Sanadco Inc., a Texas Corporation Mahmoud Ahmed Isba Broadway Grocery, Inc. And Shariz, Inc. v. Glenn Hegar, in His Individual and Official Capacity as Comptroller of Public Accounts Office of Comptroller of Public Accounts for the State of Texas And Ken Paxton, in His Official Capacity as Attorney General of the State of Texas ( 2015 )

ACCEPTED
03-14-00771-CV
5422011
THIRD COURT OF APPEALS
AUSTIN, TEXAS
5/26/2015 4:15:15 PM
JEFFREY D. KYLE
CLERK
NO. 03-14-00771-CV
In the Court of Appeals FILED IN
3rd COURT OF APPEALS
for the Third Judicial District AUSTIN, TEXAS
Austin, Texas 5/26/2015 4:15:15 PM
JEFFREY D. KYLE
Clerk
SANADCO INC., MAHMOUD A. ISBA, BROADWAY GROCERY, INC., SHARIZ, INC. RUBY &
SONS STORE, INC., AND RUBINA NOORANI,
Appellants,
v.
THE OFFICE OF THE COMPTROLLER OF PUBLIC ACCOUNTS; GLENN HEGAR, IN HIS
OFFICIAL CAPACITY AS COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS;
AND KEN PAXTON IN HIS OFFICIAL CAPACITY AS ATTORNEY GENERAL OF THE STATE OF
TEXAS, ET AL.,
Appellees.
On Appeal from Cause No. D-1-GN-13-004352
The 200th Judicial District Court of Travis County, Texas
The Honorable Charles Ramsay, Judge Presiding
APPELLEES’ RESPONSIVE BRIEF
KEN PAXTON ROBERT O’KEEFE
Attorney General of Texas Chief, Financial and Tax Litigation Division
CHARLES E. ROY JACK HOHENGARTEN
First Assistant Attorney General State Bar No. 09812200
Assistant Attorney General
JAMES E. DAVIS Financial Litigation, Tax, and
Deputy Attorney General for Defense Charitable Trusts Division
Litigation P.O. Box 12548
Austin, Texas 78711 2548
TEL: (512) 475-3503
FAX: (512) 477 2348
jack.hohengarten@texasattorneygeneral.gov
Attorneys for Appellees
TO THE HONORABLE THIRD COURT OF APPEALS:
Appellees, Office of the Comptroller, Glenn Hegar, in his Official Capacity as
Comptroller of Public Accounts of the State of Texas (“Comptroller”), and Ken Paxton, in
his Official Capacity as Attorney General of Texas, pursuant to Tex. R. App. P. 28 and 38,
file this response:
This accelerated appeal is governed by Sanadco, Inc. v. Office of the Comptroller,
2015 WL 1478200 (Tex. App.—Austin March 25, 2015, no pet.) (mem. op.)—indeed, this
accelerated appeal is Sanadco v. Office of the Comptroller. While Sanadco I was pending
before this court, and after it had denied their appellate motion for emergency relief, the
taxpayers Sanadco and Mahmoud Isba turned around and filed a second, identical lawsuit
in district court, challenging the Comptroller’s tax determination, and asserting claims
under the APA and UDJA.
The Honorable Judge Charles Ramsey denied Mahmoud Isba’s application for
temporary injunction and Isba appeals that order. But, as shown below, Isba’s second
suit—and this accelerated appeal of Judge Ramsey’s order—raises no new issues. As
such, it is governed by this court’s opinion in Sanadco I.
Appellees’ Responsive Brief page ii
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
TABLE OF CONTENTS
Table of Contents .......................................................................................................3
Index of Authorities ...................................................................................................4
Statement of the Case.................................................................................................6
Issue Presented ...........................................................................................................7
Statement of Facts ......................................................................................................8
Summary of the Argument.........................................................................................9
Argument..................................................................................................................10
A. Appellant Isba failed to pay or make arrangements to pay for the
reporter’s record, and the absence of that record is dispositive ............... 10
B. Even assuming arguendo that Isba presented an issue not requiring
review of the reporter’s record, Sanadco I fully disposes of his
appeal on jurisdictional grounds. .............................................................15
C. The waiver of immunity in APA section 2001.171 does not apply,
because the legislature has set out a specialized procedure for tax
protest suits. .............................................................................................17
D. Isba’s filing suit for judicial review does not and cannot vacate the
Comptroller’s tax determination. .............................................................20
Prayer .......................................................................................................................19
Certificate of Compliance ........................................................................................20
Certificate of Service ...............................................................................................20
Appendix ..................................................................................................................21
Appellees’ Responsive Brief page iii
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
INDEX OF AUTHORITES
Cases
Bryant v. United Shortline Inc. Assur. Services, N.A.,
972 S.W.2d 26 (Tex.1998)..............................................................................12, 13
Central Power & Light Co. v. Sharp,
919 S.W.2d 485 (Tex. App.–Austin 1996, writ denied) .......................................17
City of El Paso v. Heinrich,
284 S.W.3d 366 (Tex.2009) ..................................................................................15
Combs v. Chevron,
319 S.W.3d 836 (Tex. App.–Austin 2010, pet. denied) .......................................17
CRC–Evans Pipeline Int'l, Inc. v. Myers,
927 S.W.2d 259 (Tex. App.—Houston [1st Dist.] 1996, no writ) .......................11
Garth v. Staktek Corp.,
876 S.W.2d 545, 548 (Tex.App.—Austin 1994, writ dism’d w.o.j.) ................... 11
Miller Paper Co. v. Roberts Paper Co.,
901 S.W.2d 593 (Tex.App.—Amarillo 1995, no writ)...................................11, 12
Millwrights Local Union No. 2484 v. Rust Engineering Co.,
433 S.W.2d 683 (Tex.1968) ..................................................................................12
In re: Nestle USA, Inc.,
359 S.W.3d 211 (Tex. 2012)...........................................................................15, 17
Rodriguez v. State,
970 S.W.2d 133 (Tex.App.—Amarillo 1998, pet. ref'd) ......................................13
Rogers v. Howell,
592 S.W.2d 402 (Tex.Civ.App.—Dallas 1979, writ ref'd n.r.e.) ..........................12
Schafer v. Conner,
813 S.W.2d 154 (Tex.1991) ..................................................................................13
Tex. Dep't of Protective & Regulatory Servs. v. Mega Child Care,
145 S.W.3d 170 (Tex. 2004).................................................................................16
Texas Indus. Gas v. Phoenix Metallurgical Corp.,
828 S.W.2d 529 (Tex.App.—Houston [1st Dist.] 1992, no writ) ........................11
Texas Logos, L.P. v. Texas Dept. of Transp.,
241 S.W.3d 105 (Tex.App.–Austin 2007, no pet.) ...............................................14
Texas Natural Res. Conservation Comm'n v. IT–Davy,
74 S.W.3d 849 (Tex.2002)....................................................................................14
Walling v. Metcalfe,
863 S.W.2d 56 (Tex.1993)....................................................................................10
Appellees’ Responsive Brief page iv
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
Statutes
Tex. Gov’t Code § 2001.171........................................................................14, 15, 16
Tex. Gov’t Code § 2001.173....................................................................................18
Tex. Gov’t Code § 2001.038....................................................................................15
Tex. Civ. Prac. & Rem. Code § 37.001 ...................................................................15
Tex. Tax Code 111.0611(a) .......................................................................................8
Tex. Tax Code 112.054 ............................................................................................18
Tex. Tax Code 112.051-.156 ...................................................................................16
Appellate Rules
Tex. R. App. P 37.3(c) .........................................................................................9, 14
Tex. R. App. P. 35.3(b)(1)-(3) .................................................................................13
Tex. R. App. P. 50(d) ...............................................................................................13
Appellees’ Responsive Brief page v
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
STATEMENT OF THE CASE
Nature of the Case: This is a suit brought (again) by the Sanadco taxpayers under the
Administrative Procedure Act and the UDJA, alleging two
internal agency memos were APA “rules,” which the
Comptroller failed to adopt in accordance with APA
requirements. See Tex. Gov’t Code §§ 2001.021-.033 (West
2008). The taxpayers also sought declaratory relief, alleging the
Comptroller had engaged in ultra vires acts, and challenged the
constitutionality of several statutes in the Tax Code. Finally,
they sought to enjoin the Comptroller’s administrative
enforcement and collection activities.
Trial Court: 200th Judicial District Court of Travis County, Texas, The
Honorable Charles Ramsey, Judge Presiding
Course of Proceedings: While Sanadco, Inc. v. Office of the Comptroller, No. 03-11-
000462-CV (“Sanadco I”)1 was pending before this Court—and
after it had denied their motion for emergency relief2—Sanadco
and Isba brought a second, identical suit in district court. As
before, they asserted claims under the Administrative Procedure
Act and the UDJA, challenging the Comptroller’s final
determination of tax liability. 3
1
See Appendix, Tab A.
2
See Appendix, Tab B.
3
See Appendix, Tab C
Appellees’ Responsive Brief page vi
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
Trial Court Disposition: Isba applied for temporary injunctive relief enjoining all
administrative enforcement and collection activities relating to
his tax liability. After an evidentiary hearing on October 14,
2014, 4 the district court denied Isba’s application for temporary
injunction. 5 Appendix, Tab D.
ISSUES PRESENTED
1. Is Isba’s failure to pay or make arrangements to pay for preparation of the
reporter’s record dispositive of this appeal of the order denying temporary
injunction?
2. In view of this court’s March 25, 2015, opinion in Sanadco I, did the district
court have subject-matter jurisdiction over Isba’s APA and UDJA claims?
3. Did the suit for judicial review filed by Sanadco and Isba automatically
vacate the Comptroller’s final determination, so as to preclude the agency
from undertaking administrative enforcement activities?
4
As shown by this court’s file, Isba failed to pay or make arrangements to pay for the court
reporter’s record of the October 14, 2014 evidentiary hearing before the district court. See Tex. R. App.
P. 37.3(c); Appendix, Tab D.
5
See Appendix, Tab E.
Appellees’ Responsive Brief page vii
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
STATEMENT OF FACTS
The background and facts are correctly stated in this Court’s March 25, 2015
opinion in Sanadco I. The only distinction in this appeal is that it involves the
personal tax liability of Sanadco’s principal Isba.6 Although appellant’s statement
of facts includes assertions relating to Broadway Grocery, Inc., Shariz, Inc., and
Rubi & Sons Store, Inc., none of those taxpayers are before this Court: The
October 14, 2014 hearing and the district court’s November 13, 2014 order
denying temporary injunctive relief related only to Isba.7
SUMMARY OF ARGUMENT
The district court’s order denying Isba’s application for temporary injunction
should be affirmed, because:
First, given the standard of review for orders denying temporary injunctive
relief, the absence of a reporter's record is dispositive. Whether Isba was entitled to
a temporary injunction depended upon the evidence presented in support of his
application for relief. See Tex. R. App. P 37.3(c). Without a reporter's record, this
Court cannot know what legal arguments were made and what, if any, evidence
was presented to the trial court in support of those arguments. Nor can it assess
6
See Appendix, Tab F (F of F Nos. 19-27, C of L Nos. 11, 12, 15-17); Tex. Tax Code §
111.0611(a)(personal liability of corporate officers for fraudulent tax evasion).
.
7
See Appendix, Tab E.
whether Isba satisfied the elements for establishing his right to temporary relief—
particularly, the element of irreparable harm.
Second, even assuming there remained an issue that did not require the
reporter’s record, this Court’s opinion in Sanadco I has already addressed and
disposed of Isba’s legal arguments—by concluding that the district court lacked
subject-matter jurisdiction over the taxpayer’s APA and UDJA claims.
Third, as this Court observed in Sanadco I, where a taxpayer who is
challenging the Comptroller’s assessment of taxes and penalties has not complied
with Chapter 112, the APA does not and cannot provide an alternate jurisdictional
basis for such claims. To hold otherwise would effectively read out of the Tax
Code the statutory prerequisites for bringing a tax-protest or refund suits in district
court. The APA procedure for judicial review would swallow and render
meaningless those prerequisites—an outcome the legislature could not have
intended.
Appellees’ Responsive Brief page 2
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
ARGUMENT
A. Appellant Isba failed to pay or make arrangements to pay for the
reporter’s record, and the absence of that record is dispositive.
The purpose of a temporary injunction is to preserve the status quo pending a
trial on the merits. See Walling v. Metcalfe, 863 S.W.2d 56, 58 (Tex.1993). In an
appeal from an order granting or denying a request for a temporary injunction,
appellate review is confined to the validity of the order that grants or denies the
injunctive relief. See id.
The decision to grant or deny the injunction lies within the sound discretion of
the trial court, and will not be disturbed absent a clear abuse of discretion. See id.
This Court may neither substitute its judgment for that of the trial court nor
consider the merits of the lawsuit. See id.; Texas Indus. Gas v. Phoenix
Metallurgical Corp., 828 S.W.2d 529, 532 (Tex.App.—Houston [1st Dist.] 1992,
no writ). Rather, it must view the evidence in the light most favorable to the trial
court's order, indulging every reasonable inference in its favor, and determine
whether the order was so arbitrary as to exceed the bounds of reasonable
discretion. See CRC–Evans Pipeline Int'l, Inc. v. Myers, 927 S.W.2d 259, 262
(Tex. App.—Houston [1st Dist.] 1996, no writ). The Court cannot reverse a trial
Appellees’ Responsive Brief page 3
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
court's order if the trial court was presented with conflicting evidence and the
record includes evidence that reasonably supports the trial court's decision. See id.
Next, the purpose of a temporary injunction is to preserve the status quo until a
final hearing on the merits. Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d
593, 597 (Tex.App.—Amarillo 1995, no writ). Furthermore, the applicant is not
entitled to temporary relief until he demonstrates a probable injury and a probable
right of recovery. Garth v. Staktek Corp., 876 S.W.2d 545, 548 (Tex. App.—
Austin 1994, writ dism’d w.o.j.).
A probable right of recovery is proven by alleging the existence of a right and
presenting evidence tending to illustrate that the right is being denied. Miller
Paper Co. v. Roberts Paper Co., 901 S.W.2d at 597. Probable injury is proven
through evidence of imminent harm, irreparable injury, and the lack of an adequate
legal remedy. Id. Both prongs require the presentation of evidence and, unlike
temporary restraining orders, cannot be based upon sworn pleadings or affidavits
unless the parties so agree. Millwrights Local Union No. 2484 v. Rust Engineering
Co., 433 S.W.2d 683, 685–87 (Tex.1968); Rogers v. Howell, 592 S.W.2d 402, 403
(Tex.Civ.App.—Dallas 1979, writ ref'd n.r.e.).
Given the standard of review for orders denying temporary injunctive relief, the
absence of a reporter's record is dispositive. Whether Isba was entitled to a
Appellees’ Responsive Brief page 4
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
temporary injunction depended upon the evidence presented in support of his
application for relief. Without a reporter’s record, this Court cannot know what, if
any, evidence was presented to the trial court. Nor can it assess whether Isba
satisfied the elements considered by Miller Paper as prerequisites to obtaining
such relief.
Indeed, the reporter’s record is so pivotal to this Court’s review that its absence
necessitates the presumption that the missing evidence actually supported the trial
court's ruling. See Bryant v. United Shortline Inc. Assur. Services, N.A., 972
S.W.2d 26, 31 (Tex.1998) (Court stating that: “We indulge every presumption in
favor of the trial court’s findings in the absence of a statement of facts.”) True,
Bryant and its predecessors are based on the appellant’s having the burden of
providing the appeals court with a record sufficient to prove error under the
appellate rules in existence before September 1, 1997. See Tex. R. App. P. 50(d)
(repealed September 1, 1997); Schafer v. Conner, 813 S.W.2d 154, 155
(Tex.1991).
But while the current appellate rules state that the court reporter is responsible
for preparing, certifying, and timely filing the reporter’s record, that responsibility
is expressly conditioned upon the appellant’s filing the notice of appeal, requesting
that the reporter's record be prepared, and paying for or making arrangements to
Appellees’ Responsive Brief page 5
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
pay for the reporter's record. Tex. R. App. P. 35.3(b)(1)-(3); Rodriguez v. State,
970 S.W.2d 133, 135 (Tex.App.—Amarillo 1998, pet. ref'd) (involving the clerk's
record). Accordingly, if the appellant’s failure to complete the steps required
under rule 35.3(b)(1), (2), and (3) denies the appellate court a sufficient record
with which to review his appeal, Bryant controls.
Simply put, this Court cannot determine what evidence was before the trial
court, cannot determine whether the trial court abused its discretion, cannot
determine whether Isba proved the existence of a right, cannot determine whether
the Comptroller’s activities resulted in or threatened a denial of that right—and, in
particular, cannot determine whether Isba was threatened with imminent harm and
irreparable injury, and lacked an adequate legal remedy. Accordingly, this court
should presume that the missing record supports the trial court's determination and
forego further review of this dispute as authorized under appellate rule 37.3(c).
B. Even assuming arguendo that Isba presented an issue not requiring
review of the reporter’s record, Sanadco I fully disposes of his appeal on
jurisdictional grounds.
Although Rule 37.3(c) affords this Court the discretion to decide issues that
do not depend on the reporter's record, that authorization does not and cannot
extend to review of the order denying Isba’s application—as that determination
is clearly dependent upon the presence of the reporter’s record.
Appellees’ Responsive Brief page 6
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
In addition, Isba’s legal arguments have already been rejected by this Court
in Sanadco I. Isba contends that APA section 2001.171, which authorizes
judicial review of final administrative decisions, provides an alternative
jurisdictional basis for challenging Comptroller tax determinations.
But the opinion in Sanadco I has already addressed and disposed of this
argument:
Sovereign immunity protects the State of Texas, its agencies, and its
officials from lawsuits unless the legislature expressly gives its
consent to the suit. Texas Natural Res. Conservation Comm'n v. IT–
Davy, 74 S.W.3d 849, 853 (Tex.2002). Absent the State's consent to
suit, a trial court lacks subject-matter jurisdiction. Id. at 855.
Sovereign immunity not only bars suits for money damages but also
protects the State against suits to “control state action.” Texas Logos,
L.P. v. Texas Dept. of Transp., 241 S.W.3d 105, 118 (Tex.App.–
Austin 2007, no pet.). Therefore, absent an express waiver of
sovereign immunity, Sanadco's counterclaims are barred.
Sanadco I, 2015 WL 1478200 at * 4.
After citing the well-established case law governing sovereign immunity, the
court addressed Sanadco’s jurisdictional arguments:
Sanadco cites two statutes providing limited waivers of immunity—
the Administrative Procedure Act, see Tex. Gov't Code § 2001.038,
and the Uniform Declaratory Judgments Act, see Tex. Civ. Prac. &
Rem.Code § 37.001 et seq.—as well as an exception to waiver, the
doctrine of ultra vires, see City of El Paso v. Heinrich, 284 S.W.3d
366, 372–73, 380 (Tex.2009), as conferring jurisdiction on the district
court over its counterclaims. However, as discussed below, we
conclude that all of these grounds for jurisdiction are preempted by
Appellees’ Responsive Brief page 7
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
Chapter 112 of the Tax Code, which the supreme court has held
provides exclusive remedies for relief from assessed taxes on any
basis. See Nestle, 359 S.W.3d at 211. Because Sanadco did not
comply with the mandatory Chapter 112 requirements, the district
court has no jurisdiction over any of its counterclaims.
Id.
Although the language quoted above specifically addresses APA section
2001.038, which authorizes challenges to agency rules, the court’s holding and
rationale necessarily extend to APA section 2001.171, as well. Both statutes are
preempted by Tax Code Chapter 112, which specifically waives immunity for
certain taxpayer actions, conditioning the waiver on prerequisites to the taxpayer’s
bringing suit under that chapter. Sanadco I at * 5. Moreover, this precise issue—
the availability of APA section 2001.171 to a taxpayer challenging state taxes—
was addressed in post-submission briefing in Sanadco I.8
C. The waiver of immunity in APA section 2001.171 does not apply,
because the legislature has set out a specialized procedure for tax
protest suits.
As the Comptroller pointed out in its post-submission briefing in Sanadco I,
APA section 2001.171 does not apply to the Tax Code. The APA provides an
independent right to judicial review only where the agency’s enabling statute
neither specifically authorizes nor prohibits judicial review of the decision. Tex.
8
See Appendix, Tab G, at p. 3; and Tab H, at p. 4-7.
Appellees’ Responsive Brief page 8
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
Dep't of Protective & Regulatory Servs. v. Mega Child Care, 145 S.W.3d 170
(Tex. 2004).
Here, in clear contrast to Mega Child Care, the Chapter 112 of the Tax Code
specifically sets out the statutory prerequisites for challenging the Comptroller’s
determination of tax liability in district court.
The legislature has created a limited waiver of sovereign immunity for tax
refund and protest suits, and for tax injunction suits, but mandated specific
prerequisites which must be satisfied prior to filing suit against these specifically
enumerated claims. See Tex. Tax Code Ann. §§112.051-.156 (West 2015).
The undisputed jurisdictional facts, as shown by Isba’s pleading, are that
neither he nor Sanadco has met the statutory prerequisites in Chapter 112.9
Compliance with the procedural requirements of the tax-protest law is a
jurisdictional prerequisite to suit. Sanadco I at * 5; In re: Nestle USA, Inc. 359
S.W.3d at 211; see also Central Power & Light Co. v. Sharp, 919 S.W.2d 485, 491
(Tex. App.–Austin 1996, writ denied); Combs v. Chevron, 319 S.W.3d 836, 844-45
(Tex. App.–Austin 2010, pet. denied).
Most importantly, Isba’s argument, if accepted by this court, would
effectively read out of the Tax Code the statutory prerequisites for bringing a tax-
9
See Appendix Tab C, at pp. 3-4.
Appellees’ Responsive Brief page 9
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
protest suit in district court. The APA procedure for judicial review would
swallow and render meaningless those prerequisites—an outcome the legislature
could not have intended. See Nestle, 359 S.W.3d at 211-12 (Tex. 2012) (holding
that statutory prerequisites for taxpayer suits are conditions on the legislative
waiver of immunity and dismissing original proceeding for want of jurisdiction).
D. Isba’s filing suit for judicial review does not and cannot vacate the
Comptroller’s tax determination.
In addition, Isba argues that his filing suit under the APA automatically
vacated the Comptroller’s final tax determination. Therefore, he reasons, Sanadco
I does not control, because this court emphasized that its holding applied only to
cases in which the taxpayer seeks relief from a tax assessment that has become a
final liability. See Sanadco I at *6, n.9.
In so arguing, Isba is attempting to selectively read and blend provisions in
the Tax Code with the APA to achieve a procedural result that the legislature did
not intend. First, he points to the Tax Code section 112.054, which provides that
trial of the issues in “suits under this subchapter are de novo.” He then attempts to
blend that section with APA section 2001.173, which provides that if the manner
of review of the agency decision is trial de novo “the reviewing court shall try each
Appellees’ Responsive Brief page 10
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
issue of fact and law . . . as though there has not been an intervening agency
action.”
But this argument requires Isba to skip over the fact that he has not complied
with the pre-payment and notice requirements of Subchapter B of Chapter 112, but
rather, is attempting to evade those very prerequisites. Accordingly, his suit cannot
be a “suit[] brought under this subchapter” and perforce cannot be a suit entitled to
de novo review. In short, Isba cannot have it both ways. He cannot argue that he
does not have to comply with the statutory prerequisites of Chapter 112, but that its
de novo standard of review nonetheless governs his challenge to the Comptroller’s
tax assessment.
Appellees’ Responsive Brief page 11
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
PRAYER
In view of the foregoing, the state officials request that this court affirm the
trial court’s order, tax all costs to appellant Isba, and grant such other and further
relief to which the state officials may show themselves entitled.
Respectfully submitted,
KEN PAXTON
Attorney General of Texas
CHARLES E. ROY
First Assistant Attorney General
JAMES E. DAVIS
Deputy Attorney General for Defense
Litigation
ROBERT O’KEEFE
Chief, Financial and Tax Litigation
Division
/s / Jack Hohengarten
JACK HOHENGARTEN
State Bar No. 09812200
Assistant Attorney General
Financial Litigation, Tax, and
Charitable Trusts Division
P.O. Box 12548
Austin, Texas 78711 2548
TEL: (512) 475-3503
FAX: (512) 477 2348
jack.hohengarten@texasattorneygeneral.gov
Attorneys for Appellees, Glen Hegar,
Comptroller of Public Accounts of the
State of Texas and Ken Paxton, Attorney
General of the State of Texas
Appellees’ Responsive Brief page 12
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
CERTIFICATE OF COMPLIANCE
In compliance with Texas Rule of Appellate Procedure 9.4(i)(2), this brief
contains 2,271 words, excluding the portions of the brief exempted by Rule
9.4(i)(1).
CERTIFICATE OF SERVICE
I certify that on this 22nd day of May, 2015, a true and correct copy of the
foregoing document, Appellees’ Responsive Brief, has been sent to the attorney for
appellants via e-service and/ or electronic mail, as follows:
Samuel T. Jackson
Law Office of Samuel T. Jackson
P.O. Box 170633
Arlington, TX 76003-0633
jacksonlaw@hotmail.com
/s / Jack Hohengarten
Jack Hohengarten
Appellees’ Responsive Brief page 13
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
APPENDIX
Tab A
Memorandum Opinion on Motion for Rehearing in Sanadco I,
No. 03-11-00462-CV, in the Third Court of Appeals.
Tab B
Order and Motion for Emergency Relief to Lift the Automatic Stay for a
Limited Purpose in Sanadco I, No. 03-11-00462-CV, in the Third Court of Appeals.
Tab C
Plaintiff’s Original Petition for Judicial Review, Declaratory Judgment,
Temporary Injunction and Request for Disclosure, No. D-1-GN-13-004352,
Sanadco Inc. v. Hegar, in the 200th Judicial District Court, Travis County
(“Sanadco II).
Tab D
Letter regarding payment for Reporter’s Record in Sanadco II,
No. 03-14-00771-CV, in the Third Court of Appeals.
Tab E
Order Denying Plaintiff’s Declaratory Judgment and Application for Temporary
Injunction
Plaintiffs’ Third Amended Petition for Judicial Review, Declaratory
Judgment, Temporary Injunction and Request for Disclosure, in Sanadco II,
No. D-1-GN-13-004352, in the 200th Judicial District Court of
Tab F
Certification of Public Records for Order Denying Motion for Rehearing on
Comptroller’s Decision on Hearing Nos. 106,815 and 107,006
Certification of Public Records for Comptroller’s Decision on Hearing Nos.
106815 and 107006 with Attachments A – Texas Notification of Hearing
Results
Tab G
Appellants’ Post-Submission Letter Brief in Sanadco I, No. 03-11-00462-
CV, in the Third Court of Appeals.
Tab H
State Officials’ Response to Appellants’ Post-Submission Brief in Sanadco
I, No. 03-11-00462-CV, in the Third Court of Appeals.
Appellees’ Responsive Brief page 14
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
Tab A
Memorandum Opinion
On Motion for Rehearing
Sanadco I, No. 03-11-00462-CV
Third Court of Appeals.
Appellees’ Responsive Brief page 1
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
ON MOTION FOR REHEARING
NO. 03-11-00462-CV
Sanadco Inc., a Texas Corporation; Mahmoud A. Isba, a/k/a Mahmoud Ahmed Abuisba,
a/k/a Mike Isba; \Malid Abderrahman; Majic Investments,Inc.; Faisal Kahn; Isra
Enterprises,Inc.; Hattab Al-Shudifat; Haifa Enterprises,Inc.; EID corp.; Mohammed s.
Al Hajeid; Majdi Rafe Okla Nsairat; and Omar Unlimited,Inc. Individually, Appellants
v
The Office of the Comptroller of Public Accounts of the State of Texas; Glenn Hegar,
Individually and in his Official Capacity as Comptroller of Public Accounts of the State of
Texas; and Ken Paxton in his Official Capacity as Attorney General for the State of Texas,
Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 9STH JUDICIAL DISTRICT
NO. D-1-GV-10-000902, HONORABLE TIM SULAK, JUDGE PR_ESIDING
MEMORANI) UM OPINION
We grant the Comptroller's motion for rehearing, withdraw our prior opinion and
judgrnent issued on Septernber 26,2013, and substitute in their place this opinion and judgment
affirming the district court's disrnissal of Sanadco, Inc.'s counterclaims.
After the Comptroller of Public Accounts performed an audit on a convenience
store owned by Sanadco, the Comptroller and the Attorney General (cumulatively the "Comptroller")
filed suit against Sanadco to recover delinquent taxes. In response, Sanadco filed various
counterclaims against the Comptroller arguing that the manner in which he calculated the amount
of taxes due was under the terms of an unauth orized.rule, that many of the actions that he engaged
in while conducting his audits were ultra vires, and that the provision of the Tax Code authorizing
audits by sampling and projecting was unconstitutional. After Sanadco filed its counterclaims, the
Comptroller filed a plea to the jurisdiction contending that the district court did not have jurisdiction
over the counterclaims. Subsequent to reviewing the plea and convening a hearing, the district court
granted the Comptroller's plea and dismissed Sanadco's counterclaims for lack ofjurisdiction. On
appeal, Sanadco challenges the dismissal of its counterclaims. We aff,rrm the district court's order
granting the Comptroller's plea to the jurisdiction.
RELEVANT STATUTORY SCHEME AND AUDITING MEMOS
Before delving into the background and issues in this case, a brief overview of
the governing framework for this case as well as a brief sytopsis of the actions by the Comptroller
that form the subject of this case is helpful. Under the Tax Code, convenience stores are required
to maintain their sales records for tax purposes, Tex. Tax Code $ I51.025, and the Comptroller is
authorized to examine and audit the records of convenience-store owners, id. $$ I I 1.004, 151.025.
In addition, the Comptroller may use sampling and projection methods for estimating the amount
oftaxes owed if"the taxpayer's records are inadequate or insufficient." Id. ç 11 1.0042(b). Moreover,
if the Cornptroller "is not satisfied" with the calculated tax owed based on the taxpayer's records,
the Comptroller may determine the amount of tax owed from "other information available to the
comptroller;' Id. ç I 11.008(a).
In addition to requiring convenience stores to maintain sales records, the Tax Code
also requires brewers, manufacturers, wholesalers, and distributors of alcoholic beverages to file
2
reports clironiclingtheirsales to stores and listingthe storesbyname. Id l5l.46l-.462. Similarly,
$$
the Tax Code authorizes the Comptroller to request wholesalers and distributors of tobacco
productstofilethesametypeofreports. Id $$ 154.021(addressingcigarettesales), 155.105 (covering
non-cigarette tobacco products). The type of information required in these repofts is commonly
referred to as H.B. I 1 information because the reporting requirernents were enacted by House Bill
11 (H.8.11) of the 80th legislattxe. see Act of May 3,2007,80th Leg., R.s., ch. 129, g$ l-3,2007
Tex. Gen. Laws 159, 159-62.
Once an audit has been performed, the store owner may request a rcdetermination
from the Comptroller within 30 days of receiving notice of the Comptroller's assessment. Tex. Tax
Code $ 1 I 1.009(a), (b). In addition, the owner may also request a hearing on the redetermination,
id. $ 11 1.009(c), before the State Office of Administrative Hearings, id $ 11 1.00455. If no request
for a redetermination is filed within 30 days, "the determination is final on the expiration of the
period." Id. ç 111.009(b).
As an alternative to requesting a redetermination, an individual may pay the assessed
taxes and penalties and file a claim for a refund with the Comptroller or pay the taxes and penalties
underprotestandfilesuitseekingtheirrecovery.t Seerd $$111.104(b),(c), 112.051,.052;seealso
In re Nestle USA, lnc.,359 S.W.3d 207,21I (Tex. 2012) (protest, refund, and injunction suits
I
There is one more additional, limited remedy in the form of an action for a restraining order
or injunction to prohibit the assessment or collection of a state tax, which action also requires
prepayment of the taxes due or the posting of a bond as well as a pre-suit "statement of the grounds
on which the order or injunction is sought" filed with the attorney general. Tex. Tax Code $ lI2.I0l.
This remedy additionally requires a showing that (1) irreparable injury will result to the applicant
if tlre injunction is not granted , (2) no other adequate remedy is available to the applicant, and (3)
the applicant has a reasonable possibility of prevailing on the merits of the claim. Id. ç 112.10fi.
J
provide only means to seek relief from taxes assessed under Chapter 112). A tax-refund claim
proceeds to an administrative hearing, after which the Comptroller will issue a decision that
becomes final twenty days after service on the taxpayer. Id $ 1 I 1.105. A tax-refund claimant who
is dissatisfîed with the decision may file a motion for rehearin g, id. (c), and then if still dissatisfied
may file a suit in district court seeking to recover the amount paid within 30 days after the motion
for rehearing is denied, id g I l2.I5I(a), (b), (c).
If pursuing a protest-payment suit, a taxpayer must f,rle a written protest detailing
each reason for recovering the payment and submit such protest with payment of the assessed
taxes and penalties within six months (or other applicable limitations period) after the deficiency
determination becomes final Id. $g 111.104(c)(3), 112.051(b), (c).
Prior to the passage of H.B. 11, the Comptroller issued a meÍto entitled AP 92,
which provided guidance to auditors performing audits of convenience stores. In the memo, the
Comptroller explained that there had been a "lack of uniformity in estimated convenience store
audits" and tliat "mark-up percentages and product mix percentages" were developed to be used in
audits o'when necessitated by lack of reliable records" or if a store's "records are unavailable,
inadequate or unreliable." After H.B. 11 passed, the Comptroller issued another memo to audit
personnel entitled AP 122. The new memo updated AP 92 and required auditors to use H.B. I I
information "to produce the most accurate audit results." Sanadco's counterclaims arise from the
issuance of these two memos along with various actions taken by the Comptroller when performing
his audit of Sanadco.
4
BACKGROUND
Turning to the facts of this case, Sanadco owns a convenience store, and Mahmoud
Isba operates the store and is designated as a responsible person for Sanadco. The Comptroller
audited Sanadco and determined that Sanadco had underreported its taxable sales for alcohol and
tobacco products. The amount of the deficit was determined using H.B. I I d,ata. After making his
determination, the Comptroller sent a bill for the estimated amount owed and for interest on that
amount as well as a penalty.
After receiving notice of the amount due, Sanadco did not seek redetermination
of the assessment, see Tex. Tax Code $ 111.009, or pay any portion of the assessed taxes and
penaltiesandseekstatutoryreliefvia ataxpayer refundorprotest slit,seeid. $$ 111.104, lI2.I5l.
Accordingly, the Attorney General filed suit to collect the delinquent taxes. In response, Sanadco
filed an answer and raised several counterclaims seeking declaratory and injunctive relief against
the Cornptroller's collection of the taxes, compensatory damages, and attorney's fees. Those
counterclaims were made against thc Off,rce of the Comptroller, Susan Combs2 in her official
capacity as Comptroller, and Greg AbbotC in his official capacity as the Attorney General. Sanadco
later amended its answer and counterclaims, adding as counter-plaintiffs several other individuals
and companies who had been assessed similar taxes.a Unlike Sanadco, the other named counter-
'Since the events giving rise to this appeal, Glenn Hegar was elected Comptroller.
Accordingly, our references to the Comptroller are to him.
3 Since the events giving rise to this appeal, Ken Paxton was elected Attorney General.
Accordingly, our references to the Attorney General are to him.
a For ease of reading, we will generally refer to all of the counter-plaintifß as Sanadco.
