Nothing Particularly of note in this case.
This is a C-store, that did not agree with it's estimate, and only provided assertions as to why they disagreed.
These continue to be fairly common audits as small convenience and liquor store owners have relatively unfair audits, and tend to be fairly compliant.
Then, they continue to be common hearings because they are slam dunks for the Comptroller. These hearings are generally by the self represented because lawyers rarely take these cases and if they had a CPA paying attention to their sales, they likely wouldn't be in this situation.
202507017H
INDEXED BY TAX TYPE ONLY
SOAH DOCKET NO. 304-25-14636
CPA HEARING NO. 119,066
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: June 1, 2018 THROUGH August 31, 2021
Sales And Use Tax/RDT
BEFORE THE COMPTROLLER OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
KELLY HANCOCK
Acting Texas Comptroller of Public Accounts
MOLLY ANNE BUCHANAN
Representing Respondent
**************
Representing Petitioner
COMPTROLLER’S DECISION
This decision is considered final on July 28, 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 zero amount due.
SIGNED on this 2nd day of July 2025
KELLY HANCOCK
Acting 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. 304-25-14636
Before the State Office of Administrative Hearings
TCPA Hearing No. 119,066
Proposal for Decision
**************’s (Petitioner) convenience store business was audited for sales and use tax compliance by the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller). Petitioner was assessed tax, interest, and a 10% late penalty for one late-filed period. Petitioner requested redetermination, contending audit error and requesting a penalty waiver. Petitioner also contends that the audit does not account for a change in ownership, mismanagement, and employee theft. Staff asserts Petitioner failed to show audit error and that the assessed penalty should be upheld. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends that the assessment be upheld.
I. Notice, Jurisdiction, and Procedural History
Staff referred the contested case to the State Office of Administrative Hearings (SOAH) and, on March 20, 2025, issued Petitioner a Notice of Hearing by Written Submission. On April 23, 2025, ALJ Keneshia Washington issued an Order Setting Written Submission Hearing, which set the written submission hearing, filing deadlines, and a record close date. Petitioner was represented by its owner, **************, and Molly Anne Buchanan represented Staff. The contested case record closed on June 4, 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 here.
II. Reasons for Decision
Evidence Presented
Petitioner did not provide evidence for the hearing. Staff provided the pleadings the parties exchanged prior to referring the matter to SOAH and offered the following exhibits:
Hearing Request Receipt;
Texas Notification of Exam Results;
Penalty & Interest Waiver;
Audit Report; and
Audit Plan.
Staff’s exhibits were admitted into the record without objection.
B. Agreed Adjustments
Staff did not agree to adjust the assessment.
C. Facts Established and Issues Presented
During the period at issue, Petitioner owned and operated a convenience store business with an outlet in CITY, Texas. Petitioner primarily sold tobacco, beer, soda, and other products common to convenience stores. In August 2021, Staff initiated a sales and use tax compliance audit of Petitioner’s business for the period of June 1, 2018, through August 31, 2021. Petitioner provided the contract examiner from Staff’s Audit Division with federal income tax returns, available inventory purchase invoices for July – December 2020, and available monthly register reports. The examiner did not perform a shelf test to determine pricing because the store was out of business when the audit began.
Because Petitioner failed to provide complete documents, the examiner used an estimation procedure to conduct the audit, using available purchase invoices, monthly register reports, and vendor-reported purchases from the Comptroller’s Retail Inventory Tracking System (RITS). [ENDNOTE 3] The examiner estimated an alcohol markup based on Petitioner’s October 8, 2018, price sheet and estimated tobacco, soda, and candy markups based on audits of similar business performed in the area within the last year. He estimated a product mix percentage based on the available purchase invoices and the RITS data.
