                                   In The
                              Court of Appeals
                     Seventh District of Texas at Amarillo
                             ________________________

                                  No. 07-11-0025-CV
                             ________________________

           VERIZON BUSINESS NETWORK SERVICES, INC., APPELLANT

                                           V.

  SUSAN COMBS, COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF
 TEXAS, AND GREG ABBOTT, ATTORNEY GENERAL OF THE STATE OF TEXAS,
                            APPELLEES



                        On Appeal from the 353rd District Court
                                 Travis County, Texas
                          Trial Court No. D-1-GN-07-004221
                      Honorable Stephen Yelenosky, Judge Presiding


                                     April 3, 2013

                           MEMORANDUM OPINION
                  Before QUINN, C.J., and HANCOCK and PIRTLE, JJ.


      Appellant, Verizon Business Network Services, Inc., operates a nationwide

telecommunications network that includes switch systems operated by custom software.

In December 2007, Verizon filed suit in district court seeking a tax refund in the amount

of $19,641,188.54 for sales and use taxes paid on software acquired during the refund
period, January 1, 1996 to August 31, 2000.               Following a bench trial, the trial court

entered a judgment in favor of Appellees, Susan Combs, Comptroller of Public

Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of

Texas, granting Verizon a partial refund of $1,507,649.45, but denying all other relief. 1


        Verizon appeals that judgment asserting: (1) it is entitled to a refund of the sales

and use taxes paid on services it acquired to update the software used to operate the

switches in its nationwide telecommunications network, (2) the evidence was legally and

factually insufficient to support the trial court’s finding that software services acquired

during the refund period were taxable under sales and use tax statutes, 2 and (3) it is

entitled to a refund of interest assessed by the Comptroller on any delinquent taxes that

would have been offset by the partial refund granted by the trial court. We affirm.


                                              BACKGROUND


        In the early 1990s, Verizon contracted with three vendors, Northern Telecom,

Inc. (Nortel), DSC Communications Corporation which later became Alcatel USA

Marketing, Inc. (DSC/Alcatel), and Ericsson Network Systems, Inc. (Ericsson) to replace

its analog switches with digital switches. Among other things, the switches in question

were designed to route long distance calls to their desired locations.                     The newly

installed switches included software programs designed to operate the switches. After


1
 The Texas Tax Code authorizes tax refund suits. See TEX. TAX CODE ANN. § 112.151 (West 2008). The
Comptroller and Attorney General are necessary parties to a taxpayer suit. Id. at § 112.151(b). Since the
interests of the Comptroller and Attorney General do not diverge in this case, we will refer to both
collectively as “the Comptroller.”
2
 Because the disputed taxes were incurred between 1996 and 2000, tax statutes and rules existing then
are applicable to our analysis. Unless otherwise noted, however, where there was no material change in
the applicable statutes, regulations or rules, we will cite to their current versions.

                                                   2
Nortel, DSC/Alcatel and Ericsson sold the switches to Verizon, they continued to

develop software programs to enhance the switches’ operational performance. The

parties refer to these software developments as “feature enhancements” or “software

loads.”    To create a feature enhancement, the vendor re-wrote some code in the

switches’ operating software and created new code that produced new and/or modified

computer programs that were subsequently loaded into the switches. For example,

software loads developed by the vendors permitted the switches to handle increased

caller capacity, multiple messaging, new filing capabilities, phone number portability and

more effective transmission of emergency government communications over Verizon’s

network.


      The commercial relationship between Verizon and its vendors was governed by

purchase agreements executed, for the most part, in the early 1990s and renewed

through a series of amendments thereafter. Typically, Verizon would request a feature

enhancement to perform a particular task. Once Verizon and the vendor agreed on the

specifications for the new software program, the vendor would assemble a software

development team comprised of software development engineers, test engineers,

project managers and specification writers to modify and/or create new code to obtain

the new feature or functionality sought by Verizon. Once the new software program

was completed it would be combined with the switches’ original operating software into

a “software load” which was sent to Verizon’s test laboratory in Richardson, Texas,

where it was loaded onto a “testbed” and tested in an emulated network that had all the

components of a real network to determine whether it “conform[ed] to specifications”

and was “capable of carrying revenue producing or tandem traffic.” After the Laboratory


                                            3
validated the software load, it was then tested in two field offices. If the field tests were

successful, Verizon notified the vendor to make copies of the software load and send it

to the switches for installation according to a schedule established by Verizon. Shortly

thereafter, the Laboratory conducted a “compare” test to determine whether the

software load installed at the switches matched the test program.           Thereafter, the

original program remained at the Richardson Laboratory, in order to troubleshoot any

problems in a controlled environment.         Once installed at the Laboratory, feature

enhancements were not removed from the testbed until they were eliminated from the

network.


       A review of Verizon’s procurement documents and invoices for the feature

enhancements indicates that Verizon paid a lump sum price for each software program.

Richard Yeats, Verizon’s Principal Contract Administrator, testified that, “[b]ecause we

paid one price the vendor took care of all the operations including getting to the site,

having everything there to install the feature enhancement . . . .” Yeats further testified

that the “[v]endor never broke down the lump sum price by site because he was

developing software, not allocating where it should go.”         Further, the procurement

documents and, with a few exceptions, the invoices indicate that the software loads

containing the feature enhancements were first shipped by vendors to the Richardson

Laboratory. Many of the invoices for DSC/Alcatel and Nortel contained the following

notations:    “Install at Lab Richardson,” “SITE:         Richardson” and “Destination:

Richardson, TX.”


