The recent Texas Third Court of Appeals decision in Hegar v. El Paso Electric Company highlights the importance of specificity when seeking Texas state tax refunds. There, the Third Court of Appeals found that the courts lacked jurisdiction over a taxpayer’s Texas sales tax refund suit when the taxpayer failed to specify the precise grounds under which it sought the refund until its administrative hearing was ongoing. This post will describe the opinion in further detail as well as its implications for Texas taxpayers.
Background
The Texas Tax Code requires a Texas tax refund claim to, among other things, “state fully and in detail each reason or ground upon which the claim is founded.” If the Texas Comptroller denies the refund claim, the law requires the taxpayer to go through the administrative hearings process to challenge the denial of the refund claim. To request an administrative hearing, the Texas Comptroller’s rules require a taxpayer to file a statement of grounds. If the taxpayer is unsuccessful in the refund hearing, the taxpayer may file a refund suit in Travis County District Court. The courts only have jurisdiction over the refund suit if the taxpayer meets the law’s procedural prerequisites.
El Paso Electric Company’s refund suit sought a Texas sales and use tax refund based on the Texas Tax Code’s exemption for telemetry units related to step-down transformers, which is found in the manufacturing exemption statute. In its statement of grounds, El Paso Electric Company quoted the entire manufacturing exemption statute, which lists over four dozen categories of exempt equipment, but did not state in particular that it sought an exemption for telemetry units related to step-down transformers. It specifically stated that it sought this exemption in a filing before the State Office of Administrative Hearings made four years after the filing of the statement of grounds.
The Decision and Its Implications
The Texas Third Court of Appeals held that the courts did not have jurisdiction over El Paso Electric Company’s Texas tax refund claim because it had not timely claimed the exemption for telemetry units related to step-down transformers. The Court’s position was that the taxpayer should have stated the specific grounds for the refund claim in the statement of grounds. While El Paso Electric Company argued that their quotation of the entire manufacturing exemption statute was specific enough, the Court found that this was not sufficient to put the Comptroller on notice as to the taxpayer’s claim.
This decision serves as a cautionary tale for taxpayers seeking Texas tax refunds. While it has become common for taxpayers to file general or blanket refund claims, this decision shows the possible pitfalls of this strategy. Taxpayers seeking Texas tax refunds should be careful to be as specific as possible in their statements of grounds. To avoid potentially losing out on Texas tax refunds for which they otherwise qualify, taxpayers seeking to file Texas tax refund claims should contact a Texas tax professional, such as a tax attorney, to be sure they state their claims with necessary specificity.
