Judicial Review of Texas Sales Tax Assessments: What Courts Look For

Businesses that are unable to achieve favorable resolutions of sales tax disputes with the Texas Comptroller’s Office have the right to challenge their liability in court. Businesses can seek judicial review of their Texas sales tax assessments on various grounds, and, when warranted, seeking judicial review can be an effective way to avoid unwarranted tax liability.

Determining whether a business has grounds to seek judicial review of a Texas sales tax audit requires a comprehensive assessment of the business’s sales tax liability, the audit process, and any subsequent administrative proceedings. While businesses can seek judicial review on both substantive and procedural grounds, they must be able to point to one or more specific issues that warrant a different tax assessment based on the specific circumstances at hand.

3 Potential Grounds for Seeking Judicial Review of a Texas Sales Tax Assessment

When can (and should) businesses challenge their Texas sales tax assessments in court? Some examples of potential grounds to seek judicial review include:

1. Misinterpretation of the Law

Businesses can seek judicial review of their Texas sales tax assessments that result from a misinterpretation of the law. Texas’s sales tax laws are complex, and they leave room for interpretation in many scenarios. If auditors, attorneys at the Texas Comptroller’s Office, or an administrative law judge at the State Office of Administrative Hearings (SOAH) have misinterpreted the law resulting in the imposition or affirmation of undue sales tax liability, seeking judicial review may be a necessary next step.

We commonly see interpretation issues related to:

Economic or Physical Nexus

Businesses are only required to collect and remit Texas sales tax if they have “nexus” with the state. This can be either an economic nexus (based on volume of in-state sales for out-of-state businesses) or a physical nexus (based on physical presence in or contacts with the state)—but there can be various interpretation-related issues when it comes to assessing both potential grounds for sales tax liability.

Exemption Certificate Requirements

Misinterpretations of the law regarding exemption certificate requirements can also lead to unwarranted sales tax liability. If auditors incorrectly assume that exemption certificates are required when they are not, they may impose substantial back sales tax liability (along with associated interest and penalties) based on a flawed determination that the business has paid less than it owed.

Taxability of Goods or Services

Similar issues can arise regarding the taxability of goods and services under Texas’s sales tax laws. While most goods and some services are subject to sales tax under Texas law, there are both broad carveouts and specific exceptions. Incorrectly interpreting the taxability of a business’s goods or services can also lead to substantial unwarranted sales tax liability determinations.

2. Misapplication of the Law

Along with misinterpretation of the law, misapplication of the law can serve as grounds for judicial review of a business’s Texas sales tax assessment as well. Here too, mistakes are not uncommon. Misapplication of the law can lead to substantial unwarranted sales tax liability, and securing a just result can require intricate legal arguments and comprehensive evidence demonstrating how the law was misapplied.

Some examples of specific issues that can warrant petitions for judicial review include:

Incorrect Assessment of Sales Tax Liability

Even if auditors correctly interpret the law, they can still miscalculate a business’s sales tax liability by misapplying the law under the circumstances at hand. In many cases, determining whether (and how) Texas’s sales tax laws apply can be complex, and errors are not uncommon, leading to incorrect assessments.

Incorrect Determination of Nexus or Taxability

Incorrect determinations of nexus can lead to wholesale errors in assessing businesses’ Texas sales tax liability. Likewise, incorrect determinations of taxability with regard to a business’s goods or services can lead to broad-based errors that impose sales tax liability when no such liability is warranted.

Incorrect Imposition of Penalties  

The imposition of penalties can substantially increase businesses’ total sales tax-related liability to the Texas Comptroller. However, penalties can be (and often are) imposed in error. If auditors have incorrectly determined that penalties are warranted, this alone can serve as justification and motivation for seeking judicial review.

3. Improper Auditing Methodologies

Use of improper auditing methodologies is another issue that can lead to substantial inaccuracies in Texas sales tax assessments. When auditors’ methodologies are flawed, this can give rise to systemic issues that compromise the entire audit process. Improper auditing methodologies can often serve as the clearest grounds for filing an appeal in state court; though, here too, businesses must be prepared to clearly and affirmatively demonstrate why a different outcome is required.

Common auditing errors that can lead to unjustified imposition of Texas sales tax liability include:

Failure (or Refusal) to Consider Relevant Records

Failing (or refusing) to consider relevant business records is an improper auditing practice that can lead to inaccurate Texas sales tax assessments. As a general rule, auditors have a duty to consider all relevant facts; and, if they fail (or refuse) to do so, this is an error that can—and should—be rectified.

Improper Calculations

The same is true of calculation errors. Even if auditors correctly interpret and apply the law, they can still make calculation errors that inflate businesses’ sales tax assessments. This is particularly common in complex cases involving high volumes of taxable products or services and substantial sales tax liability.

Sampling-Related Issues

Sampling-related issues are another common concern that can leave businesses with little choice but to pursue a sales tax appeal in state court. Improperly selecting samples and improperly extrapolating from sample data are both issues that businesses may need to address through the judicial review process.

Request a Confidential Consultation with a Texas Sales Tax Litigation Attorney at Brown PC

Brown PC is a Texas tax law firm that represents in-state and out-of-state corporate clients in state sales tax matters. If you would like to speak with a Texas sales tax litigation attorney at our firm about pursuing judicial review, please call 888-870-0025 or inquire online today.