Sanadco Inc., a Texas Corporation Mahmoud Ahmed Isba Broadway Grocery, Inc. And Shariz, Inc. v. Glenn Hegar, in His Individual and Official Capacity as Comptroller of Public Accounts Office of Comptroller of Public Accounts for the State of Texas And Ken Paxton, in His Official Capacity as Attorney General of the State of Texas

ACCEPTED

03-14-00771-CV

5422011

THIRD COURT OF APPEALS

AUSTIN, TEXAS

5/26/2015 4:15:15 PM

JEFFREY D. KYLE

CLERK

NO. 03-14-00771-CV

In the Court of Appeals FILED IN

3rd COURT OF APPEALS

for the Third Judicial District AUSTIN, TEXAS

Austin, Texas 5/26/2015 4:15:15 PM

JEFFREY D. KYLE

Clerk

SANADCO INC., MAHMOUD A. ISBA, BROADWAY GROCERY, INC., SHARIZ, INC. RUBY &

SONS STORE, INC., AND RUBINA NOORANI,

Appellants,

v.

THE OFFICE OF THE COMPTROLLER OF PUBLIC ACCOUNTS; GLENN HEGAR, IN HIS

OFFICIAL CAPACITY AS COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS;

AND KEN PAXTON IN HIS OFFICIAL CAPACITY AS ATTORNEY GENERAL OF THE STATE OF

TEXAS, ET AL.,

Appellees.

On Appeal from Cause No. D-1-GN-13-004352

The 200th Judicial District Court of Travis County, Texas

The Honorable Charles Ramsay, Judge Presiding

APPELLEES’ RESPONSIVE BRIEF

KEN PAXTON ROBERT O’KEEFE

Attorney General of Texas Chief, Financial and Tax Litigation Division

CHARLES E. ROY JACK HOHENGARTEN

First Assistant Attorney General State Bar No. 09812200

Assistant Attorney General

JAMES E. DAVIS Financial Litigation, Tax, and

Deputy Attorney General for Defense Charitable Trusts Division

Litigation P.O. Box 12548

Austin, Texas 78711 2548

TEL: (512) 475-3503

FAX: (512) 477 2348

jack.hohengarten@texasattorneygeneral.gov

Attorneys for Appellees

TO THE HONORABLE THIRD COURT OF APPEALS:

Appellees, Office of the Comptroller, Glenn Hegar, in his Official Capacity as

Comptroller of Public Accounts of the State of Texas (“Comptroller”), and Ken Paxton, in

his Official Capacity as Attorney General of Texas, pursuant to Tex. R. App. P. 28 and 38,

file this response:

This accelerated appeal is governed by Sanadco, Inc. v. Office of the Comptroller,

2015 WL 1478200 (Tex. App.—Austin March 25, 2015, no pet.) (mem. op.)—indeed, this

accelerated appeal is Sanadco v. Office of the Comptroller. While Sanadco I was pending

before this court, and after it had denied their appellate motion for emergency relief, the

taxpayers Sanadco and Mahmoud Isba turned around and filed a second, identical lawsuit

in district court, challenging the Comptroller’s tax determination, and asserting claims

under the APA and UDJA.

The Honorable Judge Charles Ramsey denied Mahmoud Isba’s application for

temporary injunction and Isba appeals that order. But, as shown below, Isba’s second

suit—and this accelerated appeal of Judge Ramsey’s order—raises no new issues. As

such, it is governed by this court’s opinion in Sanadco I.

Appellees’ Responsive Brief page ii

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

TABLE OF CONTENTS

Table of Contents .......................................................................................................3

Index of Authorities ...................................................................................................4

Statement of the Case.................................................................................................6

Issue Presented ...........................................................................................................7

Statement of Facts ......................................................................................................8

Summary of the Argument.........................................................................................9

Argument..................................................................................................................10

A. Appellant Isba failed to pay or make arrangements to pay for the

reporter’s record, and the absence of that record is dispositive ............... 10

B. Even assuming arguendo that Isba presented an issue not requiring

review of the reporter’s record, Sanadco I fully disposes of his

appeal on jurisdictional grounds. .............................................................15

C. The waiver of immunity in APA section 2001.171 does not apply,

because the legislature has set out a specialized procedure for tax

protest suits. .............................................................................................17

D. Isba’s filing suit for judicial review does not and cannot vacate the

Comptroller’s tax determination. .............................................................20

Prayer .......................................................................................................................19

Certificate of Compliance ........................................................................................20

Certificate of Service ...............................................................................................20

Appendix ..................................................................................................................21

Appellees’ Responsive Brief page iii

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

INDEX OF AUTHORITES

Cases

Bryant v. United Shortline Inc. Assur. Services, N.A.,

972 S.W.2d 26 (Tex.1998)..............................................................................12, 13

Central Power & Light Co. v. Sharp,

919 S.W.2d 485 (Tex. App.–Austin 1996, writ denied) .......................................17

City of El Paso v. Heinrich,

284 S.W.3d 366 (Tex.2009) ..................................................................................15

Combs v. Chevron,

319 S.W.3d 836 (Tex. App.–Austin 2010, pet. denied) .......................................17

CRC–Evans Pipeline Int'l, Inc. v. Myers,

927 S.W.2d 259 (Tex. App.—Houston [1st Dist.] 1996, no writ) .......................11

Garth v. Staktek Corp.,

876 S.W.2d 545, 548 (Tex.App.—Austin 1994, writ dism’d w.o.j.) ................... 11

Miller Paper Co. v. Roberts Paper Co.,

901 S.W.2d 593 (Tex.App.—Amarillo 1995, no writ)...................................11, 12

Millwrights Local Union No. 2484 v. Rust Engineering Co.,

433 S.W.2d 683 (Tex.1968) ..................................................................................12

In re: Nestle USA, Inc.,

359 S.W.3d 211 (Tex. 2012)...........................................................................15, 17

Rodriguez v. State,

970 S.W.2d 133 (Tex.App.—Amarillo 1998, pet. ref'd) ......................................13

Rogers v. Howell,

592 S.W.2d 402 (Tex.Civ.App.—Dallas 1979, writ ref'd n.r.e.) ..........................12

Schafer v. Conner,

813 S.W.2d 154 (Tex.1991) ..................................................................................13

Tex. Dep't of Protective & Regulatory Servs. v. Mega Child Care,

145 S.W.3d 170 (Tex. 2004).................................................................................16

Texas Indus. Gas v. Phoenix Metallurgical Corp.,

828 S.W.2d 529 (Tex.App.—Houston [1st Dist.] 1992, no writ) ........................11

Texas Logos, L.P. v. Texas Dept. of Transp.,

241 S.W.3d 105 (Tex.App.–Austin 2007, no pet.) ...............................................14

Texas Natural Res. Conservation Comm'n v. IT–Davy,

74 S.W.3d 849 (Tex.2002)....................................................................................14

Walling v. Metcalfe,

863 S.W.2d 56 (Tex.1993)....................................................................................10

Appellees’ Responsive Brief page iv

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

Statutes

Tex. Gov’t Code § 2001.171........................................................................14, 15, 16

Tex. Gov’t Code § 2001.173....................................................................................18

Tex. Gov’t Code § 2001.038....................................................................................15

Tex. Civ. Prac. & Rem. Code § 37.001 ...................................................................15

Tex. Tax Code 111.0611(a) .......................................................................................8

Tex. Tax Code 112.054 ............................................................................................18

Tex. Tax Code 112.051-.156 ...................................................................................16

Appellate Rules

Tex. R. App. P 37.3(c) .........................................................................................9, 14

Tex. R. App. P. 35.3(b)(1)-(3) .................................................................................13

Tex. R. App. P. 50(d) ...............................................................................................13

Appellees’ Responsive Brief page v

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

STATEMENT OF THE CASE

Nature of the Case: This is a suit brought (again) by the Sanadco taxpayers under the

Administrative Procedure Act and the UDJA, alleging two

internal agency memos were APA “rules,” which the

Comptroller failed to adopt in accordance with APA

requirements. See Tex. Gov’t Code §§ 2001.021-.033 (West

2008). The taxpayers also sought declaratory relief, alleging the

Comptroller had engaged in ultra vires acts, and challenged the

constitutionality of several statutes in the Tax Code. Finally,

they sought to enjoin the Comptroller’s administrative

enforcement and collection activities.

Trial Court: 200th Judicial District Court of Travis County, Texas, The

Honorable Charles Ramsey, Judge Presiding

Course of Proceedings: While Sanadco, Inc. v. Office of the Comptroller, No. 03-11-

000462-CV (“Sanadco I”)1 was pending before this Court—and

after it had denied their motion for emergency relief2—Sanadco

and Isba brought a second, identical suit in district court. As

before, they asserted claims under the Administrative Procedure

Act and the UDJA, challenging the Comptroller’s final

determination of tax liability. 3

1

See Appendix, Tab A.

2

See Appendix, Tab B.

3

See Appendix, Tab C

Appellees’ Responsive Brief page vi

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

Trial Court Disposition: Isba applied for temporary injunctive relief enjoining all

administrative enforcement and collection activities relating to

his tax liability. After an evidentiary hearing on October 14,

2014, 4 the district court denied Isba’s application for temporary

injunction. 5 Appendix, Tab D.

ISSUES PRESENTED

1. Is Isba’s failure to pay or make arrangements to pay for preparation of the

reporter’s record dispositive of this appeal of the order denying temporary

injunction?

2. In view of this court’s March 25, 2015, opinion in Sanadco I, did the district

court have subject-matter jurisdiction over Isba’s APA and UDJA claims?

3. Did the suit for judicial review filed by Sanadco and Isba automatically

vacate the Comptroller’s final determination, so as to preclude the agency

from undertaking administrative enforcement activities?

4

As shown by this court’s file, Isba failed to pay or make arrangements to pay for the court

reporter’s record of the October 14, 2014 evidentiary hearing before the district court. See Tex. R. App.

P. 37.3(c); Appendix, Tab D.

5

See Appendix, Tab E.

Appellees’ Responsive Brief page vii

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

STATEMENT OF FACTS

The background and facts are correctly stated in this Court’s March 25, 2015

opinion in Sanadco I. The only distinction in this appeal is that it involves the

personal tax liability of Sanadco’s principal Isba.6 Although appellant’s statement

of facts includes assertions relating to Broadway Grocery, Inc., Shariz, Inc., and

Rubi & Sons Store, Inc., none of those taxpayers are before this Court: The

October 14, 2014 hearing and the district court’s November 13, 2014 order

denying temporary injunctive relief related only to Isba.7

SUMMARY OF ARGUMENT

The district court’s order denying Isba’s application for temporary injunction

should be affirmed, because:

First, given the standard of review for orders denying temporary injunctive

relief, the absence of a reporter's record is dispositive. Whether Isba was entitled to

a temporary injunction depended upon the evidence presented in support of his

application for relief. See Tex. R. App. P 37.3(c). Without a reporter's record, this

Court cannot know what legal arguments were made and what, if any, evidence

was presented to the trial court in support of those arguments. Nor can it assess

6

See Appendix, Tab F (F of F Nos. 19-27, C of L Nos. 11, 12, 15-17); Tex. Tax Code §

111.0611(a)(personal liability of corporate officers for fraudulent tax evasion).

.

7

See Appendix, Tab E.

whether Isba satisfied the elements for establishing his right to temporary relief—

particularly, the element of irreparable harm.

Second, even assuming there remained an issue that did not require the

reporter’s record, this Court’s opinion in Sanadco I has already addressed and

disposed of Isba’s legal arguments—by concluding that the district court lacked

subject-matter jurisdiction over the taxpayer’s APA and UDJA claims.

Third, as this Court observed in Sanadco I, where a taxpayer who is

challenging the Comptroller’s assessment of taxes and penalties has not complied

with Chapter 112, the APA does not and cannot provide an alternate jurisdictional

basis for such claims. To hold otherwise would effectively read out of the Tax

Code the statutory prerequisites for bringing a tax-protest or refund suits in district

court. The APA procedure for judicial review would swallow and render

meaningless those prerequisites—an outcome the legislature could not have

intended.

Appellees’ Responsive Brief page 2

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

ARGUMENT

A. Appellant Isba failed to pay or make arrangements to pay for the

reporter’s record, and the absence of that record is dispositive.

The purpose of a temporary injunction is to preserve the status quo pending a

trial on the merits. See Walling v. Metcalfe, 863 S.W.2d 56, 58 (Tex.1993). In an

appeal from an order granting or denying a request for a temporary injunction,

appellate review is confined to the validity of the order that grants or denies the

injunctive relief. See id.

The decision to grant or deny the injunction lies within the sound discretion of

the trial court, and will not be disturbed absent a clear abuse of discretion. See id.

This Court may neither substitute its judgment for that of the trial court nor

consider the merits of the lawsuit. See id.; Texas Indus. Gas v. Phoenix

Metallurgical Corp., 828 S.W.2d 529, 532 (Tex.App.—Houston [1st Dist.] 1992,

no writ). Rather, it must view the evidence in the light most favorable to the trial

court's order, indulging every reasonable inference in its favor, and determine

whether the order was so arbitrary as to exceed the bounds of reasonable

discretion. See CRC–Evans Pipeline Int'l, Inc. v. Myers, 927 S.W.2d 259, 262

(Tex. App.—Houston [1st Dist.] 1996, no writ). The Court cannot reverse a trial

Appellees’ Responsive Brief page 3

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

court's order if the trial court was presented with conflicting evidence and the

record includes evidence that reasonably supports the trial court's decision. See id.

Next, the purpose of a temporary injunction is to preserve the status quo until a

final hearing on the merits. Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d

593, 597 (Tex.App.—Amarillo 1995, no writ). Furthermore, the applicant is not

entitled to temporary relief until he demonstrates a probable injury and a probable

right of recovery. Garth v. Staktek Corp., 876 S.W.2d 545, 548 (Tex. App.—

Austin 1994, writ dism’d w.o.j.).

A probable right of recovery is proven by alleging the existence of a right and

presenting evidence tending to illustrate that the right is being denied. Miller

Paper Co. v. Roberts Paper Co., 901 S.W.2d at 597. Probable injury is proven

through evidence of imminent harm, irreparable injury, and the lack of an adequate

legal remedy. Id. Both prongs require the presentation of evidence and, unlike

temporary restraining orders, cannot be based upon sworn pleadings or affidavits

unless the parties so agree. Millwrights Local Union No. 2484 v. Rust Engineering

Co., 433 S.W.2d 683, 685–87 (Tex.1968); Rogers v. Howell, 592 S.W.2d 402, 403

(Tex.Civ.App.—Dallas 1979, writ ref'd n.r.e.).

Given the standard of review for orders denying temporary injunctive relief, the

absence of a reporter's record is dispositive. Whether Isba was entitled to a

Appellees’ Responsive Brief page 4

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

temporary injunction depended upon the evidence presented in support of his

application for relief. Without a reporter’s record, this Court cannot know what, if

any, evidence was presented to the trial court. Nor can it assess whether Isba

satisfied the elements considered by Miller Paper as prerequisites to obtaining

such relief.

Indeed, the reporter’s record is so pivotal to this Court’s review that its absence

necessitates the presumption that the missing evidence actually supported the trial

court's ruling. See Bryant v. United Shortline Inc. Assur. Services, N.A., 972

S.W.2d 26, 31 (Tex.1998) (Court stating that: “We indulge every presumption in

favor of the trial court’s findings in the absence of a statement of facts.”) True,

Bryant and its predecessors are based on the appellant’s having the burden of

providing the appeals court with a record sufficient to prove error under the

appellate rules in existence before September 1, 1997. See Tex. R. App. P. 50(d)

(repealed September 1, 1997); Schafer v. Conner, 813 S.W.2d 154, 155

(Tex.1991).

