This one is a bit interesting just due to the tax going up during redetermination, which is extremely rare. Maybe more specific responsive document would not have moved the assessment in that way, however there's not much useful bits here. Actually presenting documents has the most effect.
SOAH DOCKET NO. 304-23-21617
CPA HEARING NO. 118,461
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: April 1, 2015 THROUGH January 31, 2019
Sales And Use Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
EDUARDO VASQUEZ
Representing Respondent
**************
Representing Petitioner
COMPTROLLER’S DECISION
This decision is considered final on February 13, 2024, 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) Keneshia Washington 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 recommendation letter is Attachment B. The PFD as changed is Attachment C. Attachments A, B, and C are incorporated by reference.
Attachment A reflects a liability.[3]
The total sum of the tax, penalty, and interest is due and payable 20 days after a comptroller’s decision becomes final.[4] If such sum is not timely paid, an additional penalty of 10 percent of the taxes due will accrue.
SIGNED on this 19th day of January 2024
GLENN HEGAR
Comptroller of Public Accounts
By: Lisa Craven
Deputy Comptroller
Attachment A, Texas Notification of Hearing Results
Attachment B, ALJ’s recommendation letter
Attachment C, Proposal for Decision as changed
ATTACHMENT C
SOAH Docket No. 304-23-21617
TCPA Hearing No. 118,461
**************
TAXPAYER NO: **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
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 for tax collected and not remitted, and accrued interest. Petitioner requested redetermination of the assessment and provided additional documentation. Staff amended the audit. Petitioner provided additional records during the redetermination period, which resulted in further adjustments, but disputes remain. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends that the amended audit be upheld in its entirety, except as agreed by Staff.
I. NOTICE, JURISDICTION, AND PROCEDURAL HISTORY
Staff referred this case to the State Office of Administrative Hearings (SOAH) and, on June 20, 2023, issued a Notice of Hearing by Written Submission. On July 10, 2023, ALJ Keneshia Washington issued an Order Setting Written Submission Hearing. Eduardo Vasquez represented Staff, and Petitioner was represented by ************** . The contested case record closed on September 18, 2023.
There are no issues of notice or jurisdiction; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion.
II. REASONS FOR DECISION
A. EVIDENCE
Petitioner did not submit evidence for the hearing. Staff submitted the pleadings the parties exchanged prior to referring the case to SOAH and provided the following exhibits:
1. Hearing Request Receipt;
2. Texas Notification of Audit Results;
3. Penalty & Interest Waiver Worksheet;
4. Audit Report;
5. Audit Plan;
6. Amended Audit Report;
7. Amended Audit Plan; and
8. Proposed Amended Assessment.
B. AGREED ADJUSTMENTS
Staff agrees to reduce the taxable amount for item number 9320T-349 in Exam 200 from $29,950 to zero. The transaction is shown as 7202A- 349 in Staff’s Exhibit 8.
C. MATERIAL FACTS AND ISSUES PRESENTED
During the period at issue, Petitioner provided construction, repairs, warehousing, and transportation of products for hotels with its primary office located in CITY, Texas. In May 2019, Staff initiated an audit of Petitioner for sales and use tax compliance covering the period of April 1, 2015, through January 31, 2019. Petitioner provided the auditor with financial statements, contracts, job files, a chart of accounts, resale and exemption certificates, federal income tax returns, bank statements, general ledgers, depreciation schedules, and sales and purchase invoices.
The auditor reviewed Petitioner’s sales invoices, noting the date and whether sales tax was collected. He then compared the amount of sales tax collected based on Petitioner’s invoices to the sales tax reported on Petitioner’s sales and use tax returns. The variations are scheduled in Exam 100 as tax collected but not remitted.
The auditor reviewed Petitioner’s bank statements and general ledger. He then totaled the deposits for each quarter and month respectively and removed the sales tax collected from the totals, with Petitioner’s gross receipts remaining. The auditor compared the gross receipts indicated on Petitioner’s bank statements and general ledger to the gross receipts reported on its sales and use tax returns. The difference is scheduled in Exam 200 as additional taxable sales.
