News and Insights

Texas Court Strikes Down Provisions of Comptroller’s Rule 3.325 on Refunds

Tax Development May 13, 2013

A Travis County District Judge has invalidated several provisions of the Texas Comptroller of Public Accounts’ rule relating to refunds of sales and use tax. In Ryan, LLC v. Combs, Cause No. D-1-GN-12-002388 (Dist. Ct. – Travis Cty., May 10, 2013), Judge Amy Clark Meachum declared that subsections (a)(4), (b)(10) and (e) of 34 TAC § 3.325 (effective January 7, 2013) and subsection (a)(4) of the previous version of the rule (effective July 19, 2011) are invalid and illegal.

Tex. Tax Code § 111.104(c) prescribes the requirements for claiming a refund of taxes imposed by Title 2 of the Tax Code, including sales and use tax. It provides that a refund claim must be written, “state fully and in detail each reason or ground on which the claim is founded,” and be filed before the statute of limitations has expired.

In July of 2011, the Comptroller repealed its former rule on sales tax refunds and adopted new 34 TAC § 3.325. Subsection (a)(4) of the 2011 rule purported to require tax refund claimants to include substantial transaction-level detail and supporting documentation with their initial refund claims. The mandatory information included a schedule of transactions showing vendor names, invoice dates, invoice numbers, descriptions of items purchased, amounts paid, vendors’ taxpayer identification numbers, and local jurisdictions to which taxes were paid. The claimant was also required to “submit supporting documentation required by the comptroller to verify any refund claimed or credit taken.”

Immediately after the rule took effect, the Comptroller began returning “incomplete” claims to the claimant. If such claims were supplemented and resubmitted, the Comptroller contended that the statute of limitations had not been tolled by the original submission.

Negative feedback about the 2011 rule led the Comptroller to modify some of its procedures and promulgate rule amendments effective January 7, 2013. Like the 2011 rule, the 2013 rule purports to require transaction-level detail and documentation upon initial filing of a refund claim. Although it provides that an “incomplete” refund claim can toll limitations and may be supplemented, these provisions contradict others that purport to invalidate “incomplete” claims. Even after the changes, the new rule continues to impose requirements and burdens not found in the underlying statute.

Represented by Doug Sigel and Matt Ormiston of the Ryan Law Firm, LLP, Ryan filed suit seeking a declaratory judgment that portions of the 2011 and 2013 rules were invalid because they impose additional burdens, conditions, and restrictions on sales and use tax refund claims in excess of the requirements of Tax Code § 111.104. Specifically, Ryan complained that the law does not require transaction-level detail and supporting documentation to perfect a refund claim. Although such information is ordinarily provided to the Comptroller during the process of refund verification, the statute does not require it to be provided on the day the claim is filed. Ryan pointed out that the rules require a taxpayer to prove entitlement to a refund on the day a claim is filed. This is substantially more burdensome than the statute, which requires only that a taxpayer place the Comptroller on notice regarding the subject matter of the claim.

The Comptroller sought to have Ryan’s lawsuit dismissed, arguing among other things that Ryan had no standing to challenge the rules. The court overruled these objections, concluding that Tex. Gov’t Code § 2001.038 grants Ryan standing because the illegal rules interfere with or impair Ryan’s legal rights to pursue refund claims on its own behalf and on behalf of its clients.

At press time, it is not known whether the Comptroller will appeal the District Court’s judgment.