Welcome back to another hard-hitting edition of Texas Tax Roundup. Let’s see what the Texas tax world weathered the scorching month that was June 2023:
L.L.C., Inc. and Fun Holdings, LLC v. Hegar, No. 13-21-00011-CV (Tex. App.—Corpus Christi June 8, 2023)—The Texas Thirteenth Court of Appeals affirmed the district court’s dismissal of a case brought by two sexually oriented businesses (the “Appellants”) challenging the fee of $5 per customer entry that is imposed on each sexually oriented business (the “SOB Fee”).
A “sexually oriented business” is defined as nightclub, bar, restaurant, or similar commercial enterprise that:
- provides for an audience of two or more individuals live nude entertainment or live nude performances; and
- authorizes on-premises consumption of alcoholic beverages.
The Appellants submitted protest payments of the SOB Fee. Under Texas Tax Code § 112.051 (Protest Payment Required), “[i]f a person who is required to pay a tax imposed by [Texas Tax Code Title 2] or collected by the comptroller under any law . . . contends that the tax is unlawful or that the public official charged with the duty of collecting the tax may not legally demand or collect the tax, the person shall pay the amount claimed by the state, and if the person intends to bring suit . . ., the person must submit with the payment a [written] protest.”
After making the protest payments, the Appellants brought suit in Travis County district court alleging that the Comptroller had unfairly assessed the SOB Fee against them but not similar business that serve alcohol and employ partially nude female employees, like certain sports bars and grills. The Appellants claimed that Texas Tax Code § 112.052 (Taxpayer Suit After Protest Payment) provided the basis for their right to bring suit against the state. That section provides:
(a) A person may bring suit against the state to recover a tax required to be paid to the state if the person has first paid the tax under protest . . . .
(b) A suit under this section must be brought before the 91st day after the date the protest payment was made, or the suit is barred.
(c) The state may bring a counterclaim in a suit brought under this section if the counterclaim relates to taxes imposed under the same statute and during the same period as the taxes that are the subject of the suit and if the counterclaim is filed not later than the 30th day before the date set for trial on the merits of the suit. The state is not required to make an assessment of the taxes subject to the counterclaim under any other statute, and the period of limitation applicable to an assessment of the taxes does not apply to a counterclaim brought under this subsection.
(d) A taxpayer shall produce contemporaneous records and supporting documentation appropriate to the tax for the transactions in question to substantiate and enable verification of a taxpayer’s claim relating to the amount of the tax, penalty, or interest that has been assessed or collected or will be refunded . . . .
The Comptroller filed a plea to the jurisdiction, requesting that the Comptroller dismiss the Appellants case. The Comptroller argued that the Appellants could not bring suit against the state under the protest payment statute because the Comptroller did not “audit, assess, make a jeopardy or deficiency determination, or issue a refund denial.” Instead, the Comptroller contended that the Appellants voluntarily submitted the SOB Fees. Thus, the Appellants could not bring suit because there was no “claim relating to the amount of the tax, penalty, or interest that has been assessed or collected or will be refunded,” as required under the protest suit statute. The district court granted the Comptroller’s plea to the jurisdiction and dismissed the case.
The Texas Thirteenth Court of Appeals affirmed the trial court’s granting of the Comptroller’s plea to the jurisdiction. In reaching this ruling, the Thirteenth Court of Appeals examined the opinion of the Texas Third Court of Appeals in 1st Global, Inc. v. Hegar, No. 03- 19-00740-CV (Tex. App.—Austin Oct. 29, 2021). In 1st Global, the Third Court of Appeals held that a district court did not have jurisdiction to hear a case brought by a taxpayer in connection with franchise tax that the taxpayer self-assessed and paid under protest with its regular annual franchise tax report. The Third Court of Appeals held that the phrase “amount claimed by the state” in Texas Tax Code § 112.051(a) “can reasonably be read to require some sort of affirmative claim by the state for a specific amount of franchise taxes.” Because the taxpayer self-assessed the franchise tax at issue, the protest payment statute did not give the district court jurisdiction to hear the case. However, the Third Court of Appeals noted in passing that “under other circumstances, a statute might, by itself, represent an ‘amount claimed by the state’ if, for example, the legislature enacted a law fixing the annual franchise tax for a named class of taxpayers at a specific amount.” The Third Court of Appeals cited as an example of such a statute the Texas Supreme Court’s observation in In re Nestle USA, Inc., 387 S.W.3d 610, 612 (Tex. 2012) that “Texas’ first franchise tax, enacted in 1893, was $10 annually for ‘each and every private domestic corporation heretofore chartered or that may be hereafter chartered under the laws of this State . . . .’”
