Texas Comptroller of Public Accounts – Administrative CPA Hearing No. 111,302 (2017)
In this audit and final hearings decision the Texas Comptroller and Administrative Law Judge incorrectly assessed over $100,000 in sales tax plus a 10% penalty and interest against a collision repair shop. The shop performed lump sum (nontaxable) repairs but the auditor and hearings judge determined that the sales tax listed in the insurance company proceeds represented sales tax collected and not remitted.
THIS TYPE OF MISTAKE HAPPENS ALSO OFTEN WITH RESIDENTIAL REPAIR JOBS THAT INVOLVE INSURANCE PROCEEDS. THE SALES TAX AUDITOR CONSIDERED THE SALES TAX ‘PROCEEDS’ RECEIVED FROM THE INSURANCE COMPANIES AS SALES TAX CHARGED, COLLECTED, AND NOT REMITTED TO THE TEXAS COMPTROLLER’S OFFICE. THIS COLLISION REPAIR SHOP WAS ASSESSED 100% OF THE SALES TAX RECEIVED FROM THE INSURANCE COMPANIES EVEN THOUGH THEY PAID SALES TAX TO THEIR MATERIALS VENDORS AND ISSUED A NON-TAXABLE LUMP SUM INVOICE TO THEIR CUSTOMERS.
THIS INCORRECT SALES TAX AUDIT ASSESSMENT CAN ALSO BE SUBJECT TO AN ADDITIONAL 50% FRAUD PENALTY PER TAX CODE SECTION 111.0611 – TEXAS NOTIFICATION OF PERSONAL LIABILITY FOR FRAUDULENT TAX EVASION. It did not happen in this audit but other audits with the exact same assessments have resulted in the assessment of the Additional 50% Officer Fraud Penalty per Tax Code Section 111.0611.
And keep in mind this over assessment of sales tax occurs on a regular basis against collision shops and what are known as paintless dent repair (PDR) shops (i.e., shops that don’t replace the car panels, they just knock out the dents and don’t repaint the panels).
This Comptroller of Public Accounts Hearing Decision is listed as: SOAH DOCKET NO. 304-17-5309.26 / CPA HEARING NO. 111,302 (see attachment #1) and was dated November 16, 2017.
This hearing (CPA Hearing No. 111,302) can be accessed by clicking on the following link:
If you open the attachment/link you will find that I have highlights and underlined the relevant parts of the hearings so you can read for yourself how the administrative law judge rationalizes the decision that the collision repair shop’s lump-sum invoices are not the controlling document for the sales tax audit. Instead, the judge incorrectly reads Tax Rule 3.290(h)(l) to support a claim that the sales tax listed in the insurance estimates documents provided directly to the repair person is evidence that the repair person charged the insurance company sales tax on the materials also listed in the estimate. This is really a stretch. And an incorrect one at that.
For over 30 years as an auditor and Texas State Tax consultant I have read that sales tax is: (1) a transaction tax and (2) the tax is determined by the true ‘essence of the transaction’. There is not taxable transaction between the repair person and the insurance company. The repair person did not issue an invoice to the insurance company. There is not exchange of goods or services between the repair person and the insurance company. There is however, a transaction between the repair person and the insured customer. And that transaction is represented by a lump sum repair of a motor vehicle with is not subject to sales tax. In this Hearing, Decision Chief Administrative Law (ALJ) Judge Lesli Ginn states:
Regarding the assessment of tax collected and not remitted, the ALJ finds that the conclusion in the PFD is correct based on the evidence in the record. As stated in the PFD, the auto insurance companies issued estimates to Petitioner itemizing the parts and labor needed to complete the repair and the estimated cost of each. The charges for parts and labor were separately stated in the estimates, and sales tax was applied to the charges for parts.
Once the repairs were complete, the insurance company issued the payment to Petitioner. The customer's unpaid out-of-pocket deductible was subtracted to arrive at the dollar amount the insurance company would pay Petitioner for the repairs.