The auditor reviewed the transactions missing invoices and the sales invoices without tax charged to the customer. Based on the job files, contracts, and available sales invoices, the auditor concluded Petitioner made taxable and nontaxable sales. Specifically, Petitioner provided nontaxable moving services and third-party shipping. Petitioner also provided taxable hotel renovations and repairs as well as assembly and installation of furniture and equipment. For some taxable sales, Petitioner did not have a valid resale or exemption certificate on file. The auditor scheduled transactions with missing invoices and sales invoices with untaxed taxable sales in Exam 300 as disallowed deductions.
The auditor reviewed Petitioner’s general ledgers for accounts of interest, including purchases of tangible personal property and repair services. The auditor reviewed purchase invoices associated with items from the general ledger and noted whether tax was charged on purchases of tangible personal property and taxable services. Taxable expenses are scheduled in Exam 500 based on missing invoices and invoices for purchases of tangible personal property and taxable services where Petitioner was not charged tax by the vendor. The auditor reviewed Petitioner’s 2018 federal income tax return, asset listing, and depreciation schedule. Petitioner did not provide purchase invoices for all of the assets subject to sales tax based on the description. Taxable asset purchases are scheduled in Exam 600.
On September 23, 2020, the Comptroller issued a Texas Notification of Audit Results to Petitioner assessing tax, interest, and 10% penalty assessed on tax collected but not remitted. Petitioner filed or paid two sales tax returns late and the overall error rate for the audit was 73.91%.
Petitioner requested redetermination of the assessment, contesting each exam in the audit, stating that it had additional documentation to show audit error, and requesting penalty and interest waivers. Petitioner provided additional information and documentation, and Staff amended the audit, resulting in additional tax collected but not remitted and reductions in the assessment of taxable gross sales, disallowed deductions, and taxable expense purchases. However, disputes remained.
Subsequent to the amendment, during the redetermination period, Petitioner provided documentation showing additional taxable gross receipts, additional tax collected not remitted, and erroneously allocated local tax based on the location of its primary office rather than the job site. Additional adjustments are shown in Staff’s Exhibit 8 wherein the auditor removed Exam 100 and scheduled Exam 110, credits for local tax erroneously allocated; Exam 120, tax collected but not remitted; Exam 130, additional taxable sales; Exam 200 additional taxable gross receipts; Exam 300, disallowed deductions; Exam 500, taxable expense purchases; and Exam 600, taxable asset purchases.
Staff also agrees to reduce the taxable amount for item number 9320T-349 in Exam 200, shown as 7202A-349 in Staff’s Exhibit 8, from $29,950 to zero. Staff did not agree to any additional adjustments and referred the matter to SOAH. The proposed adjustments result in an increase in the tax due from the amended audit, but a reduction from the original audit. Considering the agreed adjustments, the overall error rate for the audit is 68.91%.
D. ALJ’S ANALYSIS AND RECOMMENDATION
Texas imposes a tax on each sale of a taxable item in this state. Tex. Tax Code § 151.051. The term “taxable item” includes tangible personal property and taxable services. Id. § 151.010. All gross receipts of a seller are presumed to have been subject to sales tax unless a properly completed resale or exemption certificate is accepted. Id. § 151.054(a). A seller of taxable items is required to collect tax from its customer or accept a properly completed resale or exemption certificate in lieu of collecting tax. Id. §§ 151.051, .052, .054, .104, .417. When tax is imposed on tangible personal property, the taxing entity’s prima facie burden of proof is easily met because, unless an exemption applies, all sales of tangible personal property in this state are taxable. See Comptroller’s Decision No. 117,129921 (2022). However, only services specifically enumerated in Texas Tax Code § 151.0101 are taxable. Therefore, to impose tax on a service, Staff must demonstrate not only that a service was sold but that the service is taxable. Id.