In its primary opinion written by Justice Clarissa Silva, the Thirteenth Court of Appeals followed the Third Court of Appeals’ line of reasoning in 1st Global. Justice Silva also rejected the Appellants’ argument that the SOB Fee represented the sort of statutorily fixed tax or fee envisioned by the Third Court of Appeals as potentially being an “amount claimed by State.” Justice Silva observed that the example that Third Court of Appeals provided of a statutorily fixed tax involved a franchise tax of certain fixed amount ($10) imposed on a certain class of taxpayers over an annual period. The majority held that the amount of the SOB Fee was not “fixed” because it would vary based on the number of customers that the sexually oriented business over a given period.
In a concurring opinion, Chief Justice Dori Contreras stated that she agreed with the conclusion reflected in the Court’s primary opinion only because the case was transferred from the Third Court of Appeals, and 1st Global would be controlling precedent in that appellate district. However, Chief Justice Contreras stated that she would have held in favor of the Appellants if this were not a transfer case, noting that she would “conclude that the Comptroller, acting on behalf of the state, ‘claims’ that SOBs owe the SOB Fee ‘to be paid each year in the amount prescribed’ by the SOB Fee Statute, ‘and thus a taxable entity may file a protest letter’ with its SOB Fee ‘challenging any portion of that amount owed that it contends is unlawful.’” In her view, “[i]t is irrelevant that appellants—as opposed to the Comptroller—were the ones who performed the rudimentary arithmetic necessary to calculate the precise dollar figure of their total SOB Fee . . . .”
Sales and Use Tax / Boat Sales and Use Tax
34 Tex. Admin. Code §§ 3.297 (Carriers, Commercial Vessels, Locomotives and Rolling Stock, and Motor Vehicles), 3.741 (Taxes on Sales and Use of Boats and Boat Motors) [48 Tex. Reg. 3516-3522]—The Comptroller adopts with typographical changes the amendments to these rules that were discussed here back in May.
Notable Additions to the State Tax Automated Research System (“STAR”)
Mixed Beverage Taxes
Retailer Inventory Tracking System Data
Comptroller’s Decision Nos. 117,162, 117,163 (2023)—In this mixed beverage tax audit, the ALJ upheld assessments of mixed beverage sales tax and mixed beverage gross receipts tax that were based on data reported to the Comptroller via the Retailer Inventory Tracking System (“RITS”) when the taxpayer in question claimed that it had to discard its inventory and records for the first two years of the audit period due to mold and water contamination caused by Hurricane Harvey. The taxpayer argued that alcohol purchases for those years should be reduced to zero. However, the taxpayer didn’t have a list of discarded inventory or documentation regarding the extent of the damage caused by the storm. Under Texas Tax Code Section 151.462 (Reports by Brewers, Brewpubs, Wholesalers, and Distributors), certain alcohol manufacturers and distributors are required to report to the Comptroller their sales to alcohol retailers. The ALJ determined that in the absence of documentation, RITS data was the best information available for the taxpayer’s purchases for those years. The ALJ also rejected the taxpayer’s request for penalty waiver, noting that the taxpayer had failed to provide daily summaries for any period and had 20 delinquent returns or late payment during the 41-month audit period.
