ATTACHMENT C
SOAH Docket No. 304-23-07264.26
Before the State Office of Administrative Hearings
TCPA Hearing No. 118,345
CORRECTED PROPOSAL FOR DECISION
The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) audited ************** (Petitioner) for sales and use tax compliance and made an assessment that included tax, 10% penalty, and accrued interest. Petitioner requested redetermination and provided additional documentation for consideration. Staff agreed to amend the audit. Petitioner argued errors remained in the amended audit and provided Staff with invoices in support of its contentions. Staff agreed to delete three transactions from the amended audit but argues Petitioner’s evidence is insufficient to support additional adjustments. In this Corrected Proposal for Decision, the Administrative Law Judge (ALJ) recommends affirming the amended assessment, except as agreed by Staff.
I. NOTICE, JURISDICTION, AND PROCEDURAL HISTORY
Staff referred the case to the State Office of Administrative Hearings (SOAH) and on December 13, 2022, issued a Notice of Hearing by Written Submission to Petitioner. On December 14, 2022, ALJ Trevor Moore issued an Order Setting Written Submission Hearing, setting the hearing, establishing filing deadlines, and setting the record closing date of February 13, 2023. Mark Moore represented Staff, and Petitioner was represented by **************.
The Proposal for Decision was issued on February 14, 2023. On February 23, 2023, Staff filed exceptions to the Proposal for Decision. Petitioner did not file exceptions and did not file a response to Staff’s exceptions. This Corrected Proposal for Decision represents the ALJ’s ruling on the exceptions.
Petitioner did not submit argument or file exhibits for the written submission hearing, but attached the following invoices to the pleadings filed with Staff:
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Exam 401, Record ID 2717G-173, COMPANY A, Invoice 9021;
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Exam 401, Record ID 2717G-174, COMPANY A, Invoice 8987;
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Exam 402, Record ID 2717G-175, COMPANY A, Invoice 7629;
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Exam 500, Record ID 2717G-81, COMPANY A, Invoice PP10654;
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Exam 500, Record ID 2717G-84, COMPANY A, Invoice PP10654-1;
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Exam 500, Record ID 2717G-89, COMPANY A, Invoice 881;
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Exam 500, Record ID 2717G-90, COMPANY A, Invoice 1323;
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Exam 500, Record ID 2717G-91, COMPANY A, Invoice 1484;
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Exam 500, Record ID 2717G-100, COMPANY A, Invoice 179;
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Exam 500, Record ID 2717G-104, COMPANY A, Invoice 207;
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Exam 500, Record ID 2717G-112, COMPANY A, Invoice 216;
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Exam 500, Record ID 2717G-142, COMPANY A, Invoice 9623; and
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Exam 500, Reord ID 2717G-143, COMPANY A, Invoice 9908.
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:
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60-Day Letter;
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Texas Notification of Audit Results;
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Penalty & Interest Waiver Worksheet;
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Audit Report;
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Audit Plan;
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Amended Audit Report;
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Amended Audit Plan; and
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Contested Items Spreadsheet.
The exhibits were admitted without objection.
Staff agreed to the audit adjustments as set out in its Exhibit 8. Staff also agreed to interest waiver for the period of September 1, 2020, through September 30, 2021.
C. Facts Demonstrated by the Evidence
Petitioner operates a full-service restaurant in CITY, Texas. The restaurant is unique in that it offers a variety of amusements, including a 500,000-gallon aquarium, a Ferris wheel, a carousel, and a train. In March 2017, Staff initiated a sales and use tax compliance audit for the period of February 1, 2014, through March 31, 2017. Petitioner provided its business records for the audit, and the auditor performed detail examinations for disallowed deductions (Exam 300) and assets (Exam 500) and sample examinations for expenses (Exams 401, 402, and 403). On March 15, 2019, Staff issued Petitioner a Notification of Audit Results assessing tax, 10% penalty, and accrued interest.
