What Can the State of Texas Do to Collect State Taxes?

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TL Fahring focuses on helping individuals and businesses with a wide variety of matters involving state, federal, and international taxation. He has represented clients in all stages of federal and state tax disputes, including audits, administrative appeals, litigation, and collection matters. Mr. Fahring also has used his tax knowledge to assist clients in planning complex domestic and international transactions, including advising as to potential reporting and withholding requirements.

Mr. Fahring received his J.D. from the University of Texas School of Law, where he graduated with high honors and was inducted into the Order of the Coif and Chancellors honors societies. After clerking for a year at the Texas Eleventh Court of Appeals, he attended New York University School of Law, where he received an LL.M. (Master of Laws) in Taxation and served as a student editor on the Tax Law Review.

What Can the State of Texas Do to Collect State Taxes?

So, the Texas Comptroller of Public Accounts (“Comptroller”) says you owe state tax.  If the deficiency determination hasn’t yet become final, you still may be able to challenge the underlying tax liability (for more on that, read this post).  But say you don’t do that (or say the say the Comptroller has made a jeopardy determination and can begin collection action immediately)?  What happens then?

At that point, the Comptroller, acting independently or with the Attorney General of the State of Texas (“Attorney General”), may try to collect the taxes claimed to be due.  Here are some of the tools they have at their disposal.[1]

State Tax Liens

One item in the Comptroller’s arsenal is the state tax lien.  Automatically arising when a taxpayer owes tax, penalties, or interest to the state, a state tax lien attaches to all of the taxpayer’s property that is subject to execution.[2]  But, it only becomes effective against a bona fide purchaser once a notice of state tax lien is filed with the county clerk in the appropriate county.[3]

A notice of state tax lien must include the name of the taxpayer, the type of tax owed, each period for which the tax is claimed, the tax due for each period (excluding penalties, interest, and other costs), and any other relevant information.[4]  The Texas Tax Code provides that a single notice of state tax lien “is sufficient to cover all taxes administered by the Comptroller, including penalty and interest computed by reference to the amount of tax, that may have accrued before or after the filing of the notice.”[5]  Meaning that the notice may cover taxes that the notice doesn’t even mention.

State tax liens remain in effect until the taxpayer fully pays the taxes, interests, penalties, and fees that the taxpayer owes the state.[6]  Nevertheless, the Comptroller and Attorney General may agree to a partial release of a state tax lien on specific real or personal property if the taxpayer pays the Comptroller the “reasonable cash market value” of the property (such “reasonable cash market value” being determined as prescribed by the Comptroller).[7]

In order to challenge the validity of a state tax lien, a taxpayer (or any other person) must file suit in Travis County district court within 10 years of the date when the lien is filed.[8]  However, this limitations period won’t apply only if a taxpayer provides “substantive evidence” that the Comptroller “considers satisfactory” that rebuts the presumption that the taxpayer received proper notice of the taxpayer’s tax liability (so probably almost never).[9]  As result of a suit challenging the validity of a state tax, the lien will either be 1) perpetuated and foreclosed or 2) nullified.[10]

Levies

Another option for the Comptroller is a levy.  The Comptroller has three years after a payment becomes delinquent or after the last filing of a notice of state tax lien to issue a notice of the taxpayer’s alleged deficiency to any person who 1) possesses or controls a financial account or other intangible or personal property belonging to the taxpayer or 2) owes a debt to the taxpayer.[11]  This notice must state the amount of taxes, penalties, and interest that the taxpayer owes, plus the amount of penalties and interest that will accrue for a period of up to 30 days.[12]  In the case of certain financial accounts, the notice is effective only up to the amount stated on the notice.[13]

The recipient of the notice has 20 days to report to the Comptroller each of the taxpayer’s assets within the recipient’s possession or control and any debts that the recipient owes the taxpayer.[14]  In addition, the recipient is prohibited from transferring or disposing of any such assets or debts for a period of 60 days without the Comptroller’s consent.[15] The Comptroller then can levy upon the assets or debts by delivering a notice of levy during this 60-day period.[16]  Upon receiving a notice of levy, the recipient must transfer the assets to the Comptroller or pay the Comptroller the amounts that the recipient owes to the taxpayer.[17]

Seizure and Sale of Property

The Comptroller also may seize and sell at public auction the taxpayer’s non-exempt real and personal property within three years after a payment becomes delinquent.[18]