But while the current appellate rules state that the court reporter is responsible

for preparing, certifying, and timely filing the reporter’s record, that responsibility

is expressly conditioned upon the appellant’s filing the notice of appeal, requesting

that the reporter's record be prepared, and paying for or making arrangements to

Appellees’ Responsive Brief page 5

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

pay for the reporter's record. Tex. R. App. P. 35.3(b)(1)-(3); Rodriguez v. State,

970 S.W.2d 133, 135 (Tex.App.—Amarillo 1998, pet. ref'd) (involving the clerk's

record). Accordingly, if the appellant’s failure to complete the steps required

under rule 35.3(b)(1), (2), and (3) denies the appellate court a sufficient record

with which to review his appeal, Bryant controls.

Simply put, this Court cannot determine what evidence was before the trial

court, cannot determine whether the trial court abused its discretion, cannot

determine whether Isba proved the existence of a right, cannot determine whether

the Comptroller’s activities resulted in or threatened a denial of that right—and, in

particular, cannot determine whether Isba was threatened with imminent harm and

irreparable injury, and lacked an adequate legal remedy. Accordingly, this court

should presume that the missing record supports the trial court's determination and

forego further review of this dispute as authorized under appellate rule 37.3(c).

B. Even assuming arguendo that Isba presented an issue not requiring

review of the reporter’s record, Sanadco I fully disposes of his appeal on

jurisdictional grounds.

Although Rule 37.3(c) affords this Court the discretion to decide issues that

do not depend on the reporter's record, that authorization does not and cannot

extend to review of the order denying Isba’s application—as that determination

is clearly dependent upon the presence of the reporter’s record.

Appellees’ Responsive Brief page 6

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

In addition, Isba’s legal arguments have already been rejected by this Court

in Sanadco I. Isba contends that APA section 2001.171, which authorizes

judicial review of final administrative decisions, provides an alternative

jurisdictional basis for challenging Comptroller tax determinations.

But the opinion in Sanadco I has already addressed and disposed of this

argument:

Sovereign immunity protects the State of Texas, its agencies, and its

officials from lawsuits unless the legislature expressly gives its

consent to the suit. Texas Natural Res. Conservation Comm'n v. IT–

Davy, 74 S.W.3d 849, 853 (Tex.2002). Absent the State's consent to

suit, a trial court lacks subject-matter jurisdiction. Id. at 855.

Sovereign immunity not only bars suits for money damages but also

protects the State against suits to “control state action.” Texas Logos,

L.P. v. Texas Dept. of Transp., 241 S.W.3d 105, 118 (Tex.App.–

Austin 2007, no pet.). Therefore, absent an express waiver of

sovereign immunity, Sanadco's counterclaims are barred.

Sanadco I, 2015 WL 1478200 at * 4.

After citing the well-established case law governing sovereign immunity, the

court addressed Sanadco’s jurisdictional arguments:

Sanadco cites two statutes providing limited waivers of immunity—

the Administrative Procedure Act, see Tex. Gov't Code § 2001.038,

and the Uniform Declaratory Judgments Act, see Tex. Civ. Prac. &

Rem.Code § 37.001 et seq.—as well as an exception to waiver, the

doctrine of ultra vires, see City of El Paso v. Heinrich, 284 S.W.3d

366, 372–73, 380 (Tex.2009), as conferring jurisdiction on the district

court over its counterclaims. However, as discussed below, we

conclude that all of these grounds for jurisdiction are preempted by

Appellees’ Responsive Brief page 7

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

Chapter 112 of the Tax Code, which the supreme court has held

provides exclusive remedies for relief from assessed taxes on any

basis. See Nestle, 359 S.W.3d at 211. Because Sanadco did not

comply with the mandatory Chapter 112 requirements, the district

court has no jurisdiction over any of its counterclaims.

Id.

Although the language quoted above specifically addresses APA section

2001.038, which authorizes challenges to agency rules, the court’s holding and

rationale necessarily extend to APA section 2001.171, as well. Both statutes are

preempted by Tax Code Chapter 112, which specifically waives immunity for

certain taxpayer actions, conditioning the waiver on prerequisites to the taxpayer’s

bringing suit under that chapter. Sanadco I at * 5. Moreover, this precise issue—

the availability of APA section 2001.171 to a taxpayer challenging state taxes—

was addressed in post-submission briefing in Sanadco I.8

C. The waiver of immunity in APA section 2001.171 does not apply,

because the legislature has set out a specialized procedure for tax

protest suits.

As the Comptroller pointed out in its post-submission briefing in Sanadco I,

APA section 2001.171 does not apply to the Tax Code. The APA provides an

independent right to judicial review only where the agency’s enabling statute

neither specifically authorizes nor prohibits judicial review of the decision. Tex.

8

See Appendix, Tab G, at p. 3; and Tab H, at p. 4-7.

Appellees’ Responsive Brief page 8

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

Dep't of Protective & Regulatory Servs. v. Mega Child Care, 145 S.W.3d 170

(Tex. 2004).

Here, in clear contrast to Mega Child Care, the Chapter 112 of the Tax Code

specifically sets out the statutory prerequisites for challenging the Comptroller’s

determination of tax liability in district court.

The legislature has created a limited waiver of sovereign immunity for tax

refund and protest suits, and for tax injunction suits, but mandated specific

prerequisites which must be satisfied prior to filing suit against these specifically

enumerated claims. See Tex. Tax Code Ann. §§112.051-.156 (West 2015).

The undisputed jurisdictional facts, as shown by Isba’s pleading, are that

neither he nor Sanadco has met the statutory prerequisites in Chapter 112.9

Compliance with the procedural requirements of the tax-protest law is a

jurisdictional prerequisite to suit. Sanadco I at * 5; In re: Nestle USA, Inc. 359

S.W.3d at 211; see also Central Power & Light Co. v. Sharp, 919 S.W.2d 485, 491

(Tex. App.–Austin 1996, writ denied); Combs v. Chevron, 319 S.W.3d 836, 844-45

(Tex. App.–Austin 2010, pet. denied).

Most importantly, Isba’s argument, if accepted by this court, would

effectively read out of the Tax Code the statutory prerequisites for bringing a tax-

9

See Appendix Tab C, at pp. 3-4.

Appellees’ Responsive Brief page 9

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

protest suit in district court. The APA procedure for judicial review would

swallow and render meaningless those prerequisites—an outcome the legislature

could not have intended. See Nestle, 359 S.W.3d at 211-12 (Tex. 2012) (holding

that statutory prerequisites for taxpayer suits are conditions on the legislative

waiver of immunity and dismissing original proceeding for want of jurisdiction).

D. Isba’s filing suit for judicial review does not and cannot vacate the

Comptroller’s tax determination.

In addition, Isba argues that his filing suit under the APA automatically

vacated the Comptroller’s final tax determination. Therefore, he reasons, Sanadco

I does not control, because this court emphasized that its holding applied only to

cases in which the taxpayer seeks relief from a tax assessment that has become a

final liability. See Sanadco I at *6, n.9.

In so arguing, Isba is attempting to selectively read and blend provisions in

the Tax Code with the APA to achieve a procedural result that the legislature did

not intend. First, he points to the Tax Code section 112.054, which provides that

trial of the issues in “suits under this subchapter are de novo.” He then attempts to

blend that section with APA section 2001.173, which provides that if the manner

of review of the agency decision is trial de novo “the reviewing court shall try each

Appellees’ Responsive Brief page 10

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

issue of fact and law . . . as though there has not been an intervening agency

action.”

But this argument requires Isba to skip over the fact that he has not complied

with the pre-payment and notice requirements of Subchapter B of Chapter 112, but

rather, is attempting to evade those very prerequisites. Accordingly, his suit cannot

be a “suit[] brought under this subchapter” and perforce cannot be a suit entitled to

de novo review. In short, Isba cannot have it both ways. He cannot argue that he

does not have to comply with the statutory prerequisites of Chapter 112, but that its

de novo standard of review nonetheless governs his challenge to the Comptroller’s

tax assessment.

Appellees’ Responsive Brief page 11

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

PRAYER

In view of the foregoing, the state officials request that this court affirm the

trial court’s order, tax all costs to appellant Isba, and grant such other and further

relief to which the state officials may show themselves entitled.

Respectfully submitted,

KEN PAXTON

Attorney General of Texas

CHARLES E. ROY

First Assistant Attorney General

JAMES E. DAVIS

Deputy Attorney General for Defense

Litigation

ROBERT O’KEEFE

Chief, Financial and Tax Litigation

Division

/s / Jack Hohengarten

JACK HOHENGARTEN

State Bar No. 09812200

Assistant Attorney General

Financial Litigation, Tax, and

Charitable Trusts Division

P.O. Box 12548

Austin, Texas 78711 2548

TEL: (512) 475-3503

FAX: (512) 477 2348

jack.hohengarten@texasattorneygeneral.gov

Attorneys for Appellees, Glen Hegar,

Comptroller of Public Accounts of the

State of Texas and Ken Paxton, Attorney

General of the State of Texas

Appellees’ Responsive Brief page 12

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

CERTIFICATE OF COMPLIANCE

In compliance with Texas Rule of Appellate Procedure 9.4(i)(2), this brief

contains 2,271 words, excluding the portions of the brief exempted by Rule

9.4(i)(1).

CERTIFICATE OF SERVICE

I certify that on this 22nd day of May, 2015, a true and correct copy of the

foregoing document, Appellees’ Responsive Brief, has been sent to the attorney for

appellants via e-service and/ or electronic mail, as follows:

Samuel T. Jackson

Law Office of Samuel T. Jackson

P.O. Box 170633

Arlington, TX 76003-0633

jacksonlaw@hotmail.com

/s / Jack Hohengarten

Jack Hohengarten

Appellees’ Responsive Brief page 13

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

APPENDIX

Tab A

Memorandum Opinion on Motion for Rehearing in Sanadco I,

No. 03-11-00462-CV, in the Third Court of Appeals.

Tab B

Order and Motion for Emergency Relief to Lift the Automatic Stay for a

Limited Purpose in Sanadco I, No. 03-11-00462-CV, in the Third Court of Appeals.

Tab C

Plaintiff’s Original Petition for Judicial Review, Declaratory Judgment,

Temporary Injunction and Request for Disclosure, No. D-1-GN-13-004352,

Sanadco Inc. v. Hegar, in the 200th Judicial District Court, Travis County

(“Sanadco II).

Tab D

Letter regarding payment for Reporter’s Record in Sanadco II,

No. 03-14-00771-CV, in the Third Court of Appeals.

Tab E

Order Denying Plaintiff’s Declaratory Judgment and Application for Temporary

Injunction

Plaintiffs’ Third Amended Petition for Judicial Review, Declaratory

Judgment, Temporary Injunction and Request for Disclosure, in Sanadco II,

No. D-1-GN-13-004352, in the 200th Judicial District Court of

Tab F

Certification of Public Records for Order Denying Motion for Rehearing on

Comptroller’s Decision on Hearing Nos. 106,815 and 107,006

Certification of Public Records for Comptroller’s Decision on Hearing Nos.

106815 and 107006 with Attachments A – Texas Notification of Hearing

Results

Tab G

Appellants’ Post-Submission Letter Brief in Sanadco I, No. 03-11-00462-

CV, in the Third Court of Appeals.

Tab H

State Officials’ Response to Appellants’ Post-Submission Brief in Sanadco

I, No. 03-11-00462-CV, in the Third Court of Appeals.

Appellees’ Responsive Brief page 14

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

Tab A

Memorandum Opinion

On Motion for Rehearing

Sanadco I, No. 03-11-00462-CV

Third Court of Appeals.

Appellees’ Responsive Brief page 1

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

ON MOTION FOR REHEARING

NO. 03-11-00462-CV

Sanadco Inc., a Texas Corporation; Mahmoud A. Isba, a/k/a Mahmoud Ahmed Abuisba,

a/k/a Mike Isba; \Malid Abderrahman; Majic Investments,Inc.; Faisal Kahn; Isra

Enterprises,Inc.; Hattab Al-Shudifat; Haifa Enterprises,Inc.; EID corp.; Mohammed s.

Al Hajeid; Majdi Rafe Okla Nsairat; and Omar Unlimited,Inc. Individually, Appellants

v

The Office of the Comptroller of Public Accounts of the State of Texas; Glenn Hegar,

Individually and in his Official Capacity as Comptroller of Public Accounts of the State of

Texas; and Ken Paxton in his Official Capacity as Attorney General for the State of Texas,

Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 9STH JUDICIAL DISTRICT

NO. D-1-GV-10-000902, HONORABLE TIM SULAK, JUDGE PR_ESIDING

MEMORANI) UM OPINION

We grant the Comptroller's motion for rehearing, withdraw our prior opinion and

judgrnent issued on Septernber 26,2013, and substitute in their place this opinion and judgment

affirming the district court's disrnissal of Sanadco, Inc.'s counterclaims.

After the Comptroller of Public Accounts performed an audit on a convenience

store owned by Sanadco, the Comptroller and the Attorney General (cumulatively the "Comptroller")

filed suit against Sanadco to recover delinquent taxes. In response, Sanadco filed various

counterclaims against the Comptroller arguing that the manner in which he calculated the amount

of taxes due was under the terms of an unauth orized.rule, that many of the actions that he engaged

in while conducting his audits were ultra vires, and that the provision of the Tax Code authorizing

audits by sampling and projecting was unconstitutional. After Sanadco filed its counterclaims, the

Comptroller filed a plea to the jurisdiction contending that the district court did not have jurisdiction

over the counterclaims. Subsequent to reviewing the plea and convening a hearing, the district court

granted the Comptroller's plea and dismissed Sanadco's counterclaims for lack ofjurisdiction. On

appeal, Sanadco challenges the dismissal of its counterclaims. We aff,rrm the district court's order

granting the Comptroller's plea to the jurisdiction.

RELEVANT STATUTORY SCHEME AND AUDITING MEMOS

Before delving into the background and issues in this case, a brief overview of

the governing framework for this case as well as a brief sytopsis of the actions by the Comptroller

that form the subject of this case is helpful. Under the Tax Code, convenience stores are required

to maintain their sales records for tax purposes, Tex. Tax Code $ I51.025, and the Comptroller is

authorized to examine and audit the records of convenience-store owners, id. $$ I I 1.004, 151.025.

In addition, the Comptroller may use sampling and projection methods for estimating the amount

oftaxes owed if"the taxpayer's records are inadequate or insufficient." Id. ç 11 1.0042(b). Moreover,

if the Cornptroller "is not satisfied" with the calculated tax owed based on the taxpayer's records,

the Comptroller may determine the amount of tax owed from "other information available to the

comptroller;' Id. ç I 11.008(a).

In addition to requiring convenience stores to maintain sales records, the Tax Code

also requires brewers, manufacturers, wholesalers, and distributors of alcoholic beverages to file

2

reports clironiclingtheirsales to stores and listingthe storesbyname. Id l5l.46l-.462. Similarly,

$$

the Tax Code authorizes the Comptroller to request wholesalers and distributors of tobacco

productstofilethesametypeofreports. Id $$ 154.021(addressingcigarettesales), 155.105 (covering

non-cigarette tobacco products). The type of information required in these repofts is commonly

referred to as H.B. I 1 information because the reporting requirernents were enacted by House Bill

11 (H.8.11) of the 80th legislattxe. see Act of May 3,2007,80th Leg., R.s., ch. 129, g$ l-3,2007

Tex. Gen. Laws 159, 159-62.

Once an audit has been performed, the store owner may request a rcdetermination

from the Comptroller within 30 days of receiving notice of the Comptroller's assessment. Tex. Tax

Code $ 1 I 1.009(a), (b). In addition, the owner may also request a hearing on the redetermination,

id. $ 11 1.009(c), before the State Office of Administrative Hearings, id $ 11 1.00455. If no request

for a redetermination is filed within 30 days, "the determination is final on the expiration of the

period." Id. ç 111.009(b).

As an alternative to requesting a redetermination, an individual may pay the assessed

taxes and penalties and file a claim for a refund with the Comptroller or pay the taxes and penalties

underprotestandfilesuitseekingtheirrecovery.t Seerd $$111.104(b),(c), 112.051,.052;seealso

In re Nestle USA, lnc.,359 S.W.3d 207,21I (Tex. 2012) (protest, refund, and injunction suits

I

There is one more additional, limited remedy in the form of an action for a restraining order

or injunction to prohibit the assessment or collection of a state tax, which action also requires

prepayment of the taxes due or the posting of a bond as well as a pre-suit "statement of the grounds

on which the order or injunction is sought" filed with the attorney general. Tex. Tax Code $ lI2.I0l.