The payment to Petitioner included the sales tax on the parts, as listed in the estimate. Petitioner was required to collect and remit tax on the agreed contract price of the materials, not on its wholesale costs. See 34 Tex. Admin. Code § 3.290(h)(l). Petitioner collected the sales tax due on the separated price for the materials as listed in the estimate. A person who collects a tax or any money represented to be a tax from another person holds the amount collected in trust for the state and is liable to the state for the full amount collected, as well as accrued penalties and interest thereon. Tex. Tax Code§ lll.016(a). The statute covers all instances in which a retailer collects from its customer an amount represented to be tax. See Comptroller's Decision Nos. 110,954 (2016) and 107,108 (2014). Petitioner was obligated to remit the taxes that it collected.
I have underlined the sentences that I believe are misleading. Take for instance the sentence:
The charges for parts and labor were separately stated in the estimates, and sales tax was applied to the charges for parts.
I do not believe, nor did the repair person or their customers that the sales tax listed in the insurance estimate documents represented with the agreement between the customer and the repair person. In fact, the repair person in this case (and as customary) deducted the customer’s deductible’ amount from the initial estimate and the insurance company paid that amount.
That is because, as stated in the hearing, the repair person often used less expensive parts or possibly not as much labor to complete the job. In any case, it is perfectly legal for the repair person to complete the repairs for an amount less than the initial estimated repair costs (including sales tax) so that the customer did not have to pay out of pocket for the deductible portion of the repairs.
Here is another sentence from the hearing decision that I disagree with:
Petitioner collected the sales tax due on the separated price for the materials as listed in the estimate.
In my opinion, the repair person never charged, not collected sales tax from anyone. Not the customer. Not the insurance company. The judge does not say WHO the repair person is charging but it would not matter. Even if the claim was that the repair person charged the insured customer this would not be true. The repair person issued a lump sum invoice to the customer.
Providing the customer with a copy of the insurance proceeds document (which listed the remittance to the repair person for estimated parts, labor and sales tax on materials) does not make this document supersede the lump sum invoice provided to the customer by the repair person.
I am afraid that the identity of the shop is confidential by law and so I cannot tell you the name of this unfortunate business that was incorrectly assessed by over $100,000 ($87k in tax plus regular penalty and interest) by the Texas Comptroller’s Office. But I have seen it happen to too many clients and so I am writing this article in the hope that either a Texas State Representative or Senator will simply add 2 or 3 sentences to correct this abuse and misinterpretation of the applicable sales tax statute and tax rule. IMO this is an incorrect subjective interpretation of Texas sales tax law and should be changed.
And here’s the kicker (i.e., to rub sales tax salt in the wound). If the collision repair shop does not have a sales tax permit for the audit period, then all the sales tax correctly paid to materials vendors is not allowed as an offset or credit against the sales tax assessed on the insurance proceeds funds provided to the collision shop. It is considered sales tax paid in error which means the collision shop actually paid sales tax twice (once himself to the vendors and then again to the auditor/agency).
Audits are generally for a 4 year period and this really adds up. on your lump-sum collision repairs during the 4-year audit period will not be credited can be considered ‘PAID IN ERROR’ and no credits will be given against the sales tax assessed per the insurance estimate proceeds. The reason that no credits are granted for tax paid to vendors is that if the collision shop does not have an active sales tax permit (why would you have a sales tax permit if all your jobs were lump sum) the Texas Comptroller can and will deny your credits for tax paid to vendors. That is the law.
This article is about an unfair commonly performed Texas Comptroller Sales Tax audit of an auto collision facility (i.e., repair person). The Texas Comptroller and Administrative Law Judge in this case incorrectly considered the estimated sales tax proceeds/reimbursement funds paid by the insurance company to the ‘lump sum’ repair person as ‘sales tax collected and not remitted.
It should be noted that the auditor, hearings attorney, and judge all acknowledged that these insurance repair funds issued to the repair person were used to pay for materials, labor, and SALES TAX to vendors on incorporated and consumed materials. Yet it did not matter. The judge decided that the controlling document for the audit would not be the lump sum invoice between the repair person and the insured customer. Instead, the judge decided that the controlling document would be the estimated issued by the insurance company to the repair person. This is not correct.
The insurance company is not a party to the transaction for the repair of the vehicle. Their insurance estimate document(s) showing reimbursed costs to the repair person associated with material, labor and sales tax have ZERO relevance to this sales tax audit. This insurance estimate has nothing to do with the sales tax audit. It is simple an internal document.
