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SOAH DOCKET NO. 304-23-02421.26
CPA HEARING NO. 118,524
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: August 1, 2015 THROUGH September 30, 2019
Sales And Use 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 May 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) Trevor Moore of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision (PFD) that includes Findings of Fact and Conclusions of Law. SOAH served the PFD on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure. The ALJ corrected the amended PFD. The ALJ recommended that the Comptroller adopt the corrected amended PFD as written.
After review and consideration, IT IS ORDERED that the corrected amended 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 amended PFD as written 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 4th day of May 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 amended Proposal for Decision as changed
ATTACHMENT B
State Office of Administrative Hearings
Kristofer S. Monson
Chief Administrative Law Judge
April 26, 2023
The Honorable Glenn Hegar
Comptroller of Public Accounts
LBJ Building
111 E. 17th Street, 1st Floor
Austin, TX 78701
RE: SOAH Docket: 304-23-02421.26
TCPA Hearing No.: 118,524 Taxpayer No.: **************
Dear parties:
Please be advised that Staff filed exceptions to the Proposal for Decision (PFD) in this matter on January 31, 2023. Petitioner did not file a response. On February 24, 2023, the undersigned Administrative Law Judge (ALJ) issued an Amended PFD representing my rulings and recommendations on the exceptions. On March 9, 2023, Staff filed exceptions to the Amended PFD. Petitioner filed a response but did not address the exceptions raised by Staff. The Corrected Amended PFD that follows represents the ALJ’s ruling on Staff’s exceptions. The corrections do not constitute a substantive amendment that would afford the parties an opportunity to file exceptions. A copy of the Corrected Amended PFD is enclosed. The ALJ recommends that the Amended PFD be adopted as written.
Sincerely,
Kristopher S. Monson
Chief Administrative Law Judge
ATTACHMENT C
SOAH Docket No. 304-23-02421
TCPA Hearing No. 118,524
**************
TAXPAYER NO: **************
v.
Texas Comptroller of Public Accounts
Before the State Office of Administrative Hearings
Corrected Amended Proposal for Decision
************** (Petitioner) is a Delaware corporation with its headquarters outside Texas. Petitioner submitted a Voluntary Disclosure Submission (Disclosure) to the Comptroller wherein it agreed to remit the Texas sales and use tax due for the period beginning August 1, 2015, and ending August 31, 2019 (Disclosure Period). Petitioner subsequently submitted a summary of its sales in Texas for the Disclosure Period and remitted the Texas sales and use tax due for periods beginning October 1, 2018. After reviewing Petitioner’s Texas sales, the Business Activity Research Team (BART) of the Texas Comptroller of Public Accounts (Comptroller) determined Texas sales and use tax was due for the entire Disclosure Period and issued Petitioner an assessment for tax due and accrued interest. Petitioner requested redetermination, contending it made sales in Texas during the entire Disclosure Period, but arguing that it did not have constitutional nexus with Texas for sales and use tax prior to October 1, 2018. Petitioner also argued the tax assessment was miscalculated. In this Corrected Amended Proposal for Decision (PFD), the Administrative Law Judge (ALJ) recommends affirming the assessment.
I. NOTICE, JURISDICTION, AND PROCEDURAL HISTORY
Staff referred the case to the State Office of Administrative Hearings (SOAH) and, on October 19, 2022, issued a Notice of Hearing by Written Submission to Petitioner. On October 24, 2022, ALJ Trevor Moore issued an Order Setting Written Submission Hearing setting the hearing, establishing filing deadlines, and setting the record closing date of January 17, 2023. Janice Cahalane represented Staff, and Petitioner was represented by **************.
The Proposal for Decision was issued on January 23, 2023. On January 31, 2023, Staff filed Exceptions to the PFD. Petitioner did not file exceptions and did not file a response to Staff’s exceptions. On February 24, 2023, the ALJ issued an Amended PFD. On March 9, 2023, Staff filed exceptions to the Amended PFD Petitioner filed a response, further arguing its motion to reopen the contested case record but not addressing Staff’s exceptions to the Amended PFD.