       Following the entry of judgment, at Verizon’s request, the trial court issued

Findings of Fact and Conclusions of Law, in pertinent part, as follows:

                                             4
                          I. FINDINGS OF FACT

1. [Verizon] operated telecommunications facilities throughout the United
States, including Texas during the refund period of January 1, 1996
through August 31, 2001 (the “Period”).

2. [Verizon] filed tax refund claims under Tax Code § 111.104 for the
recovery of $19,641,188.54, plus statutory interest.

3. All procedural steps required for [Verizon] to file a suit for refund under
Chapter 112 of the Tax Code were met by [Verizon].

4. [Verizon] paid sales and use tax in the amount of $1,507,649.45 upon
purchases of hardware and non-customized software, as referenced on
worksheets 2, 5, 6, and 7 included in Joint Exhibit 1.

5. The hardware and non-customized software referenced . . . in Joint
Exhibit 1 were shipped by the vendor to out-of-state locations and never
used in Texas.

6. [Verizon] paid sales and use tax on the purchase of a single license to
use computer software described as feature enhancements to existing
software.

7. The feature enhancements were first shipped to and used in
Richardson, Texas.

8. The feature enhancements purchased by [Verizon] were purchased
from the original vendors from whom [Verizon] purchased its other existing
computer programs that function on its telecommunications network.

9. The feature enhancements added instructional code to existing
computer programs being used by [Verizon] on its telecommunications
network which allowed existing features on the network to work in a
different way, such as more efficient prioritization of calls across the
network, and added new features to the network, such as increasing call
capacity of the network switches and allowing for phone number
portability.

10. The feature enhancements processed data and produced results
thereby enabling features on [Verizon]’s telecommunications network to
operate in a new or different manner.

11. The feature enhancements were tested by [Verizon] in Richardson,
Texas, before being implemented across its nationwide tele-
communications network.



                                      5
      12.    The feature enhancement software remained on [Verizon]’s
      equipment in Texas after testing, and continued to be used in Richardson,
      Texas, to provide various types of technical support regarding [Verizon]’s
      telecommunications network.

      13. The Comptroller calculated her counterclaim using estimates.

                              II. CONCLUSIONS OF LAW

      1. No sales or use tax is due on the hardware and non-customizable
      software referenced on worksheets 2, 5, 6, and 7 included in Joint Exhibit
      1 because the hardware and non-customizable software was not delivered
      to or used in Texas.

      2. [Verizon] is entitled to a refund of the sales and use tax in the amount
      of $1,507,649.45, plus statutory interest provided by Tax Code § 112.155,
      related to its purchases of the hardware and non-customizable software
      referenced on worksheets 2, 5, 6, and 7 included in Joint Exhibit 1.

      3. The feature enhancements are a computer program as defined in Tax
      Code § 151.0031.

      4. [Verizon]’s purchases of the feature enhancements are subject to sales
      and use tax because the feature enhancements are tangible personal
      property that was possessed and used in Texas.

      5. [Verizon] failed to meet its burden of proof to show that it is entitled to a
      refund of sales and use tax paid upon its purchases of the feature
      enhancements.

                                          * * *

                                       DISCUSSION


      Verizon asserts that its purchases were a required service, i.e., maintenance

necessary to update and maintain software originally installed in the 1990s and, as

such, those purchases were exempt from Texas sales and use tax.                 In order to

understand the transactions at issue here, we find it necessary to go into some detail

regarding Verizon’s purchases.




                                             6
       Verizon first asserts that the Texas sales and use tax is inapplicable to the refund

period transactions in question because those transactions were contracts for software

services that were necessary to maintain and/or remodel the operating software used

by its existing switches.    Verizon further contends the service provided by these

transactions benefitted its entire nationwide network and, as a result, should be

apportioned to its principal place of business in Washington, D.C., under the

Comptroller’s "service benefit rule."    Alternatively, Verizon asserts that each switch

represented an identifiable segment of its business and the software service charges

should be apportioned to each individual switch.       In the further alternative, Verizon

contends that, if the feature enhancements are found not to be services but instead are

derived from the sale or use of tangible personal property, it is entitled to a refund of

taxes paid for feature enhancements utilized by switches outside of Texas. Lastly,

Verizon contends that we should reform the trial court’s judgment to require the

Comptroller to refund all interest on any delinquent tax assessed for the refund period

that is offset by the $1,507,649.45 refund ordered by the trial court. For the reasons

stated below, we disagree. Logic dictates that we address Verizon’s first and second

issues together.


I.     STANDARD OF REVIEW


       A.     LEGAL & FACTUAL SUFFICIENCY


       In a suit for a tax refund, a taxpayer must conclusively establish that a tax was

overpaid and the exact amount of that overpayment. Baker v. Bullock, 529 S.W.2d 279,

281 (Tex.Civ.App.—Austin 1975, writ ref’d n.r.e.). As the plaintiff in this tax refund case,


                                             7
Verizon had the burden of proving, by a preponderance of the evidence, that it was

entitled to a refund. See GATX Terminals Corp. v. Rylander, 78 S.W.3d 630, 634, 636

(Tex.App.—Austin 2002, no pet.) (collected cases cited therein).


