TX 9603H1406A01 Sales and/or Use Tax (State,Local,MTA) 1996-03-25

I'm a sole proprietor disputing a sales tax audit. If I ask Texas to settle my liability because paying it would make me insolvent, can the Comptroller count my spouse's wages and our community property, not just my business assets?

Short answer: Yes. In this Comptroller's Decision on Rehearing (Hearing No. 29,794), the Administrative Law Judge held that when a sole proprietor asks the Comptroller to settle a tax assessment under Tex. Tax Code § 111.102 because paying it would render her insolvent, the Comptroller may look at all of the taxpayer's assets -- not just business assets -- including community property and wages, regardless of whether those wages were earned by the taxpayer or her spouse. The taxpayer's cited Family Code provisions (spousal support duty and community property rules) did not support excluding the spouse's earnings. Because the business had gross receipts of roughly the same amount for three straight years, was still operating, and had recognized a profit in the most recent year, the judge found the taxpayer could not pay the assessment in a lump sum (making her technically 'insolvent' for lump-sum purposes) but could pay it over time, so the Comptroller declined to settle any part of the liability and instead directed her to arrange a payout agreement with the Enforcement Division.

Apply this to your situation

This page answers the general question as of 1996. Ezel answers yours, under current Texas tax law, with citations.

Disclaimer: This is a Comptroller's Decision on Rehearing (Hearing No. 29,794) from a formal Texas Comptroller administrative hearing, published on the State Tax Automated Research (STAR) system. Unlike an informal letter ruling, this is a contested-case adjudication with Findings of Fact and Conclusions of Law that resolved a specific taxpayer's audit dispute; it is not a generally binding precedent for other taxpayers, and documents on STAR may no longer represent current Comptroller policy even if not marked superseded. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Subject

Insolvency — Comptroller May Consider All Assets Of A Sole Proprietor Including Community Property/Spouse'S Earnings When Making Determination

Plain-English summary

This is a formal Comptroller's Decision on Rehearing (Hearing No. 29,794) resolving a contested sales and use tax audit of a sole proprietor who sold jewelry wholesale. The Comptroller had assessed additional tax, penalty, and interest for the audit period May 1, 1987 through March 31, 1991, mainly because many of the taxpayer's tax-free sales were unsupported by valid resale or exemption certificates, and because some collected tax was never remitted.

The taxpayer (Petitioner) raised several contentions, and the Administrative Law Judge (ALJ) ruled on each:

Bad debt deduction (Contention 1): Granted, subject to the Tax Division verifying the amended 1991 federal return.
Resale certificate from a customer, "INDIVIDUAL" (Contentions 2 and 3): Denied. The certificate was invalid on its face (it had only 9 digits instead of the required 11-digit Texas permit number), and the Petitioner knew the buyer's purchases were actually gifts, not for resale — so she could not have accepted the certificate in good faith. The seller remains liable for the tax; the Comptroller can pursue the seller, the purchaser, or both under Tex. Tax Code § 151.515.
Penalty and interest waiver (Contention 4): Denied. The Petitioner didn't show reasonable diligence, undue Comptroller delay, detrimental reliance on bad Comptroller advice, or a natural disaster — the factors under 34 Tex. Admin. Code Rule 3.5.
Unsupported claim that two sales never happened (Contention 5): Denied for lack of credible evidence.
Additional resale certificates (Contention 6): Denied; the Petitioner didn't rebut the Tax Division's specific reasons for rejecting them.
Insolvency settlement request (Contention 7) — the key holding: The Petitioner asked the Comptroller to settle/reduce the assessment under Tex. Tax Code § 111.102 on the theory that paying it would make her insolvent. The judge found she could not pay the full amount in one lump sum (satisfying the "insolvent" language for lump-sum purposes) but that she could pay over time, since her jewelry business was still operating, had averaged similar gross receipts for three years, and had turned a profit the most recent year. The judge also rejected the Petitioner's argument that the Comptroller couldn't look at her spouse's wages: the Family Code provisions she cited (§ 4.02, spousal support duty, and § 5.22, community property) did not exempt community property or a spouse's earnings from consideration. The judge held that in making an insolvency determination for a sole proprietor, the Comptroller may consider all of the taxpayer's assets, including community property, regardless of whose earnings they technically are. As a result, the Comptroller declined to settle any of the liability and instead recommended the Petitioner arrange a payout agreement with the Enforcement Division.

