202503027H

Below is the hearing language in full, and above that I have gone through a couple points that caught my attention.

This ones a bit interesting in that the taxpayer provided numerous records on many issues, and all were denied in detail. The taxpayer's representative censored but not identified, so it was likely a company official.

It's generally a bit concerning that so much evidence was presented, but found wanting. The most egregious to me is that the direct pay exemption of a parent company was not valid for the purchase of the subsidiary. There doesn't seem to be substantial support for this position. It's a bit beyond my practice area so I won't comment further beyond I hope this was reviewed by expert counsel.

This one bit jumped out at me - The Comptroller has consistently treated new construction as an exclusion from taxation, not an exemption. See, e.g., Comptroller’s Decision Nos. 33,338; 33,339 (1995).

Quite frankly the above is the first time I can recall that being referenced. On the reading docket now I suppose.

202503027H

 

 

SOAH DOCKET NO. 304-23-26705

CPA HEARING NO. 119,576

 

RE:      **************
TAXPAYER NO:  **************

AUDIT OFFICE:   **************

AUDIT PERIOD:  January 1, 2014 THROUGH December 31, 2017

Sales And Use Tax/RDT

BEFORE THE COMPTROLLER OF PUBLIC ACCOUNTS

OF THE STATE OF TEXAS

GLENN HEGAR

Texas Comptroller of Public Accounts

ALBERTO CRUZ

Representing Respondent

**************

Representing Petitioner

 

COMPTROLLER’S DECISION
 

This decision is considered final on April 15, 2025, 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) Kimberly LaFlair 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 amended the PFD.  The ALJ recommended that the Comptroller adopt the Amended PFD as written.

After review and consideration, IT IS ORDERED that the Amended PFD is adopted as changed.[2] 

The result from this Decision is Attachment A.  The ALJ’s recommendation letter is Attachment B.  The Amended PFD as changed is Attachment C.  Attachments A, B, and C are incorporated by reference.

Attachment A reflects a credit owed to Petitioner.

The credit will be processed after the date the comptroller’s decision is final. The parties may waive the right to file a motion for rehearing to expedite the processing of the credit. A waiver of rehearing or motion for rehearing may be filed as described above.

 

SIGNED on this 21st day of March 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, Amended Proposal for Decision as changed

 

 

 

ATTACHMENT C

 

 

SOAH Docket No. 304-23-26705

Before the State Office of Administrative Hearings

TCPA Hearing No. 119,576

 

Amended 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, penalty, and accrued interest. Petitioner requested redetermination and provided additional documentation, resulting in an amended audit. Petitioner disputes the amended audit and contends the auditor incorrectly categorized lump-sum new construction services as the sale and installation of tangible personal property and that nontaxable services, such as contract programming and analysis/configuration were scheduled in error. Petitioner also contends that the auditor improperly rejected certain direct payment and exemption certificates. Staff disagrees and contends Petitioner failed to meet its burden of proof on all contentions.

 

In this Amended Proposal for Decision, the Administrative Law Judge (ALJ) finds that Petitioner failed to meet its evidentiary burden, and the amended assessment should be upheld in its entirety.

 

I. Notice, Jurisdiction, and Procedural History

 

Staff referred this case to the State Office of Administrative Hearings (SOAH) and, on August 30, 2023, issued a Notice of Hearing by Written Submission. On September 19, 2023, ALJ Kimberly LaFlair issued an order setting the written submission hearing. Alberto Alejandro Cruz represented Staff, and Petitioner was represented by **************. The contested case record closed on February 20, 2024, and the Proposal for Decision (PFD) was issued on April 19, 2024. On May 6, 2024, Staff filed exceptions to the PFD. Petitioner filed multiple agreed motions to continue the deadline to file exceptions. On July 19, 2024, Petitioner filed its exceptions to the PFD and on August 5, 2024, it filed its response to Staff’s exceptions. Staff did not respond to Petitioner’s exceptions.

