Sanadco Inc., a Texas Corporation Mahmoud Ahmed Isba Broadway Grocery, Inc. And Shariz, Inc. v. Glenn Hegar, in His Individual and Official Capacity as Comptroller of Public Accounts Office of Comptroller of Public Accounts for the State of Texas And Ken Paxton, in His Official Capacity as Attorney General of the State of Texas

Opinion

ACCEPTED 03-14-00771-CV 5422011 THIRD COURT OF APPEALS AUSTIN, TEXAS 5/26/2015 4:15:15 PM JEFFREY D. KYLE CLERK NO. 03-14-00771-CV

In the Court of Appeals FILED IN 3rd COURT OF APPEALS for the Third Judicial District AUSTIN, TEXAS Austin, Texas 5/26/2015 4:15:15 PM JEFFREY D. KYLE Clerk SANADCO INC., MAHMOUD A. ISBA, BROADWAY GROCERY, INC., SHARIZ, INC. RUBY & SONS STORE, INC., AND RUBINA NOORANI, Appellants,

v.

THE OFFICE OF THE COMPTROLLER OF PUBLIC ACCOUNTS; GLENN HEGAR, IN HIS OFFICIAL CAPACITY AS COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS; AND KEN PAXTON IN HIS OFFICIAL CAPACITY AS ATTORNEY GENERAL OF THE STATE OF TEXAS, ET AL., Appellees. On Appeal from Cause No. D-1-GN-13-004352 The 200th Judicial District Court of Travis County, Texas The Honorable Charles Ramsay, Judge Presiding

APPELLEES’ RESPONSIVE BRIEF

KEN PAXTON ROBERT O’KEEFE Attorney General of Texas Chief, Financial and Tax Litigation Division

CHARLES E. ROY JACK HOHENGARTEN First Assistant Attorney General State Bar No. 09812200 Assistant Attorney General JAMES E. DAVIS Financial Litigation, Tax, and Deputy Attorney General for Defense Charitable Trusts Division Litigation P.O. Box 12548 Austin, Texas 78711 2548 TEL: (512) 475-3503 FAX: (512) 477 2348 jack.hohengarten@texasattorneygeneral.gov Attorneys for Appellees TO THE HONORABLE THIRD COURT OF APPEALS:

Appellees, Office of the Comptroller, Glenn Hegar, in his Official Capacity as

Comptroller of Public Accounts of the State of Texas (“Comptroller”), and Ken Paxton, in

his Official Capacity as Attorney General of Texas, pursuant to Tex. R. App. P. 28 and 38,

file this response:

This accelerated appeal is governed by Sanadco, Inc. v. Office of the Comptroller,

2015 WL 1478200 (Tex. App.—Austin March 25, 2015, no pet.) (mem. op.)—indeed, this

accelerated appeal is Sanadco v. Office of the Comptroller. While Sanadco I was pending

before this court, and after it had denied their appellate motion for emergency relief, the

taxpayers Sanadco and Mahmoud Isba turned around and filed a second, identical lawsuit

in district court, challenging the Comptroller’s tax determination, and asserting claims

under the APA and UDJA.

The Honorable Judge Charles Ramsey denied Mahmoud Isba’s application for

temporary injunction and Isba appeals that order. But, as shown below, Isba’s second

suit—and this accelerated appeal of Judge Ramsey’s order—raises no new issues. As

such, it is governed by this court’s opinion in Sanadco I.

Appellees’ Responsive Brief page ii Sanadco v. Glenn Hegar, et al., 03-14-00771-CV TABLE OF CONTENTS

Table of Contents .......................................................................................................3

Index of Authorities ...................................................................................................4

Statement of the Case.................................................................................................6

Issue Presented ...........................................................................................................7

Statement of Facts ......................................................................................................8

Summary of the Argument.........................................................................................9

Argument..................................................................................................................10

A. Appellant Isba failed to pay or make arrangements to pay for the reporter’s record, and the absence of that record is dispositive ............... 10

B. Even assuming arguendo that Isba presented an issue not requiring review of the reporter’s record, Sanadco I fully disposes of his appeal on jurisdictional grounds. .............................................................15

C. The waiver of immunity in APA section 2001.171 does not apply, because the legislature has set out a specialized procedure for tax protest suits. .............................................................................................17

D. Isba’s filing suit for judicial review does not and cannot vacate the Comptroller’s tax determination. .............................................................20

Prayer .......................................................................................................................19

Certificate of Compliance ........................................................................................20

Certificate of Service ...............................................................................................20

Appendix ..................................................................................................................21

Appellees’ Responsive Brief page iii Sanadco v. Glenn Hegar, et al., 03-14-00771-CV INDEX OF AUTHORITES

Cases Bryant v. United Shortline Inc. Assur. Services, N.A., 972 S.W.2d 26 (Tex.1998)..............................................................................12, 13 Central Power & Light Co. v. Sharp, 919 S.W.2d 485 (Tex. App.–Austin 1996, writ denied) .......................................17 City of El Paso v. Heinrich, 284 S.W.3d 366 (Tex.2009) ..................................................................................15 Combs v. Chevron, 319 S.W.3d 836 (Tex. App.–Austin 2010, pet. denied) .......................................17 CRC–Evans Pipeline Int'l, Inc. v. Myers, 927 S.W.2d 259 (Tex. App.—Houston [1st Dist.] 1996, no writ) .......................11 Garth v. Staktek Corp., 876 S.W.2d 545, 548 (Tex.App.—Austin 1994, writ dism’d w.o.j.) ................... 11 Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593 (Tex.App.—Amarillo 1995, no writ)...................................11, 12 Millwrights Local Union No. 2484 v. Rust Engineering Co., 433 S.W.2d 683 (Tex.1968) ..................................................................................12 In re: Nestle USA, Inc., 359 S.W.3d 211 (Tex. 2012)...........................................................................15, 17 Rodriguez v. State, 970 S.W.2d 133 (Tex.App.—Amarillo 1998, pet. ref'd) ......................................13 Rogers v. Howell, 592 S.W.2d 402 (Tex.Civ.App.—Dallas 1979, writ ref'd n.r.e.) ..........................12 Schafer v. Conner, 813 S.W.2d 154 (Tex.1991) ..................................................................................13 Tex. Dep't of Protective & Regulatory Servs. v. Mega Child Care, 145 S.W.3d 170 (Tex. 2004).................................................................................16 Texas Indus. Gas v. Phoenix Metallurgical Corp., 828 S.W.2d 529 (Tex.App.—Houston [1st Dist.] 1992, no writ) ........................11 Texas Logos, L.P. v. Texas Dept. of Transp., 241 S.W.3d 105 (Tex.App.–Austin 2007, no pet.) ...............................................14 Texas Natural Res. Conservation Comm'n v. IT–Davy, 74 S.W.3d 849 (Tex.2002)....................................................................................14 Walling v. Metcalfe, 863 S.W.2d 56 (Tex.1993)....................................................................................10

Appellees’ Responsive Brief page iv Sanadco v. Glenn Hegar, et al., 03-14-00771-CV Statutes Tex. Gov’t Code § 2001.171........................................................................14, 15, 16 Tex. Gov’t Code § 2001.173....................................................................................18 Tex. Gov’t Code § 2001.038....................................................................................15 Tex. Civ. Prac. & Rem. Code § 37.001 ...................................................................15 Tex. Tax Code 111.0611(a) .......................................................................................8 Tex. Tax Code 112.054 ............................................................................................18 Tex. Tax Code 112.051-.156 ...................................................................................16

Appellate Rules Tex. R. App. P 37.3(c) .........................................................................................9, 14 Tex. R. App. P. 35.3(b)(1)-(3) .................................................................................13 Tex. R. App. P. 50(d) ...............................................................................................13

Appellees’ Responsive Brief page v Sanadco v. Glenn Hegar, et al., 03-14-00771-CV STATEMENT OF THE CASE

Nature of the Case: This is a suit brought (again) by the Sanadco taxpayers under the Administrative Procedure Act and the UDJA, alleging two internal agency memos were APA “rules,” which the Comptroller failed to adopt in accordance with APA requirements. See Tex. Gov’t Code §§ 2001.021-.033 (West 2008). The taxpayers also sought declaratory relief, alleging the Comptroller had engaged in ultra vires acts, and challenged the constitutionality of several statutes in the Tax Code. Finally, they sought to enjoin the Comptroller’s administrative enforcement and collection activities.

Trial Court: 200th Judicial District Court of Travis County, Texas, The Honorable Charles Ramsey, Judge Presiding

Course of Proceedings: While Sanadco, Inc. v. Office of the Comptroller, No. 03-11- 000462-CV (“Sanadco I”)1 was pending before this Court—and after it had denied their motion for emergency relief2—Sanadco and Isba brought a second, identical suit in district court. As before, they asserted claims under the Administrative Procedure Act and the UDJA, challenging the Comptroller’s final determination of tax liability. 3

1 See Appendix, Tab A. 2 See Appendix, Tab B. 3 See Appendix, Tab C

Appellees’ Responsive Brief page vi Sanadco v. Glenn Hegar, et al., 03-14-00771-CV Trial Court Disposition: Isba applied for temporary injunctive relief enjoining all administrative enforcement and collection activities relating to his tax liability. After an evidentiary hearing on October 14, 2014, 4 the district court denied Isba’s application for temporary injunction. 5 Appendix, Tab D.

ISSUES PRESENTED

1. Is Isba’s failure to pay or make arrangements to pay for preparation of the reporter’s record dispositive of this appeal of the order denying temporary injunction?

2. In view of this court’s March 25, 2015, opinion in Sanadco I, did the district court have subject-matter jurisdiction over Isba’s APA and UDJA claims?

3. Did the suit for judicial review filed by Sanadco and Isba automatically vacate the Comptroller’s final determination, so as to preclude the agency from undertaking administrative enforcement activities?

4 As shown by this court’s file, Isba failed to pay or make arrangements to pay for the court reporter’s record of the October 14, 2014 evidentiary hearing before the district court. See Tex. R. App. P. 37.3(c); Appendix, Tab D. 5 See Appendix, Tab E.

Appellees’ Responsive Brief page vii Sanadco v. Glenn Hegar, et al., 03-14-00771-CV STATEMENT OF FACTS

The background and facts are correctly stated in this Court’s March 25, 2015

opinion in Sanadco I. The only distinction in this appeal is that it involves the

personal tax liability of Sanadco’s principal Isba.6 Although appellant’s statement

of facts includes assertions relating to Broadway Grocery, Inc., Shariz, Inc., and

Rubi & Sons Store, Inc., none of those taxpayers are before this Court: The

October 14, 2014 hearing and the district court’s November 13, 2014 order

denying temporary injunctive relief related only to Isba.7

SUMMARY OF ARGUMENT

The district court’s order denying Isba’s application for temporary injunction

should be affirmed, because:

First, given the standard of review for orders denying temporary injunctive

relief, the absence of a reporter's record is dispositive. Whether Isba was entitled to

a temporary injunction depended upon the evidence presented in support of his

application for relief. See Tex. R. App. P 37.3(c). Without a reporter's record, this

Court cannot know what legal arguments were made and what, if any, evidence

was presented to the trial court in support of those arguments. Nor can it assess

6 See Appendix, Tab F (F of F Nos. 19-27, C of L Nos. 11, 12, 15-17); Tex. Tax Code § 111.0611(a)(personal liability of corporate officers for fraudulent tax evasion). . 7 See Appendix, Tab E. whether Isba satisfied the elements for establishing his right to temporary relief—

particularly, the element of irreparable harm.

Second, even assuming there remained an issue that did not require the

reporter’s record, this Court’s opinion in Sanadco I has already addressed and

disposed of Isba’s legal arguments—by concluding that the district court lacked

subject-matter jurisdiction over the taxpayer’s APA and UDJA claims.

Third, as this Court observed in Sanadco I, where a taxpayer who is

challenging the Comptroller’s assessment of taxes and penalties has not complied

with Chapter 112, the APA does not and cannot provide an alternate jurisdictional

basis for such claims. To hold otherwise would effectively read out of the Tax

Code the statutory prerequisites for bringing a tax-protest or refund suits in district

court. The APA procedure for judicial review would swallow and render

meaningless those prerequisites—an outcome the legislature could not have

intended.

Appellees’ Responsive Brief page 2 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV ARGUMENT

A. Appellant Isba failed to pay or make arrangements to pay for the reporter’s record, and the absence of that record is dispositive.

The purpose of a temporary injunction is to preserve the status quo pending a

trial on the merits. See Walling v. Metcalfe, 863 S.W.2d 56, 58 (Tex.1993). In an

appeal from an order granting or denying a request for a temporary injunction,

appellate review is confined to the validity of the order that grants or denies the

injunctive relief. See id.

The decision to grant or deny the injunction lies within the sound discretion of

the trial court, and will not be disturbed absent a clear abuse of discretion. See id.

This Court may neither substitute its judgment for that of the trial court nor

consider the merits of the lawsuit. See id.; Texas Indus. Gas v. Phoenix

Metallurgical Corp., 828 S.W.2d 529, 532 (Tex.App.—Houston [1st Dist.] 1992,

no writ). Rather, it must view the evidence in the light most favorable to the trial

court's order, indulging every reasonable inference in its favor, and determine

whether the order was so arbitrary as to exceed the bounds of reasonable

discretion. See CRC–Evans Pipeline Int'l, Inc. v. Myers, 927 S.W.2d 259, 262

(Tex. App.—Houston [1st Dist.] 1996, no writ). The Court cannot reverse a trial

Appellees’ Responsive Brief page 3 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV court's order if the trial court was presented with conflicting evidence and the

record includes evidence that reasonably supports the trial court's decision. See id.

Next, the purpose of a temporary injunction is to preserve the status quo until a

final hearing on the merits. Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d

593, 597 (Tex.App.—Amarillo 1995, no writ). Furthermore, the applicant is not

entitled to temporary relief until he demonstrates a probable injury and a probable

right of recovery. Garth v. Staktek Corp., 876 S.W.2d 545, 548 (Tex. App.—

Austin 1994, writ dism’d w.o.j.).

A probable right of recovery is proven by alleging the existence of a right and

presenting evidence tending to illustrate that the right is being denied. Miller

Paper Co. v. Roberts Paper Co., 901 S.W.2d at 597. Probable injury is proven

through evidence of imminent harm, irreparable injury, and the lack of an adequate

legal remedy. Id. Both prongs require the presentation of evidence and, unlike

temporary restraining orders, cannot be based upon sworn pleadings or affidavits

unless the parties so agree. Millwrights Local Union No. 2484 v. Rust Engineering

Co., 433 S.W.2d 683, 685–87 (Tex.1968); Rogers v. Howell, 592 S.W.2d 402, 403

(Tex.Civ.App.—Dallas 1979, writ ref'd n.r.e.).

Given the standard of review for orders denying temporary injunctive relief, the

absence of a reporter's record is dispositive. Whether Isba was entitled to a

Appellees’ Responsive Brief page 4 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV temporary injunction depended upon the evidence presented in support of his

application for relief. Without a reporter’s record, this Court cannot know what, if

any, evidence was presented to the trial court. Nor can it assess whether Isba

satisfied the elements considered by Miller Paper as prerequisites to obtaining

such relief.

Indeed, the reporter’s record is so pivotal to this Court’s review that its absence

necessitates the presumption that the missing evidence actually supported the trial

court's ruling. See Bryant v. United Shortline Inc. Assur. Services, N.A., 972

S.W.2d 26, 31 (Tex.1998) (Court stating that: “We indulge every presumption in

favor of the trial court’s findings in the absence of a statement of facts.”) True,

Bryant and its predecessors are based on the appellant’s having the burden of

providing the appeals court with a record sufficient to prove error under the

appellate rules in existence before September 1, 1997. See Tex. R. App. P. 50(d)

(repealed September 1, 1997); Schafer v. Conner, 813 S.W.2d 154, 155

(Tex.1991).

But while the current appellate rules state that the court reporter is responsible

for preparing, certifying, and timely filing the reporter’s record, that responsibility

is expressly conditioned upon the appellant’s filing the notice of appeal, requesting

that the reporter's record be prepared, and paying for or making arrangements to

Appellees’ Responsive Brief page 5 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV pay for the reporter's record. Tex. R. App. P. 35.3(b)(1)-(3); Rodriguez v. State,

970 S.W.2d 133, 135 (Tex.App.—Amarillo 1998, pet. ref'd) (involving the clerk's

record). Accordingly, if the appellant’s failure to complete the steps required

under rule 35.3(b)(1), (2), and (3) denies the appellate court a sufficient record

with which to review his appeal, Bryant controls.

Simply put, this Court cannot determine what evidence was before the trial

court, cannot determine whether the trial court abused its discretion, cannot

determine whether Isba proved the existence of a right, cannot determine whether

the Comptroller’s activities resulted in or threatened a denial of that right—and, in

particular, cannot determine whether Isba was threatened with imminent harm and

irreparable injury, and lacked an adequate legal remedy. Accordingly, this court

should presume that the missing record supports the trial court's determination and

forego further review of this dispute as authorized under appellate rule 37.3(c).

B. Even assuming arguendo that Isba presented an issue not requiring review of the reporter’s record, Sanadco I fully disposes of his appeal on jurisdictional grounds.

Although Rule 37.3(c) affords this Court the discretion to decide issues that

do not depend on the reporter's record, that authorization does not and cannot

extend to review of the order denying Isba’s application—as that determination

is clearly dependent upon the presence of the reporter’s record.

Appellees’ Responsive Brief page 6 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV In addition, Isba’s legal arguments have already been rejected by this Court

in Sanadco I. Isba contends that APA section 2001.171, which authorizes

judicial review of final administrative decisions, provides an alternative

jurisdictional basis for challenging Comptroller tax determinations.

But the opinion in Sanadco I has already addressed and disposed of this

argument:

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.

Sanadco I, 2015 WL 1478200 at * 4.

After citing the well-established case law governing sovereign immunity, the

court addressed Sanadco’s jurisdictional arguments:

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

Appellees’ Responsive Brief page 7 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV 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.

Id.

Although the language quoted above specifically addresses APA section

2001.038, which authorizes challenges to agency rules, the court’s holding and

rationale necessarily extend to APA section 2001.171, as well. Both statutes are

preempted by Tax Code Chapter 112, which specifically waives immunity for

certain taxpayer actions, conditioning the waiver on prerequisites to the taxpayer’s

bringing suit under that chapter. Sanadco I at * 5. Moreover, this precise issue—

the availability of APA section 2001.171 to a taxpayer challenging state taxes—

was addressed in post-submission briefing in Sanadco I.8

C. The waiver of immunity in APA section 2001.171 does not apply, because the legislature has set out a specialized procedure for tax protest suits.

As the Comptroller pointed out in its post-submission briefing in Sanadco I,

APA section 2001.171 does not apply to the Tax Code. The APA provides an

independent right to judicial review only where the agency’s enabling statute

neither specifically authorizes nor prohibits judicial review of the decision. Tex.

8 See Appendix, Tab G, at p. 3; and Tab H, at p. 4-7.

Appellees’ Responsive Brief page 8 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV Dep't of Protective & Regulatory Servs. v. Mega Child Care, 145 S.W.3d 170

(Tex. 2004).

Here, in clear contrast to Mega Child Care, the Chapter 112 of the Tax Code

specifically sets out the statutory prerequisites for challenging the Comptroller’s

determination of tax liability in district court.

The legislature has created a limited waiver of sovereign immunity for tax

refund and protest suits, and for tax injunction suits, but mandated specific

prerequisites which must be satisfied prior to filing suit against these specifically

enumerated claims. See Tex. Tax Code Ann. §§112.051-.156 (West 2015).

The undisputed jurisdictional facts, as shown by Isba’s pleading, are that

neither he nor Sanadco has met the statutory prerequisites in Chapter 112.9

Compliance with the procedural requirements of the tax-protest law is a

jurisdictional prerequisite to suit. Sanadco I at * 5; In re: Nestle USA, Inc. 359

S.W.3d at 211; see also Central Power & Light Co. v. Sharp, 919 S.W.2d 485, 491

(Tex. App.–Austin 1996, writ denied); Combs v. Chevron, 319 S.W.3d 836, 844-45

(Tex. App.–Austin 2010, pet. denied).

Most importantly, Isba’s argument, if accepted by this court, would

effectively read out of the Tax Code the statutory prerequisites for bringing a tax-

9 See Appendix Tab C, at pp. 3-4.

Appellees’ Responsive Brief page 9 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV protest suit in district court. The APA procedure for judicial review would

swallow and render meaningless those prerequisites—an outcome the legislature

could not have intended. See Nestle, 359 S.W.3d at 211-12 (Tex. 2012) (holding

that statutory prerequisites for taxpayer suits are conditions on the legislative

waiver of immunity and dismissing original proceeding for want of jurisdiction).

D. Isba’s filing suit for judicial review does not and cannot vacate the Comptroller’s tax determination.

In addition, Isba argues that his filing suit under the APA automatically

vacated the Comptroller’s final tax determination. Therefore, he reasons, Sanadco

I does not control, because this court emphasized that its holding applied only to

cases in which the taxpayer seeks relief from a tax assessment that has become a

final liability. See Sanadco I at *6, n.9.

In so arguing, Isba is attempting to selectively read and blend provisions in

the Tax Code with the APA to achieve a procedural result that the legislature did

not intend. First, he points to the Tax Code section 112.054, which provides that

trial of the issues in “suits under this subchapter are de novo.” He then attempts to

blend that section with APA section 2001.173, which provides that if the manner

of review of the agency decision is trial de novo “the reviewing court shall try each

Appellees’ Responsive Brief page 10 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV issue of fact and law . . . as though there has not been an intervening agency

action.”

But this argument requires Isba to skip over the fact that he has not complied

with the pre-payment and notice requirements of Subchapter B of Chapter 112, but

rather, is attempting to evade those very prerequisites. Accordingly, his suit cannot

be a “suit[] brought under this subchapter” and perforce cannot be a suit entitled to

de novo review. In short, Isba cannot have it both ways. He cannot argue that he

does not have to comply with the statutory prerequisites of Chapter 112, but that its

de novo standard of review nonetheless governs his challenge to the Comptroller’s

tax assessment.

Appellees’ Responsive Brief page 11 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV PRAYER

In view of the foregoing, the state officials request that this court affirm the

trial court’s order, tax all costs to appellant Isba, and grant such other and further

relief to which the state officials may show themselves entitled.

Respectfully submitted,

KEN PAXTON Attorney General of Texas

CHARLES E. ROY First Assistant Attorney General

JAMES E. DAVIS Deputy Attorney General for Defense Litigation

ROBERT O’KEEFE Chief, Financial and Tax Litigation Division

/s / Jack Hohengarten JACK HOHENGARTEN State Bar No. 09812200 Assistant Attorney General Financial Litigation, Tax, and Charitable Trusts Division P.O. Box 12548 Austin, Texas 78711 2548 TEL: (512) 475-3503 FAX: (512) 477 2348 jack.hohengarten@texasattorneygeneral.gov

Attorneys for Appellees, Glen Hegar, Comptroller of Public Accounts of the State of Texas and Ken Paxton, Attorney General of the State of Texas

Appellees’ Responsive Brief page 12 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV CERTIFICATE OF COMPLIANCE

In compliance with Texas Rule of Appellate Procedure 9.4(i)(2), this brief

contains 2,271 words, excluding the portions of the brief exempted by Rule

9.4(i)(1).

CERTIFICATE OF SERVICE

I certify that on this 22nd day of May, 2015, a true and correct copy of the

foregoing document, Appellees’ Responsive Brief, has been sent to the attorney for

appellants via e-service and/ or electronic mail, as follows:

Samuel T. Jackson Law Office of Samuel T. Jackson P.O. Box 170633 Arlington, TX 76003-0633 jacksonlaw@hotmail.com /s / Jack Hohengarten Jack Hohengarten

Appellees’ Responsive Brief page 13 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV

Tab A Memorandum Opinion on Motion for Rehearing in Sanadco I, No. 03-11-00462-CV, in the Third Court of Appeals. Tab B Order and Motion for Emergency Relief to Lift the Automatic Stay for a Limited Purpose in Sanadco I, No. 03-11-00462-CV, in the Third Court of Appeals. Tab C Plaintiff’s Original Petition for Judicial Review, Declaratory Judgment, Temporary Injunction and Request for Disclosure, No. D-1-GN-13-004352, Sanadco Inc. v. Hegar, in the 200th Judicial District Court, Travis County (“Sanadco II). Tab D Letter regarding payment for Reporter’s Record in Sanadco II, No. 03-14-00771-CV, in the Third Court of Appeals. Tab E Order Denying Plaintiff’s Declaratory Judgment and Application for Temporary Injunction Plaintiffs’ Third Amended Petition for Judicial Review, Declaratory Judgment, Temporary Injunction and Request for Disclosure, in Sanadco II, No. D-1-GN-13-004352, in the 200th Judicial District Court of Tab F Certification of Public Records for Order Denying Motion for Rehearing on Comptroller’s Decision on Hearing Nos. 106,815 and 107,006 Certification of Public Records for Comptroller’s Decision on Hearing Nos. 106815 and 107006 with Attachments A – Texas Notification of Hearing Results Tab G Appellants’ Post-Submission Letter Brief in Sanadco I, No. 03-11-00462- CV, in the Third Court of Appeals. Tab H State Officials’ Response to Appellants’ Post-Submission Brief in Sanadco I, No. 03-11-00462-CV, in the Third Court of Appeals.

Appellees’ Responsive Brief page 14 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV Tab A

Memorandum Opinion On Motion for Rehearing Sanadco I, No. 03-11-00462-CV Third Court of Appeals.

Appellees’ Responsive Brief page 1 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV 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; \Malid 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, 9STH JUDICIAL DISTRICT NO. D-1-GV-10-000902, HONORABLE TIM SULAK, JUDGE PR_ESIDING

MEMORANI) UM OPINION

We grant the Comptroller's motion for rehearing, withdraw our prior opinion and

judgrnent issued on Septernber 26,2013, and substitute in their place this opinion and judgment

affirming the district court's disrnissal 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 unauth orized.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 ofjurisdiction. On

appeal, Sanadco challenges the dismissal of its counterclaims. We aff,rrm 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 sytopsis 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 $ I51.025, and the Comptroller is

authorized to examine and audit the records of convenience-store owners, id. $$ I I 1.004, 151.025.

In addition, the Comptroller may use sampling and projection methods for estimating the amount

oftaxes owed if"the taxpayer's records are inadequate or insufficient." Id. ç 11 1.0042(b). Moreover,

if the Cornptroller "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. ç I 11.008(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

2 reports clironiclingtheirsales to stores and listingthe storesbyname. Id l5l.46l-.462. Similarly, $$

the Tax Code authorizes the Comptroller to request wholesalers and distributors of tobacco

productstofilethesametypeofreports. Id $$ 154.021(addressingcigarettesales), 155.105 (covering

non-cigarette tobacco products). The type of information required in these repofts is commonly

referred to as H.B. I 1 information because the reporting requirernents were enacted by House Bill 11 (H.8.11) of the 80th legislattxe. see Act of May 3,2007,80th Leg., R.s., ch. 129, g$ l-3,2007

Tex. Gen. Laws 159, 159-62.

Once an audit has been performed, the store owner may request a rcdetermination

from the Comptroller within 30 days of receiving notice of the Comptroller's assessment. Tex. Tax

Code $ 1 I 1.009(a), (b). In addition, the owner may also request a hearing on the redetermination,

id. $ 11 1.009(c), before the State Office of Administrative Hearings, id $ 11 1.00455. If no request

for a redetermination is filed within 30 days, "the determination is final on the expiration of the

period." Id. ç 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

underprotestandfilesuitseekingtheirrecovery.t Seerd $$111.104(b),(c), 112.051,.052;seealso

In re Nestle USA, lnc.,359 S.W.3d 207,21I (Tex. 2012) (protest, refund, and injunction suits

I 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 $ lI2.I0l. This remedy additionally requires a showing that (1) irreparable injury will result to the applicant if tlre 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. ç 112.10fi.

J 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 $ 1 I 1.105. A tax-refund claimant who

is dissatisfîed with the decision may file a motion for rehearin g, 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 g I l2.I5I(a), (b), (c).

If pursuing a protest-payment suit, a taxpayer must f,rle 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. $g 111.104(c)(3), 112.051(b), (c).

Prior to the passage of H.B. 11, the Comptroller issued a meÍto 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 tliat "mark-up percentages and product mix percentages" were developed to be used in

audits o'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. I I

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.

4 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. I I d,ata. 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

penaltiesandseekstatutoryreliefvia ataxpayer refundorprotest slit,seeid. $$ 111.104, lI2.I5l. 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 Cornptroller's collection of the taxes, compensatory damages, and attorney's fees. Those

counterclaims were made against thc Off,rce of the Comptroller, Susan Combs2 in her official

capacity as Comptroller, and Greg AbbotC 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.a Unlike Sanadco, the other named counter-

'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. a For ease of reading, we will generally refer to all of the counter-plaintifß as Sanadco.

5 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.s

Regarding its counterclaims, Sanadco alleged eight complaints relevant to this appeal.

In its first counterclaim, Sanadco asserted that AP 92 and AP I22 are administrative rules that

were not promulgated in compliance with the requirements of the Administrative Procedure Act.

SeeTex.Gov'tCode$2001.038. Accordingly,sanadcosoughtadeclarationthatthosememosare

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 andthereby 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 assefting that "the Comptroller is not authorized to estimate convenience store audits

using the rnethods described in AP 92 or AP I22 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

s Despite their participation in the administrative redetennination 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); Bellv. Moores,832 S.V/.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); seealsoAetnaCas.&Sur.Co.v.Hillman,796F.2d770,774,776(5thCir. 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).

6 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. 1 1 information was improper and that

the governing statutes do not allow "the Comptroller to give conclusive effect to the HB 1 I data."

In its fourth counterclaim, Sanadco alleged that the Comptroller improperly authorized

auditors to'ouse 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. l l 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 aS\o/openalty without proof of fraud

or of an intent to avoid the tax as required by the Tax Code. SeeTex. Tax Code $ I I 1.061(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. ç 111.0042. In its seventh counterclaim, Sanadco alleged that the Comptroller engaged in an unconstitutional taking when he

improperly collected sales anduse taxes. Lastly, Sanadco challengedthe constitutionality ofthe Tax

Code provision authorizing the Comptroller to impose a ten-percent penalty if he believes that the

ooamount due for a tax period is jeopardized by delay." See id $ I fi .022.

After Sanadco fìled 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

7 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. Pensiondys. v. Ferrell,248 S.W.3d 151,

156 (Tex. 2007). Determinations regarding whether a trial court has jurisdiction over a case are

questionsoflaw,whichwereviewdenovo. TexasDep'tofParl

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-Dary, 74 S.W.3d 849, 853 (Tex. 2002). Absent the State's consent

to suit, atrial court lacks subject-matter jurisdiction. Id. at 855. Sovereign imrnunity not only bars

suits for money damages but also protects the State against suits to "control state action." Texes

Logos, L.P. v. Texas Dept. of Transp.,241 S.W.3d 105, 118 (Tex. App.-Austin2007, 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 Uniforrn Declaratory Judgments Act, see

Tex. Civ. Prac. & Rem. Code $ 37.001 et seq.-aswell 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 atZII. 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 specif,rcally

enumerated taxpayer actions, each conditiorring waiver on certain administrative or other

prerequisites to a taxpayer's bringing a suit or claim thereunder. See Tex. Tax Code $$ 1 12.052

(protest suit),.101 (inyunction suit),.151 (refuüd suit); Nestle,359 S.W.3d at211 (dismissing

mandamus cause for want ofjurisdiction, where taxpayer sought declaration of constifutionality 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 Ll2 for

considers whether the non-moyant's pleadings affirmatively demonstrate the trial court's jurisdiction over tlre challenged causes. See Texas Dep't of Parks & Wildlife v. Miranda, 133 S.W.3d 2I7 ,226 (Tex. 2004). Counter-plaintiffs are the functional equivalents of plairitiffs with respect to whether their claims confèr subject-matter jurisdiction on the trial çotrt. See, e.g., Smith v. Clary Corp., 917 S.W.2d 796, 798 n.l (Tex. 1996) (court must not only have jurisdiction over amount in controversy but also must have subject-rnatter jurisdiction over counterclaim).

9 refund, protest, or injunction suit). Regardless of the taxpayer's claims ,the only permitted taxpayer

actions cliallenging state taxes areo'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 af 2rl. In Nestle, the supreme court held that these three statutorily provided taxpayer suits

(along with their respective prerequisites to suit) are the only rneans by which a taxpayer may

challenge "the applicability, assessment, collection, or constitutionality" of a state tax. kJ. at209.

"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."'1d. (quoting Tex.

Tax Code $ I 12.108); see also In re Allcat Claitns Serv., L.P.,356 S.W.3d 455,479 (Tex. 2011)

("[S]ection I 12.108 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 I 12 "allows no other actions to

challenge or seek refunds of the taxes to wliich it applies," including declaratory-judgment actions.

Nestle,359 S.W.3d at209-10; see also Strayhorn t¡. Raytheon E-Sys., Inc.,10I 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 tlie Comptroller. If Sanadco were able to pursue its counterclaims

"free of Chapter 112's restrictions," the State's o'entire tax collection scheme" would be disrupted.

10 Nestle,359 S.W.3d at 2Il ("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 1 12 refund or protest procedures. However, Sanadco elected not to pursue either remedy.T

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 reliefto 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.s

7 The third Chapter l12 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 tlre form of a protest suit and a refirnd suit. ,S¿e Berry v. McDonald,l23 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 1 12. 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.

I 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

ll Because Sanadco did not comply with the jurisdictional prerequisites of Chap ter IIZ, 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.e We need not

reach Sanadco's issues about the trial court's surnmary judgment because the Comptroller's plea

to the jurisdiction was directed to all eight of Sanadco's counterclaims, and our jurisdictional

deterrnination is dispositive of all issues on appeal. seeTex. R. App. p. 47 .l.

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 damageoffsetsagainstthemonetaryreliefsoughtbytheComptroller. SeeManbeckv.Austinlndep. 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 adrninistrative and statutory procedures already discussed-Sanadco's counterclaims cannot be considered "properly defensive" or offsets thereto.

e 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'tAss'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.201 1)) (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. EntertainmentPubl'ns Lnc.,292 S.W.3d 712,723 (Tex. App.-Austin2009, nopet.) (affrrmingtrial court's denial ofplea 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 ofthe administrative process and the deficiency assessment had become final, the facts here are distinguishable fiom 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.

T2 David Puryear, Justice

Before Justices Puryear, Henson, and Goodwin Justice Henson not participating

Affirmed on Motion for Rehearing

Filed: March 25,2015

13 Tab B

Order and Motion for Emergency Relief to Lift the Automatic Stay for a Limited Purpose Sanadco I, No. 03-11-00462-CV Third Court of Appeals.

Appellees’ Responsive Brief page 2 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-11-00462-CV

Sanadco Inc., a'Iexas Corporation, and Mahmoud A. Isba, a/k/a Mahmoud Ahmed Abuisba, aikla Mike Isba,Individually, Appellants

v

Susan Combs,Individually, and in her Offïcial Capacity as Comptroller of Public Accounts of the State of Texas, and Greg Abbott in his Official Capacity as Attorney General of the State of Texas, et al., Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 9STH JUDICIAL DISTRICT NO. D-1-GV-10-OOO9O2, HONORABLE TIM SULAK, JUDGE PRESIDING

ORDER

On April 16,2012, the appellants filed a motion for emergency relief related to their

appeal in cause number 03-11-00462-CV, and the appellees fìled a response on April 18,2012.

Having reviewed the motion and the response, we deny the motion for emergency relief.

It is ordered }l4ay 3,2012.

Before Justices Puryear, Henson and Goodwin ProDoc FaxService Page 2 of 103

NO, 03-11- 00462

lln U,llt 0[birù 6nu$ nt H.frenld AT TÐ'(AS

Sanadco Inc,, Mahmoud A, Isba, Walid Abderrahman, Maiic Investments Inc,, Faisal Khan, Isra Enterprises, Inc,, Hattab Al-Shudifat, Haifa Enterprises, Inc., EID Corp,, Mohammed S, Al Haieid, Maidi Rafe 0kla Nsairat, Omar Unlimited, [nc., and All Others Similarly Situated, APPELLANTS VS.

The Office of the Comptroller of Public Accounts; Susan Combs, Ín her individual and official capacities as Comptroller of Public Accounts for the State of Texas; and Greg Abbott in his official capacity as Attorney General of the State of Texas APPEttEES

Appeal From Cause No D-1-GV-10-000902 The 98th Dlstrlct Court 0f Travls Counfy, Texas The Honorable Tim Sulak, Presiding

MOTION FOR EMERGENCY RELIEF TO LIFT THE AUTOMATIC STAY FOR A TIMITED PURPOSE

SAMUET T, IACKSON sBN 10495700 P.O, BOX 670L33 ARTINGTON, TX 76003.0133 TEL: [817) 751-71ss FAX: [866) 37+-oL64 COUNSET FOR APPELLANTS ProDoc Faxservice Page 3 of 103

IDENTITY OF PARTIES AND COUNSEL

APPETLANTS:

Sa¡¡nnco Intc., MauuAuD A. Isne, WeuD ABDERRAnMAN, Mn¡tc h.rvrs'rurl¡Ts INC,, Fnlsnl KuRtrl, Isnn ErrlrrRpRlsps, INc,, HATTng AL-SHUDIFAT, Hnlrn ErurrRpnlsrs, In¡c,, EID CoRp,, Mognuprup S, Al HRInn, Mn¡u Rere 0xln NsRlnet, Ounn Un¡unarrEo, INc., Rn¡n Au Ornrns Slrrtunlv S¡ruRrEp

COUNSEL FOR APPELLANTS:

tAW OFFICE OF SAMUET T. IACKSON P.O, Box 170633 Arlington, Texas 76003-063 3 TEL; [817) 75I'7Iïs FAX: [866) 374-0164 Email: jacksonlaw(ôhotmail.cont

REAL PARTIES IN INTEREST:

Tun Orncn oF THB CouprnollrR oF Punuc Accouxrs; Susnr¡ Coltns, INDTvTDUALLv, AND rN HER oFFICIAL cApAcrry es CouprnoLLER or PunLrc Accout¡rs 0F THESrnru on TExRs; AND GREG A¡Borr, IN Hrs oFFIcrAr cApAcrry Rs ArroR¡¡Ey

GEruERel oF THE Srnrr or TExRs

COUNSET FOR REAL PARTIES IN INTEREST:

TACK HOHENGARTEN Assistant Attorney General FINANCIAL LITIGATiO N DIVISION P.0. Box )"2548 Austin, TXTBTLI-2548 TEL; (stz) 475-3503 FAX: (s12) 477 -23+Bl 480-8327

211:' t q rt Motion for Ernergency Relief to Lift Autom¿ic Stay for Limited Purpose ProDoc FaxService Page 4 of 103

TABTE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL ',2 I TABLE OF CONTENTS ..J

TABLE OF AUTHORITIES 5

STATEMENT OF JURISDICTION B

STATEMENT OF THE CASE 9

ISSUES PRESENTED 10

L Did the Comptroller engage in ultra vires çonduct when she persisted in pursuing the cancellation of Appellants' sales tax permit after her decision to cancel the permit had been timely appealto the district court? .,,,..,...10

ll. Was the Comptroller's attempt to collect alleged sales tax liabilitìes while the underlying claims were subject to an interlocutory appeal in violation of the automatic stay provisions?,,,,.,,,. ,.,,,...,,,, 10

lll. Did the Comptroller engage in ultra vires conduct in excess of her statutory authority when she engaged in enforcement procedures to collect sales tax assessments while they were pending judicial review?.,,,. ..,... 10

lV. When Appellants' administrative procedures were exhausted, did the Comptroller's decision become a nullity when Appellants requested de novo judicial review? 10

STATEMENT OF FACTS .,..,11

ARGUMENT AND AUTHORIT]8S,.,,,,,.., ....,,r4

I. The Comptroller's Suspension of Appellants' Sales Tax Permit Violated Appellants' Right to Appeal from the Order Suspending the Permit.........,, 15

il. Tlie Cornptroller's Enforcernont Actions Violated the Automatic Stay Provisions of an Interlocutory Appeal ..... I7 III. The Comptroller's Enforcement Actions are Ultra l/ires 18

and Exceed Her Statr.itory Aulhority 18

3li;'nqi; Motion for Emergency Relief to Lift Automatic Stay for Limitecl Purpose ProDoc FaxService Page 5 of 103

CONCLUSION 22

PRAYER 22

CERTIFICATE OF SERVICE Error! Bookmark not defined.

INDEX TO APPENDIX Error! Bookmark not defined,

4l |'ne.c Motion for Ernergency Relief to Lift Automatic Stay for Limited Purpose ProDoc FaxService Page 6 of 103

TABTE OF AUTHORITIES

CASES Amrhein v. La Madeleine, lnc., 206 S.W,3d 173, (Tex.App.-Dallas 2006, no pet.),,,,.,... 15

Bunhus v, M & S Macñ. & Supply Co,, lnc., 897 S.W,2d 871 (Tex.App,-San Antonio 1995, no pet,) i5

Çity of San Antonio v. City of Boerne, 1 1 1 S.W.3d 22 (Tex.2003) 18

Greene v. Sfafe, 324 S.W.3d 276 (Tex.App,-Austin 201 0, no pet,) 18

Herrera v. Sfafe, No. 03-0'1-0010'l -CV,2002 WL 185476 17

ln Re TASO, 03-1 1 -00269-CV (Tex.App.-Austin s-6-201 1 )

Key Western Life /ns. Co. y, Sfafe Bd, of lns., 350 S.W,2d 839 (Tex, 1961),., ,.,.,,, 19

Logal v. Unlted Sfafes, 195 F,3d 229, (Sth Cir. 1999) 17, 18

Southern Canal Ç0. v. Sfafe Bd. of Water Engineers, 31 8 S,W.2d 61 9; 159 Tex, 227 (Tex, 1958) 19

State Bd. of lns. v. Republic Nat'l lns. Ço., 384 S.W,2d 3€9 (Tex,Civ,App, Austin 1964, writ refld n,r,e,),,,,, 19 - Sfafe v. Crawford, 262 S.W,3d 532 (Tex.App.-Austin 2008, no pet.) 17, 18

Subaru of America v. David McDavid Nissan, 84 S,W.3d 212 (Tex.2002), I7

fexas Dept. of Public Safety v. Banks Transp. Ço., 427 S.W,2d 593, (Tex.Sup, 1968)

5lPnqe Motion for Eurergency Relief to Lift Automatic Stay for Limite

STATUTES

Tex, Civ, Prac, & Rem, Code $ 51.014(þ),.,.......... Tex. Civ, Prac, & Rem. Code Ann $ 51 .014(b),..., Tex, Civ, Prac. & Rem. Code Ann. S 51.014(aXB) Tex, Gov't Code $ 2001.174....,.,....... Tex, Gov't Code $ 2001.176 (bX3) ,,

Tex, Gov't Code $ 2001,73 Tex, Gov't Code Ann. $ 2001 ,173(a) Tex. Gov't Code Ann. g 22.221(a).........,,,,. Tex. Rev, Civ, Stat, a¡1..4413(36), $ 7,01(a)-(b) Tex. Tax Code Ann, $ 111,0047 Tex. Tax Code Ann, S 111,0081 Tex. Tax Code Ann, $ 11 1,012 (a) (1) .

Tex. Tax Code Ann, $111.010,,,........

REGULATIONS

34 Tex Admin, Code $ 3.327 (d) ,, ,

34 Tex. Admin, Code $ 1,29 ....,,....... 8

6l1r'ln.c Motion for Emergeucy Relief to Lift, Automatic Stay for Liurited Purpose ProDoc Faxservice Page B of 103

NO, 03-11- 00462

iln WÍlt ([bíril 0nurt nf H+nÊüld nT,A[JSTN, TÐ(AS

Sanadco Inc,, Mahmoud A, Isba, Walid Abderrahman, Maiic Investments Inc,, Faisal Khan, Isra Enterprises, Inc,, Hattab Al.Shudifat, Haifa Enterprises. Inc,. EID Corn,, Mohammed S, Al Haieid. Maidi Rafe Okla Nsairat, Omar Unlimited, [nc., and All Others Similarly Situated, APPELTANTS vs,

The Office of the Comptroller of Public Accounts; Susan Cornbs, in her individual and official capacities as Comptroller of Public Accounts for the State of Texas; and Greg Abbott in his official capacity as Attorney General of the State of Texas APPELTEES

Appeal From Cause No D-1-GV-10-000902 The 9Bth Dlstrlct Court 0f Travls Counry, Texas The Honorable Tim Sulak, Presiding

MOTION FOR EMERGENCY RELIEF TO LIFT THE AUTOMATIC STAY FOR A LIMITED PURPOSE

TO THE HONORABLE THIRD COURT OF APPEALS:

SANADCO lNC, ET AL, Appellants, file this Pefiflon for Emergency Relief to Lift the AutomatÌc Stay for a Limited Purpose, and respectfully requests this court to grant this application for emergency temporary relief and lift the automatic stay imposed herein, and upon notice and hearing to grant a declaratory judgment that the Comptroller exceeded her authority by enforcing her order suspending Appellants'sales tax permit effective March 5,

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2012 (Exhibit A), despite Appellants'appeal of said order on March 26,2012 pursuant to Tex, Tax Code Ann, $ 111.0102, Tex, Tax Code Ann, $ 111.0049, and Tex. Tax Code Ann, $ 151,205 authorizing a taxpayer to appeal the revocation or suspension of a tax permit "in the same mannerthat appeals are made from a finaldeficiency determination". These causes are now pending before the ggth Judicial District Court in Travis County, Texas under Cause No. D-1-GV-10-000902 and on interlocutory appeal before this Court in No, 03-11-00462, Appellants complain of SUSAN COMBS, in her official capacity as Comptroller of Public Accounts' ultra vires acts exceeding her authority in the unauthorized requirement for payment of alleged delinquent sales taxes and provision of a bond before a final order is entered in the judicial review of the cause which is the subject of this appeal. Appellants request ihis court to lift the automatic stay imposed in ihis cause for the limited purpose of reviewing the Comptroller's interlocutory order suspending Appellants'sales tax permit and entering judgment declaring that the Comptroller is not authorized to take any enforcement actions againsi Appellants prior to entry of a final order in the triai court, or in the appellate court pending resolution of all pendlng appeals

STATEMENT OF IURISDICTION

This Court has jurisdìction of this motion pursuant to Tex. R. App. P. 29.3 to make any temporary orders necessary to preserve the parties' rights until disposition of the appeal; to review any interlocutory order that interferes with or impairs the effectiv€ness of the relief sought or that may be granted on appeal; and pursuant to Tex, Gov't Code Ann, $ 22,221(a) to issue a writ of mandamus and all other writs necessary to enforce the jurisdiction of the

cou11, including the issuance of writs nðc€ssary to preserve the subject matter of an appeal, The Court also has jurisdiction pursuant to Tex, Gov't Code Ann. $ 2001.176 (c) to accept transfer of the case for judicial review if the cout't finds that the public interest requires a prompt, authoritative determination of the legal issues in the case and the case would ordinarily be appealed.

