Texas Comptroller of Public Accounts

STAR System


HEARING NO. 47,145 RE: ************** TAXPAYER NO.: ************** AUDIT OFFICE: ************** AUDIT PERIOD: APRIL 1, 2001 THROUGH SEPTEMBER 30, 2004 SALES AND USE TAX/RDT BEFORE THE COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS ELEANOR H. KIM Chief Administrative Law Judge KACI J. PRICE Representing Tax Division ************** Representing Petitioner COMPTROLLER'S DECISION PRELIMINARY DISCUSSION: At Petitioner’s request, this Decision is based on the written submissions of the parties. Official notice has been taken of all records of the Comptroller's office that pertain to Petitioner and the issues involved in the case. Unless otherwise indicated, all Section references are to Title 2 of Texas Tax Code and all references to Rules are to sections of Title 34, Texas Administrative Code. PETITIONER’S CONTENTIONS: 1. Petitioner contends that the auditor erroneously scheduled rentals of real property in the audit. 2. Petitioner contends that it detrimentally relied on the advice of a Comptroller employee. FINDINGS OF FACT: 1. Petitioner has a facility located in the Texas hill country. Petitioner advertises that it “is a full service facility offering the finest in atmosphere, service, & cuisine” and that it can tailor an event to the customer’s needs.

2. Petitioner was audited for sales and use tax compliance for the above-captioned period and was assessed a tax deficiency and interest pursuant to a Texas Notification of Audit Results dated July 1, 2005. Petitioner’s request for redetermination resulted in this proceeding. 3. The audit adjustments consist of taxable sales (Exam 1) and taxable purchases on which no tax was paid (Exam 2). 4. All transactions scheduled in Exam 1 are described as “facility rental.” 5. The auditor noted in the audit plan that Petitioner itemizes charges for facility rental, catering, labor, and supplies. Petitioner collected sales tax on the total invoice charge in 2001 and part of 2004, but for the remainder of the audit period (2002, 2003, and January 2004), Petitioner did not collect sales tax on the separately-stated charge for facility rental. The auditor scheduled facility rental charges in connection to catering services in Exam 1. 6. The examining auditor reviewed Petitioner’s general ledgers for purchases. Because no invoices were presented, the auditor scheduled all taxable items in Exam 2. Included in Exam 2 are purchases of tangible personal property, including equipment, ovens, screens, lights, carpet, computers, and building materials and purchases of taxable services, such as landscaping services, painting, and electric repair. 7. Petitioner does not own the building, but instead, leases it from the owner. Petitioner submitted a copy of an amendment to the lease agreement dated 2004, but did not provide a copy of the original lease. The amendment provides that the lease commenced on July 1, 2000 and is scheduled to expire on December 31, 2007, with the right to extend the lease for another two years. Paragraph 3 of the amendment expressly provides that the tenant (i.e., Petitioner) shall not operate a kitchen or cook food on the premises and requires that all food served at the premises must be cooked offsite. 8. Petitioner’s website indicates that Petitioner offers several menus. During the audit period, Petitioner did not prepare the food that was served at its facility. Once the customers made arrangements with Petitioner for the food, Petitioner hired others to actually prepare the food. Petitioner billed the customers for the prepared food served at the facility. 9. Petitioner was initially advised to collect tax on the total invoice charge, which is why it collected tax in 2001. Subsequently, Petitioner was advised that the charges for facility rentals were not taxable, and Petitioner ceased collecting tax on the facility rentals. Claimant did not identify who gave the advice and did not present any evidence to establish the content of the information conveyed. In 2004, Petitioner visited the Comptroller’s field office in CITY and was told that it must collect tax on the total invoice charge, and thereafter, Petitioner began collecting tax on facility rentals. CONCLUSIONS OF LAW AND DISCUSSION: Petitioner’s contentions should be denied. During the audit period, Petitioner catered events and sold food ready for immediate consumption. Food prepared, sold, or served by caterers is subject to tax. Rule 3.293(b)(5). Petitioner collected sales tax on food charges billed to its customers, but did not collect tax on the facility rental charges for part of the audit period. The auditor scheduled the charges for facility

