The Texas Comptroller of Public Accounts recently announced that auditors will begin assessing sales tax on sales to direct payment permit holders, in the absence of properly completed direct payment exemption certificates. Audit Procedure 117, Treatment of Sales to Direct Pay Permit Holders, (May 13, 2008) (“AP 117”). AP 117 further provides that vendors must obtain direct payment exemption certificates within the 60-day period provided by Tex. Tax Code § 151.054(e).
AP 117 reverses the Comptroller’s thirty-year policy of holding vendors harmless for making tax-free sales to holders of valid direct payment permits. As early as 1978, Comptroller audit policy differentiated between tax-free sales to direct payment permit holders and tax-free sales to purchasers who claimed exemption on other grounds (e.g., sales for resale, use in manufacturing). The agency’s published guidelines provided that no tax should be assessed in the audit of the vendor even in the absence of a direct payment exemption certificate in the vendor’s file. Auditors were instructed merely to advise a vendor to secure a certificate as soon as possible.Comptroller Interoffice Memorandum to All Audit Offices (February 16, 1978, STARS Accession No. 7802L0102D11).
The foregoing policy was incorporated into subsequent editions of the Comptroller’s Audit Policy and Procedures Manual.For example, the 1986 manual provides that auditors must identify sales to direct payment permit holders and verify the effective dates of the permits. No tax should be assessed against the vendor if the purchaser held a valid direct payment permit at the time of the sale, even if no certificate were issued. It further states: “The 60-day letter is not needed for direct payment permit holders.” Audit I Manual (August 1986) at 4-29 to 4-31. This policy is reiterated in Sales Tax Policy/Procedures (August 1992).
The 1986 Audit I Manual explains this policy by noting: “It is department policy to audit all direct payment permit holders every four years.” In other words, the policy was based on the premise that it was unnecessary to assess tax against vendors because the same taxes would be audited, verified and collected in subsequent audits of the purchasers. Thus, the audit policy was designed to prevent double taxation of the same transactions.
By overturning the long-standing policy of the agency, AP 117 exposes vendors to liability for taxes that have already been accrued and paid by direct payment permit holders, or that will be assessed and paid in routine audits thereof. This greatly enhances the risk of double taxation of the same transactions. In addition, because the Comptroller will now subject direct payment exemption certificates to the 60-day rule, vendors will have no recourse in an audit if a direct payment permit holder fails to provide a certificate timely, or has gone out of business.
The new audit policy makes it imperative for vendors to obtain properly completed direct payment exemption certificates from their customers in the same manner in which they have traditionally obtained resale and exemption certificates.
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