What this means for you

Sole proprietors disputing an audit assessment

If you're a sole proprietor and try to use the § 111.102 insolvency settlement provision to reduce a Texas tax assessment, expect the Comptroller to look beyond your business's bank account. Community property and a spouse's income can be counted, because as a sole proprietor there's no legal separation between "business" and "personal" assets the way there would be for a corporation.

Married taxpayers relying on separate-earnings arguments

The taxpayer's argument here — that Texas Family Code provisions on spousal support (§ 4.02) and community property (§ 5.22) shield a spouse's wages from being counted — was rejected. Those statutes describe how community property works between spouses; they don't limit what the Comptroller may consider when deciding whether a sole proprietor is "insolvent" for tax-settlement purposes.

Businesses accepting resale certificates

Separately, the decision is a reminder that a resale certificate must have a valid, properly formatted Texas sales tax permit number (11 digits) and that a seller who knows a "resale" purchase is really for the buyer's personal use (e.g., gifts) cannot rely on the certificate in good faith — the seller remains on the hook for the tax.

Common questions

Q: Does being unable to pay a tax bill in one lump sum mean the Comptroller must settle my liability?
A: No. Even though the judge found the Petitioner couldn't pay the full amount at once (satisfying part of the insolvency language), the Comptroller still declined to settle because the ongoing business could pay over time — the recommended path was a payout/installment agreement, not a reduction of the liability.

Q: Can the Comptroller count my spouse's wages when I claim insolvency as a sole proprietor?
A: Yes, according to this decision. The ALJ held the Comptroller may consider all of a sole proprietor's assets, including community property, when making an insolvency determination under Tex. Tax Code § 111.102.

Q: What makes a resale certificate invalid?
A: Under Tex. Tax Code § 151.152 and 34 Tex. Admin. Code Rule 3.285(b)(2), it must be properly signed, contain the purchaser's correct 11-digit Texas tax permit number (or note a pending application), and describe the property being resold. Here the certificate had only 9 digits and the seller also knew the purchases weren't really for resale, so it failed on both counts.

Citations and references

Statutes and rules cited in the decision:

Tex. Tax Code § 111.102 (insolvency-based settlement of a tax claim)
Tex. Tax Code § 111.103 (discretionary waiver of penalty/interest)
Tex. Tax Code § 151.052 (seller's potential cause of action against purchaser)
Tex. Tax Code § 151.054(a) (presumption that gross receipts are taxable)
Tex. Tax Code § 151.152 (resale certificate requirements)
Tex. Tax Code § 151.515 (Comptroller may proceed against seller and/or purchaser)
Tex. Tax Code § 151.703 (automatic penalty assessment)
34 Tex. Admin. Code Rule 1.40(2)(B) (taxpayer's burden of proof)
34 Tex. Admin. Code Rule 3.5 (reasonable-diligence factors for penalty/interest waiver)
34 Tex. Admin. Code Rule 3.282(g)-(h) (Comptroller may proceed against seller or purchaser)
34 Tex. Admin. Code Rule 3.285(b)(2) (good-faith reliance on resale certificate)
Texas Family Code § 4.02 and § 5.22 (cited by Petitioner; found not to limit consideration of community property)
Hearing No. 29,794 (this decision)

Source

STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
Opinion: https://star.comptroller.texas.gov/view/9603H1406A01

Original ruling text

HEARING NO. 29,794

IN RE: **
TAXPAYER NO.: **
AUDIT OFFICE: **
AUDIT PERIOD: 05/01/87 THROUGH 03/31/91

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

LEE R. JOHNSON
Administrative Law Judge

DAVID HUDSON
Representing Tax Division

Representing Petitioner

COMPTROLLER'S DECISION ON REHEARING

PRELIMINARY DISCUSSION:

This matter was heard at an oral hearing held on January 14, 1994, by former
Administrative Law Judge Joe Galvan. As a result of reassignment of duties
within the agency, the case has been transferred to my docket for consideration
and the issuance of a proposed decision. I have listened to the audio tape
recording of the oral hearing and have reviewed all the evidence submitted by
the parties. Ernest Fortenberry represented the Tax Division at the oral
hearing and presented the testimony of Robert Whorton. Petitioner appeared on
her own behalf and testimony was received from ** and
** on behalf of Petitioner.