II. REASONS FOR DECISION
A. Evidence
Petitioner did not file exhibits for the written submission hearing but attached the following exhibits to the Reply to the Position Letter filed with Staff while the case was in redetermination at the Comptroller:
1. Email correspondence, re: Janice Cahalane to **************;
2. Staff’s Position Letter;
3. Selection Form;
4. Copy of Sirius XM Radio, Inc. v. Hegar, No. 20-0462, 2022 WL 879704 (Tex. Mar. 25, 2022);
5. Email correspondence, re: ************** to Janice Cahalane;
6. Tax Adjustment Report;
7. Tax Bases Used for Calculations;
8. Petitioner’s proposed sales tax liability; and
9. Tax Bases Used for Calculations and Petitioner’s tax payment summary;
Staff submitted the pleadings exchanged by the parties while the case was in redetermination at the Comptroller and filed the following exhibits for the written submission hearing:
1. 60-Day Letter;
2. Texas Notification of Exam Results;
3. BART Examination;
4. Petitioner’s Summary Report of Texas sales; and
5. Petitioner’s Listing of Payments.
The parties’ exhibits were admitted without objection.
B. Agreed Adjustments
Staff did not agree to adjust the assessment.
C. Facts Demonstrated by the Evidence
Petitioner is a Delaware corporation with business headquarters outside Texas. During the period at issue, Petitioner made sales of licensed software applications to customers in the United States, including customers in Texas. In September 2019, Petitioner submitted a Voluntary Disclosure Submission (Disclosure) to the Comptroller.[5] In the Disclosure, Petitioner agreed to remit all sales and use tax due on its sales in Texas beginning August 1, 2015, and ending August 31, 2019. In addition, under the terms of the Disclosure, Petitioner agreed that as of September 1, 2019, it would begin collecting sales and use tax on its taxable sales, accruing tax on taxable purchases, and properly reporting sales and use tax to the Comptroller.[6]
At the time it submitted the Disclosure, Petitioner also completed a Texas sales and use tax permit application and a Texas Nexus Questionnaire. In the questionnaire, Petitioner stated it sold and licensed software in Texas during the Disclosure Period and confirmed it had not collected Texas sales or use tax on its Texas sales. Petitioner noted it had an employee that moved to Texas in October 2018 and left employment with Petitioner in August 2019. In October 2020, Petitioner remitted sales and use tax due for the Disclosure Period beginning with October 1, 2018.[7]
Following the execution of the Disclosure, BART conducted an examination of Petitioner’s activities in Texas for sales and use tax for Disclosure Period. The BART examiner determined that during the Disclosure Period Petitioner sold licensed software applications to customers in Texas, was doing business in Texas, and had nexus with Texas for purposes of Texas sales and use tax. Relying on Petitioner’s records of Texas sales, the BART examiner calculated the taxable amount, the tax amount, and the number of “items” sold for each month of the Disclosure Period. See Staff’s Exhibit 4, Summary Report by Month. Exam 1 of the assessment includes the period August 1, 2015, to September 30, 2018, and Exam 2 includes the period October 1, 2018, to September 30, 2019. See id. On December 8, 2020, BART issued a Texas Notification of Exam Results assessing tax and accrued interest for the exam period. Penalty was waived. Petitioner timely requested a redetermination hearing.
Petitioner does not dispute that it sold licensed software applications to customers in Texas during Exam Period. However, Petitioner contends it was not required to remit sales and use tax for Texas sales prior to October 1, 2018, when one of its employees moved to Texas and Petitioner’s physical presence created nexus with Texas. Petitioner also contends the calculation of the tax due is incorrect. Staff maintains Petitioner had sales and use tax nexus during the entire Exam Period because it was engaged in business in Texas. Regarding the calculation of the tax due, Staff maintains Petitioner’s evidence is insufficient to support an adjustment to the assessment.
D. ALJ Analysis and Recommendation
1. Sales and Use Tax Nexus
Texas imposes a tax on each sale of a taxable item in this state as well as the storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state. Tex. Tax Code §§ 151.051, .101. The term “taxable item” includes tangible personal property and taxable services. Tex. Tax Code § 151.010. The sale or use of a taxable item in electronic form instead of on physical media does not alter the item’s tax status. See Tex. Tax Code § 151.010.