In a contested case hearing where the taxability of a service is at issue and the taxpayer raises an exclusionary issue, such as new construction, Staff’s prima facie case must demonstrate not only that the services in question are taxable but also that they are not the type of service excluded from sales and use tax. Id. If Staff demonstrates, prima facie, that a service is taxable and that an exclusion does not apply, it becomes the taxpayer’s burden to prove, by a preponderance of the evidence, that the service is not taxable, or by clear and convincing evidence that the taxable service was exempt from taxation. 34 Tex. Admin. Code § 1.26.
The repair, remodeling, maintenance, and restoration of tangible personal property, real property services, and real property repair and remodeling are taxable services. Tex. Tax Code § 151.0101(a)(5),(11),(13). The Comptroller interprets remodeling or modification as meaning “to rebuild, replace, alter, modify, or upgrade existing real property.” 34 Tex. Admin. Code § 3.357(a)(11). To repair is to mend or bring back real property that was broken, damaged, or defective as near as possible to its original working order. Id. § 3.357(a)(12).
However, new construction is excluded from the definition of taxable real property repair and remodeling services. New construction is defined as “All new improvements to real property including initial finish out work to the interior or exterior of the improvement.” 34 Tex. Admin. Code § 3.357(a)(8). New construction also includes the “initial finish out of each additional floor before initial occupancy or use is considered new construction” and “the addition of new, usable square footage to an existing structure.” Id. Reallocation of existing square footage inside a structure is remodeling and does not constitute the addition of new, usable square footage. Id. Furthermore, the Comptroller has consistently treated new construction as an exclusion from taxation, not an exemption. See, e.g., Comptroller’s Decision Nos. 117,921 (2022) and 33,338-33,339 (1995). A contractor is any person who builds new improvements to residential or nonresidential real property, completes any part of an uncompleted new structure that is an improvement to residential or nonresidential real property, makes improvements to real property as part of periodic and scheduled maintenance of nonresidential real property, or repairs, restores, maintains, or remodels residential real property, and who, in making the improvement, incorporates tangible personal property into the real property that is improved. 34 Tex. Admin. Code § 3.291(a)(3). Although a contractor who performs lump-sum contracts owes sales tax on all materials, consumable items, equipment, taxable services, and other taxable items that the contractor uses or incorporates into the customer’s property, it does not provide taxable services and is not required to collect sales tax on its labor charges. Id. § 3.291(b)(3)(A); see also, e.g., Comptroller’s Decision No. 101,643 (2010).
A contract that involves both nonresidential remodeling and new construction is taxable in total unless the new construction labor charge is separately stated. Id. § 3.357(b)(3). If a combination of repair, restoration, or remodeling and new construction is performed under the same contract, and the repair, restoration, or remodeling portion exceeds 5.0% of the overall charge, then the parties to the contract must separately identify taxable and nontaxable labor along with the charges that apply to each or else the entire contract is presumed to be for repair, restoration, and remodeling and is taxable. Id. §3.357(b)(7). Both parties must retain documentation that clearly defines the work that is performed to show that, had the new construction and remodeling been done independently, the charge for each would reasonably approximate the amount allocated. Id. Examples of acceptable documentation are written contracts that detail the scope of work, bid sheets, tally sheets, schedules of values, and blueprints. Id. If no written contract clearly shows agreement on the taxable and nontaxable work that is performed, then the customer and the service provider must prepare a written certification that verifies the allocation of charges for repair, restoration, or remodeling and new construction. Id.
The auditor scheduled sales and purchases of tangible personal property and taxable services based on Petitioner’s source documents, including sales and purchase invoices, contracts, job files, and a general ledger. Where the documentation supported it, the auditor removed sales of new construction and other nontaxable services as well as tax-exempt sales and purchases. The ALJ concludes Staff’s evidence demonstrates, prima facie, that the items assessed are taxable. Hence, the burden shifts to Petitioner to demonstrate by a preponderance of the evidence that the audit includes nontaxable services or new construction that is excluded from tax or by clear and convincing evidence that it includes tax exempt sales or purchases.