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STATEMENT OF THE CASE

(1) Nature of Underlying Proceedíng: This matter arises from an appeal from a show-cause proceeding to suspend the sales tax permit of Majic lnvestments, lnc, and Faisal Khan filed by ihe Comptroller of Public Accounts, Counter-Plainiiffs in a class-action suit filed in response the Comptroller's attempt to collect alleged delinquent sales tax,

(21 TríalCouñ: The show-cause Hearing to Cancel Appellants' sales tax permit was maintained by the Office of the Comptroller of Public Accounts for the State of Texas without the intervention of a trial court.

(3) Cource of Proceedings: The Comptroller held a telephonic hearing on February 24,2012 to determine whether Appellants had paid the $73,600.67 assessed pursuant to SOAH Docket No. 304-1'1- 2810,26 in which Appellant's requestfor rehearing was denied by operation of law on January 2, 2012.. Plaintiff therefore exhausted its administrative remedies and requested joinder with his prior claims seeking judicial review,

(4) Trial Cou¡'t's Dispositíon: The Comptroller issued its Decision to Cancel Appellants' sales tax permit on March 5, 2Q12, and Appellant timely filed its appeal on March 25,2012.

(õ) Subseguent Proceedings Despite Appellanis'timely appeal from ihe Order Cancelling Appellants'sales tax permit, the Comptroller has cancelled said permit and seeks to physically recover the permit, thus causing Appellanis to pease conducfing business, This emergency petition ensued.

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ISSUES PRESENTED

L Did the Comptroller engage in ultra vires conduct when she persisted in pursuing the cancellation of Appellants' sales tax permit after her decision to cancel the permit had been timely appeal to the district court?

ll, Was the Comptroller's attempt to collect alleged sales tax liabilities while the underlying claims were subject to an interlocutory appeal in violation of the automatic stay provisions?

lll. Dld the Comptroller engage in ultra vires conduct in excess of her statutory authority when she engaged in enforcement procedures to collect sales tax assessments while they were pending judicial review?

lV, When Appellants' administratlve procedures were exhausted, did the Comptroller's decision become a nullity when Appellants requested de novo judicial review?

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STATEMENT OF FACTS

Appellants are convenience store own€rs and operators who filed petitions for judicial review on February 5, 2011, in Sanadco, Et Al v, Combs, Et Al, in Cause No, 1-D-GN-10- 000902 in the 98h Judicial Court in Travis County, Texas, These petitions were filed prior to exhaustion of administrative remedies by their inclusion in this putative class action suit challenging the constitutionality of certain audit statutes, the validity of the audits, the Compiroller's ultra vires acts in the conduct of the audits and a takings claim to recover the illegaltaxes. Prior to the exhaustion of administrative remedies, the Comptroller filed a plea to the jurisdiciion and motion for summary judgment seeking dismissal of the district court suit, The trial court granted both motions in favor of the Comptroller on July ô, 2011, while the Appellants continued to pursue their various claims through the administrative process. Appellants filed notice of inierlocutory appeal to this court on July 25, 2011 in Cause No. 03- 11"00462 from the judgment granting the Compholler's Plea to the Jurisdiction in which Appellants have challenged the grant of the plaa to tha jurisdiction and the motion for summary judgment. ln the instant case, the Comptroller conducted a full audit of Majic lnvestments, lnc, for the period September 1, 2005 to April 30, 2009, resulting in additional tax liability derived from an estimation based in part on HB11 data, and 4P122 requirements, On December 7,2009, lvlaJic was assessed a tax liabillty and an additionalS00/o penalt! forfraud, and a 10% jeopardy determination penalty totaling $79,835.04, Faisal Khan, the owner, was held personally liable for the corporation's debt in the amount of $36,332.67. Appellants timely requested a redetermination hearing before SOAH on December 21,2009, pursuant to 34 Tex, Admin Code $ 1,29. On February 5, 201'1, Majic lnvestments lnc. and Faisal Khan were joined as class action claimants in Sanadco, et al v, Comþs, et al, in Cause No, 1-D.GN-10-000902 in the 98h Judicial Court in Travis Counfy, Texas. (Exhlbit B).The Districi Court heard the Comptroller's Plea to the Jurisdiction and Motion for Summary Judgment on June 28, 2011 and entered judgment on July 8,2011 dismissing each of Sanadco's claims and granting the Comptroller's summary judgment. Sanadco filed iis noiice of inierlocuiory appeal to the Third Courl of Appeals in No, 03-11-004ô2 on July 25,2011. (Exhibit 0), The redetermination hearing was held on Juna 24, 2011. -lhe ALJ submitted his Proposal for Decision on July 6,2011 and his rBsponse to Appellants'Exceptions was filed on

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August 3,2011,'l-he Comptroller's Decisionwas issued on October 19,2011, and Appellants' Motion for Rehearing was filed on November 14,2011, (Exhibit D) to which the Staff objected by motion filed on November 17,2011 , Tha Motion for Rehearing was denied by operation of law on January 2,2012. On January 13,2012, Appellants received notice to show cause why the Comptroller should not take action: (1) revoking or suspending any license, permit or certificate issued by the Comptroller; (2) freezing Appellants' assets; or (3) seizing and selling of Appellants' property, duc to his failure to pay the amount due for sales tax deficiencies of $73,600.67. Appellants were advised that such payment must be made by February 3, 2012 or the Comptroller would "take all appropriate steps to assure compliance", lncluding: revocation or suspension of any license, permit or certificate issued by the Comptroller; withholding state warrants; freezing Appellants' assets; or the seizure and sale of Appellants' property, (Exhibii E), On January 24,2012, Appellants received a "Notice of Bond or Security Required", due to the failure to post bond in thE amount of $8,500,00 because "insufficient bond or security is

currently posted, based on your sales volume". Appellants were advised that such bond must be posted by February 3,2012 or, without further notice or hearing, the Comptroller would "take all appropriate steps to assure compliance", including: revocation or suspension of any license, permit or certificate issued by the Comptroller; withholding state warrants; freezing Appellants' assets; or the seizure and sale of Appellants' property, (Exhibit E), After a telephonic hearing on February 24,2012, the Comptroller entered its order suspendlng Appellants'sales tax permit effective March 5, 2012 for failure to pay the alleged tax and post the bond, (Exhibit A) Appellants then sought judicial review by seeking joinder of this suit along with the remaining suits which had either exhausted their administrative remedies or were in the proc€ss of doing so, with their cases alreadyseeking judicial review in Cause i\o. 1-D-Gl\-10- 000902 in the 98'h Judicial Court on March 13,2012. (Exhibit F). Plaintiffs received a second Notice of Hearing to Cancel dated March 16,2012 to show caLlse why Majic's limited sales, excise and use tax permit should not be cancelled for failure to furnish bond or security in the amount of $8,500,00. A hearing was scheduled on April 6, 2012 and Plaintiffs were advised that their failure to respond to the notice on or before that date would resuli in the cancellation of their permit. (Ëxhibit E)

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Appellants perfected their appealfrom the suspension of their sales tax license by filing a Motion for Declaratory Judgment and Temporary lnjunction in Cause No. 1-D-GN-10- 0OO9O2 in the 98th Judicial Coud on March 26,2012 (Exhibit G), pursuant to Tex, Tax Code Ann, $ 111.01021, Tex. Tax Code Ann. $ 111,00492, and Tex. Tax Code Ann. g 151,2053 authorizing a taxpayer to appeal the revocation or suspension of a tax permit "in the same manner that appeals arÉ made from a final deflciency determination", Despite the timely filed appeal, the Comptroller has persisted in cancelling Appellants'sales tax license and harassing Appellants for the physical license, It being clear that due to the automatic stay imposed in this interlocutory appeal, the trlal court does not have the authority to issue the lnjunctive relief requested, Appellants have filed this petition,

Pendínq Ceses Affected bv this Motion

There are seven addiiional class action claimants who are in various stages of ihe administrativ€ process and subject to the interlocutory appeal including the following: 1. Omar lndustries in which the Comptroller denied its motion for rehearing on February 16,2Q12. 2, Haifa Enterprises, lnc, in which the Proposal for Decision was entered on January 11,2012 and they are awaiting the Comptroller's decision; 3, EID Qorp. in which the redetermination hearing was held on January 30,2012 and the parties are awaiting the Proposal for Decision; 4, MHAK, lnc. in which the redetermination hearing is scheduled for March 12, 2012', 5. Majdi Nsairat in which the redetermination hearing is scheduled on April 16, 2012"

I g t t I OtOZ TAX. Suit Challengurg CollecrionAction Venue for and.lurtsdiction of a sull that challenges or is for the purpose of avoiclurg a comptroller collection action or state tax lien in any manner is exclusively conlened on the district courts of Travis County,

' ç tt i oolo TAX. Appeals A taxpayer may appeal the revocation or suspension of a permit or lice nse uncler Section 111 0046 ancl 1 11 004? of this cocle in the sãre maffìer that appeals are macle lrom a final cleflrciency determination,

3 tst zos rAX Appeals g A taxpayer may appeal the revocatton or suspension of a tax permit in the sarre mamer that appeals are made from a final defrciency detcrmination

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0, Monir Kutob in which discovery was completed on Ðecember 18,2012, No hearing date is set, 7, Walid Abderråhman, in which the Comptroller's Posìtion Leiter was filed on January 31,2012. No hearing date has been set,

Each of these cases may be subjected to the same unauthorized enforcement procedures as the precedlng cases before a final judgment is entered unless the Comptroller is enjoined from engaging in such activity pending entry of a final judgment in Cause No. 1- GV-10-000902 now awaiting a decision in Case N0.03-11-Q046? on file in the Third Court of Appeals.

ARGUMENT AND AUTHORITIES

This Court has authority to issue writs of injunction if necessary to enforce its own jurisdiciion, See Tex, Gov't Code Ann, $ 22,221(a) ("Each court of appeals , , . may issue a writ of mandamus and all other writs necessary to enforce the jurisdiction of the cout1,"). This authority extends to the issuance of writs necessary to preserva the subjebt matier of an appeal. See Bea// v. Sfrake, 602 S,W,2d 394, 395 (Tex. Civ, App.-Austin 1980, orig, proceeding) (holding that court of appeals may issue writ of injunction if lack of injunction would "destroy the subject matter of the appeal, and thereby prevent the effective operation of any judgment this Court might render"), ln Re TASO,03-11-00269-CV (Tex,App.-Austin 5-6- 2011), This Court is authorized, pursuant to Tex, R. App. P, 29,6 to review any interlocutory order that interferes with or impairs the effectiveness of the relief sought or that may be granted on appeal. The Court is also authorized to accept trsnsfer of the case for judicial ,review if the court finds ihat the public inierest requires a prompt, authoritative determínation of the legal issues in the case and the case would ordinarily be appealed, Tex. Gov't Code Ann, $ 2001.176 (c). This case impacts statewide jurisdiction because it involves the parameters of the enforcement authority of the Office of the Comptroller of Public Affairs which presents an unavoidable destruction of the subject matter of this interlocutory appeal. lt would also be determinate of the Compiroller's enforcement authority pending appeal from its

interlocutory orders, an issue of first impression. Here, the subject matter of the appeal is the continued existence of Majic lnvestments, lnc.'s convenience store and the viability of similar enterprises because the loss of its sales tax

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permit will immediately foreclose their right to operate the convenience stores, the freezing of their checking accounts and other assets would prevent the payment of existing debts and jeopardize their credit, and the sale of their assets would completely putthem out of business, before entry of a final judgment determining the existence or extent of their tax liabilities, The order entered to cancel or suspend Appellants' permit is on appeal to the district couft and is therefore an interlocutory order reviewable by this court pursuant to TRAP 29,6. This Couft also has the authority to lift the automatic stay imposed by the interlocutory appcalfor limited purposes, See Tex, R,App, P, 10.1(a), 29,; Zumwaltv, Çity of San Antonio, 03-11-00301-CV (Tex,App.-Austin 11-29-2011); ln re Helena Chem. Co.,286 S,W.3d 492, 495 (Tex,App,-Corpus Christi, 2009, orig, proceeding) (noting that Texas Supreme Couft lifted stay when it granted mandamus relief); Aryx Capital lnt'l v, Sage Apartmenfs, 167 S,W,3d 432,438 (Tex. App,-San Antonio 2005, no pet,) (noting that party should have requested that appellate court lift its stay to allow party's filing of nonsuit in trial court). li is axiomatic that litiganis must comply with the orders of this court. See /n re Mañinez, 77 S.W,3d 482, 464 (Tex.App,-Corpus Christi 2002, orig. proceeding) (acknowledging that both litigants and the lower court must respect appellate court's stay order), lf the Comptroller desired to lssue enforcemant orders against Appellants, they should have asked this courtto lift its stayso that it could pursu6 its enforcement orders, lnstead, the Comptroller chose to circumvent this couil's authority. Because the court's assumption of the interlocutory appeal included an automatic stay provision, it prohibited the continuation of proceedings in the trial court or bythe governmental entity until furlher notice from this court, and the Comptroller therefore had no authority to pursue the enforcement actions, The Comptroller's order cancelling Appellants' permit was enterad in direct violation of this court's automatic stay provisions and is therefore void, The Comptroller should be enjoined from engaging in the complained of activities because these proceedings, whether with or without notice and hearing, are in violation of the automatic stay imposed by section Tex, Civ, Prac. & Rem, Code $ 5'1.014(b), and Tex, Tax Code Ann, S 111.0081.

I. The Comptroller's Suspension of Appellants'Sales Tax Permit Violated Appellants' Right to Appeal from the Order Suspending the Permit

The Comptroller entered an order suspending Majic lnvestment's Texas Sales, Excise and Use Tax permit effective on March 5,2012, Appellants appealed this order by filing a

i5 | ['ir ¿c Motion for Energency Relief to Lift Automatic Stay for Linite

timely Motion for Declaratory Judgment and Temporary lnjunction in Cause No. 1,Ð-GN-10- 000902 in the 9Eh Judicial Court on March 26,2012 pursuant to Tex. Tax Code Ann. g 111,0102a, Tex, Tax Code Ann, $ 111,0049s, and Tex, Tax Code Ann, $ 151.205,8 authorizing a taxpayer to appeal the revocation or suspension of a tax permit "in the same manner that appeals are made from a final deficiency determination". ln suits flled pursuant to Tex. Tax Code Ann, $111,010, officers and directors ar€ entitled to a full and complete hearing on their tax liability in district court, See Tex. Tax Code Ann. $ 111.010 (West 2008) (authorizing attorney general to file suit to recover taxes), The case is tried de novo, Grcene v. Sfafe, 324 S.W.3d 276,288 (Tex.App,-Austin 2010, no pet.) (111,010 allows for a de novo review of the party's tax liabllity), Herrera v. .9fafe, No, 03-01- 00101-CV,2002 WL 185476, at *1 n.4,2002 Tex.App,.-Austin Feb,7,2OO2, no pet,) (not designated for publication) (identifying suit under section 111,010 as "de novo action by the State to collect delinquent tax"), The Administrative Procedure Act (APA) provides that when "the manner of review authorized by law for the decision in a contested case .,, is by trial de novo, the reviewing couft shall try each lssue of fact and law ,,. as though there had not been an interuening agency action or decision," T€x. Gov't Code Ann, $ 2001,173(a) frVest 2000), A de novo hearing has been defined as "a new and lndependent action in whlch the whole case is gone into as if no trial whatever had been had in the court below," Trial de novo is not an "appeal", but is a nBW and independent action, Key Wastern Life lns, Co. v. Sfafe Bd. of /ns,, 350 S,W.2d 839,846 (Tex. 1961). Tex. Tax Code Ann. $ 111.0049, and Tex. Tax Code Ann, $ 151.205 authorize a taxpayer to appeal the revocation or suspension of a tax permit "in the same manner that appeals are made from a final deficiency determination", They are therefore accorded a trial de novo and there is no final order upon which the State can proceed to enforce the order until

o g t t t Ot OZ TAX Surt Challcngrng Collection Action Venue for anrì jurisdiction of a suit that challenges or is fff the purpose olavoiding a comptoller colleclion action or statc tær ìien in any manner is exclusively confened on the clistrict courts o[ Travis Coun¡r.

' $ 1 11 0049 TAX Appeats A taxpayer may appeal the revocation or suspension of a permit or license under Section I I 1 0046 and i i i.0047 of this code in the same rnanner that appeals are rnacle from a fnal deficiency cletermuratuon

ó tst zos TAX Appeats g A taxpayer may appeal the revocation or suspension of a tax permit in the same manner that appeals are macle lrom a ftnal rleficiency determr¡ration.

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a final decision is reached in the appeal, Accordingly, they should be precluded from pursulng the suspension of the sales tax permit until this cause is concluded. Appellants therefore request this couri to lift the automatic stay for the limited purpose of staying the execution of the suspension order pending a final hearing on the appealfrom such judgment,

II. The Comptroller's Enforcement Actlons Vlolated the Automatlc Stay Provlslons of an Interlocutory Appeal

The Texas Civil Practice and Remedies Code expressly provides for an interlocutory appeal from an order granting or denying a plea to the jurisdiction by a govêrnmental unit, Tex. Civ, Prac. & Rem, Code Ann, S 51,01a(a)(8) (West 2008). When a notice of interlocutory appaal under this section is filed, all proceedings in the trial court are automatically stayed pending resolution of the appeal, /d. $ 51,014 (b). ln RE TASO, 03-11-00269-CV (Tex,App.- Austin 5-6-201 1),That appeal is currently pending in this Court as Case No, 03-1 1-00462-CV. Appellants filed its notice of interlocutory appeal on July 25, 2011, Each of the enforcement actions taken by the Comptroller commenced after the filing of the notlce. The Notice of Bond and subsequant enforcement activi$ against ISBA Enterprises, lnc, was commenced on September 20, 2011. 1'he Notice of Hearing to Cancel was commenced by letterto Majic lnvestments, lnc. dated January 13,2012,'lhe hearing was held telephonically on February 24,2012 and the Comptroller ordered the permit suspended effactive March 5,

2012, When Appeilants commenced this interlocutory appeal by filing its notice of appeal, "all other proceedings in the trial courf' were stayed pending resolution of the appeal, Tex, Civ, Prac.&Rem.CodeAnn$51,014(b).Anordersignedduringastayisa"legal nullity," Amrhein v. La Madeleine, 1nc.,206 S,W,3d 173, 174-75 (Tex.App,-Dallas 2006, no pet,)', Burrhus v. M & S Mach. & Supply Co., |nc.,897 S.W,zd 871,873 (Tex.App.-San Antonio 1995, no pet.) (holding that appellate deadlines are stayed during pendency of automatic stay imposed by insurance code). Accordingly, the enforcement actions sought by the Comptroller are void, and any further enforcement activity would be in violation of the automatic stay order and must be enloinad pending resolution of the interlocutory appeal,

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IIL The Cornptroller's Enforcement Actions are Ultra Vires and Exceed Her Statutory Authorlty

The Request for Bond is Premature The Comptroller is not authorized to collect delinquent sales taxes untll they become final, The tax code provides "[t]he amount of a determination made under this code is due and payable 20 days after a comptroller's decision in a redetermination hearing becomes flnal". Tex, Tax Code Ann, $ 111,0081 (c),7 The request for bond is pursuant to Tex, Tax Code Ann, $ 111.012 (a) (1)B which permits the comptroller io require a taxpayer to provide security for the payment of taxes only if the comptroller finds that a fax imposed by this title is insecure. 34 Tex Admin. Code g 3.327 (d), the regulation interpreting this provision provides: lf the comptroller determines at any time that the amount of the bond on file is inadequate or if a permitted retailer is dalinquent in the payment of any state or local sa/es or {/.re faxe.s, the comptroller may require a new or additional bond to be posted.

Relator maintains that the request for bond prior to the establishment of any delinquency is unlawful pursuant to the provisions of Tex, Tax Code Ann, $ 1 11 .0081(c) which provides:

The amount of a determination made under this code is due and payable 20 days after a comptroller's decision in a redetermination hearing becomes final. lf the amount of the determination is not paid within 20 days after the day the decision became final, a penalty of '10 percent of the amount of the determination, exclusive of penalties and interest, shall be added.

The Comptroller's decision becomes "final" (and ihus a party has exhausted administrative remedies) for purposes of a party's pursuing damages in a trial court for Code-

t 5 t t t OOa t TAX When Payment is Re qurecl (a) Except as providecl in Subsections þ) and (c) ol this sectiorr thc amor.urt of a determination made under this code is due ancl payable 10 days after it becomes frîal. If the amorurt olthe determination is not paid within 10 days after the clay it became final, a penally ol 10 percent of the amount of the determination, exclusive ol penalties and nterest, shall be added. þ) This section does not apply to a determination uncler Section ^lll",8??, (c) The ârnount ol a cletermination made uncler this code is due a¡ld payable 20 days after a comptrolle/s clecision Ln a recleterminalion hearing becomes ftnal Il lhe amou¡rt ol lhe cìetermination is not paicl wrthin 20 days alt¿r the day the decision became f-tnal, a penalty ol l0 percent ol the amount of the determi¡ation, exclusive of penalties and interest, shall be added.

I ç t t t.Ot Z Secunly lor the Payment of Taxes (a) If the compboller fr¡rds lhat a fax imposed by this title is lflsecure, the compfolìer mây requlro a tâxpayer tro: (1) provide se curity lor the payment of taxes:

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based claims: (1) atter the time to seek substantial-evidence review of the agency decision expires, if no affected person seeks such review, see Tex. Rev. Civ, Stat. art.4413(36), $ 7,01(a)-(b); or (2) after an affected person who seeks judicial review exhausts the substantial- evidence review avenues. Subaru of America v. David McDavid JVlssan, 84 S.W,3d 212 (Tex. 2002). ln the absence of the Gomptroller's finaldecision in the redetermination hearing, no tax has yet been imposed and no tax is "due and payable" upon which a delinquency may be for provision of security prior to a final decision and predicated. Accordingly, the request subsequent delinquency is void as ultra vires and in excess of the Comptroller's statutory authority, Sfafe y, Çravvford,262 S,W,3d 532,546 (Tex,App,.Austin 2008, no pet.) (evidence was insufficient io conclusively establish that [Taxpayers] "willfully fail[ed] to pay or cause to be paid the tax," because the tax amount had not yet become due); see also Logalv. United Sfafes, 195 F,3d 229,232 (Sth Cir, 1999), Accordingly the requirement for the payment of bond is void and ISBA should be reimbursed for the full cost of the bond, and the settlement agreement reached during the pendency of the lnterlocutory appeal should be nullified. The Notice to Cancel is Premature The Notice of Hearing to Cancel Permit is issued pursuant to Tex, Tax Code Ann. g 111.0047s which authorizes tho Comptroller, after notice and hearing, to revoke or suspend any permit or llcense issued to the pÉrson only if the comptroller finds that a person fails to complywith any provìsion of this title orwith a rule of the comptrolleradopted underthistitle. The Comptroller alleges that the notice is being issued due to Relator's "for failure to pay the amount due of $73,600,67 for the (audit) periods September 1, 2005 to April 30, 2009.

Relator maintains that the request for payment prior to the establishment of its debt is unlawful pursuant to the provisions of Tex. Tax Code Ann. S 111,0081 (c) (See fn. 1).

n $ I t t OOqZ Srxpension and Revocfltion of Pennit or License (a) If a person fails to comply with any provision of this title or with a rule of the complroller adopted under this title. the compholler, afler a hearing, m ay revoke or suspend any perm it or license issued to the person. þ) A person whose pemil or lioense the comptrolìer proposes io revoke or suspend under thls seclion is entltlcd to 20 days' wrilten notice of the tjme and place of the hearing on the revocation or suspension. At the hearng the person must show cause why each permit or license should not be suspended or revoked, (c) The compfoller shall give written notice of the revocation or suspension of a permit or license to the holcler of the permit or license . (d) Notrces under this seclion may be servecl on the holder of the permit o¡ license personally or may be mailed ,c the hoklerrs acldress as shown in thc records of the comphoììer.

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ln the absence of a final decision in the redetermination hearing, no tax has yet been imposed and no tax is "due and payable" upon which a delinquency may be predicated. Accordingly, the requast for payment prior to a final decision and subsequent delinquency is

ultra vires and in excess of the Comptroller's statutory authority, Sfafe v. Crawford, 262 S.W,3d 532, 540 (Tex.App.-Austin 2008, no pet.) (evidence was insufficlent to conclusively establiEh that [Taxpayers] "willfully fail[ed] to pay or cause to be paid th6 tax," because tha tax amount had not yet become due); see a/so Loga/ v. United Sfafes, 195 F,3d 229,232 (Sth Cir, 1 99s). The Comptroller's Decísion Has Been Vdcated Appellants have filed a petition for judicial review pursuant to Tex, Gov't Code g$ 2001,7310 and Tex, Gov't Code S 2001 .17411 in CausE No, D-1-GV-10-000902 in the gSth

District Court of Travis County, Texas for a de novo hearing to determine the validity of the deficiency assessments sought to be collected by the Comptroller in the contested proceeding. More importantly, because the only question before the District Courl concerns a matter of statutory construction, the review of the court's construction of the relevant statutes is de novo. See Clfy of ,San Antonio v. City of Boerne, 11 1 S,W,3d 22,25 (Tex. 2003). Further, in suits filed pursuantto Tex, Tax Code Ann, $111.010, officers and directors are entitled to a fuli and complete hearing on their tax liability in district court. See Tex, Tax Code Ann, $ 111.010 lWest 2008) (authorizing attorney general to file suit to recover taxes). The case is tried de novo. Greene v. Sfafe, 324 S,W,3d 276,288 (Tex,App.-Austin 2010, no pet,) (1'11,010 allows for a de novo review of the party's tax liability),Herrera y. ,Sfafe, N0.03- 01-00101-CV,2002 WL 185470, at *1 n. 4,2002 Tex.App,,-Austin Feb.7,2002, no pet,) (not to g 200i173 Gov'T. Triol De Novo Rçview (u) If the mrrnner of ¡eview nuftorized by law for the decision in n contested cuse thnt is the subject of complnint is by trinl de novo, the revierving court shnll try ench issue of fnct and lew in the ln€rnner that npplies to othe¡ civil suits rr this state as though there hacl not been an intervening agency action or decision but may not aclmit in eviclence the lact of prior state agency action or the nature of that action 0x00pt io the limitecl cxtent necessâry to show cornpliance with stâtutory provisions that vest jwiscliction in the cou¡t,

t' GOV'T Review Under Substantial Eviclence Rule or Undefned Scope of Review $ 2001 174 Il the law authorizes revie"v of a cle cision r-n a contcsted case under the substântial evidence rule or ilthe law does not deline the scope of .ludrcral revier,v, a cowl may not substitute its.ludgment lor the judgment of the statÉ agenc)¡ on the werght of the eviclence on questions committed hr agency cliscretion but: (1) may affirm the agency decrsion ul whole or lr partl and (2) shaìl reverse or remand the case for fwlher proceeclurgs ilsubstantial rights ol the Relator have been preludrccd because the aclminislratrvc furclings, inferences, conclusions, or rlecisions are: (A) rn vioìation of a constrtutional or statutory provision; @) in excess of the agencyrs stafulory authority; (C) rnacle tluough unlawful proceclurel (D) aflected by other error of law; @) not reasonably suppofted by substantial eviclence considering the ¡e liable and probative evidence ln the record as a whole: or (F) arbrrary or capricious or characænzecl by abuse of dlscretron or clearly unwar¡anted exercise of cìiscretlon.

2011'nee Motion for Ernergency Relief to Lift Automatic Stay for Limited Purpose ProDoc Faxservice PagÊ 22 of 103

designated for publication) (identifying suit under section 111,010 as "de novo action by the State to collect delinquent tax"). The Administrative Procedure Act (APA) provides that when "the manner of review authorized by law for the decision in a contested case .., ls by trial de novo, the reviewlng court shall try each issue of fact and law ,,. as though there had not been an intervening agency action or decision," Tex, Gov't Code Ann, $ 2001,173(a) (West 2000). A de novo hearing has been defined as "a new and independent action in which the whole case is gone into as if no trial whatever had been had in the court below," Trial de novo is not an "appeal", but is a new and independent action. Key Western LifE lns. Co. v. Sfafe Ed. of /ns,, 350 S,W,2d 839,846 (Tex. 1961), The sine qua non of a de novo trial is the nullification of the judgment or order of the first tribunal and a retrial of the issues on which the judgment or order was founded, When jurisdiction of the second triþunal attaches, the judgment or order of the first tribunal is not fexas Dept. of Public Safirfy v. Banks Trensp, Co,, 427 merely suspended, but is nullified. S.W.zd 593, (Tex.Sup. 1968); Southern Cenel Co. v. Stafe Bd. of Weter Engineers,318 S,W,2d 619; 159 Tex.227 (Tex. 1958). Accordingly, "res judicata" and "final judgment" are ínapplicable in de novo proceedings because the original administraiive order that is the subject of appeal is nullified in a de novo procÉeding. Sfafe Bd. of lns. v. Republic Nat'l lns, Co., 384 S,W,2d 369, 372 (Tex,Civ,App, Austin 1964, writ ref'd n,r.e.), - The filing of this Petition operates to vacata the Comptroller's Decision pursuant to Tex, Gov't Çode $ 2001.176 (b)(3)'2, because trial de novo is the manner of review authorized by law for suspension of limlted sales, excise and use tax permits,ls Accordlngly, the

t' I ZOO1 . 1 76 GOV'T, Petition Initiating Judicial Rev iew (a) A person ultiates ludrciaì review in a conte sted case by liling a petition not latcr than the 30th clay after the date on which the clecision that is the sublecl ol complaint is linal ancl appealable. (b) Unless otherwise providcd by statute r

(1) the petitton must be frled in a Travis CoLurly clistrrct court; (2) a copy of the petition must be served on lhe stale agoncy and each party of record tr the proceedings belorc the agency; and (3) the fiìing oi lhe pettlion vacates a stâte agency clecision for which lrial de novo is the manner ol review authorizecl by law but does not af,lect the enforcement of an agency decision for which another manner olreview is aulhorized.

tl g t OZ OOZ TAX Enlorcement ol License Cance llatron, Suspension, or Relusal

(c) An appeal lrom an orcler of the comptroller cancelurg or suspending or refusing the issuance or reissuance of a Iicense may be taken lo a clisfict cou¡t ol Travis Courity by the aggrieved license holder or applicant The trial shall be cìe novo u¡rder the same rules as ordinary clvil suits, except that: (l) an appeat must be perlected and fited within 30 clays altrr the elfective dat¿ of the order, decision, or rulurg of the complroller; (2) lhe trial of the case

2llìr'lqe Motion for Ernergency Relief to Lift Autornatic Stay for Limited Purpose ProDoc FaxService Page 23 oî. 103

Comptroller's Decision has not become final and can therefore not form the basis for the collection of the tax deficiencles sought to be recovered by the show cause order.

CONCTUSION

The Notice of Hearing to Cancel Relator's sales tax permit or to require the posting of bond are in violation of autornatic stay imposed by the interlocutory appeal pending before this Court in Case No. 03-11-00462, Further, there is no final order upon which io request payment of the alleged tax assessment, because the Cornptroller's decision has been vacated byvirtue of the putative class action suit pending before the 98rh Judicial District Court in Travis County Texas, seeking de novo review of the Comptroller's decision. Finally, the Notice of Hearing to Cancel, prior to entry of a final judgment, is ultra vires and in excess of the Comptroller's statutory authority, because she cannot collect on delinquent taxes until 20 days after her decision becomes fínal, Her decision cannot become final until the issues relating to the judiciai review or finally determined.

PRAYER

WHEREFORE, PREMISES CONSIDERED, Appellants request this Court of Appeals to lift the automatic stay imposed in this case for the limited purpose of reviewing the issues raised by this motion under lts authorlty pursuant to Tex, R. App, P, 29,6, and declare the Appellants rights pending the appeal of the Comptroller's order suspending Appellants' sales tax permlt and to enjoin Susan Combs, in her official capacity as Comptroller of Public Accounts, from engaging in further enforcement activities pending resolution of the underlying Motion for Declaratory Judgment and Temporary lnjunction and the pending interlocutory a ppea l.

Alternatively, to lift the automatic appeal for the limited purpose of authorizing the trial court to declare the Appellants rights pending the appeal of the Comptroller's order suspendlng Appellants'sales tax permit and to enjoln Susan Combs, in herofficialcapacity as Compirollar of Public Accounts,from engaging in further enforcemant activities pending

shall begtn rvithul 10 ciays after tts filt-trg; ancl (3) the order, decísion, or rulng of the comptroller may be suspencled or modifie d by th-e cowt pending a t¡ial on the rnents

22:l:'nr.¿ Motion for Emergency Relief to Lift Autonlalic Stay for Limited Purpose ProDoc FaxService Page 24 o-f 103

r€solution ôf the underlying Motion for Declaratory Judgmsni and Temporary lnjunction and the pending interlocutory tppÊât. Respectfulfy su þmÌtted,

f,a.w Offie of Samueft tøcft¡on PO Box 170030 Arlingtorr, TX 76003-063s Tel: (817) 751-71s5 Fax. 866-374-0164 ATTORN FOR

T. Jackson Texas Bar No. 1049570

CERTJFICATE OF C OMPI,IAN C-E

Irr compliance with Texas Rules of Appeliate Procedure 51,10, Appellanu cetiff by the sþature above, that they have notified or made ¿ clìligent efff,brt to notify the parties or thei¡ representatrves, by expedited mean$, to advi¡e them that a motion for temporary relief has been or wif be fiIed with Relators' Petitiorr for Writ of Mandamus.

tg_ Sunu¿tt Jací¡sn SAMUBL T. JACKSON

TE F

In compliance withTex. R. App.P. 10.1 (a) (5), counsel fut the Appellanh certifies by his sþature above, that he hæ confer¡ed with counsel for the real parties ín inerest, and was advised that the real partiæ fur interest oppose the relieflrequested in thís motron.

tst_ Samuetl. Jøcfr¿on

SA]VTIIEL T. JACKS OI.\T

23 lPage Motiori for Emergency Relief to Lift Automatic Stay for Limited Purpose ProDoc FaxService Page 25 of 103

CERTIFICATE OF SERVICE

I hereby certi$' by my signahue above that a true and ccrrect copy of the above and foregoing instrument wâs served on the parties or their attorneys via facsimjl€, certi-fi.ed mail, rerutn receiptrequested, and/ar hand delivery onAprü 1,5,2012, in accorda"Ece with the Texas Rules of Appellate Procedure, to the following:

JACK HO}TENGATTEN istant Attorney GenEral ,Ass FD{AN CTA], LITIGATTON ÐTViSION P.O. Box 12548 Austin, TX787tt-2548 13L; (512) 475-3503 FAX: (512) 47 t -2348 / 480-8327 Email: j ack,hohelgprten@oag,state,ü,¡s ATTORNEY F OR RTSPONDEI\TS

24lPuge Mofion for EmergencyRelief to Lift Autom¿tic Stay for Lirnif¿d Purpose Tab C

Plaintiff’s Original Petition for Judicial Review, Declaratory Judgment, Temporary Injunction and Request for Disclosure, No. D-1-GN-13-004352, Sanadco Inc. v. Hegar, in the 200th Judicial District Court, Travis County (“Sanadco II”).

Appellees’ Responsive Brief page 3 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV 1212712013 6:02:24 PM Amalia Rodriguez-Mendoza District Clerk fravis Gounty D-1-GN-13-004352 D-1-GN-13-004352 CAUSE NO,

SANADCO INC, A TEXAS CORPORATION, S IN THE DISTRICT COURT AND MAHMOUD AHMED ISBA s PIointffi, s s s VS s s SUSAN COMBS, IN HER INDIVIDUAT s TRAVIS COUNTY, TEXAS AND OFFICIAT CAPACITY s AS COMPTROTLER OF PUBLIC ACCOUNTS, s s OFFICE OF COMPTROTTER OF PUBLIC s ACCOUNTS FOR THE STATE OF TEXAS, s s AND GREGGABBOTT IN HIS OFFICIAT s CAPACITYAS ATTORNEY GENERAL OF s THE STATE OF TEXAS s 2OOTH Defendants s luDrcrAt DISTRTcT

PTAINTIFFS' ORIGINAT PETITION FOR JUDICIAL REVIEW, DECTARATORY IUDGMENT, TEMPORARY INJUNCTION AND REQUEST FOR DISCLOSURE

COME NOW SANADCO INC. and MAHMOUD AHMED ISBA, Plaintiffs, who file this Original Petition for judicial Review, Declaratory f udgment and Temporary Injunction from a pending Comptroller's Decision in a contested case proceeding before the State Office of Administrative Hearings, complaining of SUSAN COMBS, in her individual and official capacity as Texas Comptroller of Public Accounts, and GREG ABBOTT, in his ofïicial capacity as Texas Attorney General f"Defendants"), and for cause would respectfully show the following: I. DISCOVERY CONTROL PT-AN 1,. Plaintiffs desìgnate this case as a Level 3 case requiring a discovery control plan tailored to the circumstances of this particular suit pursuant to Texas Rule of Civil Procedure 190,4

II. REQUEST FOR DISCLOSURE

2. Pursuant to Texas Rules of Procedure 194, Plaintiffs request that Defendants disclose, within 50 days of service of this request, all of the information or material described in Rule 794.2. III. PARTIES

3. Sanadco Inc., Plaintiff, is a private Texas Corporation, duly organized and existing under the laws ofthe State ofTexas, engaged in the operation ofa convenience store whose principal place of business is located at 3801 East Rosedale St., Fort Worth, Texas 761,05-1,732,and whose Taxpayer No. is

4. Mahmoud A. Isba, Plaintiff, is an individual who resides in Arlington, Tarrant County TX and operates the convenience store owned by Sanadco Inc.,located at 3801 East Rosedale St., Fort Worth, Texas 76105-7732, and whose Taxpayer No. is

5. Defendant, Susan Combs [hereinafter referred to as ["Comptroller"), joined herein as a necessary party in her and official capacity as Texas Comptroller of Public Accounts, and in her individual capacity for purposes of certain of Plaintiffs' claims that certain described actions as set forth below are ultra vires and she was acting beyond the scope of her lawful authority. Susan Combs is a public official who is charged with the collection of Limited Sales, Excise and Use Taxes pursuant to the Texas Tax Code and may be served by personal service aT 1,1,L East l-7th Street, Austin, Texas 7877 4.

6. Defendant, Gregg Abbott in his official capacily as the Attorney General of Texas, joined herein as a necessary party in his official capacity, is a state agency as defined by Tnx, Gov'r, Conn Aruru. g2_t01!03 [7), having statewide jurisdiction which makes rules and determines contested cases and may be served by personalservice ar.209 West 14th Street, Bth Floor, Austin, Texas 7870L.

-2-ll':r¡1rl tv. JURISDICTION AND VENUE

7. This is an action seeking declaratory and injunctive relief from a contested case proceeding pending issuance of the Comptroller's Decision before the State Office of Administrative Hearings (SOAH) against Sanadco, Inc,, and Mahmoud Ahmed Isba in SOAH DOCKET NO. XXX-XX-XXXX.26, TCPA HRG No. 1,04,445, and SOAH DOCKET N0. 304-13 -4212.26, TCPA HRG No, 707,006, respectively, and joined for the sake of efficiency, [Exhibit A)

B, This court has subject matter jurisdiction to determine the validity of AP 92 and AP I22, and enter declaratory relief pursuant to TEX, GOV'T. CODE ANN, [2.00L03B, wherein sovereign immunity has been waived when it is alleged that a rule or its threatened application interferes with or impairs, or threatens to interfere with or impair, a legal right or privilege of the plaintiff,

9. This Court has subject matter jurisdiction pursuant to the Uniform Declaratory Judgments Act, TEX, CIV, PRAC. & REM. CODE ANN, S 37.00L et seq,, by which sovereign immunity has been waived and authorizes Plaintiffs to obtain a declaration ofrights, status, or other legal relations affected by a statute; and against a state official who engages in ultra vires acts without legal or statutory authority, or refuses to perform a purely ministerial act. City of EI Paso v. Heinrich, ¿84 SJ ¿.3d 366 370 [Tex. 2009).

10, This Court has subject matter jurisdiction pursuant to TEX. GOV'T CODE ANN. SS T\ALLI1, ZOfl_UZ3 and 20t1.J74, seeking judicial review from a pending final decision in a contested case before the State Office of Administrative Hearings. Seq Lindig v, !ohnson Cit"v. 03-08-00574-CV (Tex. App.-Austin 70-21"-2009). (a premature petition for judicial review may be cured if there is a claim over which the court obtained juriscliction under its general jurisdictional authority,)

11. This Court has subject matter jurisdiction pursuant to TEX. CONST. AßIJ-S-I=!..

V, SUMMARY OF FACTS

72. On August 17 , 2004, after the Comptroller became aware of lack of uniformity in convenience store audits, she issued a policy memorandum implementing new procedures for convenience store audits entitled Audit Policy 92lAP92 )[Exhibit B),

-3-lí):r¡1r: directing all auditors, inter alia, to conduct a shelf test during convenience store audits if the taxpayer is still in business, and use the percentages designated in AP92 as the mark-up for beer and tobacco products if the records of a convenience store are "unavailable, inadequate, or unreliable" and if the actual mark-up percentage could not be ascertained by other means.

13. Effective September l, 2007, the Texas Legislature enacted legislation directing each wholesaler or distributor of beer, wine, malt liquor or tobacco products to file a report with the Comptroller detailing the monthly net sales made to the retailer by the wholesaler or distributor, including the quantity and units of beer, wine, malt liquorand tobacco products sold to the retailer. [Tex. Tax Code S 151.433 [b) [4)t and Tex. Tax Code S 155.105.2 The data provided as a result of the legislation is commonly referred to as HB 1,1, data, but no directives regarding its use accompanied the legislation. The first reports became available on January 1, 2008.

L4, After HB 11 became effective, the Comptroller revised APg2 with APL 22 (Exhibit C), effective luly 22,2009, by revising the audit procedures and determination of mark- up percentages and incorporating H811, instructing that this data must be the starting point for all convenience store audits whether used as internal control verification or as data used to estimate the audit,

r t S t.+ll. Reports by Wholesalels and f)istr'ibutors of Beer, Wiue, and Malt Liqrrcr ç (b) The comptroller may, when considered necessary by the cornptroller tbr the adrninistration of a tax under this clrapter, require each wholesaler or clistributor of beer, wine, ol rnalt liqnol to file with the cornptroller a report each nronth

4-lirrr¡ti: 15.The Comptroller is statutorily authorized to conduct a detailed audit of selected convenience stores throughout the state, and upon a determination that the store records are inadequate or insufficient, to conduct a sample and projection audit and, in the absence of any records, may utilize the best information available.3

16, The Comptroller subsequently notifies Plaintiffs that they have been assessed a deficiency determination, including interest, and, if proven by clear and convincing evidence, an additional 50% fraud penalty and/or an additional 10o/o jeopardy determination penalty which becomes due if the deficiency is not paid on or before the assessment becomes final, but tax liens may be immediately attached to the subject property.

17. Plaintiffs must file a Request for Redetermination with the Comptroller within 20 days of the date of the notice or the assessment becomes final and immediately due.

1-8.If the Comptroller denies the redetermination, Plaintiffs may request a hearing before the State Office of Administrative Hearings, and, if aggrieved by that determination, may request a rehearing followed by suit in District Court in Travis County, Texas. If no rehearing is requested, the tax assessment becomes a final judgment.

19. Plaintiffstimely fìled a request for redetermination and a hearing was held before the SOAH on September 9, 20!3, (Exhibit D), but the ALJ requested post-hearing briefs from both parties. Plaintiffs filed their brief on October 6,2013 (Exhibit E), the Comptroller filed her response on November 4,20'L3 fExhibit F), and the

3 ç t t t.OO+2. Sampling in Auditing; Projecting Assessments (b) Sampling auditing methods are applopriate it-: (1) the taxpayer's lecords arc so detailed, cornplex, or volurninous that an audit ofall detailed records would be tunreasonable or implactica l; (2) the taxpayer''s records ale inadequate ol insufÏcient, so that a cornpetent audit for the peliod in question is not otherwise possible; or' (3) the cost ofan audit ofall cletailed recolds to the taxpayer or to the state will be unreasonable in relation to the benefìts derived, and sarnpling proccdures will ploduce a reasonable result. (c) Bcfore usìng a sample techniqle to establish a tax liability, the cornptroller or his designee must notif,i the taxpayer in writing of the sampling pt'ocednre fo be nsed. (

-5-li:':¿1r: Proposal for Decision was issued on December 12, 2003 (Exhibit G), but no Comptroller's Decision has yet been issued.

V. RETIEF SOUGHT

20. Plaintiffs, Sanadco, Inc, and Mahmoud Ahmed Isba are engaged in a contested case proceeding in the State Office of Administrative Hearings regarding an alleged sales and use tax deficiency in Docket Numbers XXX-XX-XXXX.26, and XXX-XX-XXXX.26 respectively.

2l-.Plaintiffs seek to void the underlying audit, alleging that the auditor acted fraudulently by his unauthorized use of AP 92 and AP L22 as well as HB 1-1 despite the recent Third Court of Appeals opinion that these documents were "invalid rules" and therefore void and unenforceable because they were not formally adopted pursuant to the mandatory provisions of the Administrative Procedures Act. See, Sanadco, Inc. v. Comptroller of Public Accounts, 03-1t00462 [Tex. App. -Austin 2013); LEXIS 12073 at *13 (Tex. App,-Austin Sept 26, 2013). [Exhibit H),

22. Plaintiffs also seek to void the underlying audit, alleging that the Comptroller engaged in ultra vires conduct by failing to perform the purely ministerial act of promulgating AP 92 and AP I22 as administrative rules, and subsequently acting without legal authority by implementing the illegal and unauthorized memos as agency poliry and procedure.

23. Plaintiffs further seek to void all instances in which the Comptroller imposed the additional 50% fraud penalty upon the mere finding of "underreporting" instead of the statutorily required finding of fraud or willful intent to evade the tax. In doing so, the Comptroller has engaged in conduct in excess of her statutory authority by substantially reducing her burden of proof and shifting that burden to the taxpayer by requiring him to prove that his conduct was not willful or intentional. Plaintiffs allege that this is ultra vires conduct and is outside the Comptroller's statutory authority.

24. SOAH has acknowledged that the foregoing issues are beyond the jLrrisdictional authority of the Administrative Law Judge and have therefore refused to address them within the parameters of a contested case proceeding. See, Comptroller's [TheALJdoesnothavejtrrisdictiontoconsider

-6-lí)r,r11c whether Audit Policy Memorandums 92 and 722 constitute rules as defined by the Administrative Procedure Act.); Comptroller's Decision No. I06,51,6 [2013) (Petitioner also contends the 50% additional penalty should be cleleted because the statute authorizing the additional penalties is unconstitr.rtional and because there was no intent to evade the tax. However, it is well settled that neither the Comptroller nor the ALf has jurisdiction to consider the validity of a statute.); See also, Comptroller's Decision Nos. 1-0-3É.83, 103.96-l(2077), It4.445. 1.85,726 (2012).

