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State and Local Tax ("SALT") issues require state and local tax knowledge. Chamberlain Hrdlicka's SALT Blawg provides exactly that knowledge with news updates and commentary about state and local tax issues.

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Texas Tax Refund Procedures – The Devil is in the Details

A Texas appellate court handed down on August 13 reminds taxpayers that the Texas Comptroller refund procedures are laden with traps for the unwary. 

Comptroller Seeks to Dismiss Refund Suit

In the case, Hegar v. El Paso Elec. Co., the taxpayer, El Paso Electric, sued the Texas Comptroller for refund in district court on grounds that it had paid taxes on equipment that qualified for Tax Code section 151.318(a)(4)'s exemption for “telemetry units that are related to ... step-down transformers.”.  No. 03-18-00790-CV (Tex. App. Aug. 13, 2020).  The Comptroller pled that El Paso Electric had failed to properly raise the refund at the administrative level.  Although the district court rejected the Comptroller's plea and ruled in the taxpayer's favor, the Court of Appeals reversed.

Procedural Rules for Refunds

The procedural rules in effect at the time of El Paso Electric's refund claim were basically as follows (and in material respects the same today).  The taxpayer starts the refund process by filing with the Comptroller a refund claim which, among other things, “state[s] fully and in detail each reason or ground on which the claim is founded.”  The point of this detail requirement is to place the Comptroller on notice of the legal basis of the claim.  That's also the standard against which courts generally measure a claim's adequacy from a procedural standpoint. 

If the Comptroller does not grant the entire refund claim, then, for lack of a better term, a pre-contested case process ensues.  The taxpayer requests a refund hearing by timely submitting a written request for hearing, which includes a Statement of Grounds that should also state fully and in detail the legal basis for the refund claim; the Comptroller responds with a Position Letter; and the taxpayer may submit a Reply to the Position Letter.   At the conclusion of this pre-contested case process, if the parties are unable to resolve the matter, then the matter is referred to the State Office of Administrative Hearings (SOAH) under the SOAH contested case procedures.

The procedures are significantly more intricate than this, but the foregoing explains in broad strokes the aspects fundamental to the particular issue in the El Paso Electric case.

The Comptroller’s Argument

In the El Paso Electric case, the Comptroller argued that El Paso Electric first raised any claim for the exemption for telemetry units related to step-down transformers in a document filed in the SOAH, after the pre-contested case procedures had concluded.  El Paso Electric argued that the content of its refund claim and Statement of Grounds adequately placed the Comptroller on notice of the legal basis of its claims for refund during the pre-contested case phase of the matter.  Prior to being docketed in the SOAH, El Paso Electric had quoted in full Tax Code Section 151.318's subsections (a)(1), (2), (4), (5), (6), (7), (8), (9), (10), and (11).  Subsection (a)(4) lists over four dozen categories of equipment, each of which qualifies for an exemption.  El Paso Electric had not specifically stated Tax Code section 151.318(a)(4)'s exemption for “telemetry units that are related to ... step-down transformers.”  

The Court’s Decision

The Court of Appeals concluded that a general recitation to an exemption in the Tax Code was inadequate to place the Comptroller on notice of the legal basis for the taxpayer’s claim, and accordingly the taxpayer had failed to preserve the issue.  The court’s decision is a cautionary tale that taxpayers must make sufficiently detailed refund claims and Statements of Ground, and adhere the often-persnickety set of procedural rules governing refund claim, else the taxpayer may forfeit their ability to obtain a refund, no matter the substantive bona fides of the claim.

The bottom line is that Texas tax refund procedures are a minefield.  Attorneys at Chamberlain Hrdlicka regularly assist taxpayers in navigating this intricate sets of rules for obtaining refunds of Texas taxes.

  • Peter A. Lowy
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    Peter A. Lowy, a shareholder in Chamberlain Hrdlicka’s Houston office, is best known for his tax controversy work and deep experience in the energy sector. He also advises corporations and other taxpayers in a broad spectrum of ...