Opinion

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-97-00749-CV

The Grocers Supply Company, Inc., Appellant

v.

John Sharp, Comptroller of Public Accounts of the State of Texas, and Dan Morales,

Attorney General of the State of Texas, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 261ST JUDICIAL DISTRICT

NO. 96-13035, HONORABLE MARGARET COOPER, JUDGE PRESIDING

Appellant Grocers Supply Company, Inc. ("Grocers Supply") sued appellees the

Comptroller of Public Accounts and the Attorney General for the State of Texas for a refund of

sales tax previously paid. See Tex. Tax Code Ann. § 112.151 (West 1992). (1) Both parties filed

motions for summary judgment. The trial court granted the Comptroller's motion and denied

Grocers Supply's motion. We will affirm the trial court's judgment.

BACKGROUND

The complicated chain of events that led to this dispute began in 1961 when the

legislature enacted legislation raising the sales tax rate, but included a limited exemption from that

increase. The exemption read:

There are exempted from the taxes imposed by this Chapter the receipts from the

sale, use or rental of, and the storage use or other consumption in this State of,

tangible personal property (i) used for the performance of a written contract entered

into prior to the effective date of this Chapter .

Act of Aug. 8, 1961, 57th Leg., 1st C.S., ch. 24, art. 1, § 1, 1961 Tex. Gen. Laws 71 , 84 (Tex.

Rev. Civ. Stat. Ann. art. 20.04(H), since amended) (emphasis added). In 1965, the supreme court

held that the legislature intended the exemption to apply only to transactions performed to fulfill

contracts other than those between a buyer and a seller. Calvert v. British-American Oil

Producing Co ., 397 S.W.2d 839, 843 (Tex. 1965). In other words, a purchase was not tax-exempt unless the buyer bought the item to fulfill his or her contract with a third party.

Consequently, contracts that meet this criterion have come to be known as "three-party contracts."

Shortly after the British-American decision, Grocers Supply entered into a contract

with Houston Lighting and Power Company ("HL&P") to purchase electricity. In addition to

paying for the electricity, Grocers Supply periodically paid to HL&P sales tax on the electricity

at the current sales tax rate in effect at the time. HL&P in turn paid the tax to the State. Grocers

Supply admits its contract with HL&P is not a three-party contract. This contract was still in

effect at the time of the summary-judgment hearing in this cause.

The Comptroller followed British-American consistently, holding that the prior

contract exemption was available only to contracts in existence at the time of the rate increase if

the contracts were between a purchaser and a party other than the seller. Under this policy, the

exemption was not available to contracts between a purchaser and seller.

In 1984, however, the Comptroller abandoned this policy and began to grant prior

contract exemptions from tax rate increases for two-party contracts.

With these facts before it, on April 20, 1992, Grocers Supply filed a refund claim

with the Comptroller for part of the sales tax Grocers Supply paid to HL&P from January 1, 1988

through July 31, 1990. The primary bases of Grocers Supply's refund claim were two exemptions

to sales tax rate increases the legislature enacted during the tax period in question. See Act of July

21, 1987, 70th Leg., 2nd C.S., ch. 5, art. 1, part 1, § 1, part 3, § 4, 1987 Tex. Gen. Laws 9 , 10

(increasing tax rate from 5.25% to 6%, effective October 1, 1987; exemption not codified),

amended by Act of June 5, 1990, 71st Leg., 6th C.S., ch. 5, §§ 1.01, 1.02, 1990 Tex. Gen. Laws

41 (increasing tax rate from 6% to 6.25%, effective July 1, 1990; exemption not codified) ( Tex.

Tax Code Ann. § 151.051 (b)). The exemptions Grocers Supply relied upon contained language

almost identical to the exemption enacted in 1961 and interpreted by the supreme court in British-American . (2) Grocers Supply contends that it purchased electricity "for the performance

of" the contract it entered into with HL&P before the effective dates of the rate increases and is

entitled to a refund of $17,856.81, the difference between the tax paid at the increased rates and

the tax Grocers Supply would have paid at previously applicable rates.