The record in this case was held open and the parties were instructed by Judge
Galvan to make additional submissions after the Tax Division was given the
opportunity to review the documentation relating to items that were still in
dispute. On February 15, 1994, the Tax Division filed a Post-Hearing Submission
which set out in detail recommendations to delete certain items from the audit
because properly completed resale certificates were submitted. In addition, the
filing also listed items which should remain in the audit and the reason the
certificates were not accepted.

Petitioner filed her Post-Hearing Submission on April 4, 1994, which set out
various contentions and was accompanied by Exhibits A-H. Petitioner did not
specifically address the position of the Tax Division as it related to the
rejected resale certificates. On April 14, 1994, the Tax Division filed a
response to Petitioner's April 4, 1994 submission and agreed to make adjustment
for bad debts claimed in Petitioner's amended federal income tax return for
1991, subject to verification. The items recommended for deletion from the
audit by the Tax Division should be deleted, and this Decision will only
address the issues that remain in dispute.

On November 14, 1994, the Petitioner filed Exceptions to the October 28, 1994
Proposed Comptroller's Decision. The Tax Division filed its Response to these
Exceptions on November 17, 1994. The ALJ and the Comptroller considered the
Petitioner's Exceptions and the Tax Division's Response, and a Comptroller's
Decision was issued on May 3, 1995. On July 19, 1995, the Comptroller granted
Petitioner's Motion for Rehearing for the purpose of considering Petitioner's
claim of insolvency and verifying Petitioner's claim for the bad debt
deduction. Petitioner submitted the documentation necessary for the insolvency
investigation to be performed by the Tax Division and the Tax Division
responded with its recommendation on October 4, 1995. The record in this case
closed on October 9, 1995. On October 22, 1995, Petitioner filed a Response to
the Tax Division's insolvency recommendation and requested that the record in
this case be re-opened to allow Petitioner to submit additional documentation
relative to the insolvency claim. The record in this case was re-opened, sua
sponte on October 22, 1995, for the receipt of Petitioner's response and closed
on that date. Petitioner's request to have the record re-opened once again for
the submission of additional documentation is hereby denied.

A Proposed Comptroller's Decision on Rehearing was issued on November 17, 1995.
Petitioner filed Exceptions to the Proposed Comptroller's Decision on Rehearing
on December 4, 1995. The Tax Division did not file a Reply to these Exceptions.
The ALJ and the Comptroller have considered Petitioner's Exceptions and this
Comptroller's Decision on Rehearing represents the ruling thereon.

Unless otherwise indicated, Section references are to Title 2 of the Texas Tax
Code, and Rule references are to sections of Title 34, Texas Administrative
Code. Notice has been taken of all Comptroller's records pertinent to
Petitioner or the issues raised in this case.

PETITIONER'S CONTENTIONS:

Petitioner contends that Exam 1 should be adjusted to reflect a bad debt
deduction properly claimed on her amended 1991 Federal Income Tax return.
Petitioner contends that Mr. INDIVIDUAL represented to her that acceptance
from him of a resale certificate would serve to transfer liability for Texas
sales taxes to him.
In the event the Comptroller does not find that Petitioner accepted a resale
certificate in good faith from Mr. INDIVIDUAL, she requests that the
Comptroller collect directly from Mr. INDIVIDUAL any sales taxes that may be
due on the purchases itemized in Exam 1.
Petitioner requests that the Comptroller waive any claim for a tax penalty
and/or interest on the unpaid tax.
Petitioner contends that the results of Exam 1 should be adjusted to reflect
two "taxable sales" that were never completed.
Petitioner contends that Exam 2 should be adjusted to reflect valid resale
certificates she had in her possession.
Petitioner contends that the Comptroller's assessment of tax plus penalty
and interest should be reduced and dismissed in accordance with Texas Tax Code
111.102 because collection of the assessment would render the taxpayer
insolvent.

