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Recent Legislation Gives Taxpayers Greater Access to District Court in Challenging the Texas Comptroller's Denial of a Refund Claim or Assessment of Tax

By David E. Colmenero and Alex J. Pilawski on June 30, 2021
Among the various bills that became law in the 87th Texas Legislature of 2021 are two amendments to the Texas Tax Code that will significantly impact the procedures available for challenging the denial of tax refund claims and assessments by the Texas Comptroller of Public Accounts in district court. Both of these bills (SB 903 and HB 2080) are intended to make district court more accessible to taxpayers. Both were signed into law by Governor Abbott on June 7, 2021 and are scheduled to take effect September 1, 2021. What this means in each context is discussed in more detail below. A copy of both bills are linked for reference: SB 903 and HB 2080.

Currently, the Tax Code generally requires that a taxpayer exhaust its administrative remedies before filing a lawsuit in district court challenging the Texas Comptroller’s denial of a refund claim. Tex. Tax Code § 112.151; see, e.g., Bullock v. Mel Powers Inv. Builder, 682 S.W.2d 400, 402 (Tex. App.—Austin 1984, no writ). This can be problematic for taxpayers who do not wish to go through an administrative proceeding. The Tax Code separately requires that a taxpayer who wishes to challenge the Comptroller’s assessment of tax in district court first pay the full amount at issue under protest. See Tex. Tax Code § 112.051. This can be a significant impediment to district court litigation for taxpayers who receive a large assessment from the Texas Comptroller and cannot afford to pay the disputed amount. In both cases, the issues for litigation in district court are limited to the issues raised in a motion for rehearing (in the case of a refund denial) or in a written protest (in the case of a disputed assessment). See Tex. Tax Code §§ 112.053(b); 112.152.

SB 903 Permits a Taxpayer to File a Lawsuit Challenging the Denial of a Refund Claim Without First Exhausting Administrative Remedies if Certain Procedures are Followed.

SB 903 adds Section 111.106 to the Texas Tax Code to state that a person claiming a refund under Section 111.104 may file with the Texas Comptroller a notice of intent to bypass an administrative hearing. See Tex. Tax Code § 111.106(a) (as amended). The notice of intent must (i) be filed on or before the 60th day after the date the Texas Comptroller issues a letter denying the claim for refund; (ii) be in writing; (iii) assert the material facts and each specific legal basis on which a refund is claimed; and (iv) specify the amount of the refund claimed. See id. Except as provided below, a person who files a notice of intent waives the right to an administrative hearing under Section 111.105 of the Tax Code. See id. § 111.106(f).

Under this new Section, a person who files a notice of intent to bypass an administrative hearing following the denial of a refund claim may bypass the administrative hearing and bring a lawsuit in district court if (i) the person participated in a conference with the Comptroller if one was required (as discussed below), in which case the lawsuit must be filed on or before the 60th day after the conference concludes or a later date agreed to by the Comptroller; or (ii) the Comptroller does not provide a timely notice requiring a conference in which case the suit must be filed on or before the 90th day after the date the notice of intent was filed. See id. § 111.106(b). For taxpayers who file a lawsuit in district court following a notice of intent to bypass an administrative hearing, the only issues that may be raised in a lawsuit are the material facts and legal bases contained in the notice of intent filed with the Texas Comptroller under Section 111.106(a). See Tex. Tax Code § 112.152(a)(2)(as amended).

The bill permits the Texas Comptroller to require a conference between a person who files a notice of intent to bypass an administrative hearing and a designated officer or employee of the Comptroller to clarify any fact or legal issue in dispute regarding the refund claim and to discuss the availability of additional documentation that may assist in resolving outstanding issues regarding the claim. See Tex. Tax Code § 111.106(c) (as amended). Several deadlines related to the conference are provided for in the bill. For example, if the Texas Comptroller requires a conference, the Texas Comptroller must notify the person of the conference requirement in writing not later than the 30th day after the date the notice of intent was filed. See id. § 111.106(d). In addition, the conference date must be set in the notice for no later than the 90th day after the date the notice of intent was filed. See id. A person who files a notice of intent may request to reschedule the conference date and has the option of rescinding the notice of intent within 120 days of filing the notice of intent if no agreement with the Comptroller is reached on a rescheduled date on or before the 90th day after the date the notice of intent was filed. See id. § 111.106(e).

On an unrelated matter, the bill separately extends the deadline for filing a lawsuit for taxpayers who do not file a notice of intent to bypass an administrative hearing under Section 111.106(a) and follow the traditional route of going through a hearing prior to filing a lawsuit. See id. § 112.151(c). In that case, a taxpayer is now given 60 rather than 30 days from the date the motion for rehearing is denied to file a lawsuit in district court. See id.

