So this one is a pretty big horror story. We have a taxpayer that has customers all around the world, but the totality of there deposits were compared to what was reported to the state of Texas for Texas sales and the difference was scheduled.
Any sales to other jurisdictions would not be reported to Texas, so that procedure leads to out of state sales being assessed tax on. This seems like the sort of situation where further understanding of exactly what to present would have lead to a much more reasonable result for the taxpayer.
Good law because again, the ALJ put it clearly what would have been more compelling evidence in this scenario.
201710006H
SOAH DOCKET NO. 304-17-1035.26
CPA HEARING NO. 112,071
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: October 1, 2009 THROUGH December 31, 2013
Sales And Use Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
ROBERT SCOTT
Representing Respondent
**************
Representing Petitioner
COMPTROLLER’S DECISION
This decision is considered final on November 13, 2017, 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) Victor J. Simonds of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision (PFD) that includes Findings of Fact and Conclusions of Law. SOAH served the PFD on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure. The ALJ recommended that the Comptroller adopt the PFD as written.
After review and consideration, IT IS ORDERED that the PFD is adopted as written.
The result from this Decision is Attachment A. The ALJ’s letter to the Comptroller is Attachment B. The PFD as written is Attachment C. Attachments A, B, and C are incorporated by reference.
Attachment A reflects a liability.
The total sum of the tax, penalty, and interest is due and payable 20 days after a comptroller’s decision becomes final.[2] If such sum is not timely paid, an additional penalty of 10 percent of the taxes due will accrue.
SIGNED on this 17th day of October 2017.
GLENN HEGAR
Comptroller of Public Accounts
By: Mike Reissig
Deputy Comptroller
Attachment A, Texas Notification of Hearing Results
Attachment B, ALJ’s letter to the Comptroller
Attachment C, Proposal for Decision as written
Publication: “Frequently Asked Questions Related to Motions for Rehearing”
ATTACHMENT C
SOAH DOCKET NO. 304-17-1035.26
TCPA DOCKET NO. 112,071
**************
Taxpayer No. **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
PROPOSAL FOR DECISION
In the periods at issue, ************** (Petitioner) sold mobile telephones and accessories, both as a wholesaler and as a retailer. The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) performed a sales and use tax compliance audit and concluded that Petitioner collected tax without remitting it and underreported taxable sales. Staff issued an assessment, and Petitioner requested redetermination. For example, Petitioner contends the audit erroneously scheduled tax-exempt transactions and nontaxable receipts, such as loan proceeds and account transfers. Petitioner also contends it is entitled to penalty and interest waiver. Staff reviewed documentation that Petitioner presented and agreed to make some audit adjustments. Staff also agreed to a partial interest waiver; however, several disputes remain. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends that the audit assessment be affirmed, except as agreed by Staff.
I. PROCEDURAL HISTORY, NOTICE, AND JURISDICTION
Staff referred the contested case to the State Office of Administrative Hearings (SOAH) and, on November 9, 2016, it issued a Notice of Hearing by Written Submission to Petitioner. On the same date, ALJ Victor John Simonds issued Order No. 1, which set the written submission hearing. Petitioner was represented by ************** of COMPANY. Staff was represented by Assistant General Counsel Robert E. Scott. The contested case record closed on May 4, 2017. 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 Presented
Staff presented the pleadings the parties exchanged before referring the contested case to SOAH and offered the following exhibits into evidence:
Sixty-Day Letter;
Texas Notification of Audit Results;
Penalty and Interest Waiver Worksheet;
Audit Report; and
Audit Plan of Activities.
Attached to Staff’s Position Letter is a Schedule of Disputed and Agreed Transactions (also known as an AP 124 Schedule). Petitioner attached the following exhibits to its pleadings:
Sales Journal and Sales Tax Report, re: 2010;
Auditor Preliminary Schedules (partial);
AP 124 Schedule (duplicate);
Bank Deposit Summary;
Transaction Schedules and Internal Revenue Service (IRS) Form 1099, re: 2013;
Statements of Individuals (employees and lenders); and
Schedule of International Shipments.
Each party’s exhibits were admitted into the record without objection.
B. Staff Agreed Adjustments
Staff reviewed the documentation that Petitioner provided and agreed to delete certain transactions from the audit schedules. Staff also agreed to waive interest accruals for the period May 1, 2016, through July 31, 2016. See Notice of Hearing by Written Submission and Staff’s AP 124 Schedule.[3]
C. Facts Demonstrated by the Evidence
In the period October 1, 2009, through December 31, 2013, Petitioner sold mobile telephones and accessories as a wholesaler and as a retailer. It also provided services such as unlocking, flashing, and mobile telephone repairs. Petitioner sold products to customers all around the world, e.g. China. INDIVIDUAL, a corporate officer, was responsible for running the business. He purchased inventory, made bank deposits, signed checks, and completed and signed sales tax returns.