FINDINGS OF FACT:

Petitioner is in the business of selling jewelry wholesale.
Petitioner was audited for sales and use tax compliance for the period May
1, 1987, through March 31, 1991. As a result, on December 18, 1991, the
Comptroller issued Petitioner a Texas Notice of Tax Due in the amount of
$** including tax, penalty, and interest through the date of the
Notice. Petitioner's timely filed request for redetermination resulted in this
oral hearing.
Petitioner has submitted a copy of her amended 1991 Federal Income Tax
Return. The return claims a deduction for bad debt which Petitioner claims
represents the balance owed on Petitioner's INDIVIDUAL account.
The Tax Division has agreed that Petitioner may be entitled to a bad debt
deduction, however, it has requested the opportunity to verify Petitioner's
claim.
INDIVIDUAL purchased several items of jewelry from Petitioner throughout the
audit period. INDIVIDUAL issued Petitioner a resale certificate, in the name of
COMPANY A, in lieu of tax on the transactions. The certificate does not contain
a valid Texas sales and use tax permit number. Comptroller records do not
indicate that COMPANY A holds a Texas sales and use tax permit.
Petitioner was aware that INDIVIDUAL's purchases were not for resale, but
were purchased as gifts for friends of INDIVIDUAL.
Audit adjustments were made for tax-free sales which were unsupported by
resale or exemption certificates and additional taxable sales. Adjustments were
also made for tax collected which was not remitted.
This is Petitioner's first sales and use tax audit.
Petitioner has not alleged or presented any evidence concerning (a) undue
delay caused by a Comptroller employee, (b) detrimental reliance upon incorrect
advice from a Comptroller employee, or (c) natural disasters.
Petitioner relies upon her Post-Hearing Exhibit C in support of Contention
5 that two transactions scheduled on exam 1 were never completed. Petitioner
has not presented any discussion of what Exhibit C represents, the source
documents from which it was created, or why it is relevant to the issues in
this proceeding.
Contention 5 was raised for the first time in Petitioner's Post Hearing
Submission.
Petitioner submitted copies of resale certificates for transactions that
remain in the audit which she believes are non-taxable transactions. Petitioner
did not, in her Post Hearing Submission, offer any response to the objections
raised by the Tax Division with respect to the specific contentions.
Petitioner has reported gross receipt of nearly $** per year
for her business in 1992, 1993, and 1994 according to federal income tax
returns. Petitioner continues to operate her business. The income tax returns
show net losses for 1992 ($**) and 1993 ($**); however,
Petitioner recognized a net profit in 1994 of $**. The income tax
returns also indicate wages [FOOTNOTE: Petitioner contends that these are her
husband's wages; however, there were no W-2's submitted to support this
contention. In any event, whose wages they are does not control the resolution
of the insolvency claim.] in the amount of $**, and $**
for 1993 and 1994 respectively. Petitioner could not pay the assessed liability
if required to do so in one lump-sum amount.

DISCUSSION AND CONCLUSIONS OF LAW:

Contention 1:

The Tax Division has agreed that Petitioner may be entitled to her claim for a
bad debt deduction. Petitioner has now submitted her amended 1991 Federal
Income Tax return, and the Tax Division has requested the opportunity to verify
the claim. I believe that the Tax Division's request is reasonable and it
should be allowed to make such verification. The audit should be amended in
accordance with the findings relating to the verified claim for bad debt.

Contentions 2 and 3:

Petitioner's contentions 2 and 3 should be denied.

