A Texas appellate court sitting en banc recently made it easier for taxpayers to preserve refund claims for judicial review by quoting the relevant subsection(s) of the manufacturing exemption statute and including supporting documentation identifying the equipment and transactions at issue.

El Paso Electric Company (“El Paso”) seeks refund of sales tax paid in error on exempt manufacturing equipment.

El Paso is a fully integrated public utility in the business of manufacturing, generating, transmitting, and distributing electricity in west Texas and southern New Mexico. Hegar v. El Paso Electric Company, No. 03-18-00790-CV (Tex. App.—Austin Aug. 13, 2020, no pet. h.) (majority opinion). El Paso filed an administrative sales tax refund claim for different types of equipment under a variety of sales tax exemptions. Of the $5.1 million total refund El Paso sought, the Comptroller agreed to refund over $2.5 million.

The Comptroller would not agree to refund sales tax El Paso allegedly paid in error on the purchase of meters and disconnect collars that El Paso...

A Texas appellate court recently allowed the manufacturing exemption for equipment used to process real property into products.

Lignite begins as real property and ends as tangible personal property.

Texas Westmoreland Coal Company (“Westmoreland”) owned and operated a lignite coal mine in Texas. Lignite, also called brown coal, is the lowest grade of coal, but like other forms of coal, is found in large veins underground. Hegar v. Texas Westmoreland Coal Co., No. 03-20-00406-CV (Tex. App.—Austin Oct. 7, 2021, no pet. h.).

To extract the coal, Westmoreland first removes the top layer of soil using a dragline (which was not at issue in the case) to expose the lignite formation. Then it uses a variety of excavators with large, toothed buckets to crack, break, or rip apart the lignite into smaller pieces to meet its customer’s size requirements. Once the buckets are full, the excavators drop the lignite into dump trucks from approximately 12 feet high, further breaking the lignite apart. At the end of the process, the lignite...

Businesses that finance sales using leases should consider filing Texas franchise tax refund claims based upon a recent Texas court case.

A Texas appellate court recently held that Xerox Corporation (“Xerox”) was entitled to compute its franchise tax based upon the lower Texas franchise tax rate, which resulted in a refund of half of the Texas franchise tax Xerox had paid during the relevant periods.

Xerox leases printers long-term to businesses under financing lease agreements. Xerox’s finance lessees:

• Receive possession, but not title, to the equipment;
• Were responsible for insuring the equipment against loss;
• Were required to make all payments under the lease, even if the contract was terminated; and
• Could purchase the equipment at the end of the lease but typically did not because the lease was designed to last for the useful life of the equipment.

Wholesale sales qualify for lower Texas franchise tax rate, but rentals do not.

Generally, taxpayers pay Texas franchise tax at the...

Texas Taxpayers have reached a deal with the Comptroller to delay implementation of the Comptroller’s new local sales tax sourcing rules for internet and shopping app sales until a trial expected to occur the week of June 13, 2022.

On Monday, August 30, 2021, Travis County District Judge Karin Crump presided over hearings over whether to issue an injunction blocking an effort by Comptroller Glenn Hegar to unilaterally upend the local sales tax sourcing rules established under Texas law. The next morning, as the hearing reconvened, the parties announced an agreement to delay implementation of these new rules and the Comptroller acquiesced in the injunction.

The Comptroller’s rule amendments would switch online sales to being sourced to the customer’s location, instead of the business location of the seller. This would apply to many sellers who have only one place of business in Texas. Sourcing online sales to these sellers’ business locations enhanced local taxing authorities’ ability to incentivize taxpayers to locate large facilities within their boundaries,...

On June 7, 2021, the Texas Governor signed both HB 2080 and SB 903 into law. The bills substantially lower the practical hurdles that taxpayers must meet to challenge the Comptroller in state court.

New Option to Challenge Audit Assessments

Generally, to bring a protest suit in state court, a taxpayer must pay the audit assessment under protest and submit a written protest letter raising the arguments that it will raise in its protest suit. Under the current “pay-to-play” provision of the Texas Tax Code, a taxpayer must pay the entire amount of the audit assessment to challenge it in court.

A newly-enacted law, HB 2080, eases that burden by allowing the taxpayer to pay only the undisputed portion of its audit assessment. Importantly, however, any portion of a disputed amount that is not initially paid but...