On March 19, 2020, the Texas Third Court of Appeals, issued its opinion in Hegar et al. v. J.D. Fields & Company, Inc., Tex. Ct. App. (3rd Dist.), No.03-19-00351-CV, 03/19/2020). The court ruled that a taxpayer’s sales tax protest is not barred by sovereign immunity.
The taxpayer, J.D. Fields & Company, Inc. (hereinafter “Taxpayer”) in this matter is a pipe and piling distributor headquartered in Houston. In 2008, the Texas Comptroller of Public Accounts (“Comptroller”) audited the Taxpayer for limited sales, excise, and use tax compliance for the period of April 1, 200 to May 31, 2008. The auditor discovered that Taxpayer was incorrectly collecting local tax. Taxpayer was basing the local tax on the location of where the sold pipes were being delivered rather than were the sale took place, as required by law. In September 2008, the auditor informed Taxpayer of the results of the audit and explained the issue regarding the incorrect collection of local tax. Taxpayer asked if this was issue that needed to be corrected immediately or could it could begin collection taxes based on the sale location on January 1, 2009. The auditor told Taxpayer that it would be fine to begin the change in the collection of local tax starting in 2009.
In 2012, the Comptroller again audited Taxpayer, for the period of June 1, 2008, to April 30, 2011. The audit found that Taxpayer had incorrectly collected local tax for the period of June 1, 2008, through December 31, 2008, resulting in a tax liability of $731,039.17 plus applicable interest. Taxpayer requested relief from the assessment on the grounds that it detrimentally relied on the previous auditor’s comments regarding when it needed to change how it collected local tax. The basis for the request for relief came from 34 Tex. Admin. Code §3.10(c) which is a part the Taxpayer Bill of Rights, and id. §3.5(b)(3)(K) which discusses waiver of penalty and interest. The Comptroller denied Taxpayer’s request for relief.
Taxpayer paid $860,055.76 (which was the tax liability, plus interest) under protest and sued to recover the full amount. See Tex. Tax Code §§112.051-.058 (Suit After Protest Payment). Taxpayer argued that the Comptroller erred by failing to grant relief under from 34 Tex. Admin. Code §§ 3.10 and 3.5. The Comptroller filed a motion for summary judgment arguing in relevant part, that sovereign immunity barred the claim. The district court denied the motion, and the Comptroller timely appealed the jurisdictional issue.
At the outset of its opinion, the court of appeals discussed the protest statute found in Tex. Tax Code §§112.051-.058. Id. §121.051(a)-(b) states that a taxpayer who intends to bring a protest suit contending that a tax of fee is unlawful or that the public official charged with the duty of collecting the tax or fee not legally demand or collect the tax or fee must both pay the amount claimed by the state and submit a written protest that states fully and in detail each reason for recovering payment. If a taxpayer fulfills both requirements, §112.052 waives sovereign immunity and allows the taxpayer to sue the Comptroller before the 91st day after the date of the protest payment. See Id. §112.052; In re Nestle USA, Inc., 359 S.W.3d 207, 212 (Tex. 2012). The Comptroller acknowledged that the Taxpayer complied with requirements of the protest statute but argued that the Texas Legislature had not waived immunity for the Taxpayer’s substantive claims.
The Comptroller’s appeal is based on three separate arguments. The first is that the Comptroller has sovereign immunity in this case based on equitable estoppel. The court of appeals did not find this to be a compelling argument. The court found that Taxpayer’s claim for refund was not based on equitable principles, instead the Taxpayer’s argument is that the Comptroller’s rules entitled it to a refund, and the Comptroller failed to follow its own rules. As such, the court denied the Comptroller’s sovereign immunity argument.
The Comptroller’s second argument is that it has immunity because the Texas Legislature has given the Comptroller “sole discretion” to settle tax claims. The Comptroller argued that this immunity absolutely bars a claim to enforce the provisions of 34 Tex. Admin. Code §§ 3.10 and 3.5. The court of appeals did not find that the Comptroller’s discretion is absolute. The court noted that the Comptroller in making its immunity argument cited to Tex. Tax Code §111.103(a) which states “[t]he [C]omptroller may settle a claim for a tax penalty or interest on a tax imposed by this title if the taxpayer exercised reasonable diligence to comply with the provisions of this title.” The court found that other sections of the Texas Tax Code, such as §171.006(e) includes language that gives the Comptroller complete discretion in making its decisions and such language is absent from §111.103(a). The court presumed that an omission of such language was intentional on the part of the Texas Legislature. From that, the court rejected the Comptroller’s “sole discretion” argument as it relates to §111.103(a).
The Comptroller’s last argument deals with the statutory directive found in Tex. Tax Code §112.054 states that “… a trial of the issues in a suit under this subchapter is de novo.” The Comptroller argues that this prevents courts from reviewing a settlement decision that no longer exists. The court of appeals also rejected this argument as well. The court held that even if a trial court is required to treat a dispute as if there has been no prior agency decision does not preclude the trial court from considering the underlying facts and determining if an agency violated its own rules.
The court of appeals concluded that Taxpayer’s lawsuit fits within the plain language of the waiver of immunity for claims “that the public official charged with the duty of collecting the tax or fee may not demand or collect the tax or fee.” SeeTex. Tax Code §112.051(a). The court of appeals overruled the Comptroller’s issues on appeal and affirmed the denial of the Comptroller’s plea to the jurisdiction.
Undoubtedly, the Comptroller will appeal this decision to the Texas Supreme Court. The potential impact on the Comptroller is too great for it not to appeal this decision. It will be curious to see if the Texas Supreme will hear this case and how it will rule.
For more on recent Texas tax developments, see Texas Comptroller Update Regarding Use Tax on Out-of-State Vehicle Purchases, Recent Texas Franchise Tax Case Raises Occupation Tax Exemption, The New “Wayfair” Sales Tax Laws in Texas, Your Sins Are Forgiven: The Texas Tax Amnesty Program and Voluntary Disclosure Agreements.
 See Tex. Tax Code §§321.108(e); .203(a).
 34 Tex. Admin. Code §3.10 is the Taxpayer Bill of Rights. §3.10(c) states that the Texas Comptroller will give relief to a taxpayer who follows erroneous advice given to the taxpayer by an agency employee.
 Specifically, 34 Tex. Admin. Code §3.5(b)(3)(K), states that the Texas Comptroller “will consider” factors including “reliance on advice provided by the Comptroller’s office pursuant to §3.10(c) of this title” when deciding to waive penalty and interest.
 The court of appeals presumed the omission was intention based on the Texas Supreme Court’s decision in TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011) which stated “[w]e presume that the Legislature chooses a statute’s language with care, including each word chosen for a purpose, while purposefully omitting words not chosen.”