            TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN



                                        NO. 03-02-00476-CV



                               Perry Homes, A Joint Venture , Appellant

                                                   v.

  Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, and Greg
                Abbott, Attorney General for the State of Texas, Appellees




        FROM THE DISTRICT COURT OF TRAVIS COUNTY, 261ST JUDICIAL DISTRICT
           NO. 98-14226, HONORABLE MARGARET A. COOPER, JUDGE PRESIDING



                                             OPINION


                Appellant Perry Homes, A Joint Venture (APerry Homes@), appeals from a summary

judgment in favor of appellees Carole Keeton Strayhorn, Comptroller of Public Accounts, and Greg

Abbott, Attorney General, 1 upholding the Comptroller=s sales-tax assessment levied against Perry Homes

for Areal property services@ Perry Homes purchased from various independent contractors. We will affirm

the district-court judgment.


        1
          This appeal was originally filed in the name of the predecessor to the present attorney general.
We have substituted the holder of that office as the correct party to this proceeding. See Tex. R. App. P.
7.2(a). The Comptroller and the Attorney General are statutory defendants in tax- protest suits. See Tex.
Tax Code Ann. ' 112.151(b) (West 2002). Because their interests do not diverge in this case, for
convenience we will refer to them collectively as the AComptroller.@
                                           BACKGROUND

                In this taxpayer suit, Perry Homes, after an audit and under protest, paid the Comptroller

$550,987.17 in sales tax and interest and now seeks a refund. See Tex. Tax Code Ann. '' 112.051, .052

(West 2002). Perry Homes, a residential home builder, contracted with various independent contractors

for taxable services related to Perry Homes= construction activities. The Comptroller found that sales tax

had not been paid by the sellers of the services Perry Homes had purchased during the October 1, 1991

through September 30, 1993 audit period. Perry Homes alleges that the lump-sum purchase prices it paid

the independent contractors included sales tax and, during the Comptroller=s audit, submitted contracts and

letters from the independent contractors to substantiate this allegation. The Comptroller, however, assessed

sales tax on the services. Perry Homes paid the assessment under protest and brought this action against

the Comptroller, seeking a refund. Both parties moved for summary judgment, and the district court

granted the Comptroller=s motion and denied that of Perry Homes. Perry Homes appeals.


                                             DISCUSSION

                When both sides move for summary judgment and the trial court grants one motion and

denies the other, we review the summary-judgment evidence presented by both sides and determine all

questions presented. Commissioners Court v. Agan, 940 S.W.2d 77, 81 (Tex. 1997). If we find error,

we must render the judgment the trial court should have rendered. See id.

                By its only issue on appeal, Perry Homes argues that, as a matter of law, the purchase

prices charged by the independent contractors included sales tax and, by paying the contracted amounts,

Perry Homes discharged its sales-tax obligation. As a subpart of its argument, Perry Homes contests the

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Comptroller=s interpretation of former rule 3.286(d)(3) (the ARule@). See 17 Tex. Reg. 463 (1992),

adopted 17 Tex. Reg. 1744 (1992) (amended 1996) (current version at 34 Tex. Admin. Code '

3.286(d)(3) (2003) (Comptroller of Public Accounts, Tax Administration)) (AFormer Rule 3.286(d)(3)@).

Perry Homes does not argue that the tax code or the Rule is ambiguous or unreasonable.

                The code provides:


        The primary responsibility for collection of sales tax lies with the seller:

        (a) [A] seller who makes a sale subject to the sales tax imposed by this chapter shall add
            the amount of the tax to the sales price, and when the amount of the tax is added:

             (1) it becomes a part of the sales price;

             (2) it is a debt of the purchaser to the seller until paid; and

             (3) if unpaid, it is recoverable at law in the same manner as the original sales price.


Tex. Tax Code Ann. ' 151.052(a).2 However, the Comptroller has the authority to recover the tax due on

a taxable transaction from either the seller or purchaser. Id. ' 151.515 (West 2002) (AThis chapter does

not prohibit the comptroller from proceeding against a consumer for an amount of tax that the consumer

should have paid but failed to pay.@); Bullock v. Foley Bros. Dry Goods, Corp., 802 S.W.2d 835, 838

(Tex. App.CAustin 1990, writ denied) (A[T]he tax may be collected [by the Comptroller] from the seller or

purchaser or both until the tax has been paid . . . .@). Augmenting the tax code with a more specific


        2
           The statute in effect during the audit period is substantially the same as the current provision.
Compare Act of May 31, 1981, 67th Leg., R.S., ch. 389, ' 151.052, 1981 Tex. Gen. Laws 1490, 1550,
with Tex. Tax Code Ann. ' 151.052 (West 2002). For convenience, we will cite to the current tax code
provision.

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requirement, the Rule requires: AThe amount of the sales tax must be separately stated on the bill, contract,

or invoice to the customer or there must be a written statement to the customer that the stated price includes

sales tax.@ Former Rule 3.286(d)(3).

                 If the independent contractors from whom Perry Homes purchased services did not: (1)

add sales tax to the purchase price and (2) either Aseparately state@ on the bill, contract, or invoice that sales

tax was included in the stated price or provide a written statement that the stated price included tax, Perry

Homes may not prevail.3 Here, because no invoice or bill specifically states that sales tax was included in

the lump-sum prices, the dispute is whether the language of the contracts is sufficient to satisfy the Rule and

whether the letters submitted by the independent contractors constituted written statements that the stated

price included sales tax. We hold that neither the contracts nor the letters satisfy either the tax code or the

Rule.

                 The contracts under which Perry Homes and the independent contractors operated each

contain a paragraph specifically entitled ATAXES,@ which provides:


        The Independent Contractor agrees to accept full responsibility for, and agrees to indemnify
        and hold [Perry Homes] harmless from, the payment of any and all taxes that may be
        lawfully due from the Independent Contractor to any governmental entity including, but not
        limited to, income taxes, FICA, or other withholding taxes, franchise tax, sales tax, etc.


        3
           The Rule=s current version presumes that the total amount shown does not include sales tax. The
seller may overcome the presumption by using the seller=s records to show that sales tax was included in the
sales price. 34 Tex. Admin. Code ' 3.286(d)(3) (2003).




                                                        4
This clause, asserts Perry Homes, expressly states that the price Perry Homes paid to the independent

contractors included sales tax, and therefore Perry Homes should not be held liable for the assessment.

Additionally, Perry Homes obtained letters from the independent contractors, stating:


        Per our agreement with you, as an independent subcontractor, all of your invoices or work
        orders submitted to us included the cost of all labor and materials necessary to meet the
        specifications of Perry Homes, a Joint Venture. In addition, your fees include an amount
        sufficient to meet any and all tax obligations that are lawfully owed by you to any
        government entity as a result of the work being performed.

        Documentation provided to Perry Homes, for payment of services rendered at any time,
        may or may not separate the tax portion of your charges. In the event that the tax portion
        of your charges is not separated, it is expressly implied that you have included the required
        sales taxes in the cost of labor and materials charged to us.


Perry Homes does not dispute the applicability of the tax code and the Rule. Rather, Perry Homes argues

that the contracts and letters indicate that sales tax was included in the purchase price.

                Initially, we observe that the contract clause is an indemnification clause, not a clause

indicating that the purchase price included sales tax. The clause does not state that the purchase price

Aincludes@ sales tax. At most, the clause assigns to the independent contractors the responsibility for

paying the sales tax, as already required by the tax code. See Tex. Tax Code Ann. ' 151.052(a).

                Second, the letters submitted by the independent contractors are similarly worded and are

also examples of an indemnity clause. The letters were drafted by Perry Homes and sent to each

independent contractor. At the bottom of the letters, spaces were provided for the independent

contractors= signatures. The language A[d]ocumentation . . . for payment . . . may or may not separate the


                                                     5
tax portion,@ and Aexpressly implied that you have included the required sales tax@ falls short of the

Comptroller=s requirement that the agreement contain unconditional and explicit language. We hold that

both the contract provision and the letters signed by the independent contractors are insufficient to

overcome the presumption that the purchase price did not include sales tax.

                 Finally, Perry Homes argues that the Comptroller=s interpretation of the Rule is inconsistent

with tax-code section 151.052(a) and that the interpretation impermissibly expands the language of the

statute. Perry Homes contends that the tax code only requires Aan agreement by which the parties express

their intent that the consideration includes the sales tax due,@ and that the word Aincluded@ is not required;

therefore the letters satisfy both the statute and the Rule. Stated another way, although Perry Homes does

not contest the validity of the Rule itself, it asserts that the Comptroller=s interpretation is unduly restrictive.

                 Administrative rules are ordinarily construed in the same way as statutes, and an agency=s

interpretation of its own rule is entitled to deference by the courts. Public Util. Comm=n v. Gulf States

Utils. Co., 809 S.W.2d 201, 207 (Tex. 1991); Tennessee Gas Pipeline Co. v. Rylander, 80 S.W.3d

200, 203 (Tex. App.CAustin 2002, pet. denied). Our review is limited to determining whether the

administrative interpretation Ais plainly erroneous or inconsistent with the regulation.@ Gulf States, 809

S.W.2d at 207. We will defer to an agency=s interpretation as long as it is reasonable and does not

contradict the plain meaning of the statute. See Miami ISD v. Moses, 989 S.W.2d 871, 875 (Tex.

App.CAustin 1999, pet. denied). If an agency has Afailed to follow the clear, unambiguous language of its

own regulation, we must reverse its action as arbitrary and capricious.@ Gulf States, 809 S.W.2d at 205.




                                                         6
                 In our interpretation of the Rule, we need not determine whether Perry Homes=

interpretation of the Rule is reasonable; we need only determine whether the Rule can reasonably be read in

the manner the Comptroller has chosen to interpret it. See Tennessee Gas Pipeline, 80 S.W.3d at 206;

Quimby v. Texas Dep=t of Transp., 10 S.W.3d 778, 782 (Tex. App.CAustin 2000, pet. denied) (nothing

in rule that would preclude agency=s interpretation; rule=s requirement reasonable). In making that

determination, we cannot consider the Rule in isolation, but must consider how it operates in relation to the

section of the tax code to which it pertains. See Sharp v. House of Lloyd, Inc., 815 S.W.2d 245, 249

(Tex. 1991).

                 We disagree with Perry Homes and hold that the Comptroller=s interpretation of the Rule is

consistent with the tax code. Compare Tex. Tax Code Ann. ' 151.052(a), with Former Rule 3.286(d)(3).

After considering the structure of the Rule as a whole and its function in implementing the statute, we find

the Comptroller=s interpretation consistent with the language of the Rule and, thus, not an arbitrary or

capricious application of that Rule. The Comptroller is authorized to adopt rules that clarify and implement

the legislation. See Tex. Tax Code Ann. ' 151.021 (West 2002); Texas Dep=t of Human Servs. v.

Christian Care Ctrs., Inc., 826 S.W.2d 715, 720 (Tex. App.CAustin 1992, writ denied) (under general

grant of authority, agency has all implied authority reasonably necessary to accomplish delegated purpose).

The Rule and the Comptroller=s interpretation of it provide no more than a bright-line test for buyers,

sellers, and auditors to follow. Bullock v. Hewlett-Packard Co., 628 S.W.2d 754, 756 (Tex. 1982)

(administrative convenience is proper justification for rule). The Rule requires a clear delineation of sales tax

that Amust be separately stated@ on a bill or an unequivocal, written statement that sales tax is included.


                                                       7
Former Rule 3.286(d)(3). Perry Homes failed to provide either. The requirement is neither unreasonable

nor oppressive. We do not believe that the Comptroller should be required to engage in a subjective

analysis of each bill or contract to determine the parties= intent with regard to the payment of taxes.

Therefore, we overrule Perry Homes= only issue on appeal.


                                          CONCLUSION

               We affirm the district-court judgment.




                                               __________________________________________

                                               Lee Yeakel, Justice

Before Justices Kidd, Yeakel and Patterson

Affirmed

Filed: May 22, 2003




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