 

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

1. Evidence

Petitioner submitted additional argument and evidence in the written submission hearing, which included the following exhibits:

 

1-A.      COMPANY A Project, Invoice No. ***09171768; [ENDNOTE 3]

1-B.      COMPANY B Project, Invoice No. ***100817EW;

1-C.      COMPANY C Project, Invoice No. ***072317L1;

1-D.      COMPANY D Project, Invoice No.***113016L1;

1-E.      COMPANY F Project, Invoice No. ***10081752;

1-F.       COMPANY G Project, Invoice No. ***10081752;

1-G.      COMPANY H Project, Invoice No. ***10301767;

1-H.      COMPANY J Project, Invoice No. ***011717L1;

1-I.        COMPANY K Project, Invoice No. ***021417L2;

1-J.        COMPANY L Project, Invoice No. ***052317L1;

1-K.       COMPANY M Project, Invoice No. ***102516L1;

1-L.       COMPANY O Project, Invoice No. ***122316L1;

1-M.      COMPANY P Project, Invoice No. ***08131749;

 

1.          Affidavit of INDIVIDUAL A;

1.          Software Configuration Invoices; and

1.          Direct Pay and Exemption Certificates.

 

Staff submitted the pleadings exchanged between the parties prior to referring the matter to SOAH and offered the following exhibits:

1. Hearing Request Receipt;

2. Texas Notification of Audit Results;

3. Penalty and Interest Waiver Worksheet;

4. Audit Report;

5. Audit Plan;

6. Amended Audit Report;

7. Amended Audit Plan;

8. Picture #1; and

9. Picture #2.

The parties’ exhibits are admitted without objection.

 

B. Agreed Adjustments

 

There are no agreed adjustments.

 

C. Material Facts and Issues Presented

 

Petitioner provides various services to oil, natural gas, and agricultural industries. Those services include phone conference remote monitoring, software programming, and the installation and building of control panels for the industries it services. In August 2017, Staff initiated a sales and use tax audit for the period of January 1, 2014, through December 31, 2017.

 

Petitioner used QuickBooks during the audit period and ExpenseNet, which captured expenses that flow to QuickBooks. Petitioner’s compliance manager informed the auditor that she charged tax on all transactions unless and until a completed exemption certificate was provided. Petitioner’s CFO during the audit period completed the sales and use tax returns.

 

The examinations performed were either detailed or sampled, depending on the number of transactions. The detailed examinations made adjustments for tax collected but not remitted (Exam 100) and taxable purchases of assets (Exam 600). The sample and projection examinations included adjustments for disallowed deductions (Exams 400 – 403). The adjustments for disallowed deductions were stratified by the dollar amount of the invoices.

 

Exam 100, which included adjustments for tax collected but not remitted, was due to Petitioner not accounting for local sales and use tax at the customer’s location and charging 8.25% on all transactions. To determine taxable purchases of assets scheduled, the auditor reviewed the invoices provided by Petitioner and scheduled transactions for unsupported assets that had no corresponding invoices in Exam 600. For the disallowed deduction exams, the auditor reviewed the nontaxed transactions pulled from Petitioner’s QuickBooks and the exemption certificates provided by Petitioner for validity and completeness. Any nontaxed sales not supported by a valid certificate were scheduled in Exams 400 – 403. The auditor rejected certificates for new construction projects because she determined that Petitioner did not provide new construction services during the audit period, but that it sold, installed, and repaired tangible personal property (TPP) that remained TPP after installation. The auditor also rejected the direct payment permits for two entities because each of the companies involved were legal entities able to obtain their own direct payment permits, rather than divisions or branches of each other.

 

On March 23, 2021, Staff issued an audit report and Texas Notification of Audit Results to Petitioner, assessing sales and use tax, the 10% late filing penalty, and accrued interest. Petitioner timely requested redetermination.

 

During redetermination, Petitioner provided additional documentation supporting separated billing under a contract and out-of-state work and the audit was amended. Staff did not agree to adjust the amended audit and referred the matter to SOAH.

 

Petitioner submitted additional argument and evidence in the written submission hearing. Petitioner’s additional argument presented legal and factual support for its contentions and attached invoices and other documentation. Staff issued its reply, which offered its legal and factual analysis asserting that Petitioner’s evidence is insufficient to support its burden. Staff did not agree to make any adjustments to the amended audit.