This remedy additionally requires a showing that (1) irreparable injury will result to the applicant

if tlre injunction is not granted , (2) no other adequate remedy is available to the applicant, and (3)

the applicant has a reasonable possibility of prevailing on the merits of the claim. Id. ç 112.10fi.

J

provide only means to seek relief from taxes assessed under Chapter 112). A tax-refund claim

proceeds to an administrative hearing, after which the Comptroller will issue a decision that

becomes final twenty days after service on the taxpayer. Id $ 1 I 1.105. A tax-refund claimant who

is dissatisfîed with the decision may file a motion for rehearin g, id. (c), and then if still dissatisfied

may file a suit in district court seeking to recover the amount paid within 30 days after the motion

for rehearing is denied, id g I l2.I5I(a), (b), (c).

If pursuing a protest-payment suit, a taxpayer must f,rle a written protest detailing

each reason for recovering the payment and submit such protest with payment of the assessed

taxes and penalties within six months (or other applicable limitations period) after the deficiency

determination becomes final Id. $g 111.104(c)(3), 112.051(b), (c).

Prior to the passage of H.B. 11, the Comptroller issued a meÍto entitled AP 92,

which provided guidance to auditors performing audits of convenience stores. In the memo, the

Comptroller explained that there had been a "lack of uniformity in estimated convenience store

audits" and tliat "mark-up percentages and product mix percentages" were developed to be used in

audits o'when necessitated by lack of reliable records" or if a store's "records are unavailable,

inadequate or unreliable." After H.B. 11 passed, the Comptroller issued another memo to audit

personnel entitled AP 122. The new memo updated AP 92 and required auditors to use H.B. I I

information "to produce the most accurate audit results." Sanadco's counterclaims arise from the

issuance of these two memos along with various actions taken by the Comptroller when performing

his audit of Sanadco.

4

BACKGROUND

Turning to the facts of this case, Sanadco owns a convenience store, and Mahmoud

Isba operates the store and is designated as a responsible person for Sanadco. The Comptroller

audited Sanadco and determined that Sanadco had underreported its taxable sales for alcohol and

tobacco products. The amount of the deficit was determined using H.B. I I d,ata. After making his

determination, the Comptroller sent a bill for the estimated amount owed and for interest on that

amount as well as a penalty.

After receiving notice of the amount due, Sanadco did not seek redetermination

of the assessment, see Tex. Tax Code $ 111.009, or pay any portion of the assessed taxes and

penaltiesandseekstatutoryreliefvia ataxpayer refundorprotest slit,seeid. $$ 111.104, lI2.I5l.

Accordingly, the Attorney General filed suit to collect the delinquent taxes. In response, Sanadco

filed an answer and raised several counterclaims seeking declaratory and injunctive relief against

the Cornptroller's collection of the taxes, compensatory damages, and attorney's fees. Those

counterclaims were made against thc Off,rce of the Comptroller, Susan Combs2 in her official

capacity as Comptroller, and Greg AbbotC in his official capacity as the Attorney General. Sanadco

later amended its answer and counterclaims, adding as counter-plaintiffs several other individuals

and companies who had been assessed similar taxes.a Unlike Sanadco, the other named counter-

'Since the events giving rise to this appeal, Glenn Hegar was elected Comptroller.

Accordingly, our references to the Comptroller are to him.

3 Since the events giving rise to this appeal, Ken Paxton was elected Attorney General.

Accordingly, our references to the Attorney General are to him.

a For ease of reading, we will generally refer to all of the counter-plaintifß as Sanadco.

5

plaintiffs all sought redeterminations of their assessed taxes through administrative review, but none

of the administrative proceedings had been completed by the time that the individuals were added

to the lawsuit.s

Regarding its counterclaims, Sanadco alleged eight complaints relevant to this appeal.

In its first counterclaim, Sanadco asserted that AP 92 and AP I22 are administrative rules that

were not promulgated in compliance with the requirements of the Administrative Procedure Act.

SeeTex.Gov'tCode$2001.038. Accordingly,sanadcosoughtadeclarationthatthosememosare

invalid administrative rules. In its second counterclaim, Sanadco alleged that the Comptroller

engaged in ultra vires actions when he issued AP 92 and AP 122 andthereby authorized auditors to

estimate taxes owed by convenience-store owners without "first ascertaining whether adequate

records are available" from the taxpayer to perform an audit. For those reasons, Sanadco sought

declarations assefting that "the Comptroller is not authorized to estimate convenience store audits

using the rnethods described in AP 92 or AP I22 until their proper adoption, and/or that the

authorization of their use is a non-discretionary ultra vires act committed without legal authority."

In its third counterclaim, Sanadco contended that the Comptroller acted without legal authority when

he improperly instructed auditors to use H.B. 11 information for convenience store audits "without

s Despite their participation in the administrative redetennination process, the additional

counter-plaintiffs later added as parties to the suit do not impact our consideration of whether the

trial court had subject-matter jurisdiction over Sanadco's counterclaims, because subject-matter

jurisdiction is determined at the time a suit is filed. See TJFA, L.P. v. Texas Comm'n on Envtl.

Quality,368 S.W.3d 727,733 (Tex. App.-Austin 2012,pet. denied); Bellv. Moores,832 S.V/.2d

749,753-54 (Tex. App.-Houston [14th Dist.] 1992,writ denied) (at time suit is filed, court either

has jurisdiction or it does not, and jurisdiction cannot subsequently be acquired while suit is

pending); seealsoAetnaCas.&Sur.Co.v.Hillman,796F.2d770,774,776(5thCir. 1986)(federal

rule of civil procedure 15, pertaining to amendment of pleadings, does not permit plaintiff to amend

complaint to substitute new plaintiff in order to cure lack of subject-matter jurisdiction).

6

first ascertaining whether the determination can be made from the taxpayer's records." Accordingly,

Sanadco insisted that the Comptroller's decision to require the use of H.B. 11 data is an ultra vires

act and, therefore, sought declarations that the use of H.B. 1 1 information was improper and that

the governing statutes do not allow "the Comptroller to give conclusive effect to the HB 1 I data."

In its fourth counterclaim, Sanadco alleged that the Comptroller improperly authorized

auditors to'ouse an abbreviated procedure which bypassed examination of the taxpayer's records

and authorized an estimation of his tax liability based solely on the invalid H.B. l l data, without

first determining the adequacy of the taxpayer's records." For that reason, Sanadco insisted that the

Comptroller was acting ultra vires and sought a declaration that the governing Tax Code provisions

do not authorize the abbreviated procedure. In its fifth counterclaim, Sanadco alleged that the

Comptroller acted ultra vires by authorizing the imposition of aS\o/openalty without proof of fraud

or of an intent to avoid the tax as required by the Tax Code. SeeTex. Tax Code $ I I 1.061(b). In

its sixth counterclaim, Sanadco sought a declaration that the provision of the Tax Code authorizing

sample and projection audits for estimating taxes owed is unconstitutionally vague and is, "by its

nature, a denial of substantive and procedural due process." See id. ç 111.0042. In its seventh

counterclaim, Sanadco alleged that the Comptroller engaged in an unconstitutional taking when he

improperly collected sales anduse taxes. Lastly, Sanadco challengedthe constitutionality ofthe Tax

Code provision authorizing the Comptroller to impose a ten-percent penalty if he believes that the

ooamount

due for a tax period is jeopardized by delay." See id $ I fi .022.

After Sanadco fìled its counterclaims, the Comptroller filed a motion for summary

judgment and a plea to the jurisdiction. After reviewing the pleadings, the plea, and Sanadco's

response to the plea, the district court signed an order granting the Comptroller's plea dismissing

7

all of Sanadco's counterclaims. The trial court also granted the Comptroller summary judgment

on two of Sanadco's eight counterclaims. On appeal, Sanadco contests both the district court's

order granting the Comptroller's plea and its order granting the Comptroller summary judgment.

STANDARD OF REVIEW

"A plea to the jurisdiction is a dilatory plea, the purpose of which is to defeat a cause

of action without regard to whether the claims asserted have merit." Bland Indep. Sch. Dist. v. Blue,

34 S.W.3d 547,554 (Tex. 2000). A party to a lawsuit may challenge a trial court's subject-matter

jurisdiction over a case by filing a plea . Houston Mun. Emps. Pensiondys. v. Ferrell,248 S.W.3d 151,

156 (Tex. 2007). Determinations regarding whether a trial court has jurisdiction over a case are

questionsoflaw,whichwereviewdenovo. TexasDep'tofParl<s&Witdtifev.Miranda,l33S.W.3d

217, 225-26 (Tex. 2004).

DISCUSSION

Sovereign immunity protects the State of Texas, its agencies, and its officials

from lawsuits unless the legislature expressly gives its consent to the suit. Texas Natural Res.

Conservation Comm'n v. IT-Dary, 74 S.W.3d 849, 853 (Tex. 2002). Absent the State's consent

to suit, atrial court lacks subject-matter jurisdiction. Id. at 855. Sovereign imrnunity not only bars

suits for money damages but also protects the State against suits to "control state action." Texes

Logos, L.P. v. Texas Dept. of Transp.,241 S.W.3d 105, 118 (Tex. App.-Austin2007, no pet.).

Therefore, absent an express waiver of sovereign immunity, Sanadco's counterclaims are barred.6

6 The fact that Sanadco is a counter-plaintiff rather than a plaintiff does not affect our

analysis when reviewing the trial court's ruling on a plea to the jurisdiction, as such determination

8

Sanadco cites two statutes providing limited waivers of immunity-the Administrative

Procedure Act, see Tex. Gov't Code $ 2001.038, and the Uniforrn Declaratory Judgments Act, see

Tex. Civ. Prac. & Rem. Code $ 37.001 et seq.-aswell as an exception to waiver, the doctrine of

ultra vires, see City of El Paso v. Heinrich,284 S.W.3d 366,372-73, 380 (Tex. 2009),as conferring

jurisdiction on the district court over its counterclaims. However, as discussed below, we conclude

that all of these grounds for jurisdiction are preempted by Chapter 112 of the Tax Code, which the

supreme court has held provides exclusive remedies for relief from assessed taxes on any basis.

See Nestle,359 S.W.3d atZII. Because Sanadco did not comply with the mandatory Chapter 112

requirements, the district court has no jurisdiction over any of its counterclaims.

Statutory prerequisites to taxpayer suits

The Tax Code waives the State's immunity from suit, but only for specif,rcally

enumerated taxpayer actions, each conditiorring waiver on certain administrative or other

prerequisites to a taxpayer's bringing a suit or claim thereunder. See Tex. Tax Code $$ 1 12.052

(protest suit),.101 (inyunction suit),.151 (refuüd suit); Nestle,359 S.W.3d at211 (dismissing

mandamus cause for want ofjurisdiction, where taxpayer sought declaration of constifutionality of

franchise tax, injunction prohibiting its collection, and mandamus relief compelling refund of taxes

already paid, because taxpayer had not complied with statutory prerequisites of Chapter Ll2 for

considers whether the non-moyant's pleadings affirmatively demonstrate the trial court's jurisdiction

over tlre challenged causes. See Texas Dep't of Parks & Wildlife v. Miranda, 133 S.W.3d 2I7 ,226

(Tex. 2004). Counter-plaintiffs are the functional equivalents of plairitiffs with respect to whether

their claims confèr subject-matter jurisdiction on the trial çotrt. See, e.g., Smith v. Clary Corp.,

917 S.W.2d 796, 798 n.l (Tex. 1996) (court must not only have jurisdiction over amount in

controversy but also must have subject-rnatter jurisdiction over counterclaim).

9

refund, protest, or injunction suit). Regardless of the taxpayer's claims

,the only permitted taxpayer

actions cliallenging state taxes areo'a suit after payment under protest, suit for injunction after

payment or posting of a bond, and a suit for a refund." Nestle,359 s.w.3d af 2rl.

In Nestle, the supreme court held that these three statutorily provided taxpayer suits

(along with their respective prerequisites to suit) are the only rneans by which a taxpayer may

challenge "the applicability, assessment, collection, or constitutionality" of a state tax. kJ. at209.

"The only exception is that prepayment of the tax as a prerequisite to suit is excused when it 'would

constitute an unreasonable restraint on the party's right of access to the courts."'1d. (quoting Tex.

Tax Code $ I 12.108); see also In re Allcat Claitns Serv., L.P.,356 S.W.3d 455,479 (Tex. 2011)

("[S]ection I 12.108 explicitly prohibits any court from granting injunctive or declaratory relief or

issuing any writ of mandamus or any other legal or equitable relief not already allowed elsewhere

in Chapter 112."). Besides these three avenues for relief, Chapter I 12 "allows no other actions to

challenge or seek refunds of the taxes to wliich it applies," including declaratory-judgment actions.

Nestle,359 S.W.3d at209-10; see also Strayhorn t¡. Raytheon E-Sys., Inc.,10I S.W.3d 558,572

(Tex. App.-Austin 2003, pet. denied) (when statute provides avenue for attacking agency order,

declaratory-judgment action will not lie to provide redundant remedies).

It is undisputed that Sanadco did not engage in an administrative redetermination

proceeding or meet any of the statutory requirements for a refund claim or protest suit. Sanadco may

not attempt to avoid those administrative and procedural requirements by merely filing counterclaims

to a collection suit brought by tlie Comptroller. If Sanadco were able to pursue its counterclaims

"free of Chapter 112's restrictions," the State's o'entire tax collection scheme" would be disrupted.

10

Nestle,359 S.W.3d at 2Il ("If a taxpayer were not required to lodge its complaints first by protest

or refund claim, the Comptroller would lack notice of the assertion of illegality, perhaps-as this

case illustrates-for years.").

Sanadco had two adequate, available remedies upon the Comptroller's deficiency

determination: (1) a redetermination proceeding or (2) payment of the taxes and pursuit of the

Chapter 1 12 refund or protest procedures. However, Sanadco elected not to pursue either remedy.T

It may not now attempt to circumvent the statutory prerequisites to taxpayer suits by casting its

various challenges to the assessed taxes and penalties as counterclaims seeking declaratory and

injunctive reliefto the Comptroller's collection actions when Sanadco could and should have availed

itself of the exclusive statutory taxpayer-suit procedures. While Sanadco frames its declaratory

requests in terms of the validity or constitutionality of "rules," statutes, and alleged ultra vires

actions, it is not merely seeking to obtain such declarations but to be relieved, thereby, of its tax

assessment and penalty. Chapter 112 of the Tax Code provides an exclusive remedy therefor, and

Nestle explicitly prohibits any attempt at relief from assessed state taxes on any basis except as

provided in the chapter.s

7 The third Chapter l12

remedy, an action for injunction, is not available to Sanadco under

the circumstances alleged in its pleadings because Sanadco had two other adequate remedies at law

in tlre form of a protest suit and a refirnd suit. ,S¿e Berry v. McDonald,l23 S.W.2d 388, 389 (Tex.

Civ. App.-San Antonio 1938, no writ) (holding taxpayer had adequate and complete legal remedy

under former version of statute providing for protest suit and, therefore, claim seeking relief in form

of enjoining Commissioner of Agriculture from collecting citrus sales tax was improper). However,

even if the injunction remedy under section 1 12. 101 were available to Sanadco, it is undisputed that

Sanadco did not fulfil any of the statutory prerequisites to suit thereunder, including prepayment of

the tax or posting of a bond and filing a pre-suit statement with the Attorney General.

