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GG 30
Improve the Efficiency of the State Tax System

Summary

Tax practice has changed and evolved over the years, but refund provisions in the Texas Tax Code have not. The current code contains ambiguities that should be eliminated so that the state and taxpayers both clearly understand who can seek a refund and how the refund provisions should be applied.

Background

The Comptroller’s office is responsible for the collection, administration and enforcement of state taxes.[1] The agency may assess taxpayers for taxes due to the state and may refund taxes that have been paid in error. The standards for filing refund claims and the procedures for processing those claims play a critical role in state tax administration.

The Texas Tax Code allows either a taxpayer or his or her attorney, assignee or other successor to claim a refund.[2] If one taxpayer is solely responsible for a tax, it is not difficult to determine who is entitled to a refund. For example, the franchise tax is imposed on corporations for the privilege of doing business in Texas. The corporation clearly is the taxpayer, and therefore it is clear that it may seek a refund for any overpayment. When the responsibility is imposed on more than one person, however, such determinations are more ambiguous.

For example, the sales and use tax requires retailers to collect tax from their customers on sales of taxable items.[3] Under the Tax Code, the retailer and the customer both are liable for the sales tax, and in such a situation, the Comptroller’s office may encounter competing claims for a refund.[4]

Until 1999, the Comptroller’s office allowed only retailers and customers who paid sales tax directly to the state to claim a refund. All others were required to seek a refund from the retailers to whom tax was paid. If a retailer refunded tax to a customer, it could claim a refund from the Comptroller’s office. This approach allowed the state to deal with one party and limited the possibility of tax refunds being issued twice on the same transaction. In 1999, however, the agency was forced to change this based on a Texas Supreme Court decision.[5]

In Fleming Foods of Texas v. Rylander, the Texas Supreme Court held that a customer who pays sales tax to a retailer can seek a refund directly from the Comptroller’s office. Unfortunately, the court did not expressly overturn the Comptroller’s prior position that the retailer, as the person who remitted the tax, should seek a refund from the state. The court seemed to leave intact the Comptroller’s prior policy but added another category of persons—customers—who could seek refunds directly from the state. This decision, therefore, created a tax system that permits two parties to a sales transaction to claim a refund for the same tax, and it requires the Comptroller’s office to evaluate competing or conflicting claims to ensure that the tax is refunded only once.

Despite the best efforts, this arrangement can lead to errors. For example, a customer who paid tax to a retailer may seek a refund from the Comptroller’s office while simultaneously seeking a refund from the retailer. In the meantime, the retailer may take a credit, as allowed by law, on its sales tax return to recoup the refund given to the customer. If so, the state in essence has refunded tax twice on the same transaction. Because of limited staff resources, the agency may never discover such errors, or may discover them years later, when it is too late to recapture the money erroneously paid.

Delaying tactics

In addition, the Tax Code does not provide enough detail on how a refund can be obtained. The Tax Code requires a taxpayer to submit a refund request in writing, to state the grounds on which the claim is founded and to file a claim within an applicable limitation period.[6] This requirement has remained unchanged for years. As the agency responsible for interpreting the Tax Code, the Comptroller’s office has developed administrative requirements for filing a valid refund claim, and routinely denies claims that fail to comply with these requirements.[7] While most taxpayers are willing to comply, the Comptroller’s office has encountered an increasing number of taxpayers who maintain that the prescribed standards exceed the scope of the statute.

Some taxpayers have filed vague refund claims perhaps with the expectation that they will be denied, thereby providing them with an opportunity to request an administrative hearing as a delaying tactic. Refund claims are subject to a statute of limitations, a time period that the Texas Legislature deems reasonable for a person to assert a claim. Several events can “toll” the statute of limitations—stopping the clock, in effect—but the most frequent tolling events are the filing of a refund claim and a request for an administrative hearing.[8] The “clock stops,” moreover, even if a taxpayer files a vague refund claim; fails to identify its specific disagreement with an audit; or does not specify the transactions that caused the alleged overpayment.

This is important because language in the Tax Code tolls the statute of limitations for any refund claim during a pending hearing as long as the claim is for the same tax type and period.[9] Because of this provision, taxpayers can use delays inherent in the administrative hearing process to investigate or gather new evidence for additional refund claims for which the Comptroller’s office has not been given prior notice. Such taxpayers may have little interest in resolving the original denial for which the hearing was granted in the first place.

Other portions of the refund process are marked by ambiguities and inconsistencies. For example, tolling periods are limited to the “amount of taxes in issue,” but the law does not define what the phrase means.[10] Does it mean the actual dollar amount in controversy; the audit adjustments that created the amount in controversy; or the audit issues arising from the audit adjustments that created the amount in controversy?

Such ambiguities and inconsistencies allow taxpayers to exploit ambiguities and often make it difficult for the Comptroller’s office to promptly close out a refund claim or hearing. Over the past few years, the agency has seen a dramatic increase in the number of refund claims and a similar increase in the number of hearings left pending.

Recommendation

The Texas Tax Code should be amended to codify the Comptroller’s refund requirements and clarify other areas of refund procedures.

The tax system should be updated to close existing ambiguity that allow multiple refunds to be issued on the same transaction. Also, the Comptroller’s administrative requirements should be codified for clarity and legal support. Finally, the code should be updated to eliminate loopholes that allow abuse without affecting taxpayers who have legitimate refund claims and who file and prove their claims responsibly.

Fiscal Impact

The estimate assumes an effective date of September 1, 2003. Savings would increase over time as more refund claims become subject to the statute of limitations.

Fiscal Year Savings to General Revenue
2004 $0
2005 $20,000,000
2006 $30,000,000
2007 $40,000,000
2008 $50,000,000


Endnotes

[1]Tex. Tax Code Ann. §111.001.

[2]Tex. Tax Code Ann. §111.104(b).

[3]Tex. Tax Code Ann. §§151.051, 151.052, 151.101 and 151.103.

[4]Bullock v. Foley Bros. Dry Goods Corp., 802 S.W.2d 835 (Tex. Civ. App. - Austin 1990, writ denied).

[5]Fleming Foods of Texas v. Rylander, 68 S.W.2d 278 (Tex. 1999).

[6]Tex. Tax Code Ann. §111.104.

[7]34 TAC §3.325.

[8]Tex. Tax Code Ann. §§111.104 and 111.207.

[9]Tex. Tax Code Ann. §111.207(d).

[10]Tex. Tax Code Ann. §§111.207(a) and (b).