       In this case, after a trial de novo, the trial court granted judgment in favor of the

Comptroller on Verizon’s refund claim. It later issued findings of fact and conclusions of

law. In a bench trial, the trial court’s findings of fact have the same force and effect as a

jury verdict.   Chevron Pipeline Co. v. Strayhorn, 212 S.W.3d 779, 783 (Tex.App.—

Austin 2006, pet. denied) (citing Catalina v. Blasdel, 881 S.W.2d 295, 297 (Tex. 1994)).

Appellate courts review the legal and factual sufficiency of the trial court’s findings of

fact according to the same standards applied to jury findings.         Ortiz v. Jones, 917

S.W.2d 770, 772 (Tex. 1996).


       On appeal, Verizon challenges the legal sufficiency of the trial court’s conclusion

that it was liable for the sales and use taxes imposed on the basis of feature

enhancements purchased during the refund period.           As such, our consideration of

Verizon’s challenge is guided by the Supreme Court’s decision in City of Keller v.

Wilson, 168 S.W.3d 802 (Tex. 2005). See MBM Financial Corp. v. The Woodlands

Operating Co., L.P., 292 S.W.3d 660, 663 n.3 (Tex. 2009).           In reviewing the legal

sufficiency of the evidence, we view the evidence in the light most favorable to the

verdict, crediting favorable evidence if reasonable jurors could, and disregarding

contrary evidence unless reasonable jurors could not. See City of Keller, 168 S.W.3d at

807.




                                             8
         Anything more than a scintilla of evidence is legally sufficient to support the

finding.      Cont’l Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444, 450 (Tex. 1996).

Evidence does not exceed a scintilla if it is “so weak as to do no more than create a

mere surmise or suspicion” that the fact exists; Ford Motor Co. v. Ridgway, 135 S.W.3d

598, 601 (Tex. 2004), and more than a scintilla of evidence exists if the evidence

furnishes some reasonable basis for differing conclusions by reasonable minds about

the existence of a vital fact. Rocor Int’l, Inc. v. Nat’l Union Fire Ins. Co., 77 S.W.3d 253,

262 (Tex. 2002).       So long as the evidence falls within the zone of reasonable

disagreement, we may not substitute our judgment for that of the fact finder. City of

Keller, 168 S.W.3d at 822. Moreover, the trial court who observed the witnesses and

heard the testimony first hand is the sole judge of the credibility of those witnesses and

the weight given to their testimony.         Woods v. Woods, 193 S.W.3d 720, 726

(Tex.App.—Beaumont 2006, pet. denied). See also City of Keller, 168 S.W.3d at 819.


         In reviewing a factual sufficiency challenge, we consider all the evidence and set

aside a finding only if it is so against the great weight and preponderance of the

evidence as to be clearly wrong and unjust. THI of Texas at Lubbock I, LLC v. Perea,

329 S.W.3d 548, 572 (Tex.App.—Amarillo 2010, pet. denied) (citing Ortiz v. Jones, 917

S.W.2d 770, 772 (Tex. 1996)).


         B.      STATUTORY INTERPRETATION


         In general, matters of statutory construction are questions of law rather than

issues of fact. City of Garland v. Dallas Morning News, 22 S.W.3d 351, 357 (Tex.

2000).     As such, statutory construction issues receive de novo review.        Dallas Co.


                                              9
Community College Dist. v. Bolton, 185 S.W.3d 868, 872 (Tex. 2004). Our primary

objective when construing a statute is to ascertain and give effect to the Legislature’s

intent. Id. (citing McIntyre v. Ramirez, 109 S.W.3d 741, 745 (Tex. 2003)). To discern

the Legislature’s intent, we construe the statute’s words according to their plain and

common meaning; TEX. GOV’T CODE ANN. § 312.002 (W EST 2005); Tex. Dept. of Transp.

v. City of Sunset Valley, 146 S.W.3d 637, 642 (Tex. 2004), unless a contrary intention is

apparent from the context; Taylor Firemen’s & Policemen’s Civil Serv. v. Comm’n, 616

S.W.2d 187, 189 (Tex. 1981), or unless such a construction leads to an absurd result.

Barshop v. Medina County Underground Water Dist., 925 S.W.2d 618, 629 (Tex. 1996).