The law requires that taxpayers 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). Petitioner is required to keep records to substantiate each claimed deduction or exclusion authorized by law. Tex. Tax Code § 151.025(a)(3). Petitioner must produce contemporaneous records and supporting documentation appropriate to the tax or fee 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 cannot defeat an assessment based on the burden of proof by not providing the necessary documents. See, e.g., Comptroller’s Decision No. 117,129 (2022). Moreover, the Comptroller has consistently treated missing invoices as 100% taxable. See Texas Tax Code §§ 151.025, .054; see, e.g., Comptroller’s Decision No. 118,042 (2023). Petitioner has the burden to prove by clear and convincing evidence that a customer or a transaction qualifies for an exemption. 34 Tex. Admin. Code § 1.26(c). Bare assertions are not a substitute for evidence and are insufficient to establish audit error. Comptroller’s Decision No. 115,999 (2020), citing to 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).
An audit based on a taxpayer’s books and records and conducted pursuant to established audit methodologies is entitled to a presumption of correctness, and Petitioner bears the burden of proof by a preponderance of the evidence that the audit results are incorrect. 34 Tex. Admin. Code § 1.26(e); see also Comptroller’s Decision No. 116,989 (2021). The proposed amended audit is based on Petitioner’s source records and is entitled to a presumption of correctness.
Based on its sales invoices and sales and use tax returns, Petitioner collected sales tax from its customers but did not remit it all to the State. Any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected. Tex. Tax Code § 111.016(a). Petitioner contends that it remitted all tax it collected but has not provided any documentation to support any adjustments to the proposed amended assessment. Therefore, its contention should be denied, and the scheduled tax collected but not remitted should remain assessed.
Petitioner also contends that the auditor erroneously scheduled nontaxable new construction services and that additional gross receipts scheduled were from the sale of nontaxable or tax-exempt items. The auditor amended the audit based on supporting documentation, resulting in the amended assessment. Staff also agreed to the reduction of another transaction in Exam 200 as described above.
Petitioner has not provided any documentation to support its contentions or any adjustments to the proposed amended assessment. Because Petitioner has not established that any adjustments are warranted, its contention that it is owed a refund for tax paid in error to vendors or accrued and remitted to the Comptroller is moot. Hence, the ALJ recommends upholding the proposed amended assessment except as agreed to by Staff.
Petitioner also requested a penalty waiver. Late penalties are automatically imposed on delinquent taxes. Tex. Tax Code § 111.061. The Comptroller has the discretionary authority to waive late penalties 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, 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 present case, penalty was limited to an assessment on tax collected but not remitted. The presence of tax collected but not remitted throughout the audit period is contraindicative of the exercise of reasonable diligence. See Comptroller’s Decision Nos. 118,388-118,389530 (2023). Petitioner has not established that it exercised reasonable diligence to comply with tax laws. Therefore, additional penalty waiver is not warranted.
Petitioner also requested interest waiver. 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). Petitioner did not demonstrate any of the factors that may warrant interest waiver. The contention should be denied.
III. FINDINGS OF FACT
1. During the period at issue, ************** (Petitioner) provided construction, repairs, warehousing, and transportation of products for hotels with its primary office located in CITY, Texas.
2. In May 2019, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) initiated an audit of Petitioner for sales and use tax compliance covering the period of April 1, 2015, through January 31, 2019.
3. Petitioner provided the auditor with financial statements, contracts, job files, a chart of accounts, resale and exemption certificates, federal income tax returns, bank statements, general ledgers, depreciation schedules, and sales and purchase invoices.
4. The auditor reviewed Petitioner’s sales invoices, noting the date and whether sales tax was collected. He then compared the amount of sales tax collected based on Petitioner’s invoices to the sales tax reported on Petitioner’s sales and use tax returns. The variations are scheduled in Exam 100 as tax collected but not remitted.
5. The auditor reviewed Petitioner’s bank statements and general ledger. He then totaled the deposits for each quarter and month respectively and removed the sales tax collected from the totals, with Petitioner’s gross receipts remaining. The auditor compared the gross receipts indicated on Petitioner’s bank statements and general ledger to the gross receipts reported on its sales and use tax returns. The difference is scheduled in Exam 200 as additional taxable sales.