25.In the absence of jurisdiction for SOAH to address these issues, which may be determinative of the validity of the audit, Petitioners seek to have these issues addressed by this Court under the authority of Tex, Gov't Code S 2001.038 together with the authorities previously recited wherein this Court is granted jurisdiction to determine the validity or applicabiliry of a rule beþre it is applied to the detriment of this taxpayer, and beþre he has exhausted his administrative remedies,

COMPTI\INT I

The Comptroller engaged in ultra vires conduct because she failed or refused to perform the purely ministerial act of adopting the memoranda designated as AP 92 and AP I22 as agency rules pursuant to procedures required by the APA, thereby rendering the audits utilizing these procedures invalid and unenforceable,

26. Plaintiffs incorporate the preceding paragraphs by reference as if the same were set forth fully and verbatim herein.

27.The Comptroller's memos implementing Audit Policy Memoranda 92 and 722 (tÊ- 92and /\PJJZ) effective August 17 ,2004, and July 22,2009 respectively, are agency rules as defined by Tex, Gov't Code ç 200L.003* (6) o.fne use of these rules or their threatened application interfere with or impair, or threaten to interfere with or

4 $ 2001.003 Definitions In*thi.s cbapter

(6) "Rule": (A) rneans a state agency statcmetrt of general applioability that: (i) irnplements, intelplcts, or presclibes law or policy; or (ii)

7-li):titt: impair, a legal right or privilege of the Plaintiff in that they subject Plaintiff to potential loss of his business, his license, illegal tax assessments and subjecting his property to liens and potentially to forcible sale.

28, The Audit Policy Memoranda regarding AP 92, AP L22 and HB L1 constitute agency rules as defined by the Administrative Procedures Act (APA) because they are statements of general applicabiliry relating to all convenience store audits; that implemented agency policy to add uniformity to the audits; and described the procedure or practice requirements of the agency by implementing the use of HB 11 and the percentages for mark-ups and product mixes incorporated in AP 92 and AP 722.

29.The Comptroller is charged with establishing methods for admìnistering and adopting necessary rules for the collection of taxes and other revenues, Tex. Tax Code Ann. S 111.002(a). Specifically, the Comptroller has statutory authority to "adopt, repeal, or amend such rules to reflect changes in the power of this state to collecttaxes and enforce the provisions of this title." Id,

30, A presumption favors adopting rules of general applicability through the formal rule-making procedures the APA sets ouT. Rodriguez v. Serv. Lloyds Ins. Co., 997 S.W.2d 248, 255 [Tex. 1,999). These procedures include providing notice, publication, and public comment on the proposed rule, 1d. [citing Tex. Gov't Code Ann. SS 2001,.023-.030). The process assures notice to the public and affected persons and an opportunity to be heard on matters that affect them. Id.

31.Unless a rule is promulgated and adopted in accordance with the requirements of the APA, it is invalÍd and unenforceable. Tex. Gov't, Code Ann. SS 2-0f11-Q35,s aq01.0!46 and Z0û1.,0057, Neither AP 92 nor AP I22 as it reìates to HB 1,7,were

5$ 2001.035. Substantial Compliance Requilernent; Tirne Lirnit on Pl'ocedulal Cìhallenge (a) A rule is voidable unless a state agency ado¡rts it in substantial cornpliance with Seotions 2001.0225 tlirough 2001.034.

6S Adopt Rnles of Plactice and Index Rnles, Orders, and Decisions 2001 .004 Requilernent to In addition to other leqniternents under'law, a state agency shall: (l) adopt rules of practice stating the nature antl requircments of all available formal antl inft¡r'rnal ploocdules; (2) index, cross-index to statntc, and rn¿rke available for public ir:rspection all lule s an

7 Not Etfcctivc Until Indcxcd $ 2001.005 Rulc, Ordcr, or Dccision

8-lí):,r¡1i: ever adopted as mandated by the APA and are therefore invalid and unenforceable when applied to convenience store audits.

,1 L. Plaintiffs seek a declaratory judgment against Susan Combs in her individual and official capacities as Comptroller of Public Accounts for the State of Texas, pursuant to Tex. Gov't, Code Ann, S 2-û01",038 and the Uniform Declaratory Judgments Act, Tex. Civ. Prac, & Rem, Code Ann. S 37.001 et seq., which waive sovereign immunity, declaring that the Compffoller's memoranda, designated as AP 92, AP 722 (incorporating HB 11J, are invalid administrative rules because they were not adopted in accordance with the requirements of the APA found at Tex. Gov't Code Ann, SS 2001.035 and 2001.004. EI Paso Hosp. Dist. v. Texas Health & Human Servs. Comm'n,247 S.W.:1d799.774 {Tex.2008) [quoting Railroad Comm'n v,WBD)il&GasCo.,L04 S.W.3d 69,79 (Tex.2003J);Combsv.EntertainmentPubl'ns, I nc.,}92 S.W .3 d 7').2, 7 20 (T ex.Ap p.-Austin 20 09, no pet.),

COMPLAINT II

The comptroller acted ultra vires because she acted without legal authority by implementing and enforcing 92, AP I22 and HB 11 before performing the purely ^P ministerial act of adopting them as Rules in compliance with the nondiscretionary, purely ministerial rule-making procedures mandated by the APA.

33. The Comptroller is charged with establishing methods for administering and adopting necessary rules for the collection of taxes and other revenues, Tex. Tax Code Ann, S 111,002[a). Specifically, the Comptroller has statutory authority to "adopt, repeal, or amend such rules to reflect changes in the power of this state to collecttaxes and enforce the provisions of this title." Id.

34. Suits to require state officials to comply with statutory or constitutional provisions are not prohibited by sovereign immunity. Heinrich, ZB4-5l4lJd at372. To fall within the ultra vires exception to sovereign immunity, a suit "must allege, and ultimately prove, that the officer acted without legal authority or failed to perform a purely ministerial act." ld. [citations omitted). "Thus, ultra vires suits do not attempt to exert control over the state - they altempt to reassert the control of the state. Stated another way, these suits do not seek to alter government policy but

(a) A statc agcncy rulc, ordcL, or dccision rnadc or issucd on or aflcr Janttary I, 197 6, is not valid or cffcctivc against a pcrsol'r or party, and rnay not bc invokcd by an agcncy, until thc agcncy has iudcxcd thc lulc, or

9-||rr;1i; rather to enforce existing policy." ld.

35. Unless a rule is promulgated and adopted in accordance with the requirements of the APA, it is invalid and unenforceable. Tex. Gov't. Code Ann. $$ 2001-.035, 2007.004 and 2001.005. The Comptroller has no legal authority to enforce agency rules before they are adopted in accordance with the APA, Such adoption is mandatory and nondiscretionary, The Comptroller's failure to comply with this ministerial, nondiscretionary act was therefore an ultra vires act. This Court is respectfully requested to enjoin the use of AP 92 and AP 722 until they are properly adopted as rules pursuant to the requirements of the APA,

36 Plaintiffs seek a declaratory judgment against Susan Combs in her individual and official capacities as Comptroller of Public Accounts for the State of Texas, pursuant to Tex. Gov't, Code Ann. S 2001.038 and the Uniform Declaratory Judgments Act, Tex. Civ. Prac. & Rem. Code Ann. S 37.001 et seq., declaring that the Comptroller is not authorized to estimate convenience store audits using the methods prescribed by AP 92 or AP 722 until their proper adoption, and/or that the authorization of their use is a non-discretionary ultra vires act committed without legal authority which conflicts with relevant provisions of the Tax Code and the Comptroller's administrative regulations. El Paso Hosp. Dist. v. Texas Heqlth & Human Servs. Comm'n,247 S.W.3d 709,714 [Tex. 2008) (quoting Railroad Comm'n v.WBDOil&GasCo.,I04 S.W,3d 69,79 (Tex.2003));Combsv,EntertainmentPubl'ns, |nc.,292 S,W.3d 712,720 [Tex.App.-Austin 2009, no pet.),

COMPTAINT III

The Comptroller acted ultra vires and exceeded her statutory authority by implementing HB11 without adopting it as a rule pursuant to the APA,

37. Plaintiffs incorporate the preceding paragraphs by reference as if the same were set forth fully and verbatim herein.

38, By memorandum dated luly 22,2009,the Comptroller authorized the use of HB 11 data as the starting point for convenience store audits because estimation based on vendor records obtained from the taxpayer's suppliers and the assumption of the product mix and industry percentages set forth in AP 92 and AP 122 would satisfy the best information requirement, The Comptroller envisioned that: "The availability of HB 11 data enables us to detail two major taxable product categories [beer/wine, tobacco products) from fanuary 2008 forward, It allows us to use more than one taxable product category to estimate/sample an audit."

-10-lilit¡r.r.' 39. There is no statutory provision or administrative regulation authorizing the Comptroller to determine alcohol and tobacco sales by giving conclusive effect to the HB11 data without first ascertaining whether that determination can be made from the taxpayer's records. The Comptroller's memos of July 22,2009 (Exhibit B) and September 2,2010 (Exhibit C) implementing HB11 are rules as defined by Tex. Gov't Code S 2001.003 [6), The use of this rule or its threatened application interferes with or impairs, or threatens to interfere with or impair, a legal right or privilege of the Defendant by threatening loss of revenue or loss of property,

40. The memos implementing the use of HB 11 data constitute rules as defined by the APA because they are of general application to convenience store audits, and they implement and prescribe poliry and describe the procedure or practice requirements for conducting estimated audits based on the information contained solely in the HB 11 data.

41-. The authorization of such procedure is a non-discretionary ultra vires act, and exceeds the Comptroller's statutory authority because she failed to perform the purely ministerial act of promulgating the rule in accordance with the requirements of the APA, and she was therefore acting outside her legal authority in authorizing the use of the invalid procedure.

42. Plaintiffs seek a declaratory judgment against Susan Combs in her individual and official capacities as Comptroller of Public Accounts for the State of Texas pursuant to Tex. Gov't. Code Ann. S 2001.038, declaring that the Comptroller's memos implementing HBl1 effective luly 22, 2009, and September 2, 201"0, are invalid administrative rules because the Comptroller failed to satisfy the adoption requirements of the Administrative Procedures Act (APA) found at Tex. Gov't Code Ann $$ 2001.004,2001.005 and 2001,035; and the Uniform Declaratory f udgments Act, Tex. Civ. Prac, & Rem, Code Ann. S 37.004 et seq., construing (Tex, Tax Code $ 757.433 tb) t4) and Tex. Tax Code S 155.105, decìaring that these statutes do not authorize the Comptroller to give conclusive effect to the HBl,1 data, and that the authorization of its use for such purposes is a non-discretionary ultra vires act in excess of her statutory authority which conflicts with relevant provisions of the Tax Code and the Comptroller's administrative regulations, E1 Paso Hosp. Dist. v. Texas Health & Human Servs. Comm'n,247 S.W.3d 709,774 (Tex. 2008) [quoting Railroad Comm'n v. WBD Oil &- Gas Co, 104 S.W"3d 69, 79 [Tex. 2003)); Combs v. Entertainment Publ'ns, 1nc.,292 S.W.3d 712,720 (Tex,App.-Austin 2009, no pet.).

COMPTAINT IV

11-|i)iritr' The Comptroller acted ultra vires and in excess of her stâtutory authority when she unilaterally established "gross underreporting" as an irrebuttable presumption of proof to impose the additional 50%o penalty instead of proof of fraud or intent to avoid the tax as required by Tex, Tax Code Ann. $ 111.061(b).

43. Plaintiffs incorporate the preceding paragraphs by reference as if the same were set forth fully and verbatim herein.

44 Tex. Tax Code 8-'1-,11.061[b)u authorizes the Comptroller to impose a penalty of 50% for fraud, or intent to evade the tax, in addition to the deficiency determination. When the Comptroller seeks to impose a 50 percent additional penalty it must show clear and convincing evidence of fraud or intent to evade tax. TEX. TAX CODE Section 111.061(b) and 34 TEX. ADMIN. CODE Section 1.40[1) (B)

45. Fraud implies "bad faith, intentional wrong, and a sinister motive, and the intent required to be showed is that there was specific intent to evade tax believed to be owing." Comptroller's Decision No. 34,492Q997). The Comptroller, however, has held on many occasions that "gross underreporting of taxable sales, along with other factors or no plausible explanation, is sufficiently indicative of intent to evade the tax to warrant the assessment of the fraud penalty. Comptroller's Decision No, LDL,9L1-; See Rule 1.40[1) [B). See also Webb v. Commissioner of Internal Revenue, 3e4 F. 2d366 [1968): "Fraud is never imputed or presumed and the court should not sustain findings of fraud upon circumstances which at most create only suspicion." "Negligence, whether slight or great, is not equivalent to the fraud with intent to evade tax named in the statute. The fraud meant is actual intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed owing. Mere negligence does not establish either," Webb, citing cases.

8$ I 1 1.061 Penalty on f)elinqucnt T¿rx or Tax Reports (b)E,xcept where another pcnalty lbr fi'aud or irtent to evade the tax is specifically provided, an additional penalty of 50 pelcelt of. the tax due shall be iurposed if it is tletelmined that: (t) thc f?rilure to pay the tax or hle a report when due was a resr¡lt of fi'aud or an intcnt to evatJe the tax; ot' (2) thc taxpaycr altcrs, clcstloys,

-12-llta¡lr, 46, The burden proof is on the Comptroller to prove by clear and convincing evidence that the failure to pay the tax was willful or fraudulent. 34 Tex. Admin. Code Section 1,40[1) [B). Although she claims to bear this burden, the Comptroller has authorized a finding of fraud upon the irrebuttable presumption that a 250/o underreporting constitutes fraud, thereby unlawfully shifting the burden to the taxpayer to provide some plausible reason for the underreporting.

47. An agency's interpretation of a statute it is charged with enforcing is entitled to serious consideration, so long as the construction is reasonable and does not conflict with the statute's language. R.R. Comm'n of Tex. v. Tex. Citizens for a Safe Future &. Cleqn Water,336 S.W.3d 619, 624 [Tex, 2011"). An agency's opinion, however, cannot change plain language, nor contradict statutory text. Combs v. Health Care Services Corp.,401 S.W.3d 623 (Tex.2013); Fiessv. Stqte Fqrm Lloyds, 202 S.W.3d 744,747 [Tex.2006).

48. The Comptroller has exceeded her statutory authority by reducing the burden of proof required to establish fraud by eliminating the requirement of intent or willfulness, and establishing an entirely new irrebuttable presumption standard of "gross underreporting", thereby clearly shifting the burden of proof in direct conflict with legislative and statutory authority.

49. Plaintiffs seek a declaratory judgment against Susan Combs in her individual and official capacities as Comptroller of Public Accounts for the State of Texas, pursuant to the Uniform Declaratory Judgments Act, Tex. Civ. Prac. & Rem. Code Ann. $ 37.004 et seq., construing Tex. Tax Code S11 1.461ft) and declaring that the Comptroller has acted ultra vires, and in excess of her statutory authority by unlawfully creating a new irrebuttable standard of proof and shifting the burden of proof and authorizing the imposition of the 50% fraud penalty upon an irrebuttable finding of gross underreporting without a finding of fraud or intent to avoid the tax as required by the statute, and/or that such procedure conflicts with relevant provisions of the Tax Code and the Comptroller's administrative regulations,

COMPLAINT V

The comptroller acted ultra vires because she acted without legal authority by implernenting a cornpletely new irrebuttable presurnption of "gross underreporting" as proofoffraud or intent to avoid the tax as required by Tex, Tax Code 5 111.061(b), before performing the purely ministerial act of adopting it as a

-13-li'a¡it rule in compliance with the nondiscretionary, purely ministerial rule-making procedures mandated by the APA.

50, Plaintiffs incorporate the preceding paragraphs by reference as if the same were set forth fully and verbatim herein.

51. Tex, Tax Code Ç 111.061[b) authorizes the Comptroller to impose a penalty of 50% for fraud, or intent to evade the tax, in addition to the deficiency determination, When the Comptroller seeks to impose a 50 percent additional penalty it must show clear and convincing evidence of fraud or intent to evade tax, TEX. TAX CODE Section 111.061-(b) and 34 TEX. ADMIN. CODE Section 1,40(1) [B).

52. The Comptroller has, without statutory authority, created an entirely new irrebuttable presumption that the tax payer's underreporting of 25o/o or more is "sufficiently indicative of intent to evade the tax to warrant the assessment of the fraud penalty,"

53. There is no statutory provision or administrative regulation authorizing the Comptroller to determine fraud or the intent to invade the tax by giving conclusive effect to underreporting of taxable sales, without first ascertaining whether that d etermination includes willful, frau dul ent intent,

54. The Comptroller's creation of this new standard of proof is a rule as defined by Tex. Gov't Code S 2001,003 [6), The use of this rule or its threatened application interferes with or impairs, or threatens to interfere with or impair, a legal right or privilege of the Defendant by threatening loss of revenue or loss of property,

55. The cases implementing the use of this irrebuftable presumption constitute rules as defined by the APA because they are ofgeneral application to convenience store audits, and they implement and prescribe policy and describe the procedure or practice requirements for imposing the additional 50% penalty,

56, Plaintiffs seek a declaratory judgment against Susan Combs in her individual and official capacities as Comptroller of Public Accounts for the State of Texas, pursuant to Tex, Gov't. Code Ann. S 2001.038 and the Uniform Declaratory Judgments Act, Tex, Civ. Prac. & Rem. Code Ann. S 37,004 et seq., declaring that the Comptroller is not authorized to impose the additional 50o/o penalty by implementing the irrebuttable presumption of underpayment as a substitute for a finding of fraud or intent to evade the tax until its proper adoption, and/or that the

-14-li)it¡lrr authorization of its use is a non-discretionary ultra vires act committed without Iegal authority which conflicts with relevant provisions of the Tax Code and the Comptroller's administrative regulations. El Paso Hosp. Dist, v. Texas Health 8¿. Human Servs. Comm'n,247 S.W.3d 709,71,4 (Tex. 2008) [quoting Railroad Comm'n v, WBD }il & Gas Co.,I04 S.W.3d 69,79 [Tex. 2003)); Combs v. Entertainment Publ'ns, \nc.,292 S.W.3d 7L2,720 [Tex.App.-Austin 2009, no pet,),

COMPTAINT VI

Tex. Tax Code Ann. S 111,0042 authorizing sample and proiection audits is unconstitutionally vague as written and as applied to plaintiffs,

57. Defendant, Cross-Plaintiff ["Plaintiffs") incorporates the preceding paragraphs by reference as if the same were set forth fully and verbatim herein.

58. The Comptroller has the authority to examine the type of records she deems necessary for conducting a thorough audit ofa taxpayer's records. See Tex, Tax Code Ann. ÇLL 1.004,11L0-A& and 1-5L.023.

59, Section LSL025 requires sellers to maintain [a) records of gross receipts, including documentation in the form of receipts, shipping manifests, invoices, and "other pertinent papers", [b) similar documentation relating to their purchases, and [c) records in the form of receipts, shipping manifests, invoices, "and other pertinent papers" that substantiate each claimed deduction or exclusion authorized by law. See also, Rule 3,281(a) [2),

60. The Comptroller is only authorized to conduct a sample and projection audit "when the taxpayer's records are inadequate or insufficient, so that a competent audit for the period in question is not otherwise possible." Tex. Tax Code Ann, $ LU$a42 þ) t2).

61.. When records are inadequate to reflect the taxpayer's business operations, the Comptroller is authorized to estimate a taxpayer's ìiability based on the best information available. Tex, Tax Code $ 777.004'¿(d). The Comptroller has held that the use of vendor records and the procedures set out in AP 92 satisfies the best information available requirement when no records or unreliable records are made available, See Comptroller's Decision No.44,893 (2006).

-L5-lt'ir¡rr 62. The types of records the taxpayer is required to maintain is extremely nebulous because of the inclusion of the statement "and other pertinent papers" accompanying each category of records required to be maintained. This leaves open the requirement to maintain records not included or described in the statute, providing little notice to the taxpayer of what is essential to meet the ill-defined requirements of the statute. (See Exhibit E, p. 3).

63 The determination of whether the records are "inadequate" or "insufficient" is therefore discretionary with the auditor and thus whether a detailed audit based on a thorough review of the taxpayer's records or an estimated "desk audit", based on HB 11 data and AP 92 or AP 122 estimates will be required.

64. There is no statutory guidance by which an auditor or the taxpayer may determine whether records are adequate or insufficient, and the records the auditor may require are boundless as a result of the vast array of records not specifically identified, but ostensibly permitted by the statute, such as sales summary records, general ledgers, purchase invoices, federal income tax returns, purchase journals, cash register tapes, fixed asset/depreciation schedules, daily sales journals or Z- tapes. See SOAH Docket No,XXX-XX-XXXX.26; Hearing No.1,04,037.

65. "lt is a basic principle of due process that an enactment is void for vagueness if its prohibitions are not clearly defined." Grayned v. City of Rockford, 408 U.S, 104, I08,92 S.Ct. 2294,33 L.Ed,zd 222 (I972). "Second, if arbitrary and discriminatory enforcement is to be prevented, Iaws must provide explicit standards for those who apply them." Id. Thus, for a statute not to be unconstitutionally vague, it must be sufficiently clear in at least three respects: [1) a person of ordinary intelligence must be given a reasonable opportunity to know what is prohibited; (2) the law must establish determinate guidelines for law enforcement; and [3) if First Amendment freedoms are implicated, the law must be sufficiently definite to avoid chiìling protected expression. Id. at 108-09; Long v. State, 931, S,W.2d 285, 287 [Tex.Crim.App. L996).

66. A court will find a rule unconstitutionally vague, in violation of due process, if it does not give fair notice of what conduct may be punished, and invites arbitrary and discriminatory enforcement by its lack of guidance for those charged with its enforcement. U.S,C.A, Const.Amend. L4. Vista Healthcare V. Texas,03-09-001"7B-CV [Tex.App,-Austin B-26-2010). This statute fails to establish guidelines for its application and does not give fair notice to the taxpayer of the prohibited conduct,

-16-lij;i¡.1 r' lending itself to discriminatory enforcement. It is therefore unconstitutionally vague and must be stricken.

67. Plaintiffs seek a declaratory judgment against the Office of the Comptroller of Public Accounts, Susan Combs, in her official capacity as Comptroller of Public Accounts for the State of Texas and Gregg Abbott, in his official capacity as the Attorney General for the State of Texas, pursuant to the Uniform Declaratory Judgments Act, Tex. Civ. Prac, & Rem. Code Aruru. S 37.004 et seq., construing Tex. Tax Code $ 717.0042, declaring that this statute is unconstitutional on its face and as applied to Plaintiffs because it is, by its nature, a denial of substantive and procedural due process and is constitutionally vague because it permits the audit to be made merely on undefined subjective criteria, and without providing any guidelines for the administration thereof.

COMPTAINT VII

Tex. Tax Code S111.022, authorizing a feopardy Determination without guidelines, is Unconstitutional on its face and as applied.

68. Defendant, Cross-Plaintiffs ("Plaintiffs") incorporates the preceding paragraphs by reference as if the same were set forth fully and verbatim herein.

69. Tex. Tax Code $ 111.022e authorizes the Comptroller to impose an additional 10% jeopardy determination penalty against a deficiency determination, which comes due immediately, if she "believes" that the collection of a tax required to be paid to the state or the amount due for a tax period is jeopardized by delay.

70. The statute is purely discretionary because it establishes no parameters by which the Comptroller is to make this determination except for her undefined

e 5 t t t.OZZ TAX. Jeopaldy Deterrnination (a) IlÌthe cornptroller believes that the collection ofa tax lequiled to be paid to the state ol the arnount due Ior a tax period is jeopardized by delay, the compholler shall issue a detelrnination stating the amotuìt and that the tax collection is in jeopardy. The amor¡nt lequired to be paid to the state or due for the tax peliod is due and payable irnmediately. (b) A

-17-ll'ri¡-1 r'' "belief", and there is no statutory definition for the terms "jeopardized by delay"

7T "lt is a basic principle of due process that an enactment is void for vagueness if its prohibitions are not clearly defined," Grayned v. Cíty of Rockford, 408 U.S. 104, 1.08,92 S.Ct. 2294,33 L.Ed,zd 222 (7972). "Second, if arbitrary and discriminatory enforcement is to be prevented, Iaws must provide explicit standarcls for those who apply [hem." /d, Thus, for a statute not to be unconstitutionally vague, it must be sufficiently clear in at least three respects: [1) a person of ordinary intelligence must be given a reasonable opportunity to know what is prohibited; [2) the law must establish determinate guidelines for law enforcement; and [3) if First Amendment freedoms are implicated, the law must be sufficiently definite to avoid chilling protected expression. Id. at 108-09; Long v, State, 931 S.W,zd 285, 287 [Tex.Crim,App. 1996).

72 A court will find a rule unconstitutionally vague, in violation of due process, if it does not give fair notice of what conduct may be punished, and invites arbitrary and discriminatory enforcement by its lack of guidance for those charged with its enforcement. U,S.C,A, Const.Amend.14, Vista Healthcare V. Texas,03-09-00178-CV (Tex.App,-Ausrin 8-26-2010). This statute fails to establish guidelines for its application and does not give fair notice to the taxpayer of the prohibited conduct, lending itself to discriminatory enforcement. It is therefore unconstitutionally vague and must be stricken.

73. Plaintiffs seek a declaratory judgment against the Office of the Comptroller of Public Accounts, Susan Combs, in her official capacity as Comptroller of Public Accounts for the State of Texas and Gregg Abbott, in his official capacity as the Attorney General for the State of Texas, pursuant to the Uniform Declaratory Judgments Act, Tex, Civ. Prac. & Rem. Code A¡¡n. S 37,004 et seq., construing Tex. Tax Code $ IIL022 and declaring that the statute is unconstitutional on its face and as applied to Plaintiffs because it is, by its nature, a denial of substantive and procedural due process and unconstitutionally vague because it permits the feopardy Determination to be made merely on undefined subjective criteria, and without providing any guidelines for the administration thereof.

COMPTAINT VIII

The Comptroller has taken Plaintiffs' property for public use without just compensation by collecting the foregoing illegal, unenforceable or invalid taxes pursuant to her official duties under Tex, Tax Code Ann. S 111,001.

-18-li';ty.r: 74 Plaintiff incorporates the preceding paragraphs by reference as if the same were set forth fully and verbatim herein.

75. Pursuant to her authority under Tex, Tax Code Ann. S--1.L1-0-0ato the Comptroller collected illegal, invalid and unenforceable sales and use taxes from Plaintiffs without their consent, and deposited such collections into the State's general revenue fund pursuant to Tex. Tax Code Ann. S 101.009[a),11 thereby intentionaìly engaging in authorized conduct constituting a taking of Plaintiffs' properry for public use without adequate compensation.

76 The Texas Constitution waives sovereign immunity from suit for an unconstitutional takings claim. Tex, Const. art, I, S 1,7.Lz ; See Steelev. Cíty of Houston, 603 S.W,zd 786,797 (Tex, 1980). To establish a takings claim, the complainant must prove 1) that the State intentionally performed certain acts, 2) that the acts resulted in a "taking" of property, and 3) that the property was taken for public use. General Servs. Comm'n v. Little-Tex Insulation Co.,39 S,W.3d 591, 598 [Tex. 2001-). Plaintiffs maintain they have satisfied that burden by the foregoing pleadings.

77 Plaintiffs seek a declaratory judgment against the Office of the Comptroller of Public Accounts, Susan Combs, in her official capacity as Comptroller of Public Accounts for the State of Texas and Gregg Abbott, in his official capacity as the Attorney General for the State of Texas, pursuant to Tex. Const. art, I, S 17 and the Uniform Declaratory fudgments Act, Tex. Civ, Prac. & Rem, Code Ann. S 37,004 ef seq,, declaring that the Comptroller's collection of these taxes was an intentional act

10 ç 1 I 1.001 Cìomptloller to Collect Taxes The comptroller shall collect the taxes in.rpose<1 by this title except as othelwise plovided try this title

r1 10i.009(zr) Allocation and Tlansfel clf Net Revenuçs $ (a) E,xcept as provicled by Sul:rsection (b) of this section, all revenues collected florn the taxes irnposed by the chaptels of this titlc and by Clhapter 8, Title 132, Revised Civil Statutes of Texas, 1925, as atnended, af-tel deiluction of the portion allocatcd ttrr collection, enfbrccrnent, and adrninistration purposes, shall flrst be deposited in the general re\¡cnue lund. After thc initial deposit, translèr's fl'orn the genelal revenue fund to other ftuds shall be rnade at the time, in the rnanner, and in the amorìnts provided by law.

12 of Sec, 17 Taking, damaging or destloying property for pulllic use; special privileges and imrnunities; control lrlivileges an

-19-li):i¡r.r" resulting in the taking of Plaintiffs' property for public use without adequate compensation, and that Plaintiffs are entitled to injunctive relief and the recovery of damages to compensate for their loss, including pre and post-judgment interest.

VL Sovereipn Immunitv Is Not Imnlicated

78. A suit asserting that a government officer "acted without legal authority" and seeking to compel the official "to comply with statutory or constitutional provisions" is an ultra vires suit that is not protected by sovereign immunity. City of EI Paso v. Ileinrich, 284 S"lü:3cl 366, 372 [Tex. 2009), They are not barred by sovereign immunity because they "do not attempt to exert control over the state." 1d. Instead, the suits "attempt to reassert the control of the stâte." Id.; Saenz, 3I9 S.W.3d at920. The supreme court recently expounded upon sovereign immunity in ultra vires cases in City of EI Paso v. Heinrich and Texas Department of Insurance v. Reconveyance Services,lnc.284 S.W.3d 366 (Tex, 2009);306*S.\V.3d 256 [Tex. 2010) [respectively). The Supreme Court determined that "while governmental immunity generally bars suits for retrospective money relief, it does not preclude prospective injunctive remedies in official-capacity suits against government actors who violate statutory or constitutional provisions." Heinrí.ch,284 S.W.3d at 368-69, ln Heinrich, the supreme court confirmed that "suits to require state officials to comply with statutory or constitutional provisions are not prohibited by sovereign immunity, even if a declaration to that effect compels the payment of money." Heinrich,2B4 S.W,3d at 372. Reconveyance,306 S.W.3d at 434. Further, if valid challenges to the Department's rules under the APA are raised, then it is not necessary to determine whether the Appellees have properly alleged ultra vires claims because the trial court's subject-matter jurisdiction is established by section 2001,038 of the APA. See Tex. Gov't Code Ann. S 2001,038. Section 2001,038 allows a party to bring a declaratory-judgment action challenging the validity or applicability of an agency rule if it is alleged that the rule or its threatened application interferes with or impairs a legal right or privilege of the plaintiff. See id. Section 2001.038 is considered a legislative grant of subject-matter jurisdiction, so that valid claims raised pursuant to that provision are not barred by sovereign immunity. See Combs v. Entertainment Publ'ns, |nc.,292 S.W.3d 7L2,720 [Tex.App.-Austin 2009, no pet,) [collecting cases). Tex. Dept. of Pub. Safety v. Salazar, 304 S,W,3d 896 [Tex.App. [3rd] 2010).

-20-lllii¡1 i' VtL Exhaustion Of Administrative Remedies Not Required

79. The general rule in Texas is that courts do not interfere with the statutorily conferred duties and functions of an administrative agenry. Westheimer lndep. Sch. Dist. v. Brockette,567 S,W.zd 7B0,7BS [Tex. 1978). However, courts may intervene in administratíve proceedings when an agency exercises authority beyond its statutorily conferred powers.ld. This exception to the exhaustion of administrative remedies doctrine is a variation of the rule that where the administrative agency lacks jurisdiction, a trial court may intercede before administrative remedies are exhausted. See City of Houston v. Williams, 99 J.W.3cl 209, 777 (Tex.App.-Houston [14th Dist.] 2003, no pet.). "ln such a case, the purposes underlying the exhaustion of remedies rule are not applicable, judicial and administrative efficacies are not served, and agency polices and expertise is irrelevant if the agency's final action will be a nullity ." MAG-T, L.P.,1,67 S.W,3d at 625. BO "ln order to maintain an action against the Comptroller for a refund of taxes, a party must meet the procedural requirements of the tax protest law. Compliance with these procedures is a jurisdictional prerequisite for the trial court to hear and decidethemeritsofataxrefundsuit." CentralPower&LightCo.v.Sharp,919S.W.zd 485,491. [Tex,App.-Austin 1996, writ denied) (citations omitted). Combs v. Chevron, 1nc., 3 19, 5.W"3d€36 [Tex.App, [3rd] 2010), B1 However, when an agency promulgates a rule without complying with the statutory rule-making procedures, the rule is invalid,.Tee APA S 2001.035 (a); El Paso Hosp. Dist,,247 tw.3d at7L5. The APA allows a person to challenge the validity or applicability of an agency rule pursuant to a declaratory judgment action if it is allegecl that the rule or its threatened application interferes with or impairs a legal right or privilege of the plaintiff. APA $ 2001,038[a). Thus Counter-Plaintiffs do not seek declaratory relief regarding the tax refund itself, but regarding the validity of the rule promulgated by the Comptroller in violation of the APA, for which the Iegislature has expressly permitted suit by a declaratory-judgment action. See APA S 2001.038 . Combs v. Entertainment Publ'ns, lnc., ¿g?lJ ¿,3d U2,720. Since this is not a suit for a refund pursuant to Tex, Tax Code Ann, $ 111-:l-04 its requirements are not relevant to Plaintiffs' right to seek injunctive relief.

VlIL Attorney's Fees

Pursuant to Tex Gov't Code Ann $ 2006,01,313 and Tex, Civ. Prac. & Rem, Code Ann, S 37.009, request is made for all costs and reasonable and necessary attorney's fees

13 5 zooe .ol: GOV'T. Iì.cquilcmcnts f

-21-li';i¡'r' incurred by Plaintiffs herein, including all attorney's fees and costs necessary in the event of an appeal or original proceeding to the Court of Appeals and the Supreme Court of Texas, as the Court deems equitable and just.

PRAYER FOR RETIEF

WHEREFORE, PREMISES CONSIDERED, Defendants, Cross-Plaintiffs [Plaintiffs) pray that this Court, after notice and hearing: L. Deny Plaintiff, Cross-Defendant's (Defendants) claims and enter a tâke nothing judgment. 2. Allow Plaintiffs to proceed with their claims in protest of the taxes, penalties and interest assessed in the decisions complained of without regard to the requirements of Tex. Tax Code $S 112.108. 112.05l or 11e10-L for the reason that Plaintiffs are unable to meet these financial requirements, and that such prohibition is in violation of the Open Courts provision of Article I, Sec. 13 of the Texas Constitution. 3. Enter judgments pursuant to the foregoing allegations making the following declarations as to Plaintiffs' rights: a. that the Comptroller's memos AP 92 and AP L22 on August L7 ,2004, and fuly 22,2009 respectively, establishing and implementing procedures fbr the conduct of convenience store audits, are invalid administrative rules, and that the Comptroller's authorization of their use without complying with the APA requirements was ultra vires and exceeded the scope of her statutory authority, and that her failure to comply with the requirements of the APA was a failure to perform a purely ministerial, non-discretionary act, thereby entitling Plaintiffs to declaratory and injunctive relief from the collection of these illegal, invalid and unenforceable taxes, penalties and interest; b, that the Comptroller's memo of fuly 22, 2009, implementing and establishing procedures for the use of HB11 data, is an invalid administrative rule, and that the Comptroller's authorization of its use without complying with the APA requirements was a non-discretionary, ultra vires act which

(a) In an adrninistrative adjudicatory ploceeding or a civil action resulting t'otn a complaint issued by a state ageûcy against a small business under the agency's administrative or regnlatory functiclns, the small business may be awarded reasonable attorney fees and couft costs if: (l) it is a srnall busincss at the time it becomes a party to the prooeeding or action; (2) it prcvails in thc procccding or action; and (3) thc procccding or action was groundlcss and brought: (A) in bad faith; or (B) fur purposcs clf harassmcnt.

-22-lir a 11 t' exceeded the scope of her statutory authority, and that her failure to comply with the requirements of the APA was a failure to perform a purely ministerial, non-discretionary act thereby entitling Plaintiffs to declaratory and injunctive relief from the collection of these illegal, invalicl and unenforceable taxes, penalties and interest; c. that Tex, Tax Code 55 151.433 and 155,105 do not authorize the Comptroller to conduct desk audits giving conclusive effect to the HB11 data in determining Plaintiffs' tax deficiency without examination of Plaintiffs' business records, and that doing so is ultra vires and in excess of the Comptroller's statutory authority, thereby entitling Plaintiffs to declaratory and injunctive relief from the collection of these illegal, invalid and unenforceable taxes, penalties and interest ; d that the Comptroller is not authorized to estimate the markup of alcohol and tobacco products or to conduct audits of convenience stores under the requirements of AP 92 or AP 122 without first adopting them as Rules pursuant to the requirements of the APA, and that doing so is a non- discretionary and ultra vires act in excess ofher statutory authority, thereby entitling Plaintiffs to declaratory and injunctive relief from the collection of these illegal, invalid and unenforceable taxes, penalties and interest; e. thatTex, Tax Code S 111.0042 is unconstitutional on its face and as applied to Plaintiffs because it permits the auditor to determine whether records are adequate based solely on undefined subjective criteria, and without providing any guidelines for its administration lending itself to discriminatory application, thereby entitling Plaintiffs to declaratory and injunctive relief from the collection of these illegal, invalid and unenforceable taxes, penalties and interest; f that Tex, Tax Code S 111.022 is unconstitutional on its face and as applied to Plaintiffs because it permits the Jeopardy Determination to be made merely on the Comptroller's undefined subjective criteria, and without providing any guidelines for its administration lending itself to discriminatory application thereby entitling Plaintiffs to declaratory and injunctive relief from the collection of these illegal, invalid and unenforceable taxes, penalties and interest. t tr' that the Comptroller is not authorized to unilaterally reduce the burden of proof, or to shift the burden of proof in establishing fraud as required by Tex. Tax Code Ann. $ 111,.06I, and that such conduct is non- discretionary and ultra vires and in excess ofher statutory authority, thereby entitling Plaintiffs to declaratory and injunctive relief from the collection of these illegal, invalid and unenforceable taxes, penalties and interest,

-2iJ-llt;¡tt: h, that the Comptroller has engaged in intentional conduct resulting in the taking of Plaintiffs' property for public use without adequate compensation in violation of Const. art. I, sec, 1-7 of the Texas Constitution and that Plaintiffs are entitled to declaratory, injunctive and compensatory relief; 4. : Enter judgment permanently restraining and enjoining Susan Combs, in her individual and official capacities, and the Office of the Comptroller of Public Accounts, its employees and agents, and all other persons in active concert or participation with these Counter-Defendants from engaging in the following acts or practices in derogation of Plaintiffs' and the Class'rights: a. the use of AP 92, AP I22 and HB 11 for any purpose during the conduct ofaudits ofconvenience stores, and to refrain from the collection of taxes, penalties and interest resulting from their use unless and until the Comptroller aclopts these procedures in compliance with the Administrative Procedures Act; b. conducting abbreviated audits or desk audits resulting in the estimation of tax deficiencies without an initial review of the taxpayer's records and from giving conclusive effect to HB11 data reported to the Comptroller by alcohol and tobacco distributers unless and until the Comptroller adopts these procedures in compliance with the Administrative Procedures Act; c, imposing an additional 50% penalty authorized by Tex, Tax Code $ 111.061(b) as a result of audits conducted on convenience stores, and to refrain from the collection of all penalties and corresponding interest resulting from its imposition. d, estimating the markup of alcohol and tobacco products under the requirements of AP 92 or AP 1,22 without first determining the nature and scope of Plaintiffs' records; e, authorizing auditors to determine whether records are adequate based solely on undefined subjective criteria, and without providing any guidelines for its administration; f, making a f eopardy Determination based merely on the Comptroller's undefined subjective criteria, and without providing any guidelines for its administration, and to refrain from the collection of all penalties and corresponding interest resulting from its imposition; g. authorizing an additional500/o penalty based on a finding of frar-rd without a showing of willful intent and unilaterally reducing the burden of proof, or shifting the burden of proof to Plaintiffs in establishing fraud, and to refrain from the collection of all penalties and corresponding interesl

-24-l\rt11 t' resulting from its imposition; h, engaging in the collection of taxes, penalties or interest from Plaintiffs whose audits have been conducted by any or all of the foregoing procedures, including Plaintiffs who currently have a balance due pursuant to an agreement to pay the balance due in full, or pursuant to a periodic payment agreement and Plaintiffs who currently have a balance due and have entered into no agreement with the Comptroller for periodic payments and are subject to suit by the Attorney General pursuant to Tex. Tax Code Ann. $ 111.010. 5 Enter judgment, jointly and severally, against the Comptroller of Public Accounts, Susan Combs individually and in her official capacity as Comptroller of Public Accounts for the State of Texas and Gregg Abbott, in his official capacity as Attorney General of the State of Texas for compensatory damages, including pre and post-juclgment interest, to all Plaintiffs from whom the Comptroller has collected these illegal, invalid and unenforceable taxes, penalties and interest, in whatever manner, in violation of Tex, Const. art I, sec, 17 resulting from her adherence to the invalid procedures and unconstitutional statutes alleged herein. 6. Enter judgment directing Defendants to account to Plaintiffs and the Class for all damages caused to lhem as a result of their unlawful actions, and appointing a Special Master to oversee implementation of this Court's orders with periodic reports submitted to the Court on progress with the fees and all reasonable costs charged and incurred by the Special Master to be paid by Defendants as such charges may be apportioned by the Court. 7 Enter juclgment awarding to Plaintiffs the costs and disbursements of this action including reasonable attorneys' fees and costs for experts pursuant to the provisions of the Texas Government Code, Texas Civil Practices and Remedies Code and the Administrative Procedures Act. B Plaintiffs pray for all other relief, equitable and legal to which they may prove themselves justly entitled,

Respectfully submitted,

By' Sanru¿L-l Jackson Samuel'f, Jackson Texas Bar No. 70495700 P,O. Box 170633 Arlington, TX 76003-0633 [800) 969-5023 [Toll Free):

-25-ll'ii¡ir,. (572) 692-6260 (Austin) [832) 895-6676 [Houston) (866) 374-0L64 [Fax) E mail : ¡qeksprtlau¿@ holuud. ca m

CERTIFICATE OF SERVICE

I hereby certify by my signature above that a true and correct copy of the above and foregoing instrument was served on the parties or their attorneys via facsimile, certified mail, return receipt requested, and/or hand delivery on December 27,2013, in accordance with Rule 21a, Texas Rules of Civil Procedure, to the following:

JACK HOHENGARTEN Assistant Attorney General State Bar No, 09812200 Office of the Attorney General Financial Litigation, Tax, and Charitable Trusts Division P,O. Box 1"2548 Austin, Texas 7 87 II-2548 Tel: [5L2) 475-3503 Fax: (512) 477-2348 i a ck. h o h e n gì rt e n @ texas íì tto r n ey ge n-e ral, go v Attorneys for Counter-Defendants Greg AbbotÇ Attorney General ofTexas and Susan Combs, Comptroller of Public Accounts of the State of Texas

SEAN M. O'NEILL Assistant Attorney General State Bar Number 24070354 Bankruptry & Collections Division P, O. Box 12548 Austin, Texas 7 87 17-2548 Tel: [512) 475-4255 Fax: (512) 482-834I s ean.o'neill@texasattorneygeneral.gov

Atto rney for Plainti ffs/Cou nter-Defenda nts, State of Texas, The City of Tyler, Texas, and The County of Smith, Texas

-26-li';t¡t.t' soA_tl No. 304-13 -42tt.26 (CPA I{rg. No, L06,8L5)

RE: SANADCO, INC. $ BEFORE THE STATE OFFICE $ TAXPAYERNO: $ AUDIT OFFICE: Audit- iìort Worth 2140 s OF AUDIT PERIOD: February 1,2007 $ through Jwre 30, 2009 $ Limited Sales, Excise, and Use TaxlRD'f $ ADMINI S TRATTVE }IEARINGS

soAH NO. 3 04-13 -42t2.26 (CPA I-Irg. No. 107,006)

RE: MAHMOUD A-I-IMED iSBA $ BEF'ORE TI-IE STATE OÞ-FICE I TAXPAYERNO: $ AUDITOFFICE: AdvancedCollections $ OF Processing 2S52 $ AUDIT PERIOD: };4.ay 1,2007 $ tluough June 30, 2009 $ ADMINIS TRATIVE HEARINGS Limitecl Sales, Excise, ¿rnd Use Tzux/RDT

MOTION F'OR.IOINDIIR

The above styled hearings have been set with the State Office of Administrative Llearings (SOAH) to bc heard by oral hearing. 'Ihe Tax Division respectfully recluests that SOAIi Docket Nos, 304-J.3 -4211.26 a:rd XXX-XX-XXXX.26 be joíned together ilto a single proceeding. Joinder is authorized by tire 'lexas Administrative Code. ,See 1 TBx. ADMIN. Cone $155.155(c) qnd34 Tnx. Anunv. CooE $ 1.37. Since these heæ'ings involve the samc issues of fact and law, they should be combined for the sake of effìciency.

Respectfully submrtted,

r!.rr,"U 1 ----:-- Iireal lv\Iler- AssistantìGcnel'ai Couns el Admilistrative Hearings Texas State Bar No. 24041485 Comptroller of I'ublic Accounts P.O. Box 13528 Austirr,'lX 1 87 1 I-3528 Telephone: (512)463-4612 Facsimile: (512) 463-461.]

EXHIBIT A .i Audit Division Memo - Detail Page I ofZ

INTEROFFICE MEMO carcte ßeeton f¿¡rr Åc+outß

Drte: August17,20M

AP 92

To: All Audit Pcrsonnel From¡ David Rock

SubJect: Altern¡úive Audlt Mothods, Mark-Up Percentages & Product Mlx Psrcontrgcs fot Convcniencc Storer

Our Administative Hearings Section and Adninishative taw Judges have voiced concern about ths lack of uniformity in estimatcd convenienc¿ storc audig. Percentages wore doveloped utilizing datr from the Toxas Pêtroleum Marketors and Convenience Store Association (TPCA)' Robert Monis & Associrt€s Annual Finanoial Statoments (RMA), and National Association of Convenience Stores (NACS). Thesc r¡rark-up p€rcentåges and ptoduct mix percentagæ shoy!{ gnly Ue used.whe¡ . iecessitaæ¿ by lack of bliatte records. Ashelf test mu¡t be conducted if the taxpayer is still in business. Aud¡tor¡ should not cmploy ertlustÊE or percentrgoa from othsr sourcqt in completlng audits.

Effective immediaæly the following methods should bE used to perform an audit in cases whert records ate unavaílable, inadequatc or unreliable:

l. Mark-up method: Purchase information is obtained from the taxpayer a¡d/or vendors (such ai beer dishibutors and/or cigarottc dishibutors). A mark-up is establi*red by þrforming a shclf test. The resulting mark-up is applied to ttrc purchasç information rçceive¿ from the tÐ

When ¡udits nre estlmated urlng fhe attached percentågos' the audito¡ should include llngunge tn ineir notice of estimatlon thalthesc pcrcentagcr were obtained fron fhls AP memo.

