Standard No records loss.
202503030H
SOAH DOCKET NO. 304-25-03937
CPA HEARING NO. 119,357
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE:
AUDIT PERIOD: February 1, 2018 THROUGH June 30, 2021
Sales And Use Tax/RDT
BEFORE THE COMPTROLLER OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
HEITH TREADWELL
Representing Respondent
**************
Representing Petitioner
COMPTROLLER’S DECISION
This decision is considered final on April 21, 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) 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 26th day of March 2025
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. 304-25-03937
Before the State Office of Administrative Hearings
TCPA Hearing No. 119,357
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, a 10% penalty, and accrued interest. Petitioner requested redetermination of the assessment, contending it did not collect the tax that was scheduled as tax collected but not remitted. Petitioner also contended the audit erroneously included non taxable new construction and used an erroneous estimation procedure. Staff contends Petitioner has not shown audit error. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends that the assessment be affirmed.
I. Notice, Jurisdiction, and Procedural History
Staff referred this case to the State Office of Administrative Hearings (SOAH) and, on October 30, 2024, issued a Notice of Hearing by Written Submission. On November 1, 2024, ALJ Keneshia Washington issued an Order Setting Written Submission Hearing, setting the written submission hearing requirements, filing deadlines, and record close date. Heith Treadwell represented Staff, and Petitioner was represented by **************, Petitioner’s primary member and partner. The contested case record closed on January 22, 2025.
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:
Hearing Request Receipt;
Texas Notification of Audit Results;
Penalty & Interest Waiver Worksheet;
Audit Report; and
Audit Plan.
Staff’s exhibits were admitted without objection.
B. Agreed Adjustments
Staff did not agree to adjust the assessment.
C. Material Facts and Issues
During the period at issue, Petitioner operated a full service electrical and air conditioning contractor business in the greater CITY, Texas area and the ************** Region. Petitioner provided services related to lighting installations, design, emergencies, heating, ventilation, and air conditioning systems, tugboats, video surveillance installation, and equipment replacements. Petitioner serviced residential, commercial, industrial, and marine customers.
In October 2021, Staff initiated a sales and use tax audit of Petitioner for the period of February 1, 2018, through June 30, 2021. Petitioner provided the auditor with contracts and job files, financial statements, and federal income tax returns. To prepare its Texas sales and use tax returns, Petitioner ran the sales tax liability report from QuickBooks and copied the numbers into the return. Petitioner provided a sales tax liability report for the entire audit period.
After comparing Petitioner’s sales tax liability report to its sales and use tax returns, the auditor determined that Petitioner was using the wrong lines from the sales tax liability report to prepare the returns. Based on a reconciliation using the applicable tax collected information on the sales tax liability report, the auditor scheduled tax collected but not remitted in Exam 1.
Because Petitioner did not provide complete source records, the auditor used an estimation procedure to schedule additional taxable sales. Petitioner provided the auditor with a profit and loss report for the audit period, and the auditor obtained a profit and loss report for a prior audit period from July 1, 2014, through January 31, 20189.
Source: Finding of Fact No. 8.
The auditor multiplied the total of the reported tax and assessed tax from the prior audit for disallowed deductions by the state and local sales and use tax rate to estimate taxable sales. The auditor then divided calculated taxable sales by the gross income amount indicated on Petitioner’s profit and loss report for the prior audit period to arrive at a taxable sales percentage from the prior audit period. The auditor then applied the taxable sales percentage from the prior audit period to the gross sales indicated on the sales tax liability report. He then subtracted reported taxable sales based on Petitioner’s sales and use tax returns and the taxable amount for the tax collected but not remitted scheduled in Exam 1 to arrive at a taxable amount of additional taxable sales. The auditor then applied the state and local tax rates to arrive at tax due for additional taxable sales scheduled in Exam 2.
On February 22, 2022, the Comptroller issued a Texas Notification of Audit Results to Petitioner assessing tax, 10% penalty, and interest. Petitioner timely requested redetermination, asserting tax collected but not remitted and nontaxable new construction were scheduled in error and contesting the estimation procedure used. Staff did not agree to adjust the audit and referred the matter to SOAH.
D. ALJ’s Analysis and Recommendation
In a contested case hearing, a taxpayer 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. Tex. Tax Code § 111.0041; 34 Tex. Admin. Code § 1.26(a). Sellers of taxable items and purchasers who store, use, or consume taxable items in Texas are required to keep records in the form of receipts, shipping manifests, invoices, and other pertinent papers of all the total gross receipts from all sales and purchases of taxable items from every source made during each reporting period. Tex. Tax Code § 151.025(a)(1), (2); 34 Tex. Admin. Code § 3.281(b).