 

D. 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. 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. Id.; see also, Comptroller’s Decision No. 117,129 (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. If that burden is satisfied, Petitioner must demonstrate by a preponderance of the evidence that that tax was paid, accrued, or assessed on a service in error. See 34 Tex. Admin. Code § 1.26(e). To the extent Petitioner contends an exemption applies, it must provide clear and convincing proof. Id. § 1.26(c).

 

At a hearing, a taxpayer must produce contemporaneous records and supporting documentation for the transactions in question to substantiate and enable verification of the taxpayer’s claim related to the amount of tax, penalty, or interest to be assessed, collected, or refunded. 34 Tex. Admin. Code § 1.26(a). Petitioner, as the party in possession of evidence within its control, has the burden of producing that evidence. See Watson v. Brazos Elec. Power Corp., Inc., 918 S.W.2d 639, 643 (Tex. App.—Waco 1996, writ denied) (failure to produce evidence within a party’s control raises the presumption that if produced it would operate against him, and every intendment will be in favor of the opposite party); H. E. Butt Grocery Co. v. Bruner, 530 S.W.2d 340, 343 (Tex. Civ. App.—Waco 1975, writ dism’d). This presumption arises whenever the party not in possession of the evidence has introduced evidence harmful to the party who had control of the evidence. See Brewer v. Dowling, 862 S.W.2d 156, 159 (Tex. App.—Fort Worth 1993, writ denied). “Under such circumstances, the failure of the [party in control of the evidence] to rebut the harmful evidence with evidence within its control raises a presumption that the unpresented evidence would also be unfavorable to the nonproducing party.” Id. A taxpayer cannot defeat an assessment based on the burden of proof by not providing the necessary documents. See, e.g., Comptroller’s Decision No. 107,078 (2015). In addition, factual assertions in pleadings are not evidence. See, e.g., Comptroller’s Decision No. 111,587 (2015).

 

1. New Construction

 

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. Moreover, the repair of tangible personal property is a taxable service. Id. § 151.0101(a)(5). The sales price of a taxable item includes the transportation or installation of tangible personal property as well as transportation incident to the performance of a taxable service. Tex. Tax Code § 151.007(a)(3), (4). However, if tangible personal property is incorporated into realty such that it loses its identity as tangible personal property, then the installation charges may constitute the taxable repair or remodeling of real property. Tex. Tax Code § 151.0101(a)(13). All persons who remodel nonresidential real property must collect tax on the total sales price to the customer. Id. §§ 151.0101(a)(13), .0047; 34 Tex. Admin. Code § 3.357(b)(2).

 

Remodeling or modification is defined as “to rebuild, replace, alter, modify, or upgrade existing real property” and “work that is performed after the initial finish out has been completed is remodeling even when the improvement has not been occupied or used.” 34 Tex. Admin. Code § 3.357(a)(11). However, a person who builds new improvements to realty is considered to perform nontaxable services and is classified as a contractor rather than a service provider. Id. § 3.291(a)(3). A contractor is not providing taxable services and is not required to collect sales tax on its labor charges. Tex. Tax Code §§ 151.0101(a)(13), .0047; 34 Tex. Admin. Code § 3.291; Comptroller’s Decision No. 113,810 (2019).

 

New construction is defined as “all new improvements to real property including initial finish out to the interior of the improvement.” 34 Tex. Admin. Code § 3.357(a)(8). Comptroller auditor guidance describes initial finish out work as, “Completing the interior or exterior of an unfinished improvement to realty so that it complies with the owner’s or lessor’s requirements is initial finish-out.” See Audit Procedures for Contractors and Repairmen, p.2 (April 2017). The Comptroller has consistently treated new construction as an exclusion from taxation, not an exemption. See, e.g., Comptroller’s Decision Nos. 33,338; 33,339 (1995).

 

Documentation that clearly defines the work being performed should be retained to show the new construction and remodeling delineations. 34 Tex. Admin. Code § 3.357(b)(7). Examples of acceptable documentation are written contracts that detail the scope of work, bid sheets, tally sheets, schedules of values, and blueprints. Id.

