Winning a Texas Sales Tax Protest: Evidence That Actually Matters

When protesting the outcome of a Texas sales tax audit, thorough preparation is key. To convince the Texas Comptroller’s Office or an administrative law judge (ALJ) to overturn an auditor’s findings, companies need to be prepared to affirmatively demonstrate how and where mistakes were made.

7 Key Types of Evidence in Texas Sales Tax Audit Protests

As part of their preparations, companies should gather several key documents. While the specific forms of documentation that are necessary will vary from case to case, key types of evidence in Texas sales tax audit protests commonly include:

1. Resale or Exemption Certificates

Resale or exemption certificates can be key evidence for proving that a company was not required to collect sales tax from certain customers. As a general rule, companies doing business in Texas must collect resale or exemption certificates in order to make tax-free sales. If an unfavorable audit determination is based on a company’s alleged failure to collect sales tax on tax-free transactions, the relevant resale or exemption certificates could be key for filing a successful protest.

2. Sales Records (Purchase Orders, Invoices, and Receipts)

Sales records can also be key evidence in Texas sales tax audit protests. Sales records can confirm companies’ taxable and tax-free sales figures—and, in turn, their Texas sales tax liability.

In some cases, sales records (or other relevant documentation) can also be key to proving the types of goods or services sold. Not all retail sales are subject to sales tax under Texas law. If your company is being improperly taxed on sales of non-taxable goods or services, proving that this is the case could be key to achieving a favorable resolution.

3. Payment Records (Credit Card Processing and Account Statements)

Payment records can also be key evidence for confirming companies’ reported taxable sales during Texas sales tax audit protests. Credit card processing and account statements, for example, can be used to show that a company’s reported sales tax liability is consistent with its actual sales tax liability under Texas law.

4. Shipping Documents

In this same vein, shipping documents can also help show that a company has complied with its state sales tax obligations. Whether auditors concluded that the company failed to collect or remit applicable sales tax, if a company’s sales, payment, and shipping records all show that this conclusion is misguided, this should facilitate a favorable resolution at the protest stage.

5. Financial Records

Auditors will typically seek broad access to companies’ financial records during the audit process. These records will typically be required at the protest stage as well. Producing financial records that show compliant collection, reporting, and remittance on a consistent basis can also be key for convincing the Texas Comptroller or an ALJ to accept the company’s position.

6. Customer Location Data (for Remote Sellers)

For remote sellers, customer location data can also be key evidence in some cases. If auditors are seeking to impose sales tax liability based on economic nexus, showing that the company did not have sufficient “total Texas sales” to trigger the obligation to collect and remit Texas sales tax could be critical for avoiding a substantial tax bill.

7. Evidence to Dispute Physical Nexus (for Remote Sellers)

In addition to economic nexus, remote sellers may face Texas sales tax compliance obligations based on physical nexus in some cases. If auditors are seeking to impose liability based on physical nexus, presenting evidence that disputes the company’s alleged physical contacts with the state could also be critical to avoiding a substantial tax bill.

Preparing to Protest the Outcome of a Texas Sales Tax Audit

As we noted above, collecting relevant documentation is just one part of preparing to protest the outcome of a Texas sales tax audit. For companies that need to challenge auditors’ findings, other key steps include:

• Conducting an Independent Assessment of Nexus (for Remote Sellers) – It is critical for remote sellers to conduct an independent assessment of nexus (both economic and physical). If a remote seller does not have nexus with Texas, it is not required to collect and remit Texas sales tax. However, if a remote seller does have nexus with the state, it must strictly comply with the state’s sales tax laws.
• Conducting an Independent Assessment of Sales Tax Liability – All companies should conduct an independent assessment of their sales tax liability. When protesting the outcome of a Texas sales tax audit, companies should be prepared not only to raise questions about auditors’ methods and conclusions, but also to affirmatively demonstrate how much they owe (if any).
• Documenting Calculation Errors and/or Other Issues with the Audit – Raising questions about auditors’ methods and conclusions requires clear documentation as well. When preparing for Texas sales tax protests, companies should work with their tax counsel to ensure they can demonstrate the errors made and how they led to an inaccurate determination of sales tax liability.
• Making an Informed Decision About How Best to Proceed – Companies that need to challenge the outcome of a Texas sales tax audit have several options. Here too, companies should work with their tax counsel to determine how best to proceed. Depending on the circumstances, this could involve targeting an informal resolution, filing a request for redetermination, or going directly to court.
• Taking Action Before the Deadline Expires – In all cases, companies need to ensure that they take appropriate legal action before the deadline expires. Generally speaking, companies have 60 days from the date they receive an unfavorable sales tax audit determination to file an appeal.

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

If you need more information about the steps involved in preparing for a Texas sales tax protest, we invite you to contact us. To request a confidential consultation with a Texas sales tax attorney at Brown PC, please call 888-870-0025 or inquire online today.