If a taxpayer fails to keep accurate records of gross receipts, gross purchases, deductions, and exclusions, the Comptroller may take actions that include estimating the person’s tax liability based on any available information, including records of suppliers. Tex. Tax Code §§ 111.0042(d), .008(a). Assertions in pleadings are insufficient to meet the burden of proof. See Comptroller’s Decision No. 105,892 (2012). 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).
Any person who collects a tax holds the tax amount in trust for the benefit of the state and is liable for the full amount of the tax collected plus any accrued penalties and interest. Tex. Tax Code § 111.016(a). Tax collected but not remitted is scheduled in Exam 1 based on Petitioner’s sales tax liability report and Texas sales and use tax returns. Petitioner has not provided documentation to show that Petitioner remitted the tax or returned it to its customers, and therefore has not established that the tax collected but not remitted was scheduled in error. Exam 1 should be upheld.
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. 30,461 (1994). However, only those 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. See, e.g., Comptroller’s Decision No. 102,386 (2014). Once Staff’s initial burden is met, Petitioner bears the burden to establish by a preponderance of the evidence that the service is not taxable. 34 Tex. Admin. Code § 1.26(e); Comptroller’s Decision No. 100,933 (2009). To the extent Petitioner relies on an exemption to establish error, its burden of proof is clear and convincing evidence. 34 Tex. Admin. Code § 1.26(c).
Petitioner contends the audit includes nontaxable new construction services. 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 service in question is taxable but also that it is not the type of service excluded from sales and use tax. See, e.g., Comptroller’s Decision No. 112,000 (2017).
Real property repair and remodeling services are taxable. Tex. Tax. Code § 151.0101(a)(13). Thus, all persons who repair and remodel nonresidential real property must collect tax on the total sales price to the customer, including charges for both labor and materials, without regard to whether the contract was lump sum or separated. See 34 Tex. Admin. Code § 3.357(b)(2). However, a person who builds new improvements to real property is performing nontaxable services and is classified as a contractor rather than a service provider. Id. § 3.291(a)(3). A contractor 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; see also, e.g., Comptroller’s Decision No. 101,643 (2010). Likewise, a contractor who uses lump-sum contracts (one price for the entire job) does not collect tax from its customer on the lump-sum charge. 34 Tex. Admin. Code §§ 3.291(b)(3)(A), .362(b)(1)(A).
The ALJ concludes Staff’s evidence is sufficient to establish, prima facie, that the estimated audit was authorized by statute and that the best information available was utilized. Though record evidence regarding the transactions at issue is scant, the ALJ concludes Staff met its prima facie burden to demonstrate the work at issue included taxable repair and remodeling services and that the services were not nontaxable new construction. Petitioner did not provide any evidence for the hearing; therefore, the ALJ finds Petitioner failed to prove audit error by a preponderance of the evidence. The ALJ recommends that the assessment be upheld.
III. Findings of Fact
During the period at issue, ************** (Petitioner) operated a full service electrical and air conditioning contractor business in the greater CITY, Texas area and the ************** Region.
Petitioner provided services related to lighting installations, design, building, emergencies, heating, ventilation, and air conditioning systems, tugboats, video surveillance installation, and equipment replacements.
Petitioner serviced residential, commercial, industrial, and marine customers.
In October 2021, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) initiated a sales and use tax audit of Petitioner for the period of February 1, 2018, through June 30, 2021.
Petitioner provided the auditor with contracts and job files, financial statements, and federal income tax returns. To prepare its Texas sales and use tax returns, Petitioner ran the sales tax liability report from QuickBooks and copied the numbers into the return. Petitioner provided a sales tax liability report for the entire audit period.
After comparing Petitioner’s sales tax liability report to its sales and use tax returns, the auditor determined that Petitioner was using the wrong lines from the sales tax liability report to prepare the returns. Based on a reconciliation using the applicable tax collected information on the sales tax liability report, the auditor scheduled tax collected but not remitted in Exam 1.
Because Petitioner did not provide complete source records, the auditor used an estimation procedure to schedule additional taxable sales.
Petitioner provided the auditor with a profit and loss report for the audit period, and the auditor obtained a profit and loss report for a prior audit period from July 1, 2014, through January 31, 20189.
Source: See Staff’s Exhibit No. 3 (Certified Penalty & Interest Waiver), p. CPA012.
The auditor multiplied the total of the reported tax and assessed tax from the prior audit for disallowed deductions by the state and local sales and use tax rate to estimate taxable sales. He then divided calculated taxable sales by the gross income amount indicated on Petitioner’s profit and loss report for the prior audit period to arrive at a taxable sales percentage from the prior audit period.