If the ¡udltor doer not u¡e the mark-up me(hod, lt must be documented why thi¡ method w¡s not uaed.

Examplc I - Purchtses Avaihblc/lYo Shelf Test

r TIre taxpayeds convenience store is out of business when tlre audrt is genemted. r The ta.:cpayer's purchase invoices on hand are incomplete. , Taxpayårïendôrs a¡e known'

hnp:liaudibmZiwumemos/enrry.aspx?inaex=g1YZ EXHIBIT B 08t25/2rJ09 Audit Division Memo - Detail Page 2 of 2

Tlre auditor identifies the taxpayot's vendors and obtains purchåse information for tlre audit period. No shelf test can bo conducted sinoe the store ie closed The audibr should use ths Bttschcd mar*.'up percentåges for the appropriate catogory ofpruchases.

Example 2 - Purch¡ses.{v¡llnble for Ouþ Ons Product Catcgoty/$lo Shelf Tesú

o The taxpaye/s convenience store is out of business wlren the audit is generotcd. o Only known vendods) and purchase ínvoíccs nre from beer distibutor(s). r Records on hand are tho FIT returns for ths au0it period.

No shelf test can be conducted sincs the tarçayer is out of bi¡sineca" Tho auditor should use the attached pcrcenùag{s) for the appropríate prnduot cat€gory.

The auditor obtains purchase information from the beqr dishibutor(s) and applies the mark-up percentagc for beer (Coh¡¡nn B: 125,00%) to arrive at the dollsr value of estimâted beer soles for the audit. The auditor will divido the estimatcd dollar value of beer sales for the audit by thc percenøge of beer sales to average total sales (Column C:ZIVù to calculate estimaúed total sales for ths audit. Bstimated total sales for thc audít will be multiplied try 85% to calculate estimated taxable sales for the audit.

For example:

Beer purehaseE from bear distrlbutors X 125.00t * $ value of eetimated beer gales (EBS) for the audit

EBS for the audít / 2'Ì\ - Estimated total sales (ETS) for the at¡dÌt

EÍS for the audlt X Bst - Estirnated Taxable Saleg for the audlt (B5t consldered taxåble salesi t5t allowance for non- taxable sale8)

Convenience Sto¡p Mark-Ups and Percentages of Average Sales by Product

Audit Memos Memos Search Audit Home @cPA

http//audibm2/aud/memolentry.aspx?index=.dP 92 08125n009 Coruenlencs Store Mark-Upa md P€rcentagoc ol Av€tage Ssl€s by Producl AP 92

A B c D E F G 1

2 roduBl Câtooon kuD ol 3 Êd6 ól.l S¡log For 4 Pl 5 iräár

7 1 25.00% 27 6 Vlo I Candv .9Íl7o F/o 13"Á r0 )hÊrÈnèvTobacco 1 7,85"Y. 27% 39%

)hlos/Snacks 149.25% 71 4% 14 1õ )ther Taxabl€ Foo'dDrirüo 2l 4.08% 8% Talo

Genoral i¡ierchiHB0 8% 17%

19 Sott Drlnks 144.90% 1 % æ"fo 20 21 E 6 coßl8t afs d llômr. gf6

2* 2A sam€ lhal 2t nonvenlence Étorês füâl ( nol rcêf.

2g

s/10/2007 INTBROFFICE MEMO ,Sus¿n Combs Te¡as Corttptlllw ú Publk Accounls

Dato: July 22,2009

t22 ^P To: All Audit Personnei

From: Emma lìuentes

SubJect: Cuidellnes for Çonvenlence Store Audlts

The fiollowing g¡ridelines must be used for all convenience store$ audits complcted on or after the issue date of this memo, This does not replace AP 92, it only updates our proceduræ to fully utilizo datå available to us:

' I-IB L l data, available taxpayer records, and *rird parly records must be used to produce dte most accura.te audit results,

. The product mix of each convenience store must bq considered. Indushy averages should only be used in the absence oftheso records.

. For periods prior to HB I I data where no records arc available, averÀge t¡xable sales amounts must be used to estimate the periods with missing records.

. Rebates for tobacco products and allowances for purchases made with thc Lone St¡r Catd must be addressed.

Record¡¡

, HBt I data must be the starting point for convenience store eudits, whether used as intemal control verification or as dota used to estimate the audit'

. The auclitor rnust lequest records tiom the taxpayer and/or their represcntative,

Vendors must be cont¿cted to obtain records for the entire aud¡t period, if available.

All of these records must be compared to each other for accurscy and consistency in

EXHIBIT C CPA 4 purchasing pattems. If material differences are noted between HB I I data and purchase records rec€ived fþom vendorc, conttct fte Computer Audit Information & Support (CAIS) se{tion in Audit Headquarters.

Use of Data

The availability of HB I t data enables us to efficiently detqil two major taxable product categories þeø/wine and tobacco produots) from January 2008 forwa¡d. ft allows us to use more than one taxable product category ùo estimate/sample an audit, A semple should only be consldered when ¡ convcnience ¡tore has sood lntenel controlg. cornpletç rec'ûrd¡ and inventory purchases are volumlnous.

Indlvldual Store's Product Mlr & Shelf Test

Auditor judgment is crucial to detennining the product mix of eaoh individual convenience store. The product mix of each convenience stor€ must be analyzed. This mix should be aken into consideration when revicwing available records. A shclf test mu¡t be conducted on each active outlet. It should have a minímum of l0 different higlr/medium volume itenns for each category. Thesc t0 items can be a mix of the different variety of sizes and brands available for sale (for example, I 2 pack, 6 pack, l8 pack, 20 oz, one liter bottles, quart bottles, smokeless tobacco, cigar products, domestic beer, imported beer, Cooru, Budweiser, etc.) as these are often sold with different marlarps. If the taxpayer docs not offer a variety of sizes and brands, this must be documented to explain why l0 items were not used.

Beer B¡rn / Plsco.unt,Toþgcco Outlefp., ç.tg

In instances where only beer, wine and tobacco are considered to bs the primary taxablc products, the best audit rnethod to use is the mark-up method. An example is a bcer bam or a convçnience store that attributes the majority of its taxable sales to these items. On thçsc audits, purchase infonnation from HB i I data, the taxpayer, and/or vendors (such as beer distributors and/or cigarette distributors) should be used as mentioned above. A mark-up is cstablished by performing a shelf test. The resulting mark-up is npplied to the purchase information and compared üo reported t¿xable salcs. Þifferences would bc additional taxable sales, There is no need ûo gross-up additional immaterial taxabte itcms.

C_onvenience Store with Sienific.qqt Ta4able ltems Other.thgn Beer and Tobqçc-o

There may be instances where the taxpayer sells a sþr/ìcsnl amount of other taxable items, These items should be included in the shelf test. As an example, the auditor obsorves thaf the following itoms arc being sold at the store:

r) Ice 2) Motor oil 3) Detergent 4) Phone cards

CPA S 5) Soft drinks Q Energy drinks 7\ Toilet papcr 8) Charcoal 9) Magazines

lfa majority of thesc items can be tr¿ced to purchase invoices, there is rçasonable assurance that the rccords arc subtlantlally complele and should be used to perform a purchase mark-up test, There is no need to estinato for any of the unaccounted invoices.

lf the auditor has sufficient records for a short tirno period (a few months worth of records), then it may be possible to compute the product mix for tho stôre, Theso perccntages should be used to 'ogross-up" the additional average taxable sales to arrive at audited taxable sales.

Example: HB t t data x conesponding mæk-up = $360,000

Compute the percentago of each produot to total sales: t. Product mix for beer/wine at estimated sales - $35,600.04 ( l) / (5) = 50.8470* 2. Product mix for cigaretteltobaccô ât estimated sales = 18,655.33 (2) / (5) = 26.64Vot 3. Product mix for soft drinks at estim¡ted sales = 6,812.30 (3) / (5) - 913% 4. Other taxable product mix at estimated sales =. 8.952,94 (f) 1(Ð 5. Total $70,020,61 100%

Audited taxable sales: $360,000 I 77.48%* = $464,636.04

The above exarnple is based olr auclits where a shelf tæt is conductetf. [f rto shelf tæt is concluctecl, use the cost of the iterns sold to calculale the product tnix percentuge.

Industry Avorages

If the auditor oannot get sufficient recorcls to compute a stott's individual product nrix, the attaohed product mix percentages mây be used when estimating additional taxable sales. These percentages were developed utilizing data ftom the Texas Peftoleum Marketers and Convenience Store Association (TPCA), Robert Morris & Associates Annual Financial Statements (RMA), and National Association of Convenience Stores (NACS). These rnark-up psrcentâges and ptoduct mix percentages should bc used azlywhen necessitated by lack ofretiablc records or ifthe store is òlosø, The industry averages should not be used when the product mix is available becauso the product rnix of the store may not be consistent with the national product mix percentages.

Pcrlods prlor to HB f l (January l,2008):

If there are no records prior to January 2008, estimated taxable sales should be based on the average taxable sales for the periods when records were available. We should no longer be using the enor factor to estimate additional taxable sales for ttre prior periods, This new method is a result of taxpayers who may have increased reported taxable sales after the passage of HB I I after being Çontacted æ a result ofour desk compliance project'

CPA 6 Example: Total Audited Taxable Sales using l2 months of HBI I data and other reliable data: $360,000 Average Monthly Audited Taxable Sales for periods without records: $360,000/12 months = $30,000 The $30,000 would be used for each reporting p€rid without records. Thc reported taxable sales amounts should be subtracted from the Average Monthly Audited Taxable Sales.

Tobacco Products Reb¡ts end Lone St¡r Card Allow¡nces:

A taxpayer may receive a rebate ftom the cigarotto manufactr.rre(s) which ttduces the purchase price of tobacco products. The nuditor should request thc rebate infornration from the bxpayer. [f provided, these amounts must be deducted from the purchase price of the tobacco products by month. Also, the rebate amounts should be considered when calculating the mark-up, when applicable, If the taxpayer or their reprcsentative is unable or unwilling to provide rebate infomration, the computed mark-up for tobscco will be small or possibly a negative number. If this occuts, the attâched industry averages should bE used.

Allowances for Lone Star Card should be made only when adjustrnents are made for products úrat can be purchased using the Lone Star Card (soft drinl$, chips, candy), lfadjushnents are only for 0obacco products and beer, no l¡ne Star Card allowance should be given. Refer to the Crocery Store Manual, Chapter V for ndditional information.

Notilic¡tion of E¡tlmrtion

Auditors mu$t issue the appropriate Notification of Estirnation.

If you have any questions about this, please conbact Les Arche 512463-1749, Gilbert Garcia, 512- 257-4636, or Emma Fuçntes at 512-305-9893.

Attachments:

l. RqvisedAP 122 Attadunclt.

Audit tlome (ð.crPA Audit Memos ìYlçmo.g Sçarclr

GPA 7 3/06/28 13 :41: 33 1/3 STATE OFFICE OF ADNTINISTRATIVE HE.A.RINGS AUSTIN OIITICì] 300 Wcst lSth Strcet Suite 502 Austin, Te xas 78701 Phone: (512\ 475-4993 Iax: (512) 322-2061 DATE: 06t28t2013

NTI]\4RER OF PAGES INCLL]DING THIS COVER SIfEET: J

REGARDLNG: ORDER NO.3 - RESCHEDULTNGHEARTNG

DOCTflTNL]IVIBER: 304-13-42Lt.26 JIIDGB PETEII BROOKS !.4.\ TO: !'.{x T0:

I|jREAL MILLER (COMP'TROLLER OF PI_IBLIC VIAEMl\[, ÀccouN'1s) SAMI]ET,'f JACKSON (8(t(Ð 374-0164

NOTE: IF ALL PAGES ARE NOT RECEfVED, PLEASE CONT.ACT Arnanda l)eir:hert(ade) (5121475-4993

above-namecl recipient(s) or the indivict¡al or agent responsible to deliver it to the intencled recipient, You are hereby notified that arry clissemination, clistribution or copying of this communication is strictly prohibited. If you have rcceivecl this conrmunícation in erro¡, please iurnrecliately notrly us by telephorre, and retum the origrnal messiìge to tN at the aclclress via the U.S. Postal Service, Thank you,

EXHIBIT D . 3/06/28 1-3 :41 : 33 2/3

SOAH DOCI(ET I\rO. XXX-XX-XXXX.26 TCPA IIEARING NO. 106,815

SANADCO,INC., $ BEFORE THE STATE Otr'FICD Petitioner $ $ v $ OF $ TI,XAS CON,IPTROLLBR OF PUBLIC $ z\CCOUN'l'S, $ llespontlent $ A DMIN I S't'R,,\'T' IVE HEAII.IN GS

soAH DOCKET NO. XXX-XX-XXXX.26 TCPA IIEARING NO. 107,006

MAHMOUD AHMED ISIIz\, $ BEFORE THR S'I'A'I'H, OI'FICE Petitioner $ $ v. $ OF $ TII,XAS CON,IPTIì.OLLBR OF PUBLIC $ ACCOUNTS, $ lì.cspondent $ ADNI INI ST II.,,\T IVE HBAIìINGS

ORDB,R NO.3 RESCIII,DULING HIìARING

The paÍies have proviclecltlu'ee altemate cfates f-or reschechrlingthe hearìngs clue to a schectuling

corúlict. T'hc hcarings cumcntly schcchrlcd to colìvcnc on Angust 19,2013, ¿rrc canccllcd ancl continucd

to Septernber 9,2û13 at l:00 p.m. at the State Ofïice of ¡\dministrative llearings, William P. L'lements ì3r.ilcling, 300 West l5'h Strcet, 4'h Iiloor, Anstin, Tex¿rs.

SIGNIJD,lune 2tl, 2013.

¡) $*ivs.*,S,' 1¡t r 1'Io Ì !., L t,g\ ¡ÌFtr ¡i,.Flt,I r'¡{}\1f þìl$f'lt,1f ll Ë fr. tqt ,i¡{rf}{;* hf r ¡ ! tïIi$i{:F: {,þ. dt}},iilfitþtft.'{'lt1 i. å*f;.\É,:å3t;s 3/06/28 l3 :41- : 33 3 /3"

STA'I' E OIIIIIC Il Oli ¡\D],II NI STR .\'l' M IIBARINGS AUSTIN OT'F'ICE 300 West lSth Stleet Suite 502 Austin, Texas 78701 Photte: (512)'175-4993 Fax: (512) 322-2t61

SERVICE LIST

AGENCY: Comptroller Of Public Accourts (CPA) STYLE/CASE: 106,815

SOÂII DOCKII'I' NU^\{tllJR: XXX-XX-XXXX.26

IIEFERRING AGENCY CASE:

S'I'ATE OFFICE OF ADIVIINISTIIA'TIVE ADMINI S'I'IIATIVH, LAW .IUI)Gtr], II[,ARINGS ALJ PETER BROOKS REPRESENTATIVE / ADDRESS PÀRTIES SAN4IIì]T, T ]A(IKSON TI]E I,AW OFFICE OF SAMT]EL T. JACI{SON P O. BOX 170633 ARTÌNGTON, TX 760_1_3 -063 3 (817) 75r-7rs5 (PH) (2r4) ó28-0e77 oeTi) (86ó) 374-0r64 (F,\X) j aoksonlar.v(@hotr.nail, corn

MAHMOLD ISBA AIIMED

SANADCO,INC.

]SREAI, MII.T,ER (IOMPTROT,T,ER OF PIBT,IC ACCOI INITS ADMINÌ¡J'I'1L{'.I'IVB LAVV DIVISION P O. BC)X 1_1_528 AIJSTTN, TX 787I I-3528 (5 l2) 463-4612 (r'H) (s I 2) 4rj_1-4ó 1 7 (F,{X) A-t-lS servioe(¿?cpa. ritate. tx. us

COMPTROI,I,ER OF PT]BT,IC ACCOLI\trTS

Page 1 of I soAH DOCKET NO. XXX-XX-XXXX,26 TCPA HRG No. 104,445 Taxpayer No.

SANADCO, INC. s BEFORE THE STATE OFFICE s PETITIONER s s VS s OF s TEXAS COMPTROTTER OF s PUBTIC ACCOUNTS, s s RESPONDENT $ ADMINISTRATIVE HEARINGS

soAH DOCKET NO. XXX-XX-XXXX.26 TCPA HRG No. 107,006 Taxpayer No.

MAHMOUD AHMED ISBA s BEFORE THE STATE OFFICE s PETITIONER s s VS s OF s TEXAS COMPTROTLER OF s PUBTIC ACCOUNTS, s s RESPONDENT s ADMINISTRATIVE H EARINGS

PETITIONER,S POST-HEARING BRIEF

EXHIBIT E TO THE HONORABLE TUDGE OF SAID COURT: SANADCO, INC, and MAHMOUD AHMED ISBA, Petitioners, file this Post-Hearing Brief from an administrative review hearing held on September 10,201,3, and would show unto the Court the following: L The Audit Must Be Revised To Exclude Previously Audited Inventory 1,. Background-ln 2009, SANADCO, INC, was audited for sales and use tax compliance by the BART [Business Activity Research Team), an arm of the Texas Comptroller of Public Accounts ["Comptroller") forthe initial period of January 1,2008 thru March 31,2009, and assessed a tax liability of $23,593.60, including tax, a l0o/o penalty, an additional 50% penalty and accrued interest. (Exhibit 1). The audit was entirely conducted utilizing H811 data and AP 92 and AP 722 estimated mark-ups and compared it to the reported tax payments provided from Sanadco's tax records to determine the additional tax liability. SANADCO, INC. was provided a copy of a Texas Notification of Exam Results on f uly

9,2009 advising of these results and informing him that the results would become final on July 22,2009 unless a Request for Redetermination hearing was requested by that date. If no hearing was requested by that date the assessment would become due and payable on fuly 22, 2009 and if paid after that date, an additional 1,0o/o penalty of fi2,086.77 would be added. No Request for Redetermination was filed and the assessment became due and payable on July 22,2009, but SANADCO, INC. never made any payments, On March 19, 2010 the Comptroller Certified the liability to the Office of the Attorney General for collection pursuant to Tex, Tax Code Ann, $ 1"11,010. On July 6,201,0, the Attorney General filed suit to collect this debt in Cause No. D-1-GV-10-000902. SANADCO, INC. filed its Original Answer on September 'J.9, 20L0 and its First Amended Answer and Counterclaims on fanuary L1,,201,'1, alleging that the audit was void because the Comptroller had failed to promulgate AP 92, AP I22 and HB 11 as administrative rules, Cqyt todeÂ?081,039. Sanadco also alleged that the Comptroller had engaged in ultra vires conduct by authorizing the use of AP 92, AP 1,22 and HB 11 without first adopting them as rules as required by the APA, and by authorizing the desk audit without revìew of the store's records in excess of her statutory authority. The Attorney General responded with his Original Answer and Plea to the furisdiction on f anuary 26,201,1.. The trial court helcl a non-evidentiary hearing on fune 28,20LI, and granted the Comptroller's PIea to the Jurisdiction by order dated July B, 2017. SANADCO, INC. filed an interlocutory appeal pursuant to Tex. Civ. Prac. & Rem Code Ann. S 51,014 (a) [B), on fuly 25,20IL. The Third Courtof Appeals issued its Memorandum Decision in Case No.03-11- 00462 on September 26, 2013. The court held, inter alia, that the directives in AP 92 and AP I22 are in fact rules, and the trial court had jurisdiction over Sanadco's claim that AP 92 and AP I22 were invalid rules. Though the Court of Appeals stopped short of declaring that the rules were invalid, and instead remanded the case for further proceedings, the Comptroller has never asserted that she had complied with the APA before utilizing them, and it is unlikely that she would make such a claim during the remand proceedings. 2. The audit is void and unenforceable- A presumption favors adopting rules of general applicability through the formal rule-making procedures the APA sets out. Rodriguez v. Serv. Lloyds Ins. Co.,997 S.W.2d 248,255 [Tex. 1999). These procedures include providing notice, publication, and public comment on the proposed rule. Id. (citing Tex. Gov't Code Ann. SS 2001.023- .030), The process assures notice to the public and affected persons and an opportunity to be heard on matters that affect them. Id. Unless a rule is promulgated and adopted in accordance with the requirements of the APA, it is invalid and unenforceable, Tex. Gov't, Code Ann. $$ 2001.035,1 200L.0042 and 2001.0053. Neither AP92nor AP1,22 as it relates to HB 11,

tg ZOOt.O:S, Substarrtial Cìompliance Rec¡rirement; Tirne Lirnit on Procedural fìhallenge (a) A rnle is voidable unless a state agcncy adopts it in substantial compliauce with Sections 2001.0225 through 2001.034.

'5 ZOOt.OO+ Rcquircmcnt to Arlopt Rulcs of Plactioc and Indcx Rulcs, Ordcrs, and Dccisions In a

unenforceable when applied to convenience store audits, The entire audit period was estimated for the period November 2006 thru

June 2009 using reported HB-l1 amounts for alcohol and tobacco and AP 722

percentages, It is therefore submitted that the entire audit is invalid and unenforceable pursuant to the relevant provisions of the APA. 3. The Subject Audit Overlaps Previous Final Audits It is quite difficult to determine the actual audit period from the Comptroller's evidence because the dates conflict depending on the source of the information. The Notification of Estimation Procedures sent to the Petitioners on January 27, 2011, included conflicting dates within the same instrument. In the heading, the audit period was reportedas February 7,2007 thru fune 30, 2009. The body of the Notification, however, stated that "the entire audit period will be estimated from November 2006 thru

fune 2009", a full four months prior to the period outlined in the heading. The sixty-day letter, however, dated October 22,2009, requested information from fune I, 2006 thru September 30, 2009. The follow-up letter dated July 28, 2010, requested information from February 1, 2007 through fune 30, 2009, The Texas Notification of Audit Results issued to SANADCO, INC. on April I,2011, also lists the audit period as February \,2007 thru fune 30,2009, and willbe assumed to be the official audit period, As stated above, the Comptroller has filed suit regarding a prior audit which covered the audit period of January 1, 2008 thru March 3I, 2009 which has been the subject of an interlocutory appeal authorizing SANADCO, INC. to proceed in its challenge of the audit on various grounds. Obviously this is from an order which became final on July 22, 2009 as stated in the Attorney General's petition and in the deficiency notice,

Accordingly, the subject audit purporting to cover the period February 1,2007 thru fune

(3) ìndex, cross-index to statrÌte, and rnake available fol public inspection all final olders, decisions, and opinions.

u g zttOt,Oos Rule, orcler,ol I)ccisiorNot Effective Until Indexed (a) Januat'y I, 1976, is not valid or cffcctivc agaitrst A statc agcncy nrlc, ordcr, ol

Respectful ly submitte d, By: /s/Samuel T, fackson Samuel T. Jackson Texas Bar No. 1.0495700 PO Box L70633 Arlington, TX 76003-0633 TeL (214) 751,-7755; (s12) 692-6260 Fax. 866-37 4-0L64 FOR DEFENDANTS, COUNTER.PLAINTIFFS Email:iqcksM

CERTIFICATE OF SERVICE

I hereby certify by my signature above that a true and correct copy of the above and foregoing instrument was served on the parties or their attorneys via facsimile, certified mail, return receipt requested, andf or hand delivery on October 5, 2073, in accordance with Rule 21"a, Texas Rules of Civil Procedure, to the following:

ISREAL MILLER, Assistant General Counsel, Administrative Hearings, P.O. Box 13528, Austin, Texas 787I1,-352B,Telephone: (572)463-461.2; Facsimile: (512)46'3-4617; Email: -isrcal.r¡r]le j:@tixê$êtl()]|neYg-Q-If eralåo-v- ATTORNEY FOR PLAINTIFFS soAH NO. 304-13 -4211.26 (Comptroller Hearing No, 106,815)

RE: SANADCO,INC $ BEFORE THE STATE OFFICE $ TAXPAYERNO: $ AUDIT OFFICE: Fort Worth -2140 $ OF AUDIT PERIOD: February 1,2007 $ through June 30, 2009 $ Limited Sales, Exciseo and Use Tax/RDT $ ADMINISTRATIVE HEARINGS

soAH NO. 304-13 -4212.26 (Comptroller Hearing No, 107,006)

RE: MAHMOUD AHMED ISBA $ BEFORE THE STATE OFFICE $ TAXPAYERNO: $ AUDITOFFICE: AdvancedCollections $ OF Processing 2S52 $ AUDIT PERIOD: May 1,2007 $ through June 30, 2009 $ ADMiNISTRATIVE HEARINGS Limited Sales, Excise, and Use Tax/RDT

T RE

Order No. 4 instructed the Tax Division to file its response to Petitioner's post-hearing brief on or before November 4,2013.

Itetitioner's. Cogtentions

In its Post-Hearing Brief, Petitioner raised tluee new contentions. Thc Tax Division renumbers these contentions as 6,7, and 8 because Petitioner did not withdraw its previous contentions:

l, 'fhe imposition of additional fraud penalties should be deleted because Petitioner provided substaniial records, and the underpayment was not the result of fraud or a knowing or willful intent to evade taxes.

2. The auditor was not authorized to eltgage in estimating procedures because Petitioner mai¡tained the required records, and the available records were not inadequate.

3. Petitioner disputes the auditor's exclusive use of I-IB1l information and estimated markups to determine the tax liability for beer and cigarettes when Petitíoner had documentation regarding the actual purcha*ses and markups which was ignored by the auditor.

4. Petitioner clisputes the auditor's calculations regarding markups which were well beyond national averages and those contemplated under LP-122.

EXHIBIT F jeopardy determination' 5. Petitioner disputes the imposition of additional penalties for the vague fbr its failure to because the statute authorting such penalties is unconstitutionally establish guidelines for its imposition.

6. The audit must be revised to exclude previously audited inventory'

7. The audit is void and unenforceable.

L The subject audit overlaps previous final audits'

Tax Division's Positior.r The Tax Division reaffirms its The Tax Division disagrees with all of Petitioner's contentions. that Petitioner has positions as expresseJin th. Position l-etter. The Tax Division contends any of the.necessaly factors for failed to rneet its burden to show that the audit is in error or that Division contends that the interest waiver are present in this case. Rule 1.40(2XB). The Tax record evidence is clear and convincing that Petitioner intended to evade the tax, and thus' the assessment of the 50% additional penalty should be upheld'

Contentions I and 5: The Tax Division recommends Petitioner's request for waiver of the 50% additional PenaltY be denied.

Contention 2 - 4: alcohol and tobacco Due to an absence of complete records, an audit was conducted using was calculated in accordance recorcls obtained directfy from vendors (HB 11) and an estimate (66.45%) and evidence of with Audit policy Memo 122 (AP 122). Due io the high error rate imposed in accordance with Petitioner's intent to evade taì, an additional 50% penalty was Section 111.061(bXl).

Petitioner provides no documentation or other proof in support of its claims'l

and purchases for at least Section 151.025 requires a seller to maintain records of gross receipts is required to maintain' four years. Rule g.jgl(b) outlines the categories of records that a seller

The recordkeeping requirements are imposed to enable the Comptroller to audit records and verify the accuracy oi reporting.2 If i seller fails to maintain the necessary records, the information that is Comntroller is authorized to estimate the tax liability based on other did not provide äffiì;.f-'rrr"iuáit was estimated pursuant to these provisions. Petitioner

to the Comptroller's assessmeni' r Bare assefti

2 ,3

support audit adjustments' consequently' records or provided records that were insufficient to the audit liability should be upheld.

determinations are shown in Au

Contentions 6 and 7: audit must be revised to exclude The Tax Division disputes Petitioner's contention that the previously audited invcntorY. Opinion issued by the Third Although Petitioner contends that because of the Memorandum of the comptiotter of Pubtic Accounts of courl of Appeals \n sanadco Inc., et a. l. rnt oftice lithe entire.audit is invarid and unenforceable the state oJ Texas,e/ a/ Q.{o. 03-r1-0046z-cv) pursuant to the rerevànt pÀvisions of the ApA,'; the Tax Division believes petitioner reliance on sustained the counter claim of Sanadco Inc'' the decision i, pr.ruiurå. In the opinion, the Court and Audit Procedures Memo 122 (ÃP 122) concluding that Audit Procedure ú.rno 92 (AP 92) maintains that the conclusion of the Court were improp"rty pro-rlgated rules. The taì Oivision should not be applied, as a Motion for Rehearing and Reconsideration has been filed by the -Th. comptroller, and tt e *tir",g is therefore not hnal. Tu* Division attaches the Memorandum for Rehearing and Reconsideration En Opinion as Exhibit No. O a].d the State Official's Motion Banc as Exhibit No. 7' .fhe opinion of the court in sanadco is not final until the court's power to alter the decision Inc., 195 S'w'3d 772 (Tex, expires' See oscar Rentla Contracting, Inc, v, H&S Suppty Co,,court's judgment of dismissal App.*waco 2006, pet. denied) (suit became final when appellate power to alter the judgment had,,disposed of aliirr,r", *á pur,i.t in the case and the court's Reconsideration has been filed' and the ha[d] ended."). At tt i. ti-", a lr¡iotion for Rehearing and the court will lose plenary power "30 Third court hus the po*er to alter the judgment. Hoîev^er, for rehearing or en banc reconsideration' days alter the court overrules all timCly ñled motions and all timely filed motions to extend time to file such a motion," Tex' Rule App'P' 19'1(b)' At o'final" and should be treated as binding precedent by that point, the judgÀent ln Sanadco will be ;ìË;i;r, .u* iifutttter appeal is taken to the Texas Supreme Court'

Contention 8: petitioner's contention that "this audit be deleted" lrecause the T.he Tax Division disagrees with subject audit overlaps previous final audits'

conducted and that Petitioner was The,fax Division acknowredges that a BART Assessment was purchases of alcohol and tobacco products as assessed tax based on the diãference between its reported by its vendors and its reported taxable sales for the period January 1, 2008 through audit was conducted for the audit March 31, 2009. Because this tax was assessed before the for the previously assessed period February 1,2007 through ¡un" ¡ó, iOO9, the auditor accounted that this adjustment is appropriate tax in Column F of Exam 20Á. The Táx Division coutends as a result' Furthermore' the BART and that Petitioner has not suffered from double taxation the audit' Assessment is not at issue in this hearing other than as an offset to

3 Conclusion should be upheld in the The estimated tax, l0% penalty,50Yo additional penalty, ând interest audit of Sanadco, Inc. båcause Petitioner failed to show error in the audit' Rule 1'40' The iiuUifitv for the estimated tax, TAVI penalty, 5070 additional penalty, t19 interest that was and 111'022 as a *r..ré¿ against Mahmoud Ahmed tsUà in¿ivi¿ually under Sections 111'0611 also be upheld' Inc' should result of the gros unJ.*eporting of sales tax in the âudit of Sanaclco,

Respectftrlly submitted,

Isreal Assistant Counsel Administrative Hearings Texas State BarNo' 24041485 Comptroller of Public Accounts P.O. Box 13528 Austin, Texas 7 87 ll -3528 Telephone: (512) 463-4612 Facsimile: (512) 463-4617 isreal, miller@cPa. state.tx.us

CERTIFICATE OF SERVICA

I hereby certify that a true and correct copy of the iorgeo.ing Tax Division's Response to Offìce of Samuel T' Petitioner's Post-Hearing Brief was sent to Samuel T' Jackson, Law the 4th day of November, 2013' Jackson, p.O. Box lT¡63i,Arlington, TX 76003-0633, on this

Isreal

4 State Office of Administrative Hearings

Cathleen ParsleY Chief Administrative Law ]udge December 17,2013

The Honorable Susan Combs HAND DELIVERY Comptroller of Public Accotutts LBJ Building I l1 E. 17ù Street, I't Floor Austin, TX 78701

R-8,: SOAH Docker Nos. 304-134211.26 and 304-13 4212.26i TCPA Hearing Nos. t06,BLS and 107,{$6; Texpayer No. 3-20-14145158 and 3-20'011105148; Sanadco, Inc. and Mahmoud Ahmed Isba v. Texas Comptroller of Public Accounts

Dear Comptroller Combs:

please find enclosed a Proposal for Decision in this case. It contains my recommendation and underlying rationale.

Exceptions and replies may be frled by any party in accordance with I Texas AdminisÍative Code $ 155.507(c), a SOAH rule which may be found at www.so-+h.state.tx.us.

Sincerely,

& FETEREROOKS d;ærø ADMINISTRATÏT'E LAIì' JUDGE ST^TE OFFICE OF ADIú¡t{ISInÂTfit E¿|RINGS

PB/ad xc Isreal Millcr, Assistånt General Counsel, Adminisnative Hearings Section, 1700 N' Congress, Suitc 320' Austin, TX 78701 - VIA HAND IIELIYERY Samuci Jackson, l-aw Ofnces of Samucl T. Jackon, P.O. Box 170633, Arlington, fi 76003 - V¡A REGIIL^R MATL

EXHIBIT G

300 West 15h Street Suite 502 Austin, Texas 787A1/ P.O. Box 13025 Ausfirç Texas 78717-3025 5L7.A7 5. 4993 (Main) 5t2.47 5.3445 (Docketin g) 572.47 5.499 4 (F a><) www.soah.state.tx.us Pursurnt to Tex. t Code

soAH DOCKET NO. 304'13-42rr'26 TCPA HEARING NO. 106'815 TAXPAYER NO.

s BEFORE TIIE STATE OFFICE SANADCO,INC.' Petitioner $ $ oN' v s s TEXAS COMPTROLLER OF PUBLIC s ACCOUNTS, $ s ADMINISTRATIVE ITEARING S ResPoudent

soAH DOCKET NO. 304-ß4212.26 TCPA IIEARING NO. 107'OOó TAXPAYER NO.

BEF'ORE TI{E STATE OFFICE MAHMOUD AHMED ISBA' $ Petitioner s s $ OF v $ TEXÄS COMPTROLLER OF' PTIBLIC s ACCOUNTS, $ ResPondent $ ADMINISTRATIVE HEARINGS

PROPOSAL FOR DECTSION

Sanadco, Inc. (Petitioner SI) was audited for sales and use tax compliance by the Texas assessed tax, a l0% penalty' an additional Comptroller of Public Accounts (Comptroller) and personal liability against 50% penalty, atrd, accrued interest. The Comptroller also assessed Code $ 111'0611 as the president of Mahmoud Ahmed Isba (Petitioner Isba) under Tax petitioner sI. Petitioners contest their audit assessments on the same grounds, including the

unenforceable because the estimate was based contentions that the audit assessment is void and the present audit overlaps a previous on audít procedures that constituted invalid rules, and that contentions' In this final audit assessment. comptroller stâtr (stafî) rejects the Petitioners' (ALJ) recornmends that the Proposal for Decision (PFD), the Administrative Law Judge be affirmed, except that the markup percentâge corporate assessment against Petitioner sI should CONFIDENTIAL Pur.cunnt to 2003.104

soAH DocKET NOS. 304-13.121 1.26 PROPOSAL FOR DECISION PAGE 2 & 30,1-13-{2r2,26.26 TCPA DOCKET NOS loó,E15 & 107,006

used in calculating the estimated tobacco sales should be adjusted and that the additional fraud penalty should be applied only to the report periods February 1, 2007 through April 30, 2008. The ALJ also recommends that the personal liability assessment against Petitioner Isba should be limited to the re¡rort periods May 1, 2007, through April 30, 2008.

I. PROCEDUR.A.L HISTORY, NOTICE AND JURISDICTION

On May 10, 2013, Staff referred the cases to the State Office of Administative Hearings (SOAH) for oral hearings. ALJ Peter Brooks ordered the cases joined because the cases involve related parties, and common facts and issues of law. Staff was xepresented by Assistant General

Counsel Isreal Miller and Petitionsrs were represented by Attorney Samuel T. Jackson. The case convened on September 9, 2013. "fhe ALJ closed the record on November 12,2Q13. There are no contested issues of notice or jurisdiction. Therefore, these matters are set out in the Findings of Fact and Conclusions of Law.

II. REASONS F'OR DECISION

A. Evidence Presented

Staffsubmitted the following exhibits in SOAH Docket No. 304-13 -4211.26

I Sixty-Day Letter; ,) Texas Notification of Audit Results;

J. Penalty and Interest Waiver lü/orksheet;

4. Audit Report; and

5. Audit Plan, which includes Audit Refenal Report for Additional Penalty I

CONFIDENTTAL Pursuant to Tex. Govtt 2003.104

PROPOSAL FOR DECISION PAGE 3 soAH DOCKET NOS. 30+13-4211.26 & XXX-XX-XXXX.26.26 TCPÀ DOCKET NOS 10ó,815 & 107'006

Staffsubmitæd the foltowing exhibits in SOAH DocketNo. 304'13-4212'26

Texas Notification of Personal Liability for Fraudulent Tax Eva^sion;

2 Audit Exam, including correspondence and e-mail communications from the Revenue Accounting Division; the calculated Message, Adjustnent, and Allocation Reports; Íax Summary, Status, Balance, Audit, and Tax Allocation Basis Inquiriei; and Personal Liability Fraudulent Tax Evasion Worksheeq

J sales and use tax Returns for report periods April 2007, May 2008, December 2008, February 2008, and January 2009; and

4. State Filings (Statement of Change of Registered Offrce/Agent, dated May 5,2006; and Texas Franchise Tax Public lnforrnation Reports sigrred May 10,2006, March 13, 2008, and February 26,2009.

Staff attached to its Response to Petitioner's Post-Hearing Brief the following exhibits

6 Copy of Msmorandgm Opinion issued in Sanadco, Inc. v. Comptroller, No.OS-tl-00462-CV, 2Ol3 Tex. App. LEXIS 12013 (Tex. App' - Austin September 26, 2013); and

7 Appellee's Motion for Rehearing and Reconsideration en banc filed in Sanadco, /nc.

petitioner SI produced during the hearing its responses to Staffs Second Set of Intenogatories, Requests for Admissions and Requests for Production. Petitioner did not offer any other evidence during the hearing, but did attach to its Post-Hearing Brief the following exhibits:

1 The Examination performed by the Comptroller's Business Activity Research Team (BART) for the exam period January l, 2008 through March 31, 2009, including, the Accounts Examiner Coversheet; correspondence and e-mail communications from BART; the Texas Notification of Exam Results; the Message, Adjustrnent, and Allocation Reports; Petitioner's Alcohol and Tobacco q þ,

CONFIDENTIAL Pursugnt to Gov't 2003.104

PAGE 4 NOS. 304-13*{211'2ó PROPOSAL FOR DECISION soAH DOCKET & 304-13-421226.26 iCp¿ uocxeT Nos to6"8l5 & 107'ü)6

2009; and ITS Work Manager Purchases for January 2008 th¡ough March Comments;

2,PlaintiffsoriginalPetition,Sanadco,Inc.,20]13Tex'App.LEXISl20l3; sønadco' Inc' 2013 Tex' 3. Defendant's First Amended Answer and counterclaim, APP. LEXIS 12013; and

Plea' sanadco' Inc" 4. Counter-Defendant's original Answer and Jtlrisdictional 2013 Tex. APP. LEXIS 12013

the listed documents is admitted as There were no evidentiary objections, and each of part ofthe contested oase record'

case hearing was that of The only witness testimony presented during the contested the Comptoller auditor who performed Dennis Ëastman, the aud.it supervisor who supewised PetitionerSl,saudit.Sta.ffpresentedthetestimonyofMr'Êasnnan.

B. Adiustments

staffhas not agleed to adjust any of the contested audit assessments.

C. F¡cts Estsblished and Issues Presented

during the audit period Petitioner Sl operated a convenis¡rce store in Fort Worth, Texas owns the convenience store' February 1,2007 through JunE 30,2009. Petitioner SI no longer Petitioner SI was subjecæd to a desk audit performed by BART for the exam period of assessed a tax liability of $23'593'60' January l, 2008 through March 31, 2009. It was penalty, and accrued interest' consisting of tax, the 10% standard penalty, the additional 50% alcohol and tobacco purchases for The exam was promptedl by a comparison of Petitioner SI's

I Petitioner's Exhibit 1, letter dated July 2,2009 from BART advising Petitioner sl of assessment' CONFIDENTIAL Pursu¡nt to Tex, G Code 2003.104

PAGE 5 NOS. 304-l$4211'26 PROPOSAL FOR DECISION soAH DOCKET & 30+13-4212.26.26 TCPA DOCKET NOS l0ó'815 & 107'00ó

and alcohol vendors pursr¡fint HB 11'2 The the exam period feported by Petitioner SI's tobacpo period exce€ded the reported taxable sales for HB 1 I tobacco and alcohol pufchases for the exfim the same period by s268,056 to $76,976, BART relied on the HB I I data and the comptroller's assessment' Petitioner sI did not Audit Division Policy Memo 122 (AP t22) in estimating the for redetermination contesting the assessment, consequently, the assessment fìle a request General.s The became final. The sales and uso tax delinquency was certified to the Attorney the delinquency from Petitioners SI and Isba'a Aftorney General filed a lawsuit seeking to collect However' the trial court Petitioners filed various counterclaims against the Comptoller' ofjurisdiction. Petitioners appealed the dismissal' dismissed Petitioners' counterclaims for lack directives in AP 92 and The Appeals court sustained Petitioners' claim rhat the comptroller's jurisdiction over sanadco's Ap lzzwere in fact rules and also concluded that the trial court had clairn that gz and AP 122 were invalid rules and thal thertfote, the trial court erred in ^P App' LEXIS 12013' dismissing this cotrnterclaim. ,See Sanadco, Inc',2Q13 Tex'

sales and use tax The Comptroller subsequently conducted an audit of Petitioner SI's June 30, 2009. Petitioner sI did not compliance for the audit period February 1,2007 ttuough a Notification of Estimation respond to the auditor's requests for records.5 The auditor issued procedures for St¿te Tax Audit (Notification of Estimation) dated January 27,2011, advising petitioner Sl that the audit would be estimated using HB 1l data, and that the AP 122 procedures SI no longer would be followed.6 When the auditor initiated the audit fieldwork Petitioner operated the convenience store. Therefore, the auditor could not perform a shelftest and instead

2 Wholesalers and distributors of beer, wine, malt liquor, cigarettes, cigars, and tobacco products are required to monthly basis, to the Comptroller. These electronic rePorts are required by Tex. Tax submit electronic reports, on a of Tex' I{B I l, 80rt' Leg., R.S., 2007. The Code $$ 151.462, 154.212, and 155,105, which were enacted as Part vendor records are commonly referred to as HB I I records. 3 pçtitioner,s Exhibit 2, Texas Certificate to Attorney General of Sales and Use Tax Delinquency a Petitioner's Exhibit 2, Plaintiff s Original Petition' 5 Staffs Exhibit 4 (Petitioner St), Audit Report' 6 Id. CONFIDENTIAL Punu¡nt to Gov't Code 2003,104

PAGE 6 PROPOSAL FIORDECISION SOAH DOCKET NOS. 301-13''1211'2é & 30+l$4212.26.26 icp¡ pocxpT Nos loó'srs & lo?'orló

percentages of I l8'44% and 124'07% fesp€ctively for tobacco used the induslry avGrage markup purchases Ap 122.? The auditor totared the tobacco and arcohor and alcohol purchases set out in data for the report periods January 1' 2008' tbrough made by Petitioner sI using the HB l1 June30,2009'Thetotalalcoholandtobaccopurchasesweremultipliedbytheirrespective invoices percenøge was calculated, because no purchase markup percentages.s No product-mix were available. Therefore, the standar d AP lzzproduct-mix percentage of 54o/o for tobacco and a 5% alcohol products was applied to arrive at estimated taxable sales' The auditor afforde'd wæ given for reported Exable sales' The adjusted allowance for spoilage and theft, and credit in the BART exam for the repod tuable sales were then reduced by the amounts assessed 1, 2008 throt,gh March 31, 2009, and the resulting additional taxable sales were periods January at the tax due for the period January 1' 2008' then multiplied by the applieable tÐ( rates to anive through June 30, 2009'e

data available for the periods preceding January 1, 2008, the As there wris no HB 1 t the report periods January 1' 2008' through auditor estimated the additional taxable sales for monthly net estimated taxable sales' The post' June 30, 2009 by first determining the average

December 31, 200'î total net estimated taxable sales of s728,443'I7 were divided by the I g report periods to arrive at a monthly average of $40,469'06.10 The additional taxable sales for

the pre-January 1, 2008 report periods were calculated by giving credit for the ta:

7 Id., andstaffs Exbibit 4 (Petitioner Sl), Exam 208) I Id, e staffs Exhibit 3 (Petitioner SI), Audit Report, Exam 20'

'o StoffsExhibit 4 (Petitioner Sl), Audit Report, Exam 208

" Staffs Exhibit 3 (Petitioner SI), Audit Report Exam 20' CONT'TDENTTAL Pursu¡nt to Gov't Code IM

PROPOSAL F'ORDECISION PAGE 7 soaH DOCKET NOS. 304-13-421 1.26 & 30/Lr3-4212.26.26 TCPA DOCKET NOS loó,815 & 107'006

Since no contact was made during the audit with an officer, owner' or representative of petitioner SI, the auditor did not record in the Audit Plan or in the Audit Refenal Report for owner, or Additional Penalty any information regarding the role played by an officer, director, and filing of the sales employee of petitioner SI in the operation of the store or in the preparation

and use tâx returns and the remittance of sales and use tax payments. The only substantive

information reganding Petitioner Isba's activities is found in Petitioner SI's responses to Staffs

Second Set of Interrogatories, Requests for Admissions and Requests for Production. petitioner sI admitted that Petitioner Isba signed checks for remitting sales and use tax payments

during the audit period.l2 petitionff Isba is identified as the person responsible for depositing the store's sales proceeds, ordering the store's inventory, and paying for the storg's inventory purchases. 13 Petitioner Isba was also identified as the person who received the monthly bank statements.l4 Ho*e'lrer, according to Petitioner SI's answers to the interrogatories, petitioner Isba's responsibility for these t¿sks ended when on May 1, 2008, he entered into an

agreement to sell Sanadco, Inc. to his employees, Yassien Siam and Sandra Salazar' Mr' Siam thereafter assumed responsibility for these tasks from May 1, 2008, until the end of the audit period.