Petitioner requested redetermination of the audit and provided additional records to Staff for consideration. Staff subsequently agreed to amend the audit, reducing the tax liability. However, Petitioner maintains Exams 401, 402, and 500 of the audit still contain assessments for 13 nontaxable purchases of labor and incorporated materials used in the repair and maintenance of its railroad. Petitioner contends it should be afforded tax relief because it relied on information provided by Staff during a prior audit. Petitioner also requests a waiver of penalty and interest. Staff agreed to delete three transactions in Exam 500, but otherwise contends Petitioner’s contentions should be denied.
D. ALJ Analysis and Recommendation
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Rolling Stock
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. For example, the repair and maintenance of tangible personal property is a taxable service. See id. § 151.0101(a)(5). However, sales or use tax is not due on the sale or use of locomotives and rolling stock See 34 Tex. Admin. Code § 3.297(f)(1). Sales tax is not due on the amount charged for labor or incorporated materials used to repair, remodel, maintain, or restore locomotives and rolling stock. See id. § 3.297(e)(3) (effective June 18 19, 2017). As of June 18 19, 2017, the Comptroller amended 34 Texas Administrative Code 34 § 3.297 to conform with prior Comptroller guidance, expanding the definition of “railroad” to include “tourist” and “amusement park railroads” See 34 Tex. Admin. Code § 3.297(e)(3); see also Comptroller's Decision No. 36,869 (2000); State Tax Automated Research Document Nos. 7012L0782G14 (December 23, 1970) and 9003L0996A01 (March 30, 1990).
Petitioner contends certain invoices assessed in Exam 500 were for such labor and incorporated materials and, therefore, those assessments should be removed from the audit. Staff agreed to delete three of the 13 transactions cited by Petitioner in its pleadings but contends the balance of the transactions at issue were either items not assessed in the audit or, if assessed, the invoices provided by Petitioner do not contain enough information to demonstrate the materials purchased were used in the repair or maintenance of rolling stock.
In a contested case 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. Petitioner did not submit argument or evidence for the hearing, and in considering the invoices attached to Petitioner’s pleadings, the ALJ finds the evidence in the record is insufficient to support any further audit adjustments to Exam 500. Therefore, except as agreed by Staff, Petitioner’s contention regarding Exam 500 should remain denied.
Petitioner argues that during its prior sales and use tax audit for the period of July 1, 2010, thru January 31, 2014, the auditor reviewed its asset listing, original lease, lease amendments, and donation letter to the City of Houston and found no errors in the Petitioner’s purchases of assets. Petitioner contends it relied to its detriment on the findings from the prior audit when conducting operations in the current audit period and, therefore, the assessments of asset purchases in Exam 500 should be deleted from the audit.
Under the Comptroller’s detrimental reliance policy, the Comptroller will consider giving relief to a taxpayer who was harmed by following erroneous advice given by an agency employee if the taxpayer provided complete and accurate information to the employee. 34 Tex. Admin. Code § 3.10(c). To support a claim of detrimental reliance, the taxpayer’s evidence must demonstrate: (1) the substance of the information or advice and that it was communicated directly to the taxpayer in a private letter ruling; (2) that the taxpayer followed the information or advice; (3) that the taxpayer gave sufficient information to have resulted in correct advice and did not misrepresent information, or withhold or conceal information that would affect the advice; and (4) the taxpayer has suffered, or will suffer, harm based on the erroneous advice unless the Comptroller provides the requested relief. Id. § 3.10(c)(1).
In this case, the substance of the information or advice at issue was received solely through a prior audit and was not communicated directly to Petitioner in a private letter ruling, a requirement for a detrimental reliance claim. See 34 Tex. Admin. Code § 3.10(c)(1). In addition, since the early 1980s, the Comptroller has included a standard disclaimer in the notification of audit results that cautions taxpayers that an audit result cannot be relied on as an approval of the taxpayer’s reporting system. See Comptroller’s Decision No. 104,832 (2011). It is well settled that a taxpayer who receives the standard disclaimer cannot use the audit result to assert detrimental reliance in future audits. Id. Petitioner’s claim of detrimental reliance must be denied.
