News and Insights

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

Tax Development May 28, 2015

A Texas Court of Appeals (“Court”) has invalidated several provisions of the Texas Comptroller of Public Accounts’ rule relating to refunds of sales and use tax.  In Hegar v. Ryan, LLC (“Ryan”), No. 03-13-00400-CV (Tex. App. – Austin, May 20, 2015, no pet. hist.), the Court declared that subsections (a)(4)(C) and (E) and part of subsection (e)(3) of 34 TAC § 3.325 (effective January 7, 2013), and subsections (a)(4)(A) and (C) of the previous version of the rule (effective July 19, 2011) impose additional burdens, conditions, and restrictions on refund claims in excess of those required by law.

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 adopted a new version of 34 TAC § 3.325.  Subsections (a)(4)(A) and (C) required tax refund claimants to include substantial transaction-level detail and supporting documentation with their initial refund claims.  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 claimants.  Even if such claims were supplemented and resubmitted, the Comptroller contended that the statute of limitations had not been tolled by the original submission. 

Within two years, the Comptroller modified some of its procedures and promulgated rule amendments effective January 7, 2013.  Like the 2011 rule, subsections (a)(4)(C) and (E) and the final sentence of subsection (e)(3) of the 2013 rule still required submission of transaction-level detail and documentation upon initial filing of a refund claim.  However, the 2013 rule added a safe harbor allowing supposedly “incomplete” refund claims to toll limitations and excusing taxpayers from producing voluminous documentation, provided such documents were available for the Comptroller’s review.  However, the safe harbor provisions conflicted with the surviving portions of the 2011 rule and also created potential jurisdictional traps and hurdles for refund claimants that might wish to go to district court.

Represented by Doug Sigel of the Ryan Law Firm, LLP, Ryan challenged the portions of the 2011 and 2013 rules that imposed additional burdens, conditions, and restrictions on refund claims in excess of the requirements of Tax Code § 111.104.  The trial court ruled in favor of Ryan, and the Comptroller appealed, contending that the 2011 and 2013 rules were valid and that Ryan did not have legal standing to challenge the rules. 

The Court of Appeals affirmed the trial court’s decision that Ryan had legal standing to sue.  The Court also upheld the trial court’s determination that the aforementioned subsections of both the 2011 and 2013 rules are invalid.  The Court narrowed the trial court’s decision, however, upholding those portions of the 2011 and 2013 rules that mirrored language in the statute without adding additional burdens, conditions, and restrictions. 

At press time, it is not known whether the Comptroller will request a rehearing and/or appeal to the Texas Supreme Court.


Damon Chronis

John Christian