In its opinion issued May 8, 2020 in EBS Solutions, Inc. v. Hegar, the Texas Supreme Court allowed a taxpayer’s lawsuit challenging a Texas tax assessment to go forward even though the taxpayer had not prepaid the entire assessment before filing suit. (Note: Seay & Traphagan, PLLC represents EBS Solutions, Inc. in connection with this matter.) In doing so, the Texas Supreme Court overturned a prior decision by the Texas Third Court of Appeals that agreed with the Texas Comptroller’s position that a Texas law required taxpayers to pay an entire tax assessment in protest before challenging it in court. We explain the Texas Supreme Court’s Decision and its implications for Texas taxpayers in more detail below.
Background
In general, no one can sue a governmental entity or a government official acting in their official capacity unless the government expressly permits it. This principle is known as “sovereign immunity.” The Texas Tax Code sets forth the circumstances under which the Texas Legislature has permitted taxpayers to sue the Texas Comptroller to contest Texas tax assessments. Since the Texas Legislature first specified the types of available lawsuits in the Texas Tax Code, the requirements for all types of taxpayer lawsuits in the Texas Tax Code have stated that taxpayers must pay the amount assessed before filing their lawsuit.
The Legislature provided an exception to this prepayment requirement as a result of a prior Texas Supreme Court opinion. In R Communications v. Sharp, the Texas Supreme Court held that requiring a taxpayer to prepay a tax assessment before challenging it in court violated the Open Courts provision of the Texas Constitution. As a result, the Texas Legislature added an exception stating that if a taxpayer files an oath of inability to pay the taxes assessed, and a judge finds upon notice and hearing that requiring the taxpayer prepay the amount assessed would violate the taxpayer’s right to open courts, the prepayment requirement may be waived.
Later, the Third Court of Appeals found in Bandag Licensing Corp. v. Rylander that some of the Texas Legislature’s requirements for taxpayer suits still violated the Open Courts provision of the Texas Constitution. Essentially, the Third Court of Appeals ruled that it violated the Open Courts provision for a taxpayer to have to prove they could not pay in order to access the courts without prepayment — all taxpayers should be able to access the courts without prepayment.
EBS Solutions filed a lawsuit challenging a tax assessment against it without first prepaying the entire amount assessed. It paid some of the amount assessed and also filed an oath of inability to pay. After a hearing, a judge found that requiring EBS to pay the full amount assessed in order to go forward with its lawsuit would violate its right to open courts. However, upon the Texas Comptroller’s appeal, the Third Court of Appeals held that because it had invalidated the oath of inability to pay exception in its Bandag decision, EBS could not go forward with its lawsuit without paying the full amount assessed.
The Opinion and Its Implications
In its opinion, the Texas Supreme Court held that EBS’s lawsuit could go forward because it had properly followed the requirements of the Texas Legislature’s oath of inability to pay exception. The Court held that the position taken by the Third Court of Appeals and the Texas Comptroller was unconstitutional as applied to EBS, since it worked to provide EBS no access to the courts. Thus, according to the Texas Supreme Court, taxpayers who follow the requirements of the oath of inability to pay exception, including filing the oath of inability to pay and having a judge rule in their favor in the required hearing, may sue the Texas Comptroller to challenge a tax assessment, even if they have not paid the full amount assessed.
The Texas Supreme Court’s opinion provides a fairly clear path into court for taxpayers who wish to challenge a tax assessment past the administrative process but who don’t have the ability to pay the full amount of tax assessed. However, the Texas Supreme Court noted that it expressly did not rule on the constitutionality of the Texas Legislature’s present requirements for taxpayer lawsuits as they apply to taxpayers who don’t seek access to the courts through the oath of inability to pay exception (presumably, those taxpayers who have the ability to pay but choose not to). As a result, the status of certain types of declaratory judgment actions for taxpayers (like those at issue in Bandag) remains uncertain.
Texas taxpayers seeking to challenge Texas tax assessments in court may wish to seek the advice of a Texas tax attorney in order to make sure they comply with the procedural requirements of this Texas Supreme Court opinion and the Texas Tax Code.
