Why Many Texas Sales Tax Protests Fail Before They Start

For businesses that are facing substantial sales tax liability following scrutiny from the Texas Comptroller’s Office, the first step toward challenging this liability may be to file a formal protest. While many Texas sales tax protests are successful, many also fail.

Oftentimes, Texas sales tax protests fail when they shouldn’t. Just as mistakes and oversights can lead to unwarranted determinations of liability during sales tax audits, they can also lead to unsuccessful protests. As a result, an informed and strategic approach is key.

10 Common Issues that Lead to Unsuccessful Texas Sales Tax Protests

Taking an informed and strategic approach to a Texas sales tax protest starts with understanding the process—including its challenges and risks. Once you know what to expect, you can start building a strategy focused on efficiently achieving a favorable outcome.

With this in mind, here are 10 all-too-common issues that can (and do) lead to unsuccessful Texas sales tax protests:

1. Not Understanding the Sales Tax Protest Process

As we just mentioned, understanding the process is key. Procedural oversights are common factors in unsuccessful sales tax protests—including protests that could (and should) have been won. If business owners and executives don’t know what to expect along the way, they will be far more likely to make costly mistakes, resulting in the need for further appeals.  

2. Not Appreciating the Complexity of the Sales Tax Protest Process

Texas sales tax protests are complex. From issues related to physical and economic nexus (more on this below) to issues related to the taxability of goods and services, numerous issues can present challenges for businesses that are not thoroughly prepared. The procedural aspects of the process add complexity as well, and here, too, it is imperative for corporate taxpayers pursuing protests to ensure they have a clear, comprehensive understanding of what is required to navigate it successfully.

3. Not Appreciating the Amount of Work Involved

Due to the complexity of the sales tax protest process, pursuing a successful protest requires substantial effort. Corporate taxpayers pursuing protests must ensure that they have all necessary documentation (more on this below), and they must ensure that they are prepared to present compelling and legally sound arguments for why the Texas Comptroller’s determination of their sales tax liability is misguided.

4. Making Assumptions About Texas Sales Tax Compliance

One of the most common—and most critical—mistakes we see is assuming Texas sales tax compliance. Compliance is far more complicated than many business owners and executives realize. When preparing for Texas sales tax protests, business owners and executives need to ensure they make sound decisions grounded in an accurate understanding of their companies’ collection, remittance, and recordkeeping obligations.

5. Misunderstanding Texas’ Economic Nexus Rule for Sales Tax

For out-of-state businesses with no physical contacts in Texas, assessing their state sales tax compliance obligations starts with applying Texas’ economic nexus rule. Under this rule, out-of-state sellers (or “remote sellers”) are required to collect and remit Texas sales tax if they have more than $500,000 in “total Texas revenue” in a tax year. Once a remote seller establishes economic nexus, it must continue to collect and remit sales tax until it formally terminates its obligations with the Texas Comptroller.

6. Overlooking Contacts that Can Establish Physical Nexus

Even if remote sellers do not have sufficient in-state sales to establish economic nexus, they could still have physical nexus based on various temporary, transient, and relatively minor contacts with the state. If a remote seller is preparing to file a Texas sales tax protest based on a lack of economic nexus, it must also be prepared to defend against any claims of physical nexus.

7. Lacking Necessary Documentation

When challenging their Texas sales tax liability, it is up to both in-state and out-of-state businesses to demonstrate that the Texas Comptroller’s imposition of sales tax liability is unwarranted. This requires comprehensive documentation. If a business seeking to challenge its state sales tax liability does not have the documentation needed to prove how much it is truly obligated to pay, its efforts to challenge the Texas Comptroller’s determination of liability will almost certainly be unsuccessful.

8. Lacking a Comprehensive Understanding of Texas’s Sales Tax Laws

Texas’s sales tax laws are complex. They impose liability in a wide range of circumstances and also contain exceptions that exempt businesses from collecting and remitting state sales tax in certain scenarios. When preparing for a Texas sales tax protest, it is imperative to have a comprehensive understanding of Texas’s sales tax laws and how they apply based on the specific circumstances at hand.

9. Relying on Flawed Assumptions About What is Taxable

In this same vein, business owners and executives need to avoid relying on flawed assumptions about what is (and isn’t) taxable. As in other states, some goods are exempt from state sales tax, and some services are taxable under Texas law. If a business’s owners and executives do not have a clear understanding of what is (and isn’t) subject to Texas sales tax, they won’t be able to make informed and strategic decisions about protesting their business’s liability.

10. Trying to Navigate the Process Without Experienced Tax Counsel

Due to the complexity of the Texas sales tax protest process, Texas’s sales tax laws, and the critical importance of securing a favorable outcome, experienced legal representation is essential. As a result, for business owners and executives considering a protest, engaging experienced tax counsel is the first step.

Request a Confidential Consultation with a Texas Sales Tax Lawyer at Brown PC

If you have questions about protesting the Texas Comptroller’s determination of your business’s Texas sales tax liability, 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.