Should You Settle or Fight a Texas Sales Tax Assessment?

If your company is facing a substantial Texas sales tax assessment, what should you do? Should you fight the Texas Comptroller’s determination of your company’s sales tax liability? Or, should you target a settlement that mitigates your company’s financial responsibility?

As you might expect, the short answer is, “It depends.” While fighting the Texas Comptroller’s determination of sales tax liability will make sense in some cases, in others, targeting a settlement that preserves a good working relationship with the Texas Comptroller’s Office will be the best approach.

Making an Informed Decision Requires a Clear Understanding of the Company’s Texas Sales Tax Liability

To make an informed decision about how to proceed, companies should work with their tax counsel to ensure that they have a clear understanding of their Texas sales tax liability. If the Texas Comptroller’s assessment is accurate, fighting the assessment isn’t likely to lead to a different result. Settling may still be a possibility, but in this scenario, targeting a settlement will involve different strategic considerations than when there are legitimate questions about how much the company owes.

If there are legitimate questions about how much the company owes, pursuing a settlement could be a viable option. In this scenario, the question becomes: How likely is it that fighting the Texas Comptroller’s assessment will lead to a different result? If fighting presents a reasonable chance of success (and the potential financial benefits outweigh the costs involved), then fighting may make sense. As the company’s chances of success diminish, the desirability of targeting a settlement will generally increase proportionally.

On the other hand, if the Texas Comptroller’s position is unsupported, then fighting the company’s sales tax assessment is the only practical option. Companies should not accept unwarranted determinations of sales tax liability. In this scenario, not only is fighting important for protecting the company’s financial interests in the short term, but it is also important for ensuring that the company will not be expected to overpay in the future as well.

What if Targeting a Settlement is Your Company’s Best Option?

Let’s say targeting a settlement is your company’s best option under the circumstances at hand. How should you proceed?

Here too, the answer depends on the specific circumstances at hand. In some cases, it may make sense to try to open settlement negotiations with the Texas Comptroller’s Office immediately. In the right circumstances, this can facilitate efficient settlement negotiations while mitigating the costs of securing a favorable resolution.

In other cases, it may make sense to start by initiating the formal appeals process. If the Texas Comptroller’s Office isn’t likely to consider a reasonable settlement based on its current position, it may take some convincing. In this scenario, submitting a Statement of Grounds and requesting a redetermination hearing could be a necessary first step toward setting the stage for favorable settlement negotiations.

In all cases, companies need to be careful to preserve their right to pursue a formal appeal if necessary. Even if a settlement initially appears likely, there are no guarantees—and it is critical that companies do not lose their ability to request a redetermination hearing or pursue litigation in state court. Generally, companies must initiate the formal appeals process within 60 days of receiving an unfavorable assessment in a Texas sales tax audit.

What if Your Company Has Grounds to Fight the Texas Comptroller’s Assessment?

Now, let’s say your company has grounds to fight the Texas Comptroller’s assessment. If settling is not in your company’s best interests, convincing the Texas Comptroller to reverse its position will generally involve filing a Statement of Grounds and requesting a redetermination hearing.

Redetermination is the administrative process for challenging a Texas sales tax assessment. Filing a Statement of Grounds starts the process, and then attorneys at the Texas Comptroller’s Office will review the Statement of Grounds and respond. Assuming this does not lead to productive negotiations, the company will have the option to request either an oral or written hearing before an administrative law judge (ALJ).

Requesting an oral hearing makes sense in most cases, as it maximizes the company’s opportunity to present its position. Oral redetermination hearings are akin to “mini trials,” with both parties presenting their evidence before the ALJ renders a decision.

Within the redetermination process, the ALJ’s initial decision is non-final. Both parties have the opportunity to file exceptions, and then each party can respond to the other party’s exceptions (as long as it does so in time). After considering the parties’ additional filings, the ALJ will then either finalize its initial decision or reach a different conclusion.

As an alternative to requesting a redetermination hearing, companies that need to challenge their Texas sales tax assessments may proceed directly to court. If the redetermination process isn’t likely to lead to a revised assessment (i.e., because the issues involved are particularly complex), it may make sense to bypass this stage of the process and seek a judicial determination of the company’s sales tax liability.

So, What Is the Next Step?

Taking all of this into account, if your company needs to challenge a Texas sales tax assessment, what is the next step? To make informed decisions, company executives should engage experienced outside tax counsel who can provide custom-tailored advice based on the circumstances at hand. Acting promptly can help preserve the options on the table, and ultimately, company executives should focus on an outcome that will protect their company’s best interests in the long term.

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

Brown PC is a Texas tax law firm that represents companies across the United States in high-value Texas sales tax controversies. If you would like to speak with one of our attorneys about challenging a Texas sales tax assessment, we invite you to contact us. Call 888-870-0025 or contact us confidentially online to request an appointment today.