Generally, all gross receipts of a seller are presumed to have been subject to
the sales tax unless a properly completed resale or exemption certificate is
accepted by the seller. See Section 151.054(a). A resale certificate must: (1)
be signed by the purchaser and contain the purchaser's name and address; (2)
state the purchaser's tax permit number or that the purchaser's application for
a tax permit is pending before the comptroller; and (3) contain a description
of the tangible personal property sold, leased, or rented by the purchaser in
the regular course of business or transferred as an integral part of a taxable
service performed in the regular course of business. See Section 151.152. A
seller is protected if the resale certificate is accepted in good faith and the
seller lacks actual knowledge that the sale is not a sale for resale. Rule
3.285(b)(2).

Petitioner's contention must fail for at least two reasons. The first reason
Petitioner's contention must fail is because she did not accept a properly
completed resale certificate from INDIVIDUAL. The certificate did not contain a
proper Texas sales and use tax permit number. The number on the certificate
only contained 9 digits and it should have had 11, therefore, the certificate
was invalid on its face. Second, Petitioner was aware that the sales of jewelry
to INDIVIDUAL were not for resale but were gifts for INDIVIDUAL 's friends.
Petitioner had actual knowledge that the sales were not for resale; therefore,
Petitioner lacked good faith in the acceptance of the certificates and should
not be relieved of the resulting tax liability.

Both sellers and purchasers are subject to audit and assessment of tax on any
transactions on which tax was due but has not been paid. The Comptroller may
proceed against either the seller, purchaser, or against both, until the tax,
penalty, and interest have been paid. Section 151.515 and Rule 3.282(g) and
(h). As the seller, Petitioner had a responsibility to collect and remit the
tax due or accept a properly completed resale certificate in lieu of tax on the
subject transactions. Petitioner failed to meet her responsibility with respect
to the transactions in question; therefore, the tax assessment should be
upheld.

Though the evidence was not sufficient to make a finding of fact concerning the
alleged conduct of INDIVIDUAL, I am somewhat sympathetic with respect to the
precarious position in which Petitioner has been left. However, Petitioner is
conducting business in the State of Texas and is required to be knowledgeable
of laws of the state. Ignorance of the law and reliance upon Mr. INDIVIDUAL 's
alleged representations is not an excuse for failing to comply with the laws of
this state. Petitioner may have a cause of action in court to recover any
amount of tax that may be due from INDIVIDUAL as a result of this audit. See
Section 151.052.

Contention 4:

Petitioner's requests for penalty and interest waiver should be denied.

Penalty is automatically assessed when a report is not filed or tax is not paid
when due. See Section 151.703. However, the Comptroller has discretion to waive
penalty or interest if he finds that the taxpayer has acted with reasonable
diligence to comply with the tax laws. See Section 111.103. Rule 3.5 has been
adopted and sets out the factors to be considered when determining whether a
taxpayer has exercised reasonable diligence and whether penalty or interest
should be waived.

The majority of the assessment related to tax-free sales which were not
supported by resale or exemption certificates. Adjustments were also made for
tax that was collected but not remitted. Though this was Petitioner's first
audit, considering the errors made, it cannot be concluded that Petitioner
acted with reasonable diligence. Further, Petitioner has not alleged undue
delay by the Comptroller, detrimental reliance on incorrect advice from a
Comptroller employee that resulted in the imposition of the tax, or natural
disaster. Therefore, I must recommend that Petitioner's request for penalty and
interest waiver be denied.

Contention 5:

Petitioner's contention should be overruled.

Petitioner has for the first time, in her Post-Hearing Submission, alleged that
two transactions scheduled on Exam 1 were never completed. Petitioner bears the
burden of proving, by a preponderance of the evidence, that the transactions
scheduled in the audit are incorrect. Rule 1.40(2)(B). Petitioner has not
submitted any credible evidence to support its contention.

Petitioner relies upon Exhibit C to support her contention. However, Exhibit C
has not been explained, nor has it been verified that the information contained
in it is reliable or relevant to this proceeding. No adjustments should be made
to the audit as a result of this contention.