 

Here, Petitioner contends that its control panel systems qualify as “initial finish-out work” to new improvements to real property and the labor related to them is therefore nontaxable. Petitioner argues that the tanks that Petitioner affixed its control panels to were new and a part of new facilities that had not gone online prior to Petitioner’s control equipment being affixed and configured to the tanks. In support, Petitioner provided invoices and a timeline of the invoice date and corresponding facility on-line date. In the alternative, Petitioner contends that should its control panel equipment not qualify as “initial finish-out work,” the control panels should constitute new, permanent improvement to real property, making the related labor nontaxable.

 

Staff disagrees with Petitioner’s theories on nontaxable labor and maintains the control panels are TPP that remain such even after they are placed on site. Staff asserts Petitioner did not meet its burden to show that its control panels, once affixed to the tanks, qualify as initial finish out work or permanent improvements to real property, and are no longer TPP.

 

Staff’s evidence is sufficient to establish, prima facie, that Petitioner sold, installed, and repaired TPP that remained TPP after installation. The charge for the TPP and installation was taxable. The evidence is insufficient to conclude that Petitioner incorporated the TPP into realty such that it lost its identity as tangible personal property, and therefore Petitioner did not perform new construction services that were excluded from sales tax. The ALJ finds that Petitioner’s contention that labor related to the installation of its control panels is nontaxable should be denied.

 

2. Software

 

Tangible personal property includes a computer program, and the sale, lease, or license of a computer program is a sale of tangible personal property. See Tex. Tax Code § 151.009; 34 Tex. Admin. Code § 3.308(c)(1)(A). A “computer program” is defined broadly as a series of instructions coded for acceptance or use by a computer system and which are designed to permit the computer system to process data and provide results and information. 34 Tex. Admin. Code § 3.308(a)(1). Tax is due on the sale when the computer program is transferred for consideration in Texas, or stored, used, or consumed in Texas, in electronic form or on physical media. See id. § 3.308(c)(1)(A).

 

The sales price of a taxable item includes any service that is a part of the sale. Tex. Tax Code § 151.007(b). Therefore, the sales price of a computer program includes all charges made in connection with the sale of the program, which may include charges for installation, modification, repair, maintenance, or restoration, whether or not separately stated. 34 Tex. Admin. Code § 3.308(c)(1)(B). Software implementation, installation, or data conversion are taxable when performed by the seller of taxable software. State Tax Automated Research System Document (STAR) No. 9904412L (April 14, 1999).

 

Petitioner relies on STAR Document No. 200007502L (2000) in support of its contention that labor charges for installing or configuring software not sold by a taxpayer are not taxable and asserts that it is not in the business of, and has never been in the business of, selling software. [ENDNOTE 4] Instead, Petitioner states that it configures the software purchased by its customers from third parties to operate its control panels, which control the tanks in its installations. In support, Petitioner provided several invoices that list “programming” as the service provided or “Programmer” as the employee title. Petitioner contends in its pleadings that when the invoices state “programming,” what it is referring to is “software configuration of software Taxpayer did not sell.” However, Petitioner offered no documentary evidence to support this assertion during the hearing.

 

In its response, Staff dismisses Petitioner’s argument, contending that computer programs/software are TPP, and that Petitioner has not met its burden to show otherwise. Staff also argues that some of the invoices that Petitioner provided in support of this contention actually support Staff’s position that the services are TPP, such as including “hosting services.” [ENDNOTE 5] Additionally, Staff argues that a single word on an invoice, such as “Programmer,” is insufficient to meet the burden of proof.

 

The ALJ is not convinced by the evidence in the record that Petitioner installed or configured software sold by a third party. Therefore, the ALJ concludes the evidence in the record is insufficient to demonstrate, by a preponderance of the evidence, that the charges for the services that remain at issue are not related to the sale of software or are otherwise nontaxable or by clear and convincing evidence, that they are tax exempt. 34 Tex. Admin. Code § 1.26. Petitioner’s contention should be denied, and the amended audit as related to this contention should be upheld.