Grocers Supply argues that its refund claim is supported not only by the legislative

exemptions but also an administrative rule of the Comptroller. At the time Grocers Supply filed

its refund claim, the Comptroller's rule applicable to "prior contract exemptions" read in relevant

part, "Taxable items purchased or rented for use in or sold pursuant to the performance of prior

contracts or bids are exempted from the amount of the increase in tax or change in the tax base."

See 12 Tex. Reg. 2431 (adopted), amended in part by 13 Tex. Reg. 1340 and 15 Tex. Reg. 6197

( 34 Tex. Admin. Code § 3.319 (b), since amended) (emphasis added). In spite of the British-American decision, the Comptroller was then interpreting this rule and the exemptions as applying

to two-party contracts such as that between Grocers Supply and HL&P. This ill-advised

interpretation has created the controversy now before this Court.

In May 1992, a matter of weeks after Grocers Supply filed its refund claim, the

Comptroller decided to abandon this construction and interpret the rule and exemptions in

accordance with British-American , thus rendering the exemption unavailable to participants in two-party contracts. Because Grocers Supply's contract with HL&P was not a three-party contract,

this internal decision meant that the refund request of Grocers Supply would ultimately be denied.

While no public announcement was made, this new interpretation took effect immediately and was

applied to pending refund claims. Inexplicably, the Comptroller did not at once notify Grocers

Supply that its refund claim would be denied and in fact did not advise the public of this policy

change until he placed notices in publications mailed to taxpayers and their representatives in

November 1992 and June 1993. The Comptroller did not formally promulgate his new

interpretation in the form of a rule until several years later. (3) For reasons not apparent in the

record, Grocers Supply's refund request was not formally denied until August 1996, more than

four years after it was filed.

Grocers Supply exhausted its administrative remedies and then sued the Comptroller

in district court for a refund of the sales tax. See Tex. Tax Code Ann. § 112.151 (a)(1), (2) (West

1992). Dissatisfaction with the Comptroller's decision to retroactively enforce his change in

policy is the heart of Grocer's Supply's case. Grocers Supply argues that the Comptroller's

failure to grant a refund is unlawful because it violates the Comptroller's own rule, contravenes

legislative intent, constitutes an unlawful retroactive application of applicable law, (4) and violates

the equal taxation provision of the Texas Constitution. (5) Both parties filed motions for summary

judgment. The trial court granted the Comptroller's motion and denied Grocers Supply's motion.

Grocers Supply appeals the trial-court judgment in four points of error, advocating the same

arguments it raised before the trial court.

DISCUSSION

No dispute exists about the facts material to this case. Consequently, the issues are

purely legal. The propriety of summary judgment is a question of law. Natividad v. Alexsis, Inc. ,

875 S.W.2d 695, 699 (Tex. 1994). We, therefore, review the trial court's decision de novo and

determine whether the Comptroller was entitled to judgment as a matter of law. See id .; Nixon

v. Mr. Property Management Co. , 690 S.W.2d 548 -49 (Tex. 1985).

In addressing Grocers Supply's contentions we must at all times be mindful of two

immutable facts: (1) The supreme court in British-American clearly and unequivocally held that

for a contract to qualify for the exemption it must be between the purchaser and a third party, not

between the seller and the purchaser; and (2) were it not for the Comptroller's change in policy

after Grocers Supply requested the refund, the refund would have been allowed notwithstanding

the British-American decision.

Failure to Follow Previous Interpretation

In its first point of error, Grocers Supply contends the trial court erred in granting

the Comptroller's motion because the Comptroller "is legally obligated to follow its own rules and

procedure and should not be allowed to retroactively withdraw an exemption it has affirmatively

granted." In support of this point, Grocers Supply first characterizes the Comptroller's policy

change as a contravention of his formally promulgated administrative rule. Grocers Supply then

argues the Comptroller could not properly cease enforcing the administrative rule without formally

repealing or amending the rule and intimates that the Comptroller's policy change constituted an

unconstitutional retroactive application of law. See Tex. Const. art. I, § 16.