5
plaintiffs all sought redeterminations of their assessed taxes through administrative review, but none
of the administrative proceedings had been completed by the time that the individuals were added
to the lawsuit.s
Regarding its counterclaims, Sanadco alleged eight complaints relevant to this appeal.
In its first counterclaim, Sanadco asserted that AP 92 and AP I22 are administrative rules that
were not promulgated in compliance with the requirements of the Administrative Procedure Act.
SeeTex.Gov'tCode$2001.038. Accordingly,sanadcosoughtadeclarationthatthosememosare
invalid administrative rules. In its second counterclaim, Sanadco alleged that the Comptroller
engaged in ultra vires actions when he issued AP 92 and AP 122 andthereby authorized auditors to
estimate taxes owed by convenience-store owners without "first ascertaining whether adequate
records are available" from the taxpayer to perform an audit. For those reasons, Sanadco sought
declarations assefting that "the Comptroller is not authorized to estimate convenience store audits
using the rnethods described in AP 92 or AP I22 until their proper adoption, and/or that the
authorization of their use is a non-discretionary ultra vires act committed without legal authority."
In its third counterclaim, Sanadco contended that the Comptroller acted without legal authority when
he improperly instructed auditors to use H.B. 11 information for convenience store audits "without
s Despite their participation in the administrative redetennination process, the additional
counter-plaintiffs later added as parties to the suit do not impact our consideration of whether the
trial court had subject-matter jurisdiction over Sanadco's counterclaims, because subject-matter
jurisdiction is determined at the time a suit is filed. See TJFA, L.P. v. Texas Comm'n on Envtl.
Quality,368 S.W.3d 727,733 (Tex. App.-Austin 2012,pet. denied); Bellv. Moores,832 S.V/.2d
749,753-54 (Tex. App.-Houston [14th Dist.] 1992,writ denied) (at time suit is filed, court either
has jurisdiction or it does not, and jurisdiction cannot subsequently be acquired while suit is
pending); seealsoAetnaCas.&Sur.Co.v.Hillman,796F.2d770,774,776(5thCir. 1986)(federal
rule of civil procedure 15, pertaining to amendment of pleadings, does not permit plaintiff to amend
complaint to substitute new plaintiff in order to cure lack of subject-matter jurisdiction).
6
first ascertaining whether the determination can be made from the taxpayer's records." Accordingly,
Sanadco insisted that the Comptroller's decision to require the use of H.B. 11 data is an ultra vires
act and, therefore, sought declarations that the use of H.B. 1 1 information was improper and that
the governing statutes do not allow "the Comptroller to give conclusive effect to the HB 1 I data."
In its fourth counterclaim, Sanadco alleged that the Comptroller improperly authorized
auditors to'ouse an abbreviated procedure which bypassed examination of the taxpayer's records
and authorized an estimation of his tax liability based solely on the invalid H.B. l l data, without
first determining the adequacy of the taxpayer's records." For that reason, Sanadco insisted that the
Comptroller was acting ultra vires and sought a declaration that the governing Tax Code provisions
do not authorize the abbreviated procedure. In its fifth counterclaim, Sanadco alleged that the
Comptroller acted ultra vires by authorizing the imposition of aS\o/openalty without proof of fraud
or of an intent to avoid the tax as required by the Tax Code. SeeTex. Tax Code $ I I 1.061(b). In
its sixth counterclaim, Sanadco sought a declaration that the provision of the Tax Code authorizing
sample and projection audits for estimating taxes owed is unconstitutionally vague and is, "by its
nature, a denial of substantive and procedural due process." See id. ç 111.0042. In its seventh
counterclaim, Sanadco alleged that the Comptroller engaged in an unconstitutional taking when he
improperly collected sales anduse taxes. Lastly, Sanadco challengedthe constitutionality ofthe Tax
Code provision authorizing the Comptroller to impose a ten-percent penalty if he believes that the
ooamount
due for a tax period is jeopardized by delay." See id $ I fi .022.
After Sanadco fìled its counterclaims, the Comptroller filed a motion for summary
judgment and a plea to the jurisdiction. After reviewing the pleadings, the plea, and Sanadco's
response to the plea, the district court signed an order granting the Comptroller's plea dismissing
7
all of Sanadco's counterclaims. The trial court also granted the Comptroller summary judgment
on two of Sanadco's eight counterclaims. On appeal, Sanadco contests both the district court's
order granting the Comptroller's plea and its order granting the Comptroller summary judgment.
STANDARD OF REVIEW
"A plea to the jurisdiction is a dilatory plea, the purpose of which is to defeat a cause
of action without regard to whether the claims asserted have merit." Bland Indep. Sch. Dist. v. Blue,
34 S.W.3d 547,554 (Tex. 2000). A party to a lawsuit may challenge a trial court's subject-matter
jurisdiction over a case by filing a plea . Houston Mun. Emps. Pensiondys. v. Ferrell,248 S.W.3d 151,
156 (Tex. 2007). Determinations regarding whether a trial court has jurisdiction over a case are
questionsoflaw,whichwereviewdenovo. TexasDep'tofParl74 S.W.3d 849, 853 (Tex. 2002). Absent the State's consent
to suit, atrial court lacks subject-matter jurisdiction. Id. at 855. Sovereign imrnunity not only bars
suits for money damages but also protects the State against suits to "control state action." Texes
Logos, L.P. v. Texas Dept. of Transp.,241 S.W.3d 105, 118 (Tex. App.-Austin2007, no pet.).
Therefore, absent an express waiver of sovereign immunity, Sanadco's counterclaims are barred.6
6 The fact that Sanadco is a counter-plaintiff rather than a plaintiff does not affect our
analysis when reviewing the trial court's ruling on a plea to the jurisdiction, as such determination
8
Sanadco cites two statutes providing limited waivers of immunity-the Administrative
Procedure Act, see Tex. Gov't Code $ 2001.038, and the Uniforrn Declaratory Judgments Act, see
Tex. Civ. Prac. & Rem. Code $ 37.001 et seq.-aswell as an exception to waiver, the doctrine of
ultra vires, see City of El Paso v. Heinrich,284 S.W.3d 366,372-73, 380 (Tex. 2009),as conferring
jurisdiction on the district court over its counterclaims. However, as discussed below, we conclude
that all of these grounds for jurisdiction are preempted by Chapter 112 of the Tax Code, which the
supreme court has held provides exclusive remedies for relief from assessed taxes on any basis.
See Nestle,359 S.W.3d atZII. Because Sanadco did not comply with the mandatory Chapter 112
requirements, the district court has no jurisdiction over any of its counterclaims.
Statutory prerequisites to taxpayer suits
The Tax Code waives the State's immunity from suit, but only for specif,rcally
enumerated taxpayer actions, each conditiorring waiver on certain administrative or other
prerequisites to a taxpayer's bringing a suit or claim thereunder. See Tex. Tax Code $$ 1 12.052
(protest suit),.101 (inyunction suit),.151 (refuüd suit); Nestle,359 S.W.3d at211 (dismissing
mandamus cause for want ofjurisdiction, where taxpayer sought declaration of constifutionality of
franchise tax, injunction prohibiting its collection, and mandamus relief compelling refund of taxes
already paid, because taxpayer had not complied with statutory prerequisites of Chapter Ll2 for
considers whether the non-moyant's pleadings affirmatively demonstrate the trial court's jurisdiction
over tlre challenged causes. See Texas Dep't of Parks & Wildlife v. Miranda, 133 S.W.3d 2I7 ,226
(Tex. 2004). Counter-plaintiffs are the functional equivalents of plairitiffs with respect to whether
their claims confèr subject-matter jurisdiction on the trial çotrt. See, e.g., Smith v. Clary Corp.,
917 S.W.2d 796, 798 n.l (Tex. 1996) (court must not only have jurisdiction over amount in
controversy but also must have subject-rnatter jurisdiction over counterclaim).
9
refund, protest, or injunction suit). Regardless of the taxpayer's claims
,the only permitted taxpayer
actions cliallenging state taxes areo'a suit after payment under protest, suit for injunction after
payment or posting of a bond, and a suit for a refund." Nestle,359 s.w.3d af 2rl.
In Nestle, the supreme court held that these three statutorily provided taxpayer suits
(along with their respective prerequisites to suit) are the only rneans by which a taxpayer may
challenge "the applicability, assessment, collection, or constitutionality" of a state tax. kJ. at209.
"The only exception is that prepayment of the tax as a prerequisite to suit is excused when it 'would
constitute an unreasonable restraint on the party's right of access to the courts."'1d. (quoting Tex.
Tax Code $ I 12.108); see also In re Allcat Claitns Serv., L.P.,356 S.W.3d 455,479 (Tex. 2011)
("[S]ection I 12.108 explicitly prohibits any court from granting injunctive or declaratory relief or
issuing any writ of mandamus or any other legal or equitable relief not already allowed elsewhere
in Chapter 112."). Besides these three avenues for relief, Chapter I 12 "allows no other actions to
challenge or seek refunds of the taxes to wliich it applies," including declaratory-judgment actions.
Nestle,359 S.W.3d at209-10; see also Strayhorn t¡. Raytheon E-Sys., Inc.,10I S.W.3d 558,572
(Tex. App.-Austin 2003, pet. denied) (when statute provides avenue for attacking agency order,
declaratory-judgment action will not lie to provide redundant remedies).
It is undisputed that Sanadco did not engage in an administrative redetermination
proceeding or meet any of the statutory requirements for a refund claim or protest suit. Sanadco may
not attempt to avoid those administrative and procedural requirements by merely filing counterclaims
to a collection suit brought by tlie Comptroller. If Sanadco were able to pursue its counterclaims
"free of Chapter 112's restrictions," the State's o'entire tax collection scheme" would be disrupted.
10
Nestle,359 S.W.3d at 2Il ("If a taxpayer were not required to lodge its complaints first by protest
or refund claim, the Comptroller would lack notice of the assertion of illegality, perhaps-as this
case illustrates-for years.").
Sanadco had two adequate, available remedies upon the Comptroller's deficiency
determination: (1) a redetermination proceeding or (2) payment of the taxes and pursuit of the
Chapter 1 12 refund or protest procedures. However, Sanadco elected not to pursue either remedy.T
It may not now attempt to circumvent the statutory prerequisites to taxpayer suits by casting its
various challenges to the assessed taxes and penalties as counterclaims seeking declaratory and
injunctive reliefto the Comptroller's collection actions when Sanadco could and should have availed
itself of the exclusive statutory taxpayer-suit procedures. While Sanadco frames its declaratory
requests in terms of the validity or constitutionality of "rules," statutes, and alleged ultra vires
actions, it is not merely seeking to obtain such declarations but to be relieved, thereby, of its tax
assessment and penalty. Chapter 112 of the Tax Code provides an exclusive remedy therefor, and
Nestle explicitly prohibits any attempt at relief from assessed state taxes on any basis except as
provided in the chapter.s
7 The third Chapter l12
remedy, an action for injunction, is not available to Sanadco under
the circumstances alleged in its pleadings because Sanadco had two other adequate remedies at law
in tlre form of a protest suit and a refirnd suit. ,S¿e Berry v. McDonald,l23 S.W.2d 388, 389 (Tex.
Civ. App.-San Antonio 1938, no writ) (holding taxpayer had adequate and complete legal remedy
under former version of statute providing for protest suit and, therefore, claim seeking relief in form
of enjoining Commissioner of Agriculture from collecting citrus sales tax was improper). However,
even if the injunction remedy under section 1 12. 101 were available to Sanadco, it is undisputed that
Sanadco did not fulfil any of the statutory prerequisites to suit thereunder, including prepayment of
the tax or posting of a bond and filing a pre-suit statement with the Attorney General.
I
Further, the Comptroller's claim to collect from Sanadco the delinquent taxes did not waive
immunity for all purposes but only narrowly waived it for counterclaims that both ( 1) were "germane
ll
Because Sanadco did not comply with the jurisdictional prerequisites of Chap ter IIZ,
we hold that the trial court did not have jurisdiction over any of Sanadco's eight counterclaims,
and the trial court did not err in granting the Comptroller's plea to the jurisdiction.e We need not
reach Sanadco's issues about the trial court's surnmary judgment because the Comptroller's plea
to the jurisdiction was directed to all eight of Sanadco's counterclaims, and our jurisdictional
deterrnination is dispositive of all issues on appeal. seeTex. R. App. p. 47 .l.
CONCLUSION
Having overruled each of Sanadco's issues, we affirm the district court's order
dismissing all of Sanadco's counterclaims on jurisdictional grounds.
to, connected to, and properly defensive to claims asserted by" the Comptroller and (2) operated as
damageoffsetsagainstthemonetaryreliefsoughtbytheComptroller. SeeManbeckv.Austinlndep.
Sch. Dist.,381 S.W.3d 528,533 (Tex.2012). It is without question that the later-joined counter-
plaintiffs' counterclaims did not meet either of these requirements. Also, because the Comptroller's
action sought collection of a particular, final amount of taxes, penalties, and interest-and Sanadco
did not challenge that final amount via any of the available adrninistrative and statutory procedures
already discussed-Sanadco's counterclaims cannot be considered "properly defensive" or offsets
thereto.
e We limit our holding to cases in which a taxpayer
seeks relief from a tax assessment that
has become a final liability and is no longer subject to review through administrative procedures; we
do not hold that Chapter 112 preempts every suit challenging a Comptroller rule or tax statute's
constitutionality. C.f.,Texas Entm'tAss'n,Inc.v. Combs,431 S.W.3d 790,795 (Tex. App.-Austin
2014, pet. denied) (citing Combs v. Texas Entm't Ass'n, Inc., 287 S.W.3d 852, 864-65 (Tex.
App.-Austin,2009), rev'd on other grounds,347 S.W.3d 277 (Tex.201 1)) (on remand, citing with
approval its previous opinion holding that declaratory-judgment action challenging constitutionality
and implementation of new tax statute was not preempted by Chapter 112 of Tax Code); Combs v.
EntertainmentPubl'ns Lnc.,292 S.W.3d 712,723 (Tex. App.-Austin2009, nopet.) (affrrmingtrial
court's denial ofplea to jurisdiction in suit in which taxpayer sought declaratory and injunctive relief
to prevent Comptroller from implementing allegedly invalid rule). Because Sanadco sought
injunctive relief from liability for the tax long after completion ofthe administrative process and the
deficiency assessment had become final, the facts here are distinguishable fiom those cases in which
the taxpayers sought declarations of the validity or constitutionality of rules and statutes and their
threatened enforcement prior to finality of an agency determination.
T2
David Puryear, Justice
Before Justices Puryear, Henson, and Goodwin
Justice Henson not participating
Affirmed on Motion for Rehearing
Filed: March 25,2015
13
Tab B
Order and Motion for Emergency Relief to Lift the Automatic
Stay for a Limited Purpose
Sanadco I, No. 03-11-00462-CV
Third Court of Appeals.
Appellees’ Responsive Brief page 2
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-11-00462-CV
Sanadco Inc., a'Iexas Corporation, and Mahmoud A. Isba,
a/k/a Mahmoud Ahmed Abuisba, aikla Mike Isba,Individually, Appellants
v
Susan Combs,Individually, and in her Offïcial Capacity as
Comptroller of Public Accounts of the State of Texas, and
Greg Abbott in his Official Capacity as Attorney General of the State of Texas,
et al., Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 9STH JUDICIAL DISTRICT
NO. D-1-GV-10-OOO9O2, HONORABLE TIM SULAK, JUDGE PRESIDING
ORDER
PER CURIAM
On April 16,2012, the appellants filed a motion for emergency relief related to their
appeal in cause number 03-11-00462-CV, and the appellees fìled a response on April 18,2012.
Having reviewed the motion and the response, we deny the motion for emergency relief.
It is ordered }l4ay 3,2012.
Before Justices Puryear, Henson and Goodwin
ProDoc FaxService Page 2 of 103
NO, 03-11- 00462
lln U,llt
0[birù 6nu$ nt H.frenld
AT TÐ'(AS
Sanadco Inc,, Mahmoud A, Isba, Walid Abderrahman, Maiic Investments
Inc,, Faisal Khan, Isra Enterprises, Inc,, Hattab Al-Shudifat, Haifa
Enterprises, Inc., EID Corp,, Mohammed S, Al Haieid, Maidi Rafe 0kla
Nsairat, Omar Unlimited, [nc., and All Others Similarly Situated,
APPELLANTS
VS.
The Office of the Comptroller of Public Accounts; Susan Combs, Ín her
individual and official capacities as Comptroller of Public Accounts for
the State of Texas; and Greg Abbott in his official capacity as Attorney
General of the State of Texas
APPEttEES
Appeal From Cause No D-1-GV-10-000902
The 98th Dlstrlct Court 0f Travls Counfy, Texas
The Honorable Tim Sulak, Presiding
MOTION FOR EMERGENCY RELIEF
TO LIFT THE AUTOMATIC STAY FOR A TIMITED PURPOSE
SAMUET T, IACKSON
sBN 10495700
P.O, BOX 670L33
ARTINGTON, TX 76003.0133
TEL: [817) 751-71ss
FAX: [866) 37+-oL64
COUNSET FOR APPELLANTS
ProDoc Faxservice Page 3 of 103
IDENTITY OF PARTIES AND COUNSEL
APPETLANTS:
Sa¡¡nnco Intc., MauuAuD A. Isne, WeuD ABDERRAnMAN, Mn¡tc h.rvrs'rurl¡Ts INC,,
Fnlsnl KuRtrl, Isnn ErrlrrRpRlsps, INc,, HATTng AL-SHUDIFAT, Hnlrn ErurrRpnlsrs,
In¡c,, EID CoRp,, Mognuprup S, Al HRInn, Mn¡u Rere 0xln NsRlnet, Ounn
Un¡unarrEo, INc., Rn¡n Au Ornrns Slrrtunlv S¡ruRrEp
COUNSEL FOR APPELLANTS:
tAW OFFICE OF
SAMUET T. IACKSON
P.O, Box 170633
Arlington, Texas 76003-063 3
TEL; [817) 75I'7Iïs
FAX: [866) 374-0164
Email: jacksonlaw(ôhotmail.cont
REAL PARTIES IN INTEREST:
Tun Orncn oF THB CouprnollrR oF Punuc Accouxrs; Susnr¡ Coltns,
INDTvTDUALLv, AND rN HER oFFICIAL cApAcrry es CouprnoLLER or PunLrc Accout¡rs
0F THESrnru on TExRs; AND GREG A¡Borr, IN Hrs oFFIcrAr cApAcrry Rs ArroR¡¡Ey
GEruERel oF THE Srnrr or TExRs
COUNSET FOR REAL PARTIES IN INTEREST:
TACK HOHENGARTEN
Assistant Attorney General
FINANCIAL LITIGATiO N DIVISION
P.0. Box )"2548
Austin, TXTBTLI-2548
TEL; (stz) 475-3503
FAX: (s12) 477 -23+Bl 480-8327
211:' t q rt
Motion for Ernergency Relief to Lift Autom¿ic Stay for Limited Purpose
ProDoc FaxService Page 4 of 103
TABTE OF CONTENTS
IDENTITY OF PARTIES AND COUNSEL ',2
I
TABLE OF CONTENTS ..J
TABLE OF AUTHORITIES 5
STATEMENT OF JURISDICTION B
STATEMENT OF THE CASE 9
ISSUES PRESENTED 10
L Did the Comptroller engage in ultra vires çonduct when she persisted in
pursuing the cancellation of Appellants' sales tax permit after her decision to cancel
the permit had been timely appealto the district court? .,,,..,...10
ll. Was the Comptroller's attempt to collect alleged sales tax liabilitìes while the
underlying claims were subject to an interlocutory appeal in violation of the
automatic stay provisions?,,,,.,,,. ,.,,,...,,,, 10
lll. Did the Comptroller engage in ultra vires conduct in excess of her statutory
authority when she engaged in enforcement procedures to collect sales tax
assessments while they were pending judicial review?.,,,. ..,... 10
lV. When Appellants' administrative procedures were exhausted, did the
Comptroller's decision become a nullity when Appellants requested de novo judicial
review? 10
STATEMENT OF FACTS .,..,11
ARGUMENT AND AUTHORIT]8S,.,,,,,.., ....,,r4
I. The Comptroller's Suspension of Appellants' Sales Tax Permit Violated
Appellants' Right to Appeal from the Order Suspending the Permit.........,, 15
il. Tlie Cornptroller's Enforcernont Actions Violated the Automatic Stay
Provisions of an Interlocutory Appeal ..... I7
III. The Comptroller's Enforcement Actions are Ultra l/ires 18
and Exceed Her Statr.itory Aulhority 18
3li;'nqi;
Motion for Emergency Relief to Lift Automatic Stay for Limitecl Purpose
ProDoc FaxService Page 5 of 103
CONCLUSION 22
PRAYER 22
CERTIFICATE OF SERVICE Error! Bookmark not defined.
INDEX TO APPENDIX Error! Bookmark not defined,
4l |'ne.c
Motion for Ernergency Relief to Lift Automatic Stay for Limited Purpose
ProDoc FaxService Page 6 of 103
TABTE OF AUTHORITIES
CASES
Amrhein v. La Madeleine, lnc.,
206 S.W,3d 173, (Tex.App.-Dallas 2006, no pet.),,,,.,... 15
Bunhus v, M & S Macñ. & Supply Co,, lnc.,
897 S.W,2d 871 (Tex.App,-San Antonio 1995, no pet,) i5
Çity of San Antonio v. City of Boerne,
1 1 1 S.W.3d 22 (Tex.2003) 18
Greene v. Sfafe,
324 S.W.3d 276 (Tex.App,-Austin 201 0, no pet,) 18
Herrera v. Sfafe,
No. 03-0'1-0010'l -CV,2002 WL 185476 17
ln Re TASO,
03-1 1 -00269-CV (Tex.App.-Austin s-6-201 1 )
Key Western Life /ns. Co. y, Sfafe Bd, of lns.,
350 S.W,2d 839 (Tex, 1961),., ,.,.,,, 19
Logal v. Unlted Sfafes,
195 F,3d 229, (Sth Cir. 1999) 17, 18
Southern Canal Ç0. v. Sfafe Bd. of Water Engineers,
31 8 S,W.2d 61 9; 159 Tex, 227 (Tex, 1958) 19
State Bd. of lns. v. Republic Nat'l lns. Ço.,
384 S.W,2d 3€9 (Tex,Civ,App, Austin 1964, writ refld n,r,e,),,,,, 19
-
Sfafe v. Crawford,
262 S.W,3d 532 (Tex.App.-Austin 2008, no pet.) 17, 18
Subaru of America v. David McDavid Nissan,
84 S,W.3d 212 (Tex.2002), I7
fexas Dept. of Public Safety v. Banks Transp. Ço.,
427 S.W,2d 593, (Tex.Sup, 1968)
5lPnqe
Motion for Eurergency Relief to Lift Automatic Stay for Limite324 S.W.3d 276,288 (Tex.App,-Austin 2010, no pet.)
(111,010 allows for a de novo review of the party's tax liabllity), Herrera v. .9fafe, No, 03-01-
00101-CV,2002 WL 185476, at *1 n.4,2002 Tex.App,.-Austin Feb,7,2OO2, no pet,) (not
designated for publication) (identifying suit under section 111,010 as "de novo action by the
State to collect delinquent tax"),
The Administrative Procedure Act (APA) provides that when "the manner of review
authorized by law for the decision in a contested case .,, is by trial de novo, the reviewing
couft shall try each lssue of fact and law ,,. as though there had not been an interuening
agency action or decision," T€x. Gov't Code Ann, $ 2001,173(a) frVest 2000), A de novo
hearing has been defined as "a new and lndependent action in whlch the whole case is gone
into as if no trial whatever had been had in the court below," Trial de novo is not an "appeal",
but is a nBW and independent action, Key Wastern Life lns, Co. v. Sfafe Bd. of /ns,, 350
S,W.2d 839,846 (Tex. 1961).
Tex. Tax Code Ann. $ 111.0049, and Tex. Tax Code Ann, $ 151.205 authorize a
taxpayer to appeal the revocation or suspension of a tax permit "in the same manner that
appeals are made from a final deficiency determination", They are therefore accorded a trial
de novo and there is no final order upon which the State can proceed to enforce the order until
o
g t t t Ot OZ TAX Surt Challcngrng Collection Action
Venue for anrì jurisdiction of a suit that challenges or is fff the purpose olavoiding a comptoller colleclion action
or statc tær ìien in any manner is exclusively confened on the clistrict courts o[ Travis Coun¡r.
' $ 1 11 0049 TAX Appeats
A taxpayer may appeal the revocation or suspension of a permit or license under Section I I 1 0046 and i i i.0047
of this code in the same rnanner that appeals are rnacle from a fnal deficiency cletermuratuon
ó
tst zos TAX Appeats
g
A taxpayer may appeal the revocation or suspension of a tax permit in the same manner that appeals are macle
lrom a ftnal rleficiency determr¡ration.
i6 | 1r' I r.,l
Motion for Emergency Relief to Lift Automatic Stay for Limited Purpose
ProDoc FaxService Page 18 of 103
a final decision is reached in the appeal, Accordingly, they should be precluded from pursulng
the suspension of the sales tax permit until this cause is concluded. Appellants therefore
request this couri to lift the automatic stay for the limited purpose of staying the execution of
the suspension order pending a final hearing on the appealfrom such judgment,
II. The Comptroller's Enforcement Actlons Vlolated the Automatlc Stay
Provlslons of an Interlocutory Appeal
The Texas Civil Practice and Remedies Code expressly provides for an interlocutory
appeal from an order granting or denying a plea to the jurisdiction by a govêrnmental unit, Tex.
Civ, Prac. & Rem, Code Ann, S 51,01a(a)(8) (West 2008). When a notice of interlocutory
appaal under this section is filed, all proceedings in the trial court are automatically stayed
pending resolution of the appeal, /d. $ 51,014 (b). ln RE TASO, 03-11-00269-CV (Tex,App.-
Austin 5-6-201 1),That appeal is currently pending in this Court as Case No, 03-1 1-00462-CV.
Appellants filed its notice of interlocutory appeal on July 25, 2011, Each of the
enforcement actions taken by the Comptroller commenced after the filing of the notlce. The
Notice of Bond and subsequant enforcement activi$ against ISBA Enterprises, lnc, was
commenced on September 20, 2011. 1'he Notice of Hearing to Cancel was commenced by
letterto Majic lnvestments, lnc. dated January 13,2012,'lhe hearing was held telephonically
on February 24,2012 and the Comptroller ordered the permit suspended effactive March 5,
2012,
When Appeilants commenced this interlocutory appeal by filing its notice of appeal, "all
other proceedings in the trial courf' were stayed pending resolution of the appeal, Tex, Civ,
Prac.&Rem.CodeAnn$51,014(b).Anordersignedduringastayisa"legal nullity," Amrhein
v. La Madeleine, 1nc.,206 S,W,3d 173, 174-75 (Tex.App,-Dallas 2006, no pet,)', Burrhus v. M
& S Mach. & Supply Co., |nc.,897 S.W,zd 871,873 (Tex.App.-San Antonio 1995, no pet.)
(holding that appellate deadlines are stayed during pendency of automatic stay imposed by
insurance code).
Accordingly, the enforcement actions sought by the Comptroller are void, and any
further enforcement activity would be in violation of the automatic stay order and must be
enloinad pending resolution of the interlocutory appeal,
17l1:';:qe
It4otion for Emergency Relief to Lift Autouratic Stay for Lilnited Purpose
ProDoc Faxservice Page 19 of 103
IIL The Cornptroller's Enforcement Actions are Ultra Vires
and Exceed Her Statutory Authorlty
The Request for Bond is Premature
The Comptroller is not authorized to collect delinquent sales taxes untll they become
final, The tax code provides "[t]he amount of a determination made under this code is due and
payable 20 days after a comptroller's decision in a redetermination hearing becomes flnal".
Tex, Tax Code Ann, $ 111,0081 (c),7
The request for bond is pursuant to Tex, Tax Code Ann, $ 111.012 (a) (1)B which
permits the comptroller io require a taxpayer to provide security for the payment of taxes only
if the comptroller finds that a fax imposed by this title is insecure. 34 Tex Admin. Code g 3.327
(d), the regulation interpreting this provision provides:
lf the comptroller determines at any time that the amount of the bond on file is
inadequate or if a permitted retailer is dalinquent in the payment of any state or local
sa/es or {/.re faxe.s, the comptroller may require a new or additional bond to be posted.
Relator maintains that the request for bond prior to the establishment of any
delinquency is unlawful pursuant to the provisions of Tex, Tax Code Ann, $ 1 11 .0081(c) which
provides:
The amount of a determination made under this code is due and payable 20
days after a comptroller's decision in a redetermination hearing becomes final. lf the
amount of the determination is not paid within 20 days after the day the decision
became final, a penalty of '10 percent of the amount of the determination, exclusive of
penalties and interest, shall be added.
The Comptroller's decision becomes "final" (and ihus a party has exhausted
administrative remedies) for purposes of a party's pursuing damages in a trial court for Code-
t
5 t t t OOa t TAX When Payment is Re qurecl
(a) Except as providecl in Subsections þ) and (c) ol this sectiorr thc amor.urt of a determination made under this
code is due ancl payable 10 days after it becomes frîal. If the amorurt olthe determination is not paid within 10
days after the clay it became final, a penally ol 10 percent of the amount of the determination, exclusive ol
penalties and nterest, shall be added.
þ) This section does not apply to a determination uncler Section ^lll",8??,
(c) The ârnount ol a cletermination made uncler this code is due a¡ld payable 20 days after a comptrolle/s
clecision Ln a recleterminalion hearing becomes ftnal Il lhe amou¡rt ol lhe cìetermination is not paicl wrthin 20 days
alt¿r the day the decision became f-tnal, a penalty ol l0 percent ol the amount of the determi¡ation, exclusive of
penalties and interest, shall be added.
I
ç t t t.Ot Z Secunly lor the Payment of Taxes
(a) If the compboller fr¡rds lhat a fax imposed by this title is lflsecure, the compfolìer mây requlro a tâxpayer tro:
(1) provide se curity lor the payment of taxes:
18 | Ir'n r. r:
Motioli for Ernergency Relief to LifÌ Automatic Stay for Lilnited Purpose
ProDoc FaxService Page 20 of 103
based claims: (1) atter the time to seek substantial-evidence review of the agency decision
expires, if no affected person seeks such review, see Tex. Rev. Civ, Stat. art.4413(36), $
7,01(a)-(b); or (2) after an affected person who seeks judicial review exhausts the substantial-
evidence review avenues. Subaru of America v. David McDavid JVlssan, 84 S.W,3d 212 (Tex.
2002).
ln the absence of the Gomptroller's finaldecision in the redetermination hearing, no tax
has yet been imposed and no tax is "due and payable" upon which a delinquency may be
for provision of security prior to a final decision and
predicated. Accordingly, the request
subsequent delinquency is void as ultra vires and in excess of the Comptroller's statutory
authority, Sfafe y, Çravvford,262 S,W,3d 532,546 (Tex,App,.Austin 2008, no pet.) (evidence
was insufficient io conclusively establish that [Taxpayers] "willfully fail[ed] to pay or cause to
be paid the tax," because the tax amount had not yet become due); see also Logalv. United
Sfafes, 195 F,3d 229,232 (Sth Cir, 1999),
Accordingly the requirement for the payment of bond is void and ISBA should be
reimbursed for the full cost of the bond, and the settlement agreement reached during the
pendency of the lnterlocutory appeal should be nullified.
The Notice to Cancel is Premature
The Notice of Hearing to Cancel Permit is issued pursuant to Tex, Tax Code Ann. g
111.0047s which authorizes tho Comptroller, after notice and hearing, to revoke or suspend
any permit or llcense issued to the pÉrson only if the comptroller finds that a person fails to
complywith any provìsion of this title orwith a rule of the comptrolleradopted underthistitle.
The Comptroller alleges that the notice is being issued due to Relator's "for failure to
pay the amount due of $73,600,67 for the (audit) periods September 1, 2005 to April 30, 2009.
Relator maintains that the request for payment prior to the establishment of its debt is unlawful
pursuant to the provisions of Tex. Tax Code Ann. S 111,0081 (c) (See fn. 1).
n
$ I t t OOqZ Srxpension and Revocfltion of Pennit or License
(a) If a person fails to comply with any provision of this title or with a rule of the complroller adopted under this
title. the compholler, afler a hearing, m ay revoke or suspend any perm it or license issued to the person.
þ) A person whose pemil or lioense the comptrolìer proposes io revoke or suspend under thls seclion is entltlcd
to 20 days' wrilten notice of the tjme and place of the hearing on the revocation or suspension. At the hearng the
person must show cause why each permit or license should not be suspended or revoked,
(c) The compfoller shall give written notice of the revocation or suspension of a permit or license to the holcler of
the permit or license . (d) Notrces under this seclion may be servecl on the holder of the permit o¡ license personally
or may be mailed ,c the hoklerrs acldress as shown in thc records of the comphoììer.
191 lr'irqe
Motion for Emergency Relief to Lift Automatic Stay for Limitecl Purpose
ProDoc FaxService Page 2L of. 103
ln the absence of a final decision in the redetermination hearing, no tax has yet been
imposed and no tax is "due and payable" upon which a delinquency may be predicated.
Accordingly, the requast for payment prior to a final decision and subsequent delinquency is
ultra vires and in excess of the Comptroller's statutory authority, Sfafe v. Crawford, 262
S.W,3d 532, 540 (Tex.App.-Austin 2008, no pet.) (evidence was insufficlent to conclusively
establiEh that [Taxpayers] "willfully fail[ed] to pay or cause to be paid th6 tax," because tha tax
amount had not yet become due); see a/so Loga/ v. United Sfafes, 195 F,3d 229,232 (Sth Cir,
1 99s).
The Comptroller's Decísion Has Been Vdcated
Appellants have filed a petition for judicial review pursuant to Tex, Gov't Code g$
2001,7310 and Tex, Gov't Code S 2001 .17411 in CausE No, D-1-GV-10-000902 in the gSth
District Court of Travis County, Texas for a de novo hearing to determine the validity of the
deficiency assessments sought to be collected by the Comptroller in the contested
proceeding. More importantly, because the only question before the District Courl concerns a
matter of statutory construction, the review of the court's construction of the relevant statutes
is de novo. See Clfy of ,San Antonio v. City of Boerne, 11 1 S,W,3d 22,25 (Tex. 2003).
Further, in suits filed pursuantto Tex, Tax Code Ann, $111.010, officers and directors
are entitled to a fuli and complete hearing on their tax liability in district court. See Tex, Tax
Code Ann, $ 111.010 lWest 2008) (authorizing attorney general to file suit to recover taxes).
