Another CPA representative!
From my outsider view and with no other information, I would chalk this loss up to inexperience with SOAH. They had a compelling argument, and a path to get there, they just did not peruse it in a way that is valid within the practice and procedure of the hearing. Documents are necessary. Assertions are not testimony.
Noting this as 'good law' as the judge both noted the errors and what types of documents could typical to meet the burden.
201903019H
NOTE: References to Tax Code 151.155 should be made to Tax Code 151.3181 instead.
SOAH DOCKET NO. 304-18-4934.26
CPA HEARING NO. 112,607
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: December 1, 2008 THROUGH May 31, 2012
Sales And Use Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
J. MARK ROSS
Representing Respondent
**************
Representing Petitioner
COMPTROLLER’S DECISION
This decision is considered final on April 15, 2019, 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 changed.[2]
The result from this Decision is Attachment A. The ALJ’s letter to the Comptroller is Attachment B. The PFD as changed 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.[3] If such sum is not timely paid, an additional penalty of 10 percent of the taxes due will accrue.
SIGNED on this 20th day of March 2019
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, Proposal for Decision as changed
Publication: “Frequently Asked Questions Related to Motions for Rehearing”
ATTACHMENT C
SOAH DOCKET NO. 304-18-4934.26
TCPA DOCKET NO. 112,607
**************
TAXPAYER NO. **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
PROPOSAL FOR DECISION
During the period at issue, ************** (Petitioner) manufactured sand and gravel at quarries and concrete at batch plants. 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. Petitioner timely requested redetermination. Staff reviewed the additional documentation Petitioner provided and agreed that the audit schedules should be amended. Staff also agreed to a partial interest waiver. Petitioner contends the audit continues to erroneously tax exempt manufacturing purchases and nontaxable cash payments. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends affirming the assessment, except as agreed by Staff.
I. PROCEDURAL HISTORY, NOTICE, AND JURISDICTION
Staff referred this case to the State Office of Administrative Hearings (SOAH) and, on August 1, 2018, 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. Staff attorney J. Mark Ross represented the agency, and certified public accountant ************** represented Petitioner. The contested case record closed on October 24, 2018. There are no issues of notice or jurisdiction in this proceeding; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion.
II. REASONS FOR DECISION
A. Evidence
In addition to the pleadings the parties exchanged prior to referring the matter to SOAH, Staff submitted the following exhibits:
Sixty-Day Notification;
Texas Notification of Audit Results;
Penalty and Interest Waiver Worksheet;
Audit Report;
Audit Plan;
Contested Item Spreadsheet; and
Independent Audit Review (IAR) Report.
Petitioner submitted the following exhibits:
COMPANY A Batch Operator User Guide;
COMPANY B Batch Control System Product Informational;
COMPANY C Batch Readymix Informational;
Sales Invoice;
Batch Ticket;
Various Purchase Invoices;
Various Authorizations for Expenditure (AFE); and
Plant Schematic.
Each party’s exhibits were admitted into the record without objection.
B. Staff Agreed Adjustments
Staff agreed to amend the audit schedules and to waive interest for the period April 1, 2016, through February 28, 2018.[4]
C. Undisputed Material Facts
During the audit period at issue, December 1, 2008, through May 31, 2012, Petitioner manufactured sand and gravel at several quarries in south Texas. It also owned and operated concrete batch plants where it mixed cement, sand, gravel, fly ash, and other ingredients to create concrete.
Petitioner’s customers order many different volumes, types, and strengths of concrete. Until recently, batch plant operators would calculate and measure the amounts of the required ingredients manually to fill the orders for concrete. During the audit period, Petitioner purchased new batch computers. Essentially, the plant operators could enter the size, strength, and type of concrete that a customer ordered into the batch computer. The computer would calculate the correct material amounts, open the necessary hoppers and valves, and dispense the correct volume and proportion of materials into ready-mix trucks. The batch computers also continuously monitored material inventories, compiled production reports, and printed product tickets. During the audit period, Petitioner also purchased updates, support, and warranties for the batch computers. One of Petitioner’s batch foremen estimated that the batch computers inventory related activities were “no more than 15%” of the overall total.[5]
In March 2013, Staff initiated a sales and use tax audit of Petitioner. The auditor reviewed Petitioner’s business records and determined that it failed to remit tax on a variety of expense item and asset purchases. For example, the auditor scheduled Petitioner’s batch computer purchases, a street sweeper purchase, and items that were purchased to convert a quarry haul truck into a water truck. On June 16, 2014, Staff issued a Texas Notification of Audit Results assessing Petitioner with a liability that included tax, 10% penalties, and interest. Petitioner requested redetermination.