I

Further, the Comptroller's claim to collect from Sanadco the delinquent taxes did not waive

immunity for all purposes but only narrowly waived it for counterclaims that both ( 1) were "germane

ll

Because Sanadco did not comply with the jurisdictional prerequisites of Chap ter IIZ,

we hold that the trial court did not have jurisdiction over any of Sanadco's eight counterclaims,

and the trial court did not err in granting the Comptroller's plea to the jurisdiction.e We need not

reach Sanadco's issues about the trial court's surnmary judgment because the Comptroller's plea

to the jurisdiction was directed to all eight of Sanadco's counterclaims, and our jurisdictional

deterrnination is dispositive of all issues on appeal. seeTex. R. App. p. 47 .l.

CONCLUSION

Having overruled each of Sanadco's issues, we affirm the district court's order

dismissing all of Sanadco's counterclaims on jurisdictional grounds.

to, connected to, and properly defensive to claims asserted by" the Comptroller and (2) operated as

damageoffsetsagainstthemonetaryreliefsoughtbytheComptroller. SeeManbeckv.Austinlndep.

Sch. Dist.,381 S.W.3d 528,533 (Tex.2012). It is without question that the later-joined counter-

plaintiffs' counterclaims did not meet either of these requirements. Also, because the Comptroller's

action sought collection of a particular, final amount of taxes, penalties, and interest-and Sanadco

did not challenge that final amount via any of the available adrninistrative and statutory procedures

already discussed-Sanadco's counterclaims cannot be considered "properly defensive" or offsets

thereto.

e We limit our holding to cases in which a taxpayer

seeks relief from a tax assessment that

has become a final liability and is no longer subject to review through administrative procedures; we

do not hold that Chapter 112 preempts every suit challenging a Comptroller rule or tax statute's

constitutionality. C.f.,Texas Entm'tAss'n,Inc.v. Combs,431 S.W.3d 790,795 (Tex. App.-Austin

2014, pet. denied) (citing Combs v. Texas Entm't Ass'n, Inc., 287 S.W.3d 852, 864-65 (Tex.

App.-Austin,2009), rev'd on other grounds,347 S.W.3d 277 (Tex.201 1)) (on remand, citing with

approval its previous opinion holding that declaratory-judgment action challenging constitutionality

and implementation of new tax statute was not preempted by Chapter 112 of Tax Code); Combs v.

EntertainmentPubl'ns Lnc.,292 S.W.3d 712,723 (Tex. App.-Austin2009, nopet.) (affrrmingtrial

court's denial ofplea to jurisdiction in suit in which taxpayer sought declaratory and injunctive relief

to prevent Comptroller from implementing allegedly invalid rule). Because Sanadco sought

injunctive relief from liability for the tax long after completion ofthe administrative process and the

deficiency assessment had become final, the facts here are distinguishable fiom those cases in which

the taxpayers sought declarations of the validity or constitutionality of rules and statutes and their

threatened enforcement prior to finality of an agency determination.

T2

David Puryear, Justice

Before Justices Puryear, Henson, and Goodwin

Justice Henson not participating

Affirmed on Motion for Rehearing

Filed: March 25,2015

13

Tab B

Order and Motion for Emergency Relief to Lift the Automatic

Stay for a Limited Purpose

Sanadco I, No. 03-11-00462-CV

Third Court of Appeals.

Appellees’ Responsive Brief page 2

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-11-00462-CV

Sanadco Inc., a'Iexas Corporation, and Mahmoud A. Isba,

a/k/a Mahmoud Ahmed Abuisba, aikla Mike Isba,Individually, Appellants

v

Susan Combs,Individually, and in her Offïcial Capacity as

Comptroller of Public Accounts of the State of Texas, and

Greg Abbott in his Official Capacity as Attorney General of the State of Texas,

et al., Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 9STH JUDICIAL DISTRICT

NO. D-1-GV-10-OOO9O2, HONORABLE TIM SULAK, JUDGE PRESIDING

ORDER

PER CURIAM

On April 16,2012, the appellants filed a motion for emergency relief related to their

appeal in cause number 03-11-00462-CV, and the appellees fìled a response on April 18,2012.

Having reviewed the motion and the response, we deny the motion for emergency relief.

It is ordered }l4ay 3,2012.

Before Justices Puryear, Henson and Goodwin

ProDoc FaxService Page 2 of 103

NO, 03-11- 00462

lln U,llt

0[birù 6nu$ nt H.frenld

AT TÐ'(AS

Sanadco Inc,, Mahmoud A, Isba, Walid Abderrahman, Maiic Investments

Inc,, Faisal Khan, Isra Enterprises, Inc,, Hattab Al-Shudifat, Haifa

Enterprises, Inc., EID Corp,, Mohammed S, Al Haieid, Maidi Rafe 0kla

Nsairat, Omar Unlimited, [nc., and All Others Similarly Situated,

APPELLANTS

VS.

The Office of the Comptroller of Public Accounts; Susan Combs, Ín her

individual and official capacities as Comptroller of Public Accounts for

the State of Texas; and Greg Abbott in his official capacity as Attorney

General of the State of Texas

APPEttEES

Appeal From Cause No D-1-GV-10-000902

The 98th Dlstrlct Court 0f Travls Counfy, Texas

The Honorable Tim Sulak, Presiding

MOTION FOR EMERGENCY RELIEF

TO LIFT THE AUTOMATIC STAY FOR A TIMITED PURPOSE

SAMUET T, IACKSON

sBN 10495700

P.O, BOX 670L33

ARTINGTON, TX 76003.0133

TEL: [817) 751-71ss

FAX: [866) 37+-oL64

COUNSET FOR APPELLANTS

ProDoc Faxservice Page 3 of 103

IDENTITY OF PARTIES AND COUNSEL

APPETLANTS:

Sa¡¡nnco Intc., MauuAuD A. Isne, WeuD ABDERRAnMAN, Mn¡tc h.rvrs'rurl¡Ts INC,,

Fnlsnl KuRtrl, Isnn ErrlrrRpRlsps, INc,, HATTng AL-SHUDIFAT, Hnlrn ErurrRpnlsrs,

In¡c,, EID CoRp,, Mognuprup S, Al HRInn, Mn¡u Rere 0xln NsRlnet, Ounn

Un¡unarrEo, INc., Rn¡n Au Ornrns Slrrtunlv S¡ruRrEp

COUNSEL FOR APPELLANTS:

tAW OFFICE OF

SAMUET T. IACKSON

P.O, Box 170633

Arlington, Texas 76003-063 3

TEL; [817) 75I'7Iïs

FAX: [866) 374-0164

Email: jacksonlaw(ôhotmail.cont

REAL PARTIES IN INTEREST:

Tun Orncn oF THB CouprnollrR oF Punuc Accouxrs; Susnr¡ Coltns,

INDTvTDUALLv, AND rN HER oFFICIAL cApAcrry es CouprnoLLER or PunLrc Accout¡rs

0F THESrnru on TExRs; AND GREG A¡Borr, IN Hrs oFFIcrAr cApAcrry Rs ArroR¡¡Ey

GEruERel oF THE Srnrr or TExRs

COUNSET FOR REAL PARTIES IN INTEREST:

TACK HOHENGARTEN

Assistant Attorney General

FINANCIAL LITIGATiO N DIVISION

P.0. Box )"2548

Austin, TXTBTLI-2548

TEL; (stz) 475-3503

FAX: (s12) 477 -23+Bl 480-8327

211:' t q rt

Motion for Ernergency Relief to Lift Autom¿ic Stay for Limited Purpose

ProDoc FaxService Page 4 of 103

TABTE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL ',2

I

TABLE OF CONTENTS ..J

TABLE OF AUTHORITIES 5

STATEMENT OF JURISDICTION B

STATEMENT OF THE CASE 9

ISSUES PRESENTED 10

L Did the Comptroller engage in ultra vires çonduct when she persisted in

pursuing the cancellation of Appellants' sales tax permit after her decision to cancel

the permit had been timely appealto the district court? .,,,..,...10

ll. Was the Comptroller's attempt to collect alleged sales tax liabilitìes while the

underlying claims were subject to an interlocutory appeal in violation of the

automatic stay provisions?,,,,.,,,. ,.,,,...,,,, 10

lll. Did the Comptroller engage in ultra vires conduct in excess of her statutory

authority when she engaged in enforcement procedures to collect sales tax

assessments while they were pending judicial review?.,,,. ..,... 10

lV. When Appellants' administrative procedures were exhausted, did the

Comptroller's decision become a nullity when Appellants requested de novo judicial

review? 10

STATEMENT OF FACTS .,..,11

ARGUMENT AND AUTHORIT]8S,.,,,,,.., ....,,r4

I. The Comptroller's Suspension of Appellants' Sales Tax Permit Violated

Appellants' Right to Appeal from the Order Suspending the Permit.........,, 15

il. Tlie Cornptroller's Enforcernont Actions Violated the Automatic Stay

Provisions of an Interlocutory Appeal ..... I7

III. The Comptroller's Enforcement Actions are Ultra l/ires 18

and Exceed Her Statr.itory Aulhority 18

3li;'nqi;

Motion for Emergency Relief to Lift Automatic Stay for Limitecl Purpose

ProDoc FaxService Page 5 of 103

CONCLUSION 22

PRAYER 22

CERTIFICATE OF SERVICE Error! Bookmark not defined.

INDEX TO APPENDIX Error! Bookmark not defined,

4l |'ne.c

Motion for Ernergency Relief to Lift Automatic Stay for Limited Purpose

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TABTE OF AUTHORITIES

CASES

Amrhein v. La Madeleine, lnc.,

206 S.W,3d 173, (Tex.App.-Dallas 2006, no pet.),,,,.,... 15

Bunhus v, M & S Macñ. & Supply Co,, lnc.,

897 S.W,2d 871 (Tex.App,-San Antonio 1995, no pet,) i5

Çity of San Antonio v. City of Boerne,

1 1 1 S.W.3d 22 (Tex.2003) 18

Greene v. Sfafe,

324 S.W.3d 276 (Tex.App,-Austin 201 0, no pet,) 18

Herrera v. Sfafe,

No. 03-0'1-0010'l -CV,2002 WL 185476 17

ln Re TASO,

03-1 1 -00269-CV (Tex.App.-Austin s-6-201 1 )

Key Western Life /ns. Co. y, Sfafe Bd, of lns.,

350 S.W,2d 839 (Tex, 1961),., ,.,.,,, 19

Logal v. Unlted Sfafes,

195 F,3d 229, (Sth Cir. 1999) 17, 18

Southern Canal Ç0. v. Sfafe Bd. of Water Engineers,

31 8 S,W.2d 61 9; 159 Tex, 227 (Tex, 1958) 19

State Bd. of lns. v. Republic Nat'l lns. Ço.,

384 S.W,2d 3€9 (Tex,Civ,App, Austin 1964, writ refld n,r,e,),,,,, 19

-

Sfafe v. Crawford,

262 S.W,3d 532 (Tex.App.-Austin 2008, no pet.) 17, 18

Subaru of America v. David McDavid Nissan,

84 S,W.3d 212 (Tex.2002), I7

fexas Dept. of Public Safety v. Banks Transp. Ço.,

427 S.W,2d 593, (Tex.Sup, 1968)

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Motion for Eurergency Relief to Lift Automatic Stay for Limite<l Purpose

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STATUTES

Tex, Civ, Prac, & Rem, Code $ 51.014(þ),.,..........

Tex. Civ, Prac, & Rem. Code Ann $ 51 .014(b),...,

Tex, Civ, Prac. & Rem. Code Ann. S 51.014(aXB)

Tex, Gov't Code $ 2001.174....,.,.......

Tex, Gov't Code $ 2001.176 (bX3) ,,

Tex, Gov't Code $ 2001,73

Tex, Gov't Code Ann. $ 2001 ,173(a)

Tex. Gov't Code Ann. g 22.221(a).........,,,,.

Tex. Rev, Civ, Stat, a¡1..4413(36), $ 7,01(a)-(b)

Tex. Tax Code Ann, $ 111,0047

Tex. Tax Code Ann, S 111,0081

Tex. Tax Code Ann, $ 11 1,012 (a) (1) .

Tex. Tax Code Ann, $111.010,,,........

REGULATIONS

34 Tex Admin, Code $ 3.327 (d) ,, ,

34 Tex. Admin, Code $ 1,29 ....,,....... 8

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Motion for Emergeucy Relief to Lift, Automatic Stay for Liurited Purpose

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NO, 03-11- 00462

iln WÍlt

([bíril 0nurt nf H+nÊüld

nT,A[JSTN, TÐ(AS

Sanadco Inc,, Mahmoud A, Isba, Walid Abderrahman, Maiic Investments

Inc,, Faisal Khan, Isra Enterprises, Inc,, Hattab Al.Shudifat, Haifa

Enterprises. Inc,. EID Corn,, Mohammed S, Al Haieid. Maidi Rafe Okla

Nsairat, Omar Unlimited, [nc., and All Others Similarly Situated,

APPELTANTS

vs,

The Office of the Comptroller of Public Accounts; Susan Cornbs, in her

individual and official capacities as Comptroller of Public Accounts for

the State of Texas; and Greg Abbott in his official capacity as Attorney

General of the State of Texas

APPELTEES

Appeal From Cause No D-1-GV-10-000902

The 9Bth Dlstrlct Court 0f Travls Counry, Texas

The Honorable Tim Sulak, Presiding

MOTION FOR EMERGENCY RELIEF

TO LIFT THE AUTOMATIC STAY FOR A LIMITED PURPOSE

TO THE HONORABLE THIRD COURT OF APPEALS:

SANADCO lNC, ET AL, Appellants, file this Pefiflon for Emergency Relief to Lift the

AutomatÌc Stay for a Limited Purpose, and respectfully requests this court to grant this

application for emergency temporary relief and lift the automatic stay imposed herein, and

upon notice and hearing to grant a declaratory judgment that the Comptroller exceeded her

authority by enforcing her order suspending Appellants'sales tax permit effective March 5,

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Motiolr for Enrergeucy Relief to Lift Aulomatic Stay for Limited Purpose

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2012 (Exhibit A), despite Appellants'appeal of said order on March 26,2012 pursuant to Tex,

Tax Code Ann, $ 111.0102, Tex, Tax Code Ann, $ 111.0049, and Tex. Tax Code Ann, $

151,205 authorizing a taxpayer to appeal the revocation or suspension of a tax permit "in the

same mannerthat appeals are made from a finaldeficiency determination".

These causes are now pending before the ggth Judicial District Court in Travis County,

Texas under Cause No. D-1-GV-10-000902 and on interlocutory appeal before this Court in

No, 03-11-00462,

Appellants complain of SUSAN COMBS, in her official capacity as Comptroller of

Public Accounts' ultra vires acts exceeding her authority in the unauthorized requirement for

payment of alleged delinquent sales taxes and provision of a bond before a final order is

entered in the judicial review of the cause which is the subject of this appeal.

Appellants request ihis court to lift the automatic stay imposed in ihis cause for the

limited purpose of reviewing the Comptroller's interlocutory order suspending Appellants'sales

tax permit and entering judgment declaring that the Comptroller is not authorized to take any

enforcement actions againsi Appellants prior to entry of a final order in the triai court, or in the

appellate court pending resolution of all pendlng appeals

STATEMENT OF IURISDICTION

This Court has jurisdìction of this motion pursuant to Tex. R. App. P. 29.3 to make any

temporary orders necessary to preserve the parties' rights until disposition of the appeal; to

review any interlocutory order that interferes with or impairs the effectiv€ness of the relief

sought or that may be granted on appeal; and pursuant to Tex, Gov't Code Ann, $ 22,221(a)

to issue a writ of mandamus and all other writs necessary to enforce the jurisdiction of the

cou11, including the issuance of writs nðc€ssary to preserve the subject matter of an appeal,

The Court also has jurisdiction pursuant to Tex, Gov't Code Ann. $ 2001.176 (c) to accept

transfer of the case for judicial review if the cout't finds that the public interest requires a

prompt, authoritative determination of the legal issues in the case and the case would

ordinarily be appealed.

