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Office of the Comptroller of Public Accounts for the State of Texas v. Farshid Enterprises, L.L.C.

Court of Appeals of Texas, Third District, Austin

April 13, 2017

Office of the Comptroller of Public Accounts for 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, Attorney General of Texas, Appellants
v.
Farshid Enterprises, L.L.C.; and Abul Hasnat, Appellees

         FROM THE DISTRICT COURT OF TRAVIS COUNTY, 200TH JUDICIAL DISTRICT NO. D-1-GN-16-000630, HONORABLE AMY CLARK MEACHUM, JUDGE PRESIDING

          Before Chief Justice Rose, Justices Goodwin and Bourland

          MEMORANDUM OPINION

          Melissa Goodwin, Justice

         The Office of the Comptroller of Public Accounts for the State of Texas; Glenn Hegar, Individually and in his Official Capacity as the Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of Texas, appeal the trial court's denial of their plea to the jurisdiction. See Tex. Civ. Prac. & Rem. Code § 51.014(a)(8). For the following reasons, we affirm the trial court's order denying appellants' plea to the jurisdiction with respect to appellees Farshid Enterprises, L.L.C. and Abul Hasnat's claims that challenge the constitutionality of sections of the Texas Tax Code to the extent that they seek equitable relief. We, however, reverse the trial court's order denying the plea to the jurisdiction with respect to appellees' remaining claims and dismiss those claims for lack of subject matter jurisdiction.

         BACKGROUND

         Farshid Enterprises owns and operates convenience stores, and Abul Hasnat is the president and sole officer of Farshid Enterprises. The Comptroller audited Farshid Enterprises's convenience stores for compliance with sales and use tax laws for the time period June 1, 2010 through April 30, 2014. Based on the results of the audit, the Comptroller made an assessment that included a 50% penalty. See Tex. Tax Code § 111.061(b)(1) (authorizing additional penalty of 50% of tax due if failure to pay was "a result of fraud or an intent to evade the tax"). The amount of the assessment was determined utilizing "H.B. 11 data" and a memo from the Comptroller to audit personnel that was entitled "AP 134." See id. § 111.008(a) (authorizing comptroller "to compute and determine the amount of tax to be paid from information contained in the [tax] report or from any other information available to the comptroller"); Sanadco Inc. v. Office of the Comptroller of Pub. Accounts, No. 03-11-00462-CV, 2015 WL 1478200, at *1-2 (Tex. App.-Austin Mar. 25, 2015, pet. denied) (mem. op.) (discussing relevant statutory scheme, auditing memoranda, and "H.B. 11 data" for sales and use tax audits). Farshid Enterprises requested a redetermination, see Tex. Tax Code § 111.009 (providing right to redetermination), and the contested case was referred to the State Office of Administrative Hearings. In his proposal for decision dated September 22, 2015, the administrative law judge recommended that the audit assessment be affirmed, and the Comptroller adopted the proposal for decision on December 2, 2015.[1]

         On February 11, 2016, appellees sued appellants challenging the audit and subsequent sales tax assessment. In their "First Amended Suit in Protest, Petition for Judicial Review, Declaratory Judgment, Temporary and Permanent Injunctions, " appellees sought judicial review of the Comptroller's decision under chapter 112 of the Tax Code and asserted claims under the Administrative Procedure Act, see Tex. Gov't Code §§ 2001.038, .171-.174, and the Uniform Declaratory Judgments Act, see Tex. Civ. Prac. & Rem. Code §§ 37.001-.011. Appellees alleged that AP 134 and the implementation of H.B. 11 were invalid rules and that the Comptroller had engaged in ultra vires actions. See Tex. Gov't Code § 2001.038 (authorizing declaratory judgment when "rule or its threatened application interferes with or impairs, or threatens to interfere with or impair, a legal right or privilege of the plaintiff"); City of El Paso v. Heinrich, 284 S.W.3d 366, 371-73 (Tex. 2009) (describing ultra vires doctrine). Appellees also challenged the constitutionality of Texas Tax Code sections 111.0042, 111.022, 112.051, 112.052, 112.101, and 112.108. See Tex. Tax Code §§ 111.0042 (sampling in auditing and projecting assessments), 111.022 (jeopardy determination), 112.051 (protest payment requirement), 112.052 (taxpayer suit after payment under protest), 112.101 (requirements before injunction), 112.108 (prohibiting other actions).

