Badger Tavern, L.P. v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And the Office of the Comptroller of Public Accounts of the State of Texas ( 2018 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-18-00291-CV
Badger Tavern, L.P., Appellant
v.
Glenn Hegar, Comptroller of Public Accounts of The State of Texas;
and the Office of the Comptroller of Public Accounts of The State of Texas, Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
NO. D-1-GN-17-003415, HONORABLE KARIN CRUMP, JUDGE PRESIDING
MEMORANDUM OPINION
This is an interlocutory appeal brought by Badger Tavern, L.P., complaining of the
trial court’s partial grant of the plea to the jurisdiction filed by the Comptroller of Public Accounts
and the Office of the Comptroller of Public Accounts (collectively, Comptroller). Badger Tavern
complains that its dismissed claim alleged a valid Administrative Procedure Act (APA) rule
challenge to a “pronouncement” by the Comptroller in the Texas Register that the Comptroller will
retroactively enforce its amended rule 3.722(i)(4), pertaining to the record-keeping requirements for
the collection of fees imposed on sexually oriented businesses. See Tex. Gov’t Code § 2001.038(a)
(authorizing rule-challenge suit); 34 Tex. Admin. Code § 3.722(i)(4) (Comptroller of Public Accounts,
Sexually Oriented Business Fee). We will reverse the trial court’s partial grant of the Comptroller’s
plea to the jurisdiction and remand the dismissed cause to the trial court for further proceedings.
BACKGROUND
Badger Tavern operates a Dallas strip club, which is subject to the payment of a
sexually oriented business (SOB) fee. See Tex. Bus. & Com. Code § 102.052(a) (“A fee is imposed
on a sexually oriented business in an amount equal to $5 for each entry by each customer admitted
to the business.”). This proceeding concerns the Comptroller’s 2017 amendments to its rule 3.722
that administers the SOB fee, specifically the record-keeping requirements to which SOBs are
subject. The amended rule provides: “Records required by the comptroller must be kept for at least
four years after the date on which the records are prepared, and throughout any period in which
any tax, fee, penalty, or interest may be assessed, collected, or refunded by the comptroller or in
which an administrative hearing or judicial proceedings is [sic] pending, unless the comptroller
authorizes in writing a shorter retention period.” See 34 Tex. Admin. Code § 3.722(i)(4).
Prior to 2017, the rule made no references to periods during which an administrative
hearing or judicial proceeding is pending, simply requiring records to be retained for at least four
years: “Records required by the comptroller must be kept for at least four years after the date on
which the records are prepared.” See 33 Tex. Reg. 4907 (2008), amended by 42 Tex. Reg. 219 (2017).
When the 2017 amendments were adopted and published in the Texas Register, they were
accompanied by the following statement from the Comptroller: “Retroactive application. One
commentator requested clarification on whether the Comptroller will apply the amendment
retroactively. The comptroller will apply the revised section [rule 3.722] to all pending and future
cases. . . . [T]he record-keeping requirement is a proper construction of the statute and articulates
what has always been the law since 2011, when the Legislature amended Tax Code, § 111.0041.”
2
See 42 Tex. Reg. 219, 223 (2017) (adopting amendments); see also Tex. Tax Code § 111.0041(b)
(“A taxpayer is required to keep records . . . for more than four years throughout any period when
. . . an administrative hearing is pending before the comptroller, or a judicial proceeding is pending,
to determine the amount of tax, penalty, or interest that is to be assessed, collected, or refunded.”);
Tex. Bus. & Com. Code § 102.056 (“The provisions of Subtitle B, Title 2, Tax Code [entitled
“Enforcement and Collection” of state taxes] apply to the administration, payment, collection, and
enforcement of the [SOB] fee imposed by this chapter.”). For the purposes of this litigation, Badger
Tavern refers to the Comptroller’s statement in the Texas Register that it will “apply the revised
section to all pending and future cases” as the Comptroller’s “retroactivity pronouncement.”