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Motion for Eurergency Relief to Lift Automatic Stay for Limited Purpose

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STATEMENT OF THE CASE

(1) Nature of Underlying Proceedíng:

This matter arises from an appeal from a show-cause proceeding to suspend the sales

tax permit of Majic lnvestments, lnc, and Faisal Khan filed by ihe Comptroller of Public

Accounts, Counter-Plainiiffs in a class-action suit filed in response the Comptroller's

attempt to collect alleged delinquent sales tax,

(21 TríalCouñ:

The show-cause Hearing to Cancel Appellants' sales tax permit was maintained by the

Office of the Comptroller of Public Accounts for the State of Texas without the

intervention of a trial court.

(3) Cource of Proceedings:

The Comptroller held a telephonic hearing on February 24,2012 to determine whether

Appellants had paid the $73,600.67 assessed pursuant to SOAH Docket No. 304-1'1-

2810,26 in which Appellant's requestfor rehearing was denied by operation of law on

January 2, 2012.. Plaintiff therefore exhausted its administrative remedies and

requested joinder with his prior claims seeking judicial review,

(4) Trial Cou¡'t's Dispositíon:

The Comptroller issued its Decision to Cancel Appellants' sales tax permit on March 5,

2Q12, and Appellant timely filed its appeal on March 25,2012.

(õ) Subseguent Proceedings

Despite Appellanis'timely appeal from ihe Order Cancelling Appellants'sales tax

permit, the Comptroller has cancelled said permit and seeks to physically recover the

permit, thus causing Appellanis to pease conducfing business, This emergency petition

ensued.

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Motion for Emergency Relief to LiÍÌ Autonatic Stay for Lirnited Purpose

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ISSUES PRESENTED

L Did the Comptroller engage in ultra vires conduct when she persisted in pursuing the

cancellation of Appellants' sales tax permit after her decision to cancel the permit had been

timely appeal to the district court?

ll, Was the Comptroller's attempt to collect alleged sales tax liabilities while the

underlying claims were subject to an interlocutory appeal in violation of the automatic stay

provisions?

lll. Dld the Comptroller engage in ultra vires conduct in excess of her statutory authority

when she engaged in enforcement procedures to collect sales tax assessments while they

were pending judicial review?

lV, When Appellants' administratlve procedures were exhausted, did the Comptroller's

decision become a nullity when Appellants requested de novo judicial review?

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STATEMENT OF FACTS

Appellants are convenience store own€rs and operators who filed petitions for judicial

review on February 5, 2011, in Sanadco, Et Al v, Combs, Et Al, in Cause No, 1-D-GN-10-

000902 in the 98h Judicial Court in Travis County, Texas, These petitions were filed prior to

exhaustion of administrative remedies by their inclusion in this putative class action suit

challenging the constitutionality of certain audit statutes, the validity of the audits, the

Compiroller's ultra vires acts in the conduct of the audits and a takings claim to recover the

illegaltaxes.

Prior to the exhaustion of administrative remedies, the Comptroller filed a plea to the

jurisdiciion and motion for summary judgment seeking dismissal of the district court suit, The

trial court granted both motions in favor of the Comptroller on July ô, 2011, while the

Appellants continued to pursue their various claims through the administrative process.

Appellants filed notice of inierlocutory appeal to this court on July 25, 2011 in Cause No. 03-

11"00462 from the judgment granting the Compholler's Plea to the Jurisdiction in which

Appellants have challenged the grant of the plaa to tha jurisdiction and the motion for

summary judgment.

ln the instant case, the Comptroller conducted a full audit of Majic lnvestments, lnc, for

the period September 1, 2005 to April 30, 2009, resulting in additional tax liability derived from

an estimation based in part on HB11 data, and 4P122 requirements, On December 7,2009,

lvlaJic was assessed a tax liabillty and an additionalS00/o penalt! forfraud, and a 10% jeopardy

determination penalty totaling $79,835.04, Faisal Khan, the owner, was held personally liable

for the corporation's debt in the amount of $36,332.67. Appellants timely requested a

redetermination hearing before SOAH on December 21,2009, pursuant to 34 Tex, Admin

Code $ 1,29.

On February 5, 201'1, Majic lnvestments lnc. and Faisal Khan were joined as class

action claimants in Sanadco, et al v, Comþs, et al, in Cause No, 1-D.GN-10-000902 in the 98h

Judicial Court in Travis Counfy, Texas. (Exhlbit B).The Districi Court heard the Comptroller's

Plea to the Jurisdiction and Motion for Summary Judgment on June 28, 2011 and entered

judgment on July 8,2011 dismissing each of Sanadco's claims and granting the Comptroller's

summary judgment. Sanadco filed iis noiice of inierlocuiory appeal to the Third Courl of

Appeals in No, 03-11-004ô2 on July 25,2011. (Exhibit 0),

The redetermination hearing was held on Juna 24, 2011. -lhe ALJ submitted his

Proposal for Decision on July 6,2011 and his rBsponse to Appellants'Exceptions was filed on

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Motion for Emergency Relief to Lift Automatic Stay for Limitecl Purpose

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August 3,2011,'l-he Comptroller's Decisionwas issued on October 19,2011, and Appellants'

Motion for Rehearing was filed on November 14,2011, (Exhibit D) to which the Staff objected

by motion filed on November 17,2011 , Tha Motion for Rehearing was denied by operation of

law on January 2,2012.

On January 13,2012, Appellants received notice to show cause why the Comptroller

should not take action: (1) revoking or suspending any license, permit or certificate issued by

the Comptroller; (2) freezing Appellants' assets; or (3) seizing and selling of Appellants'

property, duc to his failure to pay the amount due for sales tax deficiencies of $73,600.67.

Appellants were advised that such payment must be made by February 3, 2012 or the

Comptroller would "take all appropriate steps to assure compliance", lncluding: revocation or

suspension of any license, permit or certificate issued by the Comptroller; withholding state

warrants; freezing Appellants' assets; or the seizure and sale of Appellants' property, (Exhibii

E),

On January 24,2012, Appellants received a "Notice of Bond or Security Required", due

to the failure to post bond in thE amount of $8,500,00 because "insufficient bond or security is

currently posted, based on your sales volume". Appellants were advised that such bond must

be posted by February 3,2012 or, without further notice or hearing, the Comptroller would

"take all appropriate steps to assure compliance", including: revocation or suspension of any

license, permit or certificate issued by the Comptroller; withholding state warrants; freezing

Appellants' assets; or the seizure and sale of Appellants' property, (Exhibit E),

After a telephonic hearing on February 24,2012, the Comptroller entered its order

suspendlng Appellants'sales tax permit effective March 5, 2012 for failure to pay the alleged

tax and post the bond, (Exhibit A)

Appellants then sought judicial review by seeking joinder of this suit along with the

remaining suits which had either exhausted their administrative remedies or were in the

proc€ss of doing so, with their cases alreadyseeking judicial review in Cause i\o. 1-D-Gl\-10-

000902 in the 98'h Judicial Court on March 13,2012. (Exhibit F).

Plaintiffs received a second Notice of Hearing to Cancel dated March 16,2012 to show

caLlse why Majic's limited sales, excise and use tax permit should not be cancelled for failure

to furnish bond or security in the amount of $8,500,00. A hearing was scheduled on April 6,

2012 and Plaintiffs were advised that their failure to respond to the notice on or before that

date would resuli in the cancellation of their permit. (Ëxhibit E)

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Motion for Ernergericy Relief to Lift Autonlatic Stay for Linlitecl Purpose

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Appellants perfected their appealfrom the suspension of their sales tax license by filing

a Motion for Declaratory Judgment and Temporary lnjunction in Cause No. 1-D-GN-10-

0OO9O2 in the 98th Judicial Coud on March 26,2012 (Exhibit G), pursuant to Tex, Tax Code

Ann, $ 111.01021, Tex. Tax Code Ann. $ 111,00492, and Tex. Tax Code Ann. g 151,2053

authorizing a taxpayer to appeal the revocation or suspension of a tax permit "in the same

manner that appeals arÉ made from a final deflciency determination", Despite the timely filed

appeal, the Comptroller has persisted in cancelling Appellants'sales tax license and harassing

Appellants for the physical license,

It being clear that due to the automatic stay imposed in this interlocutory appeal, the

trlal court does not have the authority to issue the lnjunctive relief requested, Appellants have

filed this petition,

Pendínq Ceses Affected bv this Motion

There are seven addiiional class action claimants who are in various stages of ihe

administrativ€ process and subject to the interlocutory appeal including the following:

1. Omar lndustries in which the Comptroller denied its motion for rehearing on

February 16,2Q12.

2, Haifa Enterprises, lnc, in which the Proposal for Decision was entered on

January 11,2012 and they are awaiting the Comptroller's decision;

3, EID Qorp. in which the redetermination hearing was held on January 30,2012

and the parties are awaiting the Proposal for Decision;

4, MHAK, lnc. in which the redetermination hearing is scheduled for March 12,

2012',

5. Majdi Nsairat in which the redetermination hearing is scheduled on April 16,

2012"

I g t t I OtOZ TAX. Suit Challengurg CollecrionAction

Venue for and.lurtsdiction of a sull that challenges or is for the purpose of avoiclurg a comptroller collection action

or state tax lien in any manner is exclusively conlened on the district courts of Travis County,

' ç tt i oolo TAX. Appeals

A taxpayer may appeal the revocation or suspension of a permit or lice nse uncler Section 111 0046 ancl 1 11 004?

of this cocle in the sãre maffìer that appeals are macle lrom a final cleflrciency determination,

3

tst zos rAX Appeals

g

A taxpayer may appeal the revocatton or suspension of a tax permit in the sarre mamer that appeals are made

from a final defrciency detcrmination

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0, Monir Kutob in which discovery was completed on Ðecember 18,2012, No

hearing date is set,

7, Walid Abderråhman, in which the Comptroller's Posìtion Leiter was filed on January

31,2012. No hearing date has been set,

Each of these cases may be subjected to the same unauthorized enforcement

procedures as the precedlng cases before a final judgment is entered unless the Comptroller

is enjoined from engaging in such activity pending entry of a final judgment in Cause No. 1-

GV-10-000902 now awaiting a decision in Case N0.03-11-Q046? on file in the Third Court of

Appeals.

ARGUMENT AND AUTHORITIES

This Court has authority to issue writs of injunction if necessary to enforce its own

jurisdiciion, See Tex, Gov't Code Ann, $ 22,221(a) ("Each court of appeals , , . may issue a

writ of mandamus and all other writs necessary to enforce the jurisdiction of the cout1,"). This

authority extends to the issuance of writs necessary to preserva the subjebt matier of an

appeal. See Bea// v. Sfrake, 602 S,W,2d 394, 395 (Tex. Civ, App.-Austin 1980, orig,

proceeding) (holding that court of appeals may issue writ of injunction if lack of injunction

would "destroy the subject matter of the appeal, and thereby prevent the effective operation of

any judgment this Court might render"), ln Re TASO,03-11-00269-CV (Tex,App.-Austin 5-6-

2011),

This Court is authorized, pursuant to Tex, R. App. P, 29,6 to review any interlocutory

order that interferes with or impairs the effectiveness of the relief sought or that may be

granted on appeal. The Court is also authorized to accept trsnsfer of the case for judicial

,review if the court finds ihat the public inierest requires a prompt, authoritative determínation

of the legal issues in the case and the case would ordinarily be appealed, Tex. Gov't Code

Ann, $ 2001.176 (c). This case impacts statewide jurisdiction because it involves the

parameters of the enforcement authority of the Office of the Comptroller of Public Affairs which

presents an unavoidable destruction of the subject matter of this interlocutory appeal. lt would

also be determinate of the Compiroller's enforcement authority pending appeal from its

interlocutory orders, an issue of first impression.

Here, the subject matter of the appeal is the continued existence of Majic lnvestments,

lnc.'s convenience store and the viability of similar enterprises because the loss of its sales tax

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permit will immediately foreclose their right to operate the convenience stores, the freezing of

their checking accounts and other assets would prevent the payment of existing debts and

jeopardize their credit, and the sale of their assets would completely putthem out of business,

before entry of a final judgment determining the existence or extent of their tax liabilities, The

order entered to cancel or suspend Appellants' permit is on appeal to the district couft and is

therefore an interlocutory order reviewable by this court pursuant to TRAP 29,6.

This Couft also has the authority to lift the automatic stay imposed by the interlocutory

appcalfor limited purposes, See Tex, R,App, P, 10.1(a), 29,; Zumwaltv, Çity of San Antonio,

03-11-00301-CV (Tex,App.-Austin 11-29-2011); ln re Helena Chem. Co.,286 S,W.3d 492,

495 (Tex,App,-Corpus Christi, 2009, orig, proceeding) (noting that Texas Supreme Couft lifted

stay when it granted mandamus relief); Aryx Capital lnt'l v, Sage Apartmenfs, 167 S,W,3d

432,438 (Tex. App,-San Antonio 2005, no pet,) (noting that party should have requested that

appellate court lift its stay to allow party's filing of nonsuit in trial court).

li

is axiomatic that litiganis must comply with the orders of this court. See /n re

Mañinez, 77 S.W,3d 482, 464 (Tex.App,-Corpus Christi 2002, orig. proceeding)

(acknowledging that both litigants and the lower court must respect appellate court's stay

order), lf the Comptroller desired to lssue enforcemant orders against Appellants, they should

have asked this courtto lift its stayso that it could pursu6 its enforcement orders, lnstead, the

Comptroller chose to circumvent this couil's authority. Because the court's assumption of the

interlocutory appeal included an automatic stay provision, it prohibited the continuation of

proceedings in the trial court or bythe governmental entity until furlher notice from this court,

and the Comptroller therefore had no authority to pursue the enforcement actions, The

Comptroller's order cancelling Appellants' permit was enterad in direct violation of this court's

automatic stay provisions and is therefore void,

The Comptroller should be enjoined from engaging in the complained of activities

because these proceedings, whether with or without notice and hearing, are in violation of the

automatic stay imposed by section Tex, Civ, Prac. & Rem, Code $ 5'1.014(b), and Tex, Tax

Code Ann, S 111.0081.

I. The Comptroller's Suspension of Appellants'Sales Tax Permit Violated

Appellants' Right to Appeal from the Order Suspending the Permit

The Comptroller entered an order suspending Majic lnvestment's Texas Sales, Excise

and Use Tax permit effective on March 5,2012, Appellants appealed this order by filing a

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Motion for Energency Relief to Lift Automatic Stay for Linite<l Purpose

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timely Motion for Declaratory Judgment and Temporary lnjunction in Cause No. 1,Ð-GN-10-

000902 in the 9Eh Judicial Court on March 26,2012 pursuant to Tex. Tax Code Ann. g

111,0102a, Tex, Tax Code Ann, $ 111,0049s, and Tex, Tax Code Ann, $ 151.205,8 authorizing

a taxpayer to appeal the revocation or suspension of a tax permit "in the same manner that

appeals are made from a final deficiency determination".

ln suits flled pursuant to Tex. Tax Code Ann, $111,010, officers and directors ar€

entitled to a full and complete hearing on their tax liability in district court, See Tex. Tax Code

Ann. $ 111.010 (West 2008) (authorizing attorney general to file suit to recover taxes), The

case is tried de novo, Grcene v. Sfafe, 324 S.W.3d 276,288 (Tex.App,-Austin 2010, no pet.)

(111,010 allows for a de novo review of the party's tax liabllity), Herrera v. .9fafe, No, 03-01-

00101-CV,2002 WL 185476, at *1 n.4,2002 Tex.App,.-Austin Feb,7,2OO2, no pet,) (not

designated for publication) (identifying suit under section 111,010 as "de novo action by the

State to collect delinquent tax"),

The Administrative Procedure Act (APA) provides that when "the manner of review

authorized by law for the decision in a contested case .,, is by trial de novo, the reviewing

couft shall try each lssue of fact and law ,,. as though there had not been an interuening

agency action or decision," T€x. Gov't Code Ann, $ 2001,173(a) frVest 2000), A de novo

hearing has been defined as "a new and lndependent action in whlch the whole case is gone

into as if no trial whatever had been had in the court below," Trial de novo is not an "appeal",

but is a nBW and independent action, Key Wastern Life lns, Co. v. Sfafe Bd. of /ns,, 350

S,W.2d 839,846 (Tex. 1961).