The auditor then applied the taxable sales percentage from the prior audit period to the gross sales indicated on the sales tax liability report. He subtracted reported taxable sales based on Petitioner’s sales and use tax returns and the taxable amount for the tax collected but not remitted scheduled in Exam 1 to arrive at a taxable amount of additional taxable sales. The auditor then applied the state and local tax rates to arrive at tax due for additional taxable sales scheduled in Exam 2.
On February 22, 2022, the Comptroller issued a Texas Notification of Audit Results to Petitioner assessing tax, 10% penalty, and interest.
Petitioner timely requested redetermination.
Staff did not agree to adjust the assessment.
Staff referred the matter to the State Office of Administrative Hearings (SOAH).
On October 30, 2024, issued Petitioner 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.
On November 1, 2024, Administrative Law Judge (ALJ) Keneshia Washington issued an Order Setting Written Submission Hearing, setting the written submission hearing requirements, filing deadlines, and record close date.
The contested case record closed on January 22, 2025.
Petitioner did not provide evidence for the hearing.
IV. Conclusions of Law
The Comptroller has jurisdiction over this matter. See Tex. Tax Code ch. 111.
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.
Staff provided proper and timely notice of the hearing. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009.
In a contested case hearing, a taxpayer 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. Tex. Tax Code § 111.0041; 34 Tex. Admin. Code § 1.26(a).
Sellers of taxable items and purchasers who store, use, or consume taxable items in Texas are required to keep records in the form of receipts, shipping manifests, invoices, and other pertinent papers of all the total gross receipts from all sales and purchases of taxable items from every source made during each reporting period. Tex. Tax Code § 151.025(a)(1), (2); 34 Tex. Admin. Code § 3.281(b).
If a taxpayer fails to keep accurate records of gross receipts, gross purchases, deductions, and exclusions, the Comptroller may take actions that include estimating the person’s tax liability based on any available information, including records of suppliers. Tex. Tax Code §§ 111.0042(d), .008(a).
Assertions in pleadings are insufficient to meet the burden of proof. See Comptroller’s Decision No. 105,892 (2012).
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).
Any person who collects a tax holds the tax amount in trust for the benefit of the state and is liable for the full amount of the tax collected plus any accrued penalties and interest. Tex. Tax Code § 111.016(a).
Petitioner has not provided documentation to show that it remitted the tax or returned it to its customers, and therefore, has not established that tax collected but not remitted was scheduled in error.
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. Tex. Tax Code § 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. 30,461 (1994).
Only those services specifically enumerated in Texas Tax Code § 151.0101 are taxable.
To impose tax on a service, Staff must demonstrate not only that a service was sold but that the service is taxable. See, e.g., Comptroller’s Decision No. 102,386 (2014).
Once Staff’s initial burden is met, Petitioner bears the burden to establish by a preponderance of the evidence that the service is not taxable. 34 Tex. Admin. Code § 1.26(e); Comptroller’s Decision No. 100,933 (2009).
To the extent Petitioner relies on an exemption to establish error, its burden of proof is clear and convincing evidence. 34 Tex. Admin. Code § 1.26(c).
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 service in question is taxable but also that it is not the type of service excluded from sales and use tax. See, e.g., Comptroller’s Decision No. 112,000 (2017).
Real property repair and remodeling services are taxable. Tex. Tax. Code § 151.0101(a)(13).
All persons who repair and remodel nonresidential real property must collect tax on the total sales price to the customer, including charges for both labor and materials, without regard to whether the contract was lump sum or separated. See 34 Tex. Admin. Code § 3.357(b)(2).
A person who builds new improvements to real property is performing nontaxable services and is classified as a contractor rather than a service provider. 34 Tex. Admin. Code § 3.291(a)(3).
A contractor 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; see also, e.g., Comptroller’s Decision No. 101,643 (2010).
A contractor who uses lump-sum contracts (one price for the entire job) does not collect tax from its customer on the lump-sum charge. 34 Tex. Admin. Code §§ 3.291(b)(3)(A), .362(b)(1)(A).
Staff’s evidence is sufficient to establish, prima facie, that the estimated audit was authorized by statute and that the best information available was utilized.
Staff met its prima facie burden to demonstrate the work at issue included taxable repair and remodeling services and that the services were not nontaxable new construction.
Petitioner failed to prove audit error by a preponderance of the evidence.
The audit assessment should be affirmed.
Signed February 27, 2025
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: 202503030H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 2025-03-26
TAX TYPE: SALES