The case is tried de novo. Greene v. Sfafe, 324 S,W,3d 276,288 (Tex,App.-Austin 2010, no
pet,) (1'11,010 allows for a de novo review of the party's tax liability),Herrera y. ,Sfafe, N0.03-
01-00101-CV,2002 WL 185470, at *1 n. 4,2002 Tex.App,,-Austin Feb.7,2002, no pet,) (not
to g
200i173 Gov'T. Triol De Novo Rçview
(u) If
the mrrnner of ¡eview nuftorized by law for the decision in n contested cuse thnt is the subject of complnint is
by trinl de novo, the revierving court shnll try ench issue of fnct and lew in the ln€rnner that npplies to othe¡ civil
suits rr this state as though there hacl not been an intervening agency action or decision but may not aclmit in
eviclence the lact of prior state agency action or the nature of that action 0x00pt io the limitecl cxtent necessâry to
show cornpliance with stâtutory provisions that vest jwiscliction in the cou¡t,
t' GOV'T Review Under Substantial Eviclence Rule or Undefned Scope of Review
$ 2001 174
Il the law authorizes revie"v of a cle cision r-n a contcsted case under the substântial evidence rule or ilthe law does
not deline the scope of .ludrcral revier,v, a cowl may not substitute its.ludgment lor the judgment of the statÉ
agenc)¡ on the werght of the eviclence on questions committed hr agency cliscretion but: (1) may affirm the agency
decrsion ul whole or lr partl and (2) shaìl reverse or remand the case for fwlher proceeclurgs ilsubstantial rights ol
the Relator have been preludrccd because the aclminislratrvc furclings, inferences, conclusions, or rlecisions are:
(A) rn vioìation of a constrtutional or statutory provision; @) in excess of the agencyrs stafulory authority; (C)
rnacle tluough unlawful proceclurel (D) aflected by other error of law; @) not reasonably suppofted by substantial
eviclence considering the ¡e liable and probative evidence ln the record as a whole: or (F) arbrrary or capricious or
characænzecl by abuse of dlscretron or clearly unwar¡anted exercise of cìiscretlon.
2011'nee
Motion for Ernergency Relief to Lift Automatic Stay for Limited Purpose
ProDoc Faxservice PagÊ 22 of 103
designated for publication) (identifying suit under section 111,010 as "de novo action by the
State to collect delinquent tax").
The Administrative Procedure Act (APA) provides that when "the manner of review
authorized by law for the decision in a contested case .., ls by trial de novo, the reviewlng
court shall try each issue of fact and law ,,. as though there had not been an intervening
agency action or decision," Tex, Gov't Code Ann, $ 2001,173(a) (West 2000). A de novo
hearing has been defined as "a new and independent action in which the whole case is gone
into as if no trial whatever had been had in the court below," Trial de novo is not an "appeal",
but is a new and independent action. Key Western LifE lns. Co. v. Sfafe Ed. of /ns,, 350
S,W,2d 839,846 (Tex. 1961),
The sine qua non of a de novo trial is the nullification of the judgment or order of the
first tribunal and a retrial of the issues on which the judgment or order was founded, When
jurisdiction of the second triþunal attaches, the judgment or order of the first tribunal is not
fexas Dept. of Public Safirfy v. Banks Trensp, Co,, 427
merely suspended, but is nullified.
S.W.zd 593, (Tex.Sup. 1968); Southern Cenel Co. v. Stafe Bd. of Weter Engineers,318
S,W,2d 619; 159 Tex.227 (Tex. 1958). Accordingly, "res judicata" and "final judgment" are
ínapplicable in de novo proceedings because the original administraiive order that is the
subject of appeal is nullified in a de novo procÉeding. Sfafe Bd. of lns. v. Republic Nat'l lns,
Co., 384 S,W,2d 369, 372 (Tex,Civ,App, Austin 1964, writ ref'd n,r.e.),
-
The filing of this Petition operates to vacata the Comptroller's Decision pursuant to
Tex, Gov't Çode $ 2001.176 (b)(3)'2, because trial de novo is the manner of review authorized
by law for suspension of limlted sales, excise and use tax permits,ls Accordlngly, the
t'
I ZOO1 . 1 76 GOV'T, Petition Initiating Judicial Rev iew
(a) A person ultiates ludrciaì review in a conte sted case by liling a petition not latcr than the 30th clay after the
date on which the clecision that is the sublecl ol complaint is linal ancl appealable.
(b) Unless otherwise providcd by statute r
(1) the petitton must be frled in a Travis CoLurly clistrrct court;
(2) a copy of the petition must be served on lhe stale agoncy and each party of record tr the proceedings belorc the
agency; and
(3) the fiìing oi lhe pettlion vacates a stâte agency clecision for which lrial de novo is the manner ol review
authorizecl by law but does not af,lect the enforcement of an agency decision for which another manner olreview
is aulhorized.
tl g t OZ OOZ TAX Enlorcement ol License Cance llatron, Suspension, or Relusal
(c) An appeal lrom an orcler of the comptroller cancelurg or suspending or refusing the issuance or reissuance of a
Iicense may be taken lo a clisfict cou¡t ol Travis Courity by the aggrieved license holder or applicant The trial
shall be cìe novo u¡rder the same rules as ordinary clvil suits, except that: (l) an appeat must be perlected and fited
within 30 clays altrr the elfective dat¿ of the order, decision, or rulurg of the complroller; (2) lhe trial of the case
2llìr'lqe
Motion for Ernergency Relief to Lift Autornatic Stay for Limited Purpose
ProDoc FaxService Page 23 oî. 103
Comptroller's Decision has not become final and can therefore not form the basis for the
collection of the tax deficiencles sought to be recovered by the show cause order.
CONCTUSION
The Notice of Hearing to Cancel Relator's sales tax permit or to require the posting of
bond are in violation of autornatic stay imposed by the interlocutory appeal pending before this
Court in Case No. 03-11-00462, Further, there is no final order upon which io request payment
of the alleged tax assessment, because the Cornptroller's decision has been vacated byvirtue
of the putative class action suit pending before the 98rh Judicial District Court in Travis County
Texas, seeking de novo review of the Comptroller's decision. Finally, the Notice of Hearing to
Cancel, prior to entry of a final judgment, is ultra vires and in excess of the Comptroller's
statutory authority, because she cannot collect on delinquent taxes until 20 days after her
decision becomes fínal, Her decision cannot become final until the issues relating to the
judiciai review or finally determined.
PRAYER
WHEREFORE, PREMISES CONSIDERED, Appellants request this Court of Appeals
to lift the automatic stay imposed in this case for the limited purpose of reviewing the issues
raised by this motion under lts authorlty pursuant to Tex, R. App, P, 29,6, and declare the
Appellants rights pending the appeal of the Comptroller's order suspending Appellants' sales
tax permlt and to enjoin Susan Combs, in her official capacity as Comptroller of Public
Accounts, from engaging in further enforcement activities pending resolution of the underlying
Motion for Declaratory Judgment and Temporary lnjunction and the pending interlocutory
a ppea l.
Alternatively, to lift the automatic appeal for the limited purpose of authorizing the trial
court to declare the Appellants rights pending the appeal of the Comptroller's order
suspendlng Appellants'sales tax permit and to enjoln Susan Combs, in herofficialcapacity as
Compirollar of Public Accounts,from engaging in further enforcemant activities pending
shall begtn rvithul 10 ciays after tts filt-trg; ancl (3) the order, decísion, or rulng of the comptroller may be
suspencled or modifie d by th-e cowt pending a t¡ial on the rnents
22:l:'nr.¿
Motion for Emergency Relief to Lift Autonlalic Stay for Limited Purpose
ProDoc FaxService Page 24 o-f 103
r€solution ôf the underlying Motion for Declaratory Judgmsni and Temporary lnjunction and
the pending interlocutory tppÊât.
Respectfulfy su þmÌtted,
f,a.w Offie of
Samueft tøcft¡on
PO Box 170030
Arlingtorr, TX 76003-063s
Tel: (817) 751-71s5
Fax. 866-374-0164
ATTORN FOR
T. Jackson
Texas Bar No. 1049570
CERTJFICATE OF C OMPI,IAN C-E
Irr compliance with Texas Rules of Appeliate Procedure 51,10, Appellanu cetiff
by the sþature above, that they have notified or made ¿ clìligent efff,brt to notify the
parties or thei¡ representatrves, by expedited mean$, to advi¡e them that a motion for
temporary relief has been or wif be fiIed with Relators' Petitiorr for Writ of Mandamus.
tg_ Sunu¿tt Jací¡sn
SAMUBL T. JACKSON
TE F
In compliance withTex. R. App.P. 10.1 (a) (5), counsel fut the Appellanh certifies
by his sþature above, that he hæ confer¡ed with counsel for the real parties ín inerest,
and was advised that the real partiæ fur interest oppose the relieflrequested in thís motron.
tst_ Samuetl. Jøcfr¿on
SA]VTIIEL T. JACKS OI.\T
23 lPage
Motiori for Emergency Relief to Lift Automatic Stay for Limited Purpose
ProDoc FaxService Page 25 of 103
CERTIFICATE OF SERVICE
I hereby certi$' by my signahue above that a true and ccrrect copy of the above and
foregoing instrument wâs served on the parties or their attorneys via facsimjl€, certi-fi.ed
mail, rerutn receiptrequested, and/ar hand delivery onAprü 1,5,2012, in accorda"Ece with
the Texas Rules of Appellate Procedure, to the following:
JACK HO}TENGATTEN
istant Attorney GenEral
,Ass
FD{AN CTA], LITIGATTON ÐTViSION
P.O. Box 12548
Austin, TX787tt-2548
13L; (512) 475-3503
FAX: (512) 47 t -2348 / 480-8327
Email: j ack,hohelgprten@oag,state,ü,¡s
ATTORNEY F OR RTSPONDEI\TS
24lPuge
Mofion for EmergencyRelief to Lift Autom¿tic Stay for Lirnif¿d Purpose
Tab C
Plaintiff’s Original Petition for Judicial Review, Declaratory
Judgment, Temporary Injunction and Request for Disclosure,
No. D-1-GN-13-004352, Sanadco Inc. v. Hegar, in the 200th
Judicial District Court, Travis County (“Sanadco II”).
Appellees’ Responsive Brief page 3
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
1212712013 6:02:24 PM
Amalia Rodriguez-Mendoza
District Clerk
fravis Gounty
D-1-GN-13-004352
D-1-GN-13-004352
CAUSE NO,
SANADCO INC, A TEXAS CORPORATION, S IN THE DISTRICT COURT
AND MAHMOUD AHMED ISBA s
PIointffi, s
s
s
VS s
s
SUSAN COMBS, IN HER INDIVIDUAT s TRAVIS COUNTY, TEXAS
AND OFFICIAT CAPACITY s
AS COMPTROTLER OF PUBLIC ACCOUNTS, s
s
OFFICE OF COMPTROTTER OF PUBLIC s
ACCOUNTS FOR THE STATE OF TEXAS, s
s
AND GREGGABBOTT IN HIS OFFICIAT s
CAPACITYAS ATTORNEY GENERAL OF s
THE STATE OF TEXAS s
2OOTH
Defendants s luDrcrAt DISTRTcT
PTAINTIFFS' ORIGINAT PETITION FOR JUDICIAL REVIEW, DECTARATORY
IUDGMENT, TEMPORARY INJUNCTION AND REQUEST FOR DISCLOSURE
COME NOW SANADCO INC. and MAHMOUD AHMED ISBA, Plaintiffs, who file this
Original Petition for judicial Review, Declaratory f udgment and Temporary Injunction from
a pending Comptroller's Decision in a contested case proceeding before the State Office of
Administrative Hearings, complaining of SUSAN COMBS, in her individual and official
capacity as Texas Comptroller of Public Accounts, and GREG ABBOTT, in his ofïicial capacity
as Texas Attorney General f"Defendants"), and for cause would respectfully show the
following:
I.
DISCOVERY CONTROL PT-AN
1,. Plaintiffs desìgnate this case as a Level 3 case requiring a discovery control plan
tailored to the circumstances of this particular suit pursuant to Texas Rule of
Civil Procedure 190,4
II.
REQUEST FOR DISCLOSURE
2. Pursuant to Texas Rules of Procedure 194, Plaintiffs request that Defendants
disclose, within 50 days of service of this request, all of the information or material
described in Rule 794.2.
III.
PARTIES
3. Sanadco Inc., Plaintiff, is a private Texas Corporation, duly organized and existing
under the laws ofthe State ofTexas, engaged in the operation ofa convenience store
whose principal place of business is located at 3801 East Rosedale St., Fort Worth,
Texas 761,05-1,732,and whose Taxpayer No. is
4. Mahmoud A. Isba, Plaintiff, is an individual who resides in Arlington, Tarrant County
TX and operates the convenience store owned by Sanadco Inc.,located at 3801 East
Rosedale St., Fort Worth, Texas 76105-7732, and whose Taxpayer No. is
5. Defendant, Susan Combs [hereinafter referred to as ["Comptroller"), joined herein
as a necessary party in her and official capacity as Texas Comptroller of Public
Accounts, and in her individual capacity for purposes of certain of Plaintiffs' claims
that certain described actions as set forth below are ultra vires and she was acting
beyond the scope of her lawful authority. Susan Combs is a public official who is
charged with the collection of Limited Sales, Excise and Use Taxes pursuant to the
Texas Tax Code and may be served by personal service aT 1,1,L East l-7th Street,
Austin, Texas 7877 4.
6. Defendant, Gregg Abbott in his official capacily as the Attorney General of Texas,
joined herein as a necessary party in his official capacity, is a state agency as defined
by Tnx, Gov'r, Conn Aruru. g2_t01!03 [7), having statewide jurisdiction which makes
rules and determines contested cases and may be served by personalservice ar.209
West 14th Street, Bth Floor, Austin, Texas 7870L.
-2-ll':r¡1rl
tv.
JURISDICTION AND VENUE
7. This is an action seeking declaratory and injunctive relief from a contested case
proceeding pending issuance of the Comptroller's Decision before the State Office of
Administrative Hearings (SOAH) against Sanadco, Inc,, and Mahmoud Ahmed Isba
in SOAH DOCKET NO. XXX-XX-XXXX.26, TCPA HRG No. 1,04,445, and SOAH DOCKET
N0. 304-13 -4212.26, TCPA HRG No, 707,006, respectively, and joined for the sake
of efficiency, [Exhibit A)
B, This court has subject matter jurisdiction to determine the validity of AP 92 and AP
I22, and enter declaratory relief pursuant to TEX, GOV'T. CODE ANN, [2.00L03B,
wherein sovereign immunity has been waived when it is alleged that a rule or its
threatened application interferes with or impairs, or threatens to interfere with or
impair, a legal right or privilege of the plaintiff,
9. This Court has subject matter jurisdiction pursuant to the Uniform Declaratory
Judgments Act, TEX, CIV, PRAC. & REM. CODE ANN, S 37.00L et seq,, by which
sovereign immunity has been waived and authorizes Plaintiffs to obtain a
declaration ofrights, status, or other legal relations affected by a statute; and against
a state official who engages in ultra vires acts without legal or statutory authority,
or refuses to perform a purely ministerial act. City of EI Paso v. Heinrich, ¿84 SJ ¿.3d
366 370 [Tex. 2009).
10, This Court has subject matter jurisdiction pursuant to TEX. GOV'T CODE ANN. SS
T\ALLI1, ZOfl_UZ3 and 20t1.J74, seeking judicial review from a pending final
decision in a contested case before the State Office of Administrative Hearings. Seq
Lindig v, !ohnson Cit"v. 03-08-00574-CV (Tex. App.-Austin 70-21"-2009). (a
premature petition for judicial review may be cured if there is a claim over which
the court obtained juriscliction under its general jurisdictional authority,)
11. This Court has subject matter jurisdiction pursuant to TEX. CONST. AßIJ-S-I=!..
V,
SUMMARY OF FACTS
72. On August 17 , 2004, after the Comptroller became aware of lack of uniformity in
convenience store audits, she issued a policy memorandum implementing new
procedures for convenience store audits entitled Audit Policy 92lAP92 )[Exhibit B),
-3-lí):r¡1r:
directing all auditors, inter alia, to conduct a shelf test during convenience store
audits if the taxpayer is still in business, and use the percentages designated in AP92
as the mark-up for beer and tobacco products if the records of a convenience store
are "unavailable, inadequate, or unreliable" and if the actual mark-up percentage
could not be ascertained by other means.
13. Effective September l, 2007, the Texas Legislature enacted legislation directing
each wholesaler or distributor of beer, wine, malt liquor or tobacco products to file
a report with the Comptroller detailing the monthly net sales made to the retailer
by the wholesaler or distributor, including the quantity and units of beer, wine, malt
liquorand tobacco products sold to the retailer. [Tex. Tax Code S 151.433 [b) [4)t
and Tex. Tax Code S 155.105.2 The data provided as a result of the legislation is
commonly referred to as HB 1,1, data, but no directives regarding its use
accompanied the legislation. The first reports became available on January 1, 2008.
L4, After HB 11 became effective, the Comptroller revised APg2 with APL 22 (Exhibit C),
effective luly 22,2009, by revising the audit procedures and determination of mark-
up percentages and incorporating H811, instructing that this data must be the
starting point for all convenience store audits whether used as internal control
verification or as data used to estimate the audit,
r t S t.+ll. Reports by Wholesalels and f)istr'ibutors of Beer, Wiue, and Malt Liqrrcr
ç
(b) The comptroller may, when considered necessary by the cornptroller tbr the adrninistration of a tax under this
clrapter, require each wholesaler or clistributor of beer, wine, ol rnalt liqnol to file with the cornptroller a report each
nronth 997
S.W.2d 248, 255 [Tex. 1,999). These procedures include providing notice,
publication, and public comment on the proposed rule, 1d. [citing Tex. Gov't Code
Ann. SS 2001,.023-.030). The process assures notice to the public and affected
persons and an opportunity to be heard on matters that affect them. Id.
31.Unless a rule is promulgated and adopted in accordance with the requirements of
the APA, it is invalÍd and unenforceable. Tex. Gov't, Code Ann. SS 2-0f11-Q35,s
aq01.0!46 and Z0û1.,0057, Neither AP 92 nor AP I22 as it reìates to HB 1,7,were
5$ 2001.035. Substantial Compliance Requilernent; Tirne Lirnit on Pl'ocedulal Cìhallenge
(a) A rule is voidable unless a state agency ado¡rts it in substantial cornpliance with Seotions 2001.0225 tlirough
2001.034.
6S Adopt Rnles of Plactice and Index Rnles, Orders, and Decisions
2001 .004 Requilernent to
In addition to other leqniternents under'law, a state agency shall:
(l) adopt rules of practice stating the nature antl requircments of all available formal antl inft¡r'rnal ploocdules;
(2) index, cross-index to statntc, and rn¿rke available for public ir:rspection all lule s anId.
34. Suits to require state officials to comply with statutory or constitutional
provisions are not prohibited by sovereign immunity. Heinrich, ZB4-5l4lJd at372.
To fall within the ultra vires exception to sovereign immunity, a suit "must allege,
and ultimately prove, that the officer acted without legal authority or failed to
perform a purely ministerial act." ld. [citations omitted). "Thus, ultra vires suits do
not attempt to exert control over the state
- they altempt to reassert the control of
the state. Stated another way, these suits do not seek to alter government policy but
(a) A statc agcncy rulc, ordcL, or dccision rnadc or issucd on or aflcr Janttary I, 197 6, is not valid or cffcctivc against
a pcrsol'r or party, and rnay not bc invokcd by an agcncy, until thc agcncy has iudcxcd thc lulc, orId. Thus, for a statute not to be unconstitutionally vague, it must be
sufficiently clear in at least three respects: [1) a person of ordinary intelligence must
be given a reasonable opportunity to know what is prohibited; (2) the law must
establish determinate guidelines for law enforcement; and [3) if First Amendment
freedoms are implicated, the law must be sufficiently definite to avoid chiìling
protected expression. Id. at 108-09; Long v. State, 931, S,W.2d 285, 287
[Tex.Crim.App. L996).
66. A court will find a rule unconstitutionally vague, in violation of due process,
if it does not give fair notice of what conduct may be punished, and invites arbitrary
and discriminatory enforcement by its lack of guidance for those charged with its
enforcement. U.S,C.A, Const.Amend. L4. Vista Healthcare V. Texas,03-09-001"7B-CV
[Tex.App,-Austin B-26-2010). This statute fails to establish guidelines for its
application and does not give fair notice to the taxpayer of the prohibited conduct,
-16-lij;i¡.1 r'
lending itself to discriminatory enforcement. It is therefore unconstitutionally
vague and must be stricken.
67. Plaintiffs seek a declaratory judgment against the Office of the Comptroller
of Public Accounts, Susan Combs, in her official capacity as Comptroller of Public
Accounts for the State of Texas and Gregg Abbott, in his official capacity as the
Attorney General for the State of Texas, pursuant to the Uniform Declaratory
Judgments Act, Tex. Civ. Prac, & Rem. Code Aruru. S 37.004 et seq., construing Tex. Tax
Code $ 717.0042, declaring that this statute is unconstitutional on its face and as
applied to Plaintiffs because it is, by its nature, a denial of substantive and
procedural due process and is constitutionally vague because it permits the audit to
be made merely on undefined subjective criteria, and without providing any
guidelines for the administration thereof.
COMPTAINT VII
Tex. Tax Code S111.022, authorizing a feopardy Determination without guidelines,
is Unconstitutional on its face and as applied.
68. Defendant, Cross-Plaintiffs ("Plaintiffs") incorporates the preceding
paragraphs by reference as if the same were set forth fully and verbatim herein.
69. Tex. Tax Code $ 111.022e authorizes the Comptroller to impose an additional
10% jeopardy determination penalty against a deficiency determination, which
comes due immediately, if she "believes" that the collection of a tax required to be
paid to the state or the amount due for a tax period is jeopardized by delay.
70. The statute is purely discretionary because it establishes no parameters by
which the Comptroller is to make this determination except for her undefined
e
5 t t t.OZZ TAX. Jeopaldy Deterrnination
(a) IlÌthe cornptroller believes that the collection ofa tax lequiled to be paid to the state ol the arnount due Ior a tax
period is jeopardized by delay, the compholler shall issue a detelrnination stating the amotuìt and that the tax
collection is in jeopardy. The amor¡nt lequired to be paid to the state or due for the tax peliod is due and payable
irnmediately.
(b) A 408 U.S. 104,
1.08,92 S.Ct. 2294,33 L.Ed,zd 222 (7972). "Second, if arbitrary and discriminatory
enforcement is to be prevented, Iaws must provide explicit standarcls for those who
apply [hem." /d, Thus, for a statute not to be unconstitutionally vague, it must be
sufficiently clear in at least three respects: [1) a person of ordinary intelligence must
be given a reasonable opportunity to know what is prohibited; [2) the law must
establish determinate guidelines for law enforcement; and [3) if First Amendment
freedoms are implicated, the law must be sufficiently definite to avoid chilling
protected expression. Id. at 108-09; Long v, State, 931 S.W,zd 285, 287
[Tex.Crim,App. 1996).
72 A court will find a rule unconstitutionally vague, in violation of due process,
if it does not give fair notice of what conduct may be punished, and invites arbitrary
and discriminatory enforcement by its lack of guidance for those charged with its
enforcement. U,S.C,A, Const.Amend.14, Vista Healthcare V. Texas,03-09-00178-CV
(Tex.App,-Ausrin 8-26-2010). This statute fails to establish guidelines for its
application and does not give fair notice to the taxpayer of the prohibited conduct,
lending itself to discriminatory enforcement. It is therefore unconstitutionally
vague and must be stricken.
73. Plaintiffs seek a declaratory judgment against the Office of the Comptroller
of Public Accounts, Susan Combs, in her official capacity as Comptroller of Public
Accounts for the State of Texas and Gregg Abbott, in his official capacity as the
Attorney General for the State of Texas, pursuant to the Uniform Declaratory
Judgments Act, Tex, Civ. Prac. & Rem. Code A¡¡n. S 37,004 et seq., construing Tex. Tax
Code $ IIL022 and declaring that the statute is unconstitutional on its face and as
applied to Plaintiffs because it is, by its nature, a denial of substantive and
procedural due process and unconstitutionally vague because it permits the
feopardy Determination to be made merely on undefined subjective criteria, and
without providing any guidelines for the administration thereof.
COMPTAINT VIII
The Comptroller has taken Plaintiffs' property for public use without just
compensation by collecting the foregoing illegal, unenforceable or invalid taxes
pursuant to her official duties under Tex, Tax Code Ann. S 111,001.
-18-li';ty.r:
74 Plaintiff incorporates the preceding paragraphs by reference as if the same
were set forth fully and verbatim herein.
75. Pursuant to her authority under Tex, Tax Code Ann. S--1.L1-0-0ato the
Comptroller collected illegal, invalid and unenforceable sales and use taxes from
Plaintiffs without their consent, and deposited such collections into the State's
general revenue fund pursuant to Tex. Tax Code Ann. S 101.009[a),11 thereby
intentionaìly engaging in authorized conduct constituting a taking of Plaintiffs'
properry for public use without adequate compensation.
76 The Texas Constitution waives sovereign immunity from suit for an
unconstitutional takings claim. Tex, Const. art, I, S 1,7.Lz ; See Steelev. Cíty of Houston,
603 S.W,zd 786,797 (Tex, 1980). To establish a takings claim, the complainant must
prove 1) that the State intentionally performed certain acts, 2) that the acts resulted
in a "taking" of property, and 3) that the property was taken for public use. General
Servs. Comm'n v. Little-Tex Insulation Co.,39 S,W.3d 591, 598 [Tex. 2001-). Plaintiffs
maintain they have satisfied that burden by the foregoing pleadings.
77 Plaintiffs seek a declaratory judgment against the Office of the Comptroller
of Public Accounts, Susan Combs, in her official capacity as Comptroller of Public
Accounts for the State of Texas and Gregg Abbott, in his official capacity as the
Attorney General for the State of Texas, pursuant to Tex. Const. art, I, S 17 and the
Uniform Declaratory fudgments Act, Tex. Civ, Prac. & Rem, Code Ann. S 37,004 ef
seq,, declaring that the Comptroller's collection of these taxes was an intentional act
10
ç 1 I 1.001 Cìomptloller to Collect Taxes
The comptroller shall collect the taxes in.rpose<1 by this title except as othelwise plovided try this title
r1 10i.009(zr) Allocation and Tlansfel clf Net Revenuçs
$
(a) E,xcept as provicled by Sul:rsection (b) of this section, all revenues collected florn the taxes irnposed by the
chaptels of this titlc and by Clhapter 8, Title 132, Revised Civil Statutes of Texas, 1925, as atnended, af-tel deiluction
of the portion allocatcd ttrr collection, enfbrccrnent, and adrninistration purposes, shall flrst be deposited in the
general re\¡cnue lund. After thc initial deposit, translèr's fl'orn the genelal revenue fund to other ftuds shall be rnade
at the time, in the rnanner, and in the amorìnts provided by law.
12 of
Sec, 17 Taking, damaging or destloying property for pulllic use; special privileges and imrnunities; control
lrlivileges an284 S.W.3d 366 (Tex, 2009);306*S.\V.3d 256 [Tex. 2010)
[respectively).
The Supreme Court determined that "while governmental immunity
generally bars suits for retrospective money relief, it does not preclude prospective
injunctive remedies in official-capacity suits against government actors who violate
statutory or constitutional provisions." Heinrí.ch,284 S.W.3d at 368-69, ln Heinrich,
the supreme court confirmed that "suits to require state officials to comply with
statutory or constitutional provisions are not prohibited by sovereign immunity, even
if a declaration to that effect compels the payment of money." Heinrich,2B4 S.W,3d at
372. Reconveyance,306 S.W.3d at 434.
Further, if valid challenges to the Department's rules under the APA are
raised, then it is not necessary to determine whether the Appellees have properly
alleged ultra vires claims because the trial court's subject-matter jurisdiction is
established by section 2001,038 of the APA. See Tex. Gov't Code Ann. S 2001,038.
Section 2001,038 allows a party to bring a declaratory-judgment action challenging
the validity or applicability of an agency rule if it is alleged that the rule or its
threatened application interferes with or impairs a legal right or privilege of the
plaintiff. See id. Section 2001.038 is considered a legislative grant of subject-matter
jurisdiction, so that valid claims raised pursuant to that provision are not barred by
sovereign immunity. See Combs v. Entertainment Publ'ns, |nc.,292 S.W.3d 7L2,720
[Tex.App.-Austin 2009, no pet,) [collecting cases). Tex. Dept. of Pub. Safety v. Salazar,
304 S,W,3d 896 [Tex.App. [3rd] 2010).
-20-lllii¡1 i'
VtL Exhaustion Of Administrative Remedies Not Required
79. The general rule in Texas is that courts do not interfere with the statutorily
conferred duties and functions of an administrative agenry. Westheimer lndep. Sch.
Dist. v. Brockette,567 S,W.zd 7B0,7BS [Tex. 1978). However, courts may intervene
in administratíve proceedings when an agency exercises authority beyond its
statutorily conferred powers.ld. This exception to the exhaustion of administrative
remedies doctrine is a variation of the rule that where the administrative agency
lacks jurisdiction, a trial court may intercede before administrative remedies are
exhausted. See City of Houston v. Williams, 99 J.W.3cl 209, 777 (Tex.App.-Houston
[14th Dist.] 2003, no pet.). "ln such a case, the purposes underlying the exhaustion
of remedies rule are not applicable, judicial and administrative efficacies are not
served, and agency polices and expertise is irrelevant if the agency's final action will
be a nullity ." MAG-T, L.P.,1,67 S.W,3d at 625.
BO "ln order to maintain an action against the Comptroller for a refund of taxes,
a party must meet the procedural requirements of the tax protest law. Compliance
with these procedures is a jurisdictional prerequisite for the trial court to hear and
decidethemeritsofataxrefundsuit." CentralPower&LightCo.v.Sharp,919S.W.zd
485,491. [Tex,App.-Austin 1996, writ denied) (citations omitted). Combs v. Chevron,
1nc., 3 19, 5.W"3d€36 [Tex.App, [3rd] 2010),
B1 However, when an agency promulgates a rule without complying with the
statutory rule-making procedures, the rule is invalid,.Tee APA S 2001.035 (a); El Paso
Hosp. Dist,,247 tw.3d at7L5. The APA allows a person to challenge the validity or
applicability of an agency rule pursuant to a declaratory judgment action if it is
allegecl that the rule or its threatened application interferes with or impairs a legal
right or privilege of the plaintiff. APA $ 2001,038[a). Thus Counter-Plaintiffs do not
seek declaratory relief regarding the tax refund itself, but regarding the validity of
the rule promulgated by the Comptroller in violation of the APA, for which the
Iegislature has expressly permitted suit by a declaratory-judgment action. See APA
S 2001.038 . Combs v. Entertainment Publ'ns, lnc., ¿g?lJ ¿,3d U2,720. Since this is
not a suit for a refund pursuant to Tex, Tax Code Ann, $ 111-:l-04 its requirements
are not relevant to Plaintiffs' right to seek injunctive relief.
VlIL Attorney's Fees
Pursuant to Tex Gov't Code Ann $ 2006,01,313 and Tex, Civ. Prac. & Rem, Code Ann,
S 37.009, request is made for all costs and reasonable and necessary attorney's fees
13
5 zooe .ol: GOV'T. Iì.cquilcmcnts f997
S.W.2d 248,255 [Tex. 1999). These procedures include providing notice, publication,
and public comment on the proposed rule. Id. (citing Tex. Gov't Code Ann. SS 2001.023-
.030), The process assures notice to the public and affected persons and an opportunity
to be heard on matters that affect them. Id.
Unless a rule is promulgated and adopted in accordance with the
requirements of the APA, it is invalid and unenforceable, Tex. Gov't, Code Ann. $$
2001.035,1 200L.0042 and 2001.0053. Neither AP92nor AP1,22 as it relates to HB 11,
tg ZOOt.O:S, Substarrtial Cìompliance Rec¡rirement; Tirne Lirnit on Procedural fìhallenge
(a) A rnle is voidable unless a state agcncy adopts it in substantial compliauce with Sections 2001.0225 through
2001.034.
'5 ZOOt.OO+ Rcquircmcnt to Arlopt Rulcs of Plactioc and Indcx Rulcs, Ordcrs, and Dccisions
In a<)
www.soah.state.tx.us
Pursurnt to
Tex. t Code
soAH DOCKET NO. 304'13-42rr'26
TCPA HEARING NO. 106'815
TAXPAYER NO.
s BEFORE TIIE STATE OFFICE
SANADCO,INC.'
Petitioner $
$
oN'
v s
s
TEXAS COMPTROLLER OF PUBLIC s
ACCOUNTS, $
s ADMINISTRATIVE ITEARING S
ResPoudent
soAH DOCKET NO. 304-ß4212.26
TCPA IIEARING NO. 107'OOó
TAXPAYER NO.
BEF'ORE TI{E STATE OFFICE
MAHMOUD AHMED ISBA' $
Petitioner s
s
$
OF
v
$
TEXÄS COMPTROLLER OF' PTIBLIC s
ACCOUNTS, $
ResPondent $ ADMINISTRATIVE HEARINGS
PROPOSAL FOR DECTSION
Sanadco, Inc. (Petitioner SI) was audited for sales and use tax compliance by the Texas
assessed tax, a l0% penalty' an additional
Comptroller of Public Accounts (Comptroller) and
personal liability against
50% penalty, atrd, accrued interest. The Comptroller also assessed
Code $ 111'0611 as the president of
Mahmoud Ahmed Isba (Petitioner Isba) under Tax
petitioner sI. Petitioners contest their audit assessments on the same grounds, including
the
unenforceable because the estimate was based
contentions that the audit assessment is void and
the present audit overlaps a previous
on audít procedures that constituted invalid rules, and that
contentions' In this
final audit assessment. comptroller stâtr (stafî) rejects the Petitioners'
(ALJ) recornmends that the
Proposal for Decision (PFD), the Administrative Law Judge
be affirmed, except that the markup percentâge
corporate assessment against Petitioner sI should
CONFIDENTIAL
Pur.cunnt to
2003.104
soAH DocKET NOS. 304-13.121 1.26 PROPOSAL FOR DECISION PAGE 2
& 30,1-13-{2r2,26.26
TCPA DOCKET NOS loó,E15 & 107,006
used in calculating the estimated tobacco sales should be adjusted and that the additional fraud
penalty should be applied only to the report periods February 1, 2007 through April 30, 2008.
The ALJ also recommends that the personal liability assessment against Petitioner Isba should be
limited to the re¡rort periods May 1, 2007, through April 30, 2008.
I. PROCEDUR.A.L HISTORY, NOTICE AND JURISDICTION
On May 10, 2013, Staff referred the cases to the State Office of Administative Hearings
(SOAH) for oral hearings. ALJ Peter Brooks ordered the cases joined because the cases involve
related parties, and common facts and issues of law. Staff was xepresented by Assistant General
Counsel Isreal Miller and Petitionsrs were represented by Attorney Samuel T. Jackson. The case
convened on September 9, 2013. "fhe ALJ closed the record on November 12,2Q13. There are
no contested issues of notice or jurisdiction. Therefore, these matters are set out in the Findings
of Fact and Conclusions of Law.
II. REASONS F'OR DECISION
A. Evidence Presented
Staffsubmitted the following exhibits in SOAH Docket No. 304-13 -4211.26
I Sixty-Day Letter;
,)
Texas Notification of Audit Results;
J. Penalty and Interest Waiver lü/orksheet;
4. Audit Report; and
5. Audit Plan, which includes Audit Refenal Report for Additional Penalty
I
CONFIDENTTAL
Pursuant to
Tex. Govtt 2003.104
PROPOSAL FOR DECISION PAGE 3
soAH DOCKET NOS. 30+13-4211.26
& XXX-XX-XXXX.26.26
TCPÀ DOCKET NOS 10ó,815 & 107'006
Staffsubmitæd the foltowing exhibits in SOAH DocketNo. 304'13-4212'26
Texas Notification of Personal Liability for Fraudulent Tax Eva^sion;
2 Audit Exam, including correspondence and e-mail communications from the
Revenue Accounting Division; the calculated Message, Adjustnent, and
Allocation Reports; Íax Summary, Status, Balance, Audit, and Tax Allocation
Basis Inquiriei; and Personal Liability Fraudulent Tax Evasion Worksheeq
J sales and use tax Returns for report periods April 2007, May 2008,
December 2008, February 2008, and January 2009; and
4. State Filings (Statement of Change of Registered Offrce/Agent, dated
May 5,2006; and Texas Franchise Tax Public lnforrnation Reports sigrred
May 10,2006, March 13, 2008, and February 26,2009.