After the property is seized, the Comptroller must provide the taxpayer at least 20-days’ notice of the date of the sale.[19]  This notice needs to contain a description of the property being sold, the amount of tax, penalties, interest, and other costs due, the name of the delinquent taxpayer, and a statement that the property will be sold unless the delinquent taxpayer pays the amount due before the time of sale.[20]  If the property’s estimated value is at least $40,000, the Comptroller is required to publish the in a newspaper of general circulation in the county where the property is going to be sold at least 10 days before the date of the sale.[21]  If no such newspaper exists in the county, the notice has to be posted on at least three public places in the county for 20 days before the date of sale.[22]

The amount by which proceeds from the sale of the seized property exceeds the amount of taxes, penalties, interest, and costs is applied first to any person who has an interest in the property who files a notice of interest with the Comptroller and then the remainder to the taxpayer.[23]

Suspension, Revocation, or Refusal of Permit or License

Less dramatically, but just as effectively, the Comptroller can choose to suspend, revoke, or refuse to issue or renew a permit or license to a taxpayer that the Comptroller perceives as being disobedient.[24]

The Comptroller may suspend or revoke any permit or license issued to a taxpayer if the taxpayer fails to comply with any provision or rule involving state taxation.[25]  The Comptroller must give written notice of the revocation or suspension to the taxpayer 20 days before a hearing on the revocation or suspension.[26]  Similarly, the Comptroller is required refuse to issue a permit or license to a taxpayer that is delinquent in any tax.[27]  The taxpayer can appeal this revocation, suspension, or refusal in the same manner as a final deficiency determination.[28]

Suits to Collect Taxes

Ultimately, the Attorney General has the authority to bring suit to recover delinquent tax, penalties, and interest that are owed to the state.[29]  The suit is required to be brought in Travis County district court within three years from the date a deficiency or jeopardy determination becomes due and payable or within three years within the last recording of a lien.[30]  If the Attorney General is successful in the suit, the state becomes entitled to interest at the rate of 10 percent per year on the amount of the judgment for the state beginning on the date the judgment is signed and ending on the date the judgment is satisfied.[31]

After obtaining a judgment against a taxpayer, the Attorney General or Comptroller may file an abstract of judgment with the county clerk.[32]  Like a state tax lien, an abstract of judgment constitutes a lien that attaches to any real property of the taxpayer that is located in the county in which the abstract is recorded.[33]  Judgments in favor of the state or state agency do not become dormant, and a  properly filed abstract of judgment is valid for 20 years from the date the abstract is recorded or until the judgment is paid.[34]  Before this initial 20-year period expires, the state can file a renewed abstract of judgment for an additional period of 20 years.[35]

The Attorney General also can bring a suit for injunction against a taxpayer who is engaged in a business whose operation involves the receipt, collection, or withholding of a tax if the taxpayer fails to file a report or pay the tax.[36]  If obtained, the injunction prohibits the taxpayer from continuing in that business until the require report is filed or tax is paid.[37]

Fraudulent Transfers and Successor Liability

The Comptroller is not limited to just going after the taxpayer or the taxpayer’s property. In some cases, it can go after persons who acquired property from a taxpayer.

For example, a person who acquires a business or the assets of a business from a taxpayer through a fraudulent transfer or sham transaction is liable for the taxes, penalties, and interest that the taxpayer owes.[38]  A fraudulent transfer or sham transaction is a transaction where the taxpayer undertook the transfer or transaction with the intent to evade or hinder the collection of any tax liability or without receiving a reasonably equivalent value in exchange.[39]

Even if the transfer is not fraudulent, the Comptroller can still go after someone who purchased a business from a taxpayer who owes taxes.[40]  A person who purchases a business or the inventory of a business from a taxpayer that owes taxes to state is required to withhold from the purchase price an amount sufficient to cover the taxes due unless the purchaser receives a certificate from the Comptroller saying that no tax due.[41]  The purchaser can request the certificate directly from the Comptroller.[42]  If the purchaser doesn’t withhold taxes (or receive a certificate or other information releasing the purchaser from the obligation of doing so), the Comptroller can go after the purchaser for taxes that the seller owes up to the amount of the purchase price.[43]

Information Gathering from Financial Institutions

After September 1, 2021, the Comptroller’s collection efforts may be made a lot easier—which could spell trouble for delinquent taxpayers.  Financial institutions in Texas now are required to provide the Comptroller with information to aid in “matching the names of delinquent taxpayers with the names of account holders . . . .”[44]  Taxpayers likely won’t even know that their information has been provided to the Comptroller, because the financial institutions subject to this requirement are prohibited from notifying account holders about any information exchanged with the Comptroller.[45]  The Comptroller is authorized to adopt rules implementing this information-sharing requirement, so stay tuned to Freeman Law for more info.[46]

Final Thoughts

The tools at Comptroller’s and Attorney General’s disposal to collect state taxes are myriad and potentially devastating.  Taxpayers in their crosshairs may feel like the deck is stacked against them.  If you need help or have any questions about what you can do when faced with the state’s tax collection efforts, don’t hesitate to give us a call.