Petitioner SI, in the responses to Staffs lnterrogatory No. l, stated that Petitioner Isba

was the sole owner, officer, or manager through May l, 2008. Petitioner Isba signed petitioner SI's 2006 Texas Franchise Tax Public Information Report (PIR) as president of

Sanadco.rs The PIR is dated May 10, 2006. Although Petitioner SI's 2008 PIR identified petitioner Isba as the corporate presiden! the form is signed by a Mike Isba.l6 The PIR is dated

12 Petitioncr SI's Admission No. 2. 13 Petitioner SI's Answers to Interrogatories Nos. 4, 5, anct 6. r{ Fetitiouer SI's Answer to Interrogatory No. 7, It Staffs Exhibit 4 (Petitioner Isba). t6 td. CONF'IDENTTAL Pursu¡nt to Tex, Gov't 2003.104

PROPOSAL FOR DECISION PAGE E soAH DOCKET NOS. 3M-13-¿2r1.2ó & 304-134212.26.26 TCPA DOCT(ET NOS 106,815 & 107'00ó

pIR identifies Petitioner Isba as the president' but it bea¡s the March 13,200g. Thç 200g dated February 26,2009' signature Isba" without a given name.tT The PIR is

2011, the Comptroller issued to Petitioner SI a Texas Notification of Audit On April l, 50% fraud penalty, and accrued Results assessing tæ<, the standard l0% penalty, the additional

interest, totaling $112,381.02, with $64,336.87 attributable to tax' The overall error rate for

petitioner SI was 66.45yo,which was calculated by dividing the tax assessed by the sr¡m of the redetermination. tær reported and assessed.lt Petition"t SI timely requested

2011' against The Comptroller also issued a jeopardy determination on March 30' petitioner lsbao pursuant to Tax Code $ I t I .061 I , assessing personal liability for the tu liability

of Petitioner sI for the pcriod May l, 2007, th¡ough June 30, 2009'1e The personal liability

assessment consisted of tan, the standard 10% penal8, the additional 50% penalty, and accrued against Petitioner Isba interest through the date of notification. The personal liability assessed totaled $95,620.96, with $55,168.87 afiributable to tâx. Petitioner Isba timely requested

redetermination'

glounds: Both Petitioners SI and Isba contested their assessments on the same

1 The imposition of additional fraud penalties should be deleted because Petitioner providei substantial records, and the underpayment was not the result of fraud or à t oowing or willful intent to evade tæ

'1 Id. rs Petitioner Sl's Penaþ and lnterest Waiver Worksheet' ,e staffs Exhibit I (Petitioner Isba). Texa.s Notification of Personal Liabilþ CONF'TDENTIAL Pursu¡nt to Tex. Gov't Code 2003.104

PAGE 9 XXX-XX-XXXX.26 PROPOSAL FORDECISION soAH DOCKET NOS' & 304-1$.4212.26.26 TCPA DOCKET NOS 106,E15 & 107'006

The auditor,s exclusive ì¡se of HB I I information and estimated markups to J when Petitioner had determine the tax tiauitity for beer and cigarettes, markups, was improper; ãåcumentation regarding thó actual purchases and

The auditor's calculations regarding markups were well beyond nationâl avemges 4. and those contemplated under AP 122;

jeopardy determination was flawed' 5 The imposition of additional penalties for the because the statute uutftotititg such penalti"i is unconstitutionally vague for its failure to establish guidetines for its imposition;

inventory; 6. The audit should be revised to exclude previously audited

audit procedures that 7. The audit is void as unenforceable because it was based on constitute invalid rules; and

The subject audit overlap, u pr"uious final audit, consisting of a BART exam for I the period January 1, 2008 through Ma¡ch 3 1 , 2009'

D. AnalYsis ¡nd Recommendation

1. SOAH Docket No.304-13-421L.2626 (Petitioner SI)

rilhen records are inadequâte to reflect the taxpayer's business operations, the Cornptroller is authorized to estimate a torpayer's liability based on the best information

avaitable. Tex. Tax code $ 11 1.0042(d). An estimaæd audit w¿¡s appropriate in this case has held that estimated because petitioner SI did not have complete records. The Comptroller

audits based on HB I I vendor records and AP 122 procedures meet the best information see comptoller's available requirement when taxpayer records are incomplete or urueliable' DecisionNo. 103,gg2(2011). Theevidencethatsøffsubmittedestablishesthattheauditwas procedures were followed' based on the best information available and that established audit therefore, bear Consequently, the audit is entitled to a presumption of correctnçss. Petitioners, the burden of proof to show by a preponderance of the evidence that the audit results are

insonect. 34 Tex. Admin. Code $ I '40(2XB)' CONFIDENTIAL Pursusnt to Ter. Code

PAGE 10 NOS. 304-134211'2ó PROPOSAL FOR DECISION soAH DOCKET & XXX-XX-XXXX.26.26 TCPA DOCKET NOS 106'S15 & 107'006

there were sumcient Several of the cont€ntion$ are based on Petitioners' claim that for the auditor to perfonn an audit without relying on HB 1l data and the records available assertion that AP lLTestimating procedures. The audit work papers do not support Petitioners' issued letters (dated october 22' 2009 and records were provided to the auditor, The auditor

July28,20t0)requestingtherecordsrequiredtoconducttheaudit,includingpurchaseinvoices The faiture to produce records is also refe¡enced and sales records but there was no rerpon"".20 by the auditor.zl Moreover, in rhe Notification of Estimation and Sixfy-Day Letter issued did not offer any of the records it claimed it Petitioner dwing the soAH contested case hearing had available.

by the auditor exceeded the Petitioners also asserted that the markup pefcentages used The auditor used the markup percentage national averages and those contemplated by AP 122. provides that the of ]24.\|o/odesignated in AP 122 for alcohol purchases.u AP 122 expressly used for average convenience store markup percentage of 124'07o/o assigned to 2007 is to be The same provision applies for subsequent years until new markup percentages are available' products. The markup pffcçntage of 118.02% assigned to 2007 is to be used for tobacco The auditor, instead' rxed the subsequent years until new markup porcentages are available' markup percentage o,t ttt.U% that is reserved for 2006.8 No explanation was found in the

audit work papers or in staffs pleadings fbr deviating from this directive' consequently, the percentage of I l8'02% ALJ frnds that the auditor erred and recommends that the conect markup estimated tobacco sales' The should be used in marking up the tobacco pruchases to calculate a minor effect on the calculation of application of the correct markup percentage will have only sales total $100,550'67 versus the the estimated tobacco sales. The a-djusted estimated tobacco of lll.Mo/o. The ALI calculated that the application of $100,908.51 resulting f¡om the markup

ro staffs Exhibit 4 (petirioner sI), Audit Report, Exhibits ll and III. rt Sþff s Exhibir 1 (petiriorrer Sl), Sixty-Day Letter and Staffs Exhibit 4 (Petitioner SI), Audit Report, Exhibit l' æ Søffs Exhibit4 (Petitioner Sl), Exam 208' ts Id. CONFTDENTIAL Pursuant to Te¡. Code 2003.101

PROPOSAL F'OR DECISION PAGE II soAH DOCKET NOS. 304-13-421 1.26 & 30+13-4212,26,76 TCPA DOCKET NOS 10ó,815 & 107'006

products would reduce the assessment of tax from the correct markup percentâge for tobacco $64,3 36.90 to approximately $64,3 05'00

be disregarded because it is bæed Next Petitioners assert that the audit assessment should the appellate couft's recent decision in on invalid estimating procedures. Petitioners rely on any precedential value placed on the Sanadco, Inc.,2013 Tex. App. LEXIS 12013. However, decision is premature, as the decision has not become final' Appeltee has filed motions for en banc reconsideration and for rehearing. The court has yet to rule on the motions' The plenary power expires' Sce Oscar appellate court's decision becomes final when the court's S.W. 3d772 (Tex' App' * waco 2006' pet' Renda contructing, Inc. v. H&S Supply co., \nc.,195 the court will lose plenary power thirty days after the cout ovemrles the motion denied). And forrehearingandenäancreconsiderâtion'Tex'RuleApp.P'19.1(b).

petitioners also contend that the subject audit should be restricted to the report periods March 31,2009' Thus' that fall outside of the BART exam period of January 1,2008 through according to Petitioners, the audit assessment should be restricted to the report periods February l, 2007 through December 31, 2007, and April l' 2009 through June 30' 2009' the liability due druing the Petitioners, in effect, are arguing that Stâffis estopped ûom reargUing bar of collaterai period previously examined by BART. However, a party seeking to assert the estoppel must establish that: "(l) the facts sought to be litigated in the second action were fully judgment in the first and fairly titigated in the first action; (2) those facts were essential to the Sysco Food Servs' v' action; and (3) the parties were cast as adversaries in the first action'" Also see comptroller's Trapnell,8g0 s.w. 2d796,801-802 (Tex. 1994), citations omitted; and Decision No, I 00,190 QOlz)-

The BART exam of Petitioner SI's convenience store differs in several significant ways

from the subsequent sales and use tax audit of the s¿une convenience store. As the BART exam purchases, no product-mix focused exclusively on Petitioner SI's alcohol and tobacco sales and Pursuent to Govtt Code

PAGE 12 PROPOSAL FOR DECISION SOAH DOCKET NOS' 304-13-42rl'26 & XXX-XX-XXXX,26.26 iCpl bocxBT Nos 1oó'8ls & lo7'ooó

percentagewasapplìed.However,aproduct-mixpercentagewasneededwhenPetitionerSlwas food and general subsequently audited for sales of other products such as candy' soft drinks' theft in the petitioner sr was afforded a 5% a[owance for spoilage and merchandise. In addition judgment in eacrr contested tax facts were not essentíar to the sares and use tÐ( audit. The same

case.'[hus,theComptrollerwasnotestoppedbytheresultsoftheBARIexamfromthe especially since and use øx audit of the same taxpayer' subsequently performing a sales exaln were deleted from the calculation of additional taxable sales determined in the BART (2013) and taxable sales in the sales and use tax ar¡'dit see comptroller's Decision Nos' lo7 '579

104,445 and t05,726 (2012)'

TheComprollerisauthorizedtoassessanadditional50%penaltyunderTex.TaxCode tax' commitæd fraud or had the intent to evade she determines th¿t a taxpayer $ lll.061(b) if penalty and convincing evidence that the fraud staff has the bruden of establishing by clear Clear and convincing evidence is proof that will applies. see 34Tex. Admin. code $ '40(lxB)' t

produceafirmbelieforconvictionastothetruthoftheallegationssoughttobeestablished,but (2000); see compüoller's Decision No' 37'946 which need not be unequivocal or undisputed' See also, llebb State v' ,â'ddington,588 S.w.2d 569, 570 (Tex. 1979), on remand, 435 U.s. 967. F.2d 366 (1968) (fraud with the intent to evade tax v. Commissioner of Internal Revenue,3g4 requiresactual,intentionalwrongdoingwithaspecificpurposetoevade)'

the audit period is 66'450/o' The revised overall As noted above, the overall effor rate for

enor rate decreased, almost unperceptively, to 66'44% once the error rate is recalculated using prior Comptoller decisions gross undeneporting of the a.ssessed tax arnount of $64,305'24 In or gfeater, has been found sufficiently irrdicative of taxable sales, defined as an error of 25Yo of the fraud penalty' particularly when there were intent to evade the tax to warrant assessment

b assessed tax and reported tåx ($9ó'790'61)' 'Ihe recalculated formula is assessed tax ($64,305) sum ofthe + CONF1DENTIAL Pursuant to Ter" Govtt 2003.1M

PROPOSAL FOR DECISION PAGE 13 soAH DOCKET NOS. 30+13-4211.26 & 304-r&4212.26.26 TCPA DOCKET NOS 106,815 & 107'006

other factors or no plausible explanâtion. See, e.g., Comptroller's Decision No. 43,248 (2004)'

Also see Tex, Tax Code $ 1l 1.205(b),

to justifu imposition Such gross undeneporting, however, is not in and of itself sufficient tåxpayers, the Comptroller of the fraud penalty on corporate taxpayers. In the case of corporate recognizes that a corporation is a separate legal entity that is conFolled by its officers and

directors and that the requisite intent of a corporation is detemrined from the actions of the

officers or directors. \ilhen an offrcer is proven to have been directly involved in the fraudulent activities, the additional penalty against a corporation has been upheld, because a corporate

officer's fraudulent actions can be attributed to the corporation, ^See Compholler's Decision Nos. 105,418 & 104,471 (2011),44,891 (2005) and44,528 (2005), The question is to what

degree petitioner tsba, the company's president, was awaxe or should have been aware of the

uncleneporting of tax. See e. g., Comptoller's Decision No. 103,204 and 104,238 (2012)-

The only substantive evidence in the record directly establishing the exænt of petitioner Isba's involvement in the operation and rnânagement of the convenience store, in fhe

preparation and filing of the sales and use tax retums, and remittance of the tâ( payments during the audit period is found in the answers propounded to Staff s discovery. There also æe the five checks remitting payment signed by Petitioner Isba that were proffered by Staff.zs The ALJ, based sotely on the statements made in response to Staffs discovery, finds that Petitioner Isba purchased and paid for the taxable inventory, made the daily deposits, and received the bank

statements,,signed the sales tâx returns, and paid the sales and use taxes. The ALI, therefore,

concludcs that Petitioner Isba was involved in, aware of or should have been aware of the

underreporting of sales ta:<. However, the same inforrration that supports this conclusion

expressly limits Petitioner Isba's involvement to the period preceding May l, 2008, when he qmcemenr tn cell the husiness ærd o¡re of the buyers assumçd responsibility for ^*ra.a¡t inrn ç¡lLvlçu an ¡lÀrv 4r

perforrring these tasks, Staff has not addressed or refuted any part of Petitioner S['s responses to t' Staffls Exhibit4 (Petitioner Isba). Pursu¡nt to Tex. 2003.r04

PAGE 14 PROPOSAL FOR DECISION soAH DOCKET NOS. 304'13-4211'26 & 30¡l-13-4212,.26'26 lciii iiocrnT Nos lo6,8ls & 107'006

Isba's involvement to the requests, including the staæments limiting Petitioner its discovery l 2008' report periods preceding May '

AIJ COncludes that the r€cofd is suffrcient to establish' by clear and convincing The attributable to the company' the part of Petitioner Isba that are evidence, fraudulent actions on butonlyfortheperiodFebn.raryl,200T,throughApril30,200S'TheALItherefore 50% fraud penalty should be dismissed for the period recomrnends that the additional audit period' May 1, 2008 through the end of the

penalties for jeopardy determination are petitioners arso argue thât the irnposition of additional contention vague. The ALJ lacks the jurisdiction to consider Petitioner's unconstitutional the jeopardy determination statute' The courts have nrled that regarding the constitutionality of theComptrollerlacksjurisdictiontonrleontheconstitutionalityofastatutethatsheadmìnisters' SeeTex,StateBd.ofPharmacyv.IlalgreenTexasCo.,520S'u/.2d845(Tex.App.-Austin l975,writrefdn.r.e.)AlsoseeComptroller'sDecisionNo.t05,82l(2013).

2.SoAHDocketNo.304-13.42|2.26(Petitioncrlsba)

TaxCode$lll.06llimposespersonalliabilityonanofñcer'manager'ordirectorofa in a director, or partner' took an action or participated corpOration who "as an officer, managef' personal riability is plan to evade the payment of ta)

comptrolleronbchalfofthebusinessentity,orf,tling,orcausingtobefiled'ataxrehrnorreport entity that contains an intentionally false with the Comptroller on behalf of the business statement that results in the amount of the ta>r due exceeding the amount of ta¡< repofted by and (3)" 25o/o ormore' Tex. Tax Code $ 111'061l(bxl) CONF'IDENTtAL Pursuånt to Ter. Govtt r04

PROPOSAL FOR, DECISION PAGE 15 soAH DOCKET NOS. 30+13-4211.26 & 30+13-421226.26 TCPA DOCKET NOS 106,E15 & 107'006

imposition of the additional The same facts that the ALJ ¡elied on in recommending personal liability' First' there was an overall 50% penatty support upholding the assessment of gross undeneporting of the tax, which resulted' even after taking into account the adjustment establishes that recommended by the ALJ, in an enor rate of 66.45%, Moreover, the record signing of petitioner Isba was involved in the operation and management of the store and in the

the sales and use tax returns and remittance of the tax payments' He ordered and paid for the the bank ståtements, and signed both taxable inventory, deposited the store's receipts, received the comptoller' However' the the sales tax fetl¡rns and the checks remitting payments to evidence only for the period evidence establishes this involvement by clear and convincing 1, 2007 ttuough, April 30, 2008. This record is suffrcient to affrrm the personal February for that period, and the ALJ recommends that the personal liability liability assessment 1, 2008, th,rough June 30, 2009' assessment should be dismissed for the period May

3. Reconmendations

The ALJ recommends that the audit assessment against PEtitioner SI should be affrrmed, of estimated tobacco sales but subject to the recommended adjusunents correcting the calculation and limiting the additional penalty to the period February 1,2007 through April 30, 2008' In the

of the personal liabitity assessment against Petitioner Isbg the ALI recommends that the case adjustment in the underlying assessmsnt should be affrrmed subject to the recommended personal liability assessment for the corporate assessment and recommended dismissal of the petiod May 1, 2008 through June 30, 2009'

III. FINDINGS OF F'ACT

êo-oã¡n r)t¡IT.aULU) In¡ r¡¡w. lÞcrirìnner \¡ v!¡uu¡¡v¡ SI\ e^/ onerated vl¿v'F!r- a È convenicncç r *- storç in Fort Worth, Texas during the audit period February 1,2007 through June 30, 2009'

t--" Pursu¡nt to Tex. 104

PAGE T6 304-1H2rt'26 PROPOSAL FOR DECISTON soAH DOCKET NOS' & 30¡l-13-4212,26'26 îðpÁ uocxBT Nos loó,81s & lo7'006

by the Business Activity Research petitioner sl was subjected to a desk audit -performed exam 2. îä'dñortlq oipoutit,qcóunts (comptroller) for the Team @ART) of the *¿ T:îùd a tax liabilitv of period of January.1,^;ôöä ,ÑshMarchãr, zoog 50% penalty' and $23,593.60, consrsnng of tax, the 10% ttt"¿'tãi;Jty' the additional accrued interest.

a comparison of Petitioner sl's alcohol and tobacco The BART exafn was prompted by tobacco and alcohol vendors purchases for the .,..tti^ö;;ãì"iort"a Uyittition"t SI's under HB 11. tobacco wine, malt liquor, cigarettes' cigars' and wholesalers and disnibutors of beet, 4. products are required ì" ,"UÃi, elecüonic ***, on'u *ontñly basis, to the Compiloller'

These elecfionic reports are required-by i;;.'Tæ< code $$ tst.+02, 154'212, and R.S., 2007' The vendor 155.105, which *"r*îrrl[ã * i,"n 9-f f*x. ftg tt, 80th Leg-, ;;;;üäre commonlv referred to as HB 11 records'

for the exam period exceeded the reported The HB I I tobacco and alcohol purchases 5 to $76,9?o tenr relied on the FIB 1l t¿,xable sales for tr,. ää.*p.ri"å'ti SXgp56 Memo 122 (AP 122) 1n estimating the data and the Comptroñilï"ai, Division'Policy assessment. the assessment' 6 petitioner SI did not file a request for redetermination contesting beca¡ne final and the sales and use tax delinquency was consequently, tt. ^iårt-"", ceÍified to the Attomey General. The Attorney General filed a lawsuit seeking to collect

the delinquencv A'oo, í.Utioners SI and lsba- See Sanadco, Inc' v' Comptroller' No' 03- iExrs 12013 (Tex. Ap,p, - Austin september 26, 2013). u-00462-cv, 20r3î;;. ñ;. state' However' the fiial court Petitioners filed various counterclaims again{ jr:risdiction' -the 7 which decision Petitioners dismissed PetitioneJã*a"r"tui*s for laãk of Petitioners' claim that the comptroller's appealed. Th" App"i;î;,I{ sustained directives in AP 92'and AP lzzwere in fact rules and also concluded that the trial court tnat eu¿it Division Policy Memoranda (AP) 92 had jurisdiction ou*i J*r¿"oi .raim in dismissing this the rrial corut erred artd 122*rr. iou"üdîle* -¿ that, theiefore, *.rnl"rctui* . See Sanadco, Inc',2013 Tex' App' LEXIS 12013'

and use tax compliance for the I Petitioner sI was ar¡dited by the comptoller for sales records. audit period, *o tr," u"ãitoi estimated the audit due to incomplete

9 PetitionerSldidnotrespondtotheauditor'Srequestsforlecords'Theauditorissueda of Estimation) Notification nrã-utiãn pro""d*"s for State Tax Audit (Notification "f Pursu¡nt to T Gov't Code 2003.1

PAGE 17 PROPOSALFOR DECISION soAH DOCKET NOS. 304'13-421 126 & 30+1$'4212.26.26 icï¡ pocrBT Nos 106,815 & 107'006

Petitioner sl that the audit would be estimated using dated January 27, 2011, advising would be foliowed' HB 1l data, and that th;AP 122lrocedures

l0 WhentheauditorinitiatedtheauditfieldworkPetitionerSlnolongeroperatedthe perform a shelf test and instead used auditor .oJJ convenience ,aorr. rr,.i"iore, the "ot theindustryaveragçmarkuppercenla9!|-orrrt.qaxand1i24.07%respectivelyfor AP 122' ;ú"t* ;á alcohoipurchases set out in

alcohol purchases made by?etitioner sI using the HB 11. The auditor totaled the tobacco and June i0, 2009' The total alcohol 1l data for rhe reporr periods January 1, 2d0C üt*gh markup psrcentages' and tobacco p*"t **rÇre marked up by their respective AP lLlproduct-mix percentage o! for tobacco and alcohol products s+ot; 12 The standard was applied ,o ur.ii."ut þxabl; sales, because no purchase records were "stimatd available.

spoilage and theft to determine net estimated 13 The auditor afforded a 57o altowance for ,*;tl"ã"s. Credit was given for reported torable sales'

then reduced by the amounts assessed in the L4 The resulting adjusted taxable sales were anive at BART exam for th.;;p; periods January l, 2008 ttrough March 31,2009.to the additional taxable sales'

by the applicable tax rates to determine the The additional tÐ(able sales were multiplied frorn January i,' zoos througþ June 30 2009. 15 tax due for rhe ;;;; ;"riods the periods preceding January 1,2008, the 16 As there was no HB 11 data available for auditor estimated ttt" u¿¿itional ta¡

PAGE T8 PROPOSAL FOR DECISTON soAH DOCKET NOS. 304-l$421 t'26 & XXX-XX-XXXX.26.26 icp¡, nocx¡T Nos lo6'sl5 & to7'oo6 to were then multiplied by the applicable tax rate 19. The resulting additional taxable sales period' 1, 2008 part of the audit determine the tax ¿u. fo, pt.-¡anuary

Petitioner lsba was the president of Petitionet SI' 20. dwing the audit 21. petitioner Isba signed checks for remitting sales and use tax payments period, proceeds from 1't petitioner Isba was responsible for depositing the store's sales f"bruary 27,2007 through April 30, 2008' proceeds from 23. petitioner Isba was responsible for depositing the store's sales February 27,2007 through April 30,2008'

the store's inventory from February 27 '2001 ?4. Petitioner Isba was responsible for ordering through APril 30' 2008.

?{ Petitioner Isba was responsible for payment of the stofe's inventory purchases from February 27,2007 through April 30, 2008' bank statemenls from 26. Petitioner Isba was the person who received the monthly February 27, ZO07 through April 30, 2008' entered 27. petitioner Isba,s responsibility for these tasks ended on May 1, 2008, when !-e Yassien Siam into an ugr".*.rri to sell the company to his employees and

Sandra Salazar'

from May 1,2008 until the end of the 28. Mr. Siam assumed responsibility for these tasks audit period.

issued to Petitioner a Texas Notification of Audit sl 29. on April l, 2011, the comptroller Results assessing tax, the standard 10% penatty, tfri dailionat 50% fraud penaltY' and attributable to tax' accrued interest, totaling $112,381.02, with $#,336.87

30. Petitioner SI timely requested redeterminatio n' on March 30' 20ll' against 31, The Comptroller also issued a jeopardy determination petitioner Isba, purzuant to Tax Co¿i s it t.ool l, assessing personal liability for the talt

iiuilrry of potitioner sI for the period May i, 200? tluough June 30, 2009. CONNDENTIAL Pursu¡nt to Tex. tt 2003.104

PROPOSAL F]OR DECISTON PAGE 19 SOAH DOCKET NOS. 30¿f-1!4211¿6 & XXX-XX-XXXX.26.26 TCPA DOCKET NOS 1o6,El5 & 107'ü)6

10% penaitY' the 32 The personal liability assessment consisted of tÐq the standard additional 50% penaíty, ;l;*ed interest through the daæ of notification' The

liabilþ *..r1ø against Petitioner Isba toialed $95,620'96, with S55,i68'87 personal athibutable to Îâx.

Office of Adminisftative Hearings JJ Comptroller Statr (Statr) referred the cases-to the Staæ that contained.a statement of the date' for oral hearings. Staff issued Notices of Hearing the hearings; a statement of time, and place of the hearings, a statement of the nafuIe of the lLgU authority *¿ ju"r¿i.úon under yhich the hearings were to be hetd; a reference plain statement of * n.îuttioutar sections of the statutes and rules involved; and a shorÇ the matters asse¡ted. joined. 34 The Administrative Law Judge (ALJ) ordered the cases

35 The ALJ convened the hearing on August 12,201'3

36. l"lre ALI ordered the record closed on November 12,2013'

the t9PÏto 37 The conect markup percentage that the auditor should have applied !9 should be used for years following 2007. f*"har., was t ts.gz%, whictiAP 122 directs produced estimated 38 Applying the corrected markup Pefcentage to the tobacco pwchases toilä".o-sales of $1õO,SSO.Oi i't"r.* tt" $t00,908.51 rgsulting from a markup of r 18.44%).

pruchases reducçd the 39 The application of the conected markup percentage 19 -t9þ** assessment of tax from $64,336.90 to approximately $64,305'

40 The original overall error rate for Petitioner SI's audit was 66'450/o. ta5 due' 4t. The ALJ has recalculated the error rate using the reduced principal -ttqPnt.gf The r"calculated audit error rate ts 66.Mo/o,-which was calculated ty {i.vi{ing the tax tax reported tat( ($96,790'61)' *ãrl"¿ fSO+,305) bt the sum of the assessed and

w. CONCLUSIONS OF LAW

The Comptroller has jurisdiction over this matter pursuânt to Texas Tæ< Code ch' 11 I I CONFIDENTIAL Pursu¡nt to Tex. Gov't Code 104

PAGE 20 NOS. 304-l!4211.26 PROPOSAL F'OR DECISION soAH DOCKET & XXX-XX-XXXX,26.26 TCPA DOCKET NOS lo6,El5 & 107'006

rclated to the z. -ñludini Hearings has jurisdiction ovel mattels The State Ofüce of Administrative for decision with hearing in this *"tt* th. uuttt"otity to it*ut-u proposal findings of fact and conctusions Jf law p*tu*i to Texas Government Code ch' 2003 '

The comptoller provided proper and timety notice of the hearing pursuant to Texas 3 Govemment Code ch. 2001' available to estimate a 4 The Comptroller is authorized to use the best information taxpayer,s liability *t l...ords a¡e incomplete or unreliable' Tex' Tax Code "nAdmin Code $ 3'281(c)' Tex. E ri r.OO+Ztd) and 34

that the audit was in enor' 5 Petitioner SI must show by a preponderancæ of the evidence 34 Tex. Admin. Code $ 1'40(2XB)'

available' 6. The audit of sI was performed based on the best information in marking up the 7, The auditor erred in not using the conect percentage of 1-18.02% ,"ù*r" purchases in order io estimate tobacco sales, S¿¿ Audit Division Policy Memorandum 122'

The calculation of additional taxable sales should be adjusted by using the conect I puchases' markup percentage of 118.02% in marking up tobacco

penalty if the failure to pay 9 The comptoller is authorized to impose an additionai 50% to evade the tax' Tex' Tax tæ{ or file a report *t.o ¿u" was a result of fraud or an intent Code $ ll1.06l(b)' of proof to show by clear and-convincing evidence that l0 staff bea¡s the burden Code $ 1'40(1XB)' Peritioner SI acted with intentio evade tar(. 34 Tex. Admin.

Petitioner sl had the intertt to evade tax required by Tex. Tax-Code $ lll'061(b)(t)' but I l. only for the report periods February 1,2007 through April 30' 2008'

.l.lre record establishes by clear and convincing evidence that the eross undgleporting of 12 tax it'rat th" imposition of the additional 50% tax was due to the intent to evade and penalty was warranted, but only for the report periods February 1,2007 through April 30' 1Oog. Te*. Trv Code $ I11.061(bxl)'

13 The additional 50% penalty should be deleted for the report periods May l, 2ÛÛ8 through

June 30,2009. CONFIDENTIAL Pursu¡nt to Tex.

PROPOSAL FOR DECISION PAGE 2I soAH DOCKET NOS. 304-13-421 1.26 & XXX-XX-XXXX.26.26 TCPA DOCKET NOS loó,815 & t07'oo6

14. The Petitioner SI should be affirmed except for the adjushents a.ssessment against recommended in Conclusions of Law Nos' I and I 3 '

manager, or director 15. Texas Tax Code $ 111.061 1 imposes personal liability on an officer, director, oT paftner, took an actiOn or of a corporatiOn who "as an OmC"t, manager' payrnent of taxes"' pntti"ipuba in a fraudulent scheme or fraudulent plan to evade the 50s/o penalty if in, pänonA liability is for taxes, penalties, including an additiona|Code $l 11'061(a)' applicable, and interest that are due frõm the corporation. Tex. Tæ<

the payment of 16. Actions that indicate a fraudulent scheme or fraudulent plan to evade retum or feport with the taxes include filing, or causing to be filed, a fraudulent 1Ð( to be filed, a tax return o on behäf of the business entity, or filing, or causing or åport with the Comptroller on behalf of the business entity "ãrpr-ff that contains an intentionally false statemånt that resulg in the amount of the tax due exceeding the and (3). amounr of tax report ed by 25% or more. Tex. Ta:< Code $ 1 1 I .0ó I I þXl )

t7 staff established that Petitioner Isba was personally liable under Texas Tax Code Petitioner SI, but only for the report periods $ t t f .Oe f I for the assessment made against May 1,2007 through APril 30' 2008.

The personal liabilify assessment against Petitioner Isba for report periods May 1, 2008 18. through June 30, 2009 should be deleted.

19 The assessment against Petitioner Isba should be upheld, subject to thc deletion recommended in Conclusion of Law No. 19 and to the adjusftnent to the underling corporate tax assessment against Petitioner S[ recommended in Conclusion of Law No' 8.

SIGNED December 12, 20ll-

6têof, FETER BR(X}XS ADMIÑII¡TRATÍI'E T.AW JIIDGE sr^TE OFncE OF ADIüINISTAaTIVE HE TruNGS TBXAS COURT OF'APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-lr-00462-CV

Sanadco Inc., a Texas Corporation; Mahmoud Ä.Isba, a/k/a Mahmoud Ahmed Abuisba, aiftla Mike Isba; \ilalid Abderrahman; Majic Investments,Inc.; Faisal Kahn; Isra Enterprises,Inc.; Hattab Al-Shudifat; Haifa Enterprises,Inc.; EID Corp.; Mohamrned S. .4.1Hajeid; Majdi Rafe Okla Nsairat; and Omar Unlirnited, Inc. IndivÍdually, Appellants

v

The Office of the Comptroller of Public Accounts of the State of Texas; Susan Combs, Individualty and in her OffTcial Capacity as Comptroller of Public Accounts of the State of Texas; and Greg Abbott in his OffÌcial Capacity as Attorney General for the State of Texas, Appellees

I,'ROM'tHE DIS'IRICT COURT OI' ]'llAVIS COUN'[Y, 98TH JUDICIAL DIS'I'RIC'I' NO. D-l-GV-l0-000902, HONORABLE TrM SULAK, JUDGE I'>RESIDING

MEMORAND I]M OPINION

After the Comptroller of Public Accounts performed an audit on a convenience

store owned by Sanadco Inc,, the Comptroller and the Attorney Ceneral (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 she calculated

the amount of taxes due was under the terms of an unauthorized rule, that many of'the actions that

she engaged in while conducting her audits were ultra vires, and that the provision o1'the tax

cocle authorizing audits by sampling ancl projecting was unconstitutional. After Sanaclco filed its

counterclaims, the Comptroller filed a plea to the jurisdiction contending that the district court did

EXHIBIT H not have jurisdiction over the counterclaims. Subsequent to reviewing the plea and convening a

hearing, the district court dismissed Sanadco's counterclaims lbr lack ofjurisdiction. On appeal,

Sanadco challenges the dismissal of its counterclaims, and we will reverse the portion of the district

court's order dismissing Sanadco's rule challenge, affirm the remainder of the district court's order

dismissing Sanadco's other counterclaims, and remand the case fbr further proceedings.

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

tliat fbrm the subject o1'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. $$ 15 L025,111.004.

In addition, the Cornptroller may use sampling and projection rnethods f-or estirnating the amount

of taxes owed if "the taxpayer's records are inadequate or insufficienl." Id. $ 11 L0042(b). Moreover,

if the Comptroller "is not satisfied" with the calculated tax owed based on the taxpayer's records,

the Comptroller rnay determine the amount of tax owed liom "other inf-ormation available to the

comptroller." Id $ 1l1,008(a).

In addition to rcquiring convenience stores to maintain sales records, the tax code

also requires brewers, manutäcturers, wholesalers, and clistributors ol'alcoholic beverages to 1ìle

rcports chronicling their sales to stores and listing the stores by name. 1d $ $ l5 1,46I-.462. Similarly,

the tax code authorizes the Comptroller to request wholesalers and distributors of tobacco products

to lìle the sarne type ofreports. 1d $$ 154 (addressing cigarette sales), 155. 105 (covering non-cigarette

2 tobacco products). Thc type of inf'ormation rcquircd in thcsc rcports is commonly rcferrcd to as

H.B. I I information because the reporting requirements were enacted by House Bill I I of the

80th legislature. Act of May 3,2007,80th. Leg., R.S., ch. 129, SS$ \-3,2007 Tex. Gen. Laws ^S¿e

159,159-62.

Once an audit has been perfbrmed, the store owner may request a redetermination

fiom the Comptroller within 30 days of receiving notice of the Comptroller's assessment, Tex. Tax

Codc $ 111.009(a), (b), In addition, thc owncr may also rcqucst a hcaring on thc rcdctcrmination,

id g t t l.009(c), before the State Office of Administrative Hearings, id. $ 11 1.00455. If no request

1-'or a redetermination is filed within 30 days, "the determination is final on the expiration of the

period." Id ç 11 1.009(b). As an alternative to requesting a redetermination, an individual may also

pay the assessed taxes along with a written protest and then file a suit challenging Ihe tax, Id.

$$ 112.0s 1(a), (b), .052,

Prior to the passage olHouse Bill I 1, 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'unil'ormity in estimated convenience store

audits" and that "mark-up percentages and product mix percentages" were developed to be usecl in

audits "when necessitated by lack of reliable records" or iI'a store's "records are unavailable,

inadequate or unreliable," Afier House Bill 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. 1 I information "to produce the most accurate audit results." The issuance of these two memos

along with various actions taken by the Comptroller when perfbrming convenience-store audits

lorm the basis lor this case.

J BACKGROUND

Turning to the f'acts of this case, Sanaclco owns a convenience store, ancl Mahmoud

Isba operates the store and is designated as a responsible person 1òr Sanadco. The Comptroller

audited Sanadco and determined that Sanadco had underreported its taxable sales fbr alcohol and

tobacco proclucts. The amount of the cleficit was cletermined using H.B. 1 I data. After making her

deterunination, 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 clue, Sanaclco clid not file an aclministrative

challenge to the assessment, nor did it pay the amount due. Accordingly, the Attorney General

fìled suit to collect the delinquent taxes. In response, Sanadco liled an answer and raised several

counterclaims l-or declaratory relief. Those counterclaims were macle against the Offìce of the

Comptroller, Susan Combs in her of ficial capacity as Comptroller, and Greg Abbott in his official

capacity as the Attorney General. In its response, Sanadco also natned as counter-plaintilfìs other

inclividuals ancl companies who had been assessed similar taxes. Those other inclivicluals and

companies are Walid Abclerrahman; Majic Investments, Inc,; Faisal Kahn; Isra Enterprises, Inc.;

Hattab Al-Shudil'at; Hailà Enterprises, Tnc.; EID Corp.; Moharnmed S. AlHajeid; Majdi Rafe Okla

Nsairat; and Omar Unlimited, Inc.r Unlike Sanadco, the other namecl counter-plaintiffs all sought

redeterminations of their assessed taxes through administrative teview, but none ol'the administrativc

proceedings had been cornpleted by the time that the individuals were added to the lawsuit.

t For casc ol'rcading, wc will gcncrally rclcr to all of'thc countcr-plaintifïs as Sanadco. 4 Regarding its counterclaims, Sanadco alleged six complaints relevant to this appeal,

In its lirst counterclaim, Sanadco asserted that AP 92 and AP I22 are administrative rules but that

theywere not promulgated in compliance with the requirements of the administrative procedure act.

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 she

issued 92 and AP I22 and thereby authorized auditors to estimate taxes owed by convenience- ^P o'frrst store owners without ascertaining whether adequate records are available" from the taxpayer

to perfbrrn an audit. For those reasons, Sanadco sought declarations asserling that "the Cornptroller

is not authorized to estimate convcnicnce stole auclits using the methods clescribed 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 counterclairn, Sanadco contended that

the Comptroller actedwithout legal authoritywhen she improperly instructed auditors to use H.B. I 1

information f'or convenience store audits "without first ascertaining whether the determination can

be rnade fiom the taxpayer's records." Accordingly, Sanadco insisted that the Comptroller's decision

to require the use of H.B. I 1 data is an ultra vires act and, therefore, sought cleclarations that the use

of Il.B, l1 infbrmation was irnproper and that the governing stalutes do not allow "the Comptroller

to give conclusive eÍlect to the HBI I data."z In its f'ourth counterclaim, Sanadco alleged tliat the

Comptroller improperly authorized auclitors to "use an abbreviated proceclure which b¡.passed

2 In this counterclaim, Sanadco also sought a declaration that the Comptroller's decision to recluire the use of H.B. I I infbrmation constituted an impermissible and invalid rule, Because that declaratory relief would seem {.o parallel the assertions made in Sanadco's lìrst counterclaim, our analysis regarding the lirst counterclaim is intendecl to address the declaration regarding H.B. l1 as well.

5 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 fiflh counterclaim,

Sanadco alleged that the Comptrolleractedultravires byauthorizing the imposition ol'a 50% penalty

without proof of fraud or of an intent to avoid the tax as required by the tax code. ^S¿e Tex. Tax

Code $ I 1 1.061(b), In its sixth counterclaim, Sanadco sought a declaration that the provision of the

tax code authorizing sample and projection audits f'or estimating taxes owed is unconstitutionally

vague and is, "by its nature, a denial of substantive and procedural clue process." ,Se¿ id $ 1 t 1.0042.

After Sanadco filed its counterclaims, the Comptroller filed a plea to the jurisdiction.

In her plea and brief in support o1'the plea, the Cornptroller argued that the district court did not

have jurisdiction over Sanadco's counterclaims because Sanaclco dicl not allege a proper rule

challenge, because the claims are barred by sovereign immunity, because Sanadco and the other

named counter-plaintifß fäiled to exhaust their adrninistrative remedies bef'ore filing suit, because

some of the counterclaims were not ripe for review, and because Sanaclco ancl the other counter-

plaintifß did not have standing to challenge the allegedly unconstitutional tax statute.

After reviewing the pleadings, the plea, and Sanadco's response to the plea, the

district court signed an order granting the Comptroller's p1ea.3 On appeal, Sanaclco contests the

3 In addition to the six counterclaims mentioned above, Sanadco also alleged the f'ollowing additional counterclainrs: (l) that the Comptroller engaged in an unconstitutional taking when she improperly collecf ed sales and use taxes, and (2) that the tax code provision authorizing the Comptroller to impose a ten percent penalty if she believes that "the amount due lòr a tax period is jeopardized by delay" is unconstitutional.

6 district court's order granting the Comptroller's plea and, in six issues, challenges the district court's

disrnissal of its six counterclaims.a

STANDARD OF REVIEW

"A plea to the juriscliction 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 rnay challenge a trial court's subject-matter

filing containing thc Comptroller's plca to thc jurisdiction also servcd as a The rcsponsivc motion for summaryjudgment. [n the plea porlion of the filing, the Comptroller souglrt dismissal of the six counterclaims discussed in the body of the opinion but did not discuss the two additional countcrclaims. In the summary-judgment portion, the Comptrollcr sought judgmcnt in hcr lavor regarding the two additional counterclaims as well as some of the other counterclaims. In a separate order, the district court granted the motion fbr summaryjudgment.

In two issues on appeal, Sanadco argues that the district court erred by dismissing the two additional counterclaims listed above. However, those additional claims were disposed of'by summaryjuclgmcnt. The lcgislaturc has cmpowcrcd appcllatc rcvicw of a trial Çourt's intcrlocutory order granting a plea to the juriscliction by a governmental unit, see Tex. Civ. Prac, & Rem. Code $ 5l.Ola(a), but has not empowered us with authority over interlocutory orders granting a govarnmcntal unit's motion for summary judgmcnt. Accordingly, in this appcal, wc onfy adclrcss the six counterclaims listed in the body of the opinion that were attacked and dismissed on jurisdictional grounds.

4 In its counterclaims, Sanadco filed suit against the Comptroller in her individual capacity and sought to initiate a class action on behalf of individuals who had similarly been assessed taxes. In her plea to the jurisdiction and brief in supporl of the plea, the Comptroller sought dismissal of Sanadco's claims against her in her individual capacity on the ground that Sanadco had failed to "plead any Iäcts that would expose [her] to individual liability" and because the pleadings demonstrate that Sanadc o "cannot plead any làcts that would give rise to such liability." Similarly, the Comptroller requested that the district court dismiss the class action claims for several reasons, including that none of the convenience-store owners had "satisfied the statutory prerequisite to filing a class action under" the tax code. ,See Tex. Tax Code $ I12.055 (allowing lbr class actions by persons who have paid their taxes under protest). The district court granted the Comptroller's plea in its entirety, and Sanadco cloes not challenge the dismissal of its claims against the Comptroller in her individual capacity or of its class-action claims. Accordingly, those claims are not considered in this appeal and remain dismissed.

7 jurisdiction overacasebyfilingaplea. I"{ou.stonMun. Em¡ts. Pension,5"y,s. ,. Ferrell,248 S.W.3d 151,

156 (Tex. 2007). Determinations regarding whether a trial coutt has juriscliction over a case are

questionsoflaw. TexasDep'toÍ'Parks&Wildli/Þv.Miranda,133S.W.3dZI7,225-26(Tex.2004).

Subject matterjurisdiction is a question of law that appellate courts review de novo, State v. IIolland,

221 S.W.3d 639, 642 (Tex. 2007), ancl may be raised for the first time in an interlocutory appeal,

Rusk State Hosp. v. Black,392 S.W,3d 88, 95-96 (Tex. 2012). Moreover, appellate courts must

consider their jurisdiction 'oeven if that consideration is sua sponte." Freedom Cr¡mmc'ns., Inc. v.

Coronado,372 S.W.3cl 621,624 (Tex. 2012) (per curiam).

On appeal, we review de novo a trial court's decision to grant a plea to the jurisdiction.

Ferrell,248 S.W.3d at 156. [n perftrrrning this jurisdictional analysis, courts look to the "plaintif'f"s

petition to determine whether the fàcts pled aflirmatively demonstrate that juriscliction exists,"

I{olland,221 S.W.3d at642. "If the pleadings are insuffìcient to establish jurisdiction but do not

affirrnatively dernonstrate an incurable defèct, the plaintiff should be alÍbrded the opportunity to

repleacl." Id. at 643. However, if "the pleadings alTìrmatively negate the existence ofjurisdiction,

then a plea to the jurisdiction may be granted without allowing the plaintiffs an opportunity to

amend." Miranda,133 S.W.3d a|227.

DISCUSSION

As mentionecl above, Sanadco challenges the dismissal of its six counterclaims in

six separate issues on appeal

8 Sanadcoos First lssue

In its first issue on appeal, Sanadco urges that the district court erred by clismissing

its counterclaim regarding AP 92 and 122. In its counterclaim, Sanadco sought a declaration ^P that the memos are invalid administrative rules, Essentially, Sanadco contends that the memos

required the Comptroller's auditors to use certain methods when perf'orming audits of all

convenience stores and that the Comptroller used the procedures specified in the memos when

performing the audits at issue in this case. In challenging the district court's order, Sanadco insists

that the memos constituted administrative rules as defined by the adrninistrative procedure act but

thattheruleswerenotacloptedincompliancewiththeact. SeeTex,Gov'tCode$$2001.021-.041:,

see ctlsc¡ rd $ 2001.003(6) (defining "rule"). Accordingly, Sanadco contends that the district court

had jurisdiction to consider its challenge to the rules because the adrninistrative procedure act

empowers a parly to seek a declaration challenging the validity or applicability of a rule, see i.d.

$ 2001.038, including one not adopted in compliance with the act, see El Paso Cnty. Ilosp. Dist. v.

Texas Health & IIuman Servs. Comm'n,247 S.W.3d 709,715 (Tex. 2008),

In supporting the district court's dismissal of this counterclaim, the Comptroller

contends that the provision of the administrative procedure act authorizing rulc challenges does

not apply in this case because the memos do not qualify as rules under the act, As suppott f.or this

proposition, the Comptroller argues that the memos are simply statements regarcling the internal

management of the agency and do not impose any duties or requirements on convenience-store

owners. On the contrary, the Comptroller insists that the memos are designed to irnprove the

accuracy of auclits by requiring auclitors, not taxpayers, to use certain aucliting methocls. Fuilhermore,

9 thc Comptrollcr urgcs that although the mcmos may hclp auditors asccrtain whcthcr taxpaycrs owc

money, the taxpayer may challenge the determination. Accorctingly, the Comptroller insists that any

ell.ect on a taxpayer caused by the implementation of AP 92 and AP 122 would only be binding alter

an aclministrativc hcaring, which shc contends supports thc conclusion that thosc mcmos arc not rulcs,

Because we believe that AP 92 and AP I22 are rules, we must conclude that the

district court erredby dismissing Sanadco's first counterclaim. Under the administrative procedure

act, a rulc is dcfincd as ooa statç agcnoy statcmcnt of gcncral applicability that: (i) implcmcnts,

interprets, or prescribes law or policy; or (ii) describes the procedure or practice requirements of a

state agency." Tex. Gov't Code $ 2001.003(6)(A), For rule determinations, 'ogeneral applicability"

rel'ers to statements affecting the interest of the public and does not refer to statements issued

whendeterminingtherightsofindividuals. Combsv.EntertainmentPubl'ns,Irtc.,292S.W.3d712,

72I (Tex. App.-Austin 2009, no pet.). Further, the statutory definition "includes the amendment

or repeal of a prior rule" but excludes "a statemenf" regarding only the internal management or

organization of a state agency and not af fecting private rights or procedures." Tex. Gov't Code

$ 2001.003(6XB)-(C). In determining whether an agency statement is a rule, courts consider "the

intent of the agency, the prescriptive nature of the guidelines, and the context in which the statement

was made." Entertainment Publ'ns,292 S.W.3d at722.