The examiner applied the alcohol markup and tobacco markup to alcohol and tobacco purchases respectively to estimate alcohol and tobacco sales. He applied the product mix to estimate taxable sales. He then applied a 5% allowance to the estimated taxable sales for inventory loss due to theft and spoilage to arrive at estimated audited taxable sales. The examiner then subtracted reported taxable sales to estimate additional taxable sales, and applied the applicable sales tax rate. Additional taxable sales were scheduled in Exam 1, which is the sole exam in the audit.
On February 23, 2022, Staff issued a Texas Notification of Exam Results to Petitioner. The assessment included tax, interest, and a 10% penalty limited to a late-filed period. Petitioner timely requested redetermination, contending audit error and requesting a waiver of penalty. Petitioner also contends the assessment fails to account for a change in ownership, mismanagement, and employee theft. Staff did not agree to adjust the audit and referred the matter to SOAH.
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. All gross receipts of a seller are presumed to have been subject to sales tax unless a properly completed resale certificate is accepted. Id. § 151.054(a). 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. See Comptroller’s Decision No. 116,506 (2020).
Sellers of taxable items and purchasers who store, use, or consume taxable items in this state shall keep books, papers, and records in the form the Comptroller requires. Tex. Tax Code § 151.025(a); 34 Tex. Admin. Code § 3.281(a)(1). For example, records must reflect total purchases of taxable items and must substantiate any claimed deductions or exclusions authorized by law. Tex. Tax Code § 151.025(a)(2), (3); 34 Tex. Admin. Code § 3.281(b). 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). 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. Tex. Tax Code §§ 111.0042(d), .008(a).
A taxpayer is generally required to support its contentions with source records, and assertions in pleadings are insufficient to meet the burden of proof. 34 Tex. Admin. Code § 1.26(a); see also Comptroller’s Decision No. 105,892 (2012). An audit performed based on the best information available is presumed correct. Comptroller’s Decision No. 110,269 (2015).
Staff’s evidence is sufficient to establish that Petitioner made taxable sales of tangible personal property, that the estimated assessment was authorized by statute, and that the best information available was utilized. Therefore, it is Petitioner’s burden to prove audit error by a preponderance of the evidence or by clear and convincing evidence that the scheduled transactions are tax exempt. 34 Tex. Admin. Code § 1.26(c), (e). As Petitioner has not provided any source records or proof of employee theft to support adjustments to the audit, Petitioner has not met its evidentiary burden. Moreover, because the assessment is not based on successor or individual liability, changes in ownership or mismanagement are not relevant to the assessment. The notice of hearing references a request for a refund made by Petitioner to the Staff attorney assigned to this matter. However, Petitioner did not include a refund request in its statement of grounds, and there is not a refund verification performed by Staff at issue in this matter. Furthermore, Petitioner has not provided documentation to substantiate any credits that would warrant adjustments to the audit. Based on the foregoing, the ALJ recommends that the audit be upheld.
Petitioner also requested a waiver of penalty. Late penalties, such as the one imposed in this proceeding, 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). To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that penalty waiver is warranted. See id. § 1.26(e); see also Comptroller’s Decision No. 102,268 (2014).
In the present case, the penalty assessed is limited to the period of the one late filed returned during the assessment period. The late filing of a return does not demonstrate reasonable diligence to comply with the tax law for that period. Petitioner has not provided documentation to support a waiver of the penalty for the late filed period, and its request should be denied.
III. Findings of Fact
During the period at issue, Petitioner owned and operated a convenience store business with an outlet in CITY, Texas. Petitioner primarily sold tobacco, beer, soda, and other products common to convenience stores.
In August 2021, Staff initiated a sales and use tax compliance audit of Petitioner’s business for the period of June 1, 2018, through August 31, 2021.
Petitioner provided the contract examiner from Staff’s Audit Division with federal income tax returns, available inventory purchase invoices for July – December 2020, and available monthly register reports. The examiner did not perform a shelf test because the store was out of business when the audit began.
The examiner used an estimation procedure to conduct the audit, using available purchase invoices, monthly register reports, and vendor-reported purchases from the Comptroller’s Retail Inventory Tracking System (RITS).