 

[1] This post only deals with collection efforts involving state taxes.  Ad valorem (i.e., property) taxes in Texas are local taxes collected by political subdivisions of the state and aren’t going to be covered here.

[2] See Tex. Tax Code § 113.001.

[3] Id. § 113.101.  The appropriate county in this context means: 1) the county in which real property is located, or 2) the county where the taxpayer resided at the time the tax became due and payable or where the taxpayer filed the report.  Id.

[4] Id. § 113.002.

[5] Id. § 113.006(b).  The Attorney General has opined that the Comptroller may, but is not required to, issue a new state tax lien notice that accurately reflects the total amount of tax, penalties, and interest that the delinquent taxpayer owes.  See Tex. Att’y Gen. Op. No. GA-0028 (March 6, 2003).

[6] See Tex. Tax Code §§ 113.009(c), 113.105(a).  As the Texas Supreme Court has observed, “until the taxes are paid, . . . such liens render the taxpayer’s property virtually unsalable.”  R Commc’ns, Inc. v. Sharp, 875 S.W.2d 314, 317 n. 6 (Tex. 1994) (citations omitted).

[7] Tex. Tax Code § 113.008(a), (b).

[8] Id. §§ 111.0102, 113.106(e).

[9] Id. § 113.106(f).

[10] Id. § 113.106(a).

[11] Id. § 111.021(a).

[12] Tex. Tax. Code § 111.021(c).

[13] Id. § 111.021(c).

[14] Id. § 111.021(d)(1).

[15] Id. § 111.021(d)(2).  Note that if the recipient transfers an asset or debt within the 60-day period without the Comptroller’s consent, the recipient becomes liable for the taxpayer’s indebtedness to the extent of the value of asset or debt transferred and may be subject to an additional penalty equal to 50 percent of the amount sought to be frozen or levied.  Id. § 111.021(f), (f-1).

[16] Tex. Tax Code § 111.021(g).

[17] Id.

[18] Id. § 111.017(a).  Persons who attempt to interfere with the Comptroller’s seizure of property may be subject to criminal penalties.  See id. § 111.017(b).

[19] Id. § 111.018(a).

[20] Tex. Tax Code § 111.018(b)(1).

[21] Id. § 111.018(b)(4), (c).

[22] Id. § 111.018(b)(4).

[23] Id. § 111.019(c).

[24] The obvious example of such a permit or license is a sales tax permit.  Just a reminder, it’s a criminal offense to engage in business as retailer in Texas without a sales tax permit, with each day the business operates without a permit counting as a separate offense.  See id. § 151.708.

[25] See Tex. Tax Code §§ 111.0021, 111.0047(a).

[26] Id. § 111.0047(b), (c).

[27] Id. § 111.0046(a)(2).

[28] Id. § 111.0049.

[29] Id. 111.010(a).

[30] See Tex. Tax Code §§ 111.010(c), 111.202.

[31] Id. § 111.010(d).  Compare this to the rate of interest that normally applies to past due taxes, which is 4.25 percent for 2022.  See https://comptroller.texas.gov/taxes/file-pay/interest.php; see also Tex. Tax Code § 111.060(b) (“The rate of interest to be charged to the taxpayer is the prime rate plus one percent, as published in The Wall Street Journal on the first day of each calendar year that is not a Saturday, Sunday, or legal holiday.”).

[32] Tex. Prop. Code § 52.004(a).

[33] Id. § 52.001.  Unlike a state tax lien, there is an explicit mechanism for temporarily releasing an abstract of judgment on homestead property.  See id. § 52.0012; see also Tex. Const. art. 16, sec. 50(a) (setting out constitutional homestead exemption); Tex. Prop. Code § 41.001 (setting out statutory homestead exemption).

[34] Tex. Prop. Code § 52.006(b).

[35] Id. § 52.006(b).

[36] Tex. Tax Code § 111.011(a).

[37] Id. § 111.011(a).

[38] Id. § 111.024(a).

[39] Id. § 111.024(b).

[40] See id. § 111.020.

[41] Tex. Tax Code § 111.020(a).

[42] Id. § 111.020(c).

[43] Id. § 111.020(b).

[44] Id. § 111.025(b).

[45] Id. § 111.025(e).

[46] Id. § 111.025(j).