 

3. Direct Payment Exemption Certificates

 

The holder of a direct payment permit issued by the Comptroller may give a blanket exemption certificate to sellers who sell, lease, or rent taxable items to the holder of the direct payment permit. Tex. Tax Code § 151.417(a); 34 Tex. Admin. Code § 3.288(k). If a direct payment permit holder chooses to claim the direct payment exemption, it must do so by providing the seller a valid direct pay exemption certificate at the time of the transaction. Comptroller’s Decision No. 115,337 (2020), citing STAR Document No. 201004454L (April 1, 2010). If a direct payment permit holder fails to claim the direct pay exemption at the time of the sale, then the seller is responsible for collecting the state and applicable local sales taxes, as well as any local use taxes that may apply. See STAR Document No. 201004454L. A direct pay permit alone is not sufficient to support tax-free sales because permits do not contain the information required on a certificate. See, e.g., Comptroller’s Decision No. 115,337 (2020).

 

A direct payment permit is issued to a legal entity, including all branches and divisions, purchasing taxable items. 34 Tex. Admin. Code § 3.288(e). A direct payment exemption certificate issued to a supplier by one branch or division applies to purchases made by all branches or divisions from the same supplier. Id. However, one legal entity cannot use the direct payment permit of another legal entity to support tax-free sales. See 34 Tex. Admin. Code § 3.288 (e); see also Comptroller’s Decision No. 115,337 (2020). For example, the direct payment permit held by a corporation cannot be used for purchases by its subsidiaries, and each subsidiary must obtain its own permit. See STAR Document No. 8501L0611E11 (January 9, 1985); Comptroller’s Decision No. 115,337 (2020).

 

Petitioner contends that the direct pay certificates it accepted from COMPANY P and COMPANY R were properly completed and, therefore, wrongly rejected by the auditor. Petitioner relies on Texas Administrative Code § 3.288(k) and Texas Tax Code § 151.417(b) in asserting that “properly completed” direct pay certificates mean that the direct pay permit contains a direct payment permit number and a statement that “the direct payment permit holder agrees to accrue and pay to this state all taxes that are of may become due on the taxable items sold under the exemption certificate to the permit holder.” Petitioner contends that the direct pay certificates for COMPANY P and COMPANY R comply with these requirements. In support of its contention, Petitioner included the Direct Pay and Exemption Certificates for these two customers and the payment/remittance form regarding COMPANY P

 

Staff disagrees with Petitioner and argues that because the direct payment certificates and corresponding invoices do not match, the auditor properly disallowed them. For COMPANY P, Staff contends the direct pay certificate was properly rejected because the certificate was for COMPANY P, but the corresponding invoice was directed to and the work performed on behalf of COMPANY P’s subsidiary, COMPANY Q. Similarly, for COMPANY R, the direct payment certificate was for that entity, but the work performed was invoiced to its subsidiary, COMPANY S. Subsidiaries, Staff argues, are separate legal entities that must obtain their own direct payment permits.

 

In this case, both the parent and subsidiary had separate taxpayer numbers and could have issued their own exemption certificates. Additionally, the record evidence indicates that the entities at issue were subsidiaries of the legal entity and not merely branches or divisions. [ENDNOTE 6] Petitioner did not provide evidence to dispute that the entities in questions are not subsidiaries. Moreover, record evidence establishes that the transactions at issue were for work performed for the subsidiaries. The ALJ concludes that Petitioner’s evidence is insufficient to support an exemption for either COMPANY P and COMPANY R.

 

4. Exemption Certificates

 

All persons engaged in the business of selling items that are exempt from the sales tax must obtain an exemption certificate from their customers. Tex. Tax Code §§ 151.054, .155; 34 Tex. Admin. Code §§ 3.287, 3.296(d). An exemption certificate must show the name and address of the purchaser; a description of the item to be purchased; the reason the purchase is exempt from tax; the signature of the purchaser and the date; and the name and address of the seller. 34 Tex. Admin. Code § 3.287(f).

 

Petitioner contends the exemption certificate for COMPANY T was improperly rejected by the auditor. The certificate was rejected because the auditor determined that Petitioner did not provide new construction services during the audit period. Petitioner argues that the certificate should be accepted if its arguments related to its participation in new construction be accepted. As discussed above, the ALJ determined that Petitioner did not provide new construction services during the audit period and, accordingly, this contention should be denied.

 

III. Findings of Fact

1. ************** (Petitioner) provides various services to oil, natural gas, and agricultural industries. Those services include phone conference remote monitoring, software programming, and the installation and building of control panels for the industries it services.