Petitioner contends the evidence in the record supports a finding that its failure to pay any sales and use tax found due was not intentional. The ALJ agrees. However, a taxpayer’s intent to not pay or remit the tax due is not relevant to determining the applicability of the 10% penalty. Rather, late penalties are automatically imposed on delinquent taxes, and the Comptroller has the discretionary authority to waive late penalties if a taxpayer exercised reasonable diligence to comply with tax laws. Tex. Tax Code §§ 111.061; .103. In making the reasonable diligence determination, the Comptroller considers the following factors: the taxpayer’s audit history, the tax issues involved, whether a change in Comptroller policy occurred during the audit period, whether changes in the law took effect during the audit period, the size and sophistication of the taxpayer, whether tax was collected but not remitted, whether returns were timely filed, the completeness of the taxpayer’s records, the taxpayer’s efforts to comply with the recordkeeping requirements of this state, delinquencies in other taxes, reliance on advice provided by the Comptroller’s office, and the error rate in the current audit. 34 Tex. Admin. Code § 3.5(b)(3), (d). To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that penalty waiver is warranted. See id. § 1.26(e); see also Comptroller’s Decision No. 102,268 (2014).
In this case, Petitioner did not have delinquent or late-filed returns during the audit period. However, the current audit found the same type of errors as assessed in Petitioner’s prior audit, and the error percentage increased in the current audit, though slightly. Therefore, while Petitioner’s underreporting may not have been intentional, the ALJ finds Petitioner failed to demonstrate, by a preponderance of the evidence, that it exercised reasonable diligence to comply with the tax laws. The request for penalty waiver should be denied.
Delinquent taxes draw interest beginning 60 days after the date due. Tex. Tax Code § 111.060(c). The Comptroller has discretionary authority to waive interest assessments and may exercise his discretion if interest was imposed as a result of undue delay caused by Comptroller personnel, reliance on advice provided by the Comptroller’s office, or natural disaster. Id. § 111.103; 34 Tex. Admin. Code § 3.5(e).
To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that interest waiver is warranted. See 34 Tex. Admin. Code § 1.26(e); see also Comptroller’s Decision Nos. 102,268 and 109,069 (2014). Staff agreed to a partial waiver of interest due to delay, but the ALJ concludes Petitioner failed to demonstrate that any additional interest waiver is warranted.
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************** (Petitioner) operates a full-service restaurant in CITY, Texas.
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The restaurant offers a variety of amusements, including a 500,000-gallon aquarium, a Ferris wheel, a carousel, and a train.
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In March 2017, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) initiated a sales and use tax compliance audit for the period of February 1, 2014, through March 31, 2017.
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Petitioner provided its business records for the audit, and the auditor performed detail examinations for disallowed deductions (Exam 300) and assets (Exam 500) and sample examinations for expenses (Exams 401, 402, and 403).
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On March 15, 2019, Staff issued Petitioner a Notification of Audit Results assessing tax, 10% penalty, and accrued interest.
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Petitioner did not have late-filed sales and use tax returns during the audit period.
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The overall error rate for the audit increased slightly from Petitioner’s previous sales and use tax audit.
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Petitioner did not receive taxability advice or instruction from the Comptroller in the form of a private letter ruling.
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Petitioner requested redetermination of the assessment.
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Petitioner provided additional records to Staff for consideration, and Staff agreed to amend the audit, reducing the tax liability.
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Staff referred the matter to the State Office of Administrative Hearings (SOAH)
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On December 13, 2023, 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.
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On December 14, 2023, ALJ Trevor Moore issued an Order Setting Written Submission Hearing setting the hearing, establishing filing deadlines, and setting the record closing date.
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The contested case record closed on February 13, 2023.
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Staff agreed to the audit adjustments as set out in its Exhibit 8.
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Staff agreed to interest waiver for the period of September 1, 2020, through September 30, 2021.
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The Comptroller has jurisdiction over this matter. See Tex. Tax Code ch. 111.
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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.
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Staff provided proper and timely notice of the hearing. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009.
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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.
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The term “taxable item” includes tangible personal property and taxable services. Tex. Tax Code § 151.010.
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The repair and maintenance of tangible personal property is a taxable service. Tex. Tax Code § 151.0101(a)(5).
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Sales or use tax is not due on the sale or use of locomotives and rolling stock See 34 Tex. Admin. Code § 3.297(f)(1).