First, we disagree with Grocers Supply's characterization of the Comptroller's

action as a contravention of the rule. The text of the rule itself did not expressly clarify whether

the "prior contract exemptions" applied to the type of sale at issue here or only three-party

contracts. The rule does not speak to the issue any more than the legislative enactments did. The

Comptroller's policy interpreting the rule and exemptions is what clarified the type of sales

covered. (6) Therefore, we reject Grocers Supply's contention that the Comptroller contravened the

rule when he later decided not to grant "prior contract exemptions" for sales that did not concern

contracts with third parties. In reality, the Comptroller did not contravene the rule--he changed

his prior unwritten policy interpreting the rule. What is at issue in this case, then, is the

Comptroller's substitution of one interpretation of his rule for another, not the Comptroller's

contravention of one of his rules promulgated under the notice-and-comment procedures of the

Administrative Procedure Act. See Tex. Gov't Code Ann. §§ 2001.21 -.038 (West 1998).

With that observation, we address the argument that the Comptroller could not

effect his change in policy without doing so in the form of a rule so promulgated. Grocers Supply

does not argue the Comptroller may never informally adopt a policy. Instead, the crux of Grocers

Supply's argument is that the Comptroller may not informally contravene the express terms of a

formally promulgated rule. As discussed above, that is not what the Comptroller did. Grocers

Supply's argument fails because it is based on a false premise and we decline to enlarge this

argument into a general attack on the Comptroller's power to lay down a different interpretation

of a rule in the course of adjudicating a particular claim before him. (7)

Retroactive Application of Law

We also disagree with Grocers Supply's argument that retroactive application of the

policy change constituted an unlawful retroactive application of law under article I, section 16 of

the Texas Constitution. Under article I, section 16, retroactive application of a law is

unconstitutional when it destroys or impairs vested rights. Corpus Christi People's Baptist

Church, Inc. v. Nueces County Appraisal Dist. , 904 S.W.2d 621, 626 (Tex. 1995); State v.

Project Principle, Inc. , 724 S.W.2d 387, 390 (Tex. 1987); Ex Parte Abell , 613 S.W.2d 255, 260

(Tex. 1981); General Dynamics Corp. v. Sharp , 919 S.W.2d 861, 866-67 (Tex. App.--Austin

1996, writ denied). As the same principle applies to administrative rules, see Texas Dep't of

Health v. Long , 659 S.W.2d 158, 160 (Tex. App.--Austin 1983, no writ), we conclude it applies

as well to agency policies akin to rules.

The question of whether a particular right is vested is a difficult one. The supreme

court long ago attempted to describe the difference between vested and nonvested rights:

It must necessarily be held that a right, in a legal sense, exists, when, in

consequence of the existence of given facts, the law declares that one person is

entitled to enforce against another a given claim, or to resist the enforcement of a

claim urged by another. Facts may exist out of which, in the course of time or

under given circumstances, a right would become fixed or vested by operation of

existing law, but until the state of facts which the law declares shall give a right

comes into existence there cannot be in law a right; and for this reason it has been

constantly held that, until the right becomes fixed or vested, it is lawful for the law-making power to declare that the given state of facts shall not fix it, and such

laws have been constantly held not to be retroactive in the sense in which that term

is used.

Mellinger v. City of Houston , 3 S.W. 249, 253 (Tex. 1887), quoted in Ex Parte Abell , 613 S.W.2d

at 261 . The court has since further elaborated that:

[A] right cannot be considered a vested right unless it is something more than such

a mere expectation as may be based upon an anticipated continuance of the present

general laws; it must have become a title, legal or equitable to the present or future

enjoyment of a demand or a legal exemption from the demand made by another.

Ex Parte Abell , 613 S.W.2d at 261 . The court has explained that when the authority granting the

right has the power and discretion to take that right away, it cannot be said to be a vested right.

See id. at 262 . Finally, the court has noted that "procedural" or "remedial" statutes do not confer

vested, or substantive, rights. See id . at 260; see also City of Sanger v. Miller , 664 S.W.2d 819,

821 (Tex. App.--Austin 1984, no writ). According to these statements, some authority or event

must "fix" or guarantee continued entitlement to something more than a procedure or a remedy

before we will consider that thing to be a vested right.