2. In August 2017, Staff initiated a sales and use tax audit for the period of January 1, 2014, through December 31, 2017.

3. Petitioner used QuickBooks during the audit period and ExpenseNet, which captured expenses that flow to QuickBooks.

4. Petitioner’s compliance manager informed the auditor that she charged tax on all transactions unless and until a completed exemption certificate was provided. Petitioner’s CFO during the audit period completed sales and use tax returns.

5. The examinations performed were either detailed or sampled, depending on the number of transactions.

6. The detailed examinations made adjustments for tax collected but not remitted (Exam 100) and taxable purchases of assets (Exam 600).

7. The sample and projection examinations included adjustments for disallowed deductions (Exams 400 – 403). The adjustments for disallowed deductions were stratified by the dollar amount of the invoices.

8. Exam 100, which included adjustments for tax collected but not remitted, was due to Petitioner not accounting for local sales and use tax at the customer’s location and charging 8.25% on all transactions.

9. To determine taxable purchases of assets scheduled, the auditor reviewed the invoices provided by Petitioner and scheduled transactions for unsupported assets that had no corresponding invoices in Exam 600.

10. For the disallowed deduction exams, the auditor reviewed the nontaxed transactions pulled from Petitioner’s QuickBooks and the exemption certificates provided by Petitioner for validity and completeness. Any nontaxed sales not supported by a valid certificate were scheduled in Exams 400 – 403.

11. The auditor rejected certificates for new construction projects because she determined that Petitioner did not provide new construction services during the audit period, but that it sold, installed, and repaired tangible personal property (TPP) that remained TPP after installation.

12. The auditor rejected direct payment permits for two entities because each of the companies involved were legal entities able to obtain their own direct payment permits, rather than divisions or branches of each other.

13. On March 23, 2021, Staff issued an audit report and Texas Notification of Audit Results to Petitioner, assessing sales and use tax.

14. Petitioner timely requested redetermination.

15. During redetermination, Petitioner provided additional documentation supporting separated billing under a lump-sum contract and out-of-state work and the audit was amended.

16. Staff did not agree to adjust the amended audit and referred the matter to the State Office of Administrative Hearings (SOAH).

17. On August 30, 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.

18. On September 19, 2023, Administrative Law Judge Kimberly LaFlair issued an order setting the written submission hearing.

19. On January 17, 2024, Petitioner filed additional evidence and argument, and, on February 16, 2024, Staff filed its response.

20. The contested case record closed on February 20, 2024, and the Proposal for Decision (PFD) was issued on April 19, 2024.

21. On May 6, 2024, Staff filed exceptions to the PFD. On July 19, 2024, Petitioner filed its exceptions to the PFD and on August 5, 2024, it filed its response to Staff’s exceptions. Staff did not respond to Petitioner’s exceptions.

 

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. 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. Tex. Tax Code § 151.0101; see also, Comptroller’s Decision No. 117,129 (2022).

7. Only services specifically enumerated in Texas Tax Code § 151.0101 are taxable.

8. To impose tax on a service, Staff must demonstrate not only that a service was sold but that the service is taxable. Tex. Tax Code § 151.0101; see also, Comptroller’s Decision No. 117,129 (2022).

9. If that burden is satisfied, Petitioner must demonstrate by a preponderance of the evidence that that tax was paid, accrued, or assessed on a service in error. See 34 Tex. Admin. Code § 1.26(e).

10. To the extent Petitioner contends an exemption applies, it must provide clear and convincing proof. 34 Tex. Admin. Code § 1.26(c).

11. At a hearing, a taxpayer must produce contemporaneous records and supporting documentation for the transactions in question to substantiate and enable verification of the taxpayer’s claim related to the amount of tax, penalty, or interest to be assessed, collected, or refunded. 34 Tex. Admin. Code § 1.26(a).

12. Petitioner, as the party in possession of evidence within its control, has the burden of producing that evidence. See Watson v. Brazos Elec. Power Corp., Inc., 918 S.W.2d 639, 643 (Tex. App.—Waco 1996, writ denied) (failure to produce evidence within a party’s control raises the presumption that if produced it would operate against him, and every intendment will be in favor of the opposite party); H. E. Butt Grocery Co. v. Bruner, 530 S.W.2d 340, 343 (Tex. Civ. App.—Waco 1975, writ dism’d).