6. The auditor reviewed the transactions missing invoices and the sales invoices without tax charged to the customer. Based on the job files, contracts, and available sales invoices, Petitioner made taxable and nontaxable sales. Petitioner provided nontaxable moving services and third-party shipping. Petitioner also provided taxable hotel renovations and repairs as well as assembly and installation of future and equipment. For some taxable sales, Petitioner did not have a valid resale or exemption certificate on file. The auditor scheduled transactions with missing invoices and sales invoices with untaxed taxable sales in Exam 300 as disallowed deductions.
7. The auditor reviewed Petitioner’s general ledgers for accounts of interest, including purchases of tangible personal property and repair services. The auditor reviewed purchase invoices associated with items from the general ledger and noted whether tax was charged on purchases of tangible personal property and taxable services. Taxable expenses are scheduled in Exam 500 based on missing invoices and invoices for purchases of tangible personal property and taxable services where Petitioner was not charged tax by the vendor.
8. The auditor reviewed Petitioner’s 2018 federal income tax return, asset listing, and depreciation schedule. Petitioner did not provide purchase invoices for all of the assets subject to sales tax based on the description. Taxable asset purchases are scheduled in Exam 600.
9. On September 23, 2020, the Comptroller issued a Texas Notification of Audit Results to Petitioner assessing tax, interest, and 10% penalty assessed on tax collected but not remitted.
10. Petitioner filed or paid two sales tax returns late and the overall error rate for the audit was 73.91%.
11. Petitioner timely requested a redetermination of the assessment.
12. Petitioner provided additional information and documentation. Staff amended the audit, resulting in additional tax collected but not remitted and reductions in the assessment of taxable gross sales, disallowed deductions, and taxable expense purchases.
13. During the redetermination period, Petitioner provided documentation showing additional taxable gross receipts, additional tax collected not remitted, and erroneously allocated local tax based on the location of its primary office rather than the job site.
14. Additional adjustments are shown in Staff’s Exhibit 8 which is a proposed amended assessment. In the proposed amended audit, the auditor removed Exam 100 and scheduled Exam 110, credits for local tax erroneously allocated, Exam 120, tax collected but not remitted, Exam 130, additional taxable sales, Exam 200 additional taxable gross receipts, Exam 300, disallowed deductions, Exam 500, taxable expense purchases, and Exam 600, taxable asset purchases.
15. Staff agrees to reduce the taxable amount for item number 9320T-349 in Exam 200, shown as 7202A- 349 in Staff’s Exhibit 8, from $29,950 to zero.
16. The tax due reflected after the agreed adjustments is more than in the amended audit but less than the amount shown in the original audit.
17. The overall error rate for the proposed amended audit is 68.91%.
18. Staff referred the matter to the State Office of Administrative Hearings (SOAH).
19. On June 20, 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.
20. On July 10, 2023, the Administrative Law Judge issued an Order Setting Written Submission Hearing.
21. The contested case record closed on September 18, 2023.
IV. CONCLUSIONS OF LAW
1. The Comptroller has jurisdiction over this matter. See Tex. Tax Code ch. 111.
2. SOAH has jurisdiction over matters related to the hearing in this matter, including the authority to issue a proposal for decision with findings of fact and conclusions of law. See Tex. Gov’t Code ch. 2003.
3. Staff provided proper and timely notice of the hearing. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009.
4. Texas imposes a tax on each sale of a taxable item in this state. Tex. Tax Code § 151.051.
5. The term “taxable item” includes tangible personal property and taxable services. Tex. Tax Code § 151.010.
6. All gross receipts of a seller are presumed to have been subject to sales tax unless a properly completed resale or exemption certificate is accepted. Tex. Tax Code § 151.054(a).
7. A seller of taxable items is required to collect tax from its customer or accept a properly completed resale or exemption certificate in lieu of collecting tax. Tex. Tax Code §§ 151.051, .052, .054, .104, .417.