Contention 6:

Numerous resale certificates were rejected by the Tax Division and the reasons
for rejection are set out in the Tax Division's Post-Hearing Submission dated
February 15, 1994. Petitioner responded with a list and copies of the resale
certificates that she believes are exempt from tax without responding to the
specific reasons for rejection as stated by the Tax Division. Petitioner bears
the burden of proving that the position of the Tax Division is incorrect.
Without providing some evidence in rebuttal to the position of the Tax
Division's position concerning the certificates, I must conclude that
Petitioner has failed to meet her burden of proof, the remaining transactions
must remain in the audit, and Petitioner's contention must be denied.
Contention 7: With respect to Petitioner claim for insolvency, Section 111.102
provides, in pertinent part, as follows:

As part of a redetermination order, the comptroller may settle a claim for tax,
penalty, or interest imposed by this title if:

(2) collection of the amount of tax due would make the taxpayer insolvent and
the taxpayer has submitted to the comptroller all financial records, including
income tax reports and inventory of all property owned wherever located, or

(3) the taxpayer is insolvent, is in liquidation, or has ceased to do business
and

(A) the taxpayer has not property that may be seized by the courts of this
state or another state; or

(B) the value of the taxpayer's property is less than the amount of tax due and
the amount of debts against the property.

The evidence indicates that Petitioner did report losses in 1992 and 1993;
however, Petitioner did recognize a profit in 1994 of nearly $**.
Petitioner's gross receipts over the last three years have averaged near
$**, Petitioner continues as a going concern, and there are other
wages, either Petitioner's or her husband's, available to be used to pay the
assessed liability. I conclude that Petitioner is insolvent in that she could
not pay the assessed liability if required to do so in one lump-sum. On the
other hand, I also believe that Petitioner could pay the assessed liability if
given time to do so. Therefore, I recommend that the Comptroller not settle any
of the assessed liability and Petitioner should contact the Enforcement
Division and attempt to enter into a payout agreement.

Petitioner argues that the Comptroller cannot look to her spouses earnings in
seeking to collect on her tax liability. Neither of the Family Code provisions
cited by Petitioner support this position. Section 4.02 merely relates to a
spouses duty to support the other spouse and minor children. Section 5.22
provides for the general rules relating to community property. In making an
insolvency determination, the Comptroller may consider all the assets of a sole
proprietor including any community property. Petitioner has not provided any
support for its position that sole management community property could not be
considered.

RECOMMENDATION:

The audit should be amended in accordance with the recommendations as set out
by the Tax Division in its Post-Hearing Submission of February 15, 1994, the
Tax Division's Response of April 14, 1994, and this Comptroller's Decision on
Rehearing.

Signed this 25th day of March, 1996.

LEE R. JOHNSON
Administrative Law Judge

HEARING NO.: 29,794

ORDER OF THE COMPTROLLER

The above decision of the Administrative Law Judge, resulting in Taxpayer's
liability as set out in Attachment "A" which is incorporated by reference, is
approved and adopted in all respects. This decision becomes final twenty (20)
days from the date of this Order, and the total sum of the tax, penalty and
interest amounts is due and payable within twenty (20) days thereafter. If such
sum is not paid within such time, an additional penalty of ten percent of the
taxes due will accrue, and interest will continue to accrue.

If a rehearing is desired, a Motion for Rehearing must be filed with the clerk
of the Administrative Law Judges twenty (20) days from the date of this Order,
and must state the grounds upon which the motion is based.

SIGNED this the 25th day of March, 1996.

JOHN SHARP
Comptroller of Public Accounts
of the State of Texas

HEARING NO. 29,794

IN RE: **
TAXPAYER NO.: **
AUDIT OFFICE: **
AUDIT PERIOD: 05/01/87 THROUGH 03/31/91

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

LEE R. JOHNSON
Administrative Law Judge

DAVID HUDSON
Representing Tax Division

Representing Petitioner

COMPTROLLER'S DECISION

PRELIMINARY DISCUSSION:

This matter was heard at an oral hearing held on January 14, 1994, by former
Administrative Law Judge Joe Galvan. As a result of reassignment of duties
within the agency, the case has been transferred to my docket for
consideration and the issuance of a proposed decision. I have listened to the
audio tape recording of the oral hearing and have reviewed all the evidence
submitted by the parties. Ernest Fortenberry represented the Tax Division at
the oral hearing and presented the testimony of Robert Whorton. Petitioner
appeared on her own behalf and testimony was received from ** and
** on behalf of Petitioner.

