Texas taxpayers who disagree with a state tax assessment or are denied a refund could find it easier to take their arguments to court under measures advocated by Comptroller Glenn Hegar and approved by the 87th Legislature, which also gave taxpayers more time to produce certain documents in connection with an audit.
The tax-appeal law, a priority of the Comptroller’s office, takes aim at “pay-to-play” rules that have required businesses and individuals to pay disputed tax bills before challenging them in court. If taxpayers prevailed in their tax disputes, their taxes were refunded.
Pay-to-play requirements have been challenged by taxpayers who call them an unconstitutional barrier to the court system. In 1994, the Texas Supreme Court said requiring taxpayers to pay a disputed tax bill before going to court violated the Texas Constitution’s open courts requirement. One year later, the Legislature reinstated the “pay-to-play” rule but created a path to court access and judicial review of a disputed tax assessment for those who proved they could not afford to pay.
The Texas Supreme Court in 2020 upheld the part of the law (PDF) allowing access to the courts for taxpayers who can’t pay the disputed tax, but it didn’t rule whether comparable access should be granted to taxpayers who do not pay the disputed tax and do not apply for — and might not qualify for — the inability-to-pay exception.
House Bill 2080 addresses this issue, potentially saving time and sparing taxpayers the need to pay upfront before heading to court.
Easing Court Access
Under HB 2080, authored by Rep. Ben Leman and sponsored in the Senate by Sen. Joan Huffman, taxpayers who disagree with a tax assessment from the Comptroller’s office — and go through the State Office of Administrative Hearings (SOAH) process — will be able to go to court without first paying the disputed part of their tax bills.
The administrative hearings process most often allows the Comptroller’s office and taxpayers to reach a settlement. But if taxpayers want to avoid going through that process, HB 2080 preserves their ability to bypass it and go straight to court by paying disputed taxes under protest.
“I appreciate Comptroller Hegar and his office for raising this issue to me and for working with us to ensure the interests of taxpayers are protected,” says Leman.
“Access to our justice system is one of the most fundamental rights we have as citizens. Taxpayers should not be forced to pay upfront, or claim to be indigent, on possible assessments owed prior to having their day in court,” Leman says. “House Bill 2080 replaces the pay-to-play process with a process that protects taxpayers’ access to the court so their voices may be better represented.”
Huffman says, “The pay-to-play system that was in place before the passage of HB 2080 was another piece of red tape in the way of fair and transparent tax policy in our state. It is my hope that this bill is another step in the right direction for providing tax relief to Texans.”
The Comptroller’s office also worked with lawmakers and stakeholders on two additional measures regarding tax appeals and procedures.
Senate Bill 903, authored by Sen. Charles Perry and sponsored in the House by Rep. Scott Sanford, allows taxpayers who are denied a state tax refund to avoid the administrative hearings process and go to court. SB 903 does permit the Comptroller’s office to require a conference with a taxpayer to learn if a dispute can be resolved or narrowed before the court case is filed.
“By giving taxpayers the option to bypass SOAH and file suit directly with their district court, we remove the unnecessary and expensive barriers that make it more difficult for Texans to resolve their tax case,” says Sanford.
Deadline Extension
SB 296, authored by Perry and sponsored in the House by Rep. Angie Chen Button, extends the deadline for audited sellers to provide resale or exemption certificates showing they acted properly in not collecting the sales and use tax on otherwise taxable items. SB 296 lengthens the time from 60 to 90 days and allows the Comptroller’s office to agree to even more time.
The measure “provides more flexibility to taxpayers,” Button says. “The Comptroller’s office can now work with taxpayers in a better way to make sure they are not taxed on transactions that are tax exempt by ensuring a reasonable amount of time to claim qualifying deductions.”
“The 87th Legislature produced the most pro-business taxpayer reforms since I have been in the Legislature,” says Perry, a lawmaker for more than a decade. “SB 903 will give taxpayers the ability to bypass the State Office of Administrative Hearings process and file a case directly in district court, which creates efficiencies that save taxpayers time and money. SB 296 provides greater flexibility for taxpayers who are involved with sales and use tax audits, giving them more time to produce resale and exemption certificates.”
Gov. Greg Abbott signed the bills in June. SB 296 took effect immediately; HB 2080 and SB 903 take effect Sept. 1.
“We work to collect every dollar that is due to the state — and not one penny more — because we want a fair system for taxpayers whose hard-earned money pays for services and programs for all Texans,” says Comptroller Hegar.
“These new, taxpayer-friendly laws preserve our valuable administrative hearings process, which allows most disputes to be settled before a formal hearing even takes place,” Hegar says. “If taxpayers still disagree with a tax decision despite our best efforts to resolve differences, they will find it easier to take their case to court.”
Building on Improvements
Hegar has worked to improve tax-collection and dispute processes since taking office in 2015. The Council on State Taxation in a December 2019 (PDF) report raised Texas’ score on tax appeals and procedural requirements from a C+ to a B, noting the state made “a concerted effort to improve transparency in its tax system over several years” and doubled the number of days (to 60) for taxpayers to protest a determination that they owe money.
Resolving Cases
In the first 10 months of fiscal 2021, the Comptroller’s office audited nearly 11,500 taxpayers and handled more than 1,500 refund requests (Exhibit 1). Those who disagree with a tax assessment or are denied a refund may request an administrative hearing. The Comptroller’s office continues to try to resolve taxpayer issues even after a hearing is requested.