AP 92 states that lbrmulas were developed l-or estimating couveniencc-store audits

to promote uniformity. Essentially, the memo sets out mark-up percentages that were to be used

in all cascs where "records are unavailable, inadequate or unreliable." Similarly, AP 122 provides

oolnust guidelines l'or convenience-store audits and instructs that H.8. 1 1 inlorrnation be the starting

point" f'or all convenience-store audits conducted after the date of the memo.

l0 By their language, both memos are statements implementing, interpreting, or

prescribing law or policy . CJ: id. at727 (concluding that letters by Comptroller indicating her intention

to apply statute in all cases "involving brochure fundraising firms" without regard to individual

factors were rules). The directives in the memo apply to audits perf'ormed on all convenience-store

owners and not just to the named counter-plaintifß, and the memos, particularly AP 122, reveal the

Comptroller's intention to apply particular information and methods when performing all audits of

çonvenience stores in all future cases and regardless of any individual circumstances. ,See Triniry

Settlement Serv,s., LLC v. Texas State Sec. Bd , No. 03-10-0063g-CV, 2013 Tex. App. LEXIS 9487,

at *15-16 (Tex. App.-Austin Aug. 7,2013, no pet. h.) (concluding that agency statement did not

qualily as rule because it applied only to particular company and because agency did not express

intention to apply statement to all future cases).

Another factor weighing in favor of a determination that the memos are rules is

Sanadco's allegation that the Comptroller is in fäct generally using directives and fbrmulas in those

melnos when perf'onning audits on convenience stores and that the Cornptroller used the memos

during the auclits of the convenience stores at issue in this case. In other wclrds, the memos had a

tangible efïect and were not simply advisory statements. See Brinkley v. Texa,s Lottery Comm'n,

986 S.W.2d 764,770 (Tex. App.-Austin 1999, no pet.) (explaining that letters liorn Commission

setting lbrth criteria by which licensees coulcl determine if their eight-liner machines were legal

were not rules because they were merely informal views bearing upon internal agency management

in absence oÍ statute giving letters legal eflèct or attempt by agency to enlbrce statement against

licensee). Civen that the nÌemos hacl çífects on convenience stores at large, we also cannot agree

ll with the Comptroller's asseftion that thc memos were only statements directed to auditing personnel

"regarding only the internal management or organization" of the Comptroller's ofTìce. ,See Tex. Gov't

Code $ 2001.003(6)(C); cJ: Texas Mut Ins. Co. v. í/isîa Cmty. Med. Ctr., LLP,275 S.W.3d 538, 555

(Tex. App.-Austin 2008, pet. denied) (determining that staff report concerning inconsistent

implementation of rule was not itself rule because repoft was presented to agency but agency

took no official action regarding report and because it simply presented possible correction to

stop inconsistency),

Although we need not thoroughly pursue the issue here, we are also persuaded

that AP 122 is a rule because that memo requires the use of H.B. 1l information as a primary

tool f'or estimating taxes regardless of'the condition of the taxpayer's records. That requirement is

noteworthy because it seems like a departure fiom the provisions of the tax code authorizing

estimating techniques when the taxpayer's records are somehow inadequate ancl when the

Comptroller is "not satisfied" with a tax report that has been filed "or the amount of the tax required

to be paid." ,S¿e Tex. Tax Code $$ l1 L0042,.008;see also El Pa,so Cnty. Hosp. Dist.,247 S.W.3d

aI714 (concluding that agency letter setting cutofïdate f'or seeking reimbursement was rule because

it was statement of general applicability, affected all hospitals, and implemented agency policy by

rnodilying pre-existing base-year rule). This type ol modilìcation to prior practices and governing

fiameworks woul

about an agency's internal organization.

In addition, we are also not persuaded by the Comptroller's assertion that the ability

of a taxpayer to challenge an auclit performed under the methocls clescribed in the iìlemos

l2 somehow preclì.rdes a conclusion that the memos are rules. Assuming that the ability to challenge

a tax assessment could al ct whether the audit was perfòrmed under the terms of a rule, the

assessment would seem to be linal and binding upon those individuals who do not contest

their assessments. Regardless, formally promulgated rules may contain provisions authorizing

adrninistrative challenges without afI'ecting their status as rules, and l-or that reason, we do not

believe that the ability to seek administrative review forecloses a challenge to whether agency

directives were enaçted under the terms of an improperly promulgated rule.

In reaching our result, we would be remiss if'we did not rnention that the line that

separates rules from statements of o'internal management or organization" is a blurry one. ^|¿e Tex.

Cov't Code $ 2001 .003(6); see Slay v. Texas Comm'n on Envtl. Qualí,,,35 1 S.W.3d 532, 546 (Tex,

App,-Austin 201 I, pet. denied) (describing distinction as "elusive"). Although the legislature has

attempted to distinguish the two through legislation, making the distinction is ofìen not an e asy task,

particularly given the varied functions that agencies are charged with undertaking. In discussing the

dilliculty in rnaking these determinations, this Court has explained that the core concept to consider

is whether the agency statement has "a binding effect on private parties." Slay,351 S.W.3d at 546;

see ctlso id. at 546,548 (concluding that evidence supported trial court's determination that agency

statement was not rule because there was evidence that agency commissioners "were not bound

to follow fstatement's] methoclology when exercising their legislatively conf'errecl cliscretion to

impose penalties"), Although this is an extremely close case, we believe that the record as it has been

developed at this stage of the lawsuit cornpels a conclusion that the memos at issue have suflicient

elfeci on private parties to render ifiem rules.

13 In light of the preceding, we conclude that the directives in AP 92 and AP 122 aretn

fàctrules. Forthatreason,wemustalsoconcludethatthedistrictcourthadjurisdictionoverSanadco's

claim that AP 92 ancl AP 122 were invalicl rules and that, therei'ore, the district court erred by

dismissing Sanadco's first counterclaim. Accordingly, we sustain Sanadco's first issue on appeal.

Sanadcoos Second, Third, Fourth, and Fifth Issues

In its second, third, and fburth issues, Sanadco challenges the dismissal of its

requestecl declaratory relief regarding actions taken by the Comptroller that it contencls are ultra vires

acts, Specifically, Sanadco urges that the following actions by the Comptroller are not supported

by any governing law: the Cornptroller's decision to require auditors to estimate taxes owed by

using the methods described in AP 92 and AP 122 and to authorize her auditors to use H,B. 11

information to conduct abbreviated tax audits. In asserting that these actions are ultra vires, Sanadco

points to section lIL0042 of the tax code, which allows auditors to use sampling auditing methods

when a taxpayer's records are unsatisfactory. See Tex, Tax Code $ 111.0042. Similarly, Sanadco

refers to a rule in the administrative code that authorizes the Comptroller to use "a sample and

projection auditing method to determine tax liability" when a taxpayer's records are unsatisl-actory,

See 34 Tex. Aclmin. Cocle $ 3.282(c), (d). In light of the statutory provision and the rule, Sanadco

insists that the Comptroller's decision to perform the audits in the manner described is contrary to

the governing law. In its fifïh issue, Sanadco challenges the disrnissal of his declaratory claim alleging

that the Comptroller actecl ultra vires by authorizing a 50j/u penalty lòr fraud. Specifically, Sanaclco

insists that although subsection 111.061(b) of the tax code authorizes the Comptroller to impose

penalties, the provision lirnits its imposition to circurnstances in which it is determined that a fäilure

t4 to pay the tax o'due was a result of fraud or an intent to evade the tax" or that the taxpayer engaged

infiaudulentconducttoafÏèctthe"outcomeofanaudit." SeeTex.TaxCocle$ 111.061(b), Relying

on that statute, Sanadco insists that the Comptroller did not make the requisite determinations before

imposing the fiaud penalty on convenience-store owners.

Furthetmore, Sanadco contends that even though none of the named counter-plaintiff's

had fully exhausted their administrative remeclies regarcling the Comptroller's tax assessments, the

district court still had jurisdiction to consider these declaratory complaints because parties are not

requiredtoexhausttheiradrninistrativeremediesl'orproperlypleadedultra-viresclaims. Accordingl¡

Sanadco insists that the district court hacl juriscliction over its declaratory claims requesting the

Comptroller to comply with the governing statutes and rules.

Generally speaking, a party must exhaust all of its administrative remedies bel'ore

seeking judicial review of an agency determinalion. Friends of Canyon Lake, Inc. v- Guadalupe-

Blanco Riyer Auth., 96 S.W.3d 519, 525 (Tex. App,-Austin 2002, pet. denied); cf. Burgess v.

Gallery Model [Iomes, Inc., 101 S.W.3d 550,558 (Tex. App,-Houston Ist Dist.] 2003, pet.

deniecl) (explaining that Comptroller has exclusive juriscliction to rcsolve tax refunds and that party

must exhaust such remedy bel'ore filing refund suit); c/. Tex. Gov't Code $ 2001 . 17 I (empowering

person who has exhausted his administrative remedies and who is aggrieved by final agency decision

to seek juclicial review). Exhaustion of aclministrative remeclies is necessary in orcler to waive

sovereign immunity, which otherwise typically forecloses suits against government offîcials. ,See

As,signees oÍ'Best Buy v. Combs,395 S.W.3d 847 ,869 (Tex. App.-Austin 2013, pet. liled). In its

bricf, Sanaclco correctly points out that the supreme çourt has recognized an exception to the

l5 general rule for claims alleging that government ofïcials have engaged in ultra vires acts, See

City of'El Paso v. Heinrich,284 S.W.3d 366, 372-73, 380 (Tex. 2009) (explaining that with one

exception, "governmental immunityprotects government ofl.rcers sued in their official capacities to

the extent that it protects their employers" and that suits filed against government officials seeking

"to require state ofTìcials to comply with statutory or constitutional provisions are not prohibited by

sovereign immunity"); Appraisal Revietv Bd. oJ'Harci.s Cn.Íy. v. O'Connor &. Assocs.,267 S.W.3d

413,418-19 (Tex. App,-Houston [14th Dist,] 2008, no pet.) (outlining exception to exhaustion

lequirement fbr ultra vires clairns and stating that generally courts may only interlère with duties o1'

agencywhen officials exceedstatutorily conferredpowers eventhough administrative remedies have

not been exhausted).

However, we do not believe that the exception applies to Sanadco's claims. In

order to fall within the exception, a party must allege that the oflicial "acted wholly outside [his]

jurisdiction," and allegations that an agency official fuiled to fully comply "with all of the

intricacies" of the governing statutes and rules are insufïicient to confèr jurisdiction. Friends of

Canyon Loke,96 S,W.3d at 528; see O'Connor & A,ssocs.,267 S.W,3d at 4I9. As a preliminary

matter, we note that the H.B. l1 information that the Comptroller used for calculating the audits

was infbnnation that the legislature required wholesalers to provide regarding their sales of alcohol

and tobacco proclucts to convenience-store owners. See Tex. Tax Clocle $$ 151.462, 154.212.

Moreover, the bill analysis fbr H.B. 1 I reveals that the law was enacted because of 'ogrowing concern

over fiaud among convenience store owners in the area of sales tax reporting" and that the legislature

t6 was requiring the inf'ormation in order to help the Comptroller perform her audits of convenience

stores. Senate Comm. on Bus. & Cìommerce, Bill Analysis, Tex, H.B. 11, 80th Leg., R.S. (2007).

In acldition, the legislature has specifìcally empowered the Comptroller to perform

tax audits of convenience stores. ,See Tex. Tax Code $ $ I 1 1.001 (empowering Comptroller to collect

sales taxes), .004-.0041 (authorizing Comptroller to examine records of taxpayers), Importantly, the

legislature has also allowed the Comptroller to estimate the amount of taxes due in certain

circumstances. ,S¿e id $$ I I1.0042 (allowing Comptroller to use sampling auditing techniques if certain conditions are met), .008 (authorizing Cornptroller to use other infbrmation if she is

dissatisliecl with tax reporl), Moreover, the tax code clirects the Comptroller to impose a penalty o1'

50% ol'the taxes due if the Comptroller concludes that a taxpayer's f-ailure to pay was the "result

of fiaud or an intent to evade the tax." Id. ri I l I .061(b).

Although Sanaclco may disagree with the manner in which the Comptroller is

perf'orming her duties and her decision to use legislativelyprescribed information for estimating the

amount owed in her audits, we cannot agree that Sanadco has alleged complaints about actions

wholly outsicle of the Comptroller's authority. Allegations that the Comptroller is not complying

completely with every statutory requirement when performing the duties that she is authorized to

perlbrrn are not sufTicient to invoke the ultra-vires exception. See Creedmor¡r-Maha Water Srrpply

Corp. v. Texa,c Cotnnl'n olt Envtl. Quality,307 S.W.3d 505, 517-18 (Tex. App.-Austin 2010, no

pet.) (determining that allegations that agency rcached incorrect result when exercising its delegated

authoritydoes notconstituteultra-vires clairns); O'Connor &Assocs.,267 S.W.3d at4l9 (explaining

that assertions that agency hcarings clicl not fully comply with statutory procedural requiremcnts

ll were not enough to invoke ultra-vires exception); Friends of' Canyon Lake, Inc. ,96 S.W.3d at 528

(concluding that arguments that agency did not provide required notice and inf'ormation during

application process were insufficient to invoke exception); cf. Texas Comm'n of Licensing &

Regtilatìon v. Model Search Am., [nc.,953 S.W.2d 289,292 (Tex. App,-Austin 1997, no writ)

(relating that claim that agency had authority to interpret statute but had interpreted provision

incorrectly was insufficient to involce ultra-vires exception because possibility that agency might

interpret provision incorrectly does not destroy agency's ability to make that determination).

In light of the fäct that Sanadco's petition làiled to demonstrate that the named

counter-plaintil'fs had failed to exhaust their administrative remedies and in light of our cletermination

that Sanadco's allegations did not properly invoke the ultra-vires exception to the exhaustion

requirement, we must conclude that Sanadco's petition did not invoke the jurisdiction of the district

court to consider its requested declaratory relief, For these reasons, we eannot conclude that the

district couft erred by dismissing Sanadco's requested declaratory relief, and therefore, we overrule

Sanadco's second, third, lburth, and fìfth issues on appeal. See Creedmoor-Maha Water Supply

Corp.,307 S.W.3cl at 515 (noting that party does not avoid jurisdictional limitation by hling claim

under unif'orm declaratory.judgment act and that act is not general waiver of immunity).s

s On appeal, Sanadco contends that exhaustion of administrative remedies was not warranted in this case because its claims ¡rresented pure questions o1'law and were based on uncontested facts. Assuming without deciding that Sanadco invokes a viable exception to the exhaustion-of-remedies cloctrine, we disagree with Sanaclco's assertion that the reliel'that it sought only involved pure questions o1'law. In addition to seeking declarations regarding whether certain procedures by the Comptloller complied with relevant governing law, Sanadco also sought in its counterclaims to have the counter-plaintiffs be relieved of the obligation to pay their respective taxes, to recover compensatory damages liom the Comptroller as well as interest and attorney's fèes, and to obtain a judgment directing the Comptroller "to account . . . for all of the damages caused to" the

l8 Sanadco's Sixth Issue

In its final issue on appeal, Sanaclco asserts that the district court erred by clismissing

onjurisdictional grounds the counterclaim that section I11.0042 of the tax code is unconstitutional.

That provísion authorizes the Comptroller to use sarnpling auditing methods if'certain criteria

are met. Tex. Tax Cocle $ 11L0042. In its sixth counterclaim, Sanadco sought a declaration that

the provision is unconstitutionally vague as written and as applied to the counter-plaintifï's.

In order 1'or a trial court to have juriscliction over a declaratory-judgment claim, a

party must allege "a justiciable controversy as to the rights and status of parties actually before the

courl for adjudication, and the declaration sought must actually resolve the controversy." Brooks

v. Northglen A.s,t'n,141 S.W,3d 158, 163-64 (Tex. 2004). "A justiciable controversy is one in

which a real and substantial controversy exists involving a genuine conflict of tangible interests and

notmerelyatheoreticaldispute." TexasDep'tof'Pub. Safetvv. Moore,985 S,W.2d 149, 153 (Tex.

App.-Austin I 998, no pet.). 11'there is no çase or controversy, then any declaration issued by a trial

court woulcl constitute an impermissible advisory opinion. Broolcs,l4l S.W.3d at 164,

Although Sanadco urges the statute's unconstitutionality, neither his 1ìling containing

the counterclaim nor his appellate briefìs contain any allegation regarding a dispute between the

Comptroller ancl the named counter-plaintiffs involving the statute in question. In parlicular, Sanaclco

does not assert that the Comptroller used or threatened to use the sampling methods authorized in

countcr-plaintif'f's. CJ. I{arri:t Cnty. Apprai:sal Di,st. v. ETC Mktg.,399 S.W.3d 364, 368 (Tcx. App.-Houston [14th Dist.] 2013, pet. filed) (disagreeing with assertions that claims were just questions of law and that exhaustion requiremcnt did not need to be met because parly was seeking to havc its tax asscssmcnts sct asidc and could not, thcrcforc, bc pursuing purc qucstion ollaw).

T9 the provision when perl'orrning the audits for any of'the counter-plaintiffs, To the contrary, Sanadco's

filings in the district court and in his appellate briefi all allege that the Comptroller improperly

used H.B. I 1 inforrnationwhen performing audits. Accordingly, Sanadco did not plead any conflict

regarding the statute, and there was no justiciable controversybetween the named counter-plaintiffs

and the Comptroller. For that reason, we cannot conclude that the clistrict court erred by dismissing

its requested declaratory reliefl and therefbre, we overrule Sanadco's sixth issue on appeal.

CONCLUSION

Having overruled Sanadco's second, third, fourth, f'rfïh, and sixth issues, we affirm

the portion ofthe district court's orcler dismissing onjurisdictional grouncls the following declaratory

counterclaims urged by S anadco : that the Comptroller acted ultra vires by implementing AP 92 and

AP 122, that the Comptroller acted ultra vires by requiring the use of H.B. I 1 information during

audits of convenience stores, that the Comptroller actecl ultra vires by authorizingabbreviatecl audits

andby giving preclusive ei'fect to H.B. I 1 information during those audits, that the Comptroller acted

ultra vires by authorizing the imposition of a lraud penalty without requiring a determination that

all the statutory criteria hacl been met, and that section 111,0042 is unconstitutional. Having

sustained Sanadco's fÌrst issue on appeal, we reverse that portion of the clistrict court's order

disrnissing the counterclaim asserting that AP 92 and AP 122 were improperly promulgated rules,

Accordingly, we remand the case for proceeclings consistent with this opinion.

20 David Puryear, Justice

Befbre Justices Puryear, Henson, and Goodwin Jusl"ice Henson not participating

Aff,rrmed in Part; Reversed and Rernanded in Part

Filed: September 26,2013

21 Amalia Rod rig uez-Mendoza District Clerk, Travis County Travis County Courthouse Complex P. O. Box 679003 Austin, Texas 78767

Date: November 3, 2008

TO: All attorneys of record in cases pending in Travis County District Couft

NOTICE OF ENTRY OF NEW E-FILE MANDATE ORDER

The 2008 Court Order Regarding E-filing is effective as of November 1, 2008. You can view this order by selecting the link near the top of the following web page:

htto: //www.co.travis.bx. us/district clerUdefault.asp

If you have not yet established an e-filing account, please refer to Texas Online's eFiling Main Information at:

http : //www.texasonline.com/oortal/tol/en/info

We are asking that you establish your account as soon as possible, but a grace period through the end of the year has been implemented to allow you adequate time to make e-fili ng preparations.

If you have any questions regarding the e-filing process or the order's application to any of your pending cases, you may call 512-854-FILE (512-854-3453) for assistance

Thank you

ia Rod 9úry- Travis County District Clerk

Travis County District Clerk's Offìce Civil Division

Administrative Offlces Clvil and Famlly Divlsion Griminal Dlvieion Jury Office (512185+5737 (512)8*e457 (5r2) 854-9420 (512) 854-42es Fax: 854-4744 Fax: 854-6610 Fax: 85¡l-4566 Faxt 8*44,57 T}IB LAWYER REFERRAL SERVICE O¡.CENTRAL TEXAS A Non.Prcilt Cotpottllon

IF YOU NEED A LAWYER AND DON'T KNOW ONE, THE LAWYÊR REFERRAL SERVICE CAN HELP

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Thls service is certlfled as a lawyer referral servlcs ar requlred by lhe State ol Texag under Chapler 952, Occupatione Codo. Certlllcale No. 9303

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Abierto de lunes a viernes de 8:00 am-4:30 pm $20.00 por la primera media hora de consulta con un abogado /la nnncrrlfl ac nr¡fic ci co trrf¡ rla ¡l¡ñn norc,nnal nanli¡anci¡ indemnización al trabajador, bancarrota o por incapacidad del Seguro Social) This service is certified as a lawyer referral service as required by the State ol Texas under Chapter 952, Occupations Code. Certificate No. 9303 Tab D

Letter regarding payment for Reporter’s Record Sanadco II, No. 03-14-00771-CV Third Court of Appeals.

Appellees’ Responsive Brief page 4 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV I Il.li (:()t,\'

Counr oF AppEALS Tuno Drsrrucr or TexRs P,O, BOX I 2s47, AUSI'[N. TEXAS 7871 l_2547 www. tx0ourts. gov/3r'dcoa.aspx (stz) 463_t733

JEFF L. ROSE, CHIEF JUSTICE JEIìIII{EY D, KYLE, CLERK DAVID I'UIìYEAR, JUSTICE BOB PEMBEIì'TON, JUSTICI': MELISSA cOODWIN, JUSI ICIl SCO]I' K. ITIËLD, JUS]'ICE CINDY OLSON I]OURLAND, JUSl'ICE February 10,2015

Mr. Samuel T. Jackson Law Office of Samuel T. Jackson P. O. Box 170633 Arlington, TX 76003 * DELIVERED VIA E-MAIL *

RE: Court of Appeals Number: 03-14-00771-CV Trial Court Case Number: D-1-GN-13 -004352

Style Sanadco Inc., a Texas Corporation; Mahrnoud Ahrned Isba; Broadway Grocery, Inc.; and Shariz, Inc. v. Susan Combs, in Her Individual and Offrcial Capacity as Comptroller of Public Accounts; Office of Cornptroller of Public Accounts for The State Of Texas; and Gregg Abbott in His Official Capacity as Attorney General of The State Of Texas

Dear Counsel

The reporter's record was due in this Court on December 15,2014 and is overdue. The Court has been informed by Sheri Linder, the court reporter, that appellant has neithcr paid, nor made arrangements for payment, for the reporter's record. Accordingly, the reporter's record will not be filed. If appellant does not notify this Court that payment arrangements have been made for the record, or otherwise responcl to this notice on or before Friday. February 20, 2015, the Court will consider the appeal without the reporter's record. See Tex. R. App. P. 37.3(c). If the appeal is submitted for decision without a reporter's record, appellant will be expected to file a brief on or before March 12,2015.

Very truly yours,

JEFFREY D. KYLE, CLERK

BY .(t).

Amy Strother, Deputy Clerk

cc Mr. Jack Hohengarten Tab E

Order Denying Plaintiff’s Declaratory Judgment and Application for Temporary Injunction Plaintiffs’ Third Amended Petition for Judicial Review, Declaratory Judgment, Temporary Injunction and Request for Disclosure Sanadco II, No. D-1-GN-13-004352 200th Judicial District Court of Travis County, Texas

Appellees’ Responsive Brief page 5 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV F¡fed in The ilictritlt {i#un e¿f i¡'¿.¡vis eçrunfil, "içyr¡:'

i i ¿¡-ilir l) M-- r'tt}'l NO. D-1-cN-13-004352 t\t**ß-ll l- SANADCO INC, A TEXAS CORPORATION nffi "tr;i¡'Eiüìitri;'äio--..A'rl' i ' î ii' r

AND MAHMOUD AHMED ISBA $ IN THE DISTRICT COURT OF $ Plaintiff's, $ $ V $ $ SUSAN COMBS, IN HER TNDIVIDUAL $ AND OFFICIAL CAPACITY $ AS COMPTROLLER OF PUBLIC, $ TRAVIS COUNTY. TEXAS ACCOUNTS $ $ OFFICE OF COMPTROLLER OF $ PUBLIC ACCOLINTS FOR THE STATE $ OF TEXAS, $ $ AND GREG ABBOTT, IN HIS $ OFFICIAL CAPACITY AS ATTORNEY $ GENERAL OF THE STATE OF TEXAS $ Defendants $ 2OOth JUDICIAL DISTRICT

SD AP TI T CTI

I oN October l4th, 2014, this Court heard Mahmoud Ahmed lsba's application for , temporary injunction. After considering the pleadings on file, the evidence, and the arguments of counsel, the Court hnds that the application is without merit and should be DENIED. ACCORDINGLY, Mahmoud Ahmed Isba's application for temporary injunction is denied.

*'l.g-tt' SIGNED on the tT day of Qs"Let,e/,2014

HON ORABLE CHARLES RAMSAY í¡,¡-l'-Ì -|4 ProDoc FaxService Pâge Z of Z7

CAUSE NO. D-1-GN-l3-4352

SANADCO INC, A TEXAS CORPORATION, s IN THE DISTRICT COURT MAHMOUD AHMED ISBA, BROADWAY s GROCERY,INC., SHARIZ,INC., AND RUBY & s SONS STORE, INC., AND RUBINA NOORANI, $ PIaíntiffs, s s s VS s $ SUSAN COMBs,IN HER INDIVIDUAT s TR,AVIS COUNTY, TEXAS AND OFFICIAL CAPACITY $ A5 COMPTROTTER OF PUBTIC ACCOUNTS, s s OFFICE OF COMPTROLLER OF PUBLIC s ACCOUNTS FOR THE STATE OF TEXAS, $ $ AND GREGG ABBOTT IN HIS OFFICIAL s CAPACITYAS ATTORNEY GENERAL OF $ THE STATE OF TEXAS $ Defendants s z 0OTH IUDTCTAT DTSTRT CT

PLAINTIFFS' THIRD AMENDED PETITION FOR JUDICIAL REVIEW, DECI,,ARAT O RY J U D G MENT, TEM P ORARY I NIUNCTI ON AND REQUEST FOR DISCTOSURE

COME NOW SANADCO INC. anrl MAHMOUD AHMED ISBA, et al, Plaintiffs, who file this Second Anended Petition for fudicial Review, Declaratory Judgment and Tetnporary Injunction from a pending Conrptroller's Decision in a conlested case proceeding before the State Ollice of Arlninistrative Hearings, and joining Plainliffs RUBI & SONS STORE, INC. and RUBINA NOORANI, and Mahmoud A. Isba, complaining of SUSAN COMBS, in her individual and official capacity as Texas Cornptroller ol Public Accounts, and GREG ABBOTT, in his ofTìcial capacity as Texas Attorney Ceneral ("Defendants"), and f'ol' cause woulct respecttully show the fbllowing: ProDoc FàXSerViCe Page 3 oÍ. 27

I. DISCOVERY CONTROL PIAN 1. Plaintiff.s designate tlri.s case as a Leveì 2 ca.se requiring a cliscovery control plan tâilored [o the circumstances ôf this particular suit pursuânt to Texas Rule of Civil Proceclure L90.4.

II. REQUEST FOR DISCTOSURE

2. Pursuant to Texas Rules of Procedure 194, Plaintiffs reqr.rest that Def'endants disclose, within S0 days of service of this request, all of the intbrmation or material described in Rule L94.7,. I II.

PARTIES

3 Sanadco Inc., PlaintifT, is a private Texas Corporation, duly organized and existing under the laws of the State of Texas, engaged in the operation of a convenience store whose principal place of business is located at 3801 East Rosedale St., Fort Worth, Texas 76L05-1732, artd whose Taxpayer No. is

4 Mahrnoud A. Isba, Plaintifl, is an individual wlto resides in Arlington, Tarrant County TX and operâtes the convenience store owned by Sanadco Inc., located at 3801 East F-oseclale St-, Fort Worth, Texas 76L05-1'732, and whose Taxpayer No. is

5 Broadway Grocery Inc., Plaintifi is a private Texas Corporation, duly organizecl and existittg under the laws of the State of Texas, engaged in the operation of a convenience store whose principal place of business is located at 8342 Broaclway St., San Atrtonio, Texas 78209-2009, atrd whose Taxpayer No. is

6. Shariz, l¡rc., PlaintitÏ, is a private Texas Corporation, duly orgattized and existing u¡rder tlre laws of the State of Texas, engaged in the operation of a conveuience store whose principal place of bttsiness is located at 143L0 Taslnania Ct., Strgarland,TX77498, and whose Taxpayer No. is

7 Plaintifls Rulli & Sons Stole, lnc. and Rutrina Noorani joirr tìri-- petitittn on alÌ cìairl.- as Pctitroners in a suit currerrtly on file with the State Oflice tll

?age 2 ol 26 ProDoc FaxService Page 4 of 27

Adnri¡ristrative Hearing.s who have not yet exhausted their aclruitristrative remedies, but an audit has been initiated by the Conrptroller of Public Acct¡unts.

B. Mahmourt A. Isl¡a, Plaintiff, as owner ând ôperâftr Òf Nevine Food Store #2, located ât 163L E Vickery Blvcl,, Ft. Worth, TX, joins this Petition on all claims as the Petitiorrer in Case No. 1"10,485 with lhe State Office of Administratrative Hearings for audit periods Merclt 1", 2009 thru Septetnber 30, 20I2.

9. Defendant, Su.san Comb.s (hereinafter referred t

10 Defendant, Gregg Abbott in his official capacity as the Attorney General of Texas, joined herein as a necessary pal'W in his official capacity, is a state agency as defined by Trx. Gov'r, Conr An¡¡. S 2001,003 [7), having statewide jurisdiction whicll makes rules atrd determines contested cases and may be served by persrrnal service at 209 West l4th Street, Bth Florlr, Austin, Texa.'; 78707.

lv. IURISDICTION AND VENUE

T1 Titis is an action seel

12. This court has subject matter jurisdiction to deter¡nine the validity of AP 92 and AP 1ZZ, and enter declaratory relief pursuatlt to TEX. GOV'T. CODE ANN. S 2001.038, wlrereilr sovereign irr-rmunity has heerr waived wlren it i.s alleged that a rr¡le rlr it,s threatenecl a¡r¡rlicatiorr interferes with

13 This Court has subject ¡latler jr.rrisdiction pursuant to the Uniform Declaratory )udgrnents Act, TEX. CIV, PRAC. & REM. CODE ANN. 5 37.001 et seq., by which sovereign inrmunity has been waived and authorizes Plainliffs to ol¡tain a declaration of rights, status, or other legal relations affected by a statute; and

Page 3 ol 26 ProDoc Fâxservice Page 5 of. 27

again.-t a state official who engages in ultra vires acts witlrout legal or statutory autlrority, or refu.^es trr perftrrnr a purely ministeriaì 'Åct. City of El Puso v. Heinrich, 284 S.W.3d 36(t'370 (Tex.2t)09).

14. This Court has subject rnatter jurisdiction pursuant to TEX. GOV'T CODE ANN. $$ 2007.1.7L,200L.173 ancl 2001.174, seeking judicial revìew liom a pending tinal decision in a contested case before the State Office of Administrative Hearings. See, LÍndís v. lohnson Ci6+ 03-08-00574-CV [Tex. App.-Austin 10-2L- 2009). (a premature petition for juclicial review rnay be cured if there is a claim over which the cor¡rt oìrtained jurisdiction under its general jurisdictional author.ity.J

1.5 This Court has subject rnatter jurisdiction pursuant to TEX. CONST. ART. l, S L9.

V. SUMMARY OF FACTS

16. On Augr-rst 77,2004, after the Com¡rtroller became aware of lack of uniformity in convenience store audits, she issued a policy rnernorandum implementing new procedures for convenience store audits entitled Audit Policy 92 (AP 92J, directing all auditors, inter alia, to conrluct a shelf test during convenience store anclits if lhe tnxpayer is slill in business, tud use the perceÌ)tages designatecl in AP 92 as the mark-up fbr beer and tobacco products if the records ofa convenience store are "unavailable, inadequate, or unreliable" and if tlìe actual mark-up percentage could not be ascertained by other nreans.

17 Effective September 1,, 2007, the Texas Legislarure enacted legislation directing each wholesaler or clistr-ibutor- of beer, wine, malt liquor or tobacco products to file a report with the Comptrollel detailing the monthly net sales made to the retailer by tlie wholesaler or clistributor, inclucliug the quantity and units of beer, wine, nralt liqurlr and Iobacco ¡rroducts sold tt¡ the retailer. (Tex. Tax Cocle $ Tex. Tax Cc¡de $ 151.462 [aJ arrcl Tex. Tax Cotle $ 155.'105r. The clata ¡rroviderl as a

1$ 155.105 Reporfs by Wholesalers ancl Distlibr¡tors r-rl'Cigars and Tob¡cco lt'odt¡cts (a) Thc uonrptroilcr nray. whcn consirlcrcd rì{ic:Çrjs¿rry þy tlrç çt.¡nr¡rtrollcr fttr thc a<[mi¡ri:stratìon of u tax untlcr this chnpter', require ench wholesnler ol disiríbutoL of cignrs nnd tobacco products to ftle with tlte comptloller rì rÈport 0¿Çh nrr.rlrth çrlsalcs tcl rçtailçrs ìn this statc. (b) 'l'hc wholcsalcr rir distributor ghall lilc thc rcp()rt on or bchrrc thc 25th day til cach nronth. 'l hc rcport must contain the I'ollowing inf'ormation tbl the preceding calendar tnollth's sales in relatiou to each t'etaiìer

Page 4 of 26 ProDoc FaxService Page 6 or. 27

resrrlt of tlre legislation is comrrrr¡rrly referrecl to as HB 11 data, blrt no clirectives regarcling its use acconrpanied the legislatirlrr. The fir-st neports became availabìe on January I,2008.

18, After HB LL became ef[ec[ive, the Conptroller revised AP 9Zwith AP 122 effective luly 22, 2009, by revising the audit procedures ând determination of mark-up percenlâges âncl incorporâting HBll., instructing that this clata musl be the starting point fbr all convenience store audits whether used as internal control veritication or as clata nsed to estimate the audit.

L9 The Comptroller is statutorily authorized to conduct a detailed audit of selected convenience stoLes througltout the state, atrd upotr a determinatiou that the store records are inadequate or insuftìcient to conduct a sample and projection audit ancl, in tlre absence of any records, may utilize the best information available. Tex. Tax Code Ann. € 11L.0042.

20. Tlre Cotnptroller .sr.rbsequently uotifie"^ Plaintiffs tliat they have hee¡r assessetJ a cleficiency determinatirlrr, including itrterest, and, if proven by clear anrì convincing eviclence, a¡r additional 50ô/o frar.rcl penalty ancl/or an adrlitional 10o/o jeopardy clelermination penalty which becontes due if the deficiency is not paid on or before the assessment beconles final, but tax liens may be immedÍately attached lo the subject properry.

27 Plaintiffs must file a Request for Recletermination with the Comptroller within 20 days of the date of the notice or the assessment becomes final and irnmediately due,

zz If the Comptroller denies tlre redetenniuation, Plaintifk may request a þearing before tlie State Office of Adnlinistrative Hearings, and, if aggrieved by that determi¡ration, may request a rehearing followed by suit in District Court itr Travis County, Texas. If no rehearing is requested, the tax assessment becomes a final judgment.

ZZ. Sanadco lnc. anrl Maìrnroud A. lsba tin'rely filed a request for' redeten:rinatiotr in SOAH Docket No. 304-L3-427'1..26, '|CPA lleari¡lg No. 106,815,

(4) rhÈ rnontlìly ner sales rnûdrì tù the letailet'by the wholesnler ol distribtttor, inchtding: (A) thu quarrtity antl units t¡f cigars antl tollaçuu ¡rrotlur;ts soltf to thc rotailcr; antl (ts) lor cnch unit oltobacco prodLLcrs otlrcr Lhan cignrs, thc nct wcight ns listcd by thc rtranulacturcr

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ancl SOAH Docket No.XXX-XX-XXXX.2(1, TCPA Hearins No. 107,006, respectively, and joinetì for the.sake of efficierrcy. A lrearing wa.,; held before the SOAH on Septerlber 9,20-I 3, lrut the ALJ reqr-rested pttst-ìrearir:g lrriefs fronr br¡th parties. Plaintiffs filed their brieron October 6,2013, the Comptroller filed her response on Novernber +, 201,3 and the Proposal for Decision was issued on Decernber 12, 20L3. The Comptroller issuecl her Decision on |une 16,20L4 nncl Petitioners timely filed their Motion for Rehearing which was denied by the Comptroller on fuly 15, 201.4, thereby exhausting Plaintiffs' administrative remedies.

24. Mahuroucl A. Isba, as owner ancl operator of Nevine Food Store, lìled a request fbr redetermination on May L3, 2013, and his request fbr hearing was disrnissed by tlre Cornptroller for lack of prosecution in Hearing No. 1L0,4B5. Plaintiff filed a tirnely motion lbr rehearing which was denied by the Comptroller on September 16, 2014. Mr. Isba, having exhausted his administrative rernedies, tiles this Petition tbr Judicial Review, by joining as a Plaintiff in this cause.

25. Plaintiff, Broatlway Grocery Inc., is engaged irl ä conte..ited case proceecling in the State Office r¡f Aclministrative Hearings regarcling an aììeged sale.s anrJ u.se tax tleficiency in Docket Numher 304-'l+-7796.26, TCPA HRG No. 109,293 ancl timely filed a Request for Redeter¡ninatio¡r on fuly 30,2012, and a hearing was held before SOAH on August I, 20L4, bul no Comptroller's Decision has been rendered.

26. Plaintif[, Shariz, Inc., Ís engaged in a contesled case proceeding in the State Office oiAdministrative Hearings regarding an allegect sales and use tax deficiency in TCPA HRG No. 108,636 but has not yet been transf'erred to SOAH.

'¿7. Plaintiffs, Rr-rbi & Sorrs Store, Inc. i.s a ¡rrivate Texa.r Corporatirln, cluly organized and exis-ting urrcler the law"^ clf the State of Texa--, engage

1.Õ Plainlifls are engaged in contestecl câse proceedings before the Str-rte Office of Administrative Hearings regarding allegecl sales and nse [âx deficiency, but no final decision has been enlerecl by the Comptroller.

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29. Plaintiffs r-eek to voitl tlre urrderlying audit, alleging that the ar-¡clitr¡r acterl fraudulently by his utrauthorizerl use of AP 92 anrìAP 122 a.s wellas HB I1 de.spite the recent Third Court of Appeals ôpinion lhat these docurnents were "invalid rules" ând therefÒre void anci unenforceable because they were not formally adoplerl pursuant lo the mandatory provisions of the Administrative Procedures AcL See, Sanadco, Inc. v. Comptroller of Public Accounts,03-ll--00462 [Tex. App. - Austin 2013); LEXIS I2,A1,3 at +1"3 [Tex. App.-Austitr Sept 26, 2013J.

30. Plaintifïs also seek to void the underlying audit, alleging that the Comptroller engaged in nltra vires conduct by failing to pertbrm the purely rninisterial act of promulgating AP 92 ancl AP IZZ as arìministrative rules, and subsequently acting without legal authority by implementing the illegal and u¡rauthorized memos as agerìcy policy atrd procedure.

3'1. Plaintifls further seel< to void ell Ínstances in which the Comptroller imposed the adclitional 500/o fraud penalty upon the mere finding of "underreporting" insteacl of the statutorily required finding of fraud or willful intent to evade the tax. ln doing so, tlre Comptloller has engaged in conduct in excess ofher statutory authorily by substautially rectucing her burden ofproofand shitting that burden to the taxpayer by requiring him to prove that his co¡rcluct was not willlirl or intentional. PlaintifTs allege that this is ultra vires conduct and is outside tlte Comptloller's statutory authority.

:12, SOAH ha.s acknowleclgecl that tlre ftrregoing Íssue.s are heyond the jurisrlictional authority of the Administrative Lâw Judge and have therefore refused lo address them within the paranteters of a conlested case proceecling. See, Comptroller's Decision No. 106,516 [20L3.] [The ALf does not have jurisdiction to consider whether Auclii Policy Memoranclums 92 and 722 conslitute rules as defïnect by the Adrninistrative Procedr.rre Act.J; Cornptroller's Decision No. 106,516 (201-3) (Petitioner also contends the 50% adclitional penalty should be deleted becanse the statute autìrolizing the adclitional penalties is unconstitutÍonal and becanse there was no intent to evacle the tax. However, it is weìl settled that neitlrel' the Coinptroller nor the ALJ lias jtu'isdiction to consicler the valicliry or constitr.ltionality of a statute.); 5ee also, Comptr-oller's Decision Nos. 103,683, 1 03,96 1 [Z 0 r).), 70 4,445, 705,7 26 (20 12).

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:13. In the al:sence of juri.scliction for SOAH to atldre.^s these issues-whiclr may be rJetermi¡rative of the vaìidity oltlre audits-PetitÍr¡ners seek to have these i.ssues addressed by thi.,; Court uncler the autbtlrity of Tex, Gtlv't CtrrJe $ 20û1.038 tôgetlìer with tllè autÌìorities previously recited wherein this Court is granted jnriscliction to determine the validity or applicability of a rule beþre it is applied to the de[riment of this laxpa v. Ci San Antonio 985 S.Wzd 549, 551 [Tex.App.-San Antonio 1998, pet. denied), and before he has exlrausted his administrative relnedies. R Com¡nc'ns, Inc. v. Sharp.875 S.W.Zd 314, 3L7-18 (Tex. 1994); PUC of Texas v. Citv of Austin, T2B S.W.zd 907 [Tex.App.-Austin 1987); Combs v. Texas Entertainment Ass.,2B7 S.W.3d 852 [Tex.App.-Austin 2009),

COMPTAINT I

The Comptroller engaged in ultra vires conduct because she failed or refused to perform the purely ministerial act of arlopting tlre memoranda designated as AP 92 and AP L22 as agency rules pursuant to procedures required by the APA, thereby rendering the audits utilizing these procedures invalid and unenforceable.

34, Plaintiffs incorporate the preceding paragraphs by ret'erence as if the sarne were set forth t'ully and verbatim herein.

35, The Cornptroller's nlemos implernenting Audit Policy Memoranda 92 and lZZ (AP gZ and AP 122) effective August L7, 2004, and July 22, 2009 respectively, are agency rules as definecl by Tex. cov't Cocle $ 2001.003 [6). The use of these rules or their threatened application interfere with or itnpair, or threaten to interfere with or im¡lair, a legal riglrt or privilege of the Plaintiff in that they subject Plaintiff to poteutial loss r¡f his hu-^ines.s, his licen"-e, illegal tax a¡-sessments anrJ subjecting his property to liens ancl potentially to forcihle sale'

36 Tbe Audit Policy Menroranda regarcling AP q2, AP 722 and HB l L constitute âgency rules as defined by the Administrative Procedt¡res Act [APA] because they are statements of general applicabiìity relating to all convenience slore attdits; that irnplemented agency poìicy to add uniformity to the audits; and clescribed the procedure or practice ruquirements of the agency by implententing the use of HB l-L and the percentages for rnark-ups atrd proclrtct mixes itrcorporated in AP 92 ancl AP I22.

37 The Cornptroller is chargecl with establishing methods for administering and aclopting necessary n¡les fol the collection of taxes and other revetrues, þ4

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Tax Code Ann.6 111.002|a1. S peciÊically, the Crrnrptroller lra.t statutory authority to "ado¡rt, repeal, or arnend suclr ru'les tr¡ reflect change.s in the pttwer tlf tlri.s state to collect taxe.s and enforce the ¡rrovisitlns ttf tlri.s title," /cJ.

38, A presnmption favors adopting rules of generàl applicability through the formal rule-making procedures the APA sets tut, Rodriguez v. Serv. Llo.vds lns. Co., 997 S.W.2d 248, 255 (Tex. 1999). These procedures include providing notice, publication, and public conlment on the proposed rule. /d. fciting Tex. Gov't Code Ann. $$ 200L,023-.030). The process assr¡res notice to the public ancl atfected persons and an opportunity to be heard on matters that aff-ect them. /d.

39. Unless a rule is pronmlgated and adopted in accordance with the requirements of the APA, it is invalid and unentbrceable, Tex. Gov't. Code Ann. $$ 2001.035, 2001,004 and 2001,005. Neither AP 92 nor AP 122 as it relates to HB 11, were ever aclopted as rnanclated by the APA and are therefore invalid and unetrforseal:le whetr appìied ttl ctllrvenience stttre auclit-^.

40 Pl¡intiffs seek a cleclaratory juclgment against Susan Comhs in her indiviclual and officiaì capacities as (ìomptroller of Public Accounts for tlre State of Tèxås, pursuânt to Tex. Gov't. Cocle Ann. $ 2001.038 and the Uniform Declaratory Jucìgments Act, Tex. Civ. Prac. & Rem. Code Ann, 5 37.001 et seq., which waive sovereign immnnity, declaring that the Cornptroller's mèmorânda, clesignated as AP 92, AP 722 (incorporaling HB ) 1J, are invaìid adrninisfrative rttles hecanse they were not adopted in accorclance with the requiremenls of the APA fotlnd at Tex. Gov't Code Ann. $iì 200i-.035 ancl 2001.004. El Paso Hosp. Disf. v. Texas Health & Huntan Cotnnt'n. 247 5.W,3d 7 09 , 7L4 (Tex. 2008) (quoting Railroad Comtn'n v. WBD Oíl & Gas Co.. 1,04 S.W.3cl 69, 79 (Tex. 2003)); Combs v. Entertainment Publ'ns,Inc.,292 S.W.3d 712,720 [Tex.App.-Attstin Z009, no pet.)

COMPLAINT II

The comptroller acted ultra vires because she acted without legal authority by implementing and enforcing AP 92, AP l2.Z and HB 11 before performing the purely ministerial act of arlopting them as Rules in conrpliance with the nondiscretionary, purely ministerial rule-making procedures nrandated by the APA.

4L Plaintilf.s rncrlr¡torate the ¡rrececling paragr:ìphs hy reference ¿ìs if, the .sarr¡e

were set lorth fully and verbati m hereill,

42 The Conr¡rtroller is r:lrarged witli establi^shing rlethocl.s frlr adnrinisterrng Page 9 of 2Ci PrÕDoc FaxService Page 1l- of. 27

antl ackt¡:ting necessary rules frlr the collection of taxes arrtl tlther revenues. Ter Tax Code Ann. S 111.002[a). Specifically, the Conrptr<¡ller has statutot'y authority to "arìo¡:t, repeaì, rlr ameud suclr rr-rìe.s to reflect change.s in the power rtf this state ro collect taxes anci enforce the provisions of this title." Id'

43. Suits to require stale officials to comply with statutory or constitutionâl provisions âre ltot prohibitecl by sovereign imntuttity. Heínrích,284 S.W.3d at 372. To fall within the u/tra vires exception to sovereign immunity, a suit "must allege, and ultimately prove, that the officel acted without legal authority or tailed to perfbrm a purely rni¡risterial act." Id. (citations omittedJ. "Tltus, ultra víres suits do not attempt to exert control over the state - they atternpt to Ìeassert the control of the state. Stated another way, these suits do not seek to alter govertlment policy but rather to e¡rtbrce existing policy." /d.

++. Unless a rule is promulgated and aclopted i¡r accordance with the requirements- of the APA, it i"- invalid and une¡rforceable. Tex. Gov't. Code Ann. $$ Tex. Gov't. Cr¡de Ann. $S 2001.035,2001.Û04 and Aq01.0Q!' The Comptrollerhas no legal ar.rthrtrity to elrfrlrce agency rr-rles heftlre they are adopted in accr¡rdance with the APA. Such adoption r.s marrrJatury and nclncliscretir)näry. The Comptroller's failure to comply with this tninisterial, nondiscretionâry act was lherefore an ultra vires acl. This Corlrt is respectfully requested to enjoin the use of AP 92 and AP 122 unlil they are properly adopted as rules pursuant to the requiretnents of the APA.