Tex. Tax Code Ann. $ 111.0049, and Tex. Tax Code Ann, $ 151.205 authorize a

taxpayer to appeal the revocation or suspension of a tax permit "in the same manner that

appeals are made from a final deficiency determination", They are therefore accorded a trial

de novo and there is no final order upon which the State can proceed to enforce the order until

o

g t t t Ot OZ TAX Surt Challcngrng Collection Action

Venue for anrì jurisdiction of a suit that challenges or is fff the purpose olavoiding a comptoller colleclion action

or statc tær ìien in any manner is exclusively confened on the clistrict courts o[ Travis Coun¡r.

' $ 1 11 0049 TAX Appeats

A taxpayer may appeal the revocation or suspension of a permit or license under Section I I 1 0046 and i i i.0047

of this code in the same rnanner that appeals are rnacle from a fnal deficiency cletermuratuon

ó

tst zos TAX Appeats

g

A taxpayer may appeal the revocation or suspension of a tax permit in the same manner that appeals are macle

lrom a ftnal rleficiency determr¡ration.

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Motion for Emergency Relief to Lift Automatic Stay for Limited Purpose

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a final decision is reached in the appeal, Accordingly, they should be precluded from pursulng

the suspension of the sales tax permit until this cause is concluded. Appellants therefore

request this couri to lift the automatic stay for the limited purpose of staying the execution of

the suspension order pending a final hearing on the appealfrom such judgment,

II. The Comptroller's Enforcement Actlons Vlolated the Automatlc Stay

Provlslons of an Interlocutory Appeal

The Texas Civil Practice and Remedies Code expressly provides for an interlocutory

appeal from an order granting or denying a plea to the jurisdiction by a govêrnmental unit, Tex.

Civ, Prac. & Rem, Code Ann, S 51,01a(a)(8) (West 2008). When a notice of interlocutory

appaal under this section is filed, all proceedings in the trial court are automatically stayed

pending resolution of the appeal, /d. $ 51,014 (b). ln RE TASO, 03-11-00269-CV (Tex,App.-

Austin 5-6-201 1),That appeal is currently pending in this Court as Case No, 03-1 1-00462-CV.

Appellants filed its notice of interlocutory appeal on July 25, 2011, Each of the

enforcement actions taken by the Comptroller commenced after the filing of the notlce. The

Notice of Bond and subsequant enforcement activi$ against ISBA Enterprises, lnc, was

commenced on September 20, 2011. 1'he Notice of Hearing to Cancel was commenced by

letterto Majic lnvestments, lnc. dated January 13,2012,'lhe hearing was held telephonically

on February 24,2012 and the Comptroller ordered the permit suspended effactive March 5,

2012,

When Appeilants commenced this interlocutory appeal by filing its notice of appeal, "all

other proceedings in the trial courf' were stayed pending resolution of the appeal, Tex, Civ,

Prac.&Rem.CodeAnn$51,014(b).Anordersignedduringastayisa"legal nullity," Amrhein

v. La Madeleine, 1nc.,206 S,W,3d 173, 174-75 (Tex.App,-Dallas 2006, no pet,)', Burrhus v. M

& S Mach. & Supply Co., |nc.,897 S.W,zd 871,873 (Tex.App.-San Antonio 1995, no pet.)

(holding that appellate deadlines are stayed during pendency of automatic stay imposed by

insurance code).

Accordingly, the enforcement actions sought by the Comptroller are void, and any

further enforcement activity would be in violation of the automatic stay order and must be

enloinad pending resolution of the interlocutory appeal,

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It4otion for Emergency Relief to Lift Autouratic Stay for Lilnited Purpose

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IIL The Cornptroller's Enforcement Actions are Ultra Vires

and Exceed Her Statutory Authorlty

The Request for Bond is Premature

The Comptroller is not authorized to collect delinquent sales taxes untll they become

final, The tax code provides "[t]he amount of a determination made under this code is due and

payable 20 days after a comptroller's decision in a redetermination hearing becomes flnal".

Tex, Tax Code Ann, $ 111,0081 (c),7

The request for bond is pursuant to Tex, Tax Code Ann, $ 111.012 (a) (1)B which

permits the comptroller io require a taxpayer to provide security for the payment of taxes only

if the comptroller finds that a fax imposed by this title is insecure. 34 Tex Admin. Code g 3.327

(d), the regulation interpreting this provision provides:

lf the comptroller determines at any time that the amount of the bond on file is

inadequate or if a permitted retailer is dalinquent in the payment of any state or local

sa/es or {/.re faxe.s, the comptroller may require a new or additional bond to be posted.

Relator maintains that the request for bond prior to the establishment of any

delinquency is unlawful pursuant to the provisions of Tex, Tax Code Ann, $ 1 11 .0081(c) which

provides:

The amount of a determination made under this code is due and payable 20

days after a comptroller's decision in a redetermination hearing becomes final. lf the

amount of the determination is not paid within 20 days after the day the decision

became final, a penalty of '10 percent of the amount of the determination, exclusive of

penalties and interest, shall be added.

The Comptroller's decision becomes "final" (and ihus a party has exhausted

administrative remedies) for purposes of a party's pursuing damages in a trial court for Code-

t

5 t t t OOa t TAX When Payment is Re qurecl

(a) Except as providecl in Subsections þ) and (c) ol this sectiorr thc amor.urt of a determination made under this

code is due ancl payable 10 days after it becomes frîal. If the amorurt olthe determination is not paid within 10

days after the clay it became final, a penally ol 10 percent of the amount of the determination, exclusive ol

penalties and nterest, shall be added.

þ) This section does not apply to a determination uncler Section ^lll",8??,

(c) The ârnount ol a cletermination made uncler this code is due a¡ld payable 20 days after a comptrolle/s

clecision Ln a recleterminalion hearing becomes ftnal Il lhe amou¡rt ol lhe cìetermination is not paicl wrthin 20 days

alt¿r the day the decision became f-tnal, a penalty ol l0 percent ol the amount of the determi¡ation, exclusive of

penalties and interest, shall be added.

I

ç t t t.Ot Z Secunly lor the Payment of Taxes

(a) If the compboller fr¡rds lhat a fax imposed by this title is lflsecure, the compfolìer mây requlro a tâxpayer tro:

(1) provide se curity lor the payment of taxes:

18 | Ir'n r. r:

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based claims: (1) atter the time to seek substantial-evidence review of the agency decision

expires, if no affected person seeks such review, see Tex. Rev. Civ, Stat. art.4413(36), $

7,01(a)-(b); or (2) after an affected person who seeks judicial review exhausts the substantial-

evidence review avenues. Subaru of America v. David McDavid JVlssan, 84 S.W,3d 212 (Tex.

2002).

ln the absence of the Gomptroller's finaldecision in the redetermination hearing, no tax

has yet been imposed and no tax is "due and payable" upon which a delinquency may be

for provision of security prior to a final decision and

predicated. Accordingly, the request

subsequent delinquency is void as ultra vires and in excess of the Comptroller's statutory

authority, Sfafe y, Çravvford,262 S,W,3d 532,546 (Tex,App,.Austin 2008, no pet.) (evidence

was insufficient io conclusively establish that [Taxpayers] "willfully fail[ed] to pay or cause to

be paid the tax," because the tax amount had not yet become due); see also Logalv. United

Sfafes, 195 F,3d 229,232 (Sth Cir, 1999),

Accordingly the requirement for the payment of bond is void and ISBA should be

reimbursed for the full cost of the bond, and the settlement agreement reached during the

pendency of the lnterlocutory appeal should be nullified.

The Notice to Cancel is Premature

The Notice of Hearing to Cancel Permit is issued pursuant to Tex, Tax Code Ann. g

111.0047s which authorizes tho Comptroller, after notice and hearing, to revoke or suspend

any permit or llcense issued to the pÉrson only if the comptroller finds that a person fails to

complywith any provìsion of this title orwith a rule of the comptrolleradopted underthistitle.

The Comptroller alleges that the notice is being issued due to Relator's "for failure to

pay the amount due of $73,600,67 for the (audit) periods September 1, 2005 to April 30, 2009.

Relator maintains that the request for payment prior to the establishment of its debt is unlawful

pursuant to the provisions of Tex. Tax Code Ann. S 111,0081 (c) (See fn. 1).

n

$ I t t OOqZ Srxpension and Revocfltion of Pennit or License

(a) If a person fails to comply with any provision of this title or with a rule of the complroller adopted under this

title. the compholler, afler a hearing, m ay revoke or suspend any perm it or license issued to the person.

þ) A person whose pemil or lioense the comptrolìer proposes io revoke or suspend under thls seclion is entltlcd

to 20 days' wrilten notice of the tjme and place of the hearing on the revocation or suspension. At the hearng the

person must show cause why each permit or license should not be suspended or revoked,

(c) The compfoller shall give written notice of the revocation or suspension of a permit or license to the holcler of

the permit or license . (d) Notrces under this seclion may be servecl on the holder of the permit o¡ license personally

or may be mailed ,c the hoklerrs acldress as shown in thc records of the comphoììer.

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ln the absence of a final decision in the redetermination hearing, no tax has yet been

imposed and no tax is "due and payable" upon which a delinquency may be predicated.

Accordingly, the requast for payment prior to a final decision and subsequent delinquency is

ultra vires and in excess of the Comptroller's statutory authority, Sfafe v. Crawford, 262

S.W,3d 532, 540 (Tex.App.-Austin 2008, no pet.) (evidence was insufficlent to conclusively

establiEh that [Taxpayers] "willfully fail[ed] to pay or cause to be paid th6 tax," because tha tax

amount had not yet become due); see a/so Loga/ v. United Sfafes, 195 F,3d 229,232 (Sth Cir,

1 99s).

The Comptroller's Decísion Has Been Vdcated

Appellants have filed a petition for judicial review pursuant to Tex, Gov't Code g$

2001,7310 and Tex, Gov't Code S 2001 .17411 in CausE No, D-1-GV-10-000902 in the gSth

District Court of Travis County, Texas for a de novo hearing to determine the validity of the

deficiency assessments sought to be collected by the Comptroller in the contested

proceeding. More importantly, because the only question before the District Courl concerns a

matter of statutory construction, the review of the court's construction of the relevant statutes

is de novo. See Clfy of ,San Antonio v. City of Boerne, 11 1 S,W,3d 22,25 (Tex. 2003).

Further, in suits filed pursuantto Tex, Tax Code Ann, $111.010, officers and directors

are entitled to a fuli and complete hearing on their tax liability in district court. See Tex, Tax

Code Ann, $ 111.010 lWest 2008) (authorizing attorney general to file suit to recover taxes).

The case is tried de novo. Greene v. Sfafe, 324 S,W,3d 276,288 (Tex,App.-Austin 2010, no

pet,) (1'11,010 allows for a de novo review of the party's tax liability),Herrera y. ,Sfafe, N0.03-

01-00101-CV,2002 WL 185470, at *1 n. 4,2002 Tex.App,,-Austin Feb.7,2002, no pet,) (not

to g

200i173 Gov'T. Triol De Novo Rçview

(u) If

the mrrnner of ¡eview nuftorized by law for the decision in n contested cuse thnt is the subject of complnint is

by trinl de novo, the revierving court shnll try ench issue of fnct and lew in the ln€rnner that npplies to othe¡ civil

suits rr this state as though there hacl not been an intervening agency action or decision but may not aclmit in

eviclence the lact of prior state agency action or the nature of that action 0x00pt io the limitecl cxtent necessâry to

show cornpliance with stâtutory provisions that vest jwiscliction in the cou¡t,

t' GOV'T Review Under Substantial Eviclence Rule or Undefned Scope of Review

$ 2001 174

Il the law authorizes revie"v of a cle cision r-n a contcsted case under the substântial evidence rule or ilthe law does

not deline the scope of .ludrcral revier,v, a cowl may not substitute its.ludgment lor the judgment of the statÉ

agenc)¡ on the werght of the eviclence on questions committed hr agency cliscretion but: (1) may affirm the agency

decrsion ul whole or lr partl and (2) shaìl reverse or remand the case for fwlher proceeclurgs ilsubstantial rights ol

the Relator have been preludrccd because the aclminislratrvc furclings, inferences, conclusions, or rlecisions are:

(A) rn vioìation of a constrtutional or statutory provision; @) in excess of the agencyrs stafulory authority; (C)

rnacle tluough unlawful proceclurel (D) aflected by other error of law; @) not reasonably suppofted by substantial

eviclence considering the ¡e liable and probative evidence ln the record as a whole: or (F) arbrrary or capricious or

characænzecl by abuse of dlscretron or clearly unwar¡anted exercise of cìiscretlon.

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designated for publication) (identifying suit under section 111,010 as "de novo action by the

State to collect delinquent tax").

The Administrative Procedure Act (APA) provides that when "the manner of review

authorized by law for the decision in a contested case .., ls by trial de novo, the reviewlng

court shall try each issue of fact and law ,,. as though there had not been an intervening

agency action or decision," Tex, Gov't Code Ann, $ 2001,173(a) (West 2000). A de novo

hearing has been defined as "a new and independent action in which the whole case is gone

into as if no trial whatever had been had in the court below," Trial de novo is not an "appeal",

but is a new and independent action. Key Western LifE lns. Co. v. Sfafe Ed. of /ns,, 350

S,W,2d 839,846 (Tex. 1961),

The sine qua non of a de novo trial is the nullification of the judgment or order of the

first tribunal and a retrial of the issues on which the judgment or order was founded, When

jurisdiction of the second triþunal attaches, the judgment or order of the first tribunal is not

fexas Dept. of Public Safirfy v. Banks Trensp, Co,, 427

merely suspended, but is nullified.

S.W.zd 593, (Tex.Sup. 1968); Southern Cenel Co. v. Stafe Bd. of Weter Engineers,318

S,W,2d 619; 159 Tex.227 (Tex. 1958). Accordingly, "res judicata" and "final judgment" are

ínapplicable in de novo proceedings because the original administraiive order that is the

subject of appeal is nullified in a de novo procÉeding. Sfafe Bd. of lns. v. Republic Nat'l lns,

Co., 384 S,W,2d 369, 372 (Tex,Civ,App, Austin 1964, writ ref'd n,r.e.),

-

The filing of this Petition operates to vacata the Comptroller's Decision pursuant to

Tex, Gov't Çode $ 2001.176 (b)(3)'2, because trial de novo is the manner of review authorized

by law for suspension of limlted sales, excise and use tax permits,ls Accordlngly, the

t'

I ZOO1 . 1 76 GOV'T, Petition Initiating Judicial Rev iew

(a) A person ultiates ludrciaì review in a conte sted case by liling a petition not latcr than the 30th clay after the

date on which the clecision that is the sublecl ol complaint is linal ancl appealable.

(b) Unless otherwise providcd by statute r

(1) the petitton must be frled in a Travis CoLurly clistrrct court;

(2) a copy of the petition must be served on lhe stale agoncy and each party of record tr the proceedings belorc the

agency; and

(3) the fiìing oi lhe pettlion vacates a stâte agency clecision for which lrial de novo is the manner ol review

authorizecl by law but does not af,lect the enforcement of an agency decision for which another manner olreview

is aulhorized.

tl g t OZ OOZ TAX Enlorcement ol License Cance llatron, Suspension, or Relusal

(c) An appeal lrom an orcler of the comptroller cancelurg or suspending or refusing the issuance or reissuance of a

Iicense may be taken lo a clisfict cou¡t ol Travis Courity by the aggrieved license holder or applicant The trial

shall be cìe novo u¡rder the same rules as ordinary clvil suits, except that: (l) an appeat must be perlected and fited

within 30 clays altrr the elfective dat¿ of the order, decision, or rulurg of the complroller; (2) lhe trial of the case

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Comptroller's Decision has not become final and can therefore not form the basis for the

collection of the tax deficiencles sought to be recovered by the show cause order.