After the rule amendments were published, Badger Tavern filed a lawsuit against the
Comptroller seeking a declaration that the amended rule is invalid. See Tex. Gov’t Code § 2001.038(a)
(“The validity or applicability of a rule . . . may be determined in an action for declaratory judgment
if it is alleged that the rule or its threatened application interferes with or impairs, or threatens to
interfere with or impair, a legal right or privilege of the plaintiff.”). Badger Tavern’s live petition
alleged that it “lawfully discarded records in reliance on Original Rule § 3.722’s four-year retention
requirement but has now been subjected to a retroactive record keeping requirement” with respect
to a tax-protest suit that was already pending at the time of the rule’s amendment.
Badger Tavern’s live pleading asserted two “causes of action”: (1) the Comptroller
exceeded his statutory authority by promulgating a rule that requires retroactive record keeping,
and (2) the Comptroller’s record-keeping rule violates the Texas Constitution’s prohibition against
retroactive laws. See Tex. Const. Art. 1, § 16 (“No . . . ex post facto or retroactive law . . . shall be
3
made.”). The trial court denied the Comptroller’s plea as to the second cause of action but granted
the plea as to the first. Badger Tavern appeals the dismissal of its first cause of action.
STANDARD OF REVIEW
A plea to the jurisdiction challenges the trial court’s authority to determine the
subject matter of the action. Texas Dep’t of Transp. v. Jones, 8 S.W.3d 636, 638 (Tex. 1999).
Whether the trial court has jurisdiction is a question of law, Texas Nat. Res. Conservation Comm’n
v. IT–Davy, 74 S.W.3d 849, 855 (Tex. 2002), and we review the trial court’s ruling on a plea to the
jurisdiction de novo, Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 928 (Tex. 1998). In assessing
a plea to the jurisdiction, we begin by considering the plaintiff’s live pleadings and determine
whether the facts alleged affirmatively demonstrate that jurisdiction exists. Heckman v. Williamson
Cty., 369 S.W.3d 137, 150 (Tex. 2012). We may also consider evidence submitted to negate the
existence of jurisdiction, but we need not do so here because the underlying jurisdictional facts are
not disputed. See id. We construe the plaintiff’s pleadings liberally, taking all factual assertions as
true, and look to the plaintiff’s intent. Id. A plea to the jurisdiction must be granted if the defendant
affirmatively negates the existence of the court’s jurisdiction. Id.
DISCUSSION
In one issue, Badger Tavern contends that the trial court erred in granting the
Comptroller’s plea to the jurisdiction as to its first cause of action. Specifically, it argues that “the
retroactivity pronouncement in the Texas Register is a rule that may be challenged” and that the
trial court has jurisdiction to hear the merits of its statutory validity challenge to that “rule” in
4
addition to its constitutional validity challenge. As pleaded in its live petition, Badger Tavern’s
claim that the retroactivity pronouncement is invalid rests on its assertion that the “retroactive
imposition of record keeping requirements contravenes the specific statutory language” of the
Business and Commerce Code (which authorizes the SOB fee and delegates to the Comptroller the
authority to set by rule the record-keeping requirements) because “there is no language [in the
Business and Commerce Code] permitting the Comptroller to impose retroactive record keeping
requirements.” The Comptroller responds that (1) Badger Tavern did not plead in its live petition
that the retroactivity pronouncement was a rule and thus cannot appeal that unasserted claim;
(2) even if Badger Tavern’s pleadings could be construed to have given fair notice of that claim,
the retroactivity pronouncement does not constitute a rule under applicable law; and (3) in any
event, Badger Tavern is not making a true validity or applicability challenge but merely an “as
applied” or “application” challenge for which the APA does not waive the Comptroller’s immunity.
