Make Taxes Paid Under Protest Available for Certification

Taxes paid under protest and collected by the Comptroller of Public Accounts, the State Treasury or the Texas Alcoholic Beverage Commission should not be deposited into a suspense fund but deposited into the fund to which the tax is allocated by law. Any refunds would be handled under existing law covering other types of refunds.


Background
The 70th Legislature required that certain taxes paid under protest during the 1988-89 biennium be deposited in the funds to which those taxes were allocated by law instead of depositing those taxes in a suspense fund. 1 These taxes were the limited sales and use tax, motor vehicle sales and rental tax, cigarette tax, cigar and tobacco products tax, hotel occupancy tax, interstate motor carrier tax, franchise tax, insurance companies occupation tax, surtax on title insur ance companies, insurance administrative services tax and those temporary taxes and fees imposed by House Bill 61, 70th Legislature, Second Called Session. The 71st Legislature extended the requirement through the 1990-91 biennium for all but th e temporary taxes and fees and made this requirement permanent for the insurance taxes. 2

The 72nd Legislature did not renew this authority for the 1992-93 biennium. Taxes paid under protest were deposited into a suspense fund in the State Treasury. (The suspense fund is a special fund where the money is held pending the outcome of the protests .) As of October 31, 1992, about $50 million in taxes had been paid under protest and deposited in the suspense fund during the biennium, and approximately $37.6 million of this amount was franchise tax. 3 There is no evidence that there was a specific policy intention in this change. The law simply was not renewed by operation of provisions in the original law.

During fiscal 1992, the state won 12 of 19 tax protest cases, received partial settlements in six cases and lost only one. The state retained $4 million, or approximately 77 percent, of the money involved in the tax-protest cases settled that year. 4

Tax money held in the suspense fund continues to earn inter est for the state; however, that money cannot be certified or used for the state operating budget. It is available for cash flow purposes only through interfund borrowing. During the previous two biennia, protested tax payments were deposited in the Genera l Revenue Fund and certified for spending. When the state was required to provide a refund to a taxpayer, the state used current revenues. No problems were experienced with this arrangement.

Paying refunds out of the General Revenue Fund is standard practice and is used for all other refund situations except this one. These refunds are routinely considered in the preparation of state revenue estimates. Thus, there is no risk to the state s fiscal condition as a result of this change. Also, there is no risk to the taxpayer in terms of the state s ability to refund this money. During fiscal 1992, over $298 million was refunded from the General Revenue Fund. 5


Recommendation
The Legislature should require that tax money paid under protest and collected by the Comptroller of Public Accounts, the State Treasury or the Texas Alcoholic Beverage Commission be deposited in the fund to which the tax is allocated by law.

Protest-payment accounts should be established in these funds in order to track the money paid under protest.

In addition, all money generated by these taxes that is in the suspense fund on September 1, 1993, should also be transferred to the funds to which they are allocated by law.


Implications
The state would be able to include protest mo ney in the revenue estimate for legislative appropriations. The state would lose interest earned on protest payments, but the legislature would have greater discretion in the appropriations process.


Fiscal Impact
This estimate assumes an effective date of September 1, 1993. There would be a positive effect on the state s cash flow. There would be no administrative costs.

Fiscal Gain to the General Change
Year Revenue Fund 001 in FTEs

1994 $62,977,000 0
1995 13,000,000 0
1996 13,000,000 0
1997 13,000,000 0
1998 13,000,000 0



Endnotes
1 General and Special Laws 1987, 70th Legislature, Second Called Session, ch. 5, art. 10, p. 36.
2 General and Special Laws 1989, 71st Legislature, Regular Session, ch. 232, sec. 7, p. 1072.
3 Comptroller of Public Accounts, Revenue Accounting Division, Revenues Deposited Under Protest (various months). (Computer printout.)
4 Office of The Attorney General, Taxation Division, Comptroller Tax Protest Cases - Sept. 1991 through Aug. 1992, December 7, 1992. (Memorandum.)
5 Comptroller of Public Accounts, Revenue Accounting Division, Monthly Reports, Fiscal Year 1992.