Refund Suits vs. Protests in Texas Sales Tax Cases

Refund suits and protests are the two primary means for businesses to dispute their Texas sales tax liability outside of the administrative appeals process. Substantively, these actions are largely similar, with the main difference being timing.

Businesses can file refund suits when they discover that they have previously overpaid their sales tax liability. In contrast, businesses can file protests when they disagree with the Texas Comptroller’s imposition of additional liability during the audit process. Broadly, businesses can file refund suits and protests on similar grounds, and the procedures for both are largely similar.

Grounds to File a Refund Suit or Protest Involving Texas Sales Tax

With this in mind, when can (and should) businesses file refund suits or protests involving Texas sales tax? While there are numerous possible grounds for seeking a sales tax refund or disputing a business’s sales tax liability, some examples of more common grounds include:

Incorrect Determination of Nexus

Businesses located outside Texas are required to collect and remit Texas sales tax only if they have nexus with the state. While this can be either an economic or a physical nexus, both forms have stringent statutory requirements. If a business has previously made an incorrect determination (or the Texas Comptroller has made one) regarding nexus, a refund suit or protest may be warranted.

Termination of Nexus

Businesses can also file refund suits and protests based on the termination of their nexus with the state. If a business moves out of Texas or an out-of-state business no longer meets the requirements for physical or economic nexus, it can terminate its obligation to collect and remit sales tax under Texas law. Once a business properly terminates its Texas sales tax responsibilities, it is no longer required to comply with the law—unless and until it establishes physical or economic nexus again.

Incorrect Calculation of Sales Tax Liability

Businesses can seek refunds based on their own incorrect calculation of their sales tax liability, and they can file protests based on the Texas Comptroller’s incorrect calculation of how much they owe. With the complexity of Texas’s sales tax laws, calculation errors are not uncommon. Whether a business has incorrectly calculated its liability or the Texas Comptroller has incorrectly calculated its liability, the business can (and should) seek to ensure that it is not paying any more than is legally required.

Valid Refunds or Returns

Refunds and returns can reduce the amount that businesses are required to pay in Texas state sales tax. However, refund and return scams are common, and as a result, the Texas Comptroller often views substantial refund and return claims skeptically. Here too, businesses should seek to ensure they pay no more than necessary—and this means filing refund suits and protests when warranted.

Failure to Apply an Exemption

Several types of products and services are exempt from sales tax under Texas law. If a product or service is exempt from Texas sales tax and a business has paid sales tax on the sale of that product or service unnecessarily, a refund suit or protest may be warranted if the Texas Comptroller is unwilling to resolve the matter amicably. Determining the applicability of Texas’s sales tax exemptions can be complicated in some cases, and, generally speaking, it is up to businesses to affirmatively demonstrate that an exception applies.

Sale of Items for Export

Texas businesses are not required to collect and remit state sales tax on items sold for export to other countries. Here, too, however, it is generally up to businesses to prove that Texas state sales tax compliance is not required. Depending on the circumstances, businesses may need export certificates, import documents, bills of lading, and/or other documentation to demonstrate that a refund or nonpayment of sales tax is warranted.

Sales Tax Paid in Error for Other Reasons

In-state and out-of-state businesses can also file refund suits and protests if they have paid Texas sales tax in error. Ultimately, if a business has overpaid its Texas sales tax liability for any reason—whether due to an inadvertent overpayment or to avoid triggering interest and penalties—the business should take appropriate legal action to secure a just resolution.

Additional Considerations for Filing a Texas Sales Tax Refund Suit or Protest

In addition to identifying all viable grounds for filing a refund suit or protest, businesses seeking to avoid unwarranted Texas sales tax liability should also address other considerations. These additional considerations include (but are not limited to):

• The Statute of Limitations – As the Texas Comptroller explains, “[g]enerally, a person or business has four years from the date on which the tax was due and payable to make a refund claim.” While the statute of limitations can be tolled in certain circumstances, once it has expired, seeking a refund is no longer an option.
• The Potential for Additional Sales Tax Liability – When seeking refunds or filing protests, businesses should also assess their potential for facing additional sales tax liability. If a refund claim or protest could trigger additional scrutiny from the Texas Comptroller’s Office (as is often the case), business owners will need to make an informed decision about how to manage the associated risks.
• The Costs and Benefits Involved – Business owners should also carefully assess the overall potential costs and benefits. These include the costs of potential tax litigation and the potential benefits of avoiding additional sales tax compliance obligations (and associated costs) in the future, among others.

Discuss Your Company’s Options with an Experienced Texas State Sales Tax Lawyer at Brown PC

If you need more information about the grounds for filing a sales tax refund suit or protest in Texas, or about the procedures involved, we invite you to get in touch. To discuss your company’s options with an experienced Texas state sales tax lawyer at Brown PC, please call 888-870-0025 or request an appointment online today.