CONCTUSION

The Notice of Hearing to Cancel Relator's sales tax permit or to require the posting of

bond are in violation of autornatic stay imposed by the interlocutory appeal pending before this

Court in Case No. 03-11-00462, Further, there is no final order upon which io request payment

of the alleged tax assessment, because the Cornptroller's decision has been vacated byvirtue

of the putative class action suit pending before the 98rh Judicial District Court in Travis County

Texas, seeking de novo review of the Comptroller's decision. Finally, the Notice of Hearing to

Cancel, prior to entry of a final judgment, is ultra vires and in excess of the Comptroller's

statutory authority, because she cannot collect on delinquent taxes until 20 days after her

decision becomes fínal, Her decision cannot become final until the issues relating to the

judiciai review or finally determined.

PRAYER

WHEREFORE, PREMISES CONSIDERED, Appellants request this Court of Appeals

to lift the automatic stay imposed in this case for the limited purpose of reviewing the issues

raised by this motion under lts authorlty pursuant to Tex, R. App, P, 29,6, and declare the

Appellants rights pending the appeal of the Comptroller's order suspending Appellants' sales

tax permlt and to enjoin Susan Combs, in her official capacity as Comptroller of Public

Accounts, from engaging in further enforcement activities pending resolution of the underlying

Motion for Declaratory Judgment and Temporary lnjunction and the pending interlocutory

a ppea l.

Alternatively, to lift the automatic appeal for the limited purpose of authorizing the trial

court to declare the Appellants rights pending the appeal of the Comptroller's order

suspendlng Appellants'sales tax permit and to enjoln Susan Combs, in herofficialcapacity as

Compirollar of Public Accounts,from engaging in further enforcemant activities pending

shall begtn rvithul 10 ciays after tts filt-trg; ancl (3) the order, decísion, or rulng of the comptroller may be

suspencled or modifie d by th-e cowt pending a t¡ial on the rnents

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r€solution ôf the underlying Motion for Declaratory Judgmsni and Temporary lnjunction and

the pending interlocutory tppÊât.

Respectfulfy su þmÌtted,

f,a.w Offie of

Samueft tøcft¡on

PO Box 170030

Arlingtorr, TX 76003-063s

Tel: (817) 751-71s5

Fax. 866-374-0164

ATTORN FOR

T. Jackson

Texas Bar No. 1049570

CERTJFICATE OF C OMPI,IAN C-E

Irr compliance with Texas Rules of Appeliate Procedure 51,10, Appellanu cetiff

by the sþature above, that they have notified or made ¿ clìligent efff,brt to notify the

parties or thei¡ representatrves, by expedited mean$, to advi¡e them that a motion for

temporary relief has been or wif be fiIed with Relators' Petitiorr for Writ of Mandamus.

tg_ Sunu¿tt Jací¡sn

SAMUBL T. JACKSON

TE F

In compliance withTex. R. App.P. 10.1 (a) (5), counsel fut the Appellanh certifies

by his sþature above, that he hæ confer¡ed with counsel for the real parties ín inerest,

and was advised that the real partiæ fur interest oppose the relieflrequested in thís motron.

tst_ Samuetl. Jøcfr¿on

SA]VTIIEL T. JACKS OI.\T

23 lPage

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CERTIFICATE OF SERVICE

I hereby certi$' by my signahue above that a true and ccrrect copy of the above and

foregoing instrument wâs served on the parties or their attorneys via facsimjl€, certi-fi.ed

mail, rerutn receiptrequested, and/ar hand delivery onAprü 1,5,2012, in accorda"Ece with

the Texas Rules of Appellate Procedure, to the following:

JACK HO}TENGATTEN

istant Attorney GenEral

,Ass

FD{AN CTA], LITIGATTON ÐTViSION

P.O. Box 12548

Austin, TX787tt-2548

13L; (512) 475-3503

FAX: (512) 47 t -2348 / 480-8327

Email: j ack,hohelgprten@oag,state,ü,¡s

ATTORNEY F OR RTSPONDEI\TS

24lPuge

Mofion for EmergencyRelief to Lift Autom¿tic Stay for Lirnif¿d Purpose

Tab C

Plaintiff’s Original Petition for Judicial Review, Declaratory

Judgment, Temporary Injunction and Request for Disclosure,

No. D-1-GN-13-004352, Sanadco Inc. v. Hegar, in the 200th

Judicial District Court, Travis County (“Sanadco II”).

Appellees’ Responsive Brief page 3

Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

1212712013 6:02:24 PM

Amalia Rodriguez-Mendoza

District Clerk

fravis Gounty

D-1-GN-13-004352

D-1-GN-13-004352

CAUSE NO,

SANADCO INC, A TEXAS CORPORATION, S IN THE DISTRICT COURT

AND MAHMOUD AHMED ISBA s

PIointffi, s

s

s

VS s

s

SUSAN COMBS, IN HER INDIVIDUAT s TRAVIS COUNTY, TEXAS

AND OFFICIAT CAPACITY s

AS COMPTROTLER OF PUBLIC ACCOUNTS, s

s

OFFICE OF COMPTROTTER OF PUBLIC s

ACCOUNTS FOR THE STATE OF TEXAS, s

s

AND GREGGABBOTT IN HIS OFFICIAT s

CAPACITYAS ATTORNEY GENERAL OF s

THE STATE OF TEXAS s

2OOTH

Defendants s luDrcrAt DISTRTcT

PTAINTIFFS' ORIGINAT PETITION FOR JUDICIAL REVIEW, DECTARATORY

IUDGMENT, TEMPORARY INJUNCTION AND REQUEST FOR DISCLOSURE

COME NOW SANADCO INC. and MAHMOUD AHMED ISBA, Plaintiffs, who file this

Original Petition for judicial Review, Declaratory f udgment and Temporary Injunction from

a pending Comptroller's Decision in a contested case proceeding before the State Office of

Administrative Hearings, complaining of SUSAN COMBS, in her individual and official

capacity as Texas Comptroller of Public Accounts, and GREG ABBOTT, in his ofïicial capacity

as Texas Attorney General f"Defendants"), and for cause would respectfully show the

following:

I.

DISCOVERY CONTROL PT-AN

1,. Plaintiffs desìgnate this case as a Level 3 case requiring a discovery control plan

tailored to the circumstances of this particular suit pursuant to Texas Rule of

Civil Procedure 190,4

II.

REQUEST FOR DISCLOSURE

2. Pursuant to Texas Rules of Procedure 194, Plaintiffs request that Defendants

disclose, within 50 days of service of this request, all of the information or material

described in Rule 794.2.

III.

PARTIES

3. Sanadco Inc., Plaintiff, is a private Texas Corporation, duly organized and existing

under the laws ofthe State ofTexas, engaged in the operation ofa convenience store

whose principal place of business is located at 3801 East Rosedale St., Fort Worth,

Texas 761,05-1,732,and whose Taxpayer No. is

4. Mahmoud A. Isba, Plaintiff, is an individual who resides in Arlington, Tarrant County

TX and operates the convenience store owned by Sanadco Inc.,located at 3801 East

Rosedale St., Fort Worth, Texas 76105-7732, and whose Taxpayer No. is

5. Defendant, Susan Combs [hereinafter referred to as ["Comptroller"), joined herein

as a necessary party in her and official capacity as Texas Comptroller of Public

Accounts, and in her individual capacity for purposes of certain of Plaintiffs' claims

that certain described actions as set forth below are ultra vires and she was acting

beyond the scope of her lawful authority. Susan Combs is a public official who is

charged with the collection of Limited Sales, Excise and Use Taxes pursuant to the

Texas Tax Code and may be served by personal service aT 1,1,L East l-7th Street,

Austin, Texas 7877 4.

6. Defendant, Gregg Abbott in his official capacily as the Attorney General of Texas,

joined herein as a necessary party in his official capacity, is a state agency as defined

by Tnx, Gov'r, Conn Aruru. g2_t01!03 [7), having statewide jurisdiction which makes

rules and determines contested cases and may be served by personalservice ar.209

West 14th Street, Bth Floor, Austin, Texas 7870L.

-2-ll':r¡1rl

tv.

JURISDICTION AND VENUE

7. This is an action seeking declaratory and injunctive relief from a contested case

proceeding pending issuance of the Comptroller's Decision before the State Office of

Administrative Hearings (SOAH) against Sanadco, Inc,, and Mahmoud Ahmed Isba

in SOAH DOCKET NO. XXX-XX-XXXX.26, TCPA HRG No. 1,04,445, and SOAH DOCKET

N0. 304-13 -4212.26, TCPA HRG No, 707,006, respectively, and joined for the sake

of efficiency, [Exhibit A)

B, This court has subject matter jurisdiction to determine the validity of AP 92 and AP

I22, and enter declaratory relief pursuant to TEX, GOV'T. CODE ANN, [2.00L03B,

wherein sovereign immunity has been waived when it is alleged that a rule or its

threatened application interferes with or impairs, or threatens to interfere with or

impair, a legal right or privilege of the plaintiff,

9. This Court has subject matter jurisdiction pursuant to the Uniform Declaratory

Judgments Act, TEX, CIV, PRAC. & REM. CODE ANN, S 37.00L et seq,, by which

sovereign immunity has been waived and authorizes Plaintiffs to obtain a

declaration ofrights, status, or other legal relations affected by a statute; and against

a state official who engages in ultra vires acts without legal or statutory authority,

or refuses to perform a purely ministerial act. City of EI Paso v. Heinrich, ¿84 SJ ¿.3d

366 370 [Tex. 2009).

10, This Court has subject matter jurisdiction pursuant to TEX. GOV'T CODE ANN. SS

T\ALLI1, ZOfl_UZ3 and 20t1.J74, seeking judicial review from a pending final

decision in a contested case before the State Office of Administrative Hearings. Seq

Lindig v, !ohnson Cit"v. 03-08-00574-CV (Tex. App.-Austin 70-21"-2009). (a

premature petition for judicial review may be cured if there is a claim over which

the court obtained juriscliction under its general jurisdictional authority,)

11. This Court has subject matter jurisdiction pursuant to TEX. CONST. AßIJ-S-I=!..

V,

SUMMARY OF FACTS

72. On August 17 , 2004, after the Comptroller became aware of lack of uniformity in

convenience store audits, she issued a policy memorandum implementing new

procedures for convenience store audits entitled Audit Policy 92lAP92 )[Exhibit B),

-3-lí):r¡1r:

directing all auditors, inter alia, to conduct a shelf test during convenience store

audits if the taxpayer is still in business, and use the percentages designated in AP92

as the mark-up for beer and tobacco products if the records of a convenience store

are "unavailable, inadequate, or unreliable" and if the actual mark-up percentage

could not be ascertained by other means.

13. Effective September l, 2007, the Texas Legislature enacted legislation directing

each wholesaler or distributor of beer, wine, malt liquor or tobacco products to file

a report with the Comptroller detailing the monthly net sales made to the retailer

by the wholesaler or distributor, including the quantity and units of beer, wine, malt

liquorand tobacco products sold to the retailer. [Tex. Tax Code S 151.433 [b) [4)t

and Tex. Tax Code S 155.105.2 The data provided as a result of the legislation is

commonly referred to as HB 1,1, data, but no directives regarding its use

accompanied the legislation. The first reports became available on January 1, 2008.

L4, After HB 11 became effective, the Comptroller revised APg2 with APL 22 (Exhibit C),

effective luly 22,2009, by revising the audit procedures and determination of mark-

up percentages and incorporating H811, instructing that this data must be the

starting point for all convenience store audits whether used as internal control

verification or as data used to estimate the audit,

r t S t.+ll. Reports by Wholesalels and f)istr'ibutors of Beer, Wiue, and Malt Liqrrcr

ç

(b) The comptroller may, when considered necessary by the cornptroller tbr the adrninistration of a tax under this

clrapter, require each wholesaler or clistributor of beer, wine, ol rnalt liqnol to file with the cornptroller a report each

nronth <lfsales to retailers irr this state,

(c) The wholcsaler or distributol shall file the leport on or before the 25th day of each mouth. The leport rl.rst

,0. fu tlowing infc¡r'mation tìlr the preceding calerrdar rnonth's sales in lelation to each retailer:

:ollrnt"

(4) the monthly net sales made to the retailer by outlet by the wholesalel ol distlibutor, including the quautity and

runitsof beer, wine, and rnalt liquol sold to the retailer.

2

ç tSS.tOS Reports by Wholesalels and Distributors of Cigars and Tobacco Products

(a) The cor.nptroller rnay, when considered necessary by tlre cornptlollel for the adrninistlation of a tax undel this

chapter, reqnire eachwholesalel or distributor of cigals and tobacco prodncts to hle with the comptroller a leport

each month of sales to letailers in this state.

(b) The wholesalel ol distribut<lr shal1 filc the repolt on or before the 25th day of each month, The report must

the folklwing inforrnation for the precedilg calcntlar rnonth's salcs in relatiorr to each lctailcr

î,rl?-

(4) tbc rnonthly nct salcs madc to thc lctailcr by thc wholcsalcr or distributor, inchrdingl

(A) thc quattity and units ofcigals aniJ tobacco prodncts sold to thc rctailcr; and

(R) for cach nnit of tobacco products othcr than cigars, thc nct wciglrt as listcd by thc manufactulcr.

4-lirrr¡ti:

15.The Comptroller is statutorily authorized to conduct a detailed audit of selected

convenience stores throughout the state, and upon a determination that the store

records are inadequate or insufficient, to conduct a sample and projection audit and,

in the absence of any records, may utilize the best information available.3

16, The Comptroller subsequently notifies Plaintiffs that they have been assessed a

deficiency determination, including interest, and, if proven by clear and convincing

evidence, an additional 50% fraud penalty and/or an additional 10o/o jeopardy

determination penalty which becomes due if the deficiency is not paid on or before

the assessment becomes final, but tax liens may be immediately attached to the

subject property.

17. Plaintiffs must file a Request for Redetermination with the Comptroller within 20

days of the date of the notice or the assessment becomes final and immediately due.

1-8.If the Comptroller denies the redetermination, Plaintiffs may request a hearing

before the State Office of Administrative Hearings, and, if aggrieved by that

determination, may request a rehearing followed by suit in District Court in Travis

County, Texas. If no rehearing is requested, the tax assessment becomes a final

judgment.

19. Plaintiffstimely fìled a request for redetermination and a hearing was held before

the SOAH on September 9, 20!3, (Exhibit D), but the ALJ requested post-hearing

briefs from both parties. Plaintiffs filed their brief on October 6,2013 (Exhibit E),

the Comptroller filed her response on November 4,20'L3 fExhibit F), and the

3

ç t t t.OO+2. Sampling in Auditing; Projecting Assessments

(b) Sampling auditing methods are applopriate it-:

(1) the taxpayer's lecords arc so detailed, cornplex, or volurninous that an audit ofall detailed records would be

tunreasonable or implactica l;

(2) the taxpayer''s records ale inadequate ol insufÏcient, so that a cornpetent audit for the peliod in question is not

otherwise possible; or'

(3) the cost ofan audit ofall cletailed recolds to the taxpayer or to the state will be unreasonable in relation to the

benefìts derived, and sarnpling proccdures will ploduce a reasonable result.

(c) Bcfore usìng a sample techniqle to establish a tax liability, the cornptroller or his designee must notif,i the

taxpayer in writing of the sampling pt'ocednre fo be nsed.

(<J) The sarnple tnust reflect as ucarly as ¡rossible the normal conditions under which the busincss was opelate<J

<luring the period to which the auclit applies. If a taxpayer can demonstr¿rte that a transaction in a sarnple peliod is

not rcpl'cscntativc of thc taxpaycr's busincss opcrations, thc transaction shall bc olirninatcd h'om thc sarnplc and bc

sopalatcly asscsscd in thc audit, Ifrccords arc inadr;quatc to lcflcct accuratcly thc busincss opcrations ofthc taxpaycr,

thc comptrollcr or his dcsignoc shall dctclminc thc bcst information availablc ar.rd basc his audit rcport on that

information.

-5-li:':¿1r:

Proposal for Decision was issued on December 12, 2003 (Exhibit G), but no

Comptroller's Decision has yet been issued.