In Sims v. Adoption Alliance , the Fourth Court of Appeals considered the difficulty

in applying these factors in determining whether a right has become vested. 922 S.W.2d 213,

216-17 (Tex. App.--San Antonio 1996, writ denied). As noted in Sims , some commentators have

observed that the determination of whether a right is vested is little more than a conclusion. See

id . at 216 (citing 1 G. Braden, The Constitution of the State of Texas: An Annotated and

Comparative Analysis 61-62 (1977); Smith, Retroactive Laws and Vested Rights , 5 Tex. L. Rev.

231 (1927), 6 Tex. L. Rev. 409 (1928)). The court in Sims also listed, however, several

principles from which courts seek guidance: (1) whether the retroactive law gives effect to or

defeats the bona fide intentions or reasonable expectations of the persons affected; (2) the element

of surprise by which a person has changed his or her position or omitted to change it in reliance

upon the law in force; and (3) whether the statute has become a likely basis for substantial reliance

by people who may have changed their positions to reap its benefits. 922 S.W.2d at 217 .

After careful consideration of these principles, we conclude that the Comptroller's

erroneous interpretation in clear contravention of the legislature's purpose in enacting the "prior

contract exemptions" did not create a vested right. Before Grocers Supply ever contracted with

HL&P, the supreme court in British-American had already pronounced a "prior contract

exemption" as being inapplicable to two-party contracts such as Grocers Supply's. It is true that

the Comptroller, some twenty years later, ceased adherence to British-American . However,

nothing guaranteed or "fixed" Grocers Supply's hope or expectation that the Comptroller would

continue to enforce the exemptions in contravention of precedent and legislative intent. In the

absence of some such guarantee any expectation of Grocers Supply that the Comptroller would

continue to defy such precedent and legislative intent cannot be termed reasonable. Grocers

Supply acted solely at its risk in choosing to follow the Comptroller in disregarding the supreme

court's unequivocal interpretation of the legislature's purpose. Furthermore, the Comptroller's

eventual reversion to established precedent should not have come as a surprise to Grocers Supply.

We hold that the Comptroller's unlawful policy did not create a vested right;

therefore, the Comptroller's change in policy during the pendency of Grocers Supply's refund

claim was not an unconstitutional retroactive application of law. See Ex Parte Abell , 613 S.W.2d

at 260 (when case pending, retroactive change in law does not affect steps previously taken in

case, but all subsequent proceedings in case governed by new law). For the foregoing reasons,

we overrule point of error one.

Doctrine of Legislative Acceptance

In point of error two, Grocers Supply argues the Comptroller's change in policy

contravened legislative intent. Grocers Supply argues that the legislature, by reenacting the

exemption without change, had tacitly condoned the Comptroller's previous application of the

exemptions to transactions like the one at issue here. This argument is based upon the legislative

acceptance doctrine.

According to that doctrine, courts should adopt an agency's construction of a statute

if an agency rule interpreting the statute is in effect when the legislature amends the law without

making substantial change. Central Power & Light Co. v. Sharp , 919 S.W.2d 485, 489 (Tex.

App.--Austin 1996), writ denied per curiam , 960 S.W.2d 617 (1997); Quorum Sales, Inc. v.

Sharp , 910 S.W.2d 59, 64 (Tex. App.--Austin 1995, writ denied). This doctrine does not,

however, require us to adopt an unwritten policy an agency uses to implement one of its own

rules, especially when the agency equivocates on the policy over the course of time. Texas Citrus

Exchange v. Sharp , 955 S.W.2d 164, 171 (Tex. App.--Austin 1997, no writ).

Even if we were to attempt to apply the doctrine to this case, we would not reach

the result Grocers Supply advocates. If the Comptroller, over time, was uncertain in his position,

the supreme court could not have written with more certainty:

It is clear that the exemption statute means that the written contract therein referred

to must be one between the purchaser and a third party and not between the seller

and the purchaser.

British-American , 397 S.W.2d at 843 . The legislature never changed the "prior contract

exemption" language in subsequent enactments, even those upon which Grocers Supply relies.

We cannot conclude that the legislature's reenactment of the exemptions without change constitutes

an acceptance of an interpretation contrary to the precedent. It is just as likely, if not more likely,

that the legislature's reenactment without change expresses an approval of the long-standing

judicial construction of the statutory language. The legislative acceptance doctrine provides no

guidance in this case. Therefore, we overrule point of error two.