      We construe administrative rules, which have the same force as statutes, in the

same manner as statutes. Rodriguez v. Service Lloyd’s Ins. Co., 997 S.W.2d 248, 254

(Tex. 1999). “Serious consideration” is given to an agency’s construction of a statute

that it is charged with enforcing, particularly when the statute involves complex subject

matter within the agency’s area of expertise, so long as that construction is reasonable

and consistent with the statutory language. See First Am. Title Ins. Co. v. Combs, 258

S.W.3d 627, 632 (Tex. 2008), cert. denied, 556 U.S. 1221, 129 S.Ct. 2157, 173 L.Ed.2d

1156 (2009). If a statute can be reasonably read as the enforcing agency has ruled,

then courts are bound to accept that interpretation even if other reasonable

interpretations exist. See Southwestern Bell Tel. Co. v. Combs, 270 S.W.3d 249, 260

(Tex.App.—Amarillo 2008, pet. denied). Further, we defer to an agency’s interpretation

of its own rule when the rule is vague or ambiguous, unless the administrative

interpretation is “plainly erroneous or inconsistent with the regulation.” Service Lloyd’s




                                           10
Ins. Co., 997 S.W.2d at 254-55; Gulf Coast Coalition of Cities v. Public Utility Com’n,

161 S.W.3d 706, 712 (Tex.App.—Austin 2005, no pet.).


II.      “SALE AND/OR USE” VS. “SERVICE”


         The sales tax is a transaction tax; Bullock v. Delta Industrial Constr. Co., 668

S.W.2d 502, 504 (Tex.App.—Austin 1984, no writ) (citing Calvert v. Canteen Co., 371

S.W.2d 556, 558 (Tex. 1963)), that is imposed on the sale of tangible personal property

in this state. TEX. TAX CODE ANN. § 151.051(a) (W EST 2008). See United Services

Automobile Assoc. v. Strayhorn, 124 S.W.3d 722, 730 (Tex.App.—Austin 2003, pet.

denied).    A use tax, on the other hand, is assessed when a party stores, uses or

consumes a taxable item 3 within the state. TEX. TAX CODE ANN. § 151.101(a) (W EST

2008).     The use tax is designed to complement the sales tax and applies to situations

in which the taxing authority is unable to assess a sale tax because the purchase took

place outside its taxing jurisdiction and the property purchased is stored or used within

its jurisdiction. Delta Industrial Const. Co., 668 S.W.2d at 504 (citing Bullock v. Lone

Star Gas Co., 567 S.W.2d 493, 497 (Tex.), cert. denied, 439 U.S. 985, 99 S.Ct. 577, 58

L.Ed.2d 657 (1978)). See 34 TEX. ADMIN. CODE § 3.346(b)(1) (1990).


         A “sale” or “purchase” means a transfer of title or possession of tangible personal

property and/or the performance of a taxable service when done or performed for

consideration. TEX. TAX CODE ANN. § 151.005(1) (W EST 2008). “Tangible personal

property” includes computer programs; TEX. TAX CODE ANN. § 151.009 (W EST 2008).,

and a “computer program” is comprised of a series of instructions that are coded for

3
 A “taxable item” means tangible personal property and taxable services. TEX. TAX CODE ANN. § 151.010
(W EST 2008).

                                                 11
acceptance or use by a computer system and that are designed to permit the computer

system to process data and provide results and information. Further, the sale or use of

a taxable item such as a computer program in electronic form instead of on physical

media does not alter the item’s taxable status. TEX. TAX CODE ANN. § 151.010 (W EST

2008).


         “Use” means “the exercise of a right or power incidental to the ownership of

tangible personal property . . . .” TEX. TAX CODE ANN. § 151.011(a) (W EST 2008). The

term “storage” means “[t]he keeping or retention of tangible personal property in Texas

for any purpose other than . . . transporting property out of state to a location outside

Texas for use solely outside of Texas.” 34 TEX. ADMIN. CODE § 3.346(a)(1)(A) (1990)

(emphasis added). See also TEX. TAX CODE ANN. § 151.011(f)(1) (WEST 2008). There is

a presumption that tangible personal property delivered, shipped or brought into Texas

is purchased for storage, use or consumption within Texas. TEX. TAX CODE ANN. §§

151.105(a) & 151.104(a) (W EST 2008). See 34 TEX. ADMIN. CODE § 3.346(e) (1990).

Further, the use tax is imposed at the same rate the sale tax would have been imposed

on a similar in-state purchase and is assessed based on the item’s sales price. TEX.

TAX CODE ANN. § 151.101(b) (W EST 2008).


         In sum, a computer program is tangible personal property subject to sales tax

when the computer program is transferred or possessed in electronic form or on

physical media for consideration; see TEX. TAX CODE ANN. §§ 151.005 & 151.051 (W EST

2008), or subject to use tax if the computer program is stored, used, and/or consumed

in this state. See TEX. TAX CODE ANN. § 151.102 (W EST 2008).



                                           12
      The evidence at trial established that Verizon entered into purchase orders with

vendors to purchase feature enhancements to enhance the performance of operating

software programs on its digital switches.       It subsequently contracted with vendors

through purchase orders to develop and deliver the feature enhancements made to its

specifications in return for lump sum payments. To create the feature enhancements,

vendors re-wrote some code in the existing operating software and created new code

that produced new and/or modified computer software programs or feature

enhancements.     The feature enhancements were incorporated into software loads

comprised of the new feature enhancement and the original operating software that was

already loaded in the switches. The software loads were first shipped to Richardson,

Texas, where they were tested to determine whether they met the contract’s

specifications. The software load also underwent a comparison test to assure that the

software load installed at the switches matched the master program. Thereafter, the

master program remained throughout the refund period on Verizon’s equipment in

Richardson, Texas, to troubleshoot or provide technical support for its network if

problems occurred involving the feature enhancement.