In May 2014, Staff initiated a sales and use tax compliance audit. Petitioner provided exemption certificates, sales invoices, sales journals, general ledgers, and federal income tax returns. The auditor reviewed the documents and noted several errors. For example, the auditor determined that there was some tax that was collected but not remitted. See Staff’s Exhibit No. 4, Exam 1. However, the much larger errors were based on the auditor’s conclusion that, though the sales journals generally reconciled with the reported gross sales, the bank statements reflected large amounts that were not included or accounted for in Petitioner’s journals. For example, in 2010, bank deposits exceeded reported gross sales by over $1.7 million; in 2011, the disparity swelled to $7.1 million; in 2012, it was $11.8 million; and for the first-half of 2013, the difference was over $8 million. The auditor also found that the sales Petitioner reported to the state did not always match the amounts that were reported to the federal government. See Staff’s Exhibit No. 4, Exam 2. The calculated overall audit error rate was 99.63%.[4] The auditor submitted a request seeking approval to add the 50% additional penalty to the audit assessment; however, the request was rejected by the review committee. On April 3, 2014, Staff issued a Texas Notification of Audit Results to Petitioner assessing a liability of $3,451,042.23 (inclusive of tax, penalties, and interest accrued to the account as of the statement date). Petitioner requested redetermination. Staff reviewed the documentation that Petitioner submitted to the auditor and agreed that the audit schedules should be amended. For example, the Exam 2 taxable amount was reduced from $36,284,047.94 to $25,077,228.62. In reply to Staff’s Position Letter, Petitioner submitted various transaction summaries, Form 1099s, and unsworn statements. Staff declined to recommend further adjustments, generally arguing that Petitioner’s evidence was not persuasive.
D. Analysis and ALJ’s Recommendations
A tax is imposed on each sale in this state of tangible personal property and taxable services. Tex. Tax Code §§ 151.010, .051. A “sale” includes a transfer of title or possession of tangible personal property, and the exchange, barter, lease, or rental of tangible personal property. Id. § 151.005. Retailers are required to keep records that reflect the total gross receipts from sales and the total purchases of taxable items. Id. § 151.025; see also 34 Tex. Admin. Code § 3.281(b). For example, a taxpayer is required to keep records to substantiate each claimed deduction or exclusion authorized by law. Tex. Tax Code § 151.025(a)(3). Additionally, all gross receipts of a seller are presumed to have been subject to the sales tax unless a properly completed resale or exemption certificate is accepted by the seller. Id. § 151.054(a). Treating transactions that lack documentation as taxable is supported by statute. See, e.g., Comptroller’s Decision Nos. 103,035 (2014); 39,765 (2003). Moreover, 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 any available information, including records of suppliers. Tex. Tax Code §§ 111.0042(d), .008(a). Staff’s evidence is sufficient to establish, prima facie, that Petitioner’s records were incomplete and unreliable; therefore, the estimated audit was authorized by statute. The audit schedules were based on Petitioner’s bank statements and other available records. The ALJ finds that the best information available was utilized. Therefore, it is Petitioner’s burden to show audit error. See 34 Tex. Admin. Code § 1.40(2), which provides that the burden of proof is on the taxpayer, by clear and convincing evidence, if it claims a transaction is exempt from taxation; or, by a preponderance of the evidence, if it contends that an action, or proposed action, of Staff is unwarranted.
To meet its burden, Petitioner submitted certain documents with its reply to Staff’s Position Letter. However, as Staff states, the summary documents and unsworn statements that Petitioner provided are unpersuasive and are insufficient to meet Petitioner’s burden of proof, particularly with respect to its claims to exemptions (e.g., international shipments). Among Petitioner’s arguments is that the audit schedules include loan proceeds. Petitioner provided several Form 1099s showing non-employee compensation and a summary transaction detail, but there is no apparent relationship between the amounts. Petitioner also provided several unsworn statements from individuals stating that they loaned money to Petitioner. Aside from the fact that the statements are no better than mere assertions, the single sentence statement is far too vague to carry any evidentiary weight. Therefore, the ALJ finds that, except as agreed by Staff, Petitioner failed to meet its burden of proof.
Petitioner also contends that it is entitled to penalty and interest wavier. Late penalties are automatically imposed on delinquent sales taxes. Tex. Tax Code §§ 111.061, 151.703. The Comptroller has the discretionary authority to waive them if a taxpayer has exercised reasonable diligence to comply with tax laws. Id. § 111.103. A taxpayer must establish reasonable diligence by a preponderance of evidence. See Comptroller’s Decision No. 102,695 (2010). 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 (such as maintaining an accrual system for taxable purchases), 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). In the instant matter, Petitioner has not been audited previously, but Petitioner’s records were incomplete, the error rate is high, there was tax that was collected but not remitted, and the disparity between bank deposits and reported sales was quite large. Therefore, the ALJ finds that penalty waiver is not warranted.
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 § 1.40(2)(B); see also Comptroller’s Decision Nos. 102,268 and 109,069 (2014). Petitioner did not submit any evidence to demonstrate that interest waiver beyond the amount recommended by Staff is warranted.
III. FINDINGS OF FACT
1. In the period October 1, 2009, through December 31, 2013, ************** (Petitioner) sold mobile telephones and accessories as a wholesaler and as a retailer. It also provided services such as unlocking, flashing, and mobile telephone repairs.