45. Plaintift's seek a declaratory iudgrnent against Susan Combs in her individual and official capacities as Comptroller of Public Accounts for the State of Texas, pursuant to Tex. Gov't. Code Ann. $ 2001.038 and the Uniforrn Declaratory |udgments Act, Tex. Civ. Prac. & Rem. Code Ann. S 37.001 et seq., declarittg that the ComptroÌler is not ârìthorized lo estimate convenience store auclits ttsing the lrethçcls prei^ct'¡herì by AP 92 or AP 122 until their ¡tro¡ter adtrptitlrr, and/or that tlre authorization of tlreir u.se is a non-c.liscretittnary uìtra vires act ctlmmitted without legal authority which conflicts with relevatrt prtlvisions rlf the Tax Code and the Cornptroller's adrninistrative regulatiotrs. El Paso Hosp, Ditt. v. lexas th &. Hu Comm'n 247 5.W.3d,709,714 [Tex, Z00B) [quoting Rçilroad 'tl v. WBD (].9 104 S.W,3d 69, 79 [Tex. 2003)); Contbs v. rtainment Publ' 292 S.W.3cl 712,720 [Tex.App.-Austin 2009, no pet.J

COMPLAINT IV

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The Cornptroller acted ultra vires and in excess of her statutory authority when she unilaterally established "gross underreporting" ¿ts ân irrebuttable presumption of proof to impose the additional SOYo penalty instead of proof of fraud or intênt to avoid the tax as required by Tex. Tax Code Ann. $ 111'061[b).

46. PlaÍntilfs incorporate the preceding pârâgraphs by reference as if the sarne wÈre set forth fully and verbatim herein.

47. Tex, Tax Code $ 111.06Lfir) authorizes the Cornptroller to impose a penalty of 50% f'or tiaud, or intent to evacle the tax, in addition to the deficiency determination. When the Comptroller seeks to impose a 50 percentadditional penalqy it must show clear and convincing evidence of traud or intent to evade tax. TEX. TAX CODE Section 111.061[b) and 34 TEX. ADMIN. CODE Sectio¡r 1.40 [1] [Bl

48. Fraud implies "bad faith, intentional wrollg, and a sinister motive, and the intent required to be showetl is tl-rat tìrere was .specific intent trl evade tax believecl tr¡ he rrwing," C

49. The burden proof is on the Comptroller to prove by clear and convincing eviclence that the failure to pay tlle tax was willftrl or fraudulent. 34 Tex. Adrnin. Code Section 1.a0(1) [B). Although she claims to bear lhis burden, t]re Comptroller has authorized a finding of fraud upon the irrebuttable presumption that a 25Va u¡derreportirìg constitutes ti'aud, thereby unlawfully shifting the burden to the taxpayer to provide sotne plattsible reasou fbr the nnderreporting.

50. An agency's interpretation of a statute it is charged with enforcing is entitled to serious consideration, so long as the construction is reaso¡rable atrd cloes not conflictwitlr tlre stattrte's language. R.R. Co¡nnt'n of Tex. v. Tex, Citizens for u Sufe Future & Clean Wuter, :136 S.W.:ld 619 , 624 {'lex. 201,1). An agency's 6piniçlr, howeveç cannr¡t clrange plain ianguage, nor ctlntradict statutory text. Comhs v. Heulth Care Services Cor¡t .,401 S.W.3cl 623 [Tex. 2013); Fiess v. State Frtrm LJ!ty!.\ 202 S.W.3cl 744,747 [Tex' 2006)

5-1' 1'he Complroller has exceerted her statutory aulhority by reducing the burden of proof required to establish trar.rci by eliminating the requirenlent of intent or

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wiìlfulness, and establishing an entirely new irrebr¡ttable presurn¡:tittn .çtandard ttf "grr).s"^ underre¡)orting", thereby clearly shifting the burclen ttf ¡rrottf in direct cr¡ n fl i ct witlr ì egisl ative a lr cl r^tatu Lory ar"r lh o rity.

52. Plaintiffs seek â cteclaratory judgnrent âgâinst Susan. Cotnbs in her individual and officiel capacities as Comptroller of Public Accounts for the State of Texàs, pursuant to the Uniforrn Declaratory fuclgrnents Act, Tex. Civ. Prac, & Re¡n, Cocle Ann. $ 37.004 et seq., construing Tex. Tax Code $ 1LL.061(b) and declaring that the Cornptroller has acLed ultra vires, and i¡r excess of her statutory authority by unlawf'ully creating a new irrebuttable standard of proof and shifting the burden of proof and authorizing tlre irnposition of the 50% fraud penalty upon an irrebuttable finding of gross undeueporting without a finding of fraud or intent to avoid the tax as required by the statute, aud/or that such procedure cotrflicts with relevant provisions of the Tax Code and tl'le Comptroller's administrative regulations.

COMP LAINTV

The comptroller acted ultra vires because she acted without legal authority by implementing a completely new irrebuttable presumption of "gross underreporting" as proofoffraud or intent to avoid the tax as required by Tex. Tax Code g 111.061(b), before performing the purely ministerial act of adopting it as a rule in compliðnce wilh the nondiscretiottary, purely ministerial rule-making proceclures mandated bY the APA.

58. Plai¡tiffs incorporate tlie preceding paragrapl-rs by reference ãs if the same were set forth tully and verbatim lrereill,

54. Tex, Tax (lr¡de $ 111.061.(l:) authorizes tlre Corl¡rtroller to im¡rclse a penalty oî 5\o/o frlr fraud, or intent to thc tax, irr aclclitit¡n to the rleficiency evacìe tleterr¡inatiolr. When the Comptroller seeks to itnpose a 50 percentaddititrnal perralty it mus^t show clear and convincing evicìerrce rlf frar-rcl tlr ilrtent ttl evade tax. 'l TEX. TAX CODE Section 11.061[b) anrl 34 TEX. ADMIN. CODE Section 1.40 [1J IBJ

55 The Coniptroller has, r,vi[hout slatutory ar.rthority, crea[ecl an entirely new jrrebLrttable presunrption that the tax pâyer's underreporling of 25o/o or nlore is "suf[iciently indicative of intenl to evade the tax lo warrallt [he assessment of the fraud irenalty."

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56, There i.s nostatutory provision rrr aclmini.strative regulation autlrorizirrg the Cttnrptroller to cletermine f¡'aucl or tlre intent to invade tlre tax by giving co¡rclusive effect tr¡ ulrderre¡rorting of taxable .sales, withr¡ut first ascertaining wlrether that cletermina tion includes willful, frauciulen t intent.

57. The Contptroller's crealion of this new standard of proof is a rule as defTned by Tex. Gov't Cocle $ 2001.003 [6J, The use of this rule or ils threatened application interf'eres with or impairs, or threatens to interfere with or irnpair, a legal right or ptivilege of the Det'enclant by threatening loss of revenue or loss of property.

59, The cases impleutenting the use of this irrebuttable presumptiotr constitute rules as defined by theAPA because they are ofgeneral application to convenience store audits, and they inrplement and prescribe policy and describe the procedure or practice requirements tbr inrposing the additional 500Á penalty.

59. Plaintiffs .teek a tJeclaratory jr-rcìgrnent against Susan Combs in her inrliviclual ancì official capacities^ as Comptroller of Public Accor.rnts frtr the State of Texa,s, Fut'.suänt tr¡ Tex, Gt¡v't. Cr¡cle Ann. S 2001.038 and the IJnifrlrm Declaratory Judgmer:ts Act, Tex. Civ. Prac. & Rem. Code Ann.5 37.0C)4 etseq,, declaringthatthe Complroller is not authorized to impose the acldÍtional 50o/o penalty by implementing the irrebuttable presunrption of underpayrnent as a substitute for a finding of fraud or intent to evade lhe lax until its proper adoption, and/or that the âr¡thorizâtion ôf its use is a non-discretionary ultrâ vires act comrnitted without legal authority which conflicts with relevant provisions of the Tax Cocle and the Comptroller's administrative reguiations. EI Paso Hosp. Dist. v. Texas Health & Huma¡t Se¡vs. Comm'n,247 S.W.3d 709,714 (Tex. 2008) (quoting RaÌlroad Comm'n v. WBD Oíl &, Gas Co., 1.04 S.W.3d 69, 79 (Tex. 2003)); Combs v, Entertainrnent PubÌ.'ns, lnc.,292 S.W.3rl 712,720 [Tex.App.-Austin 2009, no pet.).

COMPLAINT VI

Tex, Tax Code Ann. S f.11,0042 authorizing sample and proiection audits is unconstitutionally vâgue as written and as applied to plaintiffs.

60 Plaintiff,s incorporates the preceding ¡raragraphs by reference a.s if tlre..;ame were set forth fr-rìly ancl verbatim herein.

6L The Cotnptroller has the authority lo exaûìine the lype of records she deems necessâry for conducting a thorough auclit of a taxpayer's records. See Tex.

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Tax CorleAn¡r. $S 111.004, 111.008, and 1.51.023.

62. Section 151.025 reÇ¡uires s-eìlers to rnaintain (aJ records of gro.ss recei¡rts, including docurnentation in [he form of receipts, shipping tnanifests, invoices, and "other pertinenL pâpers", [b) sirnilar documentation relating to their purchases, and (cJ records in the form of receipts, shipping manifests, invoices, "and other pertinent pâpers" that substantiate each cleimed deduction or exclusion authorizecl by law. See also, Rule 3.281(a) [2).

63. The Comptroller is only authorizecl to conduct a sarnple and projection audit "when the taxpayer's records are inadequate or insulTìcient, so that a competent audit for the period in question is not otherwise possible." Tex. Tax CodeAnn. $ 1"L1.0042 tbl (Zl.

64. When lecords are inadequate to reflec[ the taxpayer's business operations, tlre Comptroller is authrlrizecl to estlnrate a taxpayer's liabiìity based on the hest infrrnnation avaiìable. Tex. Tax Code $ 111.0042(d). The Comptroller lras helcl that tlre use

65. The types of records the taxpayer is required to maintain is extremely nebulous because of the inclusion of the stâtement "ancl other pertinent papers" âccompânying each category of records required to be maintained. This leaves open the requirernent to rnaintain recolds not included or described in the statute, providing little ¡rotice to the taxpayer of what is essential to tneet the ill-defìned reqniremettts of the statltte.

66. The cleterlnination of whether the records are "inacìequäte" or "insufficient" is therefore discretionary with the auditor a¡rd thus whethet' a detailed audit based on a thorough review of the taxpayer's records or atr estinrated "desk auditl', ìrased on HB 11 rlata ancl AP 9Z ol'AP 1ZZ esti¡riates will be reqr'tit-ed.

67 There is nr¡ statl¡tory glriclance by whicìr an auditrtr rrr the taxpayer may deternrine whether recurcl.s are arìequate r¡r insufficierrt, and the rectlrcls the auditr¡l'n-ray recluir-e äre br¡undle.ss as a re..;ltlt t¡f the va.s[ array t¡f rectlrcls- not specifically iclelttified, but ostensibiy permitted by the statute, such as sales sunìmary records, general ledgers, purcltase invoices, fecleral income tax returns, purchase journals, cash register tapes, fixed asset/depreciatiott schedules, daily

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sales journals t¡r Z-ta¡res. See SOAH Docket No. XXX-XX-XXXX.2(t; Hearing No 104,t)37.

68. A court will find ä rule unconstitutionally vâgue, in violation of clue process, if it cìoes not give fair notice of whal conduct rnay be punishecl, and invites arbitrary and discriminatory enforcenlent by its Iack of guidance for those charged with its enforcernent. U,S.C.A. Const. Amend. L4. Vista Healthcare V. Texas,03-09- 00178-CV [Tex.App.-Austin 8-26-2010). This statute fails to establish guidelines fbr its application and does not give tair notice to the taxpayer of the prohibited conduct, lending itself to cliscriminatory enfbrcement. It is therefbre unconstitutionally vague and must be stricken.

69. Plai¡rtiffs seek a declaratory judgrnent against the Office of the Comptroller of Public Accounts, Susan Combs, in her official capacity as Cornptroller of Public Accou¡rts for the State of Texas and Gregg Abbott, in his official capacity as the Attorney General for the State of Texa.s, pLrr.sua¡lt to the [Inif

COMPLAINTVII

Tex.'Iax Code SLL1.022, authorizing a leopardy Determination without guidelines, is Uncotrstitutional on its facc and as applied.

70 Plaintift's incorporate tlre preceding paragraphs by leference as if the sanre were set fbrtli fuììy and verbatiln hereiu.

71, Tex. Tax Code $ 111.022 authorizes the Cornptroller to impose an aclditit¡nal 10o/o jeo¡rarcly deterrninatiotr ¡rerralty against a cleficiency cìeternrination, whiclr co¡llefi clue irnnrediateìy, if she "believes" that tlre collection of ¿r tax requirecì to be paicl to the s^tate r¡r tlie amou¡rt due frlr a tax pericld is jeopardizecl by delay.

72 The statute is purely cliscretionary because it establishes no pâråtneters by which lhe Cornptroller is to tnal

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"belief', and tlrere is no statutory clefinition fortlre terllls "jeoparrìized by delay"

73. "lt i.s a basic ¡rrinci¡rìe of dne process- that an erractr¡ent i.s void fr¡r vaguèness if its prohibitions are no[ clearly definecl." Grayned v. Ciry of Rockford, 408 U.S. l-04, L0B, 92 S.Ct. 2294,33 L.Ed.2d 222 U972). "Second, if arbitrary and cliscriminatory enforcernenl is to be preventecl, laws must provide explìcit standards for those who âpply thern." /d. Thus, for â statufÈ not lo be unconstitutionally vagt¡e, it lnust be sufficiently clear in at least three respects: (1-) a person of ordinary intelligence must be given a reasonable opportunity to know what is prohibitecl; (2) the law must establish detenninate guidelines fbr law enf'orcement; atrcl (3) if First Amendment fieedorns are ìmplicated, the law must be sutficiently definite to avoid chilling protected expression. ld. at 108-09; Longv. State, 93L S.W.Zd ZB5,ZB7 [Tex. Crirn. App. 1996J.

7+. A court will find a rule unconstitutionally vague, in violation of due pÌocess, if it tloes nr:t give f,air rrotice of wìrat conrluct may he ¡:runislrecl, and invites arbitrary ancl discriminatory enforcenrent by its lack of guidanue for those charged with its enfrrrcement. [I.S,C,A. Ct¡nst. Amend. 1.4. Vistu Heulthcure V. Texus, 03-09- 00178-CV (Tex.App.-Austin B-26-2010). Thi.s statute fails to e¡.-tâhli.sh guideline.s for its âpplicâtion ând does not give fair notice to the taxpayer of the prohibited conduct, lending itself to discrÍminatory enforcement. It is therefore unconstitutionally vâgue and nusI be stricken.

75 Plaintiffs seek a declaratory judgment against the Offìce of the Comptroller of Public Accouttts, Susatr Combs, in her ofTìcial capacity as Cornptroller of Public Accounts for the State of Texas and Gregg Abbott, in his offÏcial capacity as tlle Attorney General for the State of Texas, pursuant to the Unifbrm Declaratory Judgrnents Act, Tex. Civ, Prac, & Rem. Cocle Atln. S 37.004 et ser¡., construing Tex. Tax Code 511-1,022 ancl declaring that the statute is unconstitutional on its face and as applied to Plaintiffs because it is, by its nature, a clenial of substantive and procedural due process and uncollstitutionally vague because it permits the Jeopardy Determination to be macle merely on nndefìned subjective cliteria, and without ¡rroviding arry guiclelines frlr the adrnini.stration thereof-

VIII- Attorney's Fees

Ptu'suant to Tex Gov't Code Ann $ 2006.0132 and Tex. Civ. Prac. & Retn. Cocie Ann. $ 37.009, request is macle lor all costs ancl reasotrable and necessary attorney's fees

2 ii zt)0rr.(lt3 (ÌoV'T. Rccìuirçnrçnts fìrr Rr;urrvcry

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incurrecl by Plaintiffs lrerein, inclr-rcling aìl at[orney's fees ancl co.sts nece.ssary in the event of an ap¡reaì rlr original proceeding to the Court of A¡rpeals ancl the Su¡treme Court of Texas, a.s the Cour-t cleems ec¡uitable ancl jr.rst,

COUNTER-PTAINTIFFS' APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTIONS

1 Defendants, Counter-Plaintitfs ["Plaintiffs") incorporate the preceding pârâgrâphs by reference âs if the same were sel forth fttlly and verbÈtim herein.

2 Plaintiffs, Counter-Defendants ("Defenclants") âre Susan Cornbs, Comptroller; Greg Abbot! Texas Attorney Getreral; and the Offìce of the Cornptroller, as previously describect in this petition.

3. Def'endants' activities and omissions as clescribed above anct below are in violation of the mandated provisions of the Administrative Procedure Act (APA) and/or constitute ultra vires co¡rduct in excess of the Cornptroller's official capacity and subject to the Uniform Declaratoty Judgments Act IUDJAJ, Tex. Civ. Prac. & Rem. Code Ann. $ 37.001. et seq, and as described in Citv of EI Paso v. Heinrich,2B4 S.W.3d at372 (Tex. 2009J; Comhs v. Entertuinment Puhl'ns, |nc..,292 S,W.Sd at, 720 [Tex.A¡rp.'Austin 2009, no ¡ret'); Texus Dep't. 0f Protective B¿ Reuulutorv Services v. lvleau Chiltl Cctre, Inc., 145 S.W.3d at 1.73 [Tex. 2004), inclutling the following:

i. The Comptroller's failure or refusal to perform the purely nlinisterial act of adopting AP 92 and AP 1-22 âs âgency rules, âs mandated by Tex. Gov't Code S 2001 ët seq. ii, The Comptroller's artthorizatiotl atrd etrforcement of policies and procedures that hacl not beelr prornulgated as agency rules, as rnattdated by Tex. Gov't. Code An¡r. SQ 2001-.035, 200L.004 and 200L.005 including the use of AP 92, AP 1.22 and HB 1L clata.

(a) In an aclniinistrative acljudicatory proceeding ot'a civiì action I'esulting tioul o con:plaiut issued Lry a sfate rgcncy àgainsr rt small busincss uirrlcr thc agcncy's adn:inistrativc ()r rùÈ,ul¡ìt()ry functions, thc snrall busincss moy be awal'decl reasonal¡le íittonìey fÞes an<ì coult costs ifl ( l) it is a sr¡all businr;ss at thc tinrc it lrcc0Ìrcs d party t0 thc ¡rrocucrling r,r¡ ncti<)n; (2) ir prevaila in the proceeding ot'nction; nnd (3) thc l¡-r.rr;cctlirrg r¡r uctio¡r wal groundlcsl ar¡tl brought: (A) in bud laith; rir (B) lbr prrrposes o1' harasstlretrt'

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iii. The Comptroller'.s ar,ttht¡rization ttl concìuct "de.sk" audits and giving ct¡nclusive effect to HB11 clata without deternrirring tìre adec¡uacy of l:laintiffs'recorcl.s in coutravention ttf Tex. Tax Cocìe Ann, $ 111,0042 and 34 I

Tex. Adnin. Code Section 3.281(cJ. iv. The Conrptroller's authorization, in excess of her stâtutory authority, to conduct estimated audits i¡l contravention of Tex. Tax Code Ann. $ 111.0042 which specifically restricts the Cornptroller to either detailed or sample and projection auctits when sales tax reports have been filed. The only time the Comptroller is statutorily authorizecl to estìmate an audit is wlrere the taxpayer /ails to Jìle a sales tax report. Tex. Tax Code Ann. $ 151.503. v. The Comptroller's unauthorized, ultra vires reduction of the burden of proof required to impose an adclitional 50%' penalqy from "fraud, or intent to avoid the tax" as required ìryTex. Tax Code Ann. $ 111.061[b), to "gross underreporting" of Zí%t of the tax clue as developecl by agency decisions ahsent it.s promuìgatitln as^ a rule utrder tlie APA.

4. Plaintiffs have plead il c¿rL¡se of action agairrst the Comptroller. As previou.sly outlined in tlris ¡retitittn, Pìaintiff ¡^eeks a decìaratitln under Tex, Gov't. Code Ann. 5 2001.038 that AP 92 and AP L22 are invalid. Plaintiff seeks a declaralion also ttnder Tex. Civ. Prac. & Rem. Code õ 37.004 that the Com ptroller exceedect her statutory authorily under Sections 11,1,0042 ancl 11L.06L of the Tcxas Tax Cocte in authorizing êstinìâtecl nudits anrl the additionnl 50% penalty.

5. The Cornptroller's ultra vires conduct in excess of her statutory authority conti¡rues to create invalict, uneliforceable, fiauduletrt and illegal audits resulting in excessive and distorted cteticiencies uporì convenience store owners and operators subjecting them to tlle fbllowing pre-hearing enfbrcemeltt retnedies:

i, Irnposition of a jeopardy cletermination fl-oln which taxes can be inrmediately and forcibly collected without filing a collectiou suit. Tex. Tax Code Ann, Ç 111.022. ¡i. Perfection of a lien on all non-exetrtPt Property, real ancl per.sonaì, merely by filing a tax lien notice with the apprrlpriate county clerk. Tex. Tax Code Ann 113 attaclrilrg to all afl-er-acqr-rireiì property r-¡ntil the taxes are pairì, Tex. Tax Cr¡de Ann. 11" 3.10 5 renrlering the [axpayer's property virtually unsalable.

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iii. of the taxpayer's balrk accr¡urrt¡- ancl freezing of Garni.shnrent property hekl hy thirtl ¡rarties without tlre requirement of a hearing. See Tex. Tax Code Ann. $S 1 11,021, 113.103. iv, Seizure and âuctiôning of lhe taxpayer's proper[y, or, after affording a hearing, revoldng the taxpayer's sales tax perrnit. See Tex. Tax Cocle Ann. SF 111.0047. 11_1.017-.019 v. Enjoining ft¡rther sales of goods or services after revoking the sales tax perrnit, etfectively closing a business. Te><-Jax Code Ann. $ 151..26Z(a). vi. Unílateral imposition of a bond to secure payment of the defìciency under the threat of revocation of the sales tax permit and et'fectively closure of the business without a hearing. Tex. Tax Ccde Aru $ 111.012 vii. Refusal to renew sales tax permit due to clelinquency o¡. refusal to pay the tax. Tex. Tax Code Ann, S 11.1,0046. viii. Corrtinuecl accurnuìation of rJaily irrterest rrntil a final jr,rdgment is reached. ix. The.se renredie.s are cumuìative, and may tlrerefctre be imposecl simultaneously upon the taxpayer.

6. It is probable that Plaintilfs will prevail agains[ Defenclants on the merits and oblain permanent injunctive and declaratory relief prohibiting the use of the policies and proceclure incorporated in AP 92 and AP l_22 because it is inclisputable that they are adrninistrative rules as defined by the APA as statements of statewide application; that prescribe law or poìicy; and describes the procedure or practice requirements of the agency. Further, the Third Court of Appeals has already rendered a ctecisiolt fì'oln the acceleratecl appeal declaring that AP 92 and AP 1,22 were invalicl adrninistrative rules subject to the provisions of tlie APA, because they had r-rot been properly adopted nncler the rnanclatory requirements of the APA. ackson v. the C troller Public Acco No. 03-11-00462 [Austin App.j [Sept. ZB,2073).

7. If thc Plaintiff.s' A¡rplication fr¡r Temporary Injunctirlri rs not grarrted, irreparable harnr is imminent ìrecau.se denying tlre reqr-rest frlr the injurrctive relief will irnmediately.subject defelrdants to the enforcenrent procedure.s orrtlined in palagreiph 44 abclve witlrout [renefit oF a hearing, ba.sed sriìely tin t]re auditr¡r.s' unconfirmecl deficiency determinations.

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B. The Plaintiffs will therefore ¡rotentially face the imnrecliate imposition of ¡:ro¡rerty liens; seizure and sale of proFerty ancl ¡:roper-ty rigìrts^; immecliate garnir-hnrent and freezitrg of banking accounts; .suspen.sion or revocatir¡n of saìes and use tax permits; imposition of cnerous bond or security requirernents; accrual of interest, and potential loss ând clestrllction of their businesses without access to judicial intervention for which Defendants have no adequate remedy at law. (See {[ a - L1, incorporaled herein by reference).

9. Plaintift's lrave no adequate remedy at law because the Comptroller is not subject to damages claims and these enforcement procedures are not subject to pre- deprivation hearings because any judicial remecly available is by appeal to the Distlict Court after the enforcement procedures have already been applied. Tex. Tax Code Ann. $$ 1.l. L.0049, 162.007 . By the time these remedies are accessed, the taxpayers will have already lost their permits, their right to engage in business, and the probable loss or sale of their- business a¡rd assets.

10. Plaintiffs ruc¡ve the Court to set this request frrr a temporäry injunclion hearing, and after the hearing, enter a temporary injurrction grantirrg the relief requested herein ancl further enjr:ining Defendants from corrducting any audits inc

LL.To preserve the Plaintiffs rights during the pendency of this action, Defendants shoulci be cited to appear and show cause why they shoulcl not be enjoined cluring the pendency of this cause t'rom f'urther eugagitrg in any of the concluct or activities clescribecl herein.

12. Plaintiffs would therefore respectfully request the Court to grant the following l'elief: i. After notice and hearing, enter a temporary injunction, er-rjoining Plaintiffs, their agenls ancl their employees from continuing to engâge in tl.re corrduct o¡ activitie.s herein clescribed, including, but rrot limiter-ì to, the l¡se of the ¡rrocetlure.s clescrihed in AP 92 ancl AP L22 as lrerein tJe.scrihed, in the conduct of cr¡nvenience -store aurlits, ii. After notice aneì heari ng, ahate the accunrulatirln of irrtere.st where appropriale, pending ¿r finaì deler¡nination on the merits. iii. After a finaì hearing on the merits of this câuse, permanenlly enjoin Plaintiffs and all others acling in concer[ wilh lhenr frorn engaging in

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the activities ancl concluct rlescriherl hereirr pencling cornpliance with the relevant stätntes, including the APA.

PRAYER FOR RETIEF

WHEREFORE, PREMISES CONSIDERED, Defendants, Cross-Plaintiffs (Plaintiffs) pray that this Court, after notice and hearing: 1. Deny PlaintifT Cross-Defendant's (Def'endants) claims and e¡rter a take nothing judgrnenL

2. Allow Plaintiffs to proceecl with their claims in protest of the taxes, penalties and interest assessed in the decisions complained of without regard to the lequirenrents of Tex. Tax Code S$ 1f 2.108, 112,051, or 112.101 for the reason that Plaintiffs are unable to meet these financial requirentents, and that such plohilrition is in violation of the Open Courts provision of Article I, Sec. L3 of the Texa.s Constitution.

:1. Enter judgments pursuant to tlre frrreg<>ing allegations making the following declaratir¡nli âs to Plaintiff.s' rights: â. ihat the Cornptroller's memos AP 92 and AP 722 on Augusl 17,2004, and July 22,2009 respectively, establishing and irnplementing procedures for the conduct of conveniencè stôre audits, are invalid administrative rules, anrl that the Cornptroller's authorization o[ their use without complying with the APA requiremenls was ultra vires ancl exceecled the scope of her statutory authority, and that her failure to comply with the requirements of the APA was a f'ailure to perf'orrn a purely ministerial, non- discretionary act, thereby entitling PlaintifÏ's to declaratory and injunctive relief fîorn the collection of these illegal, invalicl ancl unenfbrceable taxes, penalties and interest; b. that the Corr-rptroller's rnemo of Juty 22, 2009, implementing and establishing procedures for tlie use of HB11 data, is an invalid administrative rule, and that the Comptroller's authorization of its use without conrplying wrtlr the APA requirements wa.s â non-dir^cretionary, ultra vires act which exceecled the .scope of her statutory authrlrity, anrl that lrer failure to comply with the requirements of the APA was a failure t<¡ perfornr a pr-rrely ministerial, non-discretiurrary act, thereby entitling Plaintiffs and Class to cleclaralory and injunctive relief from the collection ol these illegal, invalic-l and unenforceable taxes, penalties and interest;

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c. that Tex. Tax Cocle $ 151.462 and 155,105 do not authorize the Com¡rtroìler to contluct clesk audit.s giving conclu^sive ef,fect to the HB11 data i¡r determinirrg Plaintiffs'tax deficiency witlrout examirratron of Plaintiffs' business records, and that doing so is ultra vires anr-l in excess of the Cornptroller's sf¿ìtutory authority, thereby entitling Plaintiffs and Class to declaratory and injunctive relief from the collectiôn of these illegal, invalid and unenforceable tâxes, penalties ancl interest ; rl that the Cornptroller is not authorizecl to estimate the rnarkup of alcohol and tobacco proclucts or to concluct audits of convenience stores under the requirements of AP 92 or AP l-22 without first adopting them as Rules pursnant to the requirements of the APA, ancl that doing so is a non- discretionaly and ultra vires acl in excess ot- her statutory authority, thereby entitling Plaintiffs and Class to declaratory and injunctive relief from the collection of these illegal, invalid and unenforcealrle taxes, penalties and interesÇ e tl'"t@isunctlnstitutitrnaìrlnits.faceandas appliecl tr¡ Plaintiffs hecau.se it permits the auditor tr¡ deternrine whether records are adet¡uate basecl solely r¡n ulrdefined sulrjective criteria, and without ¡:rroviding any guicleliner^ for its administration lenrìing itself to cliscriminatory application, lhereby entitling Plaintiffs to declaratory anrl injunclive relief fronl tlle collection ol these illegal, invalid and unenforceabìe laxes, penallies and interest; f. that Tex. Tax Cod e 6 1I']...O22 is unconstilutional on its face and as apptied to Plaintiffs because il permits the feopardy Determinâtion to be made merely on the Comptroller's undefined subjective criteria, and withont providing any guidelines for its administration lencting itself to discrirninatory application thereby entitling Plaintiffs ancl Class to declaratory and injunctive relief frorn the collection of these illegal, invalid and unenforceable taxes, penalties ancl interest. o b. that the Comptroller is not ar¡thorizecl to unilaterally reduce rhe burden of proof, or to shift the bltrden of proof in estabìishing fraud as required by Tex. Tax Code Ann. Ç 111,061.. ancl that such conduct is non- cliscretionary and ultra vires and iu exce.ss of her statr-rtory autholity, thereby entitling Plaintiff.s and Cla.ss to declaratory and injurrctive relief from the collectiorr of the.se itlegal, invalid and unenlorceabìe taxes, penalties and iuterest. h, that the Comptroller has engaged in intentional conrluct resulling in the tal

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atrd that Plaintiffs are entitled tt¡ declaratory, injunctive a¡rd coillpensatory relief.

4. After setting a reasonable bond, enler judgment telnporarily, and after hearing on lhe merits, permânently restraining and enjoining Susan Conrbs, in her indjvidual and official capacities, ancl the Office of the Comptroller of Public AccoLrnts, its employees and âgents, and all other persons in aclive concert or participation with these Counter-Det'enda¡rts from engaging in the acts and practices macle the subject of the temporary injunction.

5 Enter judgment, jointly and severally, against the Comptroller of Public Accounts, Susan Combs individually and in her ofticial capacity as Comptroller of Public Accounts tbr the State of Texas and Gregg Abbott, i¡r his offìcial capacity as Attorney Ceneral of the State of Texas for compensatory damages, including pre and post-judgment interest, to all Plaintiffs fiom whonr the Comptroller has collec,ted the"-e illegal, invaìid and l¡nenforceable taxes, ¡:enalties and interes! in whatever männër, in violation of Tex. Const. art l, ¡^ec. 17 resulting fronr her adìrerence to the invalid procedure.s ancl uncon.stitutional statute.s alleged lrerein.

6 Enter judgntent directing Defendants to account to Plaintiffs and the Class for all dantages caused to thern as a result of their unlawful actions, and appointing a Special Master to oversee irnplernentation of this Court's orders with periodic reports submitted to the Courl on progress with the fees and all reasonable costs charged and incurred by the Special Master lo be paid by Defendants as such charges may be apportioned by the Court. 7 Enter juclgment awarding to Pìaintiffs the costs and disbursements of this action including reasonable attorneys' t'ees and costs f'or experts pursuant to the provisions of the Texas Government Code, Texas Civil Practices and Remedies Code and the Administrative Procedures Act. c) Plaintift-s pray for all other relief, equitable and legal to which they may prove themselves justly entitled. Respectfully submitted, By: /s/ Samuel T- jackson Samuel T. Jackson Texa.s Bar No, 10495700 PO Box 170(133 Arlin¡¡ton, TX 76003-0633 Tel. [214] 751-7155; [s12) 692-6260 Fax.866-37 +-0164

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FOR DEFENDANTS, COIINTER.PLAINTIFFS Email: þcþsonlaw@hotnrail.com

Plqe 24 of 26 ProDoc FaxService Page 26 0f. 27

CERTIFICATE OF SERVICE

I hereby certity by rny signature above that a true and correct copy of the above and foregoing instrut¡e¡rt was served on the parties or their attorneys via facsimile, certified rnail, return receipt requested, and/or hand delivery on October L7,2014, in accordance with Rule 2La, Texas Rules of Civil Procedure, to the t'ollowing:

IACK HOHENGARTEN As.- i starrt Attrlrney Gen eral P,0, Box 72548 Au --ti n, Texas 7 87 7 1 -2548 Tel: [512) 475-3503 Fax: (51.2) 477-2348 i ack.hohengarten@texasattorneygeneral.gov Attorneys for Counter-Defendants

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VERIFICATION

STATE OF TEXAS E J

$ COUNTY OF TARRANT 5

BEFORE ME, the undersigned authority, personally appeared Samuel T. Jackson, who, being by rne duly swoln, on his oath deposed and stated the tbllowing: l, SatnuelT. ]ackson, am over l.B, of sound mind and otherwise capable of making this afïidavit. I am the attorney representing Sanaclco Inc., Mahmaud Isba, and the renraitring plaintiffs in this putative class action suit. I have prepared Plaintiffs' Second A¡nended Petition for Judicinl Revì.ew, Declaratory Judgment, Tentporary lnjunction ctnd Request for Dísclosure. I lrereby certiff upon personal knowledge and inforlnation and beliel that the factual allegations in the foregoing Application for Tempor-ary lnjunction are true ¡nd correct,

SAMUEL T. JACKSON ATTORNEY FOR PLAINTIFFS

Subscribed and Sworn to Before Me on Octôber 1,7,2014 to certify which wi[ness my hancl and official seal.

Notary Pubìic in a¡rd for the State of Texas My comrnission expires

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TRCP ZLn. - Service by Telephonic Transfer As prorrided by TRCP 21a, tJris document is sentto you using ProDoc F¿rxSerr¡ice. For lnore infbrmation ¡rbout this service visit rvrvw.proclocefìle.cou/Information/Faqs.irspx,

Date: l0l17l20I4 6:00:59 PM To: JACK HOHENGARTEN

Fax Nruuber: 512-477-2348

From: Samuel Jaokson Law Oflice of Samuel T, Jackson P.O, Box 170633 Arlington, TX 76003-0633

Phone Numberl 512-692-6260

Re:

Service Docrunent(s): SANADCO 3d AMEND PET FOR JUD REV.docx

Tofsl Number of Prrges: 27 (inoluding oover sheet)

PRIVILEGED AND CONFIDENTIAL This*f-acsimile transmissiorl m¿ry contain privilegecl confìdenti¿rl information and is intended for the sole use of the ¿ddressee. If you rue not the intended recipient, or tJre persott responsible to deliver the message to tl,e intendecl recipienÏ, yôu åre hereby aclvisecl lhal any clissemination, distlibution or copying of this cornmunication is plohibited. If you have t'eoeived this facsimile i¡ emor, ple ase notify the sendei' and destroy all copies of the oliginal facsimile message, Tab F

Certification of Public Records for Order Denying Motion for Rehearing on Comptroller’s Decision on Hearing Nos. 106,815 and 107,006 and Certification of Public Records for Comptroller’s Decision on Hearing Nos. 106815 and 107006 with Attachments A – Texas Notification of Hearing Results

Appellees’ Responsive Brief page 6 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV GLEIYIII HEGåR TEX"N,S COMPTROI,I,ER OF PUBT,IC "H.CCOUNTS

P.O.Box Ì3528 . llustin,TX ?8711-3528

STATE OF TEXAS s s COUNTY OF TRAVIS s

CERTIFICATION OF PUBLIC RECORDS

I, Lisa Brown, Paralegal of the Litigation Section in the General Counsel Division of the Comptroller of Public Accounts of the State of Texas, DO I{EREBY CERTIFY AND ATTEST that I am a custodian of tax records and files of the Comptroller of Public Accounts.

I FURTHER CERTIFY that the attached document Order Denying Motion for Rehearing on Comptroller's Decision on Hearing Nos. 106.815 and 107.006 is a true and correct copy of an official record, report or entry therein, or document authorized by law to be recorded or filed in our office, and is actually recorded or filed in our office. Said documents are related to Sanadco, Inc., Taxpayer No. and Mahmoud Ahmed Isba, Taxpayer No.

IN TESTIMONY WHEREOF, I have officially affixed my name and caused to be impressed hereon the seal Texas Comptroller of Public Accounts at tt1- East 17ù Street, Suite 131, Austin, County of Travis, Texas 78701, on this the 16th day of April 20L5.

Lisa Brown Custodian of Records Litigation Section (5t2) 463-4095 (Page 2 of 297,

ITEARTNG NO. 106,E15

RE: SA¡IADCO,INC. $ BEFORE TIIE COMPTROLLER $ OF PUBLIC ACCOIJNTS $ OF THE STATE OF TÐ(AS $ TÆ(PAYER NO: $ SUSAI\T COMBS $ Texas ConpEoller of Pr¡btic Accounts ALJDIT OFFICE: Fort Worth 2140 $ $ ISREAL MILI.ER AUDIT PERIOD: Febntary l,2OO7 $ Division Re,presenting Tax TIIROUGH June 30,2ffi9 $ $ SAMIJEL T. JACKSON Sales And Use Ta¡,lRDT $ Representing Petitioner

HEARTNG NO. 1ffi,006

RE: lvfAHMOtiD AHMED ISBA $ BEFORE TIIE COMPTROLLER $ OF PIJBLIC ACCOI.JNIS $ OF TIIE STATE OF TEXAS $ TAXPAYER NO: $ SUSAN COMBS $ Texas Comptoller of Public Accounts ALJDIT OFFICE: Advanced Processes 2552 $ $ ISREAL MILLË,R AIJDIT PERIOD: May L,2407 $ Re,prcsenting Tax Division THROUGH h¡ne 30,2009 $ s SAMUEL T.IACKSON Sales AndUseTalRDT $ Re,presenting Petitioner

ORDER DENYING MOTTON ['OR REIIEARING

On July 8, 2014, Petitioners timely filed a Motion for Rehearing concerning the June 16, 2014 Comptroller's Decision issued in the above-referenced matter. On luly 8, 2014, the Tax Division filed its Reply opposing Petitioners' Motion.

Having considered Petitioners' Motion and the Tax Division's Reply, it is concluded that the Motion for Rehearing does not raise any legal or factr¡al grounds that would affect the decision of the Comptroller. It is accordingly ORDERED that the Motion for Rehearing be, and is herebyn DENIED.

The CompEoller's Decision becomes final on the date of this Order De,nying Motion for Rehearing, a¡d the total sr¡m of the tax, penalty, and interest is due and payable vithin twenty (20) days thereafter. If such sr¡m is not paid timely, an additional penalty of ten percent of the taxes due will accrue and interest will continue to accme r¡rtil the taxes owed are paid. (Pàge 3 óf 297')

Ssnadco, I¡rc. ar¡d M¡hmoud ¡{hmed fsba Hrg. Nos. lqi,8ls a¡d 107,006 rue2

All parties of record ar,e being notified by copy of this Order.

signed on this Jé{e, of ruly 2014.

SUSAI.I COMBS Compholler of Public Accounts

by: A. Compholler GLENN HE G¡IR TEX,¡IS COMPTROTTER OF PUBTIC ITCCOUNTS

P.O.Box 13528 . Jlustin,TX 78711-3528

STATE OF TEXAS s s COUNTY OF TRAVIS s

CERTIFICATION OF PUBLIC RECORDS

I, Lisa Brown, Paralegal of the Litigation Section in the General Counsel Division of the Comptroller of Public Accounts of the State of Texas, DO HEREBY CERTIFY AND ATTEST that I am a custodian of tax records and files of the Comptroller of Public Accounts.

I FURTHER CERTIFY that the attached document, Order Denying Motion for Rehearing on Comptroller's Decision on Hearing Nos. 106.815 and 107.006 is a true and correct copy of an official record, report or entry therein, or document authorized by law to be recorded or filed in our office, and is actually recorded or filed in our office. Said documents are related to Sanadco, Inc., Taxpayer No. and Mahmoud Ahmed Isba, Taxpayer No.

IN TESTIMONY WHEREOF, I have officially affixed my name and caused to be impressed hereon the seal Texas Comptroller of Public Accounts at 1L1 East L7th Street, Suite 13L, Austin, County of Travis, Texas 7870'1., on this the 1-6th day of April 20L5.

Lisa Brown Custodian of Records Litigation Section ('LZ) 463-40es (Page 2 of 297,

ruARTNC NO. 106,815

RE: SA¡IADCO, bIC. s BEFORE THE COMPTROLLER $ OF PT,JBLIC ACCOIJNTS $ OFTHE STATE OFTÐßS $ TÆ{PAYER NO: $ SUSAI.T COMBS $ Texas Conptnoller of Public Accor¡nts AIJDIT OFFICE: ForttJttorth 2140 $ $ ISREAL MILLER AIJDIT PERIOD: Febntary 1,2007 $ Representing Tax Division THROUGH June 30,2009 $ $ SAI\,ÍI.JEL T. IACKSON Sales And Use Tax/RDT g Representing Petitioner

HEARTNG NO. 1ü,006 RE: IYIAHMOUD AHMED ISBA $ BEFORE THE COMPTROI.I,ER $ oF PUBLTC ACCOtninS $ OF TTIE STATE OF TEXAS $ TAXPAYER NO: $ SUSAN COMBS $ Texas Comptroller of Public Accounts AtJDIt OFFICE: Advanced Processes 2552 $ $ SNN¡T, MIIJ.ER ALJDIT PERIOD: May 1,2007 $ Represeuting Tar Division TI{ROUGH June 30,2009 $ $ SAMI.JEL T. TACKSON Sales A¡d Use Tax/RDT $ Re,presenting Petitioner

ORDER DEI\TTING MOTION X'OR REIIEARING

Oo July 8, 2014, Petitioners timely filed a Motion for Rehearing conceming the June 16, 2014 Comptroller's Decision issued in the above-referenced matter. On July 8, 2014, the Tax Division filed its Reply opposing Petitioners' Motion.

Having considered Petitioners' Motion and the Tax Division's Reply, it is concluded that the Motion for Rehearing does not raise any legal or factual grounds that would affect the decision of the Comptroller. It is accordingly ORDERED that the Motion for Rehearing be, and is hereby, DENIED.

The Comptroller's Decision becomes fin¡l on the date of this Order Denying Motion for Rehearing, and the total sr¡n of the tax, penalty, and inærest is due and payable within tw€nty (20) days thereafter. If such sr¡m is not paid timely, an additional penalty of tm percent of the taxes due will accrue and interest will continue to accnre until the taxes owed are paid. (Page 3 of 297,

Suadco, hc. and M¡bmoud ¡{b¡ncd hba Hrg. Nos. 106,815 a¡d 107,006 Pagc 2

All parties of record aç being notified by copy of this Order.

signed onthis létlìã, of ruly zo¿4.

susAlr coMBs Compúoller of Public Accounts

A. Comptroller GLENN HEGtrR TEX.A"S COMPTROI¡IER OF PUBIIC .trCCOUNTS

P.O.Box 13528 . Jlustin,TX 78711-3528

STATE OF TEXAS s s COUNTY OF TRAVIS s

CERTIFICATION OF P UBLIC R ECORDS

I, Lisa Brown, Paralegal of the Litigation Section in the General Counsel Division of the Comptroller of Public Accounts of the State of Texas, DO I#REBY CERTIFY AND ATTEST that I am a custodian of tax records and files of the Comptroller of Public Accounts.

I FURTHER CERTIFY that the attached document, Comntroller's Decision on Hearing Nos. 106.815 and 107.006 with Attachments A - Texas NotifÏcation of Hearin&Results is a true and correct copy of an official record, report or entry therein, or document authorized by law to be recorded or filed in our office, and is actually recorded or filed in our office. Said documents are related to Sanadco, Inc., Taxpayer No. and Mahmoud Ahmed Isba, Taxpayer No.

IN TESTIMONY WHEREOF, I have officially affixed my name and caused to be impressed hereon the seal Texas Comptroller of Public Accounts at 111 East 17ü Street, Suite 131, Austin, County of Travis, Texas 7870L, on this the 16tlt day of April 20L5.