      Pursuant to the purchase agreements and invoices, a substantial amount of the

purchase price for the feature enhancements was paid either before or shortly after

testing at the Richardson Laboratory.       Contrary to Verizon's position, neither the

purchase agreements nor the purchase orders required Verizon’s vendors to be paid

only after the software load had undergone field testing or was installed in the individual

switches. Under the purchase agreement, installation was provided by the vendors at

no additional charge, i.e., installation was part of the lump sum consideration paid for


                                            13
the purchase of the feature enhancement. Thus, we find that the vendors sold their

feature enhancement, a computer program or tangible personal property, to Verizon in

Texas because Verizon took possession of the feature enhancement in Texas and

most, if not all, of the consideration was paid when the feature enhancement was

successfully tested and determined to be capable of carrying revenue producing or

switch traffic.


       Alternatively, even if we were to construe the sale of the feature enhancement as

occurring out of state, the feature enhancements were “used” in Texas because the

software programs were first shipped to the Richardson Laboratory, where they were

tested before being copied and installed on the digital switches.     Furthermore, the

programs remained on the Laboratory’s testbed to permit troubleshooting and technical

support.    See Comptroller of Public Accounts, Hearing No. 44,127, STAR Accession

No. 200511437H (July 8, 2005) (computer software program installed on claimant’s

server in Texas that remained on server during entire refund period constituted a “use”

and “storage” even though ultimate users would be located inside and outside Texas);

Comptroller of Public Accounts, Hearing No. 36,957, STAR Accession No. 9912159H

(December 20, 1999) (entire lump sum purchase price taxable where software tested in

Texas even though one of the programs was shipped out of state for installation and

use elsewhere). See also Comptroller of Public Accounts, Hearing No.32,619, STAR

Accession No. 9508H1366C05 (August 25, 1995) (where refrigeration units were tested

in Texas to see if they were working correctly before being shipped out of state,




                                           14
refrigeration units were used in Texas and subject to sales tax because they were

operated to test their performance in Texas). 4


       Verizon maintains there was no “sale” or “use” of the feature enhancements in

Texas before their installation in the digital switches because it was purchasing a

“service,” i.e., the feature enhancements were purchased as “maintenance” or

“remodeling” of existing software. The Comptroller defines “maintenance” as “[a]ll work

on operational and functioning tangible personal property necessary to sustain or

support safe, efficient, continuous operations, or to keep in good working order by

preventing the decline, failure, lapse, or deterioration of tangible personal property." 34

TEX. ADMIN. CODE § 3.292(a)(3) (2006). “Remodel” is defined as “[t]o modify the style,

shape, or form of tangible personal property belonging to another without causing a loss

of its identity or without causing the item to operate in a new and different manner.” Id.

at (a)(5). Under the Tax Code, the Comptroller has exclusive jurisdiction to interpret the

statute defining “taxable service.” See TEX. TAX CODE ANN. § 151.0101(b) (W EST 2008).


       Therefore, by statutory definition, computer program "maintenance" means

providing "error correction, improvements, or technical support.” See 34 TEX. ADMIN.

CODE § 3.308(b)(3) (1987).          Although Verizon asserts that portions of the invoices

represent charges for “error correction,” its witnesses could not testify to a single entry

in the invoices as being indicative of “error correction.” Therefore, the crux of Verizon’s

assertion is its contention that the term “improvement” includes any modification of a



4
 The     State  Tax     Automated       Research    (STAR)   System   may   be   accessed   at:
http://www.window.state.tx.us/taxinfo/sales/.


                                                   15
software program that has been installed in an operating system. We believe Verizon

reads too much into this simple word.


       Under section 3.292, “maintenance” means to “sustain or support safe, efficient,

continuous operations, or to keep in good working order by preventing the decline,

failure, lapse, or deterioration of tangible personal property.” 34 TEX. ADMIN. CODE §

3.292(a)(3) (2006) (emphasis added). The definitions in section 3.292 apply when used

in section 3.308, unless the context clearly indicates otherwise. 34 TEX. ADMIN. CODE §

3.292 (2006). Here, we find that the context does not appear otherwise. Thus, when

sections 3.292 and 3.308 are read together, computer program maintenance means

providing error correction, improvements, or technical support to sustain or support the

computer program’s efficient and continuous operations, or to keep the computer

program in good working order by preventing the decline, failure, lapse, or deterioration

of the computer program.        Viewed through this lens, then, it is apparent that any

maintenance performed to maintain the original software operating system at the

capacity at which it performed when initially loaded on the digital switches would be an

“improvement” or “make better” the original operating software system because it would

keep the original software system in good working order or sustain and support its

efficient, continuous operation. Accordingly, we hold that, so long as a change to a

software program does no more than keep the existing software operating system

functioning at its original capacity before the change and does not alter the operating

system’s specifications existing prior to the installation of the new software program, the

change is “maintenance.” However, if the new software program alters the operating

system’s original capacity for operating or its specifications existing prior to installation


                                             16
of the new software program, as it did here, then the installation of the new software

program brings a new functionality to the operating system and is subject to sale and

use tax provided the purchase satisfies the remaining statutory requirements.           See

generally Comptroller of Public Accounts, Hearing No. 35,100, STAR Accession No.

9707575H (July 3, 1997).