V.

RETIEF SOUGHT

20. Plaintiffs, Sanadco, Inc, and Mahmoud Ahmed Isba are engaged in a contested case

proceeding in the State Office of Administrative Hearings regarding an alleged sales

and use tax deficiency in Docket Numbers XXX-XX-XXXX.26, and XXX-XX-XXXX.26

respectively.

2l-.Plaintiffs seek to void the underlying audit, alleging that the auditor acted

fraudulently by his unauthorized use of AP 92 and AP L22 as well as HB 1-1 despite

the recent Third Court of Appeals opinion that these documents were "invalid rules"

and therefore void and unenforceable because they were not formally adopted

pursuant to the mandatory provisions of the Administrative Procedures Act. See,

Sanadco, Inc. v. Comptroller of Public Accounts, 03-1t00462 [Tex. App. -Austin

2013); LEXIS 12073 at *13 (Tex. App,-Austin Sept 26, 2013). [Exhibit H),

22. Plaintiffs also seek to void the underlying audit, alleging that the Comptroller

engaged in ultra vires conduct by failing to perform the purely ministerial act of

promulgating AP 92 and AP I22 as administrative rules, and subsequently acting

without legal authority by implementing the illegal and unauthorized memos as

agency poliry and procedure.

23. Plaintiffs further seek to void all instances in which the Comptroller imposed the

additional 50% fraud penalty upon the mere finding of "underreporting" instead of

the statutorily required finding of fraud or willful intent to evade the tax. In doing

so, the Comptroller has engaged in conduct in excess of her statutory authority by

substantially reducing her burden of proof and shifting that burden to the taxpayer

by requiring him to prove that his conduct was not willful or intentional. Plaintiffs

allege that this is ultra vires conduct and is outside the Comptroller's statutory

authority.

24. SOAH has acknowledged that the foregoing issues are beyond the jLrrisdictional

authority of the Administrative Law Judge and have therefore refused to address

them within the parameters of a contested case proceeding. See, Comptroller's

[TheALJdoesnothavejtrrisdictiontoconsider

-6-lí)r,r11c

whether Audit Policy Memorandums 92 and 722 constitute rules as defined by the

Administrative Procedure Act.); Comptroller's Decision No. I06,51,6 [2013)

(Petitioner also contends the 50% additional penalty should be cleleted because the

statute authorizing the additional penalties is unconstitr.rtional and because there

was no intent to evade the tax. However, it is well settled that neither the

Comptroller nor the ALf has jurisdiction to consider the validity of a statute.); See

also, Comptroller's Decision Nos. 1-0-3É.83, 103.96-l(2077), It4.445. 1.85,726

(2012).

25.In the absence of jurisdiction for SOAH to address these issues, which may be

determinative of the validity of the audit, Petitioners seek to have these issues

addressed by this Court under the authority of Tex, Gov't Code S 2001.038 together

with the authorities previously recited wherein this Court is granted jurisdiction to

determine the validity or applicabiliry of a rule beþre it is applied to the detriment

of this taxpayer, and beþre he has exhausted his administrative remedies,

COMPTI\INT I

The Comptroller engaged in ultra vires conduct because she failed or refused to

perform the purely ministerial act of adopting the memoranda designated as AP 92

and AP I22 as agency rules pursuant to procedures required by the APA, thereby

rendering the audits utilizing these procedures invalid and unenforceable,

26. Plaintiffs incorporate the preceding paragraphs by reference as if the same were set

forth fully and verbatim herein.

27.The Comptroller's memos implementing Audit Policy Memoranda 92 and 722 (tÊ-

92and /\PJJZ) effective August 17 ,2004, and July 22,2009 respectively, are agency

rules as defined by Tex, Gov't Code ç 200L.003* (6) o.fne use of these rules or their

threatened application interfere with or impair, or threaten to interfere with or

4

$ 2001.003 Definitions

In*thi.s cbapter

(6) "Rule":

(A) rneans a state agency statcmetrt of general applioability that:

(i) irnplements, intelplcts, or presclibes law or policy; or

(ii) <fcscribcs thc proccdurc clr practicc r'ccluircmcnts ofa statc agcucy;

(I3) inchrdcs thc amcndrncnt or rcpcal of a plior ntlcì and

(C) docs not includc a statcmcnt rcgalding only thc intcrnal managcmcnt or orgauization of a statc agcnoy and not

affcctiug plivatc liglrts or proccdnrcs.

7-li):titt:

impair, a legal right or privilege of the Plaintiff in that they subject Plaintiff to

potential loss of his business, his license, illegal tax assessments and subjecting his

property to liens and potentially to forcible sale.

28, The Audit Policy Memoranda regarding AP 92, AP L22 and HB L1 constitute agency

rules as defined by the Administrative Procedures Act (APA) because they are

statements of general applicabiliry relating to all convenience store audits; that

implemented agency policy to add uniformity to the audits; and described the

procedure or practice requirements of the agency by implementing the use of HB 11

and the percentages for mark-ups and product mixes incorporated in AP 92 and AP

722.

29.The Comptroller is charged with establishing methods for admìnistering and

adopting necessary rules for the collection of taxes and other revenues, Tex. Tax

Code Ann. S 111.002(a). Specifically, the Comptroller has statutory authority to

"adopt, repeal, or amend such rules to reflect changes in the power of this state to

collecttaxes and enforce the provisions of this title." Id,

30, A presumption favors adopting rules of general applicability through the formal

rule-making procedures the APA sets ouT. Rodriguez v. Serv. Lloyds Ins. Co., 997

S.W.2d 248, 255 [Tex. 1,999). These procedures include providing notice,

publication, and public comment on the proposed rule, 1d. [citing Tex. Gov't Code

Ann. SS 2001,.023-.030). The process assures notice to the public and affected

persons and an opportunity to be heard on matters that affect them. Id.

31.Unless a rule is promulgated and adopted in accordance with the requirements of

the APA, it is invalÍd and unenforceable. Tex. Gov't, Code Ann. SS 2-0f11-Q35,s

aq01.0!46 and Z0û1.,0057, Neither AP 92 nor AP I22 as it reìates to HB 1,7,were

5$ 2001.035. Substantial Compliance Requilernent; Tirne Lirnit on Pl'ocedulal Cìhallenge

(a) A rule is voidable unless a state agency ado¡rts it in substantial cornpliance with Seotions 2001.0225 tlirough

2001.034.

6S Adopt Rnles of Plactice and Index Rnles, Orders, and Decisions

2001 .004 Requilernent to

In addition to other leqniternents under'law, a state agency shall:

(l) adopt rules of practice stating the nature antl requircments of all available formal antl inft¡r'rnal ploocdules;

(2) index, cross-index to statntc, and rn¿rke available for public ir:rspection all lule s an<J other writtcn statcments of

policy ol intclplctations that alc plcparcd, adoptcd, or uscd by thc agcncy in discharging its flmctions; and

(3) iutJcx, cross-index to statute, anil rnake available for public inspeotion all final or<Iers, clecisions, aud opiuions.

7 Not Etfcctivc Until Indcxcd

$ 2001.005 Rulc, Ordcr, or Dccision

8-lí):,r¡1i:

ever adopted as mandated by the APA and are therefore invalid and unenforceable

when applied to convenience store audits.

,1 L. Plaintiffs seek a declaratory judgment against Susan Combs in her individual

and official capacities as Comptroller of Public Accounts for the State of Texas,

pursuant to Tex. Gov't, Code Ann, S 2-û01",038 and the Uniform Declaratory

Judgments Act, Tex. Civ. Prac, & Rem, Code Ann. S 37.001 et seq., which waive

sovereign immunity, declaring that the Compffoller's memoranda, designated as AP

92, AP 722 (incorporating HB 11J, are invalid administrative rules because they

were not adopted in accordance with the requirements of the APA found at Tex.

Gov't Code Ann, SS 2001.035 and 2001.004. EI Paso Hosp. Dist. v. Texas Health &

Human Servs. Comm'n,247 S.W.:1d799.774 {Tex.2008) [quoting Railroad Comm'n

v,WBD)il&GasCo.,L04 S.W.3d 69,79 (Tex.2003J);Combsv.EntertainmentPubl'ns,

I nc.,}92 S.W .3 d 7').2, 7 20 (T ex.Ap p.-Austin 20 09, no pet.),

COMPLAINT II

The comptroller acted ultra vires because she acted without legal authority by

implementing and enforcing 92, AP I22 and HB 11 before performing the purely

^P

ministerial act of adopting them as Rules in compliance with the nondiscretionary,

purely ministerial rule-making procedures mandated by the APA.

33. The Comptroller is charged with establishing methods for administering and

adopting necessary rules for the collection of taxes and other revenues, Tex. Tax

Code Ann, S 111,002[a). Specifically, the Comptroller has statutory authority to

"adopt, repeal, or amend such rules to reflect changes in the power of this state to

collecttaxes and enforce the provisions of this title." Id.

34. Suits to require state officials to comply with statutory or constitutional

provisions are not prohibited by sovereign immunity. Heinrich, ZB4-5l4lJd at372.

To fall within the ultra vires exception to sovereign immunity, a suit "must allege,

and ultimately prove, that the officer acted without legal authority or failed to

perform a purely ministerial act." ld. [citations omitted). "Thus, ultra vires suits do

not attempt to exert control over the state

- they altempt to reassert the control of

the state. Stated another way, these suits do not seek to alter government policy but

(a) A statc agcncy rulc, ordcL, or dccision rnadc or issucd on or aflcr Janttary I, 197 6, is not valid or cffcctivc against

a pcrsol'r or party, and rnay not bc invokcd by an agcncy, until thc agcncy has iudcxcd thc lulc, or<JÇr, or dcciskrn

and rnadc it availablc fur'public inspcction as rcqrtircd by this chaptcr,

(b) This sccticln docs not apply in favol ofa pcrson or party that has actual knowlcdgc ofthc rulc, ordcr, or clocision.

9-||rr;1i;

rather to enforce existing policy." ld.

35. Unless a rule is promulgated and adopted in accordance with the

requirements of the APA, it is invalid and unenforceable. Tex. Gov't. Code Ann. $$

2001-.035, 2007.004 and 2001.005. The Comptroller has no legal authority to

enforce agency rules before they are adopted in accordance with the APA, Such

adoption is mandatory and nondiscretionary, The Comptroller's failure to comply

with this ministerial, nondiscretionary act was therefore an ultra vires act. This

Court is respectfully requested to enjoin the use of AP 92 and AP 722 until they are

properly adopted as rules pursuant to the requirements of the APA,

36 Plaintiffs seek a declaratory judgment against Susan Combs in her individual

and official capacities as Comptroller of Public Accounts for the State of Texas,

pursuant to Tex. Gov't, Code Ann. S 2001.038 and the Uniform Declaratory

Judgments Act, Tex. Civ. Prac. & Rem. Code Ann. S 37.001 et seq., declaring that the

Comptroller is not authorized to estimate convenience store audits using the

methods prescribed by AP 92 or AP 722 until their proper adoption, and/or that the

authorization of their use is a non-discretionary ultra vires act committed without

legal authority which conflicts with relevant provisions of the Tax Code and the

Comptroller's administrative regulations. El Paso Hosp. Dist. v. Texas Heqlth &

Human Servs. Comm'n,247 S.W.3d 709,714 [Tex. 2008) (quoting Railroad Comm'n

v.WBDOil&GasCo.,I04 S.W,3d 69,79 (Tex.2003));Combsv,EntertainmentPubl'ns,

|nc.,292 S,W.3d 712,720 [Tex.App.-Austin 2009, no pet.),

COMPTAINT III

The Comptroller acted ultra vires and exceeded her statutory authority by

implementing HB11 without adopting it as a rule pursuant to the APA,

37. Plaintiffs incorporate the preceding paragraphs by reference as if the same

were set forth fully and verbatim herein.

38, By memorandum dated luly 22,2009,the Comptroller authorized the use of

HB 11 data as the starting point for convenience store audits because estimation

based on vendor records obtained from the taxpayer's suppliers and the assumption

of the product mix and industry percentages set forth in AP 92 and AP 122 would

satisfy the best information requirement, The Comptroller envisioned that: "The

availability of HB 11 data enables us to detail two major taxable product categories

[beer/wine, tobacco products) from fanuary 2008 forward, It allows us to use more

than one taxable product category to estimate/sample an audit."

-10-lilit¡r.r.'

39. There is no statutory provision or administrative regulation authorizing the

Comptroller to determine alcohol and tobacco sales by giving conclusive effect to

the HB11 data without first ascertaining whether that determination can be made

from the taxpayer's records. The Comptroller's memos of July 22,2009 (Exhibit B)

and September 2,2010 (Exhibit C) implementing HB11 are rules as defined by Tex.

Gov't Code S 2001.003 [6), The use of this rule or its threatened application

interferes with or impairs, or threatens to interfere with or impair, a legal right or

privilege of the Defendant by threatening loss of revenue or loss of property,

40. The memos implementing the use of HB 11 data constitute rules as defined

by the APA because they are of general application to convenience store audits, and

they implement and prescribe poliry and describe the procedure or practice

requirements for conducting estimated audits based on the information contained

solely in the HB 11 data.

41-. The authorization of such procedure is a non-discretionary ultra vires act,

and exceeds the Comptroller's statutory authority because she failed to perform the

purely ministerial act of promulgating the rule in accordance with the requirements

of the APA, and she was therefore acting outside her legal authority in authorizing

the use of the invalid procedure.

42. Plaintiffs seek a declaratory judgment against Susan Combs in her individual

and official capacities as Comptroller of Public Accounts for the State of Texas

pursuant to Tex. Gov't. Code Ann. S 2001.038, declaring that the Comptroller's

memos implementing HBl1 effective luly 22, 2009, and September 2, 201"0, are

invalid administrative rules because the Comptroller failed to satisfy the adoption

requirements of the Administrative Procedures Act (APA) found at Tex. Gov't Code

Ann $$ 2001.004,2001.005 and 2001,035; and the Uniform Declaratory f udgments

Act, Tex. Civ. Prac, & Rem, Code Ann. S 37.004 et seq., construing (Tex, Tax Code $

757.433 tb) t4) and Tex. Tax Code S 155.105, decìaring that these statutes do not

authorize the Comptroller to give conclusive effect to the HBl,1 data, and that the

authorization of its use for such purposes is a non-discretionary ultra vires act in

excess of her statutory authority which conflicts with relevant provisions of the Tax

Code and the Comptroller's administrative regulations, E1 Paso Hosp. Dist. v. Texas

Health & Human Servs. Comm'n,247 S.W.3d 709,774 (Tex. 2008) [quoting Railroad

Comm'n v. WBD Oil &- Gas Co, 104 S.W"3d 69, 79 [Tex. 2003)); Combs v.

Entertainment Publ'ns, 1nc.,292 S.W.3d 712,720 (Tex,App.-Austin 2009, no pet.).

COMPTAINT IV

11-|i)iritr'

The Comptroller acted ultra vires and in excess of her stâtutory authority when she

unilaterally established "gross underreporting" as an irrebuttable presumption of

proof to impose the additional 50%o penalty instead of proof of fraud or intent to

avoid the tax as required by Tex, Tax Code Ann. $ 111.061(b).

43. Plaintiffs incorporate the preceding paragraphs by reference as if the same

were set forth fully and verbatim herein.

44 Tex. Tax Code 8-'1-,11.061[b)u authorizes the Comptroller to impose a penalty

of 50% for fraud, or intent to evade the tax, in addition to the deficiency

determination. When the Comptroller seeks to impose a 50 percent additional

penalty it must show clear and convincing evidence of fraud or intent to evade tax.

TEX. TAX CODE Section 111.061(b) and 34 TEX. ADMIN. CODE Section 1.40[1) (B)

45. Fraud implies "bad faith, intentional wrong, and a sinister motive, and the

intent required to be showed is that there was specific intent to evade tax believed

to be owing." Comptroller's Decision No. 34,492Q997). The Comptroller, however,

has held on many occasions that "gross

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