Lisa Brown Custodian of Records Litigation Section (s12) 463-40es tågü trO of 3l¡6,

o o soAE DOCTSI NO. 30{-13'f211,fr CFAHEAaINGN(} r0úÊrs Rg SA}TAT¡CO.INC. BEFORE TITE COIVÍPTR(X.IER OFPI'BIJC ACCOT'T.¡TS OFIITE STATE OF TEKAII

TÆIPAYER NO: susAl\rcoMBs Tcx¡¡ Comptmllcr of Public Acco¡¡¡ts At Dn OFFIæ Futll¡oilh2f¡m IS¡REAL MILLER AIJDIT PERIOD; Fcbruary L,zW Roprcocoting Tax Divisiou THROUGH Jr¡¡e 30, 2fl)9 SAI!ÍIIEL T. JACKSON Sale,r ArdUs¡rTar/RDT RcnrcsñSPetitionGr

SOAU IIOCTET NO. 3ll{r13{212¿ú c?A,maxrNcNo. ltxtpoc RB ililAHMOI,'D AITMED IT¡BA 0 BEFORE TTIE COMPTTR,OLLER c oF Pr,rBLrc AccotrltTs ! OFTTTE STATE OFTE¡(AS¡ ! TÆIPAVR Ne I susAr{ coMBs I Tera¡ Comptrollcr of Publtc Accounh AIJDIT OFFICE: Adva¡codP¡ooc¡¡c¡ 2552 ! $ ISREAL MILLER AUDITPERIOD: Mny l, 2007 I Reprcsmtiqg Tax Division TI{ROUGII Juno3Oã109 0 $ SA¡I,ÍT'EL T. JACT$ON Sale¡ A¡dUseTaxlRDT $ RÉprcseûü¡rg Petido¡er

C, OÙTPTROLI.ER'S IIECIÍ¡ION

San¡dco' I¡c. (Pcdtiornr SÐ wss audited ftr s¡les and usc trx complianco by tho Tax Divi¡ion of thc Tcra¡ ComþFoller of Public Accor¡nt¡ (Statr) ¡¡d assased b¡, ¡ 109ú penrlty, ar additiotrsl 50% pcualty, End ¡ccn¡cd l¡tÊrcrt Stafralso a¡¡os¡Ed pcrronal tisbiltty îsniqs¡ Ma¡s¡lud AhEEd hba (Peüdoncr lrba) mder Ta¡ Codc I I 1l .06 t I E¡ tho prcridc,ot of Pailioncr SL Pstitioncrs contctt thclr audit u¡sctcnÊúÈ on thc ffmÇ gtound!, hchdlng tbÊ conteutio¡s tb¡t ths urdit as¡es¡ruN¡t is vold anduncoft¡cc¡blc bec¡ruc ths cstin¡tc w¡¡ bared on ¡udit pooeùrcs that consütubd invalid nrlcs, å¡d thst thÊ prlsct¡t urdit o'rcdaps a previoru '¡¡çta lt ot 3{6)

o o fknl audít ssl€stmenL Staff rejectr ths H¡tione¡s' conhtionr. In thc hoposal for Ded¡ion, the Adml¡isuaËvo Lg;rp Judgc (AU) Ë@rmÉnds rhat thc co¡prqtc ¡srGssnÉN¡t ¡g¡i!$ Petitloncr SI shot¡H bc afrisntù êxccpt'th¡t thc urarhrp pcraçnttgc uscd in calorlulng the estlmâtcd tobtcoo s¡le¡ should bo adjrutcd a¡d th¡t thc addüiú¡l fraud p€ürlty sbould bc aprplied only to tho rcport pcrids Febrnrrry l"zwl,th¡ough Apnl 30, 2(n8. lts ALI sbo rcconds that thc persoul liabillty asscssrnqrr againrt Fetitionor Isb¡ should bo limircd to ths rcport pcriodr lvlay l, ?.Oü1, througb Aprit 30, 2m8,

L TROCEI}I,nAL HNlOny, Nûfl@ ANDJITRFUTCIION

On l¡y 10, 2013, Ststr rdcsrcd thc cescs to thc Stntc Ofñco of Admi¡i¡tradvc Ha¡ringt (SOAII) for oral houings. ALI Pot¡r B¡ook¡ otdcrcd thc cares joincd bcc¡u¡c tho ca¡cr íuvdlvc ælated particr, tnd comrnou frcil! ild issucs of lsw. Staff was rrptercotcd by Accírtmt GcnËssl Cor¡n¡cl Isrcal Millet, and Pstitione¡¡ wE¡! rüg¡escntcd by AfroEEy Sgolrcl T. Jecl¡son ltc ca¡e conveocd m Scptcobcr 9, 2013. Tho ALI closcd thc ¡ccord m Novcmbor L2,2O13. Thcre Es ED contestcd i¡st¡cs of notico or jurirdicdm. Thcmfu¡¡, thc¡o m¡ttc¡r Er€ rßû out in tbo Findíng¡ of Fact mdConcltsiou¡ of l¡ru.

IT. AEASONSTORDECIIIION

Â. Evldcuc¡Prcsßut€d

Statr rubmitrcd tho following crhibib tn SOAII Dodret No. l}4113.42ll,26z

1. 6GDayIr[Er;

2. Tema¡ Notificcíon of Ar¡dit Rcsulg¡

3. Pooalqy ¡¡d Intært \ltaivcr ïltodrshctt;

4, AuditRaporç and

5. Ar¡dit Pl¡o' which i¡cl¡rdn Ard¡tRcfcnal Reput forAddidotr¡l pcn¡lry.

t 'aÊ¡ð 12 of 3t5l

ü I St¡lf submittcd thc following exhibit¡ in SOAH Dockct No. 304-13 421?^26;,

l. Tc¡¡¡ Nodñcadonof Ponon¡l tiäbility fcFnr¡d¡¡lentTax Evasipn¡

2- At¡ditE¡sn, itrctt¡dhg ccrespondcnco acd o-mdl csmmrmicgtionr fro'm tho Rovøuo AccountÍng l)ivisioni the Calq¡latcd lY[c.rsagq AdJrutmcat, and Allocation Rcporß¡ Tax Sr¡mm¡ry, S' tr'ç, Balalcc, Ar¡di$ a¡d Tar Allocltioq, Basis Inquiries; aud Fersoo¡l Liability Frnrúrlcnt Tax Evasiotr Wortshce$

3, Salcs and usc to¡ rcû¡m¡ for rcport pcriod¡ April2007, ilf¡y 2fi)8, Dectubcr 2fþ8, Fcbn¡ûy 2008, Erd Jaoury 2@9; a¡d

4, StåtcFTings¡ StrtsucntofChangcofRegi¡tÊædO'trcc/Ageût,datcd May 5, 2f106¡ md Toxa¡ Fra¡cht¡o T¡r h¡blic l¡fon¡stim R€eorb slgped May 10. 2lX!6, March 13,z(X)t, and Fùruary 26,2ß09,

Ststr 6n¡chd to its Resposo to Pctidoncdr Port-Ifcarhg B¡icf thË fonowing o¡hlbiu:

6. Copy of ltilcmoradum Opinioa is$rd ln$anadco, hs v. Compttoller øt'htb, Actountr, No 03-11-$1462.CV,2013 Tor. App. LÞOl¡ 12013 (Ts¡. App,- Arutln Scptcmbcc 26, 2013, ¡o pcL lr"Ì and

7 ApBellcc's Mdlm fur Re.hut¡S ud Rcmnsid¡r¿fl on cn bøtc Aþd i¡ Samdca,Irr,.

Pctitlonsr SI produccd during the hearing itr rÉsponscû to StsfP¡ Sccond Set of Intcrogrtortcr, Rsçests fur Admls¡ioË, and Requcrtr for Produstion" Petitiqsr did ud ofrc rny othc evidence ûuing tho heuing but did rtt¡ch to itr Post-Il€¡¡itrg Bridtbe following e¡rhibiE:

I Thc Er¡min¡don pccfrrusd by the Compuolleds Busincss Activity Rcscarc,h Tean (BART) fur tho exam poriod larnrry l,200t, throug! MÊ¡ch 31, 2009. includíng tbc Accounts Exanircr Corrcr¡hccû: comspondooco and c-'r'oil cqmm¡¡nlcadonr from BART¡ tbs T,en¡s Nottficstion of Eran Re¡ults; &Ê Mcseago' A4utm¡ot, md Allocaüon Reports¡ Petitioncd¡ Alcohol aqd Tob¡cco R¡rchase¡ fur Jonuary 2m8 úrougþ lvlarch 2009i ard f[S üroù Managcr Cotnm¡ntr;

2. Pl¡l¡rtifr¡ Origitr¡l Podtlon, Sqtdco,Inc,,20t3 Toa App. tEnS 12013¡

t 'å9l¡ ll of 3¿5)

o o 3. Dofcndmt's First Amended fui¡wcr ¡nd Countcrclafu& Sutdco, ftrc., 2Ol3 Tor. App. LÐ(IS 12013¡ md

4. Cot¡¡tcrÐef,endant'r Original Answer and lu¡isdictlotr¡l P|re\ Mco, Itu., 2013 Tcx. App. LEf,SI 12013.

Ttc¡s tvorc no evidcotiary objcctíonr, ¡¡d c¡ch of thc lisEd docu¡ncûts i¡ admitted ss part of thc contcstcd caso rÊcod"

Tto ooly wltnc¡¡ tcstimony prcsåted drning thc cootcsted caro hearing wsr thgt of Demi¡ EastDDn, tbs audit superviror who ruporvised the Com@llcr ar¡ditor who perfomed Pcddmcr Sf c audit Strffpresørtcd tho tcrtimonry of Mr. Ea¡tnnu,

B. A{lushentr

St¡frhs¡ not agrccd to adjust auy of tho contcstcd audit as¡cs¡mcnls.

C. E'ú{gErt¡bll¡hGü¡ndl¡¡uctPrr¡entcd

Pcdtione¡ SI opernted a conycúicuce stff! in Fo¡t Woûdt Texas. durirg thc auditpcrio'd Februery l, 2(N17, thmugþ fiuc 30, 2m9. Pdition¡r SI no longer owar thc convcnicnoo storc. Pctldor¡c SI waa subJoctcd to a dcsk audtt pcrforncd by BART for thc oxam pcriod of Jaruary l. 2008, th¡ougb Ma¡rh 31, 20GL It wac ¡¡sc¡¡ed r ts¡ lisbilißy of S2Í1,593.60, consisting tf tsr, thÊ f Oft st¡ndrrd pcoatty, thc additlonal 50?b pcûatty, and æc¡ucd f¡¡tËrÊst Its cxan wos púomtred¡ by a comprri¡oq of Petltionc Sfs ¡lcohol ¡¡d tobacco purcheser ftr tho cxam pcriod ¡cpqted by Pedtiorcr Sf s tobspco ¡¡rd alcohol vendor¡ purcu¡qt fU ft3 Tte IIB 11 tob¡cco and alcohol purchrscr fur thc cxampcrlod cxcccdcd tbo rcponed tareblo ¡¡lc¡ for thc ssmË pcriod by $268,056 to $76,9f6. BARI relled ot the HB tl dsts ald tho Comptolleds At¡ditDivisionPolicy Mcno 122 (AP lã2rlÂestloeting ths assclsmeal Petitioner SI did not

I Peddon¡r'¡ Erhlbit l, leffi Iü¡y 4 2æ9, &om BART ¡úybing Fedtlonrr SI of a¡¡c¡¡msd. dsæd ' lUholcr¡lcn rd di¡tibuun wh+ rnrlt lþuor, ctgr¡Eürs, sl$¡!, crd tohcco producl! aro rcqrrircd b of bccr. ¡úuir clcttoda rcpmü, on r nnnthly barb to tl¡ Conptolhr. Thlrê ctrcüonlc æpotrr arc aquind by Tc* Trr codcÂE il 15t.464, ß41lLa¡d l55.l0t,whhhrææco¡sçduputof Tcx,ILE. tt,t{tûttg,Rli. (?¡wll, Ths vcndffi ncord¡ are coumonly ruft¡rcd o a¡ HE I t ltcqù.

4 ¡agr9 l¡¡ of 146,

o I file a fs rcdctermlnation contcatins thc arsËssmcnt conscqucntly, tho arscsrmcnt rc4rcst bËc¡nÊ ñ¡st Tto snler and usc lå¡ dolinArcncy war crrdffEd to thc Aüo¡¡¡y Oenlroll Thc Aftruoy G'meml filcd ¡ t¡wsuit secking to collect tbo delinqucocy ñom Peûition¡r¡ SI ¡nd Isba"a Petido¡øsñledvadoutcountcrcIair¡sgaÍnstthoCongoller. Howwcr,thetialcsr¡¡t dtrmls¡ed PctitionËG' cotmt¡tclaims fu lac* ofjurisdicüoo Petidon¡¡r appÊal€d thË dbuirsat Tho appcrlr cou¡t sr¡st¡in€d PedËon¡r¡' cl¡tm tb¡t thË Conptro[cd¡ dlrectives h AP q¿ ånd AP 122 werc in fact núcc md also concludcd ù¡t thË Eial court hadþrisdtcdon ovcß Sansdco's clatm th¡t AP 92 a¡d AP tA¿ wc¡c inv¡lid nilcs Ê¡d ''ot, th¡reforcr, thË Ei¡l coü¡t cûEd ¡n dismirstng tbts csruþrclalm. S¿c Sanadco, I¡tc.,frL3 Tor. A¡p. LEXß l2lll3, âtr?l-z:2.

Staff subæçoutly conù¡stcd a¡ audû of Potitioncr SÍs salcr d *: tu conplinncc for tho rudlt pcriod Fcbnrary 1,2W, tkouglr Juuo 30, 2009. Pctitlon¡r SI did not ruspond to thÊ ¡¡ditods ¡Equests ftr record¡J Tte ¡¡¡ditm ls$¡ed a Nodficatiou of Ectiruadoq P¡occdr¡¡q for Stato Tar Audit (Notiffcdoo of Estûradou) dated January Tl,?OlL, advfuing Pcdtimcr SI that ùc adit would bo cstioatcd ulng HB I I date, a¡d that thc AP lZl prcccdurcr would bc túowed"6 llrhco tho aud¡t6 ir¡tiatcd the o¡dtt Fældrvoù Peüdm¡r SI no longpr opcraæd thc coavooiencc sbru. Thoreforc, ûs ntdibr could not pctrrn ¡ sbclf test asd i¡stcsd uscd thÊ i¡tdt¡suy BycrsgÊ marlup porccnragos of 118.44ft and,Yl4,Vl* rcspcrdvoly fortobacco a¡d alcohol pt¡¡chssct sct out in AP t22J \\oar¡ditor tot¡led the tobacco a¡d alcohol ptrrcharcr nrdc by Petit'tuter SI ushg thc IIB I I dÊt¡ for the rtport pcriod¡ lauuary l, 2008, tbmugb June 30, 2ül!1. Ile total ¡lcohol osd tobacco punùrscr wcrc muldplled by thdr rcspcctlvc mnçtup pcrcênÞgcs.t No B'roduct-trti¡ß pcrccqtagÊ was cskxrtatc4 beca¡¡c tro pr¡¡chæÊ lnvoicc¡

we¡c av¡ll¡ble Thcrcforc' thc sta¡dsd AP 12¿ poduclmir pcrruûgc of 549t for toba¡co and alcohol proùrcE was applicd to a¡rivc at estlm¡tcd h¡¡blc ¡alc¡. lte ar¡dltor afrrded'¡ 5% allowance for rpoílage and theft, and c¡cditwar giveoforrEportsdts¡sble ¡alcs. fbc adjruted ta¡ablo salc.r weæ theo ¡educcd by thc eaouot¡ ¡¡sos¡ed in the BART exam fu tbc rcport peciods lanuary l, 2(X)8, lh¡ot¡Eh Ilttrch 31, 2009, ¿nd thc rçsuldng additional t¡xablc salcs wqu

Þttdo¡s'¡ Erhiblt 2, Te¡¡s CÊrdñcac to Attor¡ny ftîsal of Srles r¡d Usc Tår Ih¡hqucncy. Ëtltlo¡cd¡ Erhiblt 2, Pl¡intlF¡ Ori¡i¡rl Pcrttion St¡ff¡ Erhlblt4(h¡ldon¡r SD, /t¡d¡t Rrport rd" I¿, ard St¡frr Erhlbit4 @itioncrSl),F¡¡¡¡208. Id"

5 '8gt 15 of 316l

o I then rnrltiplied by the applicable tor raæ¡ lo anivc at the t¡r du€ for thc period Januory l, 2008, tlrmugþ Jr,ne 30, züXr.Ð

A¡ there w¡s no HB 1l .l"tr ¡vailablo for thÊ pcrioù prcccdlng lanury 1, 2008, tho auditor esdn¡tcd thc addidon¡l t¡¡ablc ¡alqr for thc rr?ott periods lrnurry l, 2008, througb Jtt¡c 30' 2fi19 by fïnt dctcroining the averagc monúly rlt csth¡tcd t¡¡r¡blc sale* Tte port- Deccmber3l,20t|-,tot¡l nctestim¡tcdt¡rablo sales of $728,443,17 wcrc dividcdbyths It rc,port poriods o aslvo at a monthly aycragc of S40,469.fií.to frs sddition¡l ta¡,ablo ¡¡les frr thc prc-Januar¡' l, 200t, rçpoft pcriods wcrc calcul¡tcd by gtving csçdit for tbs t¡¡rablc s¡ler æ,portcd to thc Compbller ¡nd Epplybs thË 59É ¡llowa¡cc fur cpoilap ¡nd thcfr. Tto resulting Bddít¡ooal t¡¡¡blo salcs wat thoo nuttþlicdby thc applicablc t¡r ratc to dctorminl üro t¡x dr¡c forthir part of thc audit pcrloúll

Sl¡ce no contsct was m¡d¡ dr¡¡i¡g thc udit wtth en ofEccr, ownÊr, or ropcrcotdvc of Pcdüo¡pr SI, tho auditor did uot ncord l¡ th! Ardtt Plas c in thc Audit Refcrral Roport fø Addidonål Pcúalty rny iafrrmdon ¡cgurdlng tho rolc playcd by ao officc, d¡rEctor, offitorr ot cmployea of Pqdtion¡r SI in tho operation of tbc atoË or in thc prcparrtion a¡d filing of tho salc¡ and use ta¡ rcùllrls and thÊ troitt¡næ of s¡lct e¡d ruo t¡¡ prym0d!. Th! only substaotivc lnfom¡tio¡ ¡egs¡dhg Potition¡r Isba's adividcs ¡s frurd in Potitbncr Sf r rcspoure¡ to St¡fPs Sccmd Sct of Intcrrogatodcr, Rcqucsts for Admlsrlqrs and Rcqpcss fur Huctios. Pedtioncr SI o,lmittcd that Pctidoûcr Isbe signed ¡h¿ckr frr rcmini¡g salos a¡d uso tax pa¡rmøtr fuing tho audit pøiod.t¡ PedHo¡rcr trba i¡ ideotif,cd æ thc pcrron rcsponsiblo frr dcporlting tho $to¡Ërs sales pmceodr, ordering ths ¡torc's invconry a¡d psyl¡g for tho storc's invcotory purchases. ll Paidon¡r Isba was ¡l¡o idcntified u tho pcrron who rccaived tho monthly bank stdcmlots.l{ How"v.r, according to Pctitio¡cr sI'¡ answd to &o l¡tcrogiloriec, Pttítioncc IsbC¡ rerponribility fur thcgc tn¡ks endcd whcq on Mry l, 200t, hc cotcred into an agrccrnent to soll Suadco, Inc. to his omployeeq Y¡s¡ico Siao aÍd Sand¡¡ Ss¡szsr. l,fr. Si¡m

t Sr¡fP¡ Eltrtb¡t 3 Fairh¡¡r SI), Audir Rlporr, E¡rm 20. '" Sbfrg Erhibit 4 (pctidonrr SÐ, A¡dlr RÊEorq Errn 208. " Sb.fr! Erhlbh 3 (Pcddon¡r SI), A¡¡dftnlporl Euu 2tt. "¡l PttitloucrSl'¡âdnl¡¡ionNo. I SI'¡ Atrsrr¡¡ to I¡rcirottbrþl Nor.4, S, qnd 6, r' Fuitloae Fctitioncr Sl'¡ An¡scr b hænoËtoty Xo. Z.

6 aç¡c 16 of t¡l6l

I I the¡caftcr assumcd rc¡ponsibility for theso tasks from May l. 2008, r¡ntil tlro end of thp û¡td¡t puioû

h tho rcspuses to StBfFB Intcnogabry No. 1, statcd th¡tPctitioncr Petitiooq S[ Isba wss thÊ golc owucr, officcc, or ñrîmg¡r eñug! ItEy l, 200t. Pctidoncr tsba signed PcddsücrSIs 2006 Te¡as Frmchi¡eTarPubllc l¡bmsdonR¡po,¡t(PIR) ar pæridotof S¡¡¡dco.t5 Thc PIR is d*ed Mry 10, 2006. Althougb PËdtio¡or Sf s zfXlB PIR ialcotified Paidou¡r l¡ba as the corporato p'resldcnt, thc fqm is dgnÊd by r Mikc Isbat6 ÎbÊ PIR h dåtÊd ¡ÍErEù 13, 2008. ltc 2009 PIR idcntific¡ Pcddon¡r Isbr ¡¡ tho pmsidco! brrt lt boan thc stg¡an¡ro Isba, without a givon n¡Ec.l? fto PIR t¡ detcdFcbnury 26, 21t09.

Oû April l, 201 l, St¡ff i¡sucd to Petitiou SI a Tcxa¡ NdfrcsÉon of At¡dit Ræults nrresring tu. tho st¡nd¡¡d 109t pcoalty, tho addldo¡¡l 50ft ftaud pcoalty, ¡nd ascrucd intEEG¡t, totaling $l l2¡8f .02, with $64,336.87 aü¡ibut¡blc to tar. ltc ovo¡all euu rate fc Pctitioaer SI was 66.459t, whlch w¡¡ c¡leul¡tcd by rlividi¡g thG ts¡ asrccecd by tho srrm of thË tar ropoficd a¡d æscssc¿l¡ Pctltloucr SI tinroly nquæted rcdacrminadm.

Staffalso isswd a jcoprdy dctErniuntim on ltl¡¡c,h 30, 2011, agatnrt PeÊidonor hb* pu¡srlant to Tsx Cod¡ 0 l1l.ülll, arsossing pmsourl liabilþfortbc ta¡ liâbility of Fotitio¡crSl for tho period May l, 2ffit,thmug! Iune 3Q ZO[p.¡e ftc personal ligbility a¡¡cr¡mcut co¡¡istcd of t¡+ the st¡rd¡rd l0% peurlty, thc addidon¡I50% pen¡tty, ud acenrd ¡DtÊrcst thmugb ûr date of notiñcadon Ttc porsmal lkhitity æscstcd agdlst Pedtionsr l¡br totnled $95,620,96, with $55,168.87 ¡ttributable to tor. Poddo¡sr Isba tlnely rc4rctcd rrdcto¡min¡tion

Both Paitioncrs SI a¡d Isba couæstcd tboi¡ as¡cssnÊnts on üe samc graunds:

1. 'lûc imposidon of sdditíon¡l ftard peoalties should bc deletd beca¡rse Petitïoncr pmvidcd substriliel rccoûds, and tho uuderpaymcnt was ûot thc F$ult of frar¡d or alnowlng or willfirl i¡¡entto wdo tnrßs; la Snff ¡ Ë¡¡hlbtt4 ftddoncr lrbo! 1¡ Iû fl H. lt Fdhlos Sf ¡ Ën¡lty lrd htnclt lV¡ivr¡ Worlsbcc¿ It St¡tr¡ E¡hibÍt I (Paidm¡r I¡b¡). Tcl¡¡ Notificaloo of kron¡l Lirbilit¡

1 rrgË 1? oú 3¡16)

I I n Ttro ¡uditq wss not atùo¡izcd to cng¡ge in csdmatlng pmccôucr bccaruo Pciltones Eai¡rt¡¡npd tho nqttircd ¡ccord¡, ¡nd the ¡v¡ilable rcærd¡ wcrc not lnadcryatel

3. Itc andibrt¡ cxdr¡¡lvc ruo of HB 1l infcudion md o¡tlmatcd ry*r¡p¡ þ rletcrmi¡! tbs t¡r li¡bitlty for bccr ud cig¡¡Ettcq whco PcdËmcr b¡d dos¡mcntdon rcgading thc arü¡¡t pnrrbrrcr ard m¡rkryl, war impropct¡

4, tto u¡ditds calcr¡l¡dou mga¡d¡ng narlnrpr wcrc wcll beload ustion¡l sycrsger urd thoso cmtcnpl¡þd r¡DdÊs AP 122¡

). fts imFosidon of additioo¡I pcnalticc frr tbsþprrdy dcterminadon w¡¡ fl¡wcd, becauso thc stah¡te authorizlng suc,h pcoalticr ir urcouadtrËonally vrguc fur itr hih¡¡o to cstablich gr¡ideü!Ér fur itr iryeitiooi

6. Tto u¡dít sho¡ld be ¡cvlsed to cncludo prwiouety fl¡diEd ltrvootory¡

7, Ito audit l¡ void ¡s rmcûfo¡ccablc bccar¡¡c lt wa¡ b¡¡od on arditpmccdurc¡ thnt conrdtutc inv¡lH n¡leq aod

8. Tto subject audit overlaps a ¡mvlors fin¡l a¡¡tiq couri¡tl"g of a EARI cx¡ln for tho pcriod lourry l, 2008, thrcugh Mamh 31,2009.

Il. ArrlydlrndR¡conm¡¡d¡üon

t' gOAg Dockct No' 30&t3-421L2fr2ß(Fcddoner Sf)

ll,hon rÊcqds are inadcqurto to ¡cflest üc taxpeycr's brsincs¡ operati.rn¡, tho Compmllcr ir ¡uthorlzcd to esti¡¡¡Bb a tarpaycds tiabilitybucd m thc bcst i¡form¡tio¡ availablo. Tm. T¡x CodÊ A¡n. å til.(XHqd). .An esttn"tcd audlt wa¡ spp(opri¡O i¡ thl¡ ca¡c bpca¡¡c Petidoncr SI dld mt havc comphtc ¡mdr. thc Comptolor has hcld thrt cstimated auù'ts based o¡ HB I I vcndu ¡eco¡ds and AP 122 proccdrrrcs mect thc bc¡t i¡fumation Ev¡ilable requirement whcn tarpayer ¡€cordr ro incompleto q un¡stiabl€. ,fec Compuollcr's Decision No. 103,892 (2011). Itc evldcnce thd Stqtr submittÊd establishes th¡t tbo ¡r¡dit w¡s bæcd on tho bcst i¡foto¡don avallablo srd that Gståblbhcd a¡¡dit procÊdu¡Er wqo followpd. Consequætl5 tbc zuditis e$düdto apøaruuoptionof corrcctness. PËtitionors, ther€furË,bcg thc bu¡dcn of ptoof b show by r prrtlondcrancp of tho widcoce tb¡t tbo a¡dit rç¡ultc aru ircorcct 34 Ter. Adn¡D. Codc ! 1.40(2XBI

E råfls 18 of 3¡¡6,

Ð Ð

SovËrsl of thc coutcûtioûs uc baged on Petitio¡¡ns' cldm that ttrere qrçro sufñdcnt r€co'¡ds sya¡Isble fc ths audito¡ to pcrbrm sr ar¡dit witbor¡t ntylng on HB ll dsts s¡d thc AP lzi¿ crtinatíng proccdu¡e¡. lte audít woù paporr do uot support Potidons' a¡sc(dm th¡t rccord¡ rroe pnvidcd b thÊ attditor. lbc audiþ¡ i¡n¡ed lëtt¡ß (datcd Octoblr 24 2009, and Iuly 28, 2010) ¡cq¡c¡ting tho ¡eco¡d¡ reçired O conú¡ct tho rrdit, iuclr¡dtug purc.,hsso invoice¡ q¡d sal¡;s ¡ccords, h¡t thsrc was D rcs¡nuso.m Tho frift¡¡o to prodr¡cÊ æcord¡ ts ¡lso rEftrcúced i¡ thc Notlffc-atton of Estìmrtiou and 6$day lcmcr i¡sucd b'' tbo audimrlt Morcover, Pctitiousr ù¡rlng th! SOAII cmtc¡ted casa heuing did uot ofÈr any of thc reco¡ù it clsinþd tt had avatlabls.

Petidon¡r¡ slso sssciled thlt thc mErII¡p pËttcqtsges rsedby thc urdits crccçded ths n¡$on¡l ayeraggs a¡d thosc confeorylaæd by AP 12i¿. ThÊ udior rscd tho nrrkup l,crtñtrgc of l?/|.Ul9Édesignatcd itr AP lUlft alcohol prchaser3 lä¿expe.lrty provider that thc avcrìago convcnicocc storc ^P ma*rrp pcrcc¡tsge of l2fr.tl% assigncd o zffn h O bo wcd for subrequcot ye¡n until ncw rrdnrp pcrccilttagcs ¡¡o cv¡ilablc. Itc samc prcvlrion epplios fø tobacco producr, Tho nrrkup pcrccntago of 118.ü¿% aroigncd to zffi, lr tt¡ bc rned for subaequent ¡tan until ncw mrrkup pqccotsgcs src ava¡hblo. Tte nrditor, instcq{ rued thc Es¡lnrp pcrcceitagc of 118.44% that ls ¡tscwod fq 2m63 No erplrnrdon wa¡ fou¡d in tho audit work papcra or in Statrs plcadhg¡ for doviating from üir direcüvo. Conscquco¡ly, thc AL¡ äDdt th¡t thc auditc crrcd ud rccomm¡nds thst thc curcct ¡larh¡p pcrccûtagç of 118.O2% shotúdbe uscd in markiug up thc tobacco purcharcs to cålcolltc estimatcd bbacco solel. Tho appllcadon of tho conçct m¡¡ln¡p p€rcüt8gc will havo only a minc offtct on tho calsuladon of the esdmatd bbacco salcs. Tbc edjrsted estimrted tobacco salcs tot¡l $100"550.67 vernu tho $f00'908.51 resulting from tl¡c mrrtup of ll8.¡t49b. Ttc ALI calcr¡lated ttru tho applicationof th¡ conccr narkup pcrcËütryc frr tobacco poducts would rcducc tho a¡¡c¡smcnt of tax Êom $64,336.90 to rymxlmatcly $64,305.ü1.

æ srqtrs 8rh¡blr 4 (Pcrtdoncc sI), Aüd& Rlport Erh¡b¡ll tr s¡d IIL " $¡E¡ Erhibit I (Paitloncr SI). Shty-Dry l¡ücs aod SrÂtr¡ E¡htbl 4 ¡Frdrtorur Sn Atdit RlPoft, Elblblt t 'D Suff¡ Erhibit4 (P¡titloncr SI), Era¡n 208. Id.

9 tågr trg ot 3¿6t

I I Nert Pctitionñt ülcrt thlt thc ar¡dlt a,iscsrmctrt rhould bc dlsrega¡ded becansc it h based on invalid estinadng proccducr. Paitiocr¡ rely on thc appellate cou¡t's receot dod¡ion in Sandco, Inc.,ãJt3 Tor App. LE¡l$¡ 1æ13. Ilowcver. auypræedcntlal valrrc placcd m tho dccisim ir prunatuio' ar tho deci¡io¡ h¡¡ ¡ot bccous ffnal. Appcllcs h¡s ñled üotlotrs for an åønc¡ccmsidcradqs and fq ¡üeuh& Thc coruth¡s ]rÊtto n¡ls o¡ tbc motions. Th¡ ap,pellate col¡¡t'¡ decisim beconw fi¡¡l when the court'g plenry powor enpinos. ,Íe¿ Oscæ Renfu Contmctlng ilrc. v. H&It Sttpply Cd, tgí S.W. 3d 7U¿ (Ter. ADp.-Wm 2fF6, peL dcnid). And thÉ court will loso pleorry powr 30 days aftr thc cor¡rt ovc¡n¡lss thc uotion for rchcartng E¡d ¿¡t bøtc ¡cco¡sldsadø. Ter. R. App. P. lg,fft).

Paldoncrs al,so contend th¡t thc snbjccr ardlt shouldbo ¡cstrl¿:tcd to tho rÉTqt psrtodr ûst f¡ll oursidc of tho BART cxam pøiod of January l, 2008, thm¡Eh Ma¡ch 31, 2009. ïtru, aßcoûdl¡g to Petitioner¡, tbc audit as¡Gssrrcot should be restrlctcd to tho nport pcdodt Fcbn¡¡ry \.z0úl,througb [lcccobcr3L,1W, and Apnl 1, 2009, thrurgbluoc 30,2009. Pctidonss, h cftct, are ugulng ùat St¡ff i¡ cstoppcd from nargutng thc llabitity duc during tho period prcviotsly c¡autncd bV BAtr(f. Ho$rwcr, B bc ü collater¡l paúy scr$úg to arscrt thÊ estoppel mut etebllsh th¡B 'U) th! facE sougbt to bo litigatcd in thc sccond rctim wcro fully md frfuly litlgated h tbo ftst scdolr; @) thoro fects rryÊre esscnd¡l to thc judgmeot tB tbÉ ñrst acdoq md (3) tho pardos wcro cast as ¡dvcrr¡ric¡ l¡tbo first aßtioû' ,Sylco Food Íeru. u 7Iaprcll,890 S.$t 2d 796,801 (Ter. 1994),cüaìont øúnd: ¡ndáI¡o sac Comprollar's Decisíon No. l00,f 90 (2012).

Iho B¡{RT cxam of Pedtionn SIs convtnicnco storp dlffers i¡ scvcral rignificrot ways Ëom the stùseqtcut sales md r¡se tnr audit of th¡ san! oonyenicnae sto¡e. As thc BART o¡am focr¡scd cxclttsivoly on Peddoær SI's alcohol a¡d rcbaaco salcr and purc.hasetr !o product-uix pctcÊutage wt! epplied" Howevtr, a pmduæ-mix pcrceutagÊ wa¡ nccded rrybeo Petítlon¡r SI was nrbscqreotly il¡ditcd fc ¡al¡s of other poducts sr¡cb as c¡ndy, roft drinlr, fmd and gcoeral ¡n¡¡chmdi¡c. I¡ addidon Pctitioner SI was afr¡dcd a 5% allowa¡cc for spoilagc and thÉfr in the sslet etrd use t¡¡ audiL Tto sanË faas weru not csrcod¡l to thc judgmø i¡ each ontestcd taf, cæo. rhus, tho Conptroller w¡s mt e¡topp€d by thc rc¡r¡lß of thc BART c¡¡m from subaequcotly pedoruing a galc¡ ¡¡d rus ta¡ ar¡dit of thc ssmt tsrpÊyer, especiatly si¡co tbo

ÍÛ 'agÉr 20 6t 3¡¡6,

t I ta¡able sal€s det€rm¡ncd itr lhc BART exan w€r€ dcleted from the calcr¡luion of ddltional tnr¡blo salca is tb€ ¡ale¡ ¡nd ¡¡¡e tar ardit S¿¿ Compùoûler's Decision Nm . ltl ,579 (2013) B¡d 104,445 a¡d 105126 (2012).

Conptolls i¡ autho¡izcd to u$css n additio¡¡l 5096 pcr¡¡tty unds Ten..Tal Codo Thc Aü" $ 111.061(b) if ¡hc detcrnincs that a tarpaycr commined Êaud or had tbs Inæot to evadc tf,. Strtr hÄ ths bu¡deu of establishing by derr and convlndng cvidcncc ûat tb Êa¡¡d peoalty rpplies. See 34Tex, Ad¡dn CodË 0 1.40(1XB). Cleu rnd cmvhcing evideoce ic proof thnt will producc a firm bolid or conviction ¡s to thc tnrth of thc allcgodous sougþt to bc eståblhhcq but whtch necd not bc uncçirncal or mdisputcd. Sae Compbollrr's Decisioû No. 3?,946 GmOÌ Sutcv. Addlngto45SE S.W2d 569, fl0(tcx" 1f/9) (pcccrui¡m)toînËñondç¡141 U.S.418.

A¡ noted above, thc overall €N¡aß ratÊ for ths ûrdit p€aiod b 66.459t. 1t¡ rwised ovcratl €mtr rltc dccrcase{ rluoot unperccptiveln to 66.44% oncc tho ccu ratc ir rcc¡lcul¡tcd using thc qsecsscd t¡r auoutrt of $64305.¿ ln ptor Comptollcr of dcclsions grosr undonqordry t¡xeblo cslcs. dcfiúGd ar an cror of 25ft or grcctcr, har bccn frr¡nd ¡ufñcicntly hdtcativo of ín¡cot to cv¡dc tho lax to wûrant rssossrrot of the frürd pcû¡lty, padcululywhs¡ th¡ro wcre olher facton or m plaurible erplanatlon Seq e.go Com:ptsoller's Desision No .432A9 (2004). Also ¡cs Ter. Tar Codo A¡u $ 111.2050).

Such gross undcrcporting horcver, i¡ not in a¡d of ltself sr¡ffldeût to jrsttfy tnposltlm of tbe frard penalty otr cor¡þratc tupa¡lcn. I¡ tho casc of corporaE ts¡paycm, tbc Couprollu recog¡ízer rhnt ¡ çoqpsrat'p¡ ís a scparaæ tegrl eotity th* ts coatrolledby its offioen and d¡tcctors a¡d th¡t thc rcqt¡lsito irtE¡lt of a corporadon is dctcm¡scd üom tbc a¡üo¡¡ of tho officem or dheclo¡¡. 'Slheû an officer is provcn !o havc becn dhoctly involrred i¡ thc fra¡¡duleot activities, tho rddltiust penrlty agninst a corporation bas beca uphcld, bcøruo a oûrlþratc officcr't ft¡r¡dr¡lcot acdons can bo au¡ibr¡tcd to thc corymatiou Sec Compboller's Ilecision No¡. 105,148 &, 104,471 (2011),44.891 (2005) otrd ++"52t (2005). Tto çmtton is to whd, degræ Fedtionrr Isba, the oonpuJt's presidmt was awårs or should h¡ve bem swqg of tbe nnderæ,porting of ta¡. ,S¿¿ e, g, Comptrollcdc Deci¡iotr No. 103,204 and 104¿38 (2012), 2f lba rcc¡lcr¡l¡td fmu¡¡l¡ t¡ rsrcr¡cd ¡¡¡ ($úfJ{lll) + un of tba s¡¡c¡¡cd tu ud nporred h¡ ($96,790.61).

il '¡9Ð 2l ot 346)

Ð ü

Ttc only subst¡ntivc widenße in tbc rccord dircctty çgtaþliihtng the extent of Petitioncß f¡bds lnvolvtmeü in tho orpcration end nn¡¡gcocnt of th! coovcuiencc srtc, ln tbc prparrtion and filing of thp sales s'ld uso tr¡ ¡Ëür¡rq ard rorn¡ttrscÊ of the ta¡ payncnts durlng th! audft pcsiod is found i¡ tbc answcr¡t popounded to Statrs dlscovcry. ltcrc al¡o uc ùo fiw chcclß rrmittiry paynËût rigned by Pcddoner I¡b¡ that were ¡nofued by Statr ã ThÊ ,¡lLI, based solely on tho stqFEFût¡ made in raspmsc to Sufs disoavoçr, find¡ that Pctidoncc I¡ba puch¡sd rnd patd for thc t¡rablt invcotory, mado ths daily d4osltq and rcccilræd thc bæk statc¡DsúF, signcd th¡ sales t¡¡ rch¡¡nr, and paid thc s¡lcs a¡d r¡se t¡¡c¡, Ttc ,{LI, thcrcfo¡q conclud$ that Pctitionor Bba ws¡ involved in, awuc of, or shor¡ld h¡vs bcco awsrt of tho undencportiug of ralcs t¡r ltrowwer, thc sams info¡oadm thnt supporb tblr couchsiou exprculy limitr Petitisrcr Isbr's involvcmcot to ths perlod preæding ltsy l, 2008, wheu hc cûtËrd l¡to m ogremrmt to seU tho buslnc¡s md ouo of tho buyars assuurd rcspooribilíty fG perbrming thcsc t¡cks. St¡ff bsl uot rdd¡c¡sad ø ¡sñnpd my p¡rt of Petitloncr SI's rcrpmser ùo

its discovery requcats, hclt¡d¡ng thc ¡tatcneûtr limiting Pcdtiomr IsbC¡ involveusnt to th! repøt puiodr prcccding May 1, 2ü)8.

Tho ¡{LI co¡sludc! i¡ srfflciæ b cstabüdr" by clerr and convincing that thc ¡eco¡d eyid€úco, fra¡¡dulcut scdou¡ on tba pan of Ftitioncr Isba thrt au aûih¡t¡bb to tho compann but only for the pertod Februsry l, 2(XIl, thrf,¡gb Aprü 30, 2fi18. Thc ¡{LI thorcfu¡c recommcnds tb¡t the sddldonal 5096 frat¡d p€o¡lty ¡hould be dismissed frr the peaiod ì{ey I. 2fi}8, thmueþ the cod of the ardit plod.

Pctidmer¡ also arguc th¡t thc inposition of ¡ddithn¡l penaltler for jeopardy deçnnin¡tion ¡rounco¡stlnüion¡l vaguc. Tho ALI lackr tho jurMictionm considcrPaitio¡cds conteirtion regardirrg thc corutihrtlonnlity of tbc jcqrrdy d*crnination stah¡to. Ibc cor¡¡t¡ h¡vo ruled th¡t thc Co,ryEoller lac.ks jurtsrlicdoû to n¡le on thc cousdhrttonality of ¡ sunüc tb¡t sho adøini¡tsrs . Tal. Statc Ed øf Fhønaq v, Walgrecn Tæ cø.,520 s.w.2d 845 Cfex. civ. Sec

App.-Austb 1915, writ rtfld n.r.c) . Also,rce Compnoller's Dedsion No. 105,821 (2013).

ä sr¡tr¡Brbibir4(Èrirtoulsb¡).

l2 raf¡€ æ of 346,

o I L SOAEllockctNo.Sfl{-lil{Zl¿26(Pcttllo¡erlsb¡)

Tsr Code $ 111.0611 iryes pcnmal lirbilityon a¡officer, Esnsglg ordi¡cctqof ¡ corpcatiou who'a¡ u officcr, m¡ongÊf, direú:tor, orpartcr, took o¡ acdor orpartlclpatrd tn a frar¡ù¡lent scheoo or fraudttlcot plan to evadc thc payncnt of taxes.' Ttc pcnonal llability fu for trxeq p¡ldeq including u ¡ddldon¡l 50ß penalty, ¡¡d tnscst th+ arc duo ftom thc ærporatloa Acdonr th* indica¡e s ft¡rdulcût scbeoc or Êa¡¡ô¡lenl pl¡o o evade thc psyu@t of tarcs includo filing, G er¡!¡ng to bc filÊE ¡ fr¡ndulcut ta¡ rtt¡rr c rcport wlth tbc Conptrollcr o¡ bchalf of thc brui¡css endty, or fillng or cãusl¡g to bo ffte{ a tar, rch¡m ffi rcport with tbc Comptollcr mbeh¡lf of thebruinc¡¡ outþ th¡l o¡t¡in¡ ¡n lqtrqtonaly fal¡o s'qt¡rnent that results i! qÊ amor¡nt of thÊ tar duc cxcccdlng tbo amor¡qt of tar rcporæd by 25% or morg. Tcx. Ta¡ Cod! A¡n ! 111.0611O)(1), (3).

The sanc facu thåt thË ALI relied on in æconncodlng tnposltloo of tho additiusl 50fú pq¡tty support upbldlng tùG æseslmcût of pcnoral liability. Fhst, üere wa¡ üt ovcr¡ll gnss undßmpoßülg of the t¡r. which rtsr¡lteq evcú slftcr tÀlrlñg inb sccontrt tho rdJumcut rÊcorneúdcd by thc ALt, ltr ar !ilot tat€ of 66.45*. Morrcoyer, thc ¡ccord esubllshcr th¡t Petido¡cr Isbr ws¡ l¡volved ln tbc opemtion ¡¡¡l mrnngg'rcût of thc cttrc aûd iD üc ¡tgni¡g of thp sales and ruc t¡¡ ¡Eh¡ror snd r€úitrüßc of the ts¡ ps],rer¡s Hc ordËrÊd and prtd for thc t¡rnbþ inventory, deposltcd thc std!'s t?ccþts, ¡ccciwd thc ba¡k ståtcNrmc, and slgnod both

tho sales tsr rcü¡rr! and thc chccks rcoittlng ps''mmb ûo the Corpholler. Horpsrrc. thc evidcnps e$tablbhË thls hvolvemcut by cleu ud convincing eridcnco only fur thc pcdod Fcbruary l, 2007 ùrougù, Aprtl30, 2æ& TbiE rËcord i¡ srúficicût to nffirm tbe pcnonal Uabitity âsse$smmt for thc pertod Mry 1, 20(n, th¡ou$ Ap¡i130, 2008, snd tho lllJ rccom¡nÊn& that tbc pcrronat li¡bility Êss€ssnclrt shq¡ld bG disni¡sed for tho pcriod Mny l, 2fX)8, througb Jr¡¡Ê 30, 2009.

A R¡couueud¡don¡

Tte ALI rccom¡no¡rd¡ tht the ar¡dit o¡scs¡rnent agpinrt Petitiou¡r SI should bc atrrrrc4 btrt subject to thc reco¡nm¡ndcd adjwtmcnts correcdng th¡ catcr¡latiou of estim¡ted tobacco sales

It ago 2t of 316l

o o and limiting tho addido¡ral pcualty to tho pËiod Fcbrurry \,z[ßr,thmugb April 30,2008. In thc c¡sc of tho peßson¡l llabllity IssËsmÉnt rgdnst Petitioner Isbq ùe ALI recor¡mcnd¡ th¡t the rssÉsmcnt ùq¡ld bo affi¡ucd strbjccf to th¡ rccommcodcd rdjusheot in tho undedying corpoßÊtt ¡s¡es$rcrt and recoded dlsní¡¡rl of thc pemørl tiabiltty Bss€s$lsnt for tbe pcriod llíay 1, 200t, througþ ft¡nc 30,2fi19.

III. NNIIINGS OFFACÏT

t. Smadco, Inc. (Pcddo[€r SD oporated a cmveofoucc slorÊ h Fort S/o¡lb" Texu, dr¡¡fug the ndft poriod februry 1.2ßCÍ1, thougþ June 30,2(n9.

L Pedtionlr SI war subjectcd to a desk urdit pcrfued by the Brnins¡ Acdvtty Rcscarch Te¡m (BART) of tbc Ters¡ Cooptoller of Pr¡blic Apcounts (Comptrollc) fo¡ ths Gf,arn pcriod of lanury l, 2008, thrc¡tgb ME¡rü, 31, 20(Þ, and a¡¡sscd a tar lirbility of $23"5E1.60, conrirtingof tlr, tbo 10ft ¡t¡¡d¡¡d pco¡lty, tbÊ sdditiooål50* p€ülty, Ed accn¡cd intcrest

3, Ttc BART qam wrs prompEd by a comparisoo of Pctidmsr SIs alohol a¡d tobacco purtù¡lct for thc craln pcdod rcponod by Paltioner SIs bbsoco ¡¡d alcohol vcadors r¡ldcr IIB 11.

4. \lfholcs¡lsn and disüCbutoñ of bccr,wine mnlt liqum, cigrrc[g, dg¡¡¡, ¡¡d tobacco psoductr are rcqulred to submít elect¡ontc rcIþrür, on a nonthly basír, !o the Comptroller. Tlese elesl¡onic repffi arc rcqulred by Tc¡. Tax Codc ADD" l! LJl.Æ2" f54.212, ¡¡d 155.10Éi, which wera eriactcd rs paft of Tcx. ILB. 11, 80th Læg., RS. (2007). Tt¡ veodor records orc commonly refcrrËd to as IIB tl ¡eco¡ds.

5. ThG HB ll tobacco ¡nd nlpohol purchrscr fortho cxan paiod e¡cceded the rr,pwted tr¡ablo sslßs for tho ¡qnle ¡rcdod by $268,056 to $76,y/6. BART rclled oa tho HB l1 d¡t¡ md tho Comptoller'¡ At¡dit Divi¡ion Policy Mcmo (AP) 122 in cstimating thc asge!s¡ucnt

6. Podtion* SI did not fllc a rcqu€st furrcdetc¡ni¡stion contdting üÊ E¡NcssEGrt, conseqæatly, thc assæsraçnr bccuc finEl s¡¡[ tþç sales ud u¡o tsr dgltñquç{tcy was ccstiñcd to tho Anoruoy Oeoffal. Thc Anornoy Gcoeral filcd a l¡w¡r¡it scaking to cotlcct tbc dollqtcncy from Peddonsû SI ed Mahmor¡d Ahmd Isba @ctldorrcr l¡ba). $