Staff attached to its Response to Petitioner's Post-Hearing Brief the following exhibits
6 Copy of Msmorandgm Opinion issued in Sanadco, Inc. v. Comptroller,
No.OS-tl-00462-CV, 2Ol3 Tex. App. LEXIS 12013 (Tex. App' - Austin
September 26, 2013); and
7 Appellee's Motion for Rehearing and Reconsideration en banc filed in
Sanadco, /nc.
petitioner SI produced during the hearing its responses to Staffs Second Set of
Intenogatories, Requests for Admissions and Requests for Production. Petitioner did not
offer any other evidence during the hearing, but did attach to its Post-Hearing Brief the
following exhibits:
1 The Examination performed by the Comptroller's Business Activity Research
Team (BART) for the exam period January l, 2008 through March 31, 2009,
including, the Accounts Examiner Coversheet; correspondence and e-mail
communications from BART; the Texas Notification of Exam Results; the
Message, Adjustrnent, and Allocation Reports; Petitioner's Alcohol and Tobacco
q
þ,
CONFIDENTIAL
Pursugnt to
Gov't 2003.104
PAGE 4
NOS. 304-13*{211'2ó PROPOSAL FOR DECISION
soAH DOCKET
& 304-13-421226.26
iCp¿ uocxeT Nos to6"8l5 & 107'ü)6
2009; and ITS Work Manager
Purchases for January 2008 th¡ough March
Comments;
2,PlaintiffsoriginalPetition,Sanadco,Inc.,20]13Tex'App.LEXISl20l3;
sønadco' Inc' 2013 Tex'
3. Defendant's First Amended Answer and counterclaim,
APP. LEXIS 12013; and
Plea' sanadco' Inc"
4. Counter-Defendant's original Answer and Jtlrisdictional
2013 Tex. APP. LEXIS 12013
the listed documents is admitted as
There were no evidentiary objections, and each of
part ofthe contested oase record'
case hearing was that of
The only witness testimony presented during the contested
the Comptoller auditor who performed
Dennis Ëastman, the aud.it supervisor who supewised
PetitionerSl,saudit.Sta.ffpresentedthetestimonyofMr'Êasnnan.
B. Adiustments
staffhas not agleed to adjust any of the contested audit assessments.
C. F¡cts Estsblished and Issues Presented
during the audit period
Petitioner Sl operated a convenis¡rce store in Fort Worth, Texas
owns the convenience store'
February 1,2007 through JunE 30,2009. Petitioner SI no longer
Petitioner SI was subjecæd to a desk audit performed by
BART for the exam period of
assessed a tax liability of $23'593'60'
January l, 2008 through March 31, 2009. It was
penalty, and accrued interest'
consisting of tax, the 10% standard penalty, the additional 50%
alcohol and tobacco purchases for
The exam was promptedl by a comparison of Petitioner SI's
I Petitioner's Exhibit 1, letter dated July 2,2009 from BART advising Petitioner sl of assessment'
CONFIDENTIAL
Pursu¡nt to
Tex, G Code 2003.104
PAGE 5
NOS. 304-l$4211'26 PROPOSAL FOR DECISION
soAH DOCKET
& 30+13-4212.26.26
TCPA DOCKET NOS l0ó'815 & 107'00ó
and alcohol vendors pursr¡fint HB 11'2 The
the exam period feported by Petitioner SI's tobacpo
period exce€ded the reported taxable sales for
HB 1 I tobacco and alcohol pufchases for the exfim
the same period by s268,056 to $76,976, BART
relied on the HB I I data and the comptroller's
assessment' Petitioner sI did not
Audit Division Policy Memo 122 (AP t22) in estimating the
for redetermination contesting the assessment, consequently, the assessment
fìle a request
General.s The
became final. The sales and uso tax delinquency was certified to the Attorney
the delinquency from Petitioners SI and Isba'a
Aftorney General filed a lawsuit seeking to collect
However' the trial court
Petitioners filed various counterclaims against the Comptoller'
ofjurisdiction. Petitioners appealed the dismissal'
dismissed Petitioners' counterclaims for lack
directives in AP 92 and
The Appeals court sustained Petitioners' claim rhat the comptroller's
jurisdiction over sanadco's
Ap lzzwere in fact rules and also concluded that the trial court had
clairn that gz and AP 122 were invalid rules and thal thertfote, the trial court erred in
^P App' LEXIS 12013'
dismissing this cotrnterclaim. ,See Sanadco, Inc',2Q13 Tex'
sales and use tax
The Comptroller subsequently conducted an audit of Petitioner SI's
June 30, 2009. Petitioner sI did not
compliance for the audit period February 1,2007 ttuough
a Notification of Estimation
respond to the auditor's requests for records.5 The auditor issued
procedures for St¿te Tax Audit (Notification of Estimation) dated January 27,2011, advising
petitioner Sl that the audit would be estimated using HB 1l data, and that the AP 122 procedures
SI no longer
would be followed.6 When the auditor initiated the audit fieldwork Petitioner
operated the convenience store. Therefore, the auditor could
not perform a shelftest and instead
2 Wholesalers and distributors of beer, wine, malt liquor, cigarettes, cigars,
and tobacco products are required to
monthly basis, to the Comptroller. These electronic rePorts are required by Tex. Tax
submit electronic reports, on a
of Tex' I{B I l, 80rt' Leg., R.S., 2007. The
Code $$ 151.462, 154.212, and 155,105, which were enacted as Part
vendor records are commonly referred to as HB I I records.
3 pçtitioner,s Exhibit 2, Texas Certificate to Attorney General of Sales and Use Tax Delinquency
a Petitioner's Exhibit 2, Plaintiff s Original Petition'
5 Staffs Exhibit 4 (Petitioner St), Audit Report'
6 Id.
CONFIDENTIAL
Punu¡nt to
Gov't Code 2003,104
PAGE 6
PROPOSAL FIORDECISION
SOAH DOCKET NOS. 301-13''1211'2é
& 30+l$4212.26.26
icp¡ pocxpT Nos loó'srs & lo?'orló
percentages of I l8'44% and 124'07% fesp€ctively for tobacco
used the induslry avGrage markup
purchases
Ap 122.? The auditor totared the tobacco and arcohor
and alcohol purchases set out in
data for the report periods January 1' 2008' tbrough
made by Petitioner sI using the HB l1
June30,2009'Thetotalalcoholandtobaccopurchasesweremultipliedbytheirrespective
invoices
percenøge was calculated, because no purchase
markup percentages.s No product-mix
were available. Therefore, the standar d AP
lzzproduct-mix percentage of 54o/o for tobacco and
a 5%
alcohol products was applied to arrive at estimated taxable sales' The auditor afforde'd
wæ given for reported Exable sales' The adjusted
allowance for spoilage and theft, and credit
in the BART exam for the repod
tuable sales were then reduced by the amounts assessed
1, 2008 throt,gh March 31, 2009, and the resulting
additional taxable sales were
periods January
at the tax due for the period January 1' 2008'
then multiplied by the applieable tÐ( rates to anive
through June 30, 2009'e
data available for the periods preceding January 1,
2008, the
As there wris no HB 1 t
the report periods January 1' 2008' through
auditor estimated the additional taxable sales for
monthly net estimated taxable sales' The post'
June 30, 2009 by first determining the average
December 31, 200'î total net estimated taxable sales
of s728,443'I7 were divided by the
I g report periods to arrive at a monthly average
of $40,469'06.10 The additional taxable sales for
the pre-January 1, 2008 report periods were calculated
by giving credit for the ta:Id., andstaffs Exbibit 4 (Petitioner Sl), Exam 208)
I Id,
e staffs Exhibit 3 (Petitioner SI), Audit Report, Exam 20'
'o StoffsExhibit 4 (Petitioner Sl), Audit Report, Exam 208
" Staffs Exhibit 3 (Petitioner SI), Audit Report Exam 20'
CONT'TDENTTAL
Pursu¡nt to
Gov't Code IM
PROPOSAL F'ORDECISION PAGE 7
soaH DOCKET NOS. 304-13-421 1.26
& 30/Lr3-4212.26.26
TCPA DOCKET NOS loó,815 & 107'006
Since no contact was made during the audit with an officer, owner' or representative
of
petitioner SI, the auditor did not record in the Audit Plan or in the Audit Refenal Report for
owner, or
Additional Penalty any information regarding the role played by an officer, director,
and filing of the sales
employee of petitioner SI in the operation of the store or in the preparation
and use tâx returns and the remittance of sales and use tax payments. The only substantive
information reganding Petitioner Isba's activities is found in Petitioner SI's responses
to Staffs
Second Set of Interrogatories, Requests for Admissions and Requests for Production.
petitioner sI admitted that Petitioner Isba signed checks for remitting sales and use tax payments
during the audit period.l2 petitionff Isba is identified as the person responsible for depositing the
store's sales proceeds, ordering the store's inventory, and paying for the storg's inventory
purchases.
13
Petitioner Isba was also identified as the person who received the monthly bank
statements.l4 Ho*e'lrer, according to Petitioner SI's answers to the interrogatories,
petitioner Isba's responsibility for these t¿sks ended when on May 1, 2008, he entered into an
agreement to sell Sanadco, Inc. to his employees, Yassien Siam and Sandra Salazar' Mr' Siam
thereafter assumed responsibility for these tasks from May 1, 2008, until the end of the audit
period.
Petitioner SI, in the responses to Staffs lnterrogatory No. l, stated that Petitioner Isba
was the sole owner, officer, or manager through May l, 2008. Petitioner Isba signed
petitioner SI's 2006 Texas Franchise Tax Public Information Report (PIR) as president of
Sanadco.rs The PIR is dated May 10, 2006. Although Petitioner SI's 2008 PIR identified
petitioner Isba as the corporate presiden! the form is signed by a Mike Isba.l6 The PIR is dated
12
Petitioncr SI's Admission No. 2.
13
Petitioner SI's Answers to Interrogatories Nos. 4, 5, anct 6.
r{ Fetitiouer SI's Answer to Interrogatory No. 7,
It Staffs Exhibit 4 (Petitioner Isba).
t6 td.
CONF'IDENTTAL
Pursu¡nt to
Tex, Gov't 2003.104
PROPOSAL FOR DECISION PAGE E
soAH DOCKET NOS. 3M-13-¿2r1.2ó
& 304-134212.26.26
TCPA DOCT(ET NOS 106,815 & 107'00ó
pIR identifies Petitioner Isba as the president' but it bea¡s the
March 13,200g. Thç 200g
dated February 26,2009'
signature Isba" without a given name.tT The PIR is
2011, the Comptroller issued to Petitioner SI a Texas
Notification of Audit
On April l,
50% fraud penalty, and accrued
Results assessing tæ<, the standard l0% penalty, the additional
interest, totaling $112,381.02, with $64,336.87 attributable
to tax' The overall error rate for
petitioner SI was 66.45yo,which was calculated by dividing the tax assessed by the sr¡m of the
redetermination.
tær reported and assessed.lt Petition"t SI timely requested
2011' against
The Comptroller also issued a jeopardy determination on March 30'
petitioner lsbao pursuant to Tax Code $ I t I .061 I , assessing personal liability for the tu liability
of Petitioner sI for the pcriod May l, 2007, th¡ough June 30, 2009'1e The personal liability
assessment consisted of tan, the standard 10%
penal8, the additional 50% penalty, and accrued
against Petitioner Isba
interest through the date of notification. The personal liability assessed
totaled $95,620.96, with $55,168.87 afiributable to tâx. Petitioner Isba timely requested
redetermination'
glounds:
Both Petitioners SI and Isba contested their assessments on the same
1 The imposition of additional fraud penalties should be deleted because Petitioner
providei substantial records, and the underpayment was not the result of fraud or
à t oowing or willful intent to evade tæId.
rs Petitioner Sl's Penaþ and lnterest Waiver Worksheet'
,e staffs Exhibit I (Petitioner Isba). Texa.s Notification of Personal Liabilþ
CONF'TDENTIAL
Pursu¡nt to
Tex. Gov't Code 2003.104
PAGE 9
XXX-XX-XXXX.26 PROPOSAL FORDECISION
soAH DOCKET NOS'
& 304-1$.4212.26.26
TCPA DOCKET NOS 106,E15 & 107'006
The auditor,s exclusive ì¡se of HB I I information
and estimated markups to
J
when Petitioner had
determine the tax tiauitity for beer and cigarettes,
markups, was improper;
ãåcumentation regarding thó actual purchases and
The auditor's calculations regarding markups were
well beyond nationâl avemges
4.
and those contemplated under AP 122;
jeopardy determination was flawed'
5 The imposition of additional penalties for the
because the statute uutftotititg such penalti"i is
unconstitutionally vague for its
failure to establish guidetines for its imposition;
inventory;
6. The audit should be revised to exclude previously audited
audit procedures that
7. The audit is void as unenforceable because it was based on
constitute invalid rules; and
The subject audit overlap, u pr"uious final audit, consisting of a
BART exam for
I
the period January 1, 2008 through Ma¡ch 3 1 , 2009'
D. AnalYsis ¡nd Recommendation
1. SOAH Docket No.304-13-421L.2626 (Petitioner SI)
rilhen records are inadequâte to reflect the taxpayer's business operations, the
Cornptroller is authorized to estimate a torpayer's liability based on
the best information
avaitable. Tex. Tax code $ 11 1.0042(d). An estimaæd audit w¿¡s appropriate
in this case
has held that estimated
because petitioner SI did not have complete records. The Comptroller
audits based on HB I I vendor records and AP 122 procedures meet
the best information
see comptoller's
available requirement when taxpayer records are incomplete or urueliable'
DecisionNo. 103,gg2(2011). Theevidencethatsøffsubmittedestablishesthattheauditwas
procedures were followed'
based on the best information available and that established audit
therefore, bear
Consequently, the audit is entitled to a presumption of correctnçss. Petitioners,
the burden of proof to show by a preponderance of the evidence that the audit results
are
insonect. 34 Tex. Admin. Code $ I '40(2XB)'
CONFIDENTIAL
Pursusnt to
Ter. Code
PAGE 10
NOS. 304-134211'2ó PROPOSAL FOR DECISION
soAH DOCKET
& XXX-XX-XXXX.26.26
TCPA DOCKET NOS 106'S15 & 107'006
there were sumcient
Several of the cont€ntion$ are based on Petitioners' claim that
for the auditor to perfonn an audit without relying on
HB 1l data and the
records available
assertion that
AP lLTestimating procedures. The audit work papers do not support Petitioners'
issued letters (dated october 22' 2009 and
records were provided to the auditor, The auditor
July28,20t0)requestingtherecordsrequiredtoconducttheaudit,includingpurchaseinvoices
The faiture to produce records is also refe¡enced
and sales records but there was no rerpon"".20
by the auditor.zl Moreover,
in rhe Notification of Estimation and Sixfy-Day Letter issued
did not offer any of the records it claimed it
Petitioner dwing the soAH contested case hearing
had available.
by the auditor exceeded the
Petitioners also asserted that the markup pefcentages used
The auditor used the markup percentage
national averages and those contemplated by AP 122.
provides that the
of ]24.\|o/odesignated in AP 122 for alcohol purchases.u AP 122 expressly
used for
average convenience store markup percentage of 124'07o/o assigned to 2007 is to be
The same provision applies for
subsequent years until new markup percentages are available'
products. The markup pffcçntage of 118.02% assigned to 2007
is to be used for
tobacco
The auditor, instead' rxed the
subsequent years until new markup porcentages are available'
markup percentage o,t ttt.U% that is reserved for 2006.8 No explanation was found in the
audit work papers or in staffs pleadings fbr deviating from this directive' consequently, the
percentage of I l8'02%
ALJ frnds that the auditor erred and recommends that the conect markup
estimated tobacco sales' The
should be used in marking up the tobacco pruchases to calculate
a minor effect on the calculation of
application of the correct markup percentage will have only
sales total $100,550'67 versus the
the estimated tobacco sales. The a-djusted estimated tobacco
of lll.Mo/o. The ALI calculated that the application of
$100,908.51 resulting f¡om the markup
ro staffs Exhibit 4 (petirioner sI), Audit Report, Exhibits ll and III.
rt Sþff s Exhibir 1 (petiriorrer Sl), Sixty-Day Letter and Staffs Exhibit 4 (Petitioner SI), Audit Report, Exhibit l'
æ Søffs Exhibit4 (Petitioner Sl), Exam 208'
ts Id.
CONFTDENTIAL
Pursuant to
Te¡. Code 2003.101
PROPOSAL F'OR DECISION PAGE II
soAH DOCKET NOS. 304-13-421 1.26
& 30+13-4212,26,76
TCPA DOCKET NOS 10ó,815 & 107'006
products would reduce the assessment of tax from
the correct markup percentâge for tobacco
$64,3 36.90 to approximately $64,3 05'00
be disregarded because it is bæed
Next Petitioners assert that the audit assessment should
the appellate couft's recent decision in
on invalid estimating procedures. Petitioners rely on
any precedential value placed on the
Sanadco, Inc.,2013 Tex. App. LEXIS 12013. However,
decision is premature, as the decision has not become
final' Appeltee has filed motions for
en banc reconsideration and for rehearing. The
court has yet to rule on the motions' The
plenary power expires' Sce Oscar
appellate court's decision becomes final when the court's
S.W. 3d772 (Tex' App' * waco 2006' pet'
Renda contructing, Inc. v. H&S Supply co., \nc.,195
the court will lose plenary power thirty days after the cout ovemrles
the motion
denied). And
forrehearingandenäancreconsiderâtion'Tex'RuleApp.P'19.1(b).
petitioners also contend that the subject audit should be restricted to the report periods
March 31,2009' Thus'
that fall outside of the BART exam period of January 1,2008 through
according to Petitioners, the audit assessment should be restricted to the report periods
February l, 2007 through December 31, 2007, and April l' 2009 through June 30' 2009'
the liability due druing the
Petitioners, in effect, are arguing that Stâffis estopped ûom reargUing
bar of collaterai
period previously examined by BART. However, a party seeking to assert the
estoppel must establish that: "(l) the facts sought to be litigated in the second action were fully
judgment in the first
and fairly titigated in the first action; (2) those facts were essential to the
Sysco Food Servs' v'
action; and (3) the parties were cast as adversaries in the first action'"
Also see comptroller's
Trapnell,8g0 s.w. 2d796,801-802 (Tex. 1994), citations omitted; and
Decision No, I 00,190 QOlz)-
The BART exam of Petitioner SI's convenience store differs in several significant
ways
from the subsequent sales and use tax audit of the s¿une convenience store. As the BART exam
purchases, no product-mix
focused exclusively on Petitioner SI's alcohol and tobacco sales and
Pursuent to
Govtt Code
PAGE 12
PROPOSAL FOR DECISION
SOAH DOCKET NOS' 304-13-42rl'26
& XXX-XX-XXXX,26.26
iCpl bocxBT Nos 1oó'8ls & lo7'ooó
percentagewasapplìed.However,aproduct-mixpercentagewasneededwhenPetitionerSlwas
food and general
subsequently audited for sales
of other products such as candy' soft drinks'
theft in the
petitioner sr was afforded a 5% a[owance for spoilage and
merchandise. In addition
judgment in eacrr contested tax
facts were not essentíar to the
sares and use tÐ( audit. The same
case.'[hus,theComptrollerwasnotestoppedbytheresultsoftheBARIexamfromthe
especially since
and use øx audit of the same taxpayer'
subsequently performing a sales
exaln were deleted from the calculation
of additional
taxable sales determined in the BART
(2013) and
taxable sales in the sales and use tax
ar¡'dit see comptroller's Decision Nos' lo7 '579
104,445 and t05,726 (2012)'
TheComprollerisauthorizedtoassessanadditional50%penaltyunderTex.TaxCode
tax'
commitæd fraud or had the intent to evade
she determines th¿t a taxpayer
$ lll.061(b) if
penalty
and convincing evidence that the fraud
staff has the bruden of establishing by clear
Clear and convincing evidence is proof that
will
applies. see 34Tex. Admin. code $ '40(lxB)'
t
produceafirmbelieforconvictionastothetruthoftheallegationssoughttobeestablished,but
(2000);
see compüoller's Decision No' 37'946
which need not be unequivocal or undisputed'
See also, llebb
State v' ,â'ddington,588 S.w.2d 569,
570 (Tex. 1979), on remand, 435 U.s. 967.
F.2d 366 (1968) (fraud with the intent to
evade tax
v. Commissioner of Internal Revenue,3g4
requiresactual,intentionalwrongdoingwithaspecificpurposetoevade)'
the audit period is 66'450/o' The revised overall
As noted above, the overall effor rate for
enor rate decreased, almost unperceptively,
to 66'44% once the error rate is recalculated using
prior Comptoller decisions gross undeneporting of
the a.ssessed tax arnount of $64,305'24 In
or gfeater, has been found sufficiently irrdicative of
taxable sales, defined as an error of 25Yo
of the fraud penalty' particularly when there were
intent to evade the tax to warrant assessment
b assessed tax and reported tåx ($9ó'790'61)'
'Ihe recalculated formula is assessed tax ($64,305) sum ofthe
+
CONF1DENTIAL
Pursuant to
Ter" Govtt 2003.1M
PROPOSAL FOR DECISION PAGE 13
soAH DOCKET NOS. 30+13-4211.26
& 304-r&4212.26.26
TCPA DOCKET NOS 106,815 & 107'006
other factors or no plausible explanâtion. See, e.g., Comptroller's Decision No. 43,248 (2004)'
Also see Tex, Tax Code $ 1l 1.205(b),
to justifu imposition
Such gross undeneporting, however, is not in and of itself sufficient
tåxpayers, the Comptroller
of the fraud penalty on corporate taxpayers. In the case of corporate
recognizes that a corporation is a separate legal entity that is conFolled
by its officers and
directors and that the requisite intent of a corporation is detemrined from
the actions of the
officers or directors. \ilhen an offrcer is proven to have been directly involved in the fraudulent
activities, the additional penalty against a corporation has been upheld, because a
corporate
officer's fraudulent actions can be attributed to the corporation, ^See Compholler's Decision
Nos. 105,418 & 104,471 (2011),44,891 (2005) and44,528 (2005), The question is to what
degree petitioner tsba, the company's president, was awaxe or should have been aware
of the
uncleneporting of tax. See e. g., Comptoller's Decision No. 103,204 and 104,238 (2012)-
The only substantive evidence in the record directly establishing the exænt of
petitioner Isba's involvement in the operation and rnânagement of the convenience store, in fhe
preparation and filing of the sales and use tax retums, and remittance of the tâ( payments during
the audit period is found in the answers propounded to Staff s discovery. There also æe the five
checks remitting payment signed by Petitioner Isba that were proffered by Staff.zs The ALJ,
based sotely on the statements made in response to Staffs discovery, finds that Petitioner Isba
purchased and paid for the taxable inventory, made the daily deposits, and received the bank
statements,,signed the sales tâx returns, and paid the sales and use taxes. The ALI, therefore,
concludcs that Petitioner Isba was involved in, aware of or should have been aware of the
underreporting of sales ta:<. However, the same inforrration that supports this conclusion
expressly limits Petitioner Isba's involvement to the period preceding May l, 2008, when he
qmcemenr tn cell the husiness ærd o¡re of the buyers assumçd responsibility for
^*ra.a¡t inrn
ç¡lLvlçu an
¡lÀrv 4r
perforrring these tasks, Staff has not addressed or refuted any part of Petitioner S['s responses to
t' Staffls Exhibit4 (Petitioner Isba).
Pursu¡nt to
Tex. 2003.r04
PAGE 14
PROPOSAL FOR DECISION
soAH DOCKET NOS. 304'13-4211'26
& 30¡l-13-4212,.26'26
lciii iiocrnT Nos lo6,8ls & 107'006
Isba's involvement to the
requests, including the staæments limiting Petitioner
its discovery
l 2008'
report periods preceding May '
AIJ COncludes that the r€cofd
is suffrcient to establish' by clear and convincing
The
attributable to the company'
the part of Petitioner Isba that are
evidence, fraudulent actions on
butonlyfortheperiodFebn.raryl,200T,throughApril30,200S'TheALItherefore
50% fraud penalty should be dismissed
for the period
recomrnends that the additional
audit period'
May 1, 2008 through the end of the
penalties for jeopardy determination are
petitioners arso argue thât the irnposition of additional
contention
vague. The ALJ lacks the jurisdiction to consider Petitioner's
unconstitutional
the jeopardy determination statute'
The courts have nrled that
regarding the constitutionality of
theComptrollerlacksjurisdictiontonrleontheconstitutionalityofastatutethatsheadmìnisters'
SeeTex,StateBd.ofPharmacyv.IlalgreenTexasCo.,520S'u/.2d845(Tex.App.-Austin
l975,writrefdn.r.e.)AlsoseeComptroller'sDecisionNo.t05,82l(2013).
2.SoAHDocketNo.304-13.42|2.26(Petitioncrlsba)
TaxCode$lll.06llimposespersonalliabilityonanofñcer'manager'ordirectorofa
in a
director, or partner' took an action or participated
corpOration who "as an officer, managef'
personal riability is
plan to evade the payment of ta)r due exceeding the amount of ta¡< repofted by
and (3)"
25o/o ormore' Tex. Tax Code $ 111'061l(bxl)
CONF'IDENTtAL
Pursuånt to
Ter. Govtt r04
PROPOSAL FOR, DECISION PAGE 15
soAH DOCKET NOS. 30+13-4211.26
& 30+13-421226.26
TCPA DOCKET NOS 106,E15 & 107'006
imposition of the additional
The same facts that the ALJ ¡elied on in recommending
personal liability' First' there was an overall
50% penatty support upholding the assessment of
gross undeneporting of the tax, which resulted' even after
taking into account the adjustment
establishes that
recommended by the ALJ, in an enor rate of 66.45%, Moreover, the record
signing of
petitioner Isba was involved in the operation and management of the store and in the
the sales and use tax returns and remittance of the
tax payments' He ordered and paid for the
the bank ståtements, and signed both
taxable inventory, deposited the store's receipts, received
the comptoller' However' the
the sales tax fetl¡rns and the checks remitting payments to
evidence only for the period
evidence establishes this involvement by clear and convincing
1, 2007 ttuough, April 30, 2008. This record is suffrcient
to affrrm the personal
February
for that period, and the ALJ recommends that the personal liability
liability assessment
1, 2008, th,rough June 30, 2009'
assessment should be dismissed for the period May
3. Reconmendations
The ALJ recommends that the audit assessment against PEtitioner
SI should be affrrmed,
of estimated tobacco sales
but subject to the recommended adjusunents correcting the calculation
and limiting the additional penalty to the period February
1,2007 through April 30, 2008' In the
of the personal liabitity assessment against Petitioner Isbg the ALI recommends
that the
case
adjustment in the underlying
assessmsnt should be affrrmed subject to the recommended
personal liability assessment for the
corporate assessment and recommended dismissal of the
petiod May 1, 2008 through June 30, 2009'
III. FINDINGS OF F'ACT
êo-oã¡n
r)t¡IT.aULU)
In¡
r¡¡w. lÞcrirìnner
\¡ v!¡uu¡¡v¡
SI\
e^/ onerated
vl¿v'F!r- a
È convenicncç
r *- storç in Fort Worth, Texas during
the audit period February 1,2007 through June 30, 2009'
t--"
Pursu¡nt to
Tex. 104
PAGE T6
304-1H2rt'26 PROPOSAL FOR DECISTON
soAH DOCKET NOS'
& 30¡l-13-4212,26'26
îðpÁ uocxBT Nos loó,81s & lo7'006
by the Business Activity Research
petitioner sl was subjected to a desk audit -performed exam
2.
îä'dñortlq oipoutit,qcóunts (comptroller) for the
Team @ART) of the *¿ T:îùd a tax liabilitv of
period of January.1,^;ôöä ,ÑshMarchãr, zoog
50% penalty' and
$23,593.60, consrsnng of
tax, the 10% ttt"¿'tãi;Jty' the additional
accrued interest.
a comparison of Petitioner sl's
alcohol and tobacco
The BART exafn was prompted by tobacco and alcohol vendors
purchases for the .,..tti^ö;;ãì"iort"a
Uyittition"t SI's
under HB 11.
tobacco
wine, malt liquor, cigarettes' cigars' and
wholesalers and disnibutors of beet,
4.
products are required ì" ,"UÃi, elecüonic
***, on'u *ontñly basis, to the Compiloller'
These elecfionic reports are required-by
i;;.'Tæ< code $$ tst.+02, 154'212, and
R.S., 2007' The vendor
155.105, which *"r*îrrl[ã * i,"n 9-f f*x. ftg tt, 80th Leg-,
;;;;üäre commonlv referred to as HB 11 records'
for the exam period exceeded the reported
The HB I I tobacco and alcohol purchases
5
to $76,9?o tenr relied on the FIB 1l
t¿,xable sales for tr,. ää.*p.ri"å'ti SXgp56
Memo 122 (AP 122) 1n estimating the
data and the Comptroñilï"ai, Division'Policy
assessment.
the assessment'
6 petitioner SI did not file a request for redetermination contesting
beca¡ne final and the sales and use
tax delinquency was
consequently, tt.
^iårt-"",
ceÍified to the Attomey General. The Attorney
General filed a lawsuit seeking to collect
the delinquencv A'oo, í.Utioners SI and
lsba- See Sanadco, Inc' v' Comptroller' No' 03-
iExrs 12013 (Tex. Ap,p, - Austin september 26, 2013).
u-00462-cv, 20r3î;;. ñ;.
state' However' the fiial court
Petitioners filed various counterclaims again{ jr:risdiction'
-the
7 which decision Petitioners
dismissed PetitioneJã*a"r"tui*s
for laãk of
Petitioners' claim that the comptroller's
appealed. Th" App"i;î;,I{ sustained
directives in AP 92'and AP lzzwere
in fact rules and also concluded that the trial court
tnat eu¿it Division Policy Memoranda (AP)
92
had jurisdiction ou*i J*r¿"oi .raim in dismissing this
the rrial corut erred
artd 122*rr. iou"üdîle* -¿ that, theiefore,
*.rnl"rctui* . See Sanadco, Inc',2013 Tex' App' LEXIS 12013'
and use tax compliance for the
I Petitioner sI was ar¡dited by the comptoller for sales records.
audit period, *o tr," u"ãitoi estimated the audit due to incomplete
9 PetitionerSldidnotrespondtotheauditor'Srequestsforlecords'Theauditorissueda
of Estimation)
Notification nrã-utiãn pro""d*"s for State Tax Audit (Notification
"f
Pursu¡nt to
T Gov't Code 2003.1
PAGE 17
PROPOSALFOR DECISION
soAH DOCKET NOS. 304'13-421 126
& 30+1$'4212.26.26
icï¡ pocrBT Nos 106,815 & 107'006
Petitioner sl that the audit would be estimated using
dated January 27, 2011, advising
would be foliowed'
HB 1l data, and that th;AP 122lrocedures
l0 WhentheauditorinitiatedtheauditfieldworkPetitionerSlnolongeroperatedthe
perform a shelf test and instead used
auditor .oJJ
convenience ,aorr. rr,.i"iore, the "ot
theindustryaveragçmarkuppercenla9!|-orrrt.qaxand1i24.07%respectivelyfor
AP 122'
;ú"t* ;á alcohoipurchases set out in
alcohol purchases made by?etitioner
sI using the HB
11. The auditor totaled the tobacco and
June i0, 2009' The total alcohol
1l data for rhe reporr periods January 1, 2d0C üt*gh markup psrcentages'
and tobacco p*"t **rÇre marked up by their respective
AP lLlproduct-mix percentage o! for tobacco and alcohol products
s+ot;
12 The standard
was applied ,o ur.ii."ut þxabl; sales, because no purchase records were
"stimatd
available.
spoilage and theft to determine net estimated
13 The auditor afforded a 57o altowance for
,*;tl"ã"s. Credit was given for reported torable sales'
then reduced by the amounts assessed in the
L4 The resulting adjusted taxable sales were anive at
BART exam for th.;;p; periods January l, 2008 ttrough March 31,2009.to
the additional taxable sales'
by the applicable tax rates to determine the
The additional tÐ(able sales were multiplied
frorn January i,' zoos througþ June 30 2009.
15
tax due for rhe ;;;; ;"riods
the periods preceding January 1,2008, the
16 As there was no HB 11 data available for
auditor estimated ttt" u¿¿itional ta¡RESIDING
MEMORAND I]M OPINION
After the Comptroller of Public Accounts performed an audit on a convenience
store owned by Sanadco Inc,, the Comptroller and the Attorney Ceneral (cumulatively the
"Comptroller") filed suit against Sanadco to recover delinquent taxes. In response, Sanadco filed
various counterclaims against the Comptroller arguing that the manner in which she calculated
the amount of taxes due was under the terms of an unauthorized rule, that many of'the actions that
she engaged in while conducting her audits were ultra vires, and that the provision o1'the tax
cocle authorizing audits by sampling ancl projecting was unconstitutional. After Sanaclco filed its
counterclaims, the Comptroller filed a plea to the jurisdiction contending that the district court did
EXHIBIT H
not have jurisdiction over the counterclaims. Subsequent to reviewing the plea and convening a
hearing, the district court dismissed Sanadco's counterclaims lbr lack ofjurisdiction. On appeal,
Sanadco challenges the dismissal of its counterclaims, and we will reverse the portion of the district
court's order dismissing Sanadco's rule challenge, affirm the remainder of the district court's order
dismissing Sanadco's other counterclaims, and remand the case fbr further proceedings.
RELEVANT STATUTORY SCHEME AND AUDITING MEMOS
Before delving into the background and issues in this case, a brief overview of
the governing framework for this case as well as a brief synopsis of the actions by the Comptroller
tliat fbrm the subject o1'this case is helpful. Under the tax code, convenience stores are required to
maintain their sales records for tax purposes, Tex. Tax Code $ 151.025, and the Comptroller is
authorized to examine and audit the records of convenience-store owners, id. $$ 15 L025,111.004.
In addition, the Cornptroller may use sampling and projection rnethods f-or estirnating the amount
of taxes owed if "the taxpayer's records are inadequate or insufficienl." Id. $ 11 L0042(b). Moreover,
if the Comptroller "is not satisfied" with the calculated tax owed based on the taxpayer's records,
the Comptroller rnay determine the amount of tax owed liom "other inf-ormation available to the
comptroller." Id $ 1l1,008(a).
In addition to rcquiring convenience stores to maintain sales records, the tax code
also requires brewers, manutäcturers, wholesalers, and clistributors ol'alcoholic beverages to 1ìle
rcports chronicling their sales to stores and listing the stores by name. 1d $ $ l5 1,46I-.462. Similarly,
the tax code authorizes the Comptroller to request wholesalers and distributors of tobacco products
to lìle the sarne type ofreports. 1d $$ 154 (addressing cigarette sales), 155. 105 (covering non-cigarette
2
tobacco products). Thc type of inf'ormation rcquircd in thcsc rcports is commonly rcferrcd to as
H.B. I I information because the reporting requirements were enacted by House Bill I I of the
80th legislature. Act of May 3,2007,80th. Leg., R.S., ch. 129, SS$ \-3,2007 Tex. Gen. Laws
^S¿e
159,159-62.