       In making our determination, we also look to the primary purpose or “essence” of

the contracts to determine whether the transaction between Verizon and its vendors

was a sale of tangible personal property rather than a service. See Combs v. Chevron,

Inc., 319 S.W.3d 836, 842 (Tex.App.—Austin 2010, writ denied); Sharp v. Direct

Resources of Print, Inc., 910 S.W.2d 535, 538 (Tex.App.—Austin 1995, pet. denied)

(“The established test for determining whether a transaction is subject to sales tax

involves a determination of the ultimate object or the essence of the transaction.”) “If

the real object of a mixed transaction is the purchase of equipment which is taxable,

and the service element is incident to that purchase, the entire transaction is taxable.”

Rylander v. San Antonio SMSA Ltd., P’ship, 11 S.W.3d 484, 487 (Tex.App.—Austin

2002, no pet.). “On the other hand, if the essence of the transaction is the purchase of

a nontaxable service, which incidentally includes the purchase of some other service or

equipment that is taxable, the entire transaction is nontaxable.” Id. (citations omitted).


       We think it indisputable that the essence of Verizon’s contracts to purchase

feature enhancements was the purchase of the computer software program itself, not

the attendant services such as engineering by a software development team,

installation, or maintenance.   The ultimate goal of the transactions was to produce a

master software load that could be loaded trouble-free at the vendor’s switches and

                                             17
then used to compare to the copies of the software loads that had been installed at the

switches.    The master software load then would be maintained indefinitely at the

Richardson Laboratory to troubleshoot any issues that might develop in the future. ”To

put it another way, [Verizon] would (if possible) have gladly used the [feature

enhancement] without purchasing the attendant services.” Chevron, Inc., 319 S.W.3d

at 842.     “On the other hand, the attendant services would have been useless to

[Verizon] without the ability to use the [feature enhancements] to [enhance the attributes

of the switches with a new functionality].” Id. See also Austin Engineering Co., Inc. v.

Combs, No. 03-10-00323-CV, 2011 Tex. App. LEXIS 6122, at *8-12 (Tex.App.—Austin

2011, no pet.) (mem. op.).


      Further, we find that any service or maintenance performed pursuant to the

purchase agreements in connection with the sale of the feature enhancements, whether

the service was supplied through installation of the software loads or cost-free

maintenance provided during the warranty period, was incidental and, as such, is

included in the sale price of the feature enhancement. See 34 TEX. ADMIN. CODE §

3.308(b)(1) (1987) (“A completed program includes any modification, installation, or

maintenance charges made in connection with the sale of the program.”) Verizon has

offered no evidence of any additional maintenance contracts or extended warranties

beyond the maintenance/warranty services performed by the vendors under the

purchase agreements. In this respect, Verizon failed to meet its burden of proof. See

Comptroller of Public Accounts, Hearing No. 43,240, STAR Accession No.

20055121526H (December 22, 2005) (to prove maintenance services were performed,




                                           18
petitioner should provide a copy of the maintenance service agreement or other

documentation).


      Verizon also asserts that the definition of “maintenance” in section 3.308 is broad

enough to cover “remodeling” because the definition includes “improvements.” Verizon

contends that when a computer programmer modifies software code, the programmer is

“remodeling” the software.    Verizon cites no legal authority under the Tax Code in

support of its assertion that the term “remodeling” applies to computer software.

Although section 3.308 refers to “remodeling,” it does so only in the context of computer

hardware. 34 TEX. ADMIN. CODE § 3.308(a)(4) (1987).         Under that portion of section

3.308 specifically addressing computer software, there is no mention of “remodeling.”

See 34 TEX. ADMIN. CODE § 3.308(b)(1)-(3) (1987). Neither is there any evidence of

record that the term “remodeling” is used in the computer industry to refer to computer

software development. In fact, Mark Nicholson, a member of Verizon’s technical staff

and one of its expert witnesses, testified that, before this suit, he never spoke with a

vendor about “remodeling” their software and stated “remodeling” was not a common

term in the industry. Thus, Verizon simply supplies no basis in law or in fact to apply the

term remodeling to computer software. Accordingly, we find that the term “remodeling”

in section 3.308 does not apply to computer software. See Meritor Automotive, Inc. v.

Ruan Leasing Co., 44 S.W.3d 86, 90 (Tex. 2001) (“Ordinarily when the Legislature has

used a term in one section of a statute and excluded it in another, we will not imply the

term where it has been excluded.”); Fireman’s Fund Co. Mutual Ins. Co. v. Hidi, 13

S.W.3d 767, 769 (Tex. 2000) (“When the Legislature has employed a term in one

section of a statute and excluded it in another, we presume that the Legislature had a


                                            19
reason for excluding it.”) However, even if, we were to determine that the term did

apply, and we do not, we would find that the record contains sufficient evidence in

support of the trial court’s finding that the feature enhancements caused the operating

software of the switches as it existed prior to the feature enhancements’ installation to

operate in a “new” or “different manner” to defeat Verizon’s legal and factual

insufficiency claims.