Tangible personal property includes a computer program, and the sale, lease, or license of a computer program is a sale of tangible personal property. See Tex. Tax Code § 151.009; 34 Tex. Admin. Code §§ 3.308(c)(1)(A).[8] Tax is due on the sale when the computer program (or a license to use the computer program) is transferred for consideration in Texas, or stored, used, or consumed in Texas, in electronic form or on physical media. See id. § 3.308(c)(1)(A).
A seller is engaged in business in Texas if the seller derives receipts from the sale, lease, or rental of tangible personal property that is located in Texas or owns or uses tangible personal property that is located in Texas; solicits orders for taxable items by mail or through other media including the Internet or other media that may be developed in the future; or otherwise conducts business in Texas. See Tex. Tax Code § 151.107(a)(3), (5), (9); 34 Tex. Admin. Code § 3.286(a)(4)(E), (G), (J). As relevant here, a seller is engaged in business in Texas when it conducts regular reoccurring activities selling software licenses in Texas. See Comptroller’s Decision No. 36,237 (1998); Tax Code § 151.107(a)(3); 34 Tex. Admin. Code § 3.286(a)(4)(E). Each seller who is engaged in business in this state must apply to the Comptroller and obtain a sales and use tax permit for each place of business of the seller operated in this state and a single permit for its out-of-state places of business. 34 Tex. Admin. Code § 3.286(b)(1).
Texas’ authority to tax out-of-state entities cannot conflict with the Texas Constitution or the United States Constitution. Tex. Tax Code § 101.002(b). The Comptroller recognizes the applicability of federal case law in determining whether a taxpayer has sufficient constitutional nexus to subject it to the payment of use tax. See, e.g., Comptroller’s Decision No. 106,632 (2014). Under federal law, states cannot impose collection responsibilities on sellers unless the tax applies to an activity with a substantial nexus with the state, which means the seller “avails itself of the substantial privilege of carrying on business” in that jurisdiction.” See Complete Auto Transit, Inc. v. Brady , 430 U.S. 274 (1977) and Polar Tankers, Inc. v. City of Valdez , 557 U.S. 1 (2009).The United States Supreme Court recently expanded the concept of nexus, overruling the physical presence test articulated in Quill Corporation v. North Dakota, 504 U.S. 298 (1992) and establishing an economic presence test. See South Dakota v. Wayfair, Inc. et al, 138 S.Ct. 2080 (2018).[9]
As set out above, Petitioner made sales of tangible personal property to customers in Texas throughout the Disclosure Period and paid the tax due on the sales made after October 1, 2018, indicating that it agrees there was sales and use tax nexus with Texas as of that date but not in prior periods. The ALJ disagrees. The evidence in the record supports a conclusion that, during the entire Disclosure Period, Petitioner derived receipts from the sale, lease, or rental of tangible personal property in Texas, the software licenses, had substantial nexus with Texas and was engaged in business in Texas. See Tex. Tax Code § 151.107(a)(3). Staff’s evidence demonstrates, prima facie, that Petitioner’s business activities in Texas established sales and use tax nexus in Texas. The burden shifts to Petitioner to prove by a preponderance of the evidence that it lacked the requisite nexus with Texas. See Comptroller’s Decision Nos. 106,632 and 108,826 (2014) and 34 Tex. Admin. Code § 3.286(a)(4)(A), (E). The burden shifts to Petitioner to prove by a preponderance of the evidence that it lacked the requisite nexus with Texas. See Comptroller’s Decision Nos. 106,632 and 108,826 (2014) and 34 Tex. Admin. Code § 3.286(a)(4)(A), (E).
Petitioner argued that it did not have nexus in Texas for purposes of sales and use tax prior to having a physical presence in Texas, citing the holding in a franchise tax case, Sirius XM Radio, Inc. v. Hegar, 643 S.W.3d 402 (2022). The ALJ disagrees with Petitioner’s argument for the reasons set out above addressing Petitioner’s physical presence in Texas. In addition, the ALJ would note that Sirius addressed the apportionment of franchise tax receipts from the provision of services in Texas. Such facts and the resulting analysis by the court in Sirius have no bearing on the issues at bar.
The ALJ concludes Petitioner’s evidence regarding its sales is insufficient to demonstrate, by a preponderance of the evidence, that it was not engaged in business in Texas and did not have sales and use tax nexus with Texas during the Disclosure Period. The contention should remain denied.