D. Issues, ALJ’s Analysis, and Recommendations
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. Petitioner contends the auditor erroneously scheduled purchases that were either exempt or otherwise were not subject to tax. It is Petitioner’s burden to show by a preponderance of the evidence that Staff’s action or proposed action is unwarranted, except that, to the extent Petitioner attempts to establish audit error based on the applicability of an exemption, its evidence must be clear and convincing. 34 Tex. Admin. Code § 1.40. A taxpayer is generally required to support its contentions with source records. See, e.g., Comptroller’s Decision No. 105,892 (2012). Bare assertions are not a substitute for evidence and are insufficient to establish audit error. See Baker v. Bullock, 529 S.W.2d 279 (Tex. Civ. App.—Austin 1975, writ ref’d n.r.e.); see also Comptroller’s Decision No. 107,916 (2013).
Batch Computers
Petitioner contends that its purchase of batch computers (and the related updates, support and warranties) are tax exempt under the manufacturing exemption.
The Tax Code provides an exemption for tangible personal property that will be sold, leased, or rented to, or stored, used, or consumed by a manufacturer if the tangible personal property is directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale and the use or consumption of the property is necessary or essential to the manufacturing, processing, or fabrication operation and directly makes or causes a chemical or physical change to the product being manufactured, processed, or fabricated for ultimate sale. Tex. Tax Code § 151.318(a)(2)(A). The exemption also includes any intermediate or preliminary product that will become an ingredient or component part of the product being manufactured, processed, or fabricated for ultimate sale. Id. § 151.318(a)(2)(B).
With regard to the batch computers, Texas Tax Code § 151.318(a)(4) provides that electronic control room equipment and computerized control units are exempt when they are used to power, supply, support, or control equipment that qualifies for exemption under Sections 151.318(a)(2) or (5) (relating to items that are directly used in the actual manufacturing of tangible personal property for sale and directly make or cause a chemical or physical change; or are directly used in manufacturing and are necessary and essential to a pollution control process). For example, manufacturers can purchase computer programs tax free if the programs directly control equipment that qualifies for the manufacturing exemption under Section 151.318(a)(2). See, e.g., State Tax Automated Research (STAR) Document No. 200012948L (December 18, 2000).
Staff agrees that Petitioner’s batch computers controlled equipment that dispensed raw materials for manufacturing concrete and that they were directly used in Petitioner’s concrete manufacturing process. However, Staff alleges that Petitioner used the computers for divergent purposes. Computers that are used for purposes other than controlling exempt manufacturing equipment are being used for a nonexempt purpose. Id. If a manufacturer uses exempt property for a nonexempt purpose (i.e., other than manufacturing or fabricating tangible personal property), the property is subject to tax for the divergent use. Tex. Tax Code § 151.155. Tax is due for the period of time property is used in a nonexempt (divergent) manner or on the full purchase price of the property. 34 Tex. Admin. Code § 3.300(k).
To meet its burden of proof and establish the exemption, Petitioner provided purchase invoices and marketing information. However, Petitioner did not submit evidence (e.g., testimony, affidavits) to establish how the equipment was actually used. Instead, Petitioner relied on statements in pleadings. For example, Petitioner’s pleadings assert that the computer’s inventory functions are performed in real time as raw materials are delivered for manufacturing concrete. It further asserts that the plant must be 100% operational to get the data. Based on those assertions, Petitioner then argues that the computer’s inventory functionality was not a divergent use. Similarly, it asserts in its pleadings that Staff erroneously conflates batch tickets and delivery tickets. Petitioner explains the distinctions between those things and asserts that the batch tickets simply document the product being delivered, which it argues is an exempt function.
Factual assertions in pleadings do not constitute evidence and cannot establish the factual elements necessary to support an exemption claim. See, e.g., Comptroller’s Decision No. 100,619 (2009). Additionally, Staff’s audit evidence demonstrates that one of Petitioner’s batch foremen stated in an audit review conference that the batch computers were used to produce daily inventory reports and that the inventory activities were “no more than 15%.” Based on the evidence in the record, it appears that the batch computers at issue were used in a divergent manner. Stated differently, the evidence does not clearly and convincingly establish that the manufacturing exemption applies and that Petitioner does not owe tax on the full purchase price. It follows that Petitioner also failed to establish an exemption for its purchase of services that were performed on the batch computers. See Tex. Tax Code § 151.3111 (generally, a service that is performed on tangible personal property that, at the time of the performance of the service is exempted because of the nature or use of the property, is exempt). Therefore, Petitioner’s manufacturing-related exemption claims should be denied.