STAR Accession No. 202306004L (June 30, 2023)—In this memo from Tax Policy to Audit, the Comptroller explained the impact of the Texas Supreme Court’s decision in Hegar v. Health Care Service Corp. on insurance taxes. In Health Care Service Corp., the Texas Supreme Court had held that stop-loss insurance policies were subject to tax under Texas Insurance Code, Chapters 222 (Life, Health, and Accident Insurance Premium Tax) and 257 (Life, Health, and Accident Insurance). Extrapolating from that decision, the Comptroller determined that stop-loss insurance policies may be allocated in-state versus out-of-state if the allocation methodology is reasonable and supported by sufficient evidence. The Comptroller also will extend the single nonprofit trust exemption found in Texas Insurance Code §§ 222.002(c)(5) (Tax Imposed) and 257.003(b)(2) (Premiums and Considerations Subject to Taxation; Limit) to stop-loss policies.
Sales and Use Taxes
Debt Collection Services
Comptroller’s Decision No. 117,858 (2023)—The ALJ determined that a taxpayer that provided debt collection services was required to collect tax on such services. The taxpayer provided vehicle repossession services for lenders, automobile dealers, banks, and finance companies. The taxpayer apparently didn’t dispute that it provided debt collection services within the meaning of the Texas Tax Code. Instead, the taxpayer argued that it was not a debt collector but a limited purpose security enforcer within the meaning of the Fair Debt Collection Practices Act (FDCPA) as construed by the U.S. Supreme Court in Obduskey v. McCarthy & Hothus LLP, 139 S.Ct. 1029 (2019). However, the taxpayer did not provide support for its position that the definitions of the FDCPA applied to Texas tax cases or even that it was a limited purpose security enforcer rather than a debt collector.
Comptroller’s Decision No. 119,115 (2023)—The ALJ found that a company that acquired the business of a taxpayer for no consideration was liable for the sales and use taxes that the taxpayer owed.
The taxpayer had operated a bookstore and event center. The Comptroller assessed sales and taxes against the taxpayer for the periods April 2021 through February 2022 because the taxpayer had failed to file sales and use tax returns. The taxpayer didn’t request an administrative hearing challenging the assessments, and they became final. The taxpayer went out of business on February 22, 2022.
Individual A worked for the taxpayer, in which capacity she handled finances such as paying rent and reporting and remitting sales tax. In January 2022, Individual A and her husband, Individual B, formed the company in question. After the taxpayer went out of business, the company began operating at the location of the taxpayer’s business using the taxpayer’s business name and inventory. The company didn’t pay the taxpayer anything to acquire these assets. In April 2022, the company moved to another location, taking with it most of the taxpayer’s inventory.
Texas Tax Code § 111.024(a) (Liability in Fraudulent Transfers) provides that a person who acquires a business or the assets of a business from a taxpayer through a fraudulent transfer or a sham transaction is liable for any tax, penalty, and interest owed by the taxpayer. Texas Tax Code § 111.024(b) provides that a transfer of a business or the assets of a business is considered a fraudulent transfer or a sham transaction if the taxpayer made the transfer or undertook the transaction: (1) with intent to evade, hinder, delay, or prevent the collection of any tax, penalty, or interest owed under this title; or (2) without receiving a reasonably equivalent value in exchange for the business or business assets subject to the transfer or transaction.
The ALJ determined that the taxpayer’s acquisition of the business and/or business assets of taxpayer constituted a fraudulent transfer and that the company was liable for the sales and use taxes that the taxpayer owed.
Motor Vehicle Repair
Comptroller’s Decision No. 118,123 (2023)—The ALJ found that a taxpayer that operated a reupholstery business had tax collected not remitted and owed tax on purchases. The taxpayer had collected tax on reupholstery jobs and had apparently not remitted some or all of the tax, which the ALJ determined was tax collected not remitted. Some of these reupholstery jobs were performed on motor vehicles. The repair of motor vehicles is not a taxable service, and when performed on a lump sum basis, the repairperson must pay tax on the purchase of parts incorporated into the motor vehicle being repaired. Because the taxpayer didn’t pay tax on its purchases of these parts used in the reupholstery of motor vehicles, the ALJ upheld the assessment of tax on these purchases.