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Sales tax is not due on the amount charged for labor or incorporated materials used to repair, remodel, maintain, or restore locomotives and rolling stock. See id. § 3.297(e)(3) (effective June 18 19, 2017).
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34 Texas Administrative Code 34 § 3.297 was amended as of June 18 19, 2017, to conform with prior Comptroller guidance, expanding the definition of “railroad” to include “tourist” and “amusement park railroads” See 34 Tex. Admin. Code § 3.297(e)(3); see also Comptroller's Decision No. 36,869 (2000); State Tax Automated Research Document Nos. 7012L0782G14 (December 23, 1970) and 9003L0996A01 (March 30, 1990).
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In a contested case 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.
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Under the Comptroller’s “detrimental reliance” policy, the Comptroller will consider giving relief to a taxpayer who was harmed by following erroneous advice given by an agency employee if the taxpayer provided complete and accurate information to the employee. 34 Tex. Admin. Code § 3.10(c).
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To support a claim of detrimental reliance, the taxpayer’s evidence must demonstrate: (1) the substance of the information or advice and that it was communicated directly to the taxpayer in a private letter ruling; (2) that the taxpayer followed the information or advice; (3) that the taxpayer gave sufficient information to have resulted in correct advice and did not misrepresent information, or withhold or conceal information that would affect the advice; and (4) the taxpayer has suffered, or will suffer, harm based on the erroneous advice unless the Comptroller provides the requested relief. 34 Tex. Admin. Code § 3.10(c)(1).
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Since the early 1980s, the Comptroller has included a standard disclaimer in the notification of audit results that cautions taxpayers that an audit result cannot be relied on as an approval of the taxpayer’s reporting system. See Comptroller’s Decision No. 104,832 (2011).
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A taxpayer who receives the standard disclaimer cannot use the audit result to assert detrimental reliance in future audits. See Comptroller’s Decision No. 104,832 (2011).
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Petitioner failed to establish its claim that it relied on Comptroller advice to its detriment.
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Late penalties are automatically imposed on delinquent taxes, and the Comptroller has the discretionary authority to waive late penalties if a taxpayer exercised reasonable diligence to comply with tax laws. Tex. Tax Code §§ 111.061; .103.
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In making the reasonable diligence determination, the Comptroller considers the following factors: the taxpayer’s audit history, the tax issues involved, whether a change in Comptroller policy occurred during the audit period, whether changes in the law took effect during the audit period, the size and sophistication of the taxpayer, whether tax was collected but not remitted, whether returns were timely filed, the completeness of the taxpayer’s records, the taxpayer’s efforts to comply with the recordkeeping requirements of this state, delinquencies in other taxes, reliance on advice provided by the Comptroller’s office, and the error rate in the current audit. 34 Tex. Admin. Code § 3.5(b)(3), (d).
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Petitioner must demonstrate, by a preponderance of the evidence, that penalty waiver is warranted. See 34 Tex. Admin Code § 1.26(e); see also Comptroller’s Decision No. 102,268 (2014).
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The ALJ finds Petitioner failed to demonstrate, by a preponderance of the evidence, that it exercised reasonable diligence to comply with the tax laws.
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The request for penalty waiver should be denied.
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Delinquent taxes draw interest beginning 60 days after the date due. Tex. Tax Code § 111.060(c).
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The Comptroller has discretionary authority to waive interest assessments and may exercise his discretion if interest was imposed as a result of undue delay caused by Comptroller personnel, reliance on advice provided by the Comptroller’s office, or natural disaster. Tex. Tax Code § 111.103; 34 Tex. Admin. Code § 3.5(e).
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To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that interest waiver is warranted. See 34 Tex. Admin. Code § 1.26(e); see also Comptroller’s Decision Nos. 102,268 and 109,069 (2014).
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The ALJ concludes Petitioner failed to demonstrate that interest waiver is warranted, except as agreed by Staff.
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Petitioner failed to demonstrate error in the amended assessment, except as agreed by Staff.
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The amended audit assessment should be upheld, except as agreed by Staff.
Trevor Moore
Presiding Administrative Law Judge