Cash Payments
Petitioner contends that the audit erroneously assesses tax on a cash distribution that it gave an employee. According to Petitioner, it compensated an employee for working overtime and entertaining a customer. Staff contends that the auditor treated this transaction as taxable, just as she would any transaction that was missing an invoice. Treating transactions that lack documentation as taxable is supported by statute. See, e.g., Comptroller’s Decision Nos. 103,035 (2014); 39,765 (2003). Petitioner’s response is that there was no invoice because there was no sale or transaction. However, Petitioner did not provide any evidence for this contention. For example, there is no affidavit or testimony from a person with knowledge of the transaction, only factual assertions in its pleadings. Therefore, Petitioner failed to meet its burden of proof on this contention. See 34 Tex. Admin. Code § 1.40(2)(B).
Pollution Control
Petitioner contends that its purchase of a street sweeper and its costs related to converting a haul truck to a water truck are exempt because the equipment was used to control pollution and meet permitting requirements.
Tangible personal property that is used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale, is exempt from sales tax if the use or consumption of the property is necessary and essential to a pollution control process. Tex. Tax Code § 151.318(a)(5); 34 Tex. Admin. Code § 3.300(d)(6). Also, tangible personal property that is used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale, if the use or consumption of the property is necessary and essential to comply with federal, state, or local laws or rules that establish requirements for public health purposes is exempt. Tex. Tax Code § 151.318(a)(10); 34 Tex. Admin. Code § 3.300(d)(11).
Staff maintains that Petitioner failed to show that the street sweeper and truck conversion items in contention were used as part of the manufacturing process. Not every act done or performed by a manufacturer qualifies for the exemptions that are provided under Section 151.318. Petitioner provided purchase invoices and marketing information to support its exemption, but a purchase invoice does not establish how an item was used. As with its other manufacturing exemption claims, Petitioner relied on factual assertions in pleadings, referring to “indisputable” and “known” facts. For example, it assails Staff for not accepting the fact that a street sweeper is a piece of specialized equipment that is used for cleaning pavement.
It is reasonable to infer that a street sweeper was used to clean streets. However, it is not reasonable to infer that the street sweeper was used in the actual manufacturing process, as opposed to cleaning parking lots for example. Nor is it reasonable to infer that Petitioner used the street sweeper to meet its environmental-permit requirements. Moreover, rarely (if ever) will an inference rise to the level of being clear and convincing. Apparently, Petitioner’s environmental permit required it to keep written records, yet no road cleaning records were submitted. Petitioner also states that the water truck was used for watering roads and asserts that there is no alternative use for such a water truck in a quarry. But, again, it provided no evidence to establish the assertion. Therefore, the ALJ finds that Petitioner failed to establish that the street sweeper and water truck at issue were used in the actual manufacturing process and recommends that its exemption claims should be denied.
III. FINDINGS OF FACT
1. During the audit period at issue, December 1, 2008, through May 31, 2012, ************** (Petitioner) manufactured sand and gravel at several quarries in south Texas. It also owned and operated concrete batch plants where it mixed cement, sand, gravel, fly ash, and other ingredients to create concrete.
2. Petitioner’s customers order many different volumes, types, and strengths of concrete.
3. Until recently, batch plant operators would calculate and measure the amounts of the required ingredients manually to fill the orders for concrete.
4. During the audit period, Petitioner purchased new batch computers. Essentially, the plant operators could enter the size, strength, and type of concrete that a customer ordered into the batch computer; whereupon, the computer would calculate the correct material amounts, open the necessary hoppers and valves, and dispense the correct volume and proportion of materials into ready mix trucks. The batch computers also continuously monitored material inventories, compiled production reports, and printed product tickets.
5. During the audit period, Petitioner also purchased updates, support, and warranties for the batch computers.
6. During the audit period, Petitioner purchased a street sweeper and also paid for items that were used to convert a quarry hauling truck to a water truck.
7. In March 2013, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) initiated a sales and use tax audit of Petitioner. The auditor reviewed Petitioner’s business records and determined that it failed to remit tax on a variety of expense item and asset purchases.
8. On June 16, 2014, Staff issued a Texas Notification of Audit Results assessing Petitioner with a liability that included tax, 10% penalties, and interest.
9. Petitioner requested redetermination.
10. Staff agreed to amend the audit schedules and to waive interest for the period April 1, 2016, through February 28, 2018.
11. Staff referred the contested case to the State Office of Administrative Hearings (SOAH).
12. On August 1, 2018, 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 or an attachment that incorporated by reference the factual matters asserted in the complaint or petition filed with the state agency.
