041(c). Here, Petitioner did not submit complete documentation for the hearing. The ALJ concludes Petitioner did not meet its burden to demonstrate error in the amended audit and, therefore, Petitioner’s contentions should be denied, and the amended assessment should be upheld.

III.  FINDINGS OF FACT

1. During the period at issue, ************** (Petitioner) provided construction services as well as pest control and extermination services.

2. In January 2019, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) initiated an audit of Petitioner’s business for sales and use tax compliance for the period April 1, 2015, through October 31, 2018.

3. In response to the auditor’s request for business records, Petitioner provided bank statements and federal income tax returns.

4. The auditor reconciled Petitioner’s collection of sales tax from customers with amounts reported to the Comptroller and scheduled tax collected but not remitted (“TCNR”) in Exam 100.

5. Due to incomplete records, the auditor estimated Petitioner’s taxable sales using Petitioner’s bank statements and federal income tax returns and scheduled additional taxable sales in Exam 200.

6. On July 17, 2019, Staff issued a Texas Notification of Audit Results to Petitioner, assessing sales and use tax, 10% penalty, and accrued interest.

7. Petitioner requested redetermination of the assessment and provided additional documentation to support nontaxable real property construction services and nontaxable pest control services performed for independent school districts.

8. The auditor reviewed the documentation related to independent school districts and traced invoices and payments from the exempt entities to the customer deposit detail reports as proof of deposit.

9. The auditor scheduled approximately 200 payments from the exempt entities and reduced additional taxable sales in Exam 200 for the payments from the school districts.

10. The auditor reviewed a construction contract and discovered that the work was performed under a separated residential contract to replace a roof. The contract indicated that no tax was charged on the separated cost of materials. The auditor therefore adjusted additional taxable sales for July 2016 in Exam 200 for the $4,865.00 charge for residential labor.

11. No adjustments were made to Exam 100.

12. Staff referred the case to the State Office of Administrative Hearings (SOAH), and on October 6, 2022, issued Petitioner a Notice of Hearing by Written Submission. The notice contained a statement of the nature of the hearing; a statement of the legal authority and jurisdiction under which the hearing was to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the factual matters or an attachment that incorporated by reference the factual matters asserted in the complaint or petition filed with the state agency.

13. On October 17, 2022, the Administrative Law Judge issued Order No. 1, which set the written submission hearing.

14. The record closed on January 9, 2023.

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. § 151.010.

6. Only those services that are specifically enumerated in Texas Tax Code § 151.0101 are taxable.

7. To impose tax on a service, Staff must demonstrate not only that a service was sold but that the service is taxable. See, e.g., Comptroller’s Decision No. 102,386 (2014).

8. If Staff demonstrates, prima facie, that a service is taxable, it becomes the taxpayer’s burden to prove audit error by a preponderance of the evidence, or by clear and convincing evidence that the taxable service was exempt from taxation. 34 Tex. Admin. Code § 1.26.

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

10. Sellers of taxable items, including persons who perform taxable services, are required to keep records that reflect total gross receipts and total purchases, as well as records to substantiate any claimed deductions or exclusions. Tex. Tax Code § 151.025(a)(3); 34 Tex. Admin. Code 3.281(a), (b).

11. If a taxpayer fails to keep accurate records of gross receipts, gross purchases, deductions, and exclusions, the Comptroller may take actions that include estimating the person’s tax liability based on the best information available. Tex. Tax Code § 111.0042(d).

12. The audit was based on the best information available.

13. Pest control services are taxable. See Tex. Tax Code §§ 151.0101(a)(11), .0048(a)(5); see also 34 Tex. Admin. Code § 3.356(a)(8).

14. Real property repair and remodeling services are taxable. Tex. Tax Code §§ 151.0101(a)(13), .0047.

15. When performing real property services, a properly completed resale certificate may be used to purchase tangible personal property tax free if the care, custody, and control of the property is transferred to the customer as part of the real property service. 34 Tex. Admin. Code § 3.356(c)(1).

16. In such cases, tax is due on the total amount charged the customer, including amounts for the tangible personal property and for the services. 34 Tex. Admin. Code § 3.356(c)(1).

17. Local sales and use taxes apply to services in the same way as they apply to tangible personal property. 34 Tex. Admin. Code § 3.356(k).

18. Local MTA taxes are collected in the same manner as all other local sales and use taxes, i.e., based on the location of the seller’s place of business. See Acts 2007, 80th Leg., R.S., ch. 823, Section 1, H.B. 142, repealing Tex. Tax Code Sections 322.105(d) and .107.

19. Effective September 1, 2007, local transit sales taxes are collected on all sales of taxable items shipped or delivered to a location in Texas from a place of business located within a transit tax jurisdiction, including sales shipped or delivered to a location outside the boundaries of the transit taxing jurisdiction. See Comptroller’s Decision No. 110,238 (2015).

20. 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 to the state for the full amount collected plus any accrued penalties and interest on the amount collected. Tex. Tax Code § 111.016(a).

21. If amounts are collected as tax in transactions on which tax is not due, the Comptroller will require, under the doctrine of unjust enrichment, that these amounts be remitted to the state or be refunded to the customers from whom they were collected. 34 Tex. Admin. Code § 3.2(c).

22. A taxpayer must produce contemporaneous records and supporting documentation appropriate to the tax or fee for the transactions in question to substantiate and enable verification of its claim of audit error. Tex. Tax Code § 111.0041(c).

23. Staff’s evidence demonstrates, prima facie, that Petitioner performed taxable pest control services and real property repair and remodeling services during the period at issue.

24. Petitioner failed to demonstrate error in the amended audit.

25. The amended audit assessment should be affirmed.

Signed February 16, 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).

[5] Petitioner paginated the Exhibit as pages 59-91.