2. Petitioner sells products to customers all around the world, e.g., China.
3. INDIVIDUAL, a corporate officer, was responsible for running the business. For example, he purchased inventory, made bank deposits, signed checks, and completed and signed sales tax returns.
4. In May 2014, Staff initiated a sales and use tax compliance audit.
5. Petitioner provided exemption certificates, sales invoices, sales journals, general ledgers, and federal income tax returns.
6. In the audit period, Petitioner collected tax that was not remitted.
7. Though the sales journals generally reconciled with the gross sales amounts Petitioner reported to the state, Petitioner’s bank statements reflected large amounts that were not included or accounted for in Petitioner’s sales journals.
8. The calculated overall audit error rate was 99.63%.
9. On April 3, 2014, Staff issued a Texas Notification of Audit Results to Petitioner assessing a liability of $3,451,042.23 (inclusive of tax, penalties, and interest accrued to the account as of the statement date).
10. Petitioner requested redetermination.
11. Staff reviewed the documentation that Petitioner submitted to the auditor and agreed that the audit schedules should be amended. For example, the Exam 2 taxable amount was reduced from $36,284,047.94 to $25,077,228.62.
12. Staff referred the case to the State Office of Administrative Hearings (SOAH).
13. On November 9, 2016, Staff issued a Notice of Hearing by Written Submission to Petitioner. 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.
14. On November 9, 2016, the Administrative Law Judge issued Order No. 1, which set the written submission hearing.
15. On May 4, 2017, the contested case record closed.
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. The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) provided proper and timely notice of the hearing. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009.
4. A tax is imposed on each sale in this state of tangible personal property and taxable services. Tex. Tax Code §§ 151.010, .051.
5. A “sale” includes a transfer of title or possession of tangible personal property, and the exchange, barter, lease, or rental of tangible personal property. Tex. Tax Code § 151.005.
6. Retailers are required to keep records that reflect the total gross receipts from sales and the total purchases of taxable items. Tex. Tax Code § 151.025; see also 34 Tex. Admin. Code § 3.281(b).
7. A taxpayer is required to keep records to substantiate each claimed deduction or exclusion authorized by law. Tex. Tax Code § 151.025(a)(3).
8. All gross receipts of a seller are presumed to have been subject to the sales tax unless a properly completed resale or exemption certificate is accepted by the seller. Tex. Tax Code § 151.054(a).
9. Treating transactions that lack documentation as taxable is supported by statute. See, e.g., Comptroller’s Decision Nos. 103,035 (2014); 39,765 (2003).
10. 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 any available information, including records of suppliers. Tex. Tax Code §§ 111.0042(d), .008(a).
11. Staff’s evidence is sufficient to establish, prima facie, that Petitioner’s records were incomplete and unreliable; therefore, the estimated audit was authorized by statute.
12. The audit was based on the best information available.
13. It is Petitioner’s burden to show audit error. See 34 Tex. Admin. Code § 1.40(2), which provides that the burden of proof is on the taxpayer, by clear and convincing evidence, if it claims a transaction is exempt from taxation; or, by a preponderance of the evidence, if it contends that an action, or proposed action, of Staff is unwarranted.
14. Except as agreed by Staff, Petitioner failed to show audit error.
15. Except as agreed by Staff, the audit schedules should be affirmed.
16. Late penalties are automatically imposed on delinquent sales taxes. Tex. Tax Code §§ 111.061, 151.703.
17. The Comptroller has the discretionary authority to waive penalties if a taxpayer has exercised reasonable diligence to comply with tax laws. Tex. Tax Code § 111.103.
18. A taxpayer must establish reasonable diligence by a preponderance of evidence. See Comptroller’s Decision No. 102,695 (2010).
19. 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 (such as maintaining an accrual system for taxable purchases), 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).
20. Petitioner did not establish that it acted with reasonable diligence in the audit period.
21. Penalty waiver is not warranted.
22. Delinquent taxes draw interest beginning 60 days after the date due. Tex. Tax Code § 111.060(c).
23. 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).
24. To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that interest waiver is warranted. See 34 Tex. Admin. Code § 1.40(2)(B); see also Comptroller’s Decision Nos. 102,268 and 109,069 (2014).
25. Except as agreed by Staff, Petitioner failed to establish that it was entitled to interest waiver.
26. The audit assessment should be affirmed, except as agreed by Staff.
SIGNED May 5, 2017.
VICTOR JOHN SIMONDS
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: https://comptroller.texas.gov/taxes/publications/96-1789.pdf.
[2] See Tex. Tax Code § 111.0081(c).
[3] In its Additional Arguments and Evidence submission to SOAH, Staff states that, except for the partial interest wavier, the original assessment should not be amended. Based on Staff’s previous pleadings and the Notice of Hearing by Written Submission, the ALJ concludes that Staff’s most recent statement is simply a misstatement, not an abandonment of its previous concessions.
[4] The audit error calculation is based on the formula: assessed tax ÷ (assessed tax + reported tax) = overall audit error percentage.
ACCESSION NUMBER: 201710006H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 2017-10-17
TAX TYPE: SALES
