Ryan & Company

The Comptroller of Public Accounts proposes an amendment to §3.2, concerning the application of payments, unjust enrichment, and refunds. The proposed amendment adds subsection (d) to implement House Bill 1, 78th Legislative Session, 2003, and establishes administrative and procedural guidelines for the appropriation of refunds.

Public Benefit/Cost; Fiscal Implications for state or local government, small businesses, and individuals.

Comments on the proposal may be submitted to Bryant K. Lomax, Manager, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711.

This new rule is proposed under Tax Code, §111.002, which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The new rule implements Tax Code, §111.0045.

§3.2. Application of Payments; Unjust Enrichment; and Refunds

(a) Payments received by the comptroller for application against existing liabilities will be credited toward the period designated by the taxpayer under conditions that [which] are not prejudicial to the interest of the State of Texas. A condition that [which] is considered prejudicial is the imminent expiration of the statute of limitations for a period or periods. Nondesignated payments shall be applied in the order of the oldest liability first, until the payment is exhausted. Crediting of a payment toward a specific liability period will be first against the tax, with any surplus used to pay off penalty and interest unless the comptroller determines that a different order of payment credit should be followed with regard to a particular tax or factual situation.

(b) Under circumstances where multiple type tax liabilities exist, such as city and state sales tax, payments will be divided proportionately between the taxes so that each tax shall share the payment on the basis of the amount due each tax.

(1) If amounts are collected as tax in transactions on which tax is not due, the comptroller will require, under the doctrine of unjust enrichment, that these amounts be remitted to the state or be refunded to the customers from whom they were collected.

(2) In the case of refunded amounts, documentary evidence must be retained establishing the transaction, the amount collected, the party from whom collected, the amount refunded, and the party to whom refund is made.

(d) Refunds and Appropriation.

(1) Limitation.

(A) During a state biennium, the comptroller cannot issue to any given taxpayer warrants for refunds in excess of $250,000 per tax type. A taxpayer may obtain a refund up to $250,000 per tax type from the comptroller, but must present any amount in excess of $250,000 to the legislature for a specific appropriation in order for the payment to be made or may request that the excess amount be applied as a credit as provided by paragraph (3) of this subsection.

(B) The limitation of $250,000 applies to each tax, fee, or other assessment collected or administered by the comptroller.

(C) Unless otherwise provided by this subsection, the limitation of $250,000 applies to all tax refunds that the comptroller determines are due, regardless of whether the refund is verified as a result of an informal refund review, an audit resulting in a credit, a final determination of a contested administrative proceeding, a final judgment of a court case, or a settlement.

(D) In determining whether a refund claim would cause a taxpayer to exceed the $250,000 limitation, the comptroller will consider all refunds, including tax, penalty, all applicable statutory interest on the tax, and any costs or attorney fees awarded by a court order, paid by the comptroller to the taxpayer for a tax type during the biennium.

(2) Exclusions.

(A) The $250,000 limitation does not apply to a payment made for the following:

(i) a court case where a judgment order of the trial court was entered prior to June 22, 2003, and no appeal or rehearing, or application therefor, is pending and the time period to file an appeal or rehearing has expired;

(ii) written settlement agreement executed by both parties prior to June 22, 2003; or

(iii) a Comptroller's final decision in a contested administrative proceeding issued prior to June 22, 2003, if the time period to file a rehearing or a petition in court has expired.

(B) Credits taken on returns. The limitation of $250,000 does not apply to the total aggregate credits taken on returns filed with the comptroller during a biennium. However, if a credit taken on a given return results in a net overpayment, then the $250,000 limitation applies to any potential refund amount.