The examiner estimated an alcohol markup based on Petitioner’s October 8, 2018, price sheet and estimated tobacco, soda, and candy markups based on audits of similar business performed in the area within the last year. He estimated a product mix percentage based on the available purchase invoices and the RITS data.
The examiner applied the alcohol markup and tobacco markup to alcohol and tobacco purchases respectively to estimate alcohol and tobacco sales. He applied the product mix to estimate taxable sales. He then applied a 5% allowance to the estimated taxable sales for inventory loss due to theft and spoilage to arrive at estimated audited taxable sales. The examiner then subtracted reported taxable sales to estimate additional taxable sales, and applied the applicable sales tax rate. Additional taxable sales were scheduled in Exam 1, which is the sole exam in the audit.
On February 23, 2022, Staff issued a Texas Notification of Exam Results to Petitioner. The assessment included tax, interest, and a 10% penalty for one late-filed period.
Petitioner timely requested redetermination.
Staff did not agree to adjust the audit.
Staff referred the contested case to the State Office of Administrative Hearings (SOAH).
On March 20, 2025, Staff 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 complaints or petitions filed with the state agency.
On April 23, 2025, ALJ Keneshia Washington issued an Order Setting Written Submission Hearing, which set the written submission hearing, filing deadlines, and a record close date.
The record closed on June 4, 2025.
Petitioner did not provide any documents for the hearing.
IV. Conclusions of Law
The Comptroller has jurisdiction over these matters. See Tex. Tax Code ch. 111.
SOAH has jurisdiction over matters related to the hearing, 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 a proper and timely notice of hearing. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009.
Texas imposes a tax on each sale of a taxable item in this state. Tex. Tax Code § 151.051.
All gross receipts of a seller are presumed to have been subject to sales tax unless a properly completed resale certificate is accepted. Tex. Tax Code § 151.054(a).
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. See Comptroller’s Decision No. 116,506 (2020).
Sellers of taxable items and purchasers who store, use, or consume taxable items in this state shall keep books, papers, and records in the form the Comptroller requires. Tex. Tax Code § 151.025(a); 34 Tex. Admin. Code § 3.281(a)(1).
For example, records must reflect total purchases of taxable items and must substantiate any claimed deductions or exclusions authorized by law. Tex. Tax Code § 151.025(a)(2), (3); 34 Tex. Admin. Code § 3.281(b).
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).
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. Tex. Tax Code §§ 111.0042(d), .008(a).
A taxpayer is generally required to support its contentions with source records, and assertions in pleadings are insufficient to meet the burden of proof. 34 Tex. Admin. Code § 1.26(a); see also Comptroller’s Decision No. 105,892 (2012).
An audit performed based on the best information available is presumed correct. Comptroller’s Decision No. 110,269 (2015).
Staff’s evidence is sufficient to establish that Petitioner made taxable sales of tangible personal property, that the estimated assessment was authorized by statute, and that the best information available was utilized.
It is Petitioner’s burden to prove audit error by a preponderance of the evidence or by clear and convincing evidence that the scheduled transactions are tax exempt. 34 Tex. Admin. Code § 1.26(c), (e).
Petitioner has not met its evidentiary burden.
The ALJ recommends that the audit be upheld.
Late penalties, such as the one imposed in this proceeding, 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. Tex. Tax Code § 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).
To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that penalty waiver is warranted. See 34 Tex. Admin. Code § 1.26(e); see also Comptroller’s Decision No. 102,268 (2014).
Petitioner’s request for penalty waiver should be denied.
Signed June 5, 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] Wholesalers and distributors of alcoholic beverages, cigarettes, cigars, and tobacco products are required to submit electronic reports of sales to retailers to the Comptroller on a monthly basis. The vendor reports are maintained in the Comptroller’s RITS.
ACCESSION NUMBER: 202507017H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 2025-07-02
TAX TYPE: SALES