8. When tax is imposed on tangible personal property the taxing entity’s prima facie burden of proof is easily met because, unless an exemption applies, all sales of tangible personal property in this state are taxable. See Comptroller’s Decision No. 117,129 (2022).
9. Only services specifically enumerated in Texas Tax Code § 151.0101 are taxable.
10. To impose tax on a service, Staff must demonstrate not only that a service was sold but that the service is taxable. See Comptroller’s Decision No. 117,129 (2022).
11. In a contested case hearing where the taxability of a service is at issue and the taxpayer raises an exclusionary issue, such as new construction, Staff’s prima facie case must demonstrate not only that the services in question are taxable but also that they are not the type of service excluded from sales and use tax. See Comptroller’s Decision No. 117,921 (2022).
12. If Staff demonstrates, prima facie, that a service is taxable and that an exclusion does not apply, it becomes the taxpayer’s burden to prove, by a preponderance of the evidence, that the service is not taxable, or by clear and convincing evidence that the taxable service was exempt from taxation. 34 Tex. Admin. Code § 1.26.
13. The repair, remodeling, maintenance, and restoration of tangible personal property, real property services, and real property repair and remodeling are taxable services. Tex. Tax Code § 151.0101(a)(5), (11), (13).
14. The Comptroller interprets remodeling or modification as meaning “to rebuild, replace, alter, modify, or upgrade existing real property.” 34 Tex. Admin. Code § 3.357(a)(11).
15. To repair is to mend or bring back real property that was broken, damaged, or defective as near as possible to its original working order. 34 Tex. Admin. Code § 3.357(a)(12).
16. However, new construction is excluded from the definition of taxable real property repair and remodeling services. See Comptroller’s Decision No. 117,921 (2022).
17. New construction is defined as “All new improvements to real property including initial finish out work to the interior or exterior of the improvement.” 34 Tex. Admin. Code § 3.357(a)(8).
18. New construction also includes the “initial finish out of each additional floor before initial occupancy or use is considered new construction” and “the addition of new, usable square footage to an existing structure.” 34 Tex. Admin. Code § 3.357(a)(8).
19. Reallocation of existing square footage inside a structure is remodeling and does not constitute the addition of new, usable square footage. 34 Tex. Admin. Code § 3.357(a)(8).
20. The Comptroller has consistently treated new construction as an exclusion from taxation, not an exemption. See, e.g., Comptroller’s Decision Nos. 117,921 (2022) and 33,338 & 33,339 (1995).
21. A contractor is any person who builds new improvements to residential or nonresidential real property, completes any part of an uncompleted new structure that is an improvement to residential or nonresidential real property, makes improvements to real property as part of periodic and scheduled maintenance of nonresidential real property, or repairs, restores, maintains, or remodels residential real property, and who, in making the improvement, incorporates tangible personal property into the real property that is improved. 34 Tex. Admin. Code § 3.291(a)(3).
22. Although a contractor who performs lump-sum contracts owes sales tax on all materials, consumable items, equipment, taxable services, and other taxable items that the contractor uses or incorporates into the customer’s property, it does not provide taxable services and is not required to collect sales tax on its labor charges. 34 Tex. Admin. Code § 3.291(b)(3)(A); see also, e.g., Comptroller’s Decision No. 101,643 (2010).
23. A contract that involves both nonresidential remodeling and new construction is taxable in total unless the new construction labor charge is separately stated. 34 Tex. Admin. Code § 3.357(b)(3).