13. This presumption arises whenever the party not in possession of the evidence has introduced evidence harmful to the party who had control of the evidence. See Brewer v. Dowling, 862 S.W.2d 156, 159 (Tex. App.—Fort Worth 1993, writ denied). “Under such circumstances, the failure of the [party in control of the evidence] to rebut the harmful evidence with evidence within its control raises a presumption that the unpresented evidence would also be unfavorable to the nonproducing party.” See Brewer v. Dowling, 862 S.W.2d 156 at 159.

14. A taxpayer cannot defeat an assessment based on the burden of proof by not providing the necessary documents. See, e.g., Comptroller’s Decision No. 107,078 (2015).

15. Factual assertions in pleadings are not evidence. See, e.g., Comptroller’s Decision No. 111,587 (2015).

16. If tangible personal property is incorporated into realty such that it loses its identity as tangible personal property, then the installation charges may constitute the taxable repair or remodeling of real property. Tex. Tax Code § 151.0101(a)(13).

17. All persons who remodel nonresidential real property must collect tax on the total sales price to the customer. Tex. Tax Code §§ 151.0101(a)(13), .0047; 34 Tex. Admin. Code § 3.357(b)(2).

18. Remodeling or modification is defined as “to rebuild, replace, alter, modify, or upgrade existing real property” and “work that is performed after the initial finish out has been completed is remodeling even when the improvement has not been occupied or used.” 34 Tex. Admin. Code § 3.357(a)(11).

19. A person who builds new improvements to realty is considered to perform nontaxable services and is classified as a contractor rather than a service provider. 34 Tex. Admin. Code § 3.291(a)(3).

20. A contractor is not providing taxable services and is not required to collect sales tax on its labor charges. Tex. Tax Code §§ 151.0101(a)(13), .0047; 34 Tex. Admin. Code § 3.291; Comptroller’s Decision No. 113,810 (2019).

21. New construction is defined as “all new improvements to real property including initial finish out to the interior of the improvement.” 34 Tex. Admin. Code § 3.357(a)(8).

22. Comptroller auditor guidance describes initial finish out work as, “Completing the interior or exterior of an unfinished improvement to realty so that it complies with the owner’s or lessor’s requirements is initial finish- out.” Audit Procedures for Contractors and Repairmen p.2 (April 2017).

23. The Comptroller has consistently treated new construction as an exclusion from taxation, not an exemption. See, e.g., Comptroller’s Decision Nos. 33,338; 33,339 (1995).

24. Documentation that clearly defines the work being performed should be retained to show the new construction and remodeling delineations. 34 Tex. Admin. Code § 3.357(b)(7).

25. Examples of acceptable documentation are written contracts that detail the scope of work, bid sheets, tally sheets, schedules of values, and blueprints. 34 Tex. Admin. Code § 3.357(b)(7).

26. Staff’s evidence is sufficient to establish, prima facie, that Petitioner sold, installed, and repaired TPP that remained TPP after installation and that Petitioner did not perform new construction services that were not exempt or excluded from sales tax.

27. Petitioner’s labor related to the installation of its control panels is taxable.

28. Tangible personal property includes a computer program, and the sale, lease, or license of a computer program is a sale of tangible personal property. See Tex. Tax Code § 151.009; 34 Tex. Admin. Code § 3.308(c)(1)(A).

29. A “computer program” is defined broadly as a series of instructions coded for acceptance or use by a computer system and which are designed to permit the computer system to process data and provide results and information. 34 Tex. Admin. Code § 3.308(a)(1).

30. Tax is due on the sale when the computer program is transferred for consideration in Texas, or stored, used, or consumed in Texas, in electronic form or on physical media. 34 Tex. Admin. Code § 3.308(c)(1)(A).

31. The sales price of a taxable item includes any service that is a part of the sale. Tex. Tax Code § 151.007(b).

32. The sales price of a computer program includes all charges made in connection with the sale of the program, which may include charges for installation, modification, repair, maintenance, or restoration, whether or not separately stated. 34 Tex. Admin. Code § 3.308(c)(1)(B).