Once an audit has been perfbrmed, the store owner may request a redetermination
fiom the Comptroller within 30 days of receiving notice of the Comptroller's assessment, Tex. Tax
Codc $ 111.009(a), (b), In addition, thc owncr may also rcqucst a hcaring on thc rcdctcrmination,
id g t t l.009(c), before the State Office of Administrative Hearings, id. $ 11 1.00455. If no request
1-'or a redetermination is filed within 30 days, "the determination is final on the expiration of the
period." Id ç 11 1.009(b). As an alternative to requesting a redetermination, an individual may also
pay the assessed taxes along with a written protest and then file a suit challenging Ihe tax, Id.
$$ 112.0s 1(a), (b), .052,
Prior to the passage olHouse Bill I 1, the Comptroller issued a memo entitled AP 92,
which provided guidance to auditors performing audits of convenience stores. In the memo, the
Comptroller explained that there had been a "lack of'unil'ormity in estimated convenience store
audits" and that "mark-up percentages and product mix percentages" were developed to be usecl in
audits "when necessitated by lack of reliable records" or iI'a store's "records are unavailable,
inadequate or unreliable," Afier House Bill 11 passed, the Comptroller issued another memo to
audit personnel entitled AP 122. The new memo updated AP 92 and required auditors to use
H.B. 1 I information "to produce the most accurate audit results." The issuance of these two memos
along with various actions taken by the Comptroller when perfbrming convenience-store audits
lorm the basis lor this case.
J
BACKGROUND
Turning to the f'acts of this case, Sanaclco owns a convenience store, ancl Mahmoud
Isba operates the store and is designated as a responsible person 1òr Sanadco. The Comptroller
audited Sanadco and determined that Sanadco had underreported its taxable sales fbr alcohol and
tobacco proclucts. The amount of the cleficit was cletermined using H.B. 1 I data. After making her
deterunination, the Comptroller sent a bill for the estimated amount owed and for interest on that
amount as well as a penalty.
After receiving notice of the amount clue, Sanaclco clid not file an aclministrative
challenge to the assessment, nor did it pay the amount due. Accordingly, the Attorney General
fìled suit to collect the delinquent taxes. In response, Sanadco liled an answer and raised several
counterclaims l-or declaratory relief. Those counterclaims were macle against the Offìce of the
Comptroller, Susan Combs in her of ficial capacity as Comptroller, and Greg Abbott in his official
capacity as the Attorney General. In its response, Sanadco also natned as counter-plaintilfìs other
inclividuals ancl companies who had been assessed similar taxes. Those other inclivicluals and
companies are Walid Abclerrahman; Majic Investments, Inc,; Faisal Kahn; Isra Enterprises, Inc.;
Hattab Al-Shudil'at; Hailà Enterprises, Tnc.; EID Corp.; Moharnmed S. AlHajeid; Majdi Rafe Okla
Nsairat; and Omar Unlimited, Inc.r Unlike Sanadco, the other namecl counter-plaintiffs all sought
redeterminations of their assessed taxes through administrative teview, but none ol'the administrativc
proceedings had been cornpleted by the time that the individuals were added to the lawsuit.
t For casc ol'rcading, wc will gcncrally rclcr to all of'thc countcr-plaintifïs as Sanadco.
4
Regarding its counterclaims, Sanadco alleged six complaints relevant to this appeal,
In its lirst counterclaim, Sanadco asserted that AP 92 and AP I22 are administrative rules but that
theywere not promulgated in compliance with the requirements of the administrative procedure act.
Accordingly, Sanadco sought a declaration that those memos are invalid administrative rules. In its
second counterclaim, Sanadco alleged that the Comptroller engaged in ultra vires actions when she
issued 92 and AP I22 and thereby authorized auditors to estimate taxes owed by convenience-
^P
o'frrst
store owners without ascertaining whether adequate records are available" from the taxpayer
to perfbrrn an audit. For those reasons, Sanadco sought declarations asserling that "the Cornptroller
is not authorized to estimate convcnicnce stole auclits using the methods clescribed in AP 92 or
AP 122 until their proper adoption, and/or that the authorization of their use is a non-discretionary
ultra vires act committed without legal authority," In its third counterclairn, Sanadco contended that
the Comptroller actedwithout legal authoritywhen she improperly instructed auditors to use H.B. I 1
information f'or convenience store audits "without first ascertaining whether the determination can
be rnade fiom the taxpayer's records." Accordingly, Sanadco insisted that the Comptroller's decision
to require the use of H.B. I 1 data is an ultra vires act and, therefore, sought cleclarations that the use
of Il.B, l1 infbrmation was irnproper and that the governing stalutes do not allow "the Comptroller
to give conclusive eÍlect to the HBI I data."z In its f'ourth counterclaim, Sanadco alleged tliat the
Comptroller improperly authorized auclitors to "use an abbreviated proceclure which b¡.passed
2 In this counterclaim, Sanadco also sought a declaration that the Comptroller's decision
to recluire the use of H.B. I I infbrmation constituted an impermissible and invalid rule, Because
that declaratory relief would seem {.o parallel the assertions made in Sanadco's lìrst counterclaim,
our analysis regarding the lirst counterclaim is intendecl to address the declaration regarding H.B.
l1 as well.
5
examination of the taxpayer's records and authorized an estimation of his tax liability based solely
on the invalid H. B. 11 data, without first determining the adequacy of the taxpayer's records." For that
reason, Sanadco insisted that the Comptroller was acting ultra vires and sought a declaration that the
governing tax code provisions do not authorize the abbreviated procedure. In its fiflh counterclaim,
Sanadco alleged that the Comptrolleractedultravires byauthorizing the imposition ol'a 50% penalty
without proof of fraud or of an intent to avoid the tax as required by the tax code. ^S¿e
Tex. Tax
Code $ I 1 1.061(b), In its sixth counterclaim, Sanadco sought a declaration that the provision of the
tax code authorizing sample and projection audits f'or estimating taxes owed is unconstitutionally
vague and is, "by its nature, a denial of substantive and procedural clue process." ,Se¿ id $ 1 t 1.0042.
After Sanadco filed its counterclaims, the Comptroller filed a plea to the jurisdiction.
In her plea and brief in support o1'the plea, the Cornptroller argued that the district court did not
have jurisdiction over Sanadco's counterclaims because Sanaclco dicl not allege a proper rule
challenge, because the claims are barred by sovereign immunity, because Sanadco and the other
named counter-plaintifß fäiled to exhaust their adrninistrative remedies bef'ore filing suit, because
some of the counterclaims were not ripe for review, and because Sanaclco ancl the other counter-
plaintifß did not have standing to challenge the allegedly unconstitutional tax statute.
After reviewing the pleadings, the plea, and Sanadco's response to the plea, the
district court signed an order granting the Comptroller's p1ea.3 On appeal, Sanaclco contests the
3 In addition to the six counterclaims mentioned above, Sanadco also alleged the f'ollowing
additional counterclainrs: (l) that the Comptroller engaged in an unconstitutional taking when
she improperly collecf ed sales and use taxes, and (2) that the tax code provision authorizing the
Comptroller to impose a ten percent penalty if she believes that "the amount due lòr a tax period is
jeopardized by delay" is unconstitutional.
6
district court's order granting the Comptroller's plea and, in six issues, challenges the district court's
disrnissal of its six counterclaims.a
STANDARD OF REVIEW
"A plea to the juriscliction is a dilatory plea, the purpose of which is to defeat a cause
of action without regard to whether the claims asserted have merit." Bland Indep. Sch. Dist. v. Blue,
34 S.W.3d 547 , 554 (Tex, 2000). A party to a lawsuit rnay challenge a trial court's subject-matter
filing containing thc Comptroller's plca to thc jurisdiction also servcd as a
The rcsponsivc
motion for summaryjudgment. [n the plea porlion of the filing, the Comptroller souglrt dismissal
of the six counterclaims discussed in the body of the opinion but did not discuss the two additional
countcrclaims. In the summary-judgment portion, the Comptrollcr sought judgmcnt in hcr lavor
regarding the two additional counterclaims as well as some of the other counterclaims. In a separate
order, the district court granted the motion fbr summaryjudgment.
In two issues on appeal, Sanadco argues that the district court erred by dismissing the
two additional counterclaims listed above. However, those additional claims were disposed of'by
summaryjuclgmcnt. The lcgislaturc has cmpowcrcd appcllatc rcvicw of a trial Çourt's intcrlocutory
order granting a plea to the juriscliction by a governmental unit, see Tex. Civ. Prac, & Rem. Code
$ 5l.Ola(a), but has not empowered us with authority over interlocutory orders granting a
govarnmcntal unit's motion for summary judgmcnt. Accordingly, in this appcal, wc onfy adclrcss
the six counterclaims listed in the body of the opinion that were attacked and dismissed on
jurisdictional grounds.
4 In its counterclaims, Sanadco filed suit against the Comptroller in her individual capacity
and sought to initiate a class action on behalf of individuals who had similarly been assessed taxes.
In her plea to the jurisdiction and brief in supporl of the plea, the Comptroller sought dismissal of
Sanadco's claims against her in her individual capacity on the ground that Sanadco had failed to
"plead any Iäcts that would expose [her] to individual liability" and because the pleadings
demonstrate that Sanadc o "cannot plead any làcts that would give rise to such liability." Similarly,
the Comptroller requested that the district court dismiss the class action claims for several reasons,
including that none of the convenience-store owners had "satisfied the statutory prerequisite to filing
a class action under" the tax code. ,See Tex. Tax Code $ I12.055 (allowing lbr class actions by
persons who have paid their taxes under protest). The district court granted the Comptroller's plea
in its entirety, and Sanadco cloes not challenge the dismissal of its claims against the Comptroller
in her individual capacity or of its class-action claims. Accordingly, those claims are not considered
in this appeal and remain dismissed.
7
jurisdiction overacasebyfilingaplea. I"{ou.stonMun. Em¡ts. Pension,5"y,s. ,. Ferrell,248 S.W.3d 151,
156 (Tex. 2007). Determinations regarding whether a trial coutt has juriscliction over a case are
questionsoflaw. TexasDep'toÍ'Parks&Wildli/Þv.Miranda,133S.W.3dZI7,225-26(Tex.2004).
Subject matterjurisdiction is a question of law that appellate courts review de novo, State v. IIolland,
221 S.W.3d 639, 642 (Tex. 2007), ancl may be raised for the first time in an interlocutory appeal,
Rusk State Hosp. v. Black,392 S.W,3d 88, 95-96 (Tex. 2012). Moreover, appellate courts must
consider their jurisdiction 'oeven if that consideration is sua sponte." Freedom Cr¡mmc'ns., Inc. v.
Coronado,372 S.W.3cl 621,624 (Tex. 2012) (per curiam).
On appeal, we review de novo a trial court's decision to grant a plea to the jurisdiction.
Ferrell,248 S.W.3d at 156. [n perftrrrning this jurisdictional analysis, courts look to the "plaintif'f"s
petition to determine whether the fàcts pled aflirmatively demonstrate that juriscliction exists,"
I{olland,221 S.W.3d at642. "If the pleadings are insuffìcient to establish jurisdiction but do not
affirrnatively dernonstrate an incurable defèct, the plaintiff should be alÍbrded the opportunity to
repleacl." Id. at 643. However, if "the pleadings alTìrmatively negate the existence ofjurisdiction,
then a plea to the jurisdiction may be granted without allowing the plaintiffs an opportunity to
amend." Miranda,133 S.W.3d a|227.
DISCUSSION
As mentionecl above, Sanadco challenges the dismissal of its six counterclaims in
six separate issues on appeal
8
Sanadcoos First lssue
In its first issue on appeal, Sanadco urges that the district court erred by clismissing
its counterclaim regarding AP 92 and 122. In its counterclaim, Sanadco sought a declaration
^P
that the memos are invalid administrative rules, Essentially, Sanadco contends that the memos
required the Comptroller's auditors to use certain methods when perf'orming audits of all
convenience stores and that the Comptroller used the procedures specified in the memos when
performing the audits at issue in this case. In challenging the district court's order, Sanadco insists
that the memos constituted administrative rules as defined by the adrninistrative procedure act but
thattheruleswerenotacloptedincompliancewiththeact. SeeTex,Gov'tCode$$2001.021-.041:,
see ctlsc¡ rd $ 2001.003(6) (defining "rule"). Accordingly, Sanadco contends that the district court
had jurisdiction to consider its challenge to the rules because the adrninistrative procedure act
empowers a parly to seek a declaration challenging the validity or applicability of a rule, see i.d.
$ 2001.038, including one not adopted in compliance with the act, see El Paso Cnty. Ilosp. Dist. v.
Texas Health & IIuman Servs. Comm'n,247 S.W.3d 709,715 (Tex. 2008),
In supporting the district court's dismissal of this counterclaim, the Comptroller
contends that the provision of the administrative procedure act authorizing rulc challenges does
not apply in this case because the memos do not qualify as rules under the act, As suppott f.or this
proposition, the Comptroller argues that the memos are simply statements regarcling the internal
management of the agency and do not impose any duties or requirements on convenience-store
owners. On the contrary, the Comptroller insists that the memos are designed to irnprove the
accuracy of auclits by requiring auclitors, not taxpayers, to use certain aucliting methocls. Fuilhermore,
9
thc Comptrollcr urgcs that although the mcmos may hclp auditors asccrtain whcthcr taxpaycrs owc
money, the taxpayer may challenge the determination. Accorctingly, the Comptroller insists that any
ell.ect on a taxpayer caused by the implementation of AP 92 and AP 122 would only be binding alter
an aclministrativc hcaring, which shc contends supports thc conclusion that thosc mcmos arc not rulcs,
Because we believe that AP 92 and AP I22 are rules, we must conclude that the
district court erredby dismissing Sanadco's first counterclaim. Under the administrative procedure
act, a rulc is dcfincd as
ooa
statç agcnoy statcmcnt of gcncral applicability that: (i) implcmcnts,
interprets, or prescribes law or policy; or (ii) describes the procedure or practice requirements of a
state agency." Tex. Gov't Code $ 2001.003(6)(A), For rule determinations, 'ogeneral applicability"
rel'ers to statements affecting the interest of the public and does not refer to statements issued
whendeterminingtherightsofindividuals. Combsv.EntertainmentPubl'ns,Irtc.,292S.W.3d712,
72I (Tex. App.-Austin 2009, no pet.). Further, the statutory definition "includes the amendment
or repeal of a prior rule" but excludes "a statemenf" regarding only the internal management or
organization of a state agency and not af fecting private rights or procedures." Tex. Gov't Code
$ 2001.003(6XB)-(C). In determining whether an agency statement is a rule, courts consider "the
intent of the agency, the prescriptive nature of the guidelines, and the context in which the statement
was made." Entertainment Publ'ns,292 S.W.3d at722.
AP 92 states that lbrmulas were developed l-or estimating couveniencc-store audits
to promote uniformity. Essentially, the memo sets out mark-up percentages that were to be used
in all cascs where "records are unavailable, inadequate or unreliable." Similarly, AP 122 provides
oolnust
guidelines l'or convenience-store audits and instructs that H.8. 1 1 inlorrnation be the starting
point" f'or all convenience-store audits conducted after the date of the memo.
l0
By their language, both memos are statements implementing, interpreting, or
prescribing law or policy . CJ: id. at727 (concluding that letters by Comptroller indicating her intention
to apply statute in all cases "involving brochure fundraising firms" without regard to individual
factors were rules). The directives in the memo apply to audits perf'ormed on all convenience-store
owners and not just to the named counter-plaintifß, and the memos, particularly AP 122, reveal the
Comptroller's intention to apply particular information and methods when performing all audits of
çonvenience stores in all future cases and regardless of any individual circumstances. ,See Triniry
Settlement Serv,s., LLC v. Texas State Sec. Bd , No. 03-10-0063g-CV, 2013 Tex. App. LEXIS 9487,
at *15-16 (Tex. App.-Austin Aug. 7,2013, no pet. h.) (concluding that agency statement did not
qualily as rule because it applied only to particular company and because agency did not express
intention to apply statement to all future cases).
Another factor weighing in favor of a determination that the memos are rules is
Sanadco's allegation that the Comptroller is in fäct generally using directives and fbrmulas in those
melnos when perf'onning audits on convenience stores and that the Cornptroller used the memos
during the auclits of the convenience stores at issue in this case. In other wclrds, the memos had a
tangible efïect and were not simply advisory statements. See Brinkley v. Texa,s Lottery Comm'n,
986 S.W.2d 764,770 (Tex. App.-Austin 1999, no pet.) (explaining that letters liorn Commission
setting lbrth criteria by which licensees coulcl determine if their eight-liner machines were legal
were not rules because they were merely informal views bearing upon internal agency management
in absence oÍ statute giving letters legal eflèct or attempt by agency to enlbrce statement against
licensee). Civen that the nÌemos hacl çífects on convenience stores at large, we also cannot agree
ll
with the Comptroller's asseftion that thc memos were only statements directed to auditing personnel
"regarding only the internal management or organization" of the Comptroller's ofTìce. ,See Tex. Gov't
Code $ 2001.003(6)(C); cJ: Texas Mut Ins. Co. v. í/isîa Cmty. Med. Ctr., LLP,275 S.W.3d 538, 555
(Tex. App.-Austin 2008, pet. denied) (determining that staff report concerning inconsistent
implementation of rule was not itself rule because repoft was presented to agency but agency
took no official action regarding report and because it simply presented possible correction to
stop inconsistency),
Although we need not thoroughly pursue the issue here, we are also persuaded
that AP 122 is a rule because that memo requires the use of H.B. 1l information as a primary
tool f'or estimating taxes regardless of'the condition of the taxpayer's records. That requirement is
noteworthy because it seems like a departure fiom the provisions of the tax code authorizing
estimating techniques when the taxpayer's records are somehow inadequate ancl when the
Comptroller is "not satisfied" with a tax report that has been filed "or the amount of the tax required
to be paid." ,S¿e Tex. Tax Code $$ l1 L0042,.008;see also El Pa,so Cnty. Hosp. Dist.,247 S.W.3d
aI714 (concluding that agency letter setting cutofïdate f'or seeking reimbursement was rule because
it was statement of general applicability, affected all hospitals, and implemented agency policy by
rnodilying pre-existing base-year rule). This type ol modilìcation to prior practices and governing
fiameworks woul1 S.W.3d 532, 546 (Tex,
App,-Austin 201 I, pet. denied) (describing distinction as "elusive"). Although the legislature has
attempted to distinguish the two through legislation, making the distinction is ofìen not an e asy task,
particularly given the varied functions that agencies are charged with undertaking. In discussing the
dilliculty in rnaking these determinations, this Court has explained that the core concept to consider
is whether the agency statement has "a binding effect on private parties." Slay,351 S.W.3d at 546;
see ctlso id. at 546,548 (concluding that evidence supported trial court's determination that agency
statement was not rule because there was evidence that agency commissioners "were not bound
to follow fstatement's] methoclology when exercising their legislatively conf'errecl cliscretion to
impose penalties"), Although this is an extremely close case, we believe that the record as it has been
developed at this stage of the lawsuit cornpels a conclusion that the memos at issue have suflicient
elfeci on private parties to render ifiem rules.
13
In light of the preceding, we conclude that the directives in AP 92 and AP 122 aretn
fàctrules. Forthatreason,wemustalsoconcludethatthedistrictcourthadjurisdictionoverSanadco's
claim that AP 92 ancl AP 122 were invalicl rules and that, therei'ore, the district court erred by
dismissing Sanadco's first counterclaim. Accordingly, we sustain Sanadco's first issue on appeal.
Sanadcoos Second, Third, Fourth, and Fifth Issues
In its second, third, and fburth issues, Sanadco challenges the dismissal of its
requestecl declaratory relief regarding actions taken by the Comptroller that it contencls are ultra vires
acts, Specifically, Sanadco urges that the following actions by the Comptroller are not supported
by any governing law: the Cornptroller's decision to require auditors to estimate taxes owed by
using the methods described in AP 92 and AP 122 and to authorize her auditors to use H,B. 11
information to conduct abbreviated tax audits. In asserting that these actions are ultra vires, Sanadco
points to section lIL0042 of the tax code, which allows auditors to use sampling auditing methods
when a taxpayer's records are unsatisfactory. See Tex, Tax Code $ 111.0042. Similarly, Sanadco
refers to a rule in the administrative code that authorizes the Comptroller to use "a sample and
projection auditing method to determine tax liability" when a taxpayer's records are unsatisl-actory,
See 34 Tex. Aclmin. Cocle $ 3.282(c), (d). In light of the statutory provision and the rule, Sanadco
insists that the Comptroller's decision to perform the audits in the manner described is contrary to
the governing law. In its fifïh issue, Sanadco challenges the disrnissal of his declaratory claim alleging
that the Comptroller actecl ultra vires by authorizing a 50j/u penalty lòr fraud. Specifically, Sanaclco
insists that although subsection 111.061(b) of the tax code authorizes the Comptroller to impose
penalties, the provision lirnits its imposition to circurnstances in which it is determined that a fäilure
t4
to pay the tax o'due was a result of fraud or an intent to evade the tax" or that the taxpayer engaged
infiaudulentconducttoafÏèctthe"outcomeofanaudit." SeeTex.TaxCocle$ 111.061(b), Relying
on that statute, Sanadco insists that the Comptroller did not make the requisite determinations before
imposing the fiaud penalty on convenience-store owners.
Furthetmore, Sanadco contends that even though none of the named counter-plaintiff's
had fully exhausted their administrative remeclies regarcling the Comptroller's tax assessments, the
district court still had jurisdiction to consider these declaratory complaints because parties are not
requiredtoexhausttheiradrninistrativeremediesl'orproperlypleadedultra-viresclaims. Accordingl¡
Sanadco insists that the district court hacl juriscliction over its declaratory claims requesting the
Comptroller to comply with the governing statutes and rules.
Generally speaking, a party must exhaust all of its administrative remedies bel'ore
seeking judicial review of an agency determinalion. Friends of Canyon Lake, Inc. v- Guadalupe-
Blanco Riyer Auth., 96 S.W.3d 519, 525 (Tex. App,-Austin 2002, pet. denied); cf. Burgess v.
Gallery Model [Iomes, Inc., 101 S.W.3d 550,558 (Tex. App,-Houston Ist Dist.] 2003, pet.
deniecl) (explaining that Comptroller has exclusive juriscliction to rcsolve tax refunds and that party
must exhaust such remedy bel'ore filing refund suit); c/. Tex. Gov't Code $ 2001 . 17 I (empowering
person who has exhausted his administrative remedies and who is aggrieved by final agency decision
to seek juclicial review). Exhaustion of aclministrative remeclies is necessary in orcler to waive
sovereign immunity, which otherwise typically forecloses suits against government offîcials. ,See
As,signees oÍ'Best Buy v. Combs,395 S.W.3d 847 ,869 (Tex. App.-Austin 2013, pet. liled). In its
bricf, Sanaclco correctly points out that the supreme çourt has recognized an exception to the
l5
general rule for claims alleging that government ofïcials have engaged in ultra vires acts, See
City of'El Paso v. Heinrich,284 S.W.3d 366, 372-73, 380 (Tex. 2009) (explaining that with one
exception, "governmental immunityprotects government ofl.rcers sued in their official capacities to
the extent that it protects their employers" and that suits filed against government officials seeking
"to require state ofTìcials to comply with statutory or constitutional provisions are not prohibited by
sovereign immunity"); Appraisal Revietv Bd. oJ'Harci.s Cn.Íy. v. O'Connor &. Assocs.,267 S.W.3d
413,418-19 (Tex. App,-Houston [14th Dist,] 2008, no pet.) (outlining exception to exhaustion
lequirement fbr ultra vires clairns and stating that generally courts may only interlère with duties o1'
agencywhen officials exceedstatutorily conferredpowers eventhough administrative remedies have
not been exhausted).
However, we do not believe that the exception applies to Sanadco's claims. In
order to fall within the exception, a party must allege that the oflicial "acted wholly outside [his]
jurisdiction," and allegations that an agency official fuiled to fully comply "with all of the
intricacies" of the governing statutes and rules are insufïicient to confèr jurisdiction. Friends of
Canyon Loke,96 S,W.3d at 528; see O'Connor & A,ssocs.,267 S.W,3d at 4I9. As a preliminary
matter, we note that the H.B. l1 information that the Comptroller used for calculating the audits
was infbnnation that the legislature required wholesalers to provide regarding their sales of alcohol
and tobacco proclucts to convenience-store owners. See Tex. Tax Clocle $$ 151.462, 154.212.
Moreover, the bill analysis fbr H.B. 1 I reveals that the law was enacted because of 'ogrowing concern
over fiaud among convenience store owners in the area of sales tax reporting" and that the legislature
t6
was requiring the inf'ormation in order to help the Comptroller perform her audits of convenience
stores. Senate Comm. on Bus. & Cìommerce, Bill Analysis, Tex, H.B. 11, 80th Leg., R.S. (2007).
In acldition, the legislature has specifìcally empowered the Comptroller to perform
tax audits of convenience stores. ,See Tex. Tax Code $ $ I 1 1.001 (empowering Comptroller to collect
sales taxes), .004-.0041 (authorizing Comptroller to examine records of taxpayers), Importantly, the
legislature has also allowed the Comptroller to estimate the amount of taxes due in certain
circumstances. ,S¿e id $$ I I1.0042 (allowing Comptroller to use sampling auditing techniques if
certain conditions are met), .008 (authorizing Cornptroller to use other infbrmation if she is
dissatisliecl with tax reporl), Moreover, the tax code clirects the Comptroller to impose a penalty o1'
50% ol'the taxes due if the Comptroller concludes that a taxpayer's f-ailure to pay was the "result
of fiaud or an intent to evade the tax." Id. ri I l I .061(b).
Although Sanaclco may disagree with the manner in which the Comptroller is
perf'orming her duties and her decision to use legislativelyprescribed information for estimating the
amount owed in her audits, we cannot agree that Sanadco has alleged complaints about actions
wholly outsicle of the Comptroller's authority. Allegations that the Comptroller is not complying
completely with every statutory requirement when performing the duties that she is authorized to
perlbrrn are not sufTicient to invoke the ultra-vires exception. See Creedmor¡r-Maha Water Srrpply
Corp. v. Texa,c Cotnnl'n olt Envtl. Quality,307 S.W.3d 505, 517-18 (Tex. App.-Austin 2010, no
pet.) (determining that allegations that agency rcached incorrect result when exercising its delegated
authoritydoes notconstituteultra-vires clairns); O'Connor &Assocs.,267 S.W.3d at4l9 (explaining
that assertions that agency hcarings clicl not fully comply with statutory procedural requiremcnts
ll
were not enough to invoke ultra-vires exception); Friends of' Canyon Lake, Inc. ,96 S.W.3d at 528
(concluding that arguments that agency did not provide required notice and inf'ormation during
application process were insufficient to invoke exception); cf. Texas Comm'n of Licensing &
Regtilatìon v. Model Search Am., [nc.,953 S.W.2d 289,292 (Tex. App,-Austin 1997, no writ)
(relating that claim that agency had authority to interpret statute but had interpreted provision
incorrectly was insufficient to involce ultra-vires exception because possibility that agency might
interpret provision incorrectly does not destroy agency's ability to make that determination).
In light of the fäct that Sanadco's petition làiled to demonstrate that the named
counter-plaintil'fs had failed to exhaust their administrative remedies and in light of our cletermination
that Sanadco's allegations did not properly invoke the ultra-vires exception to the exhaustion
requirement, we must conclude that Sanadco's petition did not invoke the jurisdiction of the district
court to consider its requested declaratory relief, For these reasons, we eannot conclude that the
district couft erred by dismissing Sanadco's requested declaratory relief, and therefore, we overrule
Sanadco's second, third, lburth, and fìfth issues on appeal. See Creedmoor-Maha Water Supply
Corp.,307 S.W.3cl at 515 (noting that party does not avoid jurisdictional limitation by hling claim
under unif'orm declaratory.judgment act and that act is not general waiver of immunity).s
s
On appeal, Sanadco contends that exhaustion of administrative remedies was not warranted
in this case because its claims ¡rresented pure questions o1'law and were based on uncontested facts.
Assuming without deciding that Sanadco invokes a viable exception to the exhaustion-of-remedies
cloctrine, we disagree with Sanaclco's assertion that the reliel'that it sought only involved pure
questions o1'law. In addition to seeking declarations regarding whether certain procedures by the
Comptloller complied with relevant governing law, Sanadco also sought in its counterclaims to
have the counter-plaintiffs be relieved of the obligation to pay their respective taxes, to recover
compensatory damages liom the Comptroller as well as interest and attorney's fèes, and to
obtain a judgment directing the Comptroller "to account . . . for all of the damages caused to" the
l8
Sanadco's Sixth Issue
In its final issue on appeal, Sanaclco asserts that the district court erred by clismissing
onjurisdictional grounds the counterclaim that section I11.0042 of the tax code is unconstitutional.
That provísion authorizes the Comptroller to use sarnpling auditing methods if'certain criteria
are met. Tex. Tax Cocle $ 11L0042. In its sixth counterclaim, Sanadco sought a declaration that
the provision is unconstitutionally vague as written and as applied to the counter-plaintifï's.
In order 1'or a trial court to have juriscliction over a declaratory-judgment claim, a
party must allege "a justiciable controversy as to the rights and status of parties actually before the
courl for adjudication, and the declaration sought must actually resolve the controversy." Brooks
v. Northglen A.s,t'n,141 S.W,3d 158, 163-64 (Tex. 2004). "A justiciable controversy is one in
which a real and substantial controversy exists involving a genuine conflict of tangible interests and
notmerelyatheoreticaldispute." TexasDep'tof'Pub. Safetvv. Moore,985 S,W.2d 149, 153 (Tex.
App.-Austin I 998, no pet.). 11'there is no çase or controversy, then any declaration issued by a trial
court woulcl constitute an impermissible advisory opinion. Broolcs,l4l S.W.3d at 164,
Although Sanadco urges the statute's unconstitutionality, neither his 1ìling containing
the counterclaim nor his appellate briefìs contain any allegation regarding a dispute between the
Comptroller ancl the named counter-plaintiffs involving the statute in question. In parlicular, Sanaclco
does not assert that the Comptroller used or threatened to use the sampling methods authorized in
countcr-plaintif'f's. CJ. I{arri:t Cnty. Apprai:sal Di,st. v. ETC Mktg.,399 S.W.3d 364, 368 (Tcx.
App.-Houston [14th Dist.] 2013, pet. filed) (disagreeing with assertions that claims were just
questions of law and that exhaustion requiremcnt did not need to be met because parly was seeking
to havc its tax asscssmcnts sct asidc and could not, thcrcforc, bc pursuing purc qucstion ollaw).
T9
the provision when perl'orrning the audits for any of'the counter-plaintiffs, To the contrary, Sanadco's
filings in the district court and in his appellate briefi all allege that the Comptroller improperly
used H.B. I 1 inforrnationwhen performing audits. Accordingly, Sanadco did not plead any conflict
regarding the statute, and there was no justiciable controversybetween the named counter-plaintiffs
and the Comptroller. For that reason, we cannot conclude that the clistrict court erred by dismissing
its requested declaratory reliefl and therefbre, we overrule Sanadco's sixth issue on appeal.
CONCLUSION
Having overruled Sanadco's second, third, fourth, f'rfïh, and sixth issues, we affirm
the portion ofthe district court's orcler dismissing onjurisdictional grouncls the following declaratory
counterclaims urged by S anadco : that the Comptroller acted ultra vires by implementing AP 92 and
AP 122, that the Comptroller acted ultra vires by requiring the use of H.B. I 1 information during
audits of convenience stores, that the Comptroller actecl ultra vires by authorizingabbreviatecl audits
andby giving preclusive ei'fect to H.B. I 1 information during those audits, that the Comptroller acted
ultra vires by authorizing the imposition of a lraud penalty without requiring a determination that
all the statutory criteria hacl been met, and that section 111,0042 is unconstitutional. Having
sustained Sanadco's fÌrst issue on appeal, we reverse that portion of the clistrict court's order
disrnissing the counterclaim asserting that AP 92 and AP 122 were improperly promulgated rules,
Accordingly, we remand the case for proceeclings consistent with this opinion.
20
David Puryear, Justice
Befbre Justices Puryear, Henson, and Goodwin
Jusl"ice Henson not participating
Aff,rrmed in Part; Reversed and Rernanded in Part
Filed: September 26,2013
21
Amalia Rod rig uez-Mendoza
District Clerk, Travis County
Travis County Courthouse Complex
P. O. Box 679003
Austin, Texas 78767
Date: November 3, 2008
TO: All attorneys of record in cases pending in Travis County District Couft
NOTICE OF ENTRY OF NEW E-FILE MANDATE ORDER
The 2008 Court Order Regarding E-filing is effective as of November 1, 2008. You can
view this order by selecting the link near the top of the following web page:
htto: //www.co.travis.bx. us/district clerUdefault.asp
If you have not yet established an e-filing account, please refer to Texas Online's eFiling
Main Information at:
http : //www.texasonline.com/oortal/tol/en/info
We are asking that you establish your account as soon as possible, but a grace period
through the end of the year has been implemented to allow you adequate time to make
e-fili ng preparations.
If you have any questions regarding the e-filing process or the order's application to
any of your pending cases, you may call 512-854-FILE (512-854-3453) for assistance
Thank you
ia Rod
9úry-
Travis County District Clerk
Travis County District Clerk's Offìce
Civil Division
Administrative Offlces Clvil and Famlly Divlsion Griminal Dlvieion Jury Office
(512185+5737 (512)8*e457 (5r2) 854-9420 (512) 854-42es
Fax: 854-4744 Fax: 854-6610 Fax: 85¡l-4566 Faxt 8*44,57
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IF YOU NEED A LAWYER
AND DON'T KNOW ONE,
THE LAWYÊR REFERRAL SERVICE
CAN HELP
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866-303-8303 (toll free)
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Weekdays 8:00 am to 4:30 pm
$20.00 for first half hour attorney consultation
(free consultations for personal injury, malpractice, workor's compensation,
bankruptcy, and social security disability)
Thls service is certlfled as a lawyer referral servlcs ar requlred by lhe State ol Texag
under Chapler 952, Occupatione Codo. Certlllcale No. 9303
SI USTED NECESITA EL GONSEJO DE UN
ABOGADO Y NO CONOCE A NINGUNO
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$20.00 por la primera media hora de consulta con un abogado
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This service is certified as a lawyer referral service as required by the State ol Texas
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Tab D
Letter regarding payment for Reporter’s Record
Sanadco II, No. 03-14-00771-CV
Third Court of Appeals.