2. Calculation of the Sales and Use Tax
In its Reply to the Position Letter, Petitioner argued the sales tax assessment is overstated due to the inclusion of nontaxable sales amounts. Staff maintains Petitioner’s evidence is insufficient to demonstrate error in the assessment.
The law requires retailers to keep records that reflect the total gross receipts from sales and the total purchases of taxable items. Tex. Tax Code § 151.025; 34 Tex. Admin. Code § 3.281(b). At a hearing, a taxpayer must produce contemporaneous records and supporting documentation for the transactions in question to substantiate and enable verification of the taxpayer’s claim related to the amount of tax, penalty, or interest to be assessed, collected, or refunded. 34 Tex. Admin. Code § 1.26(a); Tex. Tax Code § 111.0041.
In this case, Petitioner submitted the Disclosure and provided a report of its Texas sales for the Disclosure Period. The subject assessment was calculated using that sales information. Petitioner did not submit evidence for the hearing to demonstrate error in the assessment, and the ALJ concludes the contention must be denied.
III. FINDINGS OF FACT
1. ************** (Petitioner) is a Delaware corporation with business headquarters outside Texas.
2. During the period at issue, Petitioner made sales of licensed software applications to customers in the United States, including customers in Texas.
3. In September 2019, Petitioner submitted a Voluntary Disclosure Submission (Disclosure) to the Comptroller.
4. In the Disclosure, Petitioner agreed to remit all sales and use tax due on its sales in Texas beginning August 1, 2015, and ending August 31, 2019 (Disclosure Period).
5. Under the terms of the Disclosure, Petitioner agreed that as of September 1, 2019, it would begin collecting sales and use tax on its taxable sales, accruing tax on taxable purchases, and properly reporting sales and use tax to the Comptroller.
6. At the time it submitted the Disclosure, Petitioner also completed a Texas sales and use tax application and a Texas Nexus Questionnaire wherein it described its business as an internet retailer of “customer management relationship software as a service” and stated it sold and licensed software in Texas during the Disclosure Period.
7. Petitioner did not collect of remit Texas sales or use tax on its Texas sales during the Disclosure Period.
8. Petitioner had an employee that moved to Texas in October 2018 and left Petitioner in August 2019.
9. In October 2020, Petitioner remitted sales and use tax due for periods beginning in October 2018.
10. Following the execution of the Disclosure, the Comptroller’s Business Activity Research Team (BART) conducted an examination of Petitioner’s sales activities in Texas for sales and use tax for Disclosure Period.
11. The BART examiner determined that during the Disclosure Period Petitioner sold licensed software applications to customers in Texas, was doing business in Texas, and had nexus with Texas for purposes of Texas sales and use tax.
Source: See PFD, p. 3.
12. Relying on Petitioner’s records of Texas sales, the BART examiner calculated the taxable amount, the tax amount, and the number of “items” sold for each month of the Disclosure Period.
13. Petitioner derived receipts from the sale, lease, or rental of tangible personal property in Texas, the software licenses.
14. Petitioner was engaged in business in Texas during the exam period.
15. Exam 1 of the assessment includes the period August 1, 2015, to September 30, 2018, and Exam 2 includes the period October 1, 2018, to September 30, 2019.
16. On December 8, 2020, BART issued a Texas Notification of Exam Results assessing tax and accrued interest for the exam period. Penalty was waived. Petitioner timely requested a redetermination hearing.
17. Petitioner requested redetermination of the assessment.
18. Staff referred the matter to the State Office of Administrative Hearings (SOAH)
19. On October 19, 2022, Staff issued 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.
20. On October 24, 2022, ALJ Trevor Moore issued an Order Setting Written Submission Hearing setting the hearing, establishing filing deadlines, and setting the record closing date.
21. The contested case record closed on January 17, 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 as well as the storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state. Id. §§ 151.051, .101.
5. The term “taxable item” includes tangible personal property and taxable services. Tex. Tax Code § 151.010.
6. The sale or use of a taxable item in electronic form instead of on physical media does not alter the item’s tax status. Tex. Tax Code § 151.010.