Unequal Taxation

In point of error three, Grocers Supply argues the Comptroller's retroactive

application of its policy change constituted unequal taxation in violation of article VIII, section

1(a) of the Texas Constitution. The mandate that all taxes be equal and uniform requires only that

all persons falling within the same class be taxed alike. Sharp v. Caterpillar, Inc. , 932 S.W.2d

230, 240 (Tex. App.--Austin 1996, writ denied) (citing Hurt v. Cooper , 110 S.W.2d 896, 901

(Tex. 1937)). We will uphold a tax classification unless it has no rational basis. Id . In reviewing

taxation laws, we indulge a strong presumption of constitutional validity. Id . at 240 (citing Vinson

v. Burgess , 773 S.W.2d 263, 266 (Tex. 1989)).

Grocers Supply contends that the Comptroller did not tax taxpayers in the same

class equally because some taxpayers received an exemption for transactions that occurred during

the tax period at issue while other taxpayers did not. Grocers Supply contends there is no

distinction between those who received the exemption and those who did not. We disagree. First,

the Comptroller treated all taxpayers equally according to the time their exemption claims were

adjudicated. That is, the claims that were adjudicated during the interim policy were all granted;

the claims that were adjudicated after the policy change were all denied. We find no evidence that

the Comptroller would randomly pick and choose the claims he wished to grant and deny without

regard to the policy in effect at the time he was adjudicating the claims. Moreover, the

Comptroller's "classification" of taxpayers' claims according to time of adjudication had a rational

basis. The Comptroller decided to deny claims like Grocers Supply's after the policy change

because that action gave the most effect to legislative intent and judicial precedent. We cannot say

the Comptroller's decision to bring his policy into compliance with the statute he was charged with

administering was irrational or unreasonable. Consequently, we overrule point of error three.

Point of error four concerns whether the Comptroller effectively cured any unequal

taxation that resulted from its policy change. Our disposition of point of error three renders this

point moot. We, therefore, overrule point of error four.

CONCLUSION

In resolving the claims of Grocers Supply in favor of the Comptroller, we should

not be construed as endorsing or approving the manner in which the Comptroller has dealt with

exemption requests such as that of Grocers Supply. The record before us does not reflect why the

Comptroller from time to time varied his position, particularly in light of the supreme court's

straightforward pronouncement of legislative intent. These actions do not foster the confidence

and certainty in government upon which the people of this State are entitled to rely. Our criticism

of the Comptroller's procedures, however, does not lead to the result that his ultimate decision was

contrary to law.

Having overruled all Grocers Supply's points of error, we affirm the judgment of

the trial court.

_____________________________________________

Lee Yeakel, Chief Justice

Before Chief Justice Yeakel, Justices Aboussie and Jones

Affirmed

Filed: August 13, 1998

Publish

1. The Tax Code required Grocers Supply to sue both the Comptroller and the Attorney

General. See Tex. Tax Code Ann. § 112.151 (b) (West 1992). The interests of the Comptroller

and the Attorney General do not diverge in this case. For convenience, we will refer to both

collectively as "the Comptroller."

2. The 1987 exemption read in relevant part:

(a) There are exempted from the increase in the rate of the limited sales, excise, and

use tax made by this article . . . the receipts from the sale, use, or rental and the

storage, use, or consumption in this state of taxable items, if:

(1) the items are used for the performance of a contract entered into on or before

July 21, 1987 , if the contract is not subject to change or modification by

reason of the tax rate increase; or the items are used pursuant to an obligation

of a bid or bids [subject to similar limitations] . . . .

(Emphasis added.)

The 1990 exemption read in relevant part:

There are exempted from the increase in the rate of the limited sales, excise, and use

tax made by this Act the receipts from the sale, use, or rental and the storage, use, or

consumption in this state of taxable items, if:

(1) the items are used :

(A) for the performance of a contract entered into before the effective date

of this Act , and the contract is not subject to change or modification

because of the tax rate increase made by this Act; or

(B) pursuant to an obligation of a bid [subject to similar limitations] . . . .

(Emphasis added.)

3. The Comptroller formally amended his rule to state his new policy in 1995. See 34 Tex.

Admin. Code § 3.319 (1997).