Appellees’ Responsive Brief page 4
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
I Il.li (:()t,\'
Counr oF AppEALS
Tuno Drsrrucr or TexRs
P,O, BOX I 2s47, AUSI'[N. TEXAS 7871 l_2547
www. tx0ourts. gov/3r'dcoa.aspx
(stz) 463_t733
JEFF L. ROSE, CHIEF JUSTICE JEIìIII{EY D, KYLE, CLERK
DAVID I'UIìYEAR, JUSTICE
BOB PEMBEIì'TON, JUSTICI':
MELISSA cOODWIN, JUSI ICIl
SCO]I' K. ITIËLD, JUS]'ICE
CINDY OLSON I]OURLAND, JUSl'ICE
February 10,2015
Mr. Samuel T. Jackson
Law Office of Samuel T. Jackson
P. O. Box 170633
Arlington, TX 76003
* DELIVERED VIA E-MAIL *
RE: Court of Appeals Number: 03-14-00771-CV
Trial Court Case Number: D-1-GN-13 -004352
Style Sanadco Inc., a Texas Corporation; Mahrnoud Ahrned Isba; Broadway Grocery, Inc.;
and Shariz, Inc.
v. Susan Combs, in Her Individual and Offrcial Capacity as Comptroller of Public
Accounts; Office of Cornptroller of Public Accounts for The State Of Texas; and Gregg
Abbott in His Official Capacity as Attorney General of The State Of Texas
Dear Counsel
The reporter's record was due in this Court on December 15,2014 and is overdue. The
Court has been informed by Sheri Linder, the court reporter, that appellant has neithcr paid, nor
made arrangements for payment, for the reporter's record. Accordingly, the reporter's record will
not be filed.
If appellant does not notify this Court that payment arrangements have been made for the
record, or otherwise responcl to this notice on or before Friday. February 20, 2015, the Court will
consider the appeal without the reporter's record. See Tex. R. App. P. 37.3(c). If the appeal is
submitted for decision without a reporter's record, appellant will be expected to file a brief on or
before March 12,2015.
Very truly yours,
JEFFREY D. KYLE, CLERK
BY .(t).
Amy Strother, Deputy Clerk
cc Mr. Jack Hohengarten
Tab E
Order Denying Plaintiff’s Declaratory Judgment and
Application for Temporary Injunction Plaintiffs’ Third
Amended Petition for Judicial Review, Declaratory Judgment,
Temporary Injunction and Request for Disclosure
Sanadco II, No. D-1-GN-13-004352
200th Judicial District Court of Travis County, Texas
Appellees’ Responsive Brief page 5
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
F¡fed in The ilictritlt {i#un
e¿f i¡'¿.¡vis eçrunfil,
"içyr¡:'
i i ¿¡-ilir l) M--
r'tt}'l
NO. D-1-cN-13-004352
t\t**ß-ll l-
SANADCO INC, A TEXAS CORPORATION nffi "tr;i¡'Eiüìitri;'äio--..A'rl'
i ' î ii' r
AND MAHMOUD AHMED ISBA $ IN THE DISTRICT COURT OF
$
Plaintiff's,
$
$
V
$
$
SUSAN COMBS, IN HER TNDIVIDUAL
$
AND OFFICIAL CAPACITY
$
AS COMPTROLLER OF PUBLIC,
$ TRAVIS COUNTY. TEXAS
ACCOUNTS
$
$
OFFICE OF COMPTROLLER OF
$
PUBLIC ACCOLINTS FOR THE STATE
$
OF TEXAS,
$
$
AND GREG ABBOTT, IN HIS
$
OFFICIAL CAPACITY AS ATTORNEY
$
GENERAL OF THE STATE OF TEXAS
$
Defendants
$ 2OOth JUDICIAL DISTRICT
SD
AP TI T CTI
I oN
October l4th, 2014, this Court heard Mahmoud Ahmed lsba's application for
, temporary injunction. After considering the pleadings on file, the evidence,
and the arguments
of counsel, the Court hnds that the application is without merit and should be DENIED.
ACCORDINGLY, Mahmoud Ahmed Isba's application for temporary injunction is
denied.
*'l.g-tt'
SIGNED on the tT day of Qs"Let,e/,2014
HON ORABLE CHARLES RAMSAY
í¡,¡-l'-Ì -|4
ProDoc FaxService Pâge Z of Z7
CAUSE NO. D-1-GN-l3-4352
SANADCO INC, A TEXAS CORPORATION, s IN THE DISTRICT COURT
MAHMOUD AHMED ISBA, BROADWAY s
GROCERY,INC., SHARIZ,INC., AND RUBY & s
SONS STORE, INC., AND RUBINA NOORANI, $
PIaíntiffs, s
s
s
VS s
$
SUSAN COMBs,IN HER INDIVIDUAT s TR,AVIS COUNTY, TEXAS
AND OFFICIAL CAPACITY $
A5 COMPTROTTER OF PUBTIC ACCOUNTS, s
s
OFFICE OF COMPTROLLER OF PUBLIC s
ACCOUNTS FOR THE STATE OF TEXAS, $
$
AND GREGG ABBOTT IN HIS OFFICIAL s
CAPACITYAS ATTORNEY GENERAL OF $
THE STATE OF TEXAS $
Defendants s z 0OTH IUDTCTAT DTSTRT CT
PLAINTIFFS' THIRD AMENDED PETITION FOR JUDICIAL REVIEW,
DECI,,ARAT O RY J U D G MENT, TEM P ORARY I NIUNCTI ON
AND REQUEST FOR DISCTOSURE
COME NOW SANADCO INC. anrl MAHMOUD AHMED ISBA, et al, Plaintiffs, who file
this Second Anended Petition for fudicial Review, Declaratory Judgment and Tetnporary
Injunction from a pending Conrptroller's Decision in a conlested case proceeding before
the State Ollice of Arlninistrative Hearings, and joining Plainliffs RUBI & SONS STORE,
INC. and RUBINA NOORANI, and Mahmoud A. Isba, complaining of SUSAN COMBS, in
her individual and official capacity as Texas Cornptroller ol Public Accounts, and GREG
ABBOTT, in his ofTìcial capacity as Texas Attorney Ceneral ("Defendants"), and f'ol' cause
woulct respecttully show the fbllowing:
ProDoc FàXSerViCe Page 3 oÍ. 27
I.
DISCOVERY CONTROL PIAN
1. Plaintiff.s designate tlri.s case as a Leveì 2 ca.se requiring a cliscovery control plan
tâilored [o the circumstances ôf this particular suit pursuânt to Texas Rule of
Civil Proceclure L90.4.
II.
REQUEST FOR DISCTOSURE
2. Pursuant to Texas Rules of Procedure 194, Plaintiffs reqr.rest that Def'endants
disclose, within S0 days of service of this request, all of the intbrmation or material
described in Rule L94.7,.
I II.
PARTIES
3 Sanadco Inc., PlaintifT, is a private Texas Corporation, duly organized and
existing under the laws of the State of Texas, engaged in the operation of a
convenience store whose principal place of business is located at 3801 East
Rosedale St., Fort Worth, Texas 76L05-1732, artd whose Taxpayer No. is
4 Mahrnoud A. Isba, Plaintifl, is an individual wlto resides in Arlington,
Tarrant County TX and operâtes the convenience store owned by Sanadco Inc.,
located at 3801 East F-oseclale St-, Fort Worth, Texas 76L05-1'732, and whose
Taxpayer No. is
5 Broadway Grocery Inc., Plaintifi is a private Texas Corporation, duly
organizecl and existittg under the laws of the State of Texas, engaged in the
operation of a convenience store whose principal place of business is located at
8342 Broaclway St., San Atrtonio, Texas 78209-2009, atrd whose Taxpayer No. is
6. Shariz, l¡rc., PlaintitÏ, is a private Texas Corporation, duly orgattized and
existing u¡rder tlre laws of the State of Texas, engaged in the operation of a
conveuience store whose principal place of bttsiness is located at 143L0 Taslnania
Ct., Strgarland,TX77498, and whose Taxpayer No. is
7 Plaintifls Rulli & Sons Stole, lnc. and Rutrina Noorani joirr tìri-- petitittn on alÌ
cìairl.- as Pctitroners in a suit currerrtly on file with the State Oflice tll
?age 2 ol 26
ProDoc FaxService Page 4 of 27
Adnri¡ristrative Hearing.s who have not yet exhausted their aclruitristrative
remedies, but an audit has been initiated by the Conrptroller of Public Acct¡unts.
B. Mahmourt A. Isl¡a, Plaintiff, as owner ând ôperâftr Òf Nevine Food Store #2,
located ât 163L E Vickery Blvcl,, Ft. Worth, TX, joins this Petition on all claims as
the Petitiorrer in Case No. 1"10,485 with lhe State Office of Administratrative
Hearings for audit periods Merclt 1", 2009 thru Septetnber 30, 20I2.
9. Defendant, Su.san Comb.s (hereinafter referred t997 S.W.2d 248, 255 (Tex. 1999). These procedures include providing notice,
publication, and public conlment on the proposed rule. /d. fciting Tex. Gov't Code
Ann. $$ 200L,023-.030). The process assr¡res notice to the public ancl atfected
persons and an opportunity to be heard on matters that aff-ect them. /d.
39. Unless a rule is pronmlgated and adopted in accordance with the
requirements of the APA, it is invalid and unentbrceable, Tex. Gov't. Code Ann. $$
2001.035, 2001,004 and 2001,005. Neither AP 92 nor AP 122 as it relates to HB
11, were ever aclopted as rnanclated by the APA and are therefore invalid and
unetrforseal:le whetr appìied ttl ctllrvenience stttre auclit-^.
40 Pl¡intiffs seek a cleclaratory juclgment against Susan Comhs in her
indiviclual and officiaì capacities as (ìomptroller of Public Accounts for tlre State of
Tèxås, pursuânt to Tex. Gov't. Cocle Ann. $ 2001.038 and the Uniform Declaratory
Jucìgments Act, Tex. Civ. Prac. & Rem. Code Ann, 5 37.001 et seq., which waive
sovereign immnnity, declaring that the Cornptroller's mèmorânda, clesignated as
AP 92, AP 722 (incorporaling HB ) 1J, are invaìid adrninisfrative rttles hecanse they
were not adopted in accorclance with the requiremenls of the APA fotlnd at Tex.
Gov't Code Ann. $iì 200i-.035 ancl 2001.004. El Paso Hosp. Disf. v. Texas Health &
Huntan Cotnnt'n. 247 5.W,3d 7 09 , 7L4 (Tex. 2008) (quoting Railroad Comtn'n
v. WBD Oíl & Gas Co.. 1,04 S.W.3cl 69, 79 (Tex. 2003)); Combs v. Entertainment
Publ'ns,Inc.,292 S.W.3d 712,720 [Tex.App.-Attstin Z009, no pet.)
COMPLAINT II
The comptroller acted ultra vires because she acted without legal authority by
implementing and enforcing AP 92, AP l2.Z and HB 11 before performing the purely
ministerial act of arlopting them as Rules in conrpliance with the nondiscretionary,
purely ministerial rule-making procedures nrandated by the APA.
4L Plaintilf.s rncrlr¡torate the ¡rrececling paragr:ìphs hy reference ¿ìs if, the .sarr¡e
were set lorth fully and verbati m hereill,
42 The Conr¡rtroller is r:lrarged witli establi^shing rlethocl.s frlr adnrinisterrng
Page 9 of 2Ci
PrÕDoc FaxService Page 1l- of. 27
antl ackt¡:ting necessary rules frlr the collection of taxes arrtl tlther revenues. Ter
Tax Code Ann. S 111.002[a). Specifically, the Conrptr<¡ller has statutot'y authority
to "arìo¡:t, repeaì, rlr ameud suclr rr-rìe.s to reflect change.s in the power rtf this state
ro collect taxes anci enforce the provisions of this title." Id'
43. Suits to require stale officials to comply with statutory or constitutionâl
provisions âre ltot prohibitecl by sovereign imntuttity. Heínrích,284 S.W.3d at 372.
To fall within the u/tra vires exception to sovereign immunity, a suit "must allege,
and ultimately prove, that the officel acted without legal authority or tailed to
perfbrm a purely rni¡risterial act." Id. (citations omittedJ. "Tltus, ultra víres suits do
not attempt to exert control over the state - they atternpt to Ìeassert the control
of the state. Stated another way, these suits do not seek to alter govertlment policy
but rather to e¡rtbrce existing policy." /d.
++. Unless a rule is promulgated and aclopted i¡r accordance with the
requirements- of the APA, it i"- invalid and une¡rforceable. Tex. Gov't. Code Ann. $$
Tex. Gov't. Cr¡de Ann. $S 2001.035,2001.Û04 and Aq01.0Q!' The Comptrollerhas
no legal ar.rthrtrity to elrfrlrce agency rr-rles heftlre they are adopted in accr¡rdance
with the APA. Such adoption r.s marrrJatury and nclncliscretir)näry. The
Comptroller's failure to comply with this tninisterial, nondiscretionâry act was
lherefore an ultra vires acl. This Corlrt is respectfully requested to enjoin the use of
AP 92 and AP 122 unlil they are properly adopted as rules pursuant to the
requiretnents of the APA.
45. Plaintift's seek a declaratory iudgrnent against Susan Combs in her
individual and official capacities as Comptroller of Public Accounts for the State of
Texas, pursuant to Tex. Gov't. Code Ann. $ 2001.038 and the Uniforrn Declaratory
|udgments Act, Tex. Civ. Prac. & Rem. Code Ann. S 37.001 et seq., declarittg that the
ComptroÌler is not ârìthorized lo estimate convenience store auclits ttsing the
lrethçcls prei^ct'¡herì by AP 92 or AP 122 until their ¡tro¡ter adtrptitlrr, and/or that
tlre authorization of tlreir u.se is a non-c.liscretittnary uìtra vires act ctlmmitted
without legal authority which conflicts with relevatrt prtlvisions rlf the Tax Code
and the Cornptroller's adrninistrative regulatiotrs. El Paso Hosp, Ditt. v. lexas
th &. Hu Comm'n 247 5.W.3d,709,714 [Tex, Z00B) [quoting Rçilroad
'tl v. WBD (].9 104 S.W,3d 69, 79 [Tex. 2003)); Contbs v.
rtainment Publ' 292 S.W.3cl 712,720 [Tex.App.-Austin 2009, no pet.J
COMPLAINT IV
Page 10 of 2ó
ProDoc FaxService Page 12 of. 27
The Cornptroller acted ultra vires and in excess of her statutory authority when she
unilaterally established "gross underreporting" ¿ts ân irrebuttable presumption of
proof to impose the additional SOYo penalty instead of proof of fraud or intênt to
avoid the tax as required by Tex. Tax Code Ann. $ 111'061[b).
46. PlaÍntilfs incorporate the preceding pârâgraphs by reference as if the sarne
wÈre set forth fully and verbatim herein.
47. Tex, Tax Code $ 111.06Lfir) authorizes the Cornptroller to impose a penalty
of 50% f'or tiaud, or intent to evacle the tax, in addition to the deficiency
determination. When the Comptroller seeks to impose a 50 percentadditional
penalqy it must show clear and convincing evidence of traud or intent to evade tax.
TEX. TAX CODE Section 111.061[b) and 34 TEX. ADMIN. CODE Sectio¡r 1.40 [1] [Bl
48. Fraud implies "bad faith, intentional wrollg, and a sinister motive, and the
intent required to be showetl is tl-rat tìrere was .specific intent trl evade tax believecl
tr¡ he rrwing," CInc., 145 S.W.3d at 1.73 [Tex. 2004),
inclutling the following:
i. The Comptroller's failure or refusal to perform the purely nlinisterial act of
adopting AP 92 and AP 1-22 âs âgency rules, âs mandated by Tex. Gov't Code
S 2001 ët seq.
ii, The Comptroller's artthorizatiotl atrd etrforcement of policies and
procedures that hacl not beelr prornulgated as agency rules, as rnattdated by
Tex. Gov't. Code An¡r. SQ 2001-.035, 200L.004 and 200L.005 including the
use of AP 92, AP 1.22 and HB 1L clata.
(a) In an aclniinistrative acljudicatory proceeding ot'a civiì action I'esulting tioul o con:plaiut issued Lry a sfate
rgcncy àgainsr rt small busincss uirrlcr thc agcncy's adn:inistrativc ()r rùÈ,ul¡ìt()ry functions, thc snrall busincss moy
be awal'decl reasonal¡le íittonìey fÞes an<ì coult costs ifl
( l) it is a sr¡all businr;ss at thc tinrc it lrcc0Ìrcs d party t0 thc ¡rrocucrling r,r¡ ncti<)n;
(2) ir prevaila in the proceeding ot'nction; nnd
(3) thc l¡-r.rr;cctlirrg r¡r uctio¡r wal groundlcsl ar¡tl brought:
(A) in bud laith; rir
(B) lbr prrrposes o1' harasstlretrt'
PageIT of26
ProDoc FaxService Page l9 af. 27
iii. The Comptroller'.s ar,ttht¡rization ttl concìuct "de.sk" audits and giving
ct¡nclusive effect to HB11 clata without deternrirring tìre adec¡uacy of
l:laintiffs'recorcl.s in coutravention ttf Tex. Tax Cocìe Ann, $ 111,0042 and 34
I
Tex. Adnin. Code Section 3.281(cJ.
iv. The Conrptroller's authorization, in excess of her stâtutory authority, to
conduct estimated audits i¡l contravention of Tex. Tax Code Ann. $
111.0042 which specifically restricts the Cornptroller to either detailed or
sample and projection auctits when sales tax reports have been filed. The
only time the Comptroller is statutorily authorizecl to estìmate an audit is
wlrere the taxpayer /ails to Jìle a sales tax report. Tex. Tax Code Ann. $
151.503.
v. The Comptroller's unauthorized, ultra vires reduction of the burden of
proof required to impose an adclitional 50%' penalqy from "fraud, or intent
to avoid the tax" as required ìryTex. Tax Code Ann. $ 111.061[b), to "gross
underreporting" of Zí%t of the tax clue as developecl by agency decisions
ahsent it.s promuìgatitln as^ a rule utrder tlie APA.
4. Plaintiffs have plead il c¿rL¡se of action agairrst the Comptroller. As
previou.sly outlined in tlris ¡retitittn, Pìaintiff ¡^eeks a decìaratitln under Tex, Gov't.
Code Ann. 5 2001.038 that AP 92 and AP L22 are invalid. Plaintiff seeks a
declaralion also ttnder Tex. Civ. Prac. & Rem. Code õ 37.004 that the Com ptroller
exceedect her statutory authorily under Sections 11,1,0042 ancl 11L.06L of the
Tcxas Tax Cocte in authorizing êstinìâtecl nudits anrl the additionnl 50% penalty.
5. The Cornptroller's ultra vires conduct in excess of her statutory authority
conti¡rues to create invalict, uneliforceable, fiauduletrt and illegal audits resulting
in excessive and distorted cteticiencies uporì convenience store owners and
operators subjecting them to tlle fbllowing pre-hearing enfbrcemeltt retnedies:
i, Irnposition of a jeopardy cletermination fl-oln which taxes can be
inrmediately and forcibly collected without filing a collectiou suit.
Tex. Tax Code Ann, Ç 111.022.
¡i. Perfection of a lien on all non-exetrtPt Property, real ancl
per.sonaì, merely by filing a tax lien notice with the apprrlpriate
county clerk. Tex. Tax Code Ann 113 attaclrilrg to all
afl-er-acqr-rireiì property r-¡ntil the taxes are pairì, Tex. Tax Cr¡de
Ann. 11" 3.10 5 renrlering the [axpayer's property virtually
unsalable.
Page L8 of 26
ProDoc FaxService Page 20 of. 27
iii. of the taxpayer's balrk accr¡urrt¡- ancl freezing of
Garni.shnrent
property hekl hy thirtl ¡rarties without tlre requirement of a
hearing. See Tex. Tax Code Ann. $S 1 11,021, 113.103.
iv, Seizure and âuctiôning of lhe taxpayer's proper[y, or, after
affording a hearing, revoldng the taxpayer's sales tax perrnit. See
Tex. Tax Cocle Ann. SF 111.0047. 11_1.017-.019
v. Enjoining ft¡rther sales of goods or services after revoking the
sales tax perrnit, etfectively closing a business. Te><-Jax Code
Ann. $ 151..26Z(a).
vi. Unílateral imposition of a bond to secure payment of the
defìciency under the threat of revocation of the sales tax permit
and et'fectively closure of the business without a hearing. Tex.
Tax Ccde Aru $ 111.012
vii. Refusal to renew sales tax permit due to clelinquency o¡. refusal
to pay the tax. Tex. Tax Code Ann, S 11.1,0046.
viii. Corrtinuecl accurnuìation of rJaily irrterest rrntil a final jr,rdgment is
reached.
ix. The.se renredie.s are cumuìative, and may tlrerefctre be imposecl
simultaneously upon the taxpayer.
6. It is probable that Plaintilfs will prevail agains[ Defenclants on the merits
and oblain permanent injunctive and declaratory relief prohibiting the use of the
policies and proceclure incorporated in AP 92 and AP l_22 because it is
inclisputable that they are adrninistrative rules as defined by the APA as
statements of statewide application; that prescribe law or poìicy; and describes
the procedure or practice requirements of the agency. Further, the Third Court of
Appeals has already rendered a ctecisiolt fì'oln the acceleratecl appeal declaring
that AP 92 and AP 1,22 were invalicl adrninistrative rules subject to the provisions
of tlie APA, because they had r-rot been properly adopted nncler the rnanclatory
requirements of the APA. ackson v. the C troller Public Acco No.
03-11-00462 [Austin App.j [Sept. ZB,2073).
7. If thc Plaintiff.s'
A¡rplication fr¡r Temporary Injunctirlri rs not grarrted, irreparable
harnr is imminent ìrecau.se denying tlre reqr-rest frlr the injurrctive relief will
irnmediately.subject defelrdants to the enforcenrent procedure.s orrtlined in
palagreiph 44 abclve witlrout [renefit oF a hearing, ba.sed sriìely tin t]re auditr¡r.s'
unconfirmecl deficiency determinations.
Page 19 of26
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B. The Plaintiffs will therefore ¡rotentially
face the imnrecliate imposition of ¡:ro¡rerty
liens; seizure and sale of proFerty ancl ¡:roper-ty rigìrts^; immecliate garnir-hnrent
and freezitrg of banking accounts; .suspen.sion or revocatir¡n of saìes and use tax
permits; imposition of cnerous bond or security requirernents; accrual of interest,
and potential loss ând clestrllction of their businesses without access to judicial
intervention for which Defendants have no adequate remedy at law. (See {[ a -
L1, incorporaled herein by reference).
9. Plaintift's lrave no adequate remedy at law because the Comptroller is not subject
to damages claims and these enforcement procedures are not subject to pre-
deprivation hearings because any judicial remecly available is by appeal to the
Distlict Court after the enforcement procedures have already been applied. Tex.
Tax Code Ann. $$ 1.l. L.0049, 162.007 . By the time these remedies are accessed, the
taxpayers will have already lost their permits, their right to engage in business,
and the probable loss or sale of their- business a¡rd assets.
10. Plaintiffs ruc¡ve the Court to set this request frrr a temporäry injunclion hearing,
and after the hearing, enter a temporary injurrction grantirrg the relief requested
herein ancl further enjr:ining Defendants from corrducting any audits incing allegations making the following
declaratir¡nli âs to Plaintiff.s' rights:
â. ihat the Cornptroller's memos AP 92 and AP 722 on Augusl 17,2004,
and July 22,2009 respectively, establishing and irnplementing procedures
for the conduct of conveniencè stôre audits, are invalid administrative
rules, anrl that the Cornptroller's authorization o[ their use without
complying with the APA requiremenls was ultra vires ancl exceecled the
scope of her statutory authority, and that her failure to comply with the
requirements of the APA was a f'ailure to perf'orrn a purely ministerial, non-
discretionary act, thereby entitling PlaintifÏ's to declaratory and injunctive
relief fîorn the collection of these illegal, invalicl ancl unenfbrceable taxes,
penalties and interest;
b. that the Corr-rptroller's rnemo of Juty 22, 2009, implementing and
establishing procedures for tlie use of HB11 data, is an invalid
administrative rule, and that the Comptroller's authorization of its use
without conrplying wrtlr the APA requirements wa.s â non-dir^cretionary,
ultra vires act which exceecled the .scope of her statutory authrlrity, anrl that
lrer failure to comply with the requirements of the APA was a failure t<¡
perfornr a pr-rrely ministerial, non-discretiurrary act, thereby entitling
Plaintiffs and Class to cleclaralory and injunctive relief from the collection
ol these illegal, invalic-l and unenforceable taxes, penalties and interest;
Page 2L of 26
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c. that Tex. Tax Cocle $ 151.462 and 155,105 do not authorize the
Com¡rtroìler to contluct clesk audit.s giving conclu^sive ef,fect to the HB11
data i¡r determinirrg Plaintiffs'tax deficiency witlrout examirratron of
Plaintiffs' business records, and that doing so is ultra vires anr-l in excess of
the Cornptroller's sf¿ìtutory authority, thereby entitling Plaintiffs and Class
to declaratory and injunctive relief from the collectiôn of these illegal,
invalid and unenforceable tâxes, penalties ancl interest ;
rl that the Cornptroller is not authorizecl to estimate the rnarkup of
alcohol and tobacco proclucts or to concluct audits of convenience stores
under the requirements of AP 92 or AP l-22 without first adopting them as
Rules pursnant to the requirements of the APA, ancl that doing so is a non-
discretionaly and ultra vires acl in excess ot- her statutory authority,
thereby entitling Plaintiffs and Class to declaratory and injunctive relief
from the collection of these illegal, invalid and unenforcealrle taxes,
penalties and interesÇ
e tl'"t@isunctlnstitutitrnaìrlnits.faceandas
appliecl tr¡ Plaintiffs hecau.se it permits the auditor tr¡ deternrine whether
records are adet¡uate basecl solely r¡n ulrdefined sulrjective criteria, and
without ¡:rroviding any guicleliner^ for its administration lenrìing itself to
cliscriminatory application, lhereby entitling Plaintiffs to declaratory anrl
injunclive relief fronl tlle collection ol these illegal, invalid and
unenforceabìe laxes, penallies and interest;
f. that Tex. Tax Cod e 6 1I']...O22 is unconstilutional on its face and as
apptied to Plaintiffs because il permits the feopardy Determinâtion to be
made merely on the Comptroller's undefined subjective criteria, and
withont providing any guidelines for its administration lencting itself to
discrirninatory application thereby entitling Plaintiffs ancl Class to
declaratory and injunctive relief frorn the collection of these illegal, invalid
and unenforceable taxes, penalties ancl interest.
o
b. that the Comptroller is not ar¡thorizecl to unilaterally reduce rhe
burden of proof, or to shift the bltrden of proof in estabìishing fraud as
required by Tex. Tax Code Ann. Ç 111,061.. ancl that such conduct is non-
cliscretionary and ultra vires and iu exce.ss of her statr-rtory autholity,
thereby entitling Plaintiff.s and Cla.ss to declaratory and injurrctive relief
from the collectiorr of the.se itlegal, invalid and unenlorceabìe taxes,
penalties and iuterest.
h, that the Comptroller has engaged in intentional conrluct resulling in
the talId.
9
tågr trg ot 3¿6t
I I
Nert Pctitionñt ülcrt thlt thc ar¡dlt a,iscsrmctrt rhould bc dlsrega¡ded becansc it h based
on invalid estinadng proccducr. Paitiocr¡ rely on thc appellate cou¡t's receot dod¡ion in
Sandco, Inc.,ãJt3 Tor App. LE¡l$¡ 1æ13. Ilowcver. auypræedcntlal valrrc placcd m tho
dccisim ir prunatuio' ar tho deci¡io¡ h¡¡ ¡ot bccous ffnal. Appcllcs h¡s ñled üotlotrs for
an åønc¡ccmsidcradqs and fq ¡üeuh& Thc coruth¡s ]rÊtto n¡ls o¡ tbc motions. Th¡
ap,pellate col¡¡t'¡ decisim beconw fi¡¡l when the court'g plenry powor enpinos. ,Íe¿ Oscæ
Renfu Contmctlng ilrc. v. H&It Sttpply Cd, tgí S.W. 3d 7U¿ (Ter. ADp.-Wm 2fF6, peL
dcnid). And thÉ court will loso pleorry powr 30 days aftr thc cor¡rt ovc¡n¡lss thc uotion for
rchcartng E¡d ¿¡t bøtc ¡cco¡sldsadø. Ter. R. App. P. lg,fft).
Paldoncrs al,so contend th¡t thc snbjccr ardlt shouldbo ¡cstrl¿:tcd to tho rÉTqt psrtodr
ûst f¡ll oursidc of tho BART cxam pøiod of January l, 2008, thm¡Eh Ma¡ch 31, 2009. ïtru,
aßcoûdl¡g to Petitioner¡, tbc audit as¡Gssrrcot should be restrlctcd to tho nport pcdodt
Fcbn¡¡ry \.z0úl,througb [lcccobcr3L,1W, and Apnl 1, 2009, thrurgbluoc 30,2009.
Pctidonss, h cftct, are ugulng ùat St¡ff i¡ cstoppcd from nargutng thc llabitity duc during tho
period prcviotsly c¡autncd bV BAtr(f. Ho$rwcr, B bc ü collater¡l
paúy scr$úg to arscrt thÊ
estoppel mut etebllsh th¡B 'U) th! facE sougbt to bo litigatcd in thc sccond rctim wcro fully
md frfuly litlgated h tbo ftst scdolr; @) thoro fects rryÊre esscnd¡l to thc judgmeot tB tbÉ ñrst
acdoq md (3) tho pardos wcro cast as ¡dvcrr¡ric¡ l¡tbo first aßtioû' ,Sylco Food Íeru. u
7Iaprcll,890 S.$t 2d 796,801 (Ter. 1994),cüaìont øúnd: ¡ndáI¡o sac Comprollar's
Decisíon No. l00,f 90 (2012).
Iho B¡{RT cxam of Pedtionn SIs convtnicnco storp dlffers i¡ scvcral rignificrot ways
Ëom the stùseqtcut sales md r¡se tnr audit of th¡ san! oonyenicnae sto¡e. As thc BART o¡am
focr¡scd cxclttsivoly on Peddoær SI's alcohol a¡d rcbaaco salcr and purc.hasetr !o product-uix
pctcÊutage wt! epplied" Howevtr, a pmduæ-mix pcrceutagÊ wa¡ nccded rrybeo Petítlon¡r SI was
nrbscqreotly il¡ditcd fc ¡al¡s of other poducts sr¡cb as c¡ndy, roft drinlr, fmd and gcoeral
¡n¡¡chmdi¡c. I¡ addidon Pctitioner SI was afr¡dcd a 5% allowa¡cc for spoilagc and thÉfr in the
sslet etrd use t¡¡ audiL Tto sanË faas weru not csrcod¡l to thc judgmø i¡ each ontestcd taf,
cæo. rhus, tho Conptroller w¡s mt e¡topp€d by thc rc¡r¡lß of thc BART c¡¡m from
subaequcotly pedoruing a galc¡ ¡¡d rus ta¡ ar¡dit of thc ssmt tsrpÊyer, especiatly si¡co tbo
ÍÛ
'agÉr 20 6t 3¡¡6,
t I
ta¡able sal€s det€rm¡ncd itr lhc BART exan w€r€ dcleted from the calcr¡luion of ddltional
tnr¡blo salca is tb€ ¡ale¡ ¡nd ¡¡¡e tar ardit S¿¿ Compùoûler's Decision Nm . ltl ,579 (2013) B¡d
104,445 a¡d 105126 (2012).
Conptolls i¡ autho¡izcd to u$css n additio¡¡l 5096 pcr¡¡tty unds Ten..Tal Codo
Thc
Aü" $ 111.061(b) if ¡hc detcrnincs that a tarpaycr commined Êaud or had tbs Inæot to evadc
tf,. Strtr hÄ ths bu¡deu of establishing by derr and convlndng cvidcncc ûat tb Êa¡¡d peoalty
rpplies. See 34Tex, Ad¡dn CodË 0 1.40(1XB). Cleu rnd cmvhcing evideoce ic proof thnt will
producc a firm bolid or conviction ¡s to thc tnrth of thc allcgodous sougþt to bc eståblhhcq but
whtch necd not bc uncçirncal or mdisputcd. Sae Compbollrr's Decisioû No. 3?,946 GmOÌ
Sutcv. Addlngto45SE S.W2d 569, fl0(tcx" 1f/9) (pcccrui¡m)toînËñondç¡141 U.S.418.
A¡ noted above, thc overall €N¡aß ratÊ for ths ûrdit p€aiod b 66.459t. 1t¡ rwised ovcratl
€mtr rltc dccrcase{ rluoot unperccptiveln to 66.44% oncc tho ccu ratc ir rcc¡lcul¡tcd using
thc qsecsscd t¡r auoutrt of $64305.¿ ln ptor Comptollcr of
dcclsions grosr undonqordry
t¡xeblo cslcs. dcfiúGd ar an cror of 25ft or grcctcr, har bccn frr¡nd ¡ufñcicntly hdtcativo of
ín¡cot to cv¡dc tho lax to wûrant rssossrrot of the frürd pcû¡lty, padcululywhs¡ th¡ro wcre
olher facton or m plaurible erplanatlon Seq e.go Com:ptsoller's Desision No .432A9 (2004).
Also ¡cs Ter. Tar Codo A¡u $ 111.2050).
Such gross undcrcporting horcver, i¡ not in a¡d of ltself sr¡ffldeût to jrsttfy tnposltlm
of tbe frard penalty otr cor¡þratc tupa¡lcn. I¡ tho casc of corporaE ts¡paycm, tbc Couprollu
recog¡ízer rhnt ¡ çoqpsrat'p¡ ís a scparaæ tegrl eotity th* ts coatrolledby its offioen and
d¡tcctors a¡d th¡t thc rcqt¡lsito irtE¡lt of a corporadon is dctcm¡scd üom tbc a¡üo¡¡ of tho
officem or dheclo¡¡. 'Slheû an officer is provcn !o havc becn dhoctly involrred i¡ thc fra¡¡duleot
activities, tho rddltiust penrlty agninst a corporation bas beca uphcld, bcøruo a oûrlþratc
officcr't ft¡r¡dr¡lcot acdons can bo au¡ibr¡tcd to thc corymatiou Sec Compboller's Ilecision
No¡. 105,148 &, 104,471 (2011),44.891 (2005) otrd ++"52t (2005). Tto çmtton is to whd,
degræ Fedtionrr Isba, the oonpuJt's presidmt was awårs or should h¡ve bem swqg of tbe
nnderæ,porting of ta¡. ,S¿¿ e, g, Comptrollcdc Deci¡iotr No. 103,204 and 104¿38 (2012),
2f lba rcc¡lcr¡l¡td fmu¡¡l¡ t¡ rsrcr¡cd ¡¡¡ ($úfJ{lll) + un of tba s¡¡c¡¡cd tu ud nporred h¡ ($96,790.61).
il
'¡9Ð 2l ot 346)
Ð ü
Ttc only subst¡ntivc widenße in tbc rccord dircctty çgtaþliihtng the extent of
Petitioncß f¡bds lnvolvtmeü in tho orpcration end nn¡¡gcocnt of th! coovcuiencc srtc, ln tbc
prparrtion and filing of thp sales s'ld uso tr¡ ¡Ëür¡rq ard rorn¡ttrscÊ of the ta¡ payncnts durlng
th! audft pcsiod is found i¡ tbc answcr¡t popounded to Statrs dlscovcry. ltcrc al¡o uc ùo fiw
chcclß rrmittiry paynËût rigned by Pcddoner I¡b¡ that were ¡nofued by Statr ã ThÊ ,¡lLI,
based solely on tho stqFEFût¡ made in raspmsc to Sufs disoavoçr, find¡ that Pctidoncc I¡ba
puch¡sd rnd patd for thc t¡rablt invcotory, mado ths daily d4osltq and rcccilræd thc bæk
statc¡DsúF, signcd th¡ sales t¡¡ rch¡¡nr, and paid thc s¡lcs a¡d r¡se t¡¡c¡, Ttc ,{LI, thcrcfo¡q
conclud$ that Pctitionor Bba ws¡ involved in, awuc of, or shor¡ld h¡vs bcco awsrt of tho
undencportiug of ralcs t¡r ltrowwer, thc sams info¡oadm thnt supporb tblr couchsiou
exprculy limitr Petitisrcr Isbr's involvcmcot to ths perlod preæding ltsy l, 2008, wheu hc
cûtËrd l¡to m ogremrmt to seU tho buslnc¡s md ouo of tho buyars assuurd rcspooribilíty fG
perbrming thcsc t¡cks. St¡ff bsl uot rdd¡c¡sad ø ¡sñnpd my p¡rt of Petitloncr SI's rcrpmser ùo
its discovery requcats, hclt¡d¡ng thc ¡tatcneûtr limiting Pcdtiomr IsbC¡ involveusnt to th!
repøt puiodr prcccding May 1, 2ü)8.