We first address whether Badger Tavern adequately pleaded its challenge to the
retroactivity pronouncement as a rule and whether the pronouncement constitutes a rule for section
2001.038 purposes. Our review of Badger Tavern’s live petition leads us to conclude that it provided
fair notice to the Comptroller of Badger Tavern’s challenge to the retroactivity pronouncement. See
Tex. R. Civ. P. 47(a) (requiring pleading setting forth claim for relief to contain “a short statement
of the cause of action sufficient to give fair notice of the claim involved”); Hays Cty. v. Hays
Cty. Water Planning P’ship, 69 S.W.3d 253, 258 (Tex. App.—Austin 2002, no pet.) (“Fair notice
under the rules is met if an opposing attorney can ascertain the nature and the basic issues of the
controversy from the pleadings.”); see also Creedmoor-Maha Water Supply Corp. v. Texas Comm’n
5
on Envtl. Quality, 307 S.W.3d 505, 512 (Tex. App.—Austin 2010, no pet.) (noting that appellate
courts construe pleadings liberally and look to pleader’s intent in determining whether plaintiff has
met initial burden of alleging facts that affirmatively demonstrate trial court’s jurisdiction). In the
“Factual Background” section of its live petition, Badger Tavern alleged that “[t]he Comptroller
provided in the Amended Rule § 3.722’s publication in the Texas Register that it will apply
retroactively.” Under the section entitled “First Cause of Action,” Badger Tavern made the following
relevant allegations:
• The Comptroller stated in the Amended Rule § 3.722’s publication that
the record keeping requirements track the requirements of Tex. Tax Code
§ 111.0041, which requires taxpayers to keep records for at least four years
or when an administrative hearing or judicial proceeding is pending. [citation
omitted]
• The Comptroller provided in the Amended Rule § 3.722’s publication in the
Texas Register that it will apply retroactively: “[t]he comptroller will apply
the revised section to all pending and future cases.” 42 Tex. Reg. 223 (2017).
This provision in the Rule publication is itself a Rule under the definition
of “rule” in Tex. Gov’t Code § 2001.003(6), because it is a “state agency
statement of general applicability that . . . implements, interprets, or prescribes
law or policy” and because it is a “state agency statement of general
applicability that . . . describes the procedure or practice requirements of a
state agency.” [citation omitted & emphasis added]
• The retroactive imposition of record keeping requirements contravenes the
specific statutory language. There is no language permitting the Comptroller
to impose retroactive record keeping requirements. . . . The statutes at
issue should not be construed to allow retroactive application absent a
plain statement of the Legislature’s intent to do so. [citation omitted &
emphasis added]
These allegations, construed liberally, include facts that sufficiently provided the Comptroller with
fair notice of Badger Tavern’s contention that the retroactivity pronouncement is an invalid rule
6
under the APA, and we conclude that the Comptroller’s contention that Badger Tavern is advancing
on appeal a previously “unasserted claim” is without merit.
We additionally conclude that the retroactivity pronouncement constitutes a rule
that is subject to challenge under section 2001.038. See Tex. Gov’t Code § 2001.003(6) (defining
“rule” to mean “a state agency statement of general applicability that: (i) implements, interprets, or
prescribes law or policy; or (ii) describes the procedures or practice requirements of a state agency”);
El Paso Hosp. Dist. v. Texas Health & Human Servs. Comm’n, 247 S.W.3d 709, 714 (Tex. 2008)
(concluding that commission’s cutoff date for submitting paid-claims data to determine Medicaid
reimbursement rates was “rule” because it interpreted and applied particular statute and affected all
hospitals receiving Medicaid reimbursements); Teladoc, Inc. v. Texas Med. Bd., 453 S.W.3d 606,
620 (Tex. App.—Austin 2014, pet. denied) (concluding that Texas Medical Board’s pronouncements
in letter sent to health-care business “are tantamount to amendments to the existing text of” rule);
Combs v. Entertainment Publ’ns, Inc., 292 S.W.3d 712, 721 (Tex. App.—Austin 2009, no pet.)
(concluding that letters Comptroller issued to fundraising firm constituted “rule” because they
informed recipients of how Comptroller would enforce and construe tax statute concerning who
is considered “sales agent”); Texas Alcoholic Beverage Comm’n v. Amusement & Music Operators
of Tex., Inc., 997 S.W.2d 651, 660 (Tex. App.—Austin 1999, pet. dism’d w.o.j.) (holding that
statements contained in agency memoranda were “rules” because they imposed binding instructions
affecting private rights of all similarly situated persons). As this Court has previously noted, the
supreme court has instructed us to consider the intent of the agency, the prescriptive nature of the
guidelines, and the context in which the agency statement was made when determining whether an
7
agency statement is a rule. See Entertainment Publ’ns, 292 S.W.3d at 722 (citing Texas Educ.
Agency v. Leeper, 893 S.W.2d 432, 443 (Tex. 1994)).