This estimate is often not a reflection of the materials, labor or SALES TAX that will actually be paid on the lump sum repair of the motor vehicle. Many repair persons buy cheaper parts or repair existing body panels in order ‘cover the customer’s deductible’ (i.e., it is not paid out of pocket by the insured customer to the repair person).
Let’s say the insured customer has a $500 deductible. The adjuster for the insurance company estimates the LUMP SUM repair person will spend a total of $10,000 on the purchase of materials, labor cost and sales tax. Although it is irrelevant to a sales tax audit the repair person will often ‘cover the cost of the deductible’ by spending only $9,500 on materials, labor, sales tax. Keep in mind the repair shop’s lump-sum includes their built-in profit on either the cost of materials and labor.
Also keep in mind that the estimating insurance proceeds is just what it is called. An ESTIMATE. These insurance proceeds are all flexible amounts. The repair person may or may not buy the OEM (Original Equipment Manufacturer) part and instead, often with the buyer agreeing, to buy a cheaper non OEM part to save money and help reduce the deductible. And what about sales tax amounts included in these 3 rd party insurance reimbursement funds. Insurance companies often have no idea what the exact sales tax rate is in any given jurisdiction. Often these amounts are guesstimates and can vary between 6.25% (State rate) and 8.25% (max rate in Texas) depending on the local jurisdiction of the repair person’s shop. And insurance companies
accounting and adjustors are often located outside the repair shops local sales tax jurisdiction. Sometimes in another State. And so the sales tax estimates are often ‘best guesses’. And that is ok since the insurance estimates and the associated funds paid to the repair person (shop) is IRRELEVANT to the sales tax audit.
Sales tax is a TRANSACTION TAX. And the controlling document for a sales tax audit of a collision shop is the transaction invoice between the repair person and the insured customer. The controlling document is not some guesstimate/estimate issued by a 3 rd party insurance company to the transaction. And it does not matter that the insurance company paid the repair person to perform the work. That does not make the TRANSACTION between the repair person and the insurance company. This logic is illogical. That is why the tax statute and rule needs to be amended and about 50 Tax Policy Letters and Administrative Hearings will need to be superseded. The shame (and sham) of it all is that this law change, if enacted by the 2023 Texas Legislature, will not be retroactive and so all those collision repair shops that were over-assessed and sometimes put out of business won’t have any recourse except to frame the new law forbidding the Texas Comptroller from considering sales tax reimbursements from insurance companies to be considered sales tax collected and not remitted.
Therefore, the insurance ‘sales tax’ proceeds provided to the repair person (which have nothing to do the with transaction between the insured customer and the repair person) are often not even accurate. Which is not a problem since this sales tax reimbursement amount is not subject to any sales tax laws in Texas. The insurance proceeds (materials, labor, sales tax) are simply a 3 rd party paying for all costs associated with a non-taxable lump sum transaction between a repair person and the insured customer. The repair person will proceed to receive ‘x’ amount of insurance proceeds and then.
The controlling document is the LUMP SUM INVOICE BETWEEN THE REPAIR PERSON AND THE INSURED CUSTOMER. The fact that the insurance company paid for the repairs and that the estimated funds provided to the repair person included reimbursements for estimate sales to be paid by the repair person to vendors is irrelevant.
Their all transactions between the Texas Comptroller claimed 100% of the sales tax paid by the insurance company which included reimbursement for sales tax TO BE PAID by the vendor.
The sales tax auditor, the auditor’s supervisor, the Dispute Officer, the Revenue Processing Center, the Texas Comptroller hearings attorney, Texas Comptroller and finally the Administrative Law judge all got it WRONG. Every one of these employees of the State of Texas Comptroller’s Office ignored the controlling non-taxable lump sum invoice between the repair person and the insured customer document Not only did this repair person get charged sales tax on a document that had ZERO to do with his lump sum invoice between him and his customer, the sales tax was.
This is not an unusual situation. These type of ‘gotcha sales tax audits’ happen every week in Texas. If you are a ‘lump sum’ collision center, auto repair shop or paintless dent repair person you should read this article and then contact your local Texas Representative or State Senator (more later).
The repair person issues a lump sum invoice to the customer (non-taxable) and pays sales tax on all incorporated and consumed materials (taxable). Fact. The repair person does not have a sales tax permit. Fact.
The repair person does not need a sales tax permit because they don’t need one (i.e., they don’t have taxable separated materials sales to customers.