13. On August 1, 2018, the Administrative Law Judge issued Order No. 1, which set the written submission hearing.
14. On October 24, 2018, the contested case record closed.
IV. CONCLUSIONS OF LAW
1. The Comptroller has jurisdiction over this matter. 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. Tex. Gov’t Code ch. 2003.
3. Staff The Comptroller provided proper and timely notice of the hearing. Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009.
Source: See Finding of Fact No. 12.
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. It is Petitioner’s burden to show by a preponderance of the evidence that Staff’s action or proposed action is unwarranted, except that, to the extent Petitioner attempts to establish audit error based on the applicability of an exemption, its evidence must be clear and convincing. 34 Tex. Admin. Code § 1.40.
7. A taxpayer is generally required to support its contentions with source records. See, e.g., Comptroller’s Decision No. 105,892 (2012).
8. Factual assertions in pleadings do not constitute evidence and cannot establish the factual elements necessary to support an exemption claim. See, e.g., Comptroller’s Decision No. 100,619 (2009).
9. Bare assertions are not a substitute for evidence and are insufficient to establish audit error. See Baker v. Bullock, 529 S.W.2d 279 (Tex. Civ. App.—Austin 1975, writ ref’d n.r.e.); see also Comptroller’s Decision No. 107,916 (2013).
10. Tangible personal property that will be sold, leased, or rented to, or stored, used, or consumed by a manufacturer is exempt if the tangible personal property is directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale and the use or consumption of the property is necessary or essential to the manufacturing, processing, or fabrication operation and directly makes or causes a chemical or physical change to the product being manufactured, processed, or fabricated for ultimate sale. The exemption also includes any intermediate or preliminary product that will become an ingredient or component part of the product being manufactured, processed, or fabricated for ultimate sale. Tex. Tax Code § 151.318(a)(2).
11. Electronic control room equipment and computerized control units are exempt when they are used to power, supply, support, or control equipment that qualifies for exemption under Sections (2) or (5). Tex. Tax Code § 151.318(a)(4).
12. Manufacturers can purchase computer programs tax free if the programs directly control equipment that qualifies for the manufacturing exemption under Section 151.318(a)(2).
13. Computers that are used for purposes other than controlling exempt manufacturing equipment are being used for a nonexempt purpose. See, e.g., State Tax Automated Research (STAR) Document No. 200012948L (December 18, 2000).
14. Generally, a service that is performed on tangible personal property that, at the time of the performance of the service is exempted because of the nature or use of the property, is exempt. Tex. Tax Code § 151.3111.
15. If a manufacturer uses exempt property for a nonexempt purpose the property is subject to tax for the divergent use. Tex. Tax Code § 151.155.
16. Tax is due for the period of time property is used in a nonexempt (divergent) manner, or on the full purchase price of the property. 34 Tex. Admin. Code § 3.300(k).
17. Petitioner’s evidence does not clearly and convincingly establish that the manufacturing exemption applies and that Petitioner does not owe tax on the full purchase price.
18. Petitioner’s evidence does not clearly and convincingly establish an exemption for its purchase of services that were performed on the batch computers.
19. Treating transactions that lack documentation as taxable is supported by statute. See, e.g., Comptroller’s Decision Nos. 103,035 (2014); 39,765 (2003).
20. Petitioner’s evidence does not establish that the audit erroneously taxes nontaxable cash transactions.
21. Tangible personal property that is used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale, is exempt from sales tax if the use or consumption of the property is necessary and essential to a pollution control process. Tex. Tax Code § 151.318(a)(5); 34 Tex. Admin. Code § 3.300(d)(6).
22. Tangible personal property that is used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale, if the use or consumption of the property is necessary and essential to comply with federal, state, or local laws or rules that establish requirements for public health purposes is exempt. Tex. Tax Code § 151.318(a)(10); 34 Tex. Admin. Code § 3.300(d)(11).
23. Petitioner failed to establish that its purchase of a street sweeper and water truck related items were used in the actual manufacturing process.
24. Except as agreed by Staff, Petitioner failed to demonstrate that the audit erroneously scheduled exempt or nontaxable purchase transactions.
25. Except as agreed by Staff, the audit assessment should be affirmed.
SIGNED October 26, 2018.
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. Gov’t Code § 2003.101(e) and (f).
[3] See Tex. Tax Code § 111.0081(c).
[4] See Notice of Hearing by Written Submission and Staff Exhibit No. 6.
[5] See Staff Exhibit No. 7.
ACCESSION NUMBER: 201903019H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 2019-03-20
TAX TYPE: SALES
