Offers in Compromise for Texas Sales Tax: When They Work (and When They Don’t)

When it comes to Texas sales tax, inability to pay is not an excuse for noncompliance. The Texas Comptroller’s Office expects companies to properly collect and remit sales tax, and it uses liens, levies, asset seizures, and other tools to enforce compliance when necessary.

So, what if your company cannot afford to pay the Texas sales tax it owes?

In this scenario, the best option may be to pursue a settlement with the Texas Comptroller’s Office. The Texas Comptroller will consider settlements in appropriate cases, and settling a company’s sales tax debt can substantially reduce the amount it is required to pay in order to come into compliance.

Texas Does Not Have a Formal Offer in Compromise Program

Unlike the Internal Revenue Service (IRS), the Texas Comptroller’s Office does not have a formal offer-in-compromise program. At the federal level, seeking an offer in compromise is an option for taxpayers that either: (i) cannot afford to pay their full tax liability; or (ii) would face “financial hardship” if required to pay in full.

When assessing taxpayers’ eligibility to reduce their federal tax liability through an offer in compromise, the IRS considers their income, expenses, and asset equity—with a focus on determining “the most [the IRS] can expect to collect within a reasonable period of time.” If the IRS accepts a taxpayer’s offer in compromise, the taxpayer must comply with all pertinent requirements; and, if it does so, it will be deemed current on its federal tax obligations.

Settling with the Texas Comptroller’s Office May Be an Option in Various Circumstances

While the Texas Comptroller’s Office does not have a formal offer-in-compromise program, it will settle companies’ outstanding sales tax liability in appropriate cases. When evaluating potential settlements, the Texas Comptroller’s Office considers factors including (but not limited to):

• Whether (and to what extent) the company’s sales tax liability is in dispute
• The company’s ability to pay the amount owed
• The likelihood of collecting through liens, levies, asset seizures or other means
• The amount of time it would take to pursue enforcement
• The costs of enforcement

Thus, even though seeking to reduce a company’s Texas sales tax liability through an offer in compromise is not an option, seeking a settlement with the Texas Comptroller’s Office is similar in many respects. Settling with the Texas Comptroller’s Office also produces a similar outcome—and, like offers in compromise, settlement agreements can include provisions that allow companies to pay over time if necessary.

When Can (and Should) Companies Seek to Settle with the Texas Comptroller’s Office?

With all of this in mind, when can (and should) companies seek to settle their Texas sales tax debt with the Texas Comptroller’s Office? Here are some key considerations:

Should the Company Settle or File an Appeal?

In addition to considering settlement, companies with concerns about their liability following a Texas sales tax audit should also consider filing an appeal. Companies may be able to appeal their sales tax liability on various grounds, including:

• Lack of physical or economic nexus
• Incorrect interpretation of Texas’s sales tax laws
• Incorrect application of Texas’s sales tax laws
• Imposing sales tax liability for non-taxable products or services
• Failure to consider applicable product or service exemptions
• Flawed sampling techniques or outcomes
• Other substantive or procedural issues with the audit process

While these issues (or questions about these issues) can serve as leverage in settlement negotiations with the Texas Comptroller’s Office, if a company has an opportunity to avoid additional sales tax liability entirely, pursuing this opportunity may be the best option under the circumstances at hand. With this in mind, before pursuing settlements, company executives should engage experienced tax counsel to assess their options and make informed, strategic decisions about their next steps.

What Are the Long-Term Implications of Settling?

Before committing to the settlement process, company executives should also consider the long-term implications of settling. This is critical to consider when evaluating proposed settlement terms. For example, if the company accepts liability for an amount that is in dispute due to a disagreement over what the law says or how the law applies to the company’s specific circumstances, this could potentially make it more difficult for the company to dispute the Texas Comptroller’s interpretation of the law going forward.

What Are the Risks of Choosing Not to Settle?

At the same time, company executives must consider the risks of not settling. Following an audit, unpaid sales tax will quickly begin to accrue interest and penalties, and the Texas Comptroller’s Office will work quickly to pursue liens and levies. Additionally, while filing an appeal may be an option, there is no guarantee of success—and unfavorable outcomes can have long-term implications.

What Settlement Terms Should the Company Propose (and Be Willing to Accept)?

If the decision is made to seek a settlement with the Texas Comptroller’s Office, it will be critical to take a strategic approach to all aspects of the settlement process. This requires informed decision-making about the settlement terms that the company proposes in its initial offer. It also requires advance consideration of the final terms the company is willing to accept.

Will Settling Facilitate the Company’s Long-Term Business Objectives?

Making informed decisions about pursuing a Texas sales tax settlement also requires careful consideration of the company’s long-term business objectives. Is it in the company’s best interests to settle and move on? Or, is it in the company’s best interests to seek to establish a favorable precedent that avoids similar issues with the Texas Comptroller’s Office in the future?

Discuss Your Company’s Options with a Texas Sales Tax Lawyer at Brown PC

If you need more information about the considerations involved in targeting a sales tax settlement with the Texas Comptroller’s Office, we invite you to get in touch. To request a confidential consultation with an experienced Texas sales tax lawyer at Brown PC, please call 888-870-0025 or contact us confidentially online today.