         Appellees' claims included that: (i) the audit was invalid and unenforceable because it utilized AP 134 that was an invalid rule; (ii) the Comptroller acted ultra vires when he implemented and enforced AP 134 and "HB 11" without adopting them in compliance with APA rule-making procedures; (iii) the Comptroller acted ultra vires when he "established 'gross underreporting' as an irrebuttable presumption of proof to impose the additional 50% penalty" under section 111.061(b) of the Tax Code, see Tex. Tax Code § 111.061(b), without adopting it in compliance with APA rule-making procedures; (iv) sections of chapter 112 of the Tax Code "mandating prepayment of assessed taxes, penalties and interest to invoke the trial court's jurisdiction" were "unconstitutional because they impose[d] unreasonable financial barriers to access to the courts" and violated the open courts provision of the Texas Constitution, see Tex. Const. art. I, § 13; (v) section 111.0042 of the Tax Code was "unconstitutionally vague as written and as applied to appellees, " see Tex. Tax Code § 111.0042; (vi) section 111.022 of the Tax Code was "unconstitutional on its face and as applied, " see id. § 111.022; (vii) claims against Hasnat based on his personal liability under section 111.0611 of the Tax Code must be dismissed because he was not joined as a party to the underlying administrative judgment, see id. § 111.0611 (addressing personal liability for fraudulent tax evasion); and (viii) "[t]he Comptroller has taken Plaintiffs' property for public use without just compensation" by collecting the taxes against appellees, see Tex. Const. art. I, § 17. Appellees sought declaratory and injunctive relief, damages, and attorney's fees as to their claims.

         Although they stated in their pleadings that a copy of the notice of protest was attached, appellees did not file a notice of protest with the Comptroller or pay the tax assessment prior to filing suit. See Tex. Tax Code § 112.051 (requiring payment and written protest that states "fully and in detail each reason for recovering the payment" prior to bringing taxpayer protest suit). Appellees asserted that the prepayment requirements of the Tax Code were unconstitutional and that they were financially unable to prepay the assessment prior to bringing their suit. To support this position, appellees attached to their pleadings an oath by Hasnat of appellees' inability to prepay the taxes. Appellees also argued that sovereign immunity was not implicated and that exhaustion of administrative remedies was not required to invoke the trial court's jurisdiction to consider their claims. Appellees cited sections 2001.038, 2001.171, 2001.173, and 2001.174 of the APA; the UDJA; sections 112.051, 112.052, 112.101, and 112.108 of the Tax Code; and article I, sections 13 and 17 of the Texas Constitution as support for the trial court's jurisdiction over their claims. See Tex. Const. art. I, §§ 13, 17; Tex. Gov't Code §§ 2001.038, .171, .173, .174; Tex. Tax Code §§ 112.101, .108, .051, .052.

         In their answer, appellants asserted a plea to the jurisdiction, including among their arguments that appellees' claims were barred by sovereign immunity, that chapter 112 of the Tax Code was the exclusive means available to appellees to challenge the audit and tax assessments against them, and that appellees had not complied with the jurisdictional prerequisites for bringing suit under chapter 112. After a hearing, the trial court denied the plea. This interlocutory appeal followed.

         ANALYSIS

         In two issues, appellants argue that the trial court erred when it denied their plea to the jurisdiction and that the trial court did not have subject matter jurisdiction to entertain challenges to the final tax assessment against them when the claims were presented under the APA and UDJA and not under chapter 112 of the Tax Code. Appellants contend that appellees were required to comply with chapter 112's jurisdictional prerequisites before filing suit to invoke the trial court's jurisdiction to consider their challenges to the audit and tax assessment and that appellees failed to do so.

         Standard of Review

         "A plea to the jurisdiction challenges the court's authority to decide a case." Heckman v. Williamson Cty., 369 S.W.3d 137, 149 (Tex. 2012). We review a plea questioning the trial court's subject matter jurisdiction de novo. See Texas Dep't of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 226 (Tex. 2004). We focus first on the plaintiff's petition to determine whether the facts that were pleaded affirmatively demonstrate that subject matter jurisdiction exists. Id. We construe the pleadings liberally in favor of the plaintiff. Id. If the plaintiff has not affirmatively pleaded facts to support jurisdiction or to negate jurisdiction, the matter is one of pleading sufficiency, and the court should provide the plaintiff with the opportunity to amend its pleadings to cure jurisdictional defects. Id. at 226-27. "However, if a plea to the jurisdiction challenges the existence of jurisdictional facts, we consider ...


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