4. The provision of the Texas Constitution that forbids certain retroactive applications of law

is article I, section 16. Grocers Supply never cited that provision in its pleadings, motion, or

response. However, Grocers Supply's arguments sound in this constitutional theory, and the

Comptroller addressed the theory in its motion for summary judgment.

5. Tex. Const. art. VIII, § 1(a).

6. We acknowledge that the Comptroller stated a policy when he adopted the rule. Specifically,

in his comments to the rule adoption he stated his intent in promulgating the rule was to make

clear that the exemption applied to two-party contracts as well as three-party contracts. However,

we disagree that the Comptroller accomplished his goal of clarifying this policy by adopting the

rule. Moreover, the statement of policy in the comments to the rule adoption does not constitute

part of the rule itself. Cf. Destec Energy Inc. v. Houston Lighting & Power Co ., 966 S.W.2d 792 ,

795 n.3 (Tex. App.--Austin 1998, no pet.) (comments to statute persuasive but not binding); High

Plains Natural Gas Co. v. Railroad Comm'n of Tex. , 467 S.W.2d 532, 539 (Tex. Civ.

App.--Austin 1971, writ ref'd n.r.e.) (caption to statutory enactment has no enacting force).

7. We refer to an administrative agency's discretionary power to formulate and enforce policy

in the course of adjudicating a contested case, in lieu of doing so through notice-and-comment rule

making under the procedures prescribed in sections 2001.021-.038 of the Administrative

Procedure Act. Subject to statutory and constitutional considerations, most agencies have such

power if they possess both rule making and adjudicatory power. See generally Amarillo Indep.

Sch. Dist. v. Meno , 854 S.W.2d 950 (Tex. App.--Austin 1993, writ denied); Public Util.

Comm. v. Texland Elec. Co. , 701 S.W.2d 261 (Tex. App.--Austin 1985, writ ref'd n.r.e.);

Madden v. Texas Bd. of Chiropractic Examiners , 663 S.W.2d 622 (Tex. App.--Austin 1983, writ

ref'd n.r.e.).

If an agency adopts a new policy in the course of adjudicating a contested case, it does not

mean that the new policy is a "rule" in the sense that it must thenceforth, without more, be obeyed

by the affected public as would be the case with a rule duly promulgated under sections 2001.021-.038 of the Administrative Procedure Act. See generally National Labor Relations Bd. v. Wyman-Fordon Co. , 394 U.S. 759, 765-66 (1969); see also Don Walker, Ad Hoc Adjudication is Not Rule

Making , 4 Tex. Admin. L. J. 31 (1996).

Regular">Publish

1. The Tax Code required Grocers Supply to sue both the Comptroller and the Attorney

General. See Tex. Tax Code Ann. § 112.151 (b) (West 1992). The interests of the Comptroller

and the Attorney General do not diverge in this case. For convenience, we will refer to both

collectively as "the Comptroller."

2. The 1987 exemption read in relevant part:

(a) There are exempted from the increase in the rate of the limited sales, excise, and

use tax made by this article . . . the receipts from the sale, use, or rental and the

storage, use, or consumption in this state of taxable items, if:

(1) the items are used for the performance of a contract entered into on or before

July 21, 1987 , if the contract is not subject to change or modification by

reason of the tax rate increase; or the items are used pursuant to an obligation

of a bid or bids [subject to similar limitations] . . . .

(Emphasis added.)

The 1990 exemption read in relevant part:

There are exempted from the increase in the rate of the limited sales, excise, and use

tax made by this Act the receipts from the sale, use, or rental and the storage, use, or

consumption in this state of taxable items, if:

(1) the items are used :

(A) for the performance of a contract entered into before the effective date

of this Act , and the contract is not subject to change or modification

because of the tax rate increase made by this Act; or

(B) pursuant to an obligation of a bid [subject to similar limitations] . . . .

(Emphasis added.)

3. The Comptroller formally amended his rule to state his new policy in 1995. See 34 Tex.

Admin. Code § 3.319 (1997).

4. The provision of the Texas Constitution that forbids certain retroactive applications of law

is article I, section 16. Grocers Supply never cited that provision i