Taking a Texas Sales Tax Case to District Court: Is It Worth It?

Businesses that disagree with the Texas Comptroller’s determination of their state sales tax liability have the right to go to court if they are unable to secure a satisfactory resolution through the administrative appeals process. Businesses also have the option to waive their right to an administrative hearing and proceed directly to court—and this approach can make sense in some cases.

5 Key Considerations for Taking a Texas Sales Tax Controversy to Court

In Texas, sales tax disputes are handled at the district court level. When is it worth taking a Texas sales tax controversy to district court? Here are five key considerations:

1. How Much Sales Tax Liability is In Dispute?

One key consideration is the amount of sales tax liability that is in dispute. While businesses should not accept undue sales tax liability, there are costs involved in litigating sales tax controversies in district court. If the amount in dispute is relatively small, litigating may not be worth it; in this scenario, it may make sense to focus on other alternatives.

Conversely, if the amount in dispute is substantial, then litigating could be well worth it. Large retailers doing business in Texas may owe significant state sales tax, and it is imperative that they ensure they are not being forced to pay more than the law requires. From questions about the taxability of specific goods and services to questions about whether businesses have accurately documented their sales tax compliance efforts, numerous issues can lead to substantial (and potentially unwarranted) determinations of liability.

2. Does the Business Have Strong Grounds to Challenge the Texas Comptroller’s Determination of Liability?

Another key consideration is the strength of the business’ case. Does the business have strong grounds to challenge the Texas Comptroller’s determination of liability? Or, is litigating the Texas Comptroller’s assessment unlikely to produce a different result? These are fundamental questions that require a thorough analysis and careful consideration before moving forward.

Due to the complexity of Texas’s sales tax regime, making informed decisions about a business’s likelihood of success in tax litigation requires working closely with experienced local tax counsel. From fundamental considerations such as sales tax nexus to more specific issues such as sales tax exemptions and exclusions, business leaders must ensure they give due consideration to all pertinent statutory and regulatory principles. In many cases, multiple legal issues will be involved, and it will be necessary to thoroughly analyze them to determine the business’s overall likelihood of success.

3. What Has Happened to Date?

When considering the viability of Texas state sales tax litigation, it is also worth considering what has happened to date. This includes, but is not limited to, focusing on questions such as:

• What was the basis (or what were the bases) for the Texas Comptroller’s imposition of additional sales tax liability during the audit process?
• Did the business unsuccessfully assert any defenses to additional sales tax liability during the audit process?
• How did the Texas Comptroller’s attorney respond to the business’s Statement of Grounds and any additional documentation submitted (if any)?
• What grounds were stated in the Texas Comptroller’s Position Letter? Do these grounds differ from those asserted in the audit?
• What other communications or discussions have taken place with the Texas Comptroller’s Office, and how do these impact the business’s decision-making?

The answers to all of these questions can help determine how best to proceed under the present circumstances. Ultimately, the key question is whether litigating the business’s sales tax liability is likely to pay off in the long term—either at the district court level or on appeal. While the Texas Comptroller’s approach to date is not necessarily indicative of the correct application of the law, it is well worth conducting an unbiased assessment of the Texas Comptroller’s position on the issue (or issues) at hand.

4. Is Pursuing an Informal Resolution a Possibility?

Given the costs and inherent uncertainty of complex tax litigation, it is also worth considering whether an informal resolution remains a possibility. It may or may not remain a possibility depending on what has happened to date. If the Texas Comptroller’s Office is firm in its position, then litigating the controversy in district court may be the only viable option. On the other hand, if the Comptroller’s Office is willing to consider a settlement (and settling is in the business’s best interests), initiating litigation at this stage could be premature.

5. What Are the Implications for the Business’s Future Sales Tax Liability?

From considering litigation to considering an informal resolution, it is also critical that business owners and executives assess the implications of their business’s current tax controversy for their future sales tax liability. Specifically, does the Texas Comptroller’s position regarding the business’s sales tax liability mean that it will face additional sales tax liability in the future?

If so, this is a risk that needs to be factored into the business’s risk-reward analysis. Even if the business’s current sales tax liability is relatively modest, its anticipated future liability could be far greater. Calculating, collecting, remitting, and documenting a business’ sales tax liability also entails costs, and if competitors are not collecting sales tax from their customers, accepting the Texas Comptroller’s position could also put the business at a competitive disadvantage.

Request a Call with a Texas Sales Tax Attorney at Brown PC

Brown PC is a Texas tax law firm that specializes in state sales tax compliance. Our attorneys have extensive experience representing businesses at all stages of Texas state sales tax controversies—from audits and administrative appeals to tax litigation in district court. If you need to know more about your business’s options for challenging an unfavorable determination of Texas sales tax liability, we invite you to get in touch. Call us at 888-870-0025 or contact us online to request a call today.