In this case, the retroactivity pronouncement is a statement by the Comptroller that
informs the public of the Comptroller’s intention to apply the new record-keeping requirement to
“all pending cases,” purportedly requiring persons with administrative or judicial proceedings
already pending on the date the rule was amended to have maintained records since the proceedings
began. The pronouncement is aimed at placing regulated SOBs on notice of the Comptroller’s
retroactive application of the amended record-keeping requirements and applies generally to all
SOBs involved in pending proceedings. While the pronouncement appears in the same publication
as the adoption of the amended rule itself, the pronouncement clarifies an ambiguity in the text of
amended rule 3.722—i.e., whether SOBs with already-pending administrative or judicial proceedings
on the date of the rule’s adoption must have kept records since the time those proceedings began or
whether they must keep records only from the date of the adopted new rule going forward. In other
words, the retroactivity pronouncement is a Comptroller statement that applies to all SOBs with
pending proceedings that interprets the new rule and prescribes the Comptroller’s policy with
respect to retroactive record keeping. Accordingly, the retroactivity pronouncement meets the
APA’s definition of a “rule.” See Tex. Gov’t Code § 2001.003(6).
We therefore turn to a consideration of whether Badger Tavern is making a proper
validity challenge to the retroactivity pronouncement. Section 2001.038 authorizes only actions
for declaratory judgment to determine either the “validity” or “applicability” of a rule “if it is alleged
that the rule or its threatened application interferes with or impairs, or threatens to interfere with
8
or impair, a legal right or privilege of the plaintiff.” Tex. Gov’t Code § 2001.038(a); see LMV-AL
Ventures, LLC v. Texas Dep’t of Aging & Disability Servs., 520 S.W.3d 113, 125 (Tex. App.—Austin
2017, pet. denied). Badger Tavern concedes that it is not challenging the “applicability” of the
rule but only its “validity.” The Comptroller responds that Badger Tavern’s contention that the
rule exceeds the Comptroller’s statutory authority is not a proper “validity” challenge but is, instead,
an improper “application” challenge, for which section 2001.038 does not waive immunity. See
LMV-AL, 520 S.W.3d at 124. We disagree with the Comptroller.
We glean from Badger Tavern’s live petition that its primary allegation is that the
Comptroller, as expressed in the retroactivity pronouncement, now requires SOBs with judicial or
administrative proceedings pending on the date of the rule’s amendment (including Badger Tavern)
to have kept records from the date that the proceedings began through the amendment date even if
the previous four-year retention requirement expired during that time, without any prior notice that
such records must be kept.1 It contends that the Comptroller’s statement that it will apply the new
rule retroactively—as manifested in the retroactivity pronouncement—exceeds the Comptroller’s
statutory authority, “contravenes the specific statutory language,” and “imposes additional burdens,
conditions, and restrictions in excess of or inconsistent with the statutory requirements.” It further
contends that the “statutes at issue should not be construed to allow retroactive application absent
a plain statement of the Legislature’s intent to do so.” These allegations that the Comptroller
promulgated retroactive rules in the absence of express statutory authority permitting such rules
1
Badger Tavern alleged in its live petition that “Plaintiff lawfully discarded records in
reliance on Original Rule § 3.722’s four-year retention requirement” and “is impacted by the
retroactive extension of the period for which records must be kept.”
9
constitute challenges to the validity of the rule at issue. See Office of Pub. Util. Counsel v. Public
Util. Comm’n, 131 S.W.3d 314, 321 (Tex. App.—Austin 2004, pet. denied) (“To establish the rule’s
facial invalidity, a challenger must show that the rule: (1) contravenes specific statutory language;
(2) runs counter to the general objectives of the statute; or (3) imposes additional burdens, conditions,
or restrictions in excess of or inconsistent with the relevant statutory provisions.”). We conclude that
Badger Tavern’s first “cause of action” alleges a proper challenge to the validity of the retroactivity
pronouncement. Accordingly, we sustain Badger Tavern’s sole issue.
CONCLUSION
We conclude that the trial court erred in granting the Comptroller’s plea to the
jurisdiction as to Badger Tavern’s first cause of action and, accordingly, reverse the trial court’s
partial grant of the Comptroller’s plea to the jurisdiction and remand this cause to the trial court
for further proceedings.
__________________________________________
David Puryear, Justice
Before Justices Puryear, Pemberton, and Bourland
Reversed and Remanded
Filed: September 11, 2018
10