PETITIONER'S CONTENTIONS:

Petitioner contends that Exam 1 should be adjusted to reflect a bad debt
deduction properly claimed on her amended 1991 Federal Income Tax return.
Petitioner contends that Mr. INDIVIDUAL represented to her that acceptance
from him of a resale certificate would serve to transfer liability for Texas
sales taxes to him.
In the event the Comptroller does not find that Petitioner accepted a resale
certificate in good faith from Mr. INDIVIDUAL, she requests that the
Comptroller collect directly from Mr. INDIVIDUAL any sales taxes that may be
due on the purchases itemized in Exam 1.
Petitioner requests that the Comptroller waive any claim for a tax penalty
and/or interest on the unpaid tax.
Petitioner contends that the results of Exam 1 should be adjusted to reflect
two "taxable sales" that were never completed.
Petitioner contends that Exam 2 should be adjusted to reflect valid resale
certificates she had in her possession.

FINDINGS OF FACT:

Petitioner is in the business of selling jewelry wholesale.
Petitioner was audited for sales and use tax compliance for the period May
1, 1987, through March 31, 1991. As a result, on December 18, 1991, the
Comptroller issued Petitioner a Texas Notice of Tax Due in the amount of
$** including tax, penalty, and interest through the date of the
Notice. Petitioner's timely filed request for redetermination resulted in this
oral hearing.
Petitioner has submitted a copy of her amended 1991 Federal Income Tax
Return. The return claims a deduction for bad debt which Petitioner claims
represents the balance owed on Petitioner's INDIVIDUAL account.
The Tax Division has agreed that Petitioner may be entitled to a bad debt
deduction, however, it has requested the opportunity to verify Petitioner's
claim.
INDIVIDUAL purchased several items of jewelry from Petitioner throughout the
audit period. INDIVIDUAL issued Petitioner a resale certificate, in the name of
COMPANY A, in lieu of tax on the transactions. The certificate does not contain
a valid Texas sales and use tax permit number. Comptroller records do not
indicate that COMPANY A holds a Texas sales and use tax permit.
Petitioner was aware that INDIVIDUAL's purchases were not for resale, but
were purchased as gifts for friends of INDIVIDUAL.
Audit adjustments were made for tax-free sales which were unsupported by
resale or exemption certificates and additional taxable sales. Adjustments were
also made for tax collected which was not remitted.
This is Petitioner's first sales and use tax audit.
Petitioner has not alleged or presented any evidence concerning (a) undue
delay caused by a Comptroller employee, (b) detrimental reliance upon incorrect
advice from a Comptroller employee, or (c) natural disasters.
Petitioner relies upon her Post-Hearing Exhibit C in support of Contention
5 that two transactions scheduled on exam 1 were never completed. Petitioner
has not presented any discussion of what Exhibit C represents, the source
documents from which it was created, or why it is relevant to the issues in
this proceeding.
Contention 5 was raised for the first time in Petitioner's Post Hearing
Submission.
Petitioner submitted copies of resale certificates for transactions that
remain in the audit which she believes are non-taxable transactions. Petitioner
did not, in her Post Hearing Submission, offer any response to the objections
raised by the Tax Division with respect to the specific contentions.

DISCUSSION AND CONCLUSIONS OF LAW:

Contention 1:

Contentions 2 and 3:

Petitioner's contentions 2 and 3 should be denied.

Contention 4:

Petitioner's requests for penalty and interest waiver should be denied.

Contention 5:

Petitioner's contention should be overruled.

Contention 6:

RECOMMENDATION:

The audit should be amended in accordance with the recommendations as set out
by the Tax Division in its Post-Hearing Submission of February 15, 1994, and
this Proposed Decision.

Signed this 3rd day of May, 1995.

LEE R. JOHNSON
Administrative Law Judge

HEARING NO.: 29,794

ORDER OF THE COMPTROLLER

SIGNED this the 3rd day of May, 1995.

JOHN SHARP
Comptroller of Public Accounts
of the State of Texas

NOTE: Previous Accession Number 9603201H

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