Fact. Tax Rule 3.290 (a)(16) should be amended to include the following or similar statement:
Any insurance proceeds paid directly to an automotive facility performing lump sum repairs which does include a specific reimbursement of sales tax to be paid by the repairperson shall not be considered as sales tax due the State.
This law has to be amended for the coming 2023 Texas Legislative session to stop the unfair assessments of mostly collision repair shops. Customers and they pay sales tax on 100% of their purchases of consumed and incorporated materials for the collision repairs and is paid directly by the insurance companies. This happens every day. This is how this unfair process works and why the sales tax audit is incorrect and why the applicable law should be changed.
(1) The vast majority of collision shops in Texas get paid by the insurance company to perform the work,
(2) The insurance company sends out an adjuster to inspect the vehicle and determine what it will cost to repair the vehicle which includes the costs to be paid BY the repair person use lump sum (LS) invoices issued to the customer for all the work done. That is, the invoice does not separate the materials and labor used for the collision repair.
That is, lump sum (LS) invoice from the shop and the where the auditor assessed sales tax assessment on the patrials’ portion of the non-taxable lump sum invoices between the repair person and the ‘insured’ customers based on the irrelevant insurance estimate. In this case, the error is compounded because the repair person (shop) was not even permitted, paid sales tax on 100% of the purchase invoices for incorporated material purchased.
The error in judgment and misinterpretation of the applicable sales tax law by the auditor, supervisor was finally approved by a Texas Administrative Law Judge in 2017. Other similar final decisions by the Office of Administrative Hearings (SOAH) means that all auto repair/collision repair shops which allows an insurance reimbursement estimate for repairs and the accompanying payment be used as the controlling document (i.e. an invoice payment This shop was audited, and IMO incorrectly assessed a large amount of sales tax (see below). The owner of the shop then filed for what is called an Administrative (Redetermination) Hearing to argue his/her case. They lost the case.
Opinion: I believe that the 2023 Legislative Session should simply amend Texas Tax Rule 3.290 (g)(2) to not allow sales tax auditors to assess sales tax on insurance proceeds that include funds for sales tax to be correctly paid by shops for materials used in lump sum auto repair jobs.
Specifically, Tax Rule 3.290 (a)(16) should be amended to include the following or similar statement:
Any insurance proceeds paid directly to an automotive facility performing lump sum repairs which does include a specific reimbursement of sales tax to be paid by the repairperson shall not be considered as sales tax due the State.
This law has to be amended for the coming 2023 Texas Legislative session to stop the unfair assessments of mostly collision repair shops.
This Administrative (Redetermination) Hearing involving a collision repair shop performing insurance repairs is not an unusual case. In fact, this can and will happen to any collision shop under the same conditions. I can tell you I was a Texas Comptroller auditor for over 16 years and audited several collision repair shops using the exact same insurance proceeds / invoicing systems and I NEVER assessing sales tax on these businesses based on the Texas Tax Rule 3.290 (g)(2). It is sad that I can show you other hearings with the same unfair sales tax assessments made against perfectly law-abiding collision shops in Texas. This unfair treatment has got to stop.
I have had 3 collision repair clients using insurance proceeds get hit with this same unfair assessment of sales tax which resulted in an average assessment of over $100,000 in tax, penalties, and interest. 2 of these shops were put out of business and there was nothing I could do about it. As I said, Tax Rule 3.290 and the associated Tax Statute must be amended to contain a simple 2 or 3 sentence provision for any automotive repair or collision shop that receive insurance funds to pay sales tax on materials used in lump sum customer invoices.
It should be noted that this particular auto collision repair shop did everything right as far as: (1) paying sales tax to their vendors and (2) issuing a lump sum invoice to their customers. That should have been the end of it. The sales tax audit should have been what is called a NO TAX DUE audit. This taxpayer (as businesses are called by the agency) should have received a letter from the Texas Comptroller congratulating them on being a good Texas Taxpayer (suitable to framing and hanging in their lobby). But that didn’t happen. In fact, I bet this shop was possibly put out of business by this unfair and unbelievable sales tax audit.
This is basic sales tax law. The repair person issues a lump sum invoice for motor vehicle repairs. The repair person does not charge sales tax on lump sum invoices to customer. The repair person pays sales tax on all materials to vendor used in these lump sum auto repair jobs. This is the correct law. It cannot be any simpler to understand.