rentals in Exam 1, and at issue in this hearing is the taxability of those charges. Petitioner contends that Exam 1 should be deleted because facility rental charges constitute the rentals of real property, which are not subject to sales tax. On the other hand, the Tax Division contends that Exam 1 should be upheld because the adjustments relate to transactions involving facility rentals with the sale of food. Citing Rule 3.293(f)(5), the Tax Division argues that Petitioner’s charges for facility rentals are taxable as part of the selling price of the food sold ready for immediate consumption. In support of its contention, the Tax Division cites to Comptroller’s Decision Nos. 29,039 (1992) and 34,142 (1996), and STAR Accession Nos. 9610050L (October 31, 1996) and 8603T0706B03 (March 14, 1986). All agency documents cited by the Tax Division state in one way or another that a charge for room or facility is taxable if it is connected to the sale of food for immediate consumption. Petitioner attempts to distinguish its facts by contending that it does not prepare the food served at its facility and that it acts merely as a conduit for the sale of the food between the customers and the food preparers. In support thereof, Petitioner points to its lease agreement with the building owner that prohibits food from being prepared on the premises. The Tax Division questions the accuracy of Petitioner’s representation and points out that Petitioner purchased ovens, which are scheduled in the audit. Regardless, the Tax Division contends that Petitioner can be the seller of the food even if it does not actually prepare the food. A “seller” or “retailer” is “a person engaged in the business of making sales of taxable items of a kind the receipts from the sale of which are included in the measure of the sales or use tax…”. SECTION 151.008. A sale includes the furnishing, preparation, or service of meals for consideration. SECTION 151.005(6). The use of the disjunctive in the statute makes clear that a sale of a taxable item occurs if any one of the enumerated activities is done for consideration. See also, SECTION 151.314(c)(3) (Food served, prepared, or sold ready for immediate consumption in or by restaurants or like places of business are excluded from the tax exemption). Even if Petitioner did not prepare the food, it furnished or served the food at its facility for consideration; therefore, Petitioner made sales of taxable items and falls within the definition of a seller or retailer. Moreover, Petitioner solicits customers, negotiates the sales prices with customers, makes arrangements with third parties to fulfill Petitioner’s contract, and bills the customers for the third party’s work. These activities are activities of a seller and are beyond what a mere conduit would perform. See e.g., Stoker Management, Inc. v. Sharp, 958 S.W.2d 288 (Tex. App. – Austin, 1997, no writ). In fact, Petitioner collected sales tax during the audit period, demonstrating its own belief that it was the seller of the food served at its facility. Petitioner’s contention that it is not a seller is without merit and should be rejected. Rule 3.293(f)(5) provides that the sales price of meals and food sold by a caterer “includes any separately stated charge for the room or facility or the use by a customer of any items, such as tables, chairs, tableware, and tablecloths.” It further provides that the “separately stated charge for use of these items is not considered a rental to the customer but an expense connected with the sale of the meals or food products.” Rule 3.293(f)(5) construes Section 151.007 for food operators. Under Section 151.007, the sales price of a taxable item is the total amount received from the sale without the

deductions of the seller’s expenses in providing the taxable item. That is, a seller cannot reduce the sales tax base by simply itemizing the seller’s expenses to the customer. See e.g., Comptroller’s Decision No. 16,799 (1985). In such context, Rule 3.293(f)(5) contemplates a transaction in which the food sold ready for immediate consumption is the true object of the transaction and other items, including the rental of the room, are incidental to the sale of the food. The most obvious example involves restaurants. A restaurant is in the business of selling food ready for immediate consumption, and food is what the restaurant customers want when they enter the restaurant. Rule 3.293(f)(5) recognizes the seller’s and buyer’s objective and makes clear that the restaurant is not renting tables, chairs, tableware, or space at the restaurant and cannot reduce the sale price of the food by separately itemizing those charges. Caterers are considered to be in the same class as restaurants. See, STAR Accession No. 9210L1200F09 (October 29, 1992) (“Caterers and restaurants are treated the same way, for tax purposes.”). The assessment made in Exam No. 1 enforces that policy. Petitioner markets itself as “a full service facility offering the finest in atmosphere, service, & cuisine.” Such a description supports a finding that Petitioner should be treated in the same manner as a restaurant. The Tax Division has met a prima facie case that Petitioner’s charges for facility rentals in connection to food catering are subject to tax. Petitioner has the burden to prove by a preponderance of the evidence that the audit result is incorrect. Rule 1.40. In order to fall outside the scope of Rule 3.293(f)(5), Petitioner must establish that the transactions with its customers are mixed transactions with two readily separable components. In light of the view that caterers are treated similarly to restaurants, any attempt to prove two readily separable components will encounter obstacles. Here, Petitioner did not present any arguments or evidence to show that it should be treated differently from other food operators. For the foregoing reasons, Petitioner has failed to discharge its burden of proof required under Rule 1.40. Petitioner’s first contention should be denied. Petitioner’s next contention relates to the claim of detrimental reliance. For a considerable period of time, the Comptroller has maintained that a taxpayer who can prove that he relied to his detriment on the erroneous advice of a Comptroller employee is entitled to relief. To be eligible for tax relief, the assessed tax must related to sales and the taxpayer must prove each of the following elements: (1) the taxpayer received an erroneous advice (both as to the substance thereof and its direct communication to the taxpayer), (2) the taxpayer provided sufficient information to have resulted in correct advice; (3) the taxpayer followed the advice; and (4) the taxpayer will suffer harm unless the Comptroller adheres to the advice. See, Comptroller’s Decision Nos. 44,450 (2004), 27,994 (1992), and 21,014 (1988). Though Petitioner alleges that it met with a Comptroller employee who gave erroneous advice, no evidence was presented to establish who that employee was or the substance of the information provided. The first two elements have not been proven; therefore, Petitioner is not entitled to relief under the theory of detrimental reliance. RECOMMENDATION: Based upon the foregoing findings of fact, conclusions, and discussion, the audit liability should be upheld in its entirety.

Signed June 28, 2006. ELEANOR H. KIM Chief Administrative Law Judge HEARING NO. 47,145 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-three (23) days from the date of this Order, and the total sum of the tax and interest amounts is due and payable within twenty (20) days thereafter. If a rehearing is desired, a Motion for Rehearing must be filed with the Administrative Law Judge no later than twenty-three (23) days after the date of this Order, and must state the grounds upon which the motion is based. RENDERED and ISSUED on June 28, 2006. CAROLE KEETON STRAYHORN Texas Comptroller