Comptroller’s Decision 118,625 (2023)—The ALJ determined that a taxpayer that was a professional baseball team that rented a city-owned stadium was liable for sales and use tax on certain purchases of taxable items that it claimed that it had made on behalf of the city. The ALJ noted that there was no dispute that the city was an exempt entity. While there is an exemption for purchases by a contractor of tangible personal property to be incorporated into tangible personal property pursuant to a contract with an exempt entity for the improvement of realty for the primary use and benefit of the exempt entity, the ALJ found that the taxpayer was not a contractor and some of its purchases apparently were for tangible personal property that was not incorporated into the realty.
The ALJ also found that the taxpayer didn’t show that its purchase of promotional items qualified for the resale exemption, because there was no evidence that the cost of the promotional items represented a specific amount or percentage of the ticket price to a game or that the promotional items were transferred to ticket holders as an integral part of the taxpayer’s amusement services.
Information Technology Services
Comptroller’s Decision No. 118,474 (2023)—The ALJ upheld an auditor’s assessment of sales or use tax on the entirety of the monthly lump-sum amount charged by a taxpayer for “managed IT consulting services,” which included “the cost of hardware, software, software maintenance and repair, and services such as remote and onsite help desk support, confirming and testing server backups, and connectivity monitoring.” The ALJ found that various of these items were subject to sales and use tax, including:
- The sale of hardware;
- The repair of hardware;
- The sale of software;
- The maintenance and repair of software performed by the same person that sold the software.
However, no documentation was provided to identify how the lump-sum amounts should “be apportioned to taxable and nontaxable items.” Thus, sales and use tax was imposed on the full lump-sum amounts.
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 For the fee, see Tex. Bus. & Com. Code § 102.052 (Fee Based on Admissions; Records).
 See Tex. Gov’t Code §§ 22.201(d) (Courts of Appeals Districts) (“The Third Court of Appeals District is composed of the counties of Bastrop, Bell, Blanco, Burnet, Caldwell, Coke, Comal, Concho, Fayette, Hays, Irion, Lampasas, Lee, Llano, McCulloch, Milam, Mills, Runnels, San Saba, Schleicher, Sterling, Tom Green, Travis, and Williamson.”), 22.220(a) (“Each court of appeals has appellate jurisdiction of all civil cases within its district of which the district courts or county courts have jurisdiction when the amount in controversy or the judgment rendered exceeds $250, exclusive of interest and costs.”).
 See Tex. Gov’t Code § 73.001 (Authority to Transfer) (“The supreme court may order cases transferred from one court of appeals to another at any time that, in the opinion of the supreme court, there is good cause for the transfer.”).
 See Tex. R. App. Proc. 41.3. (“In cases transferred by the Supreme Court from one court of appeals to another, the court of appeals to which the case is transferred must decide the case in accordance with the precedent of the transferor court under principles of stare decisis if the transferee court’s decision otherwise would have been inconsistent with the precedent of the transferor court. The court’s opinion may state whether the outcome would have been different had the transferee court not been required to decide the case in accordance with the transferor court’s precedent.”).
 Quoting 1st Global.
 See Tex. Tax Code §§ 151.0101(a)(5)(C) (“Taxable Services”), 151.060(b) (Property Consumed in Repair of Motor Vehicle); 34 Tex. Admin. Code § 3.290(g)(1), (h)(2) (Motor Vehicle Repair and Maintenance; Accessories and Equipment Added to Motor Vehicles; Moveable Specialized Equipment).
 See 34 Tex. Admin. Code § 3.291(a)(3) (a “contractor” is “[a]ny person who builds new improvements to residential or nonresidential real property, completes any part of an uncompleted new structure that is an improvement to residential or nonresidential real property, makes improvements to real property as part of periodic and scheduled maintenance of nonresidential real property, or repairs, restores, maintains, or remodels residential real property, and who, in making the improvement, incorporates tangible personal property into the real property that is improved.”).
 Texas Tax Code §§ 151.0101(a)(5) (“Taxable Services”), 151.010, 151.051, 151.101.
 Tex. Tax Code §§ 151.009, 151.010, 151.051, 151.101.
 Texas Tax Code §§ 151.0101(a)(5)(D), 151.010, 151.051, 151.101.