And yet, this lump sum repair shop that is paid directly by the insurance company is getting over-assessed by the Texas Comptroller because the agency is considering the INSURANCE ESTIMATE / PROCEEDS / REIMBURSEMENT DOCUMENT THE PRIMARY TRANSACTION DOCUMENT (i.e., the INVOICE). And that is not true. The insurance estimate document is not the invoice and the sales tax funds contained within cannot be considered as a sales tax being charged by the repair person and the insurance company. That is because the transaction is between the customer and the repair person (not the repair person and the insurance company).
In this audit and hearing the repair person had issued a LUMP SUM INVOICE to every single customer. There should not even be a need to amend the applicable statute and tax rule. It should be common sense. Any Administrative Law Judge should see that. And yet, judge after judge is allowing the insurance documents to override the lump sum invoice between the repair person and the customer. I would have thought that there would have been a Texas District Court case (or Appeals or Supreme Court case) that cleared up this misinterpretation by the Texas Comptroller and SOAH judges.
The insurance proceeds/reimbursement paid to the repair person that includes funds for the purchase of materials, labor, and sales tax does not change the lump sum invoice between the repair person and their customer a separated contract which would then cause the sales tax reimbursement funds to be considered ‘tax collected and not remitted.
And yet, in this and all similar cases this repair person was assessed sales tax on 100% of the funds paid to them by the insurance company to cover the cost of the sales tax they paid on materials used on all lump sum repairs. This is why I quit being a sales tax auditor after 16 years and started Texas Tax Group in 2007. Let me recap.
1. SHOP PERFORMED LUMP SUM INSURANCE COLLISION REPAIRS (I.E. INSURANCE REPAIRS)
2. SHOP ISSUED LUMP SUM INVOICES TO CUSTOMERS (like every other collision shop in Texas does)
3. SHOP CORRECTLY DID NOT CHARGE SALES TAX TO CUSTOMERS ON LUMP-SUM INVOICES TP INVOICES
4. SHOP CORRECTLY PAID SALES TAX ON 100% OF MATERIALS PURCHASED FOR LUMP SUM REPAIRS
5. SHOP ALSO PROVIDED CUSTOMER A COPY OF THE INSURANCE ESTIMATE DOCS (remember this one)
6. SHOP WAS AUDITED BY TEXAS COMPTROLLER FOR SALES TAX HERE IS WHERE THE AUDIT GOES TERRIBLY WRONG
7. AUDITOR INCORRECTLY CLAIMED THAT FUNDS PAID BY INSURANCE COMPANY TO THE SHOP TO COVER THE COST OF SALES TAX PAID BY THE SHOP FOR INCORPORATED MATERIALS WERE TECHNICALLY SALES TAXES DUE TO THE STATE (unbelievable logic).
8. AUDITOR THEN ASSESSED ALL FUNDS PROVIDED BY INSURANCE COMPANY TO COVER SALES TAXES PAID BY SHOP FOR MATERIALS AS SALES TAX COLLECTED AND NOT REMITTED (seriously)
9. SHOP FILES FOR AN ADMINISTRATIVE HEARING.
10. SHOP LOSES CASE BECAUSE AUDITOR, HEARINGS ATTY AND ADMIN JUDGE DETERMINED THAT THE SALES TAX REMITTANCE PAID TO HIM BY THE INSURANCE COMPANY WAS TECHNICALLY SALES TAX CHARGED TO CUSTOMER AND WAS DUE THE TEXAS COMPTROLLER
11. TO RUB SALT IN THE WOUND THE SHOP WAS NOT GIVEN CREDIT FOR SALES TAX PAID TO VENDORS FOR MATERIALS USED IN THE REPAIRS
12. TP RUB MORE SALT IN THE SHOP WAS ASSESSED A 50% FRAUD PENALTY (FOR SALES TAX COLLECTED AND NOT REMITTED) PLUS 10% PENALTY AND INTEREST.
Dino Marcaccio, President (ex-Texas Comptroller Auditor, 16 Years)
TEXAS TAX GROUP, INC.
9950 Westpark Drive, Ste 430
Houston, Texas 77063
Houston | Austin | Dallas | San Antonio