Tho ¡{LI co¡sludc! i¡ srfflciæ b cstabüdr" by clerr and convincing
that thc ¡eco¡d
eyid€úco, fra¡¡dulcut scdou¡ on tba pan of Ftitioncr Isba thrt au aûih¡t¡bb to tho compann
but only for the pertod Februsry l, 2(XIl, thrf,¡gb Aprü 30, 2fi18. Thc ¡{LI thorcfu¡c
recommcnds tb¡t the sddldonal 5096 frat¡d p€o¡lty ¡hould be dismissed frr the peaiod
ì{ey I. 2fi}8, thmueþ the cod of the ardit plod.
Pctidmer¡ also arguc th¡t thc inposition of ¡ddithn¡l penaltler for jeopardy
deçnnin¡tion ¡rounco¡stlnüion¡l vaguc. Tho ALI lackr tho jurMictionm considcrPaitio¡cds
conteirtion regardirrg thc corutihrtlonnlity of tbc jcqrrdy d*crnination stah¡to. Ibc cor¡¡t¡ h¡vo
ruled th¡t thc Co,ryEoller lac.ks jurtsrlicdoû to n¡le on thc cousdhrttonality of ¡ sunüc tb¡t sho
adøini¡tsrs .
Tal. Statc Ed øf Fhønaq v, Walgrecn Tæ cø.,520 s.w.2d 845 Cfex. civ.
Sec
App.-Austb 1915, writ rtfld n.r.c) . Also,rce Compnoller's Dedsion No. 105,821 (2013).
ä sr¡tr¡Brbibir4(Èrirtoulsb¡).
l2
raf¡€ æ of 346,
o I
L SOAEllockctNo.Sfl{-lil{Zl¿26(Pcttllo¡erlsb¡)
Tsr Code $ 111.0611 iryes pcnmal lirbilityon a¡officer, Esnsglg ordi¡cctqof ¡
corpcatiou who'a¡ u officcr, m¡ongÊf, direú:tor, orpartcr, took o¡ acdor orpartlclpatrd tn a
frar¡ù¡lent scheoo or fraudttlcot plan to evadc thc payncnt of taxes.' Ttc pcnonal llability fu
for trxeq p¡ldeq including u ¡ddldon¡l 50ß penalty, ¡¡d tnscst th+ arc duo ftom thc
ærporatloa Acdonr th* indica¡e s ft¡rdulcût scbeoc or Êa¡¡ô¡lenl pl¡o o evade thc psyu@t
of tarcs includo filing, G er¡!¡ng to bc filÊE ¡ fr¡ndulcut ta¡ rtt¡rr c rcport wlth tbc
Conptrollcr o¡ bchalf of thc brui¡css endty, or fillng or cãusl¡g to bo ffte{ a tar, rch¡m ffi
rcport with tbc Comptollcr mbeh¡lf of thebruinc¡¡ outþ th¡l o¡t¡in¡ ¡n lqtrqtonaly fal¡o
s'qt¡rnent that results i! qÊ amor¡nt of thÊ tar duc cxcccdlng tbo amor¡qt of tar rcporæd by
25% or morg. Tcx. Ta¡ Cod! A¡n ! 111.0611O)(1), (3).
The sanc facu thåt thË ALI relied on in æconncodlng tnposltloo of tho additiusl
50fú pq¡tty support upbldlng tùG æseslmcût of pcnoral liability. Fhst, üere wa¡ üt ovcr¡ll
gnss undßmpoßülg of the t¡r. which rtsr¡lteq evcú slftcr tÀlrlñg inb sccontrt tho rdJumcut
rÊcorneúdcd by thc ALt, ltr ar !ilot tat€ of 66.45*. Morrcoyer, thc ¡ccord esubllshcr th¡t
Petido¡cr Isbr ws¡ l¡volved ln tbc opemtion ¡¡¡l mrnngg'rcût of thc cttrc aûd iD üc ¡tgni¡g of
thp sales and ruc t¡¡ ¡Eh¡ror snd r€úitrüßc of the ts¡ ps],rer¡s Hc ordËrÊd and prtd for thc
t¡rnbþ inventory, deposltcd thc std!'s t?ccþts, ¡ccciwd thc ba¡k ståtcNrmc, and slgnod both
tho sales tsr rcü¡rr! and thc chccks rcoittlng ps''mmb ûo the Corpholler. Horpsrrc. thc
evidcnps e$tablbhË thls hvolvemcut by cleu ud convincing eridcnco only fur thc pcdod
Fcbruary l, 2007 ùrougù, Aprtl30, 2æ& TbiE rËcord i¡ srúficicût to nffirm tbe pcnonal
Uabitity âsse$smmt for thc pertod Mry 1, 20(n, th¡ou$ Ap¡i130, 2008, snd tho lllJ
rccom¡nÊn& that tbc pcrronat li¡bility Êss€ssnclrt shq¡ld bG disni¡sed for tho pcriod Mny l,
2fX)8, througb Jr¡¡Ê 30, 2009.
A R¡couueud¡don¡
Tte ALI rccom¡no¡rd¡ tht the ar¡dit o¡scs¡rnent agpinrt Petitiou¡r SI should bc atrrrrc4
btrt subject to thc reco¡nm¡ndcd adjwtmcnts correcdng th¡ catcr¡latiou of estim¡ted tobacco sales
It
ago 2t of 316l
o o
and limiting tho addido¡ral pcualty to tho pËiod Fcbrurry \,z[ßr,thmugb April 30,2008. In thc
c¡sc of tho peßson¡l llabllity IssËsmÉnt rgdnst Petitioner Isbq ùe ALI recor¡mcnd¡ th¡t the
rssÉsmcnt ùq¡ld bo affi¡ucd strbjccf to th¡ rccommcodcd rdjusheot in tho undedying
corpoßÊtt ¡s¡es$rcrt and recoded dlsní¡¡rl of thc pemørl tiabiltty Bss€s$lsnt for tbe
pcriod llíay 1, 200t, througþ ft¡nc 30,2fi19.
III. NNIIINGS OFFACÏT
t. Smadco, Inc. (Pcddo[€r SD oporated a cmveofoucc slorÊ h Fort S/o¡lb" Texu, dr¡¡fug
the ndft poriod februry 1.2ßCÍ1, thougþ June 30,2(n9.
L Pedtionlr SI war subjectcd to a desk urdit pcrfued by the Brnins¡ Acdvtty Rcscarch
Te¡m (BART) of tbc Ters¡ Cooptoller of Pr¡blic Apcounts (Comptrollc) fo¡ ths Gf,arn
pcriod of lanury l, 2008, thrc¡tgb ME¡rü, 31, 20(Þ, and a¡¡sscd a tar lirbility of
$23"5E1.60, conrirtingof tlr, tbo 10ft ¡t¡¡d¡¡d pco¡lty, tbÊ sdditiooål50* p€ülty, Ed
accn¡cd intcrest
3, Ttc BART qam wrs prompEd by a comparisoo of Pctidmsr SIs alohol a¡d tobacco
purtù¡lct for thc craln pcdod rcponod by Paltioner SIs bbsoco ¡¡d alcohol vcadors
r¡ldcr IIB 11.
4. \lfholcs¡lsn and disüCbutoñ of bccr,wine mnlt liqum, cigrrc[g, dg¡¡¡, ¡¡d tobacco
psoductr are rcqulred to submít elect¡ontc rcIþrür, on a nonthly basír, !o the Comptroller.
Tlese elesl¡onic repffi arc rcqulred by Tc¡. Tax Codc ADD" l! LJl.Æ2" f54.212, ¡¡d
155.10Éi, which wera eriactcd rs paft of Tcx. ILB. 11, 80th Læg., RS. (2007). Tt¡ veodor
records orc commonly refcrrËd to as IIB tl ¡eco¡ds.
5. ThG HB ll tobacco ¡nd nlpohol purchrscr fortho cxan paiod e¡cceded the rr,pwted
tr¡ablo sslßs for tho ¡qnle ¡rcdod by $268,056 to $76,y/6. BART rclled oa tho HB l1
d¡t¡ md tho Comptoller'¡ At¡dit Divi¡ion Policy Mcmo (AP) 122 in cstimating thc
asge!s¡ucnt
6. Podtion* SI did not fllc a rcqu€st furrcdetc¡ni¡stion contdting üÊ E¡NcssEGrt,
conseqæatly, thc assæsraçnr bccuc finEl s¡¡[ tþç sales ud u¡o tsr dgltñquç{tcy was
ccstiñcd to tho Anoruoy Oeoffal. Thc Anornoy Gcoeral filcd a l¡w¡r¡it scaking to cotlcct
tbc dollqtcncy from Peddonsû SI ed Mahmor¡d Ahmd Isba @ctldorrcr l¡ba). $ea
Søna¿co. Inr. v. Compnvllcr $ Puh Accorutîs,No. G-1140462CV, 2lll3 Tex. Ap¡1.
tE¡(il¡ 12013 (Ten App. - A¡sdn ScBtarbcr 26,?Ãl3,no pet h.),
7 PdÍtioncrsfiled varior¡¡ cormterclains as¡l¡¡tthostato. Howover, tc trial cor¡rt
dl¡ni¡¡ed PctidonÊß' counterclaim¡ frr ladr ofjruisdictiq whiù dccision Poütioncn
appealcd" Thc appeals court su¡t¡i¡cd PeddCIncß' clq|m thåt thË Compfolleds di¡edivc¡
t{
'àgË 2l o! 3O6t
t t
h AP 92 Êrd AP lZt w€re in fastn¡lcs and alco concludd thrt tbË uirl court had
juridiaíon over Sandco's clafrn ûat AP q¿ E¡d AP 122 wcæ i¡vrlid rule¡ md that,
thcrcfo¡q thc Ei¡|, court GGd ln dtsnissi¡g thir countcrclaim. Sec 1øtfu, Incn
2013 Tcr. App. tElfIS 12013, alry7.L-22.
8. Pcdtifllr SI wa¡ audltcd by thn Comptroltcr' Tar Divisiø (St¡tr) for s¡lcs ¡¡d u¡c t¡x
compliancc for thß audit pedod, 8rd ü! ar¡ditor o¡üm¡tcd thc audit dus to incompleæ
¡Ecord¡.
9. Petition¡r SI did uot respond to tte Euditodr rcqucstr for record¡. Tlo audltor l¡su€d a
Notificati¡¡n of E¡timado¡ ProcedurËr for Statc T¡¡ Audit &tcd January n ,2011,
odvlstng Pcdtloocr SI th¡t tha utdit mutd bo estlmatcd rsing IIB I f dils, md tbat thc
AP 122 pmccù¡es would b! fuUorvcd"
10. Whcu thÊ sudltu ¡¡itisbd thc audit frsldwodc Pcütloner SI no longrr opcratcd tha
couveuicocc stont Tbãcfr¡q thc ¡ttditor could uot pcrform ¡ ¡hclf tcst md instcad t¡sd
thc indr¡$ry Evcrrgo marhry pcmcntage! of 118.44ft 0!d 124.ür% rcspcctivdy frr
bbacco snd alcohol prchrucs sct orü in AP lZL
11. ltc u¡dltor totaled tbc tobacco a¡d atcohol pnrcbascr nrdc þ Fctidonæ SI uslng tha
HB I 1 d¡r¡ for tbo rcport pcriodr Jaarrary I, 2l)0E, thmugþ Iruc 30, 2009. fts ætat
slcohot snd tobasco pt¡¡shrscs wcrs r[¡nitEd up by thcir respcctivc narlnrp pcæËntryc!.
t2. lþ gtnndt¡d AP 122pmùrct-mir perccnt¡BÊ sf il% fortoba¡co sndatcoholprodncb
wu rpplled to s¡dvc et estlmnted t¡nblË sslË, becmso no purch¡¡! rrcords wcæ
availabla
t3. Ite audio¡ afbrdcd ¡ 5ã ¡llowqnco br spollago a¡d thsft to dcæ(dtrc n¡t estlm¡tcd
t¡xable sale¡. Crdit was givro frr reporæd taxablc slle$
14. Itc ¡esulttng adjutcd tarable sales werc thco red¡rced by thp ¡nounts asscssed in the
BART exam for tho rcpo¡t pcriods Januory l, 200t, thror¡É ME¡ù 31, 2ü)9 to ¡¡¡ivc ¡t
the addiÉonsl ta¡sblo sales.
15. Itc addidm¡l tarable sales we¡c multtplied by thc appllcablc tårß ratcs !o detetnino tbG
t¡¡¡ dnc for tbc rcport pcriods ftoo Jrnuary 1, 2008, thrcugþ h¡¡c 30 2ü)9.
16. As thcm war no HB 11 dca availablc for Éc peçto& preædingJanrar¡r 1, 2008, th€
audito¡ cttim¡tcd thÊ addition¡l ux¡ble salc¡ fot tbic pcriod by first dclcrmtning tbc
avetegÊ monthly nct est¡m¡tcd t¡x¡ble salcs for tbc rqort pcrtodr lanuary L zqlq
tkougþ Juo 30, 20m. Tho poct-Dccanbcr 31, 20û7, toul ¡ct rstinstpd tuablo ¡alcs of
$fr2,t,443.17 wqe dfuldcd by ths l8 rEpo¡t puiodr !o a¡rlvl d a montbly averago of
$40,469.06.
ls
rgs 25 of 3¿16)
I t
17. Tfu additionsl ta¡¡blc sslcc for thcprc.Innuary 1, 200E, ¡Wo¡tpcúiodt we¡t c¡lculatcd
by rcduchg thc averago monthly nct eilimstcd t¡¡¡blo s¡les by ths t¿r¡blc mler rcportcd
to thÊ Compbollor.
18, A 5É allownnco forspoilaç ¡dth¡frwa¡ ap'plted b deterabËtbs addttion¡l t¡xsblç
srlês.
19. additioral tsrr¡bl€ ¡alc¡ wrre thco multiplicd by thc applicablo t¡f, rate to
Ito rc¡ultlng
detcminÊ thc t¡¡ duo for pr+Isruåry 1, 2008, psil of tbc audit pcdod.
24. Pedtío¡cr lsbawas üopnsidcntof Ptaitionet SL
2t. Pctiriøcr hbr rigncd cücctr hr rcuitting salor and usc tar paymrutr drutng thc atdtt
pËriod"
2?,. Paltioncr Isba wle rcrporsiblc frr dcpositing thp ¡b¡e's raler ptncccdr fton
Fcbruary Tl, 2lßÍ1, thot¡¡þ Ap¡il 30, 200t'
23, Pcdtion¡r Isba w¡s reoponsiblc for doposidng tb¡ storG's sales proeds Êom
Fehrt¡sry tl, 2907, th¡ouih Atril 30, 200t.
24. Pcdtioner Isba was responslblo hr ondcing tho stors'c hvørtory from Fob,n¡sry 27 ,
'2ûgl
tbrougb Aprit 30, 2008.
2:t. Pedtioner Isba was resBoruible furp¡ynm of tho sto¡c's invcqtøfiE¡rchases from
Febrnary 27,z0lJl-, th¡utgh April 3Q zfXlt.
26. Pctido¡ec Isb¡ was the pcnon crüo rcceivçd tbe monthly b¡¡k statcmøs Êoln
Fcbrnrary 27,2:ßVl, tbrot¡gh Ap¡il 3O 2008.
n. Pctitioncr [¡ba'¡ rcsponsibility fc thesc ' skr cnded on ìilay l, 2008, wbm hs entcred
hto an agrüÊEer[ to ¡ell thc company to hir omplo¡rccs Ya¡¡ieq Si¡m and
Sstr&¡Sal¡zãr.
28. Mr. Siam asil¡Esd Esponeibility fm thesa 'a"L. ûom lvhy l, 2008, r¡ntil thc cnd of thc
auditpcriod.
29. Oû Apil l,201l, thÊ Statrissucdto Pctitimcr SI aTex¡¡ Notific¡tio¡ of AudttRcsulti
assessingtax, thc st¡rdard t0% pcndty, thÊ Êddiüond sflqb Êaud pcnalty, sDd accrud
irtsrcst, totaling S112381.02. with S64336.t1 ¡ttribr¡¡blc to t¿r.
30. Petitionersltimdyrequeotcdrcdctcrminrdon
31 St¡ff elso issued a jcopady daccminrtim m Ma¡frh 30, æ1 1, against Petitbner Isbo,
punurnt b Tax Codc 0 I 11.061 1, arscsring pmooal li¡b¡lity for tho ta¡ liability of
Pctitioffi SI b¡ tho pcríod May 1. ZM, tbrougþ Juno 30, 2ffi!1.
tú
ågr 26 of 3{6,
o o
32- Tho pemonat tlùiltty a¡scssmcú con¡istcd of tar, tho staod¡¡d 109å pcnalç tlrc
addido¡¡l50S pcndty, aad ocuued íltËæstthrongbthc date of úl¡fic¡tioü. ThË
pcrsonal ti¡biüry sssciscd agahsthddon¡r Isb¡ toteled S5,620.96, with $55,168.E7
atuibut¡blc b tsr"
l!. St¡tr rcftrrcd thc c¡se¡ to tht StEt! Officc of Adminis¡aüvc Hoarhgp for oral hcuingr"
StatrisstrcdNodcer of llcring th¡t ss6¡þs¿ s ¡tstûn€ût of thp dsÞ, d'¡G' ud place of
tho hedng$ a stal€ûrcut dth! ün¡rc of thc hcarings; ¡ st¡tcmcú of ths lcg¡l üüborlty
rnd jruisdicdon rndcß whtch tb hcaùÞ wcro to bo held¡ I rsfGrerc! to tho putioilar
section¡ of tbc stah¡tcs ¡¡d rule¡ hvolvc{ a¡d a ¡bo¡ì pl¡t¡ sl¡trrncnt of tbc m¡tten¡
ssrcrtËd.
!4. Ttc Adn¡dstrative law ludgo (ALD ordcred the cascr joincd.
35. Ito ALI coweocd thc headug m August t2"2OL3
36. 'lihc ALI ordsrcd the ¡ccord dosed on Nov@bq 12, 2013.
37. Its cor€ct ouhrp pcræút¡gÊ that thc urdimr should havc a¡pliod to thÊ tobaaco
puchases wa¡ 118.ü19t, which AP lX¿ dìæcg should bc r¡s€d for ¡rcnre followlng 20û7.
38. Applyi¡rgtho coneacdmnùry p€rccûtagt to ûç tob¡cco prcbascs proùrcd cstlnâtd
tobapco sal€! of $lü)"550.67 (tæcsur thc $100,90t 51 resultingfrom amartup of
118.44fr).
19. Tto applicaüon of ths corrcctcd marhp pcroEotagc to tobacco purcåasco rcdnccd tho
asscssmÊnt of ta¡ fr'Dm $64,336.90 to appruùnaæly 964J05.
40. Tto orlgi¡¡l ovcrall e¡ror ratc for Pcdtioncr SPs audlt w¡s 66.459ó.
41. The ALI has rccalo¡latcd thc einr ratc using thc reù¡ccd prilc'ipal ¡mor¡nt of tar duc.
Tltc ¡cc¡lo¡latcd audit cmot raic ls 66.44%, whích wa,r c¡ls¡latcd by dviding tho t¡x
a¡¡esscd ($É{"30Ð by tho ¡um of thc as¡essed t¡¡ snd ¡cportd ts ($96,790.61).
rv. coNcl,rJslroNs or L.l\w
1. Itc Conptmllcr hu juisdicûion oyer this E¡üË pn¡sr¡¡trt to Te¡¡¡ Tar Codc ch. t I l.
L Ttrc Statc Offico of AdninisEadve Hearingp hrs Jruirdicttoc ovc¡ m¡ttcrs rÊlald to ths
hÊtiry in th¡¡ Erttctr, including tbo autbrity to i¡¡uq ¿ proposal for dccision witb
flrnrtínar of fncn nnd ennnlu¡irmr nf lnw ñrñ¡nrrrl tn T¡rqr fl¡ve+rrmcnl lrnde nh lflfl?
3. Ststr prwidcd propcr and ttmcly notlca of tho hearing purauant to Tox¡l Governmeot
Code cb" 2001.
v
åqll ?? ôt 346,
o o
4. Thc Compnoller i¡ u¡thodzed o usc tho bcst lnfrrmqdon waihblc to esd¡n¡ts ¡
tarpa¡rcr's liability whco rËcorù aro incouplen q r¡¡¡eliablc. Ter Tar Codo Ann
0 111.0042(d) a¡d 34 Ter. AdmirCode I 3.2t1(c).
5. Petidoncr SI mst show by a prrc,pondrrancc of thc evidcuce th¡t ths audit w¡s i¡ erm¿
34 Tex. fi¡lml't. CodÊ $ 1.40(2XB),
6. Ttc ar¡dit of Petitioner SI wa¡ pcrfrnncd bqsed on tc best info@¡tbs evril¡ble
1, fta audím eæd in ¡ot rnhg thÊ cûrrcct p€scrûtlgo d llE.(n% in ndíng up thc
tob¡cco purcha¡c¡ in order to ssrimaþ tob¡cco sal€s. ,Sea AP lüt
8. Tlc calaünttm of ¡dditiou¡l ¡r-ahlo salcs should bc rdjn$cd by u¡i¡g tbs cor¡cct
narhry ¡rcsccr¡tsg€ of 118.0296 þ m¡reìrrg up tobscco pt¡fch¡¡G!.
9. Tto Comptollcr is autho¡ized m impose au addltlon¡l 50S penalty lf thc failuc to pay
tsr or filc a re¡lort urüer duo was a rc¡r¡lt of fru¡d or m lntent to ovadc thc ta¡. Tcr T¡¡
CodGAn¡L ¡ 111.061(b).
10. Statrbesn the bu¡dco of pmof ùo sbowby clear andcorll¡cing cvldencc that
Petitioncr SI acted with tntcst to cvadô ta¡. 34 Tcr. Admin Codo S 1.40(lXB).
11. Petitlmcr Sl hsd thg intcut to er¡adc tar r€qrdrcd by Tcx. Tar Codc A¡n ¡ 1 t 1.061(bX1),
but ouly for thc ¡tpüt pcrtods fcbrtnry l,2ûïl,th¡or¡gh April 30, 200t.
t2. Tto rccorú ætabllshß! by clca¡ a¡d co¡vlncing wldcoæ th¡t tho grosr undccepødnþ of
t¡¡was due to thc tntcntto cradc tax and that thc impoaition of thÉ additiud 50ft
pcn¡lty w¡¡ wsr¡¡ted, hrt ody br thc rr?oû pGriods February 1,20(Xl. througþ April
30, 2008. Ter. Tsr CodcA¡n ü lll.06fGxl).
13. Ite additton¡l50fr poualty ehouldbÊddotcd forthe rçøtperlods ìil¡y 1,2008, lh¡ouib
Junc 30,20(Xl.
14. Itc a¡scssucot agaiut Petitlon¡r SI sttould bo afñnncd exccpt fur tho adjutncntr
rccommcudcdinConduslons of l¡rp Nos. E td 13.
15. !
Tex¡s Tar Codo lt 1.0611 hnpo¡e¡ pcffionat li¡bllity on an officcr, raFnnSGrr or direú:toÌ
of a corpomdon who "a,s ao officcr, qrln¡lcEr di¡eaor, or po¡ütGfi took a¡ astioo or
participrrcd tn a fraduhnt schcm¡ or fra¡¡dulent plrn to w¡d¿ tho pa¡mcnt of tarer."
Tho pusonal Uability is for t¡xe¡, pcaaltics, irclrdiry an addition¡l 509å ponnlty and
intcrest th¡t a¡o duo from thc coaporatiou Ten Tar Cods Atr¡. !1 U.06U(e).
16. Acdons th¡t i¡dic¡¡e ¡ fr¡udulcu sc,heuo or f¡¡udr¡lcot plan to ovado tho payment of
ta¡cc i¡cludc frUng or caruing b bo ñlo4 a ftar¡duld tsr Éü¡r! or ¡Ëpott wlth tho
Conpuoller m beh¡lf of ths brrrhress cotity, or ñling, or cauoing o bo filed, I tar ¡Ghrm
It
rÀçt€ 28 of, 3¿l¡,
o o
or rËPo¡t with tbo CoEFüollGr on bchalf of thc br¡slnpss cndty tbat cont¡in¡ an
ùneuttonallyfalss st¡tcmmtth¡trcsultr inthc ¿mor¡¡t of the t¡rdræ exccediag thc
ruuntoft¡rrcpqtdbyZS9É ormsc. Te¡. TqrcodcArD" Í 111.0611(b)(l), (3).
17. Stafre¡tabtisbcd th¡t Petidoncr bba war persmally liablc r¡nder Tcx¡s Tax Cdc
| 1U.061f for ùc ûssqßEÊtrt mdo agahst Peido¡¡r SI, but ody fm thc rcport p€dods
Ùfay 1,20(n, û¡ougb April 30, Zl0t.
18. Tbc pccuonal llsblllty üictsrt!úû aggiûtPetitioncß Isb¡ for npocpedods ilfny 1,200t,
thmugþ Juc 30, 2009, ¡ho¡ld bo dolctcd.
19, Th¡ ¡ssccsmcnt agalnst Pedtiooer l¡ba shor¡ld bc uphel4 eubjcct !o rhp dcterim
recom¡cudcd l¡ Couclusloq of I¿w No l8 and b thc adþtncot¡s ¡lsrmrledlng
coqtcatc Îs¡ stsÊssücnt agÊinot Pctldoncr SI rccommooded in Conclu¡iou of Lcw No. 8.
¡f,
râgË 29 ot 3r¡51
o o
HearlngNo& 106rûf5 snd 1üt006
OADER, OF THE COMPI.ROLT,ER
Ou Ilcccmbcr l?,2Ûll,thc Stato Officc of Adoi¡i¡E¡tivolleuingr' Adninistntiv€ Iåw
Iudæ (ALf), PcÈt B¡ookr, iosucd a Pnopos¡l fc Dcdsim in tho above'¡ef€ûEoccd m¡tH¡ to
whlchTa¡ Divi¡ionfiledErcsptim¡ onDcccmbcr 17,2013. fbConpuollcrh¡¡ ætsidc¡cd
thc Excoptions sûd tbo ALI's æcor"'lcodation lcüGtr fto Comptmllcr f¡s dctñn¡Bcd thc thc
ALI'¡ hoposal for Dccision, ef,ccpt for minfi chqngÊo b MGGt tJpogrôpbical or clcrical snots'
should bo adopEd withq¡t ch¡[gs üd thís Decislm npreseoE thc nûíng thctcon
Thc abwc Dcci¡ion ¡csultlng i¡ Petit¡oüc(s' ll¡btlltiæ as sct or¡t l¡, Anachnoat¡ A, whlch
ar! irco¡pcstdby ¡¡fe¡cncq lr appmræd s¡d sdspbd in all upcctr, ThÊ Deciston bccoucr
fusl tw€uty dayr afrer thc d¡Ë Faiüoscrs rcccivo nodcc of thiç l}cdrlon, and thË tot¡l sus of
ths ts4 pg'rnltt, Erd l¡tcrcst anormtr is dus and peyablc withh hflcoty dayr thacafrcr. If rue.h
sum l¡ not paid withi¡ rucb timo, an additim¡l pcoalty of tco poccnt of tho tarer ú¡G wíll
accrilqqdintäcrtwillcmti¡rætoaccnro' Ifoithcpartyde¡i¡e¡¡rehcsrin&thatpertymust
filc ¡ modo¡ fu ¡chcr¡ng whicü El¡rt ctlt! tbo grouud¡ fü fiücãrhg, no latu th"" twcuty dayr
affcr tho duo Faitlono¡¡ rccçivo notlco of ihl¡ Dcci¡ion Nodcc of thi¡ Deci¡ion ic prtsumcd to
oaq¡ron üo &td dryafrcr ttc.lajg of thl. H¡lo¡.
SisrGd qrr rhii JËh, of lr¡¡s 2014.
ST,TSAN COMBS¡
Ter¡¡ Corytollcr of Rtblic fi¡ser¡ntr
bp 7 -mnf'Pi
Compüollcß
ru
?sg€ 30 of 3461
Þ739
(Rev I -9619)
I o
TEXAS NOT1RCAT1ON OF HEARINGS RESULTS -AtlachmentA ETATEIT¡ENT DATE
Junc 17, 2014
Ta:çeyer Number Audlt Pedod Headng Number
32014146158 u1t07 THRU 8ßm0 1(F815
Typa ofTar
Llmltad Salæ, Edss, and Use
FIGURESWERE AMENOED
STATE LOCAL TOTAL
TÆ( $¡t8,876.09 s15,576.0r¿ $84,2õ3.31
FEI.¿ALTY 18,768.89 I,m6.07 u,n4,98
¡ NTEREST THRU STATEMENT DATE 17.797.n 4.41.!,9* lE.rqsj[
TOTAL OUEAS OF ÍITATEMENT OATE 981,23it.85 $2õ,994.e3 t107,2ãt.¡tE
n$¡Lqflf9% Penal$ g per the Proposel lbr Oeclelon. InÞrpd v¡lll conünua to accrue at I Z.4B psr d€y
aþ¡6117114 thmugh lhc dab of paymenl
H1,.9
lj99q p9qÊlly.qlll. ba assss¡ed on tax süll duc 43 dayc after lhe Older of the Comptouer (TEX TÆ( CODE ANN.
SEe. 111.008'l (c¡.
For payment lnhrmaüon call 1-800-531-6441, erû 3€800 bü free naüonrrtdg or celt siz¡t8lgg0o.
paye]¡le b STATE COMFÍROLLER and mall to Compfollcr of Pubtb Accounts, i 11 E
[.ake.Vqur thegk 17',r
Sbeet Autün, Texas 787744100.
' Per annurn lntemst ratot rra aubleotto chenge on Janurry ld of e¡ch yrae For rnon lnteruet nto
lnlbrmatlon, refer b Publlcetlon 98.00¿, crlll1'{,77.44l1-Zttrl, w rslof to
htto:lrutWw.wlndow.¡t¡ûe,t¡.prne,xl¡lo/tnt ile.html
(CutAnd Rct¡r¡r Bottom lb¡tlon ltlirh P¡y,mcnr)
0G,z¡m
TË'(AS NOTIFICATION OF HEARING RESULTS¡ Hearlng Nunbor
- AttactrmentA 1ffi816
STATEÍTIENT DATE
June 17.2014
Type ofTar
Llmlted Sales, E¡¡clss, ald Use
Taxpayr Name E Malllng Address
SANADCO,INC.
3801 E ROSEI¡ALE Sr
EflEl? tr¡/tEl'FL¡
l"V¡\¡ lU\rl\l l l Tt
lt\ tQa,lÊ
tl,ll,r¡- .rqt t
l tù¡r3 Arnount qfYour Payment
.PMD-
lcode laxpayer Number 'Perlod 'Audlt 'Twc 'StaÞ Amount
.Type'Ld Amou¡rt
260¡10 32014146160 0s00 001 02 81232.86 04 26994.63
(Påg€ 31 of 297i
qÞ739
o o
(Hev 9 -9€/91
TEXAS NOTIFICATION OF HEARINGS RESULTS . Attschmenl A STATEMENT DATE
Tarçayer Number Pedod Headng Number
æ
LfiiãGütIBT{1ã5 W
T¡rye olTar
I s"A_l-Es. ExcsE.AND u_gF_.. _.""_." " -.:l
F rcu n Es WERE
[:!EEEñ_-:¡fl
CTÄTtr I ñôÂt TôTÀ¡
TÆ( ;ú610fõ!3ð
PFNÂI TY :i¡a.UUOiW
INTFFIFST THFIT I STÀTtrMFÀfT NATtr ¡t¡!J¡ll,t,:
TOTAL DUE AS OF STATEMEI.IT DATE
Thl¡ notlar rullcotr tño lot¡l smoutrt du] Pa¡n.nla mado by Sanadcq lno. wlll b cr¡dlt¡d wtrcr thcy Þccom¡ ¡v¡llrblr You
wlll nood lo conlacl Fwlnu. A¡Gounüng/8uccæror Llablllty d (t001 6t1-641t or locally rt (5t4 4eg¡¡æ fbr queatlonr on
updñ rt¡l¡lnontt
(lntereelwlllcontln¡etoaccruoÊtf,!!i!þperdayafter|@|thrcughthgdaleolpaymenl..)
A 10% penalty wlll be assessed on tar stlll due ¡lft dep efter thË Older ol the Comptrollor (IEX TÆ( CODE
ANN, SEc.111.0081 (c).
For paymenl lnlormellon call 1 -80G631.5441 . e:û. 3-3900 toll frse nallonwlde, or call 512/46$3900.
Make your check payable to STATE COMPTROLLEH and mall to Comptrcller of Publlc Accounts, 111 E. 1?0'
Slrs€t, Austln, Texas 7077+0100.
Ò
Por annum lntsrltl taþr rrr cubtcct lo changc on January 1ú of cacNr ycea For more lnlorud fate
lnlonnrtlon, rl'lor lo Publlc¡tlon 9811Oq c¡¡ll14774f-283r1, or rebr to
hþ://wwrv.wlndsw,sleto.bç usltÐd nf oilnLret€. html
(CutAnd Rctum Bo$oE PoÍlon With Paymeat)
*2N
TH(AS} NOTIFICATION OF HEARING BESULTS Hearlng Number
- Anachm€nt A
STATEMENT DATE "T,Lf-o?,oqotl
l$lË?!r?gruK:5;:l
Twe ol Tar
:Il:;rä,q
Tarpayer Name & Malllng AddEEs
I snms, EXcTSEAND usE :I
[\inHruöt$ÃF" iSBAþ':;.ir,":ñ1 Amount of Your Payment
r i]¿t, lil
oqii evtøId. at
37 6-77,In Reata, thÊ cout t explained:
When the govêrnmental entity interJects itself into or chooses to êngage in litigation
to assert affirmative claims for monetary danrageÐ the entity will presunrably have
made a decision to expend rêsourcês to pay litigation costs, , , , In thís situation, we
believe that it would be fundamentally unfair to allow e governmental entity to
assert affirmative claims against a party while claiming it had immunity as to the
party's claims against it,
Id, at375-76."
