If a business took a sales tax credit believing items were exempt under the manufacturing exemption, and an audit later finds they weren't exempt, does the business owe penalty and interest?

Plain-English summary

A taxpayer asked what happens if, on or after October 1, 1999, it takes a credit for sales tax it believes was paid in error on items it thought were exempt under the manufacturing exemption — and an audit later determines those items weren't actually exempt. The Comptroller's answer: yes, the tax is still owed (the underlying credit was wrong), but the taxpayer may not face the usual penalty and interest consequences if it's authorized to conduct managed audits.

This letter arrives right as a brand-new law took effect: Senate Bill 1319, passed in the 1999 legislative session, added Tax Code § 151.0231 (Managed Audits) effective October 1, 1999 — the very date referenced in the taxpayer's question. Subsection (g) of the new section provides that, absent fraud or willful evasion, the Comptroller may not assess a penalty and may waive all or part of the accrued interest on any amount found due in a managed audit performed by a taxpayer the Comptroller has authorized to conduct one. There's one carve-out: this relief doesn't apply to any amount the taxpayer actually collected from customers as tax (or represented as tax) but never remitted to the state — that kind of shortfall stays fully subject to penalty and interest.

What this means for you

Businesses authorized to conduct managed audits

A good-faith mistake in applying an exemption (like the manufacturing exemption) that's caught during your own managed audit won't automatically cost you a penalty, and the Comptroller has discretion to waive some or all of the interest — as long as there's no fraud or willful evasion involved. This is a meaningful incentive to seek managed-audit authorization rather than waiting for a traditional Comptroller audit.

Accountants and tax professionals advising on managed audits

Flag the hard limit: the penalty/interest relief under § 151.0231(g) does not cover tax collected from customers and never remitted — that liability is treated differently (and more harshly) than a mistaken exemption claim on the business's own purchases.

Businesses considering whether to seek managed-audit status

This letter is a good illustration of the practical benefit new (as of October 1999) SB 1319/§ 151.0231 provides: it converts what would otherwise be a straight penalty-plus-interest assessment into a tax-only (or tax-plus-reduced-interest) outcome for legitimate, non-fraudulent errors caught in a managed audit.

Common questions

Q: If I mistakenly credit myself for sales tax under an exemption that turns out not to apply, do I owe the tax?
A: Yes — the underlying tax is still due regardless of managed-audit status.

Q: Can I avoid a penalty if the error is caught in a managed audit?
A: Yes, if you're authorized to conduct managed audits under Tax Code § 151.0231 and there's no fraud or willful evasion — the Comptroller may not assess a penalty and may waive some or all interest.

Q: Does this protection cover tax I collected from customers but didn't remit?
A: No. Section 151.0231(g) explicitly excludes amounts collected as tax (or represented as tax) but not remitted to the state from this relief.

Q: When did this managed-audit penalty/interest rule take effect?
A: October 1, 1999, under Senate Bill 1319 (adding Tax Code § 151.0231), the same effective date referenced in the taxpayer's question.

Citations and references

Statutes:

• Tex. Tax Code § 151.0231 — Managed Audits (added by Senate Bill 1319, effective October 1, 1999)
• Tex. Tax Code § 151.0231(g) — penalty/interest waiver for managed-audit-authorized taxpayers absent fraud or willful evasion; excludes collected-but-unremitted tax

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911855L

Original ruling text

November 3, 1999

Via FAX: **

Dear **:

This is in response to your request for a ruling on whether you would be
subject to penalties and interest under the following scenario:

If on or after October 1, 1999, you took a credit for sales tax paid in error
on items that you felt were exempt under the manufacturing exemption and later,
during an audit, it was determined that the items were not exempted?

Response: Yes.

However, a penalty may not be assessed and all or part of the interest that
would otherwise accrue may be waived for persons authorized to conduct managed
audits of their liability for tax under Chapter 151. Senate Bill 1319, passed
in the recently concluded legislative session and effective October 1, 1999,
amended Subchapter B, Chapter 151, Tax Code, adding 151.0231, concerning
Managed Audits. Subsection (g) of this new section, provides as follows:

Unless the audit or information reviewed by the comptroller under subsection
(f) discloses fraud or willful evasion of the tax, the comptroller may not
assess a penalty and may waive all or part of the interest that would
otherwise accrue on any amount identified to be due in a managed audit of
persons authorized by this office to conduct managed audits. This does not
apply to any amount collected by the taxpayer that was a tax or represented to
be a tax but that was not remitted to this state.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy