By Christopher Chang and Timothy Gustafson

A prepaid telephone card and long-distance service provider’s attempt to source phone card sales receipts outside of Texas was rebuffed by the Texas Comptroller because the taxpayer failed to carry its burden of proof. After initially sourcing 100% of its gross receipts to Texas and unsuccessfully claiming a cost-of-goods-sold deduction, the taxpayer, a Texas LLC, filed amended returns sourcing its phone card sales to the location of the out-of-state switch used to handle the customers’ calls. Comptroller Staff argued that the taxpayer’s gross receipts should be sourced based on the domicile of the calling card purchaser; however, because the taxpayer had not provided evidence of where the purchasers were domiciled, Staff argued the assessments should not be adjusted. Sidestepping the issue of the proper sourcing methodology for the services involved, the Comptroller held that the taxpayer did not satisfy its burden to show, by a preponderance of the evidence, that the assessments were erroneous. The “gaps” in the taxpayer’s evidence included a failure to explain the nature of various maintenance and connection fees and how such fees should be sourced; a failure to explain or define terms used by the taxpayer on its summary schedules; and a failure to explain the disparity of revenues sourced to Texas across the taxpayer’s various revenue streams. Texas Comptroller Decision No. 105,737 (Dec. 18, 2012).