Dino Marcaccio
President
Former Texas Comptroller State Tax Auditor

ISSUE AT HAND

Auditor, supervisor, and Independent Audit Reviewer incorrectly interpreted certain tax policy letters and state statutes. The Comptroller of Public Accounts auditor denied that the taxpayer (TP) was a manufacturer. Certain purchases of assets and expenses were included in the audit in error and should be exempt. With the auditor’s misinterpretation of the Texas tax code, the taxpayer would have had to pay $80,000 additional taxes every year on items/services that were tax-exempt.

SOLUTION

Administrative Law Judge (ALJ) found that the threading equipment, repairs, replacement parts for that equipment, and consumable supplies directly used in the threading process were exempt and should be removed from the assessment. A Comptroller’s decision exists supporting taxpayer’s position that service providers can qualify as manufacturers.

RESULTS

Comptroller waived penalty but ALJ did not waive interest

MORAL

This case is a testament to the ability of Texas Tax Group to defend its clients and prove their interpretations of the Texas tax code and Texas tax legislation are correct. Texas Tax Group will protect its clients from erroneous audit assessments.

AUDIT JOURNEY

It’s not often you escalate your audit defense to the Administrative Judge phase, but when you do, your Sales Tax consultant should be sure they are prepared with the correct response to every question presented. Going to Administrative Hearings before an Administrative Judge, puts the burden to demonstrate, by a preponderance of evidence on the taxpayer (petitioner) that the audit has erroneously scheduled transactions for tax. Taxpayers do not usually have the time or resources necessary to present a comprehensive and successful response.

Texas Tax Group has the resources and the experience required to defend your business. The taxpayer had experienced an audit and was wary of the audit results. They engaged Texas Tax Group because they had seen that a misinterpretation of the tax code resulted in significant tax liability and would be unable to be competitive in the future if they were not recognized as a manufacturer by the State. The primary contention was whether the taxpayer qualified as a manufacturer and was eligible for manufacturing exemptions. The Comptroller’s auditor interpreted the tax code in the State’s favor and assessed tax on the taxpayer’s transactions, including their threading equipment. There was clear evidence that the majority of TTG client sales were to sellers and not end-users, thus qualifying for manufacturing exemption since they were selling the processing service itself to pipe distributors for resale.

The Texas Tax Group consultant assigned to the taxpayer, Bryan Scogin possessed 26 years of Texas Comptroller auditor and audit supervisory experience. His state audit experience had found him involved in an audit very similar to the current taxpayer’s situation. He knew, as well as the taxpayer, that the Comptroller’s audit team was misinterpreting the State Tax code and policy for manufacturers. Bryan researched the Texas statutes, tax policies, Comptroller decisions, Hearing records, court rulings, and previous taxpayer audits in similar situations. The audit defense team, from other consultants to support staff to the Texas Tax Group President, also provided support to Bryan. State representatives and senators were invited to provide their support.

The following were used by Texas Tax Group in the taxpayer’s defense:
• Certain purchases of assets and expenses scheduled in the audit are in error and should be exempt.
• Most sales are to sellers and not end-users; they qualify for manufacturing exemption since they sell the processing service itself to pipe distributors for resale.
• STAR research resulted in letters and hearings that state that cutting to specified shorter lengths does not change the intrinsic characteristics of the product and is not considered processing.
• (201108544H) states, “threading pipe involves cutting grooves into the end of a piece of pipe so that it can be attached to another pipe. This activity changes the characteristics of the pipe and constitutes processing.”
• Initial threading of third-party pipe for resale by the third party is processing, and any equipment used in the process is exempt from sales tax (has been this way since manufacturing exemptions were phased in starting in 1994 (25% per year) over four years).
• A Houston equipment dealer, was willing to provide a statement indicating all of the other customers in the same business who purchase their equipment, parts, and service labor tax-free; they all provide exemption certificates and do not pay sales tax on the equipment

• Threading of new casing constitutes processing when performed for those who hold it for sale.
• The taxpayer was a processor; taxpayer does not own the tubular products they thread, but they provide threading service to others who hold the pipe or casing for sale; Gilbert Zamora responded by agreeing that the taxpayer should qualify as a processor and receive the manufacturing exemptions.
• Manufacturers do not pay tax on items that qualify for manufacturing exemption and processors of customer-supplied material held for resale do not pay tax on manufacturing equipment
• Manufacturing exemptions can be claimed either by businesses who sell the product being
processed or who sell the processing itself, and that intermediate processing can be done by a non-owner of the property being processed.
• Bryan Scogin was assigned to this audit by Mr. Dino Marcaccio, President of Texas Tax Group. Bryan was tasked with representing the taxpayer because he had prior experience with the Dispute Resolution Officer for a different TTG client. The response to that related client was that threading is considered processing, and the taxpayer qualified for the manufacturing exemptions.
• The business owner gave a tour to the auditor on 6/14/17, and the quality manager provided specific information for the job that was being threaded when the auditor took a plant tour.
• Texas Tax Group President Dino Marcaccio provided evidence of unequal treatment (Taxpayer Bill of Rights and STAR documents).
• Dino Marcaccio’s resolve to continue the fight “knowing” his firm’s client was being mistreated and the items miscategorized. He knew the continued fight would result in years of tax savings for TTG’s client and other companies experiencing the same problem of Comptroller auditors misinterpreting the Texas Tax Code.

This audit defense took over three years of continuous and consistent research and communication with all parties. The length of this case is an exception but is an example of Texas Tax Group’s full support for their taxpayers when both know the Comptroller’s position is weak.