sanadco-inc-a-texas-corporation-mahmoud-a-isba-aka-mahmoud-ahmed ( 2015 )

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; Walid 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, 98TH JUDICIAL DISTRICT
NO. D-1-GV-10-000902, HONORABLE TIM SULAK, JUDGE PRESIDING
MEMORANDUM OPINION
We grant the Comptroller’s motion for rehearing, withdraw our prior opinion and
judgment issued on September 26, 2013, and substitute in their place this opinion and judgment
affirming the district court’s dismissal 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 unauthorized 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 of jurisdiction. On
appeal, Sanadco challenges the dismissal of its counterclaims. We affirm 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 synopsis 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 § 151.025, and the Comptroller is
authorized to examine and audit the records of convenience-store owners, id. §§ 111.004, 151.025.
In addition, the Comptroller may use sampling and projection methods for estimating the amount
of taxes owed if “the taxpayer’s records are inadequate or insufficient.” Id. § 111.0042(b). Moreover,
if the Comptroller “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. § 111.008(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
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reports chronicling their sales to stores and listing the stores by name. Id. §§ 151.461-.462. Similarly,
the Tax Code authorizes the Comptroller to request wholesalers and distributors of tobacco
products to file the same type of reports. Id. §§ 154.021 (addressing cigarette sales), 155.105 (covering
non-cigarette tobacco products). The type of information required in these reports is commonly
referred to as H.B. 11 information because the reporting requirements were enacted by House Bill
11 (H.B.11) of the 80th legislature. See Act of May 3, 2007, 80th Leg., R.S., ch. 129, §§ 1-3, 2007
Tex. Gen. Laws 159, 159-62.
Once an audit has been performed, the store owner may request a redetermination
from the Comptroller within 30 days of receiving notice of the Comptroller’s assessment. Tex. Tax
Code § 111.009(a), (b). In addition, the owner may also request a hearing on the redetermination,
id. § 111.009(c), before the State Office of Administrative Hearings, id. § 111.00455. If no request
for a redetermination is filed within 30 days, “the determination is final on the expiration of the
period.” Id. § 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
under protest and file suit seeking their recovery.1 See id. §§ 111.104(b), (c), 112.051, .052; see also
In re Nestle USA, Inc., 359 S.W.3d 207, 211 (Tex. 2012) (protest, refund, and injunction suits
1
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 § 112.101.
This remedy additionally requires a showing that (1) irreparable injury will result to the applicant
if the 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. § 112.1011.
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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. § 111.105. A tax-refund claimant who
is dissatisfied with the decision may file a motion for rehearing, 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. § 112.151(a), (b), (c).
If pursuing a protest-payment suit, a taxpayer must file 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. §§ 111.104(c)(3), 112.051(b), (c).
Prior to the passage of H.B. 11, the Comptroller issued a memo 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 that “mark-up percentages and product mix percentages” were developed to be used in
audits “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. 11
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.
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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. 11 data. 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
penalties and seek statutory relief via a taxpayer refund or protest suit, see id. §§ 111.104, 112.151.
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 Comptroller’s collection of the taxes, compensatory damages, and attorney’s fees. Those
counterclaims were made against the Office of the Comptroller, Susan Combs2 in her official
capacity as Comptroller, and Greg Abbott3 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.4 Unlike Sanadco, the other named counter-
2
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.
4
For ease of reading, we will generally refer to all of the counter-plaintiffs as Sanadco.
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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.5
Regarding its counterclaims, Sanadco alleged eight complaints relevant to this appeal.
In its first counterclaim, Sanadco asserted that AP 92 and AP 122 are administrative rules that
were not promulgated in compliance with the requirements of the Administrative Procedure Act.
See Tex. Gov’t Code § 2001.038. Accordingly, Sanadco sought a declaration that those memos are
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 and thereby 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 asserting that “the Comptroller is not authorized to estimate convenience store audits
using the methods described in AP 92 or AP 122 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
5
Despite their participation in the administrative redetermination 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); Bell v. Moores, 832 S.W.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); see also Aetna Cas. & Sur. Co. v. Hillman, 796 F.2d 770, 774, 776 (5th Cir. 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).
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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. 11 information was improper and that
the governing statutes do not allow “the Comptroller to give conclusive effect to the HB11 data.”