SB 903 states that it applies to a claim for refund that is pending or filed on or after September 1, 2021. See Tex. S.B. 903, 87th Leg., R.S. (2021), Sections 4 & 5. However, because a notice of intent to bypass an administrative hearing under the bill must be filed within 60 days from the denial of a refund claim, the option to bypass an administrative hearing would appear available to pending refund claims where either no denial has been issued or where the denial is issued within 60 days prior to September 1, 2021.

HB 2080 Permits a Taxpayer to File a Lawsuit in District Court Without Paying the Amount at Issue under Protest if Certain Procedures are Followed as Well.

HB 2080 makes separate revisions to the Tax Code for challenging an assessment of tax by the Texas Comptroller. Generally, it adds Subchapter E to Chapter 112 of the Texas Tax Code to create an avenue for challenging an assessment issued by the Texas Comptroller without first having to pay the disputed amounts to the State.

A newly added Section 112.201 of the Texas Tax Code provides that a person may sue the Texas Comptroller to dispute an amount of tax, penalty or interest assessed in a deficiency redetermination or jeopardy redetermination under Chapter 111 if the person has (i) filed a request for redetermination; (ii) obtained a redetermination that includes a finding by the Texas Comptroller of the disputed and undisputed amounts; and (iii) properly filed a motion for rehearing that states the specific grounds of error and the disputed amounts associated with the grounds of error. See Tex. Tax Code § 112.201(as amended). It also states that, after the Texas Comptroller has been timely served in a suit that complies with the newly added Subchapter E, the Texas Comptroller and Attorney General are enjoined from collecting disputed amounts from the person bringing the lawsuit during the pendency of the suit, but are not enjoined from asserting tax liens. See id. § 112.201(c). A lawsuit filed under this Subchapter must be filed before the expiration of 90 days after the issue date of the denial of the motion for rehearing or it is barred. See id. § 112.201(e).

The newly added Section 112.201 includes language stating that a person bringing a lawsuit under Subchapter E “shall pay” the redetermination amounts that are not disputed in the motion for rehearing. See id. § 112.201(b). But it goes on to state that the failure to pay an undisputed amount does not affect the jurisdiction of a court to consider a suit that complies with Section 112.201(a). See id.

HB 2080 also adds language to the Tax Code stating that a court may award damages under Chapter 65 of the Texas Civil Practice and Remedies Code if the court determines that all or part of the enjoined collection amounts were disputed solely for delay. See id. § 112.201(c).

HB 2080 includes a number of procedural provisions to the Tax Code in the context of lawsuits filed under Subchapter E which generally correspond to existing requirements for protest lawsuits including, for example, a general limitation that the grounds of error contained in the motion for rehearing are the only issues that may be raised in a suit under Subchapter E (see id. § 112.204); language stating that lawsuits under this new subchapter are tried on a de novo basis (see id. § 112.206); and provisions permitting the state to bring a counterclaim for taxes imposed under the same statute and during the same period as the taxes that are the subject of the suit (see id. § 112.203).

Section 112.202 is also added to state, “A person shall produce, in connection with a suit under this subchapter, contemporaneous records and supporting documentation appropriate to the tax for the transactions in question to substantiate and enable verification of the person’s claim relating to the amount of the tax, penalty, or interest that has been assessed or collected, as required by Section 111.0041.” See id. § 112.202.

HB separately adds Section 112.003 to the Texas Tax Code to address attorneys’ fees. It states that, “[e]xcept for sanctions imposed under Chapter 10, Texas Civil Practice and Remedies Code, or the Texas Rules of Civil Procedure, attorney’s fees may not be awarded in a suit seeking legal or equitable relief against the state, a state agency, or an officer of the state relating to the applicability, assessment, collection, constitutionality, or amount of a tax, fee, or penalty imposed by Title 2 or Title 3 of the Texas Tax Code or collected by the Comptroller under any other law.” Id. § 112.003.

HB 2080 states that it applies only to a suit to dispute an amount of tax, penalty, or interest that becomes due and payable on or after September 1, 2021. See Tex. H.B. 2028, 87th Leg., R.S. (2021), Section 12. A suit to dispute an amount of tax, penalty, or interest that became due and payable before September 1, 2021 is governed by the law as it existed immediately before September 1, 2021 and the former law is continued in effect for that purpose. See id.

Closing Thoughts

SB 903 and HB 2080 are written to provide for greater, although not necessarily easier, access to district court for taxpayers seeking to challenge the Texas Comptroller’s denial of a refund claim or assessment of tax. As with any tax-related legislation, particular attention should be given to the details. Taxpayers and practitioners should be especially cognizant of the various procedural requirements, limitations and deadlines set forth in the above bills for taking advantage of these new options.

If you have questions regarding the information disclosed above or any other State Tax related matter, please contact David Colmenero at dclomenero@meadowscollier.com or Alex Pilawski at apilawski@meadowscollier.com . Both lawyers can be reached by phone at 214.744.3700.