Exhibit 1: Audits and Refunds, Sept. 1, 2020-June 30, 2021
COMPLETED AUDITS: 11,497
REFUNDS REQUESTED (NUMBER AND TOTAL AMOUNT): 1,573
Source: Texas Comptroller of Public Accounts
Cases that cannot be settled or otherwise resolved at the Comptroller’s office go to SOAH. There, an administrative law judge conducts a hearing and issues a proposal for decision that goes back to the Comptroller for a final determination. The majority of cases decided by SOAH involve sales taxes (the largest source of state funding for the state budget), followed by mixed-beverage taxes and franchise taxes (Exhibit 2).
Exhibit 2: TAX CASES BY CATEGORY
From 2017-2020, most cases decided at SOAH involved the sales and use tax, followed by mixed beverage taxes (gross receipts and sales combined) and the franchise tax.
Tax Type
Number of Hearings/th>
Percentage
Sales And Use Tax
621
49.32%
Franchise Tax
188
14.93%
Mixed Beverage Gross Receipts
159
12.63%
Mixed Beverage Sales Tax
102
8.10%
Fee for Sexually Oriented Business
99
7.86%
International Fuel Tax Agreement
21
1.67%
Direct Payment
20
1.59%
Motor Vehicle Sales-Tax Assessor-Collector
19
1.51%
Diesel Fuel Tax
7
0.56%
Other Taxes
23
1.83%
Grand Total
1,259
100.00%
Source: Texas Comptroller of Public Accounts
Relatively few cases require a formal hearing at SOAH. From 2017 to 2020, the Comptroller’s office received a total of 11,109 hearing requests. About two-thirds were resolved by agreement with the auditor assigned to review the hearings request without the need to refer them on to the Administrative Hearings Section (AHS) of the Comptroller’s office. The remaining 3,637 were sent to AHS (Exhibit 3) for further attempts to resolve by agreement or to prepare the case for docketing at SOAH.
Exhibit 3: HEARING REQUESTS
The Audit Division of the Comptroller’s office received 11,109 hearing requests from 2017-2020. The division resolved 67 percent, sending about a third to the Administrative Hearings Section.
Year
Hearing Requests Received by Audit
Requests Sent to Administrative Hearings Section
2017
2,899
1,079 (37.22%)
2018
2,959
960 (32.44%)
2019
3,000
840 (28.00%)
2020
2,251
758 (33.67%)
Totals
11,109
3,637 (32.74%)
Source: Texas Comptroller of Public Accounts
Of 4,544 cases resolved in the hearings process from 2017-2020 — including cases already on the docket — nearly 56 percent were settled, and 16 percent were dismissed. Just 1,299 cases were decided by SOAH and went to the Comptroller for a final determination (Exhibit 4). That’s 29 percent of cases addressed by AHS and just 12 percent of the hearings requested in the four-year period.
Exhibit 4: HEARINGS PROCESS RESOLUTION
A majority of cases that go to the Administrative Hearings Section of the Comptroller's office are resolved before a formal hearing occurs at SOAH.*
Agreements Reached Before Formal SOAH Hearing
Motions to Dismiss Cases
Comptroller's Decisions on SOAH Proposals for Decision
657 46.33%
290 20.45%
471 33.22%
843 60.73%
173 12.46%
372 26.80%
564 60.65%
141 15.16%
225 24.19%
456 56.44%
121 14.98%
231 28.59%
2,520 55.46%
725 15.96%
1,299 28.59%
*Case total (4,544) includes hearing requests made from 2017-2020 plus previous hearing requests resolved during this period.
Source: Texas Comptroller of Public Accounts
When a case goes to SOAH, the Comptroller’s office often prevails. A report (PDF) by the Texas Taxpayers and Research Association (TTARA) noted the agency won in nearly 85 percent of cases from 2007 through Dec. 1, 2020; in another 10 percent, taxpayers got partial relief.
That’s not surprising, given the thorough review of cases and resolution of claims prior to referral to SOAH, says Karey Barton, associate deputy comptroller for tax at the Comptroller’s office.
“Our prehearings process and agency proceedings almost always identify circumstances in which the taxpayer correctly raises an issue or provides additional documentation, and we’re able to resolve those cases and reach an agreement with the taxpayer,” Barton says. “Even when an issue remains disputed, we often are able to agree with taxpayers on adjustments such as penalty waivers, payment plans or other reasonable terms.”
For the cases that went to court between 2017 and 2020, 168 lawsuits were filed after an administrative hearing. Since 2015, Texas appeals courts have decided 33 appeals by taxpayers involving substantive tax issues that went through SOAH; of those 33 appeals, 25 were decided in favor of the Comptroller’s office. Two either are pending at the Texas Supreme Court or will be the subject of a Comptroller’s office petition for review.
Dale Craymer, TTARA president, says the new laws will benefit taxpayers whether they work through the agency process or go to court.
“This session, thanks to Comptroller Hegar’s initiative, lawmakers cut back a bunch of taxpayer red tape,” Craymer says. “Businesses will have more time to work with the agency to produce certain documents, and for those few disputes that can’t be resolved directly, taxpayers have a more streamlined path to an independent judicial hearing.” FN
Learn more about the Texas Comptroller’s Audit Division, including a step-by-step explanation of the audit process, tips on how to respond to an audit and how to challenge an audit’s findings.