In its fourth counterclaim, Sanadco alleged that the Comptroller improperly authorized
auditors to “use 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. 11 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 a 50% penalty without proof of fraud
or of an intent to avoid the tax as required by the Tax Code. See Tex. Tax Code § 111.061(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. § 111.0042. In its seventh
counterclaim, Sanadco alleged that the Comptroller engaged in an unconstitutional taking when he
improperly collected sales and use taxes. Lastly, Sanadco challenged the constitutionality of the Tax
Code provision authorizing the Comptroller to impose a ten-percent penalty if he believes that the
“amount due for a tax period is jeopardized by delay.” See id. § 111.022.
After Sanadco filed 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
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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. Pension Sys. v. Ferrell, 248 S.W.3d 151,
156 (Tex. 2007). Determinations regarding whether a trial court has jurisdiction over a case are
questions of law, which we review de novo. Texas Dep’t of Parks & Wildlife v. Miranda, 133 S.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-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.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 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 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.
Statutory prerequisites to taxpayer suits
The Tax Code waives the State’s immunity from suit, but only for specifically
enumerated taxpayer actions, each conditioning waiver on certain administrative or other
prerequisites to a taxpayer’s bringing a suit or claim thereunder. See Tex. Tax Code §§ 112.052
(protest suit), .101 (injunction suit), .151 (refund suit); Nestle, 359 S.W.3d at 211 (dismissing
mandamus cause for want of jurisdiction, where taxpayer sought declaration of constitutionality 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 112 for
considers whether the non-movant’s pleadings affirmatively demonstrate the trial court’s jurisdiction
over the challenged causes. See Texas Dep’t of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 226
(Tex. 2004). Counter-plaintiffs are the functional equivalents of plaintiffs with respect to whether
their claims confer subject-matter jurisdiction on the trial court. See, e.g., Smith v. Clary Corp.,
917 S.W.2d 796, 798 n.1 (Tex. 1996) (court must not only have jurisdiction over amount in
controversy but also must have subject-matter jurisdiction over counterclaim).
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refund, protest, or injunction suit). Regardless of the taxpayer’s claims, the only permitted taxpayer
actions challenging state taxes are “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 at 211.
In Nestle, the supreme court held that these three statutorily provided taxpayer suits
(along with their respective prerequisites to suit) are the only means by which a taxpayer may
challenge “the applicability, assessment, collection, or constitutionality” of a state tax. Id. at 209.
“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.’” Id. (quoting Tex.
Tax Code § 112.108); see also In re Allcat Claims Serv., L.P., 356 S.W.3d 455, 479 (Tex. 2011)
(“[S]ection 112.108 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 112 “allows no other actions to
challenge or seek refunds of the taxes to which it applies,” including declaratory-judgment actions.
Nestle, 359 S.W.3d at 209-10; see also Strayhorn v. Raytheon E-Sys., Inc., 101 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 the Comptroller. If Sanadco were able to pursue its counterclaims
“free of Chapter 112’s restrictions,” the State’s “entire tax collection scheme” would be disrupted.
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Nestle, 359 S.W.3d at 211 (“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 112 refund or protest procedures. However, Sanadco elected not to pursue either remedy.7
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 relief to 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.8
7
The third Chapter 112 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 the form of a protest suit and a refund suit. See Berry v. McDonald, 123 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 112.101 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.
8
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
11
Because Sanadco did not comply with the jurisdictional prerequisites of Chapter 112,
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.9 We need not
reach Sanadco’s issues about the trial court’s summary judgment because the Comptroller’s plea
to the jurisdiction was directed to all eight of Sanadco’s counterclaims, and our jurisdictional
determination is dispositive of all issues on appeal. See Tex. R. App. P. 47.1.
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
damage offsets against the monetary relief sought by the Comptroller. See Manbeck v. Austin Indep.
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 administrative and statutory procedures
already discussed—Sanadco’s counterclaims cannot be considered “properly defensive” or offsets
thereto.
9
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’t Ass’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. 2011)) (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.
Entertainment Publ’ns Inc., 292 S.W.3d 712, 723 (Tex. App.—Austin 2009, no pet.) (affirming trial
court’s denial of plea 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 of the administrative process and the
deficiency assessment had become final, the facts here are distinguishable from 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.
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__________________________________________
David Puryear, Justice
Before Justices Puryear, Henson, and Goodwin
Justice Henson not participating
Affirmed on Motion for Rehearing
Filed: March 25, 2015
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