33. Software implementation, installation, or data conversion are taxable when performed by the seller of taxable software. State Tax Automated Research System Document (STAR) No. 9904412L (April 14, 1999).

34. The evidence in the record is insufficient to demonstrate, by a preponderance of the evidence, that the charges for the services that remain at issue are not related to the sale of software or are otherwise nontaxable or by clear and convincing evidence, that they are tax exempt. 34 Admin. Code § 1.26.

35. The holder of a direct payment permit issued by the Comptroller may give a blanket exemption certificate to sellers who sell, lease, or rent taxable items to the holder of the direct payment permit. Tex. Tax Code § 151.417(a); 34 Tex. Admin. Code § 3.288(k).

36. If a direct payment permit holder chooses to claim the direct payment exemption, it must do so by providing the seller a valid direct pay exemption certificate at the time of the transaction. Comptroller’s Decision No. 115,337 (2020), citing STAR Document No. 201004454L (April 1, 2010).

37. If a direct payment permit holder fails to claim the direct pay exemption at the time of the sale, then the seller is responsible for collecting the state and applicable local sales taxes, as well as any local use taxes that may apply. See STAR Document No. 201004454L.

38. A direct pay permit alone is not sufficient to support tax-free sales because permits do not contain the information required on a certificate. See, e.g., Comptroller’s Decision No. 115,337 (2020).

39. A direct payment permit is issued to a legal entity, including all branches and divisions, purchasing taxable items. 34 Tex. Admin. Code § 3.288(e).

40. A direct payment exemption certificate issued to a supplier by one branch or division applies to purchases made by all branches or divisions from the same supplier. 34 Tex. Admin. Code § 3.288(e).

41. Direct payment holders may not authorize any other person or firm to purchase any taxable items under their permit. 34 Tex. Admin. Code § 3.288(e).

42. Use by other persons may result in revocation of the permit. 34 Tex. Admin. Code § 3.288(e).

43. “Properly completed” direct pay certificates mean that the direct pay permit contains a direct payment permit number and a statement that “the direct payment permit holder agrees to accrue and pay to this state all taxes that are of may become due on the taxable items sold under the exemption certificate to the permit holder.” Tex. Admin. Code § 3.288(k); Tex. Tax Code § 151.417(b).

44. One legal entity cannot use the direct payment permit of another legal entity to support   tax-free sales. See 34 Tex. Admin. Code § 3.288 (e); see also Comptroller’s Decision No. 115,337 (2020).

45. A direct payment permit held by a corporation cannot be used for purchases by its subsidiaries, and each subsidiary must obtain its own permit. See STAR Document No. 8501L0611E11 (January 9, 1985); Comptroller’s Decision No. 115,337 (2020).

46. The ALJ concludes that Petitioner’s evidence is insufficient to support an exemption for either COMPANY P or COMPANY R.

47. All persons engaged in the business of selling items that are exempt from the sales tax must obtain an exemption certificate from their customers. Tex. Tax Code §§ 151.054, .155; 34 Tex. Admin. Code §§ 3.287, 3.296(d).

48. An exemption certificate must show the name and address of the purchaser; a description of the item to be purchased; the reason the purchase is exempt from tax; the signature of the purchaser and the date; and the name and address of the seller. 34 Tex. Admin. Code § 3.287(f).

49. Petitioner did not provide new construction services during the audit period.

50. The ALJ recommends Petitioner’s contentions be denied and that the amended assessment is upheld in its entirety.

 

Signed February 20, 2025.

 

Kimberly LaFlair

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] The ALJ changed Petitioner’s Exhibit numbers from roman numerals to natural numbers for consistency.

[4] See Petitioner’s Exhibit 2.

[5] The Comptroller has determined that website design, creation, and hosting is taxable as data processing. Comptroller Decision No.117,671 (2022).

[6] See Staff’s Exh. 5. The Audit Plan states that COMPANY Q is a subsidiary of COMPANY P, and that COMPANY S is a subsidiary of COMPANY R. The Audit Plan also notes that the auditor informed one of Petitioner’s representatives during the audit that direct payment permits cannot be applied from the parent or subsidiaries to other companies. Additionally, the Audit Plan states that the auditor researched the SEC website to determine the status of these entities.