The Third Court of Appeals’ recent opinion in Badger Tavern, L.P. v Hegar provides several key takeaways for Texas taxpayers, including the court’s willingness to find jurisdiction outside of indigency suits, that Comptroller statements made in a rule’s preamble may constitute an invalid rule, and potential ramifications for the Comptroller’s recent amendments to the franchise tax cost of goods sold rule.

First, although the Third Court’s most recent jurisdictional opinions show that its hands are tied with respect to indigent taxpayers, Badger Tavern, L.P. confirms the court’s reluctance to pour a taxpayer out of court due to Comptroller complaints about insufficient pleading. As seen with OGCI Training, the court refuses to impose hyper-technical or Draconian pleading requirements upon taxpayers with solid paths to jurisdiction, such as Badger Tavern’s rule challenge under the Administrative Procedure Act (“APA”) and OGCI Training’s protest suit.

Second, Badger Tavern establishes that statements of Comptroller policy located in the preamble to a Comptroller rule may be invalidated through an APA rule challenge. There, a taxpayer challenged the Comptroller’s statement of retroactivity included in his Texas Register preamble to rule amendments addressing record keeping requirements for businesses subject to the sexually-oriented business (“SOB”) fee. Siding with the taxpayer, the court ruled that the Comptroller’s retroactivity statement was subject to challenge under the APA because it met the definition of a “rule.” The pronouncement was a Comptroller statement that applied to all SOBs with pending proceedings that interpreted the new rule and prescribed the Comptroller’s policy with respect to retroactive record keeping.

Finally, Badger Tavern presents interesting ramifications for the Comptroller’s recent amendments to his franchise tax cost of goods sold (“COGS”) rule. In March of 2018, the Comptroller adopted substantial changes to his COGS rule, several of which practitioners warned ran afoul of judicial interpretations of the governing statute. In addition, the Comptroller included broad policy statements construing certain aspects of the amended rule in his preamble and without formally adopting those requirements as part of the rule’s text. For example, the Comptroller formally amended his rule language to restrict the availability of the COGS subtraction for those who furnish labor or materials to projects for certain real estate activities. Per his amendments, taxpayers seeking to avail themselves of the COGS subtraction under this provision must now furnish labor used in the “direct prosecution” of the project or furnish materials as that term is newly defined. However, the Comptroller’s preamble proceeds to establish a litmus test for the rule’s “direct prosecution” requirement: Can the taxpayer obtain a lien on the real estate project? Neither the COGS statute nor the rule amendments impose this lien requirement. Thus, the Comptroller’s broad policy pronouncement that is generally applicable to a wide section of taxpayers appears to fall within the definition of a rule under the Administrative Procedure Act and be ripe for challenge under the analysis outlined by Badger Tavern, L.P.