24. If a combination of repair, restoration, or remodeling and new construction is performed under the same contract, and the repair, restoration, or remodeling portion exceeds 5.0% of the overall charge, then the parties to the contract must separately identify taxable and nontaxable labor along with the charges that apply to each or else the entire contract is presumed to be for repair, restoration, and remodeling and is taxable. Both parties must retain documentation that clearly defines the work that is performed to show that, had the new construction and remodeling been done independently, the charge for each would reasonably approximate the amount allocated. Examples of acceptable documentation are written contracts that detail the scope of work, bid sheets, tally sheets, schedules of values, and blueprints. If no written contract clearly shows agreement on the taxable and nontaxable work that is performed, then the customer and the service provider must prepare a written certification that verifies the allocation of charges for repair, restoration, or remodeling and new construction. 34 Tex. Admin. Code §3.357(b)(7)
25. The ALJ concludes Staff’s evidence demonstrates, prima facie, that the items assessed are taxable.
26. The burden shifts to Petitioner to demonstrate by a preponderance of the evidence that the audit includes nontaxable services or new construction that is excluded from tax and by clear and convincing evidence that it includes tax exempt sales or purchases.
27. The law requires that taxpayers 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).
28. Petitioner is required to keep records to substantiate each claimed deduction or exclusion authorized by law. Tex. Tax Code § 151.025(a)(3).
29. Petitioner must produce contemporaneous records and supporting documentation appropriate to the tax or fee 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.
30. Petitioner cannot defeat an assessment based on the burden of proof by not providing the necessary documents. See, e.g., Comptroller’s Decision No. 117,129921 (2022).
31. The Comptroller has consistently treated missing invoices as 100% taxable. See Texas Tax Code §§ 151.025, .054; see, e.g., Comptroller’s Decision No. 118,042 (2023).
32. Petitioner has the burden to prove by clear and convincing evidence that a customer or a transaction qualifies for an exemption. 34 Tex. Admin. Code § 1.26(c).
33. Bare assertions are not a substitute for evidence and are insufficient to establish audit error. Comptroller’s Decision No. 115,999 (2020), citing to 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).
34. Any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected. Tex. Tax Code § 111.016(a).
35. Petitioner has not met its evidentiary burden to support any adjustments to the proposed amended assessment and scheduled tax collected but not remitted should remain assessed.
36. An audit based on a taxpayer’s books and records and conducted pursuant to established audit methodologies is entitled to a presumption of correctness, and Petitioner bears the burden of proof by a preponderance of the evidence that the audit results are incorrect. 34 Tex. Admin. Code § 1.26(e); see also Comptroller’s Decision No. 116,989 (2021).
37. The proposed amended audit is based on Petitioner’s source records and is entitled to a presumption of correctness.
38. Petitioner has not met its evidentiary burden to support its contentions or any adjustments to the proposed amended assessment.
39. Because Petitioner has not established that any adjustments are warranted, its contention that it is owed a refund for tax paid in error to vendors or accrued and remitted to the Comptroller is moot.
40. The ALJ recommends upholding the proposed amended assessment except as agreed to by Staff.
41. Late penalties are automatically imposed on delinquent taxes. Tex. Tax Code § 111.061.
42. The Comptroller has the discretionary authority to waive late penalties if a taxpayer has exercised reasonable diligence to comply with tax laws. Tex. Tax Code § 111.103.
43. A taxpayer must establish reasonable diligence by a preponderance of evidence. See Comptroller’s Decision No. 102,695 (2010).
44. 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).
45. The presence of tax collected but not remitted throughout the audit period is contraindicative of the exercise of reasonable diligence. See Comptroller’s Decision Nos. 118,388- 118,389 530(2023).
46. Petitioner has not established that it exercised reasonable diligence to comply with tax laws.
47. Additional penalty waiver is not warranted.
48. Delinquent taxes draw interest beginning 60 days after the date due. Tex. Tax Code § 111.060(c).
49. 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).
50. 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).
51. Petitioner did not demonstrate any of the factors that may warrant interest waiver.
52. Interest waiver is not warranted.
53. Petitioner failed to show by clear and convincing evidence that the amended audit includes tax-exempt items.
54. Petitioner has failed to show error in the amended audit, except as agreed by Staff.
55. The amended audit should be upheld, except as agreed by Staff.
SIGNED September 27, 2023
KENESHIA WASHINGTON
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).
ACCESSION NUMBER: 202401018H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 2024-01-19
TAX TYPE: SALES
