Appealing an Adverse Texas Sales Tax Decision: Strategic Considerations

Adverse Texas sales tax decisions can leave both in-state and out-of-state businesses facing substantial and unexpected liability for taxes, interest, and penalties. While this liability will be warranted in some cases, it is not unusual for appeals to be warranted as well.

If your business is facing an adverse Texas sales tax decision, it is important to promptly assess whether an appeal is warranted under the circumstances. This involves several strategic considerations.

5 Strategic Considerations for Pursuing a Texas Sales Tax Appeal

If your business received an adverse Texas sales tax decision, should you begin preparing for an appeal? Here are five strategic considerations for challenging the outcome of a Texas sales tax audit:

1. What Grounds Does Your Business Have to File an Appeal?

Making an informed decision about whether to pursue a Texas sales tax appeal starts with understanding what grounds (if any) your business has to challenge auditors’ assessment of your business’s sales tax liability. There are several possibilities, including (but not limited to):

• Flawed auditing methodologies (including sampling methods)
• Improper interpretation or application of Texas’s nexus laws
• Improper assessment of the taxability of specific goods or services
• Inaccurate calculation of the business’s sales tax liability
• Unjustified imposition of penalties for alleged noncompliance

These and other issues can provide clear grounds for filing an appeal in appropriate cases. To determine what grounds (if any) are available in any particular case, it will be necessary to independently assess the business’s sales tax liability and thoroughly examine the audit process itself. While substantive and procedural errors can both provide grounds for appeal, identifying one or more specific issues that led to an unwarranted determination of liability is critical to pursuing a successful challenge.

2. What is the Best Option for Seeking Review?

Businesses that need to challenge the outcome of a Texas sales tax audit have various options, provided they preserve their rights in time. In some cases, the best option for seeking review, at least initially, may be to work directly with the Texas Comptroller’s Office. If clear errors were made, it may be possible to achieve a favorable resolution without a formal appeal.

If working directly with the Texas Comptroller’s Office is not a viable option, the business’s leadership team will need to decide whether to pursue an administrative appeal or pursue judicial review. Businesses that pursue administrative appeals can still seek judicial review if necessary, and having two bites at the apple can be beneficial in some cases. However, if an administrative appeal is unlikely to produce a different result, the more efficient approach may be to proceed directly to court.

3. What Documentation Can (and Should) Your Business Present in Its Appeal?

When pursuing Texas sales tax appeals, businesses must be prepared to affirmatively demonstrate why auditors’ decisions were reached in error. This may require various forms of documentation—from internal finance and accounting records to exemption certificates, purchase orders, and refund confirmations.

As businesses prepare to move forward with the appeals process, they must work with their legal counsel to make informed, strategic decisions about which documents to present in support of their position. While a “kitchen sink” approach might seem best (and might be best in some cases), oftentimes, using specific documents to expose specific errors can be an effective way of proving that a redetermination of the business’s sales tax liability is warranted. As with all legal matters, businesses must be careful to preserve the attorney-client privilege and other privileges as well, as failing to do so could compromise their ability to protect their interests going forward.

4. Are There Risks for Facing Additional Sales Tax Liability?

When evaluating a potential Texas sales tax appeal, another key consideration is whether there are any risks for facing additional sales tax liability. If the sampling process resulted in a substantial portion of the business’s taxable goods or services not being reviewed, or if calculation errors or other mistakes resulted in under-calculation of the business’s sales tax liability in certain areas, filing an appeal could result in reconsideration of these issues as well.

Ultimately, when facing controversies with the Texas Comptroller’s Office, businesses should seek to resolve their sales tax liability, as this will reduce the risk of additional scrutiny in the future. But depending on the circumstances, this may involve various strategic considerations (including, but not limited to, those discussed herein). By working with experienced tax counsel, business leaders and in-house lawyers should be able to make informed and strategic decisions focused on minimizing the business’s sales tax liability, both now and in the future.

5. What Are the Future Implications of Failing to Challenge the Texas Comptroller’s Decision?

When it comes to minimizing a business’s sales tax liability in the future, business leaders also need to think about the future implications of failing to challenge the Texas Comptroller’s determination of the business’s sales tax liability. Even if the amount in controversy in the present dispute is relatively small, failing to challenge flaws in the audit process could have significant financial implications in the long term.

Setting an unfavorable precedent can have long-term consequences, and if auditors’ errors in interpreting or applying the law go unchecked, they are likely to repeat them. As a result, in many cases, the future risks a business faces as a result of an unfavorable Texas sales tax audit determination will make it well worth filing an appeal.

Request a Confidential Consultation with a Texas Sales Tax Appeal Lawyer at Brown PC

If you need to know more about the strategic considerations involved in filing a sales tax audit in Texas, we invite you to get in touch. Our firm handles substantial Texas sales tax controversies on behalf of companies throughout the United States. To request a confidential consultation with an experienced Texas sales tax appeals lawyer at Brown PC, please call 888-870-0025 or contact us online today.