Challenging Texas Comptroller of Public Accounts Decisions

Often, business clients approach us inquiring about challenging final Texas sales tax rulings in Texas courts. In Texas, taxpayers that challenge decisions reached by the Comptroller of Public Accounts, the agency overseeing the collection and enforcement of Texas sales and use taxes, do so through a proceeding at the State Office of Administrative Hearings (SOAH). SOAH is an administrative court that handles matters for various Texas government agencies, including the Texas Comptroller of Public Accounts.

Challenges raised with SOAH generally allow for a hearing to take place, where an Administrative Law Judge (ALJ) reviews the claims of the taxpayer and the state agency at a hearing (which can be held in person or through written submission). If a taxpayer disagrees with the ruling reached by the ALJ, the taxpayer can request a rehearing. Once the process is concluded with SOAH, the Comptroller will reach a final conclusion and usually render some sort of assessment against the taxpayer.

At this point, the taxpayer may be able to challenge final Comptroller decisions in state court. Pursuant to the Texas Tax Code, taxpayers maybe able to file a refund or protest suit in Travis County District Court, and even request injunctive relief from the court to stop the Comptroller’s office from pursuing the tax amount. Often, pursuing remedies in state court and challenging Comptroller decisions require the taxpayer to pay the underlying amount and then pursue the action.

Challenging state agency decisions in state court is a complicated process, and you should proceed only after discussing it thoroughly with an attorney familiar with this process. At Bajaria Law, we handle sales tax related matters and assist with various sales tax-related legal issues.

House Bill 11 (HB 11) and Sales and Use Tax Audits

Article Submitted to NTBA by Favad Bajaria

Passed during the 80th Texas Legislative Session in 2007, House Bill 11 dramatically increased the Comptroller’s ability to identify, audit and, when appropriate, prosecute retailers who are collecting sales tax but not remitting the proper amount to the state.  HB 11 amended the Alcoholic Beverage Code and the Tax Code to require distributors and wholesalers who make sales of ale, beer, wine, cigarettes, cigars and tobacco products to Texas retailers to report those sales monthly to the Comptroller’s office. Those distributors and wholesalers are also required now to report that data electronically, unless inability to do so is shown.

HB 11 data, which has now been collected since January 2008, allows the Comptroller to compare the purchases that retailers have made of these products with the sales that retailers are required to report. Because both sets of data are largely received electronically, discrepancies can be more easily and rapidly identified. Rapid identification is essential so that the Comptroller auditors can begin their work to mitigate and recoup the revenue loss to the state. Since fiscal year 2009, the Comptroller’s office has identified more than $523 million due to the state.

In some cases, audit documentation may suggest that the taxpayer had criminal intent to evade taxes. If so, the case will be reviewed and evaluated by the Criminal Investigations Division for the possible filing of criminal charges.

A second HB 11, passed by the 2011 Legislature and effective as of Sept. 1, 2011, amended Chapter 151 of the Tax Code by requiring electronic reporting for all wholesale sales of alcoholic beverages. Holders of brewer’s permits, manufacturer’s licenses and package stores that hold a local distributor’s permit all must now file monthly […]

Successor Liability Issues When Acquiring a New Business

An important due diligence practice point for individuals and companies purchasing businesses in Texas, including assets, goodwill, or actual interest in the company is successor liability for state sales taxes.  Almost all states have successor liability statutes that impose certain pre-closing state tax liabilities on the buyer of a business.  The Texas version of this concept is found in Section 111.020 of the Texas Tax Code and reads as follows:

(a) If a person who is liable for the payment of an amount under this title sells the business or the stock of goods of the business or quits the business, the successor to the seller or the seller’s assignee shall withhold an amount of the purchase price sufficient to pay the amount due until the seller provides a receipt from the comptroller showing that the amount has been paid or a certificate stating that no amount is due.

(b) The purchaser of a business or stock of goods who fails to withhold an amount of the purchase price as required by this section is liable for the amount required to be withheld to the extent of the value of the purchase price. . . .

The impact of Section 111.020 is that if a buyer acquires a “business” it can become liable to the State of Texas for up to the full amount it pays for the business (i.e., for a total outlay of double the purchase price, once to the seller and once to the State). The assumption of debt is counted in the total price paid as well as the fair market value of any assets paid in-kind.

The determination of what constitutes a “business” is very fact specific, but the Comptroller’s Rule 3.7 (d) […]

Recommendations for Retail Businesses Facing a Sales Tax Audit by the Texas Comptroller of Public Accounts

Recently, more audits of retail businesses have taken place throughout Texas.  One of the most common problems small retain businesses that are going through an audit face, is lack of proper record keeping.  Although most  retail businesses should have proper documentation on its daily sales, some do not have adequate accounting source documents and procedures to withstand a Texas Comptroller audit of its sales and use taxes. Bajaria Law routinely assists clients with audits for businesses in the Houston, Dallas-Fort Worth, and Austin metropolitan areas, including suburbs such as Plano, Sugarland, Katy, Stafford, Richardson, Arlington, Irving, and Garland.

To prepare and come out ahead of an audit, a retail business should at least have the following procedures and accounting tools in place:

1.  Daily, weekly and monthly cash sales journal;
2.  Cash register use of z tapes and backup of daily z tapes either electronically or on paper;
3.  Detailed journal of purchases of beer, cigarettes, and other purchases from ite vendors;
4.  Matching bank deposit slips to daily sales journal;
5.  Correct monthly, quarterly and yearly reporting to Texas Comptroller;
6.  Proper accounting and remittance of sales taxes collected and remitted to the Texas Comptroller;
7.  Reconciled ledgers; and
8.  Proper financial reporting in place, including profit & loss statements, balance sheets and statement of
cash flow.

If you are facing a Texas Comptroller Audit of sales and use tax, or local tax, contact an experienced Texas Comptroller sales and use tax attorney at Bajaria Law Firm, PC.

Please visit the following links for additional information:

Texas Comptroller of Public Accounts

Bajaria Law Firm, PC Services