In groundbreaking news, the Texas Third Court of Appeals has withdrawn its earlier opinion and issued a new opinion in the Hegar v. El Paso Electric Co. case. In the case, which has attracted widespread attention, El Paso Electric filed a refund claim with the Texas Comptroller for sales taxes that it had paid on transactions involving “telemetry units that are related to step down transformers,” which are pieces of equipment used to transmit electricity. In its initial redetermination request, which is required in Texas to challenge a denied refund claim, El Paso Electric cited the Texas sales tax manufacturing exemption as one of its grounds for challenging the refund denial. Specifically, El Paso Electric cited Texas Tax Code section 151.318(a)(4), which includes the term “telemetry units that are related to the step-down transformers” among a list of around fifty different items that are exempt from sales tax when used as part of the manufacturing process in Texas. The Texas Comptroller argued that, because El Paso Electric did not explicitly tie the telemetry units related to step-down transformers directly to the code section citation, El Paso Electric was barred from raising those claims during its administrative hearing. The administrative law judge agreed and overruled El Paso Electric’s claim that its telemetry units were exempt under Texas Tax Code section 151.318(a)(4). El Paso Electric then sued in Texas District Court, which overruled the administrative law judge and granted El Paso Electric’s refund claim. The Texas Comptroller later appealed, and the Texas Third Court of Appeals once again overturned the district court, ruling for the Texas Comptroller. This latest opinion withdraws the earlier Third Court of Appeals opinion and issues a new opinion.
This case is a huge win for Texas taxpayers because it means that taxpayers will not be strictly tied to extremely specific claims as set forth in a redetermination request. Currently, a taxpayer is required to “state fully and in detail each reason or ground” for the refund claim, and a similar requirement exists for challenges to assessments. Texas Tax Code section 111.104(c); 34 Tex. Admin. Code section 1.11(a). However, the preceding requirement is tempered because a taxpayer is also permitted to state “one or more general contentions that identify a category or categories of contested items or transactions.” 34 Tex. Admin. Code section 1.11(a). This en banc decision preserves this requirement and means that a taxpayer will still be permitted some latitude in its arguments before a Texas administrative law judge, so long as the taxpayer can tie its argument back to the general contentions in the redetermination request. It should be acknowledged, however, that a taxpayer must still state its claim with enough specificity and sufficient legal citations to allow the Comptroller to understand the taxpayer’s argument and to develop its own counterarguments for the administrative hearing, but taxpayers will no longer be required to present every conceivable argument in the redetermination request, as the original opinion in El Paso Electric would have required.
The Court’s latest opinion was issued en banc, meaning that the entire court ruled on the case rather than Texas’ customary panel of three justices. This fact makes the case even more important, and because the case was decided by the Third Court of Appeals in Austin, it is largely applicable to the entire state. Unless the case is appealed to and accepted by the Texas Supreme Court, this case is the law in Texas, and that is good news for Texas taxpayers.
Contact the Authors: Stephen Long and Jimmy Lucas