7. Tangible personal property includes a computer program, and the sale, lease, or license of a computer program is a sale of tangible personal property. See Tex. Tax Code § 151.009; 34 Tex. Admin. Code §§ 3.308(c)(1)(A).
8. Tax is due on the sale when the computer program (or a license to use the computer program) is transferred for consideration in Texas, or stored, used, or consumed in Texas, in electronic form or on physical media. See 34 Tex. Admin. Code § 3.308(c)(1)(A).
9. A seller is engaged in business in Texas if the seller derives receipts from the sale, lease, or rental of tangible personal property that is located in Texas or owns or uses tangible personal property that is located in Texas; solicits orders for taxable items by mail or through other media including the Internet or other media that may be developed in the future; or otherwise conducts business in Texas. See Tex. Tax Code § 151.107(a)(3), (5), (9); 34 Tex. Admin. Code § 3.286(a)(4)(E), (G), (J).
10. A seller is engaged in business in Texas when it conducts regular reoccurring activities selling software licenses in Texas. See Comptroller’s Decision No. 36,237 (1998); Tax Code § 151.107(a)(3); 34 Tex. Admin. Code § 3.286(a)(4)(E).
11. The law requires retailers to keep records that reflect the total gross receipts from sales and the total purchases of taxable items. Tex. Tax Code § 151.025; 34 Tex. Admin. Code § 3.281(b).
12. At a hearing, a taxpayer must produce contemporaneous records and supporting documentation for the transactions in question to substantiate and enable verification of the taxpayer’s claim related to the amount of tax, penalty, or interest to be assessed, collected, or refunded. 34 Tex. Admin. Code § 1.26(a); Tex. Tax Code § 111.0041.
13. Texas’ authority to tax out-of-state entities cannot conflict with the Texas Constitution or the United States Constitution. Tex. Tax Code § 101.002(b).
14. The Comptroller recognizes the applicability of federal case law in determining whether a taxpayer has sufficient constitutional nexus to subject it to the payment of use tax. See, e.g., Comptroller’s Decision No. 106,632 (2014).
15. Under federal law, states cannot impose collection responsibilities on sellers unless the tax applies to an activity with a substantial nexus with the state, which means the seller “avails itself of the substantial privilege of carrying on business” in that jurisdiction. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) and Polar Tankers, Inc. v. City of Valdez , 557 U.S. 1 (2009).
16. The United States Supreme Court recently expanded the concept of nexus, overruling the physical presence test articulated in Quill Corporation v. North Dakota, 504 U.S. 298 (1992) and establishing an economic presence test. See South Dakota v. Wayfair, Inc. et al, 138 S.Ct. 2080 (2018).
17. Staff’s evidence demonstrates, prima facie, that Petitioner’s business activities in Texas established sales and use tax nexus in Texas. See Comptroller’s Decision Nos. 106,632 and 108,826 (2014) and 34 Tex. Admin. Code § 3.286(a)(4)(A), (E).
18. Petitioner’s evidence is insufficient to demonstrate, by a preponderance of the evidence, that it was not engaged in business in Texas and did not have sales and use tax nexus with Texas during the Disclosure Period.
19. Petitioner failed to demonstrate error in the assessment.
20. The assessment should be upheld in its entirety.
SIGNED April 26, 2023
Trevor Moore
Presiding Administrative Law Judge
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] See Staff’s Exhibit 4, Summary Report by Month.
[6] The Disclosure also addressed Petitioner’s Texas franchise tax responsibilities.
[7] The payment was applied against the assessment, as reflected in the Texas Notification of Exam Results.
[8] Prior to January 22, 2018, the relevant section was 34 Texas Administrative Code § 3.308(b)(2), (3).
[9] 34 Texas Administrative Code § 3.286(b)(2)(H) provides: Remote sellers will be subject to the permit requirement of this subsection and the collection obligation of subsection (d) of this section beginning on October 1, 2019. The initial twelve calendar months for determining a remote seller's total Texas revenue will be July 1, 2018, through June 30, 2019. If a remote seller's total Texas revenue during that period exceeds the safe harbor amount in subparagraph (B) of this paragraph, the seller shall obtain a permit by October 1, 2019, and begin collecting use tax no later than October 1, 2019.