The Defendants' claims unquestionably meet these criteria, and therefore mey nÕt
be dismlssed on immunity grounds ând âre properly before the District court,
Further, in suits filed pursuant to Tex, Tax Code Ann. $1Lt,01-0, officers and
directors âre entitled to a full and complete hearlng on rheir tax liability in district court,
.5e¿ Tex. Tax Code Ann. $ L1-L,0L0 (West 2008)
[authorizlng ettorney general to file suit to
recovertaxes), Thecaseistrieddenovo. Greenev,State,324S,W.3d 276,288 (Tex,App.-
Austln 2010, no pet,l [111,010 allows for a de novo review of the pârty's tax liability),
Herrera v. State, No, 03.01-0010L-CV, 2002WL L85476, at *L n. 4,2002 Tex.App..-Austin
Feb' 7, 2002, no pet,J lnot designated for publication) [identifying suit under sÊction
1LL,0L0 as "de novo action by the State to collect dellnquent tax"),
The Adninistrative Procedure Act [APA) provides that wlren "the mânner of review
authorized by law for the decision in a contested case .., is by trial de novo, the reviewing
court shall ffy each issue of fact and law ,,, as though there had not been an intervening
agency action or clecision." Tex, Gov't Code Ann. $ 2001.173(a) fWest 2000), A de novo
hearing has been defined âs "a rlew and independent action in which the whole case is gone
into as if no trial whatever had been hacl in the court below." Trial de novo is not an
"appeal", but is a new and independent action. Key Western Life Ins. Co. v. State Bd. of Ins.,
350 S,W,zd 839,846 [Tex, 1961),
The sine quâ non of a de novo trial is the nullificatiotl of the judgment or orcler of the
first tribunal and a retriâl of the issues on whlch the judgment or order was founded, When
jurisdiction of the second tribunal attaches, the judgment or order of the first tribunal is
not merely suspended, but is nullified, Iexas Dept, of Public Safety v, Banks Transp, Co,, 417
S,W,Zd 593, (Tex,Sup. 1968); Sauthern Canal Co, v. State Bd, afWater Engineers, SlB S,W,2d
619; 159 Tex, 227 [Tex, 1.958), Accordingly, "res judicata" and "final Judgment" are
inapplicable in de novo proceeclings because the original aclministrative order that is the
subject of appeal is nullified in a de novo proceeding, State Bd, of Ins, v, Republic Nat'l lns,
Co,,384 S.W.zd 369,372 [Tex.Civ,App.
- Austin 1964, writ refd n.r,e,), Thus, each of the
issues raised in the cause before the District Court may be addressed by the court without
consideration 0f the fìnality of the adnrinistrative judgments,
-3-lP¡rr,'.-
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[Z] Dltl the flnal ludgment ln the admlnlstratlve proceedlng prectude the class
litigants frorn raising affirnrative defenses or counter'claims not addressed in
the admlnlstratlve prücee dlngs?
Aside from the Sanadco audit, the remaining class issues are independent of the
contested case proceedings in the administrative process. Each claim was filed before the
administrative process had been c0mpleted, alleging ultra vires conducr and
unconstitutionality of statutes under the UDIA, and invalidity of agency rules under the
APA-all of which would render the respective audits voi'd, The filing of these complain$
prior to completion of the administrative process has no effect on the court's jurisdiction as
exhaustíon was not requirecl because these claims are not within the Comptroller's
exclusive jurisdictlon, and independently invoked the Dishict Court's jurisdiction, thereby
perrnitting the court to abate its proceedings pending the exhaustlon of admlnistratlve
remêdies, LÌndig v. Johnson CiÐl, 03-08-00574-cV (Tex,App,-Austin l0-21-200g); Marblø
Falls Independent school Dìsttiôt v, scott, 275 s,w.3d 558 (Tex. App.-Ausrin 200g, pet,
denied).
A UD)A clainr is sui generis and, âll otlrer things being equal, the distríct coutt's
subject-matter jurisdiction over it exists independently of any administrative remedies.
Texas Llquor contrll Bd, v, canyon creek Land corp,,456 s,w,zd Bg1, B9s [Tex, 1g70); cobb
v. Harrington,I44 Tex. 360, L90 S.W,zd 709,713 (1945),
. If a gôvÊrnmental ageucy acts beyond its statutory powêrs, or ultra vires, lts actions
are void ancl may be challenged at any time, Tn-Cify Fresh Water Supply Disr, iVo. 2 of Harris
Cnty, v, Mønn,142 S,W,Zd 945,946,947 [Tex, 1940); see also Mobil 0il Corp, v, Matagorda
County Drainage Dist, No, 3, 597 S,W.zd 910, 913 [Tex, 1980) [holding that drainage
district's attempt to ennex Iancts was beyond its statutory power and therefore null). If a
governmental authorityrs actions are voicl, the actions can be challenged by affectecl
persons. See City of Irv:ing v. Callaway,363 S.W.U d 832, 834 [Tex.Civ.App..Dallas 1962, writ
refld n,r,e,J [quo warranto proceeding necessary where åctions are voidable, but quo
warranto proceeding not necessary and claim may be brought by private citizens affected
by action when annexation ordinance attacked on grounds alleging âction void), Bexør
Metra. Water v, Cíty af Bulverde,l"56 S.W,3d 79,88 (Tex,App, -Anstin 2005).
The general rule in Texas is that courts do not irrterfere with the statutorily
conferrecl dutles and functÍons of an aclministrative agency, Westheimer Indep, Sch. Dist- v.
Êrockette, 567 S,W,zd 780, 7BS [Tex. 1978), However, courts mây inrervene in
aclministrative proceedings when an agency exercises authority beyond its statutorily
conferred powers, Id. See also City of Houston v. Williams, gg S.W,3d 709,717 [Tex.App,-
Houstou [14th Dist,] 2003, no pet,), "ln such a case, the purposês underlying the exhaustion
of renredies rule are not applicable, judicial and admini$trâtive efficacies ârê n0t served,
and agency polices and expertise is irrelevant if thê agêncy's final action will be a nullity,"
MAG-T, L.P,,L61, S.W.3d at625.
Further, the doctrine has no application where the legal question is one of whether a
stalute is constitutional, because aclministrative agencies have no power to deterrnine the
cônstitutionality of statutes, Id.; see Texas Educ, Agency v, Cypress-Fairbanks lndep, Sch, Dist,,
-4-ll:tag*
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830 S'W'Zd BB,9A'91. (Tex. L992),Accorclingly, there is no sound reason for forcing a
litigant
through the adnlinistrâdvê process when ln good fâirh he is advancirrg a zubstautial
complaint that the statute that he is charged with violating is unconstitutional. Grounds,
707 S'W'2d ât 892. In other wôrds, "Whên the only issue raised is consritutionally of rhe
statute, a court may decide it without waltlng for an adminísffatíve proce.eding." 4 K. Davis,
Administratìve Law Treqtise 435 (Znd Ed, 1983) [ernphasis addedJ; see Cent,þower & Light
Ca, v, Sharp,960 S.W,Zd 6l-7, 618 (Tex, t_997).
Witlt respect to the challenge of thè agency rules, the administr.ative proceedings
present no bârriêr to the District Court's jurisdiction because the Comptroller has
deternrined that she has no Jurisdictton over thê issue and declined to âddress ir,
Comptroller's Decision Nos, 103,683; 103,961 [2011) and104,277 (2012).
Additionally, "[t]he APA proviclei two modes of iudicial review
case decisions aud thÈ othêr for rules
- one for contested
that âre significantly differÊnr, The only time
limitation on iudlcial review of a rule -is thar a proceeding to contest compliance with
certain procedural requirements must be initiated wfthin two yêars of the rule's effective
date, Otherwise, judicial review of a rule may be sought at any time, .,. The APA does not
restrict thê scopê of juclicial review of rules but says only: The validity or applicability of a
rule . , . may be determinecl in an action for declaratory judgment if it is alleged that the rutre
or its threatênÊd applicåtion interferes with or lmpairs, or threâtens to interfere with or
impair, a legal right or privilege of the plaintiff. No standard of review is prescribed. The
statltte adds that plaintÍff need not have challenged the rule before the agency, fudicial
review of rules is thus largely unlimited in time and scope," Rdilrodd Comm'n v, WBD )il E¿
Gas Co.104 S.W,3d 69,75 [Tex.2003).
t3). Is the comptroller authorized to estimate audits under Tax code
$111.0042?
The Appellants have briefed and argued its contention rhâr the Comprroller is not
authorizecl to estÍmate aurllts performerl pursuant to $ ttt,O04Z. At oral argumenf,
Appellants cited two stâtutes establishing the circumsrånces undÊr which rhe Cotnptroller
is authorized to estimate audits which were not included in the briefs. Tex. Tax Code Ann, $
1-51.501-4 directs the cletermination of taxes clue when the taxpayer has filecl a sales tax
report, It instt:ucts tlte Comptroller to issue a determination under 5111.00S which
åuthorizes a determination under $ 111,0042 which only authorizes detailed and sample
and projection audits, The only circumstance under which the Comptroller is aurhorized to
estimate an audit is when the taxpayer fails to file a report. Tex. Tax, Code Ann, $ 151,503s,
45
t S LSOI TAX, Dete¡minotion Afrer the Filing of a Report
If a person hæ fileci a tax report, thn comptroilcr may issue a clefroicncy detcrmination uncler Section I I i .008 of thig
ccdç,
' 5 1Sl,¡03 TAX, Determinstion if No Report Filed
(o) If n per,ron fails to file B report, the com¡rtroller shali estimste the amount of receipts of the person subject to the
sales to4 ths smount oftotal sales prices oftaxnble items sold, bnsed, or rcntçd by the person to nnother for storage,
-5-ll':agr""
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The statute provides, in pertinent part, "lf a person fails to file a repor!, the cornptroller
shall estimate the âmount rf rècÊipts of the person subject to the sâles tâx , , , ,,, By
specifying failure to file a report under whidr estimation is permitted, the Legislature in
effêct êxplêssecl its intention to exclurlê all other circumstances, It is a genêrâl rule of
stetutory construction that the express rnention or enumeretion of one person or thing or
cÖnsêquênce is tantamount to ân êxpress excluslon of all others , Foshee ReflnÍng Co, v, State
et q1.,73 S,W,Zd 1098, 1-100,
The nraxim, Expressio unius est excìusio alterius [the narning of one thing excludes
ânother) is applicable here, It has often been applied in determining the powers which
have been or have not been delegated by the Legislature to administrative boards,
commissions, licensÍng authorities ancl others. CommercÍal Standard Ins, Co. v. Board of Ins.
commissioners, 34 s,w.2d 343 (Tex,civ,App.); Foshee Refining co. v, state, 73 s.w,zd 1099,
1L00 [Tex,civ'App,); state v, Mapel, 61 s,w,zd L49, Lsz [Tex,civ,App,]; srate v, Mauritz-
Wells Co,, 141 Tex. 634, L75 S,W.Zd 28B; Ex parte Halsted,, LAT Tex,Crim. R., t_BZ S,W.Zd
479,484; Harris coung v, crooker, 1"L2 Tex, 450,248 s,w,6s2,6s5; Hunrress v, state, BB
5,w.2d 630 643 (Tex.civ,App.); Mccamey v. Hollisrer oil co., Tex.civ.App., 241 s.w, 689
[aff, by ].15 Tex, 49,27+ S,W,562); Clarkv, Briscoe lrr, Co,, Z00 S,W,Zd 67q,682,
Accordlngly, the Legislature has expressþ excluded cases in which a sales tax report
has been from an estimatêd auclit, and this court should so hold,
Conclusion
It is therefore apparent that the District Court m¡¡sf permit Sanarlco to pursue its
claims and defenses in this proceeding because Reata requires it since tlìê StarÊ has
brought its action seeking the recovery of damages, Because the standartì of review is cle
novt, the District C0urt proceeding is ä nêw and independent åction, and the original
aclministrative order that is the subject of appeal is nullified, Accordingly, there is no final
judgntent upon which to base a judgnrent of res judicata or orhÊrwise conflict with the
Di strict Court's jurisdiction.
The independent claims raised by the class claimanm arspursuÊd under the UD)A or
Gov't Code $ 2001,03B by which the District Court obtains jurisdiction outside the purview
of the administrative contested case proceeding. Whether or not the aclministrative order
ostensibly resolved the issue, the District Court would proceed de novo âs though no
Judgment ltad been entered, The ultra vires clainrs prèsume tlìât the state agency acted
or consumption without the pâyrnônt of the use tax tn a retailer for each period or the totâi period for which the
person feriled to report es required by this chapter,
(b) The estimate require cl by Subsection (a) of this section may be made on any information avaiìable to the
comptroiler,
(o) On thn basis of thÊ estimatc, the comptroller shail oompute ancl determinc the amow:t requlcd to be paid to thr
stete for each period,
(d) The comptroller shell add to the determirurtion an nmount equel to l0 percent pf the smount computed under
Subsection (c) of this section ns tr penelty,
-6-lPar¡*
Letter Brief; In re Sanadco Inc., and ivlahmaud A Isba; No. 03-I1-00462-CV
ProDoc FaxService Page 3 of 5
outslde its statutory authority, thereby invaliclating the audlts, which may be challenged
independent of the adnrinistrative proceedings under thÊ UDJA,
Likewise, the rules challenges may be pursuecl inclepenclent of the administrative
procÊedlngs beøuse the Cotnpffoller presumed.thât it did not have jurisclicrion and
therefore refused to rule on the issue, The Dlstrict Court takes jurisclictton, therefore,
without the indicía of an administrative ruling pursuârlr ro 2001,098, uninhibired by
restrictions of neither time nor scope.
Respectfully sl¿bmittecl"
Law Affice of SønuefÍ, Jacñçon
P.O. Box 770633
Arlingtorç 'IX76OL7
Tet (81/) 751-7155
Fax: (866)374-0164
j adssonlaw@hobnail,com
$amuelT. Jaikson
State Bar No. 10495700
Attorney for Relat¡rrs
ccl Jack Hohengarten, Assistant Attor.ney General
-7-lllaqr:
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Dutside fts stahrtory-authority, thereby lnvalidating the audi$, which may bê chalienged
independent of the admtnlshative proceedlngs under the UDT4"
Llkewfsq the rules challenges may be pursued. lndependent of the administrative
proceedtngs Ïecause tJre Comptroller presumed that it dld not have jurfsdfction and
therefore refused to rule on the issue. The Dish'ict Court takes jurisdi'rtion, therefore,
without the indîcia of an admjnistrative ruling pursuant to 2001.088, uninhibited by
restrictiorus of neither time nor scope,
Ræp ætf uJIy subanitte d,
tøw We ofsømuøttî, Ja.cftgon
P.O,Box170619
Arlington, TX76017
TeL (817) 7s1-715s
rax (866) 37+0L&
jacke onlau@holmailcom
T. Jadcson
State Bar N0.10495700
Attomeyfor Relato¡e
cc: JacJ< Hohengarten, Aooretant Atinmey Gcneral
-7-lPage
Letter Brief; In ro Sanadco I¡ç,, süd Mahmaud A. Iabq Nq, 03.i i-00 462-CV
Tab H
State Officials’ Response to Appellants’ Post-Submission Brief
Sanadco I, No. 03-11-00462-CV
Third Court of Appeals.
Appellees’ Responsive Brief page 8
Sanadco v. Glenn Hegar, et al., 03-14-00771-CV
NO. 03-11-00462-CV
fin tÍlt @ourt of $pseuts
tor tbe (trbtrù luùici¡t Dístrír
Hagtin, U,exug
S¿rr{anco INc., L Tnx¿,s Conpon¡TroN, ¡,xu Manuoun A. IsB.L, ilxl¡.M¡,Hn¿loun
Anunn ABursna, N rcl ¡Mmn IsBA., INntvlnu^l.Ll,v,
4ppellants,
V
SusaN Comnsr l¡¡ntvrnu¡,Ll,y, AND IN HER Orrrcul, Clplcrtv ¡,s
ConnprnollERor Punr,lc Accouxrs oF THE Sr¿rB or Tnx¡,s; ar.¡n
Gnnc AnnorrrN Hrs Orntcr,ll C¡,pacrrv, ETAL.,
Appellees.
On Appeal from the 98th Judicial District Court of Travis County, Texas
Trial Court Cause No. D-l-GV-10-000902;
The Honorable Tim Sulak, Judge Presiding
STATE OFF'ICIALS' RESPONSE TO APPELLANTS'
POST-SUBMISSION BRIEF'
GREG ABBOTT JACK HOHENGARTEN
Attorney General of Texas Assistant Attorney General
Financial and Tax Litigation Division
DANIEL T. IIODGE State Bar No. 09812200
First Assistant Attorney General P.O. Box 12548
Austin, Texas 7 87 ll-2548
DAVID C. MATTAX Tel: (512) 47s-3503
Deputy Attorney General for Defense Litigation Fax: (512) 477-2348
j ack. hohen garten@oag. state.tx. us
JEFF M. GRAHAM Counselfor Appellees
Chief, Financial and T ax Litigation
TABLE OF CONTENTS
PAGE
TABLE OF CONTENTS .....11
INDEX OF AUTHORITIES
I. SUMMARY OF ARGUMENT 2
il. ARGUMENTS AND AUTHORITIES 2
A. The State's flrling suit against Sanadco for tax collection waives
sovereign immunity only for def'ensive counterclaims operating
as an offset 2
B The waiver of immunity in APA section 2001.171 does not
apply, because the legislature has set out a specializedprocedure
for tax protest suits 4
C The ulha vires claim relating to Tax Code section I I 1.0042 and
HB 11 was disposed of by summary judgment and is notbefore
this court; alternatively, the Cornptroller did not exceed her
statutory authorþ 7
CONCLUSION ...10
CERTIFICATE OF SERVICE 1l
ll
INDEX OF AUTHORITIES
STATE CASES PAGE
Central Power & Light Co. v. Sharp,
919 S.W.2d 485 (Tex. App.-Austin 1996, writ denied) 5
City of El Paso v. Heínrich,
284 S.W.3d 366 (Tex. 2009) 4,9
Combs v. Chevrari,
319 S.V/.3d 836 (Tex. App.-Austin 2010, pet. denied) 5
County of Bexar v. Bruton,
256 S.W.3d 345 (Tex. App.- San Antonio 2008, no pet.) 7
Dubai Pelroleum v, Kazí,
12 S.w.3d 71 (Tex. 2000) 6
In re: NestleUSA, Inc.,
359 S.W.3 d 207 (Tex. 20tz) 6
R Communícatíons v. Sharp,
87s S.W.2d3t4 (Tex. 1994) 416
Reata Constr. Corp. v. Cíty of Dallas,
197 S.W.3d37l (Tex. 2006) 3
Scottv. Presidío Indep. Sch. Dist.,
266 S.V/.3d 531 (Tex. App.- Austin 2008, pet. filed) . . . 7
Tex. Dep't of Protective & Regulatory Servs, v. Mega Child Care,
14s S.V/.3d 170 (Tex.2004) 5
Tex. Dep't of Transp. v. Crockett,
a
257 S.W.3 d 412 (Tex. App.- Corpus Christi 2008, pet. denied) J
rll
STATE STATUTES
Tex. Civ. Prac. & Rem. Code g 5 l.0 ta(a)(B) (West 2008) I
Tex. Govot Code Ann. 9,2001.03S (Wesr 2008) 4
Tex. Gov't Code Ann. $ 2001.121 (West 200S) 4, 5,7
Tex. Gov't Code Ann. g 3l 1.034 ('V/est 2005) 6
Tex. Gov't Code Ann. g 2001.144 (West 200S) 7
Tex. Tax Code Ann. $ 711.0A42 (V/esr 200S) 4,7,8
Tex, Tax Code Ann $ 111.008 (West 2008) . I
Tex. Tax Code Ann g 111.022 (Wesr 200S) 8
Tex. Tax Code Ann, $ 151.461(Wesr 2008) 9
Tex. Tax Codç Ann. $ 154.212 (West 2008) . I
Tex. Tax Code Ann. $ I55.105 (West 200S) 9
Tex. Tax Code Ann. $$112.051-.060 (West 2008 & Supp. 2011) 5
Tex. Tax. Code Ann. $ I I 1.009 (\Mest 200S) 3
Tex. Tax. Code Ann. $ 11 1.010 (West 2008) 4
Tex. Tax. Code Ann. li 1l 1.0013 (West 2008) .....3
Tex. Tax. Code Ann. $ 111.0102 (V/est 2008) 3,4
1V
OTHER AUTHORITIES
Tex. S. Comm. on Business and Commerce, Bill Analysis,
HB 11, 80th L.g., R,S. (2007) 2,7-9
v
NO. 03-1t-00462-CV
5n t$e @ourt of ß[ppedr
for tüe (ÍDirù luùícist Þistriú
Hastin, îllex¡s
s¡,F¡anco rNc.r .l Tnxas conpoRauoN, AND M.¿.nruoun A. rsnl, Nxt¡,Mtun¿oun
Annnun Anursn,l, Nrcln Mlxn Isnl, INnrvrnulll,v,
4ppellants,
v
Susa¡l Connnso INDIVIDUALLv, AND IN HER Orrrcu.l, C¿.p¡crty ¿s
Con¡rrnoLLER on Puslrc Accouivrs oF THE Sr¿.rp or Tnx.l,s; nnn
Gnnc Asnorr IN HIs Orrlcr¡¡ Cap^lcrry, ET AL.,
Appellees.
On Appeal from the 98th Judicial District Court of Travis County, Texas
Trial Court Cause No. D-l-GV-10-000902;
The Honorable Tim Sulak, Judge Presiding
STATE OF'FICIALS' RESPONSE TO APPET-,LANTS'
POST-SUBMISSION BRIEF
TO THE IIONORABLE JUSTICES OF SAID COURT:
Appellees, Susan Combs, Individually and in her Official Capacity as Comptroller of
Public Accounts of the State of Texas, and Greg Abbott in his Official Capacity as Attomey
General of Texas (the "State Officials"), file this re3ponse to Sanadco's post-submission
brief,
I.
First, although its failure to contest the tax at the administrative
level does not prevent
Sanadco from asserting properly defensive offset claims
in the district court, its claims still
must fall within the court's subject-matter jurisdiction. And they
must be viable as a matter
of law. Sanadco's claims are neither. Second,APA section 2001.171 does not provide an
alternative basis forjurisdiction here, because the agency's
organic law specifically sets out
the statutory prerequisites for challenging a determination of tax liability
in district court.
Application of the APA, provisions for judicial review would render meaningless
the
statutory requirements in the Chapter 112 of the Tax Code. Those requirements
serve as
legislative safeguards to the fiscal operations of the State and ensure the
Comptroller is not
unduly hindered in her collection of taxes, penalties and interest. Thírd,the State
Offrcials
have already shown, in their initial brief, that the Comptroller's guidelines in
Ap 92 and
122, and her use of desk audits, are expressly authorized by sections 111.0042 and
^P
111.008, and by HB 11.
il.
ÄRGUMENTS AND AUTHORITIES
A. The State's filing suit against Sanadco for tax collection waives sovereign
immunity only for defensive counterclaims operating as an offset.
Because the State of Texas filed suit against it, Sanadco may assert claims that arc
"germane to, connected with, and properly defensive to" claims asserted by the State of
)
Texas, except for amounts that exceed the amounts
necessary to offset the government,s
claims. Reata constr. corp. v. city ofDallas,lg7 s.w.3d 371,37UTex.2006
);Tex. Dep,t
ofTransp- v' crockett,zs7 s.w.3d 412,414 (Tex. App.
Corpus christi 200g, pet. denied);
-
see also Tex' Tax' Code Ann. 1 I 1.0102 (West 200s)
$ fiurisdiction of suit to challenge or
avoid comptroller collection action exclusively conferred on
Travis County district courts);
I I I '013 (certificate oftax delinquency is prima facie evidence,
requiring sworn denial); Tex.
R. Civ. P.97
InReata,the Supreme Courtstressedthe limitednature ofthe waiver
ofimmunity and
the policy considerations underlying it. It explained that when:
The governmental entity interjects itself into or chooses to engage
in litigation
to assert affirmative claims for monetary damages, the entityïill presuãrably
have made a decision to expend resources to pay litigation costs, If the
opposing party's claims can operate only ur * oifr.t to reduce the
goverrrment's recovery, ûo tax resources will be called upon
to pay a
judgment, and the fiscal planning of the governmental entity shout¿
noi ue
disrupted.
Reata, 197 S.W.3 d at375.
To the extent Sanadco's counterclaims for "compensatory relief' exceed this limited
waiver, the district court lacks jurisdiction.r C.R. 74, 104. For claims that are properly
gennane and defensive to the State's suit, the Tax Code does not require, as a statutory
prerequisite, that the taxpayer first challenge the Comptroller's determination at the
administrative level" ,See Tex. Tax, Code Ann. $ I I 1.009 (West 200S) (authorizi¡ gtaxpayer
I Sanadco is the only appeliant against which the State of Texas has brought claims in
district court to coilect taxes, penalties and interest.
J
to administratively petition Comptroller for redetermination of tax liability); 111.010
(authorizing Attorney General to bring suit to recover taxes); 111.0102 (authorizing
claims
to challenge or avoid collection action.); compare Tex. Gov't CodeAnn. 2001.t71(West
$
2008) (person who has exhausted administrative remedies is entitled to judicial review).
Although failure to contest the tax at the administrative level does not preclude offset
claims in the district court, Sanadco's claims still must fall within the court's subject-matter
jurisdiction, and they must be legally viable. Sanadco's claims are neither. First,
ApA
section 2001.03S cannot confer jwisdiction, because internal agency memos written by
division directors to their auditors are not APA "rules." Second, Sanadco has failed to plead
a legally viable claim that the Comptroller engaged in ultra vires acts, warranting relief under
the UDJA . See Cíty of El Paso v. Heinrich, 284 S.W.3d 366 (Tex. 2009); R Communications
v. Sharp,875 S.W.2 d374,3 17 (Tex. 1994). Third. Sanadco has no standing to challenge Tax
Code section 111.0042, and any such ruling by the courtwould amount to an advisory
opinion that does not resolve a live controversy. Sanadco's remaining constitutional claims
were decided on summary judgment and are not before this court.
B. The waiver of immunity in APA section 2001.171 does not apply, because the
legislature has set out a specialized procedure for tax protest suits.
The intervening convenience stores theorize in their post-subrnission brief that APA
section 200L171, which authorizes judicial review of frnal agency decisions, provides an
alternative basis for jurisdiction here. According to these appellants, once the Comptroller's
administrative decisions have become final, they can invoke the APA as grounds for
/l
challenging the administrative detennination of tax
riability.
But APA section 2001.171 does not apply to the Tax Code. The
ApA provides an
independent rÍght to judiciat review only where the
agency's enabling statute neither
specifically authorizes norprohibits judicial review ofthe decision.
Tex. Dep,t of protectíve
& Regulatory servs. v. Mega chitd careo 145 s.w.3d 170 (Tex. 2004).
Flere, in clear contr astto Mega Chitd Care, tn'e Comptroller's
organic law specifically
sets out the statutory prerequisites for challenging the
Comptroller's determination of tax
liability in district courr,
The legislature has created a limited waiver of sovereign immunity
for tax protest
suits, but mandated specific prerequisites which must be satisfied prior
to filing suit against
the state. ,9ee Tex. Tax code Ann. ggl12.05t-.060 (west 200g & supp. 20ll).2 The
undisputedjurisdictional facts show that none ofthe intervening convenience stores
have met
the statutory prerequisites in sections 112.051 and ll2.0SZ. C.R. 2g, 5g-61(Affidavit
of
David Rock). Compliance with the procedural requirements of the tax-protest law is a
jurisdictional prerequisíte to suit. ,See Central Power & Lìght Co. v. Sharp,gl9 S.W.2d 4g5,
491 (Tex. App.-Austin t996, writ denied); Combs v. Chevron 319 S.W.3d g36, 844-45
(Tex. App.-Austin 2010, pet. denied). Further, none of the "counter-plaintiffs" have
satisfied the statutory prerequisites for filing a class action under section 1 12.055 of the Tax
2 Like suits chalienging, or
in avoidance of, the State's tax collection suit, the statutory
prerequisites for filing a tax-protest suit do not require the taxpayer to first contest the tax
at the
administrative level.
5
Code. As a result, the trial court lacked jurisdiction over the putative class
action as well.
These explicit prerequisites serve as legislative safeguards
to the fiscal operations of
the State by ensuring that the Comptroller is not unduly hindered
in her obligation to collect
onfinaltaxassessments.,seeR communicationsv.sharp,sTss.w.2d
314,317(Tex. lgg4).
The counter-plaintiffs cannot circumvent these safeguards simply by characterízing
their
claims as APA claims forjudicial review. Such an outcome would be contrary
to the holding
in Mega Chíld Care. More importantly, Sanadco's argument, if accepted by this court,
would effectively read out of the Tax Code the statutory prerequisites for bringing a tax-
protest suit in district court. The APA procedure for judicial review
would swallow and
render meaningless those prerequisites-an outcome the legislature could not have
intended.
See In re; Nestle (JSA, ?nc.,359 S.W.3 d 207,211-12(Tex. Z[lz)(holding that statutory
prerequisites for taxpayer suits are conditions on the legislative waiver of immunity
and
dismissing original proceeding for want ofjurisdiction).
In 2005, the legislature amended the Code Construction Actto reiterate that statutory
prerequisites to suit are both rnandatory and jurisdictional. Tex. Gov't Code Ann. g 3 1 L034
(West 2005). The amendment was in response to confusion about which, if any, statutory
prerequisites to suit were actuallyjurisdictional after the Supreme Cour{'s decision in Dubaí
Petroleum v. Kazi, 12 S.W.3d 71,76 (Tex. 2000). Since the amendment to the Code
Construction Act, the courts of appeal have considered carefully whether a plaintiff has
properly complied with statutory mandates and exhausted administrative remedies where
6
required. Scott v. Presìdio Indep Sch. Díst.,266 S.w.3d 531 (Tex.App.- Austin 200g, pet.
filed); see, e.g., county of Bexar v. Bruton,256 s.v/.3d 345 (Tex, App.- San Antonio 200g,
no pet,).
Sanadco itself never challenged the assessment administratively,
so it became final.
The State of Texas and other taxing authorities then filed suit against
it and Mahmoud A.
Isba under Chapter 111 to collect the tax, interest, and statutory penalties.
Sanadco, to the
extent it relies on APA section 200l.77l,tries to have it both ways. It
argues, in effect, that
the APA judicial review provisions apply, but that the Act's exhaustion-of-remedies
requirement does not. ,see Tex. Gov't code Ann. 2001.144,2001.171 (west
$ 200s) (party
seeking judicial review must exhaust administrative remedies, including
the filing of a
motion for rehearing).
C' The ultra vires claÍm relating to Tax Code section 111.0042 and HB Ll was
disposed of by summary judgment and is not before this court; alternatively, the
Comptroller did not exceed her statutory authority.
In its last point, Sanadco simply re-urges arguments relating to Tax Code section
111.0042 that have been fully briefed by the parties. As part of its ultra vires ârgumenr,
Sanadco contends that the Comptroller has acted outside section 1 I 1.0042(b)(2) of the Tax
Code, which authorizes audit "sampling" under certain circumstances. According to
Sanadco, both the guidelines in AP 92 and AP 122 and the use of abbreviated, or
"desk,"audits exceed the limitations in that section. This issue, however, was resolved by
summary judgment and is therefore not before the court. C.R. 28, 49-50,128. Intheir brief
7
in support of plea to the jurisdiction and motion for summary judgment, the State Officials
explicitly argued that:
Because the collection and use of HB I 1 data is specifically authorized by the
Legislature, collection and use of the data by the Comptroller cannot be an
ultra vires act. Ultra vires acts are acts beyond the statutory authority granted
to state officials. See cip of El paso v. Heinrtch, 2g4 s.w.3d 366, 371-73
(Tex. 2009). As a matter of law, when the Legislature specifically grants a
state fficíal the power to perþrm an act, that act, by deJìnitíon, cannot be
outside the ffi¿¡61's statutory authority. c.R. 50 (emphasis added).
Section 5l '014 of the Civil Practice and Remedies Code authorizes interlocutory appeal of
an order granting or denying apleato the jurisdiction. It does not authorize an interlocutory
appeal of the trial court's sunmary judgrnent.
Even though the issue is not befbre the court, the State Officials have also shown in
their initial brief that the desk audits, as well as the guidelines in Ap 92 and Ap IZ2, arc
entirely consistent with section I I 1 .0042and HB 1 l.
They have also pointed out that the Tax Code expressly authorizes the Comptroller
to make an estimated assessment when taxpayers fail to file a return or when the filed return
is incorrect. Tex. Tax Code Ann $ I11.008, lll.A22 (West 200S). Subsection 111.008(a),
in particular, expressly provides that:
If the comptroller is not satisfîed with a tax report or the amount of the tax
required to be paid to the state by a person, the comptroller may compute and
determine the amount of tax to be paid from information contained in the
report or from any other information at¡ailable to the comptroller. (emphasis
added).
I
Thus, the Comptrollçr is expressly empowered to calculate the amount
of tax due by
examining any information available to her.
Further, the legislature has expressly authorized the Comptroller
to collect and use
wholesaler reports of beer, wine, malt liquor, cigar, and tobacco product
sales to convenience
stores' Tex. Tax Code Ann. $ 151.461 (forrnerly 151.433) (beer, wine, and
{i malt liquor
reports), 154.212 (cigarette reports), and 155.105 (cigars and tobacco pro¿uct
reports). As
the legislative history for HB I I shows, these reports are intended to enable
the Comptroller
to cross-check a convenience store's reports or returns with wholesaler records of sales to
that store. Tex. S. Comm. on Business and Commerce, Bill Analysis, HB l, gO,h
.l Leg., R.S.
(2ooT.3
Where the cross-check indicates a discrepancy-usually in the form of substantial
under-reporting of taxable sales by the convenienca store, as was the case with
Sanadco-section I I 1.008 authorizes the Comptroller to compute the amount actually owed.
The convenience store owners, in response, baldly theorize that while HB I I requires
wholesaler reporting to the Comptroller, it does not authorize the agency to use that data.
This contention, however, is undermined by the statutory language itself.a
3 The
bill analysis is included in the appendix, at Tab 2, to the State Officials' initial brief.
a Sections 151.433(b), 154,21"2(a) and155.105(a) of the Tax Code are included in rhe
appendix, atTab 1, to the State Officials' initial brief.
I
CONCLUSION
WHEREFORE, PREMISES CONSIDERED, the State officials requesr tharthis courr
affirm the trial court's order granting their plea to the jurisdiction.
Respectfully submitted,
GREG ABBOTT
Attorney General of Texas
DANIEL T, HODGE
First Assistant Attorney General
DAVID C. MATTAX
Deputy Attorney General for Defense Litigation
JEFF GRAI-IAM
Chief, Financial and Tax Litigation Division
/s/ .Inck Enrten
JACK HOHENGARTEN
State Bar No. 09812200
Assistant Attorney General
Financial and Tax Litigation Division
P.O. Box 12548
Austin, Texas 781 1I-2548
TEL: (512) 475-3503
FAX: (sr2) 477-2348
j ack.hohen qarten@texasattorney gen eral. gov
Counselþr Appellees
10
CERTIFICATE OF SERVICE
I heteby certi$r that on April 12, 2A12, a true and correct copy of the foregoing
document, State Officials' Response to Appellants' Fost-Submission Brief, was sent by
electronic filing with the court and counsel of record to the following:
Samuel T. Jackson
Lew Orprcg oF SAMUEL JACKSoN
P.O, Box 170633
Arlington, Texas 76003-0633
TEL: (817) 751-7lss
FAX: (866) 374-0164
E-mail : j acksonlaw@hotmail.com
Attorneyþr Appellants
JACK HOHENGARTEN
I1