        Verizon also asserts that no “sale” occurred because the feature enhancements

were not “completed programs.” The Comptroller’s definition of a “computer program”

tracks the statutory definition but also requires that the series of instructions be sold as

a “completed program.” 34 TEX. ADMIN. CODE § 3.308(b)(1) (1987).                          A “completed

program” includes any modification, installation, 5 or maintenance charges made in

connection with the sale of a computer program and “the combining of several existing

program modules into a new program will be considered the sale of a completed

program.” Id. Because the software loads contained the original operating software as

well as the new feature enhancement, we find that the new feature enhancements were

sold as a complete program. The new software load operated as one application with

the original operating software. As such, Verizon successfully tested and installed a

complete operating system in the Laboratory containing the switches’ original operating

software combined with the feature enhancements. Nicholson further testified that a

“[c]omputer program and software are one and the same.                         Software load is one

application because it must operate as one.” Moreover, without the addition of the


5
 “Sales tax is due on the sale, lease or license of a computer program” and “[c]harges for the installation
of the program are taxable whether or not separately stated.” 34 TEX. ADMIN. CODE § 3.308(b)(2) (1987).


                                                    20
feature enhancement’s new functionality, the original operating software would have

operated as originally installed without the change purchased by Verizon through the

new software program.


       Verizon also contends the trial court erred in paragraph 6 of its Findings of Fact

by finding that “[Verizon] paid sales and use tax on the purchase of a single license to

use computer software described as feature enhancements to existing software” and

asserts that, because the original license purchased with the digital switches

encompassed any future feature enhancements, there was no transfer of tangible

personal property when the feature enhancements were purchased by Verizon. Having

found there was a “sale” of the feature enhancements by the vendors to Verizon during

the refund period, we need not consider whether a license was also a part of that sale.

See 34 TEX. ADMIN. CODE § 3.308(b)(2) (1987) (“Sales tax is due on the sale, lease or

license of a computer program.”          [Emphasis added]        Moreover, the purchase

agreements indicate that the single license purchased for the original operating software

on the switches also encompassed the new feature enhancements purchased during

the refund period.


       In sum, having reviewed the entire record, we find there is more than a scintilla of

evidence supporting the trial court’s judgment that the feature enhancements or

software loads purchased by Verizon during the refund period are taxable under the

sales tax and, alternatively, the use tax. We also find that the trial court’s judgment is

not so against the great weight and preponderance of the evidence as to be clearly

wrong and unjust. In doing so, we rely upon the trial court who observed the witnesses

first hand, judged their credibility and assigned the weight given to their testimony.

                                             21
III.   SALES TAX EXEMPTION


       Verizon asserts that it is entitled to a partial refund because the feature

enhancements were installed on digital switches outside of Texas. In support, Verizon

contends that the copies of the software loads are not subject to Texas sales tax

because the copies were not delivered to Verizon in Texas but installed on Verizon’s

digital switches outside of Texas, there was no separate charge to Verizon for the

Richardson Laboratory’s test software and the software loads were not “accepted” until

they were installed on each individual switch and working properly on Verizon’s

network.


       It is a long-standing rule that exemptions from taxation are subject to strict

construction because they place a greater burden on other tax-paying businesses and

individuals rather than placing the burden on all taxpayers equally. Southwestern Bell,

270 S.W.3d at 263 (citing Cordilera Ranch, Ltd. V. Kendall County Appraisal Dist., 136

S.W.3d 249, 253-54 (Tex.App.—San Antonio 2004, no pet.)). As such, exemptions

cannot be raised by implication; Bullock v. National Bancshares Corp., 584 S.W.2d 268,

272 (Tex. 1979), cert. denied, 444 U.S. 1016, 100 S.Ct. 667, 62 L.Ed.2d 645 (1980),

must affirmatively appear, and all doubts are resolved in favor of the taxing authority

and against the claimant.    Id.   The burden of proof is on the person claiming the

exemption to clearly show that it comes within the statutory exemption; id.; USA Waste

Services of Houston, Inc. v. Strayhorn, 150 S.W.3d 491, 495 (Tex.App.—Austin 2004,

no pet.), and, although we are not bound by the Comptroller’s interpretation, the

Comptroller’s administrative interpretation of ambiguous language in a revenue statute

is entitled to our respect and due weight. Southwestern Bell, 270 S.W.3d at 263.

                                           22
       Under the Tax Code, “[a] tax is imposed on each sale of a taxable item in this

state.” TEX. TAX CODE ANN. § 151.051(a) (W EST 2008). “Sale” means the transfer of title

or possession of tangible personal property when done or performed for consideration;

TEX. TAX CODE ANN. § 151.005(1) (WEST 2008), and the “sales price” means “the total

amount for which a taxable item is sold . . . valued in money.” § 151.007(a) (W EST

2008). The sales tax rate is 6.25 percent “of the sales price of the taxable item sold.”

TEX. TAX CODE ANN. § 151.051(b) (W EST 2008). Thus, per the Tax Code, we find that

the feature enhancements were sold for a lump sum price and the total lump sum price

paid for the feature enhancements is subject to the Texas sales tax.


       Verizon cites to no statutory provision of the Tax Code that permits the

apportionment of the sales price of the feature enhancements to digital switch locations

outside Texas. Rather, Verizon seeks an exemption for “[t]he sale of tangible personal

property that under the sales contract is shipped to a point outside this state . . . . ” TEX.

TAX CODE ANN. § 151.330(a) (W EST 2008).            Here, however, neither the purchase

agreements, the purchase orders, nor the invoices required the feature enhancements

to be shipped to switch locations outside of Texas.           Rather, under the purchase

agreements, delivery meant receipt of any system or software at the F.O.B. destination

specified in the purchase order. The purchase orders for the feature enhancements

specify that the software programs be shipped to Richardson, Texas and, in a number

of cases, indicate that the “[f]inal [d]estination” is Richardson, Texas. With but a few

exceptions, the invoices also indicate that the feature enhancements were first shipped

by vendors to the Richardson Laboratory and many of the invoices for DSC/Alcatel and




                                             23
Nortel contained the following notations:          “Install at Lab Richardson,” “SITE:

Richardson” and “Destination: Richardson, TX.”


       Neither does Verizon cite to any statutory provision related to the use tax that

permits apportionment.      As noted earlier, under the Tax Code, neither “use” nor

“storage” include the exercise of a right or power over tangible personal property for the

purpose of transporting the property outside the state for use solely outside the state.

TEX. TAX CODE ANN. § 151.011(f)(1) (W EST 2008). Here, however, the master software

loads were first shipped to Texas, tested in Texas for verification that the software met

contract specifications, comparison tested, and retained in Texas to troubleshoot or

resolve future problems, if any. As such, the master software loads were not used

solely outside Texas and the exemption is inapplicable. See Comptroller’s Decision No.

36,957, STAR Accession No. 9912159H (1999); Comptroller’s Decision No. 32,619,

STAR Accession No. 9508H1366C05 (1995).


       Under the purchase agreements, the testing equipment delivered to the

Richardson Laboratory by the vendors was additional consideration for the lump sum

price Verizon paid for the feature enhancements, i.e., Verizon’s payment to the vendor

was conditioned on software loads being tested and meeting Verizon’s specifications.

Further, as noted earlier, the purchase agreements provided for acceptance prior to

their installation on Verizon’s out-of-state switches and the invoices indicate that most, if

not all, of the purchase price for the software loads was paid before copies were made

of the master program and sent to the switches.             As we indicated earlier, the

“deliverable” sought by Verizon was a master computer program containing the existing

operating software on the switches and the new feature enhancement that could be

                                             24
copied and loaded onto the switches without the occurrence of any glitches in Verizon’s

nationwide network. Thereafter, the master program was maintained at the Laboratory

to troubleshoot issues, if any, and provide technical support.


       Verizon also relies on deposition excerpts of Jeffrey A. Saltzberg for the

proposition that acceptance occurred when the feature enhancements were loaded on

the out-of-state switches and successfully operated within Verizon’s network. Saltzberg

testified that he relied upon a statement by Verizon’s head at the switch Laboratory for

this information. The deposition excerpts do not explain where Saltzberg is employed,

nor his connection with Verizon’s refund claim. The Verizon employee relied upon by

Saltzberg for this information is not named, does not identify any specific time frame or

software load and gives no explanation regarding how he came by this information. As

such, ‘[i]n legal contemplation, there [is] no evidence to support [a finding that

acceptance occurred at the switches], even if th[is] inadmissible evidence be given

probative force.” Barstow v. County of Travis, 742 S.W.2d 495, 502 (Tex.App.—Austin

1987, writ denied) (where witness testified county maintained road although he had no

personal knowledge and his information came from a telephone conversation with a

county employee, there was no evidence county maintained road).             Accordingly,

Verizon’s first and second issues are overruled.


III.   INTEREST


       The trial court refunded Verizon $1,507,649.45 for taxes unlawfully assessed

during the refund period.     Verizon contends the trial court erred by not including

language in the judgment requiring the Comptroller to refund interest on delinquent tax


                                            25
assessed by the Comptroller during the refund period by an amount equal to interest on

$1,507,649.45.    Verizon cites provisions of Chapter 112 of the Tax Code wherein

taxpayers are permitted to bring taxpayer refund suits against the Comptroller for the

amount of the refund plus interest; TEX. TAX CODE ANN. §§ 112.151(a) & 112.002 (W EST

SUPP. 2012 and W EST 2008), but also cites a provision of Chapter 111 of the Tax Code

as authority for the request to refund the interest paid on the $1,507,649.45 while the

tax was considered delinquent by the Comptroller.            See TEX. TAX CODE ANN. §

111.104(a) (W EST 2008).


       Because this issue was not raised in Verizon’s Motion For Rehearing before the

Comptroller during its administrative claim for a refund under Chapter 111 of the Tax

Code, it is precluded from doing so here. See TEX. TAX CODE ANN. § 112.152(a) (W EST

2008) (“The grounds of error contained in the motion for rehearing are the only issues

that may be raised in a suit under this subchapter.”) See also Chevron, Inc., 319

S.W.3d at 844-45. That said, we also find that the trial court’s judgment conforms to

Chapter 112, Subchapter D, of the Tax Code; see TEX. TAX CODE ANN. §§ 112.151 &

112.155 (W EST SUPP. 2012 and W EST 2008), and the trial court committed no error.

Verizon’s third issue is overruled.


                                       CONCLUSION


       The trial court’s judgment is affirmed.


                                                  Patrick A. Pirtle
                                                      Justice




                                             26