(i) Refunds of unclaimed property under Title 6 of the Property Code;

(ii) Refunds resulting from a claim filed with the comptroller within 120 days of the due and payable date of the tax and verified and granted by the comptroller during the informal review process under Tax Code, §111.1042;

(iii) Refunds of inheritance tax under Chapter 211, Tax Code;

(iv) Refunds of motor fuel tax paid on motor fuel not used on Texas highways;

(v) Refunds resulting from a timely filing of an amended franchise tax report due under Tax Code, §111.206 and §171.212, as a result of an audit or adjustment made by the Internal Revenue Services;

(vi) Refunds for enterprise projects under Tax Code §151.429, for defense readjustment projects under Tax Code §151.4291, for job retention under Tax Code §151.431, for enterprise zone under Tax Code §171.501 or any other similar refund incentives based on economic development; and

(vii) Refunds made under Tax Code §111.109, pursuant to a voucher issued by the Texas Workforce Commission under Subchapter H, Chapter 301, Labor Code.

(3) Transfer of net credits among a taxpayer's accounts

(A) Informal review, audit or administrative hearing process.

(i) If a taxpayer has both a liability and a refund for the same tax type, the taxpayer may request that the comptroller apply the refund as a credit against the liability. If the refund exceeds the liability such that applying the credit results in a net refund of less than $250,000, then the comptroller may issue that net refund, subject to the aggregate $250,000 limitation per tax type for the biennium. For example, assume a taxpayer has a sales tax audit liability of $400,000 and a sales tax refund of $500,000. If the comptroller applies the refund as a credit to the audit liability, then the comptroller may issue a refund of $100,000, as long as the issuance of that refund will not exceed the $250,000 biennial cap for that taxpayer. If the refund would exceed the biennial cap, then the comptroller may issue any portion of the $100,000 that would not exceed the limitation.

(ii) If a taxpayer has both a liability and a refund for different tax types, the taxpayer may request that the comptroller apply the refund as a credit against the liability. If the refund exceeds the liability such that applying the credit results in a net refund of less than $250,000, then the comptroller may issue that net refund, subject to the aggregate $250,000 limitation per tax type for the biennium. For example, assume a taxpayer has a sales tax audit liability of $400,000 and a franchise tax refund of $500,000. If the comptroller applies the refund as a credit to the audit liability, then the comptroller may issue a refund of $100,000 in franchise tax, as long as the refund does not exceed the $250,000 limitation for franchise tax refunds.

(iii) If after the comptroller applies a taxpayer's refund to the taxpayer's tax liability, the taxpayer has a remaining refund amount for which the comptroller cannot issue a refund warrant because of the $250,000 limitation, the taxpayer may request that the remaining refund be applied as a credit payment toward the taxpayer's future tax liabilities. The request must be in writing and be specific enough for the comptroller to ascertain to which liability the credit is to be applied.

(iv) Interest that is otherwise authorized by statue will accrue until the net credit is applied as a payment to a tax liability.

(B) Court cases

(i) In the case of a court judgment or a settlement of a court case, the comptroller will credit any tax liability that the taxpayer may owe at the time of judgment or settlement, and will issue a refund warrant in an amount that would not cause the $250,000 biennial cap for the tax type to be exceeded. The comptroller will not transfer any amount in excess of the $250,000 biennial cap as a credit payment to reduce the taxpayer's tax liabilities that are or will be incurred after the judgment or settlement, and the net amount must be presented to the legislature for a specific appropriation.

(ii) Any statutory interest will accrue until such time a specific appropriation is obtained.

(4) Assignments.

(A) A taxpayer may assign its right to receive a refund, but any defense that the comptroller may assert against the assignor applies against the assignee.

(B) Any refund amount that is assigned will be counted toward the assignor's $250,000 biennial cap. For example, an assignor assigns its right to receive a refund of $200,000, but the assignor has previously obtained a refund of $75,000 in the same biennium. The comptroller will issue a warrant in the amount of $175,000 to the assignee, and will allow the assignee to use the remaining $25,000 to apply as a credit against current or future tax liabilities.

(C) When a refund assignment is presented, the comptroller will treat the assigned refund as a payment from the assignee made on the date the assignee submits the assignment to the comptroller.

(5) Appropriation. At the end of the biennium, the comptroller will submit a list of refunds or credits that have not been paid or exhausted through credit transfers or assignment. The list will include the name of the taxpayer, the amount of tax, and interest accrued to the date of submission.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's authority to adopt.

Issued in Austin, Texas, on

MARTIN E. CHERRY
Chief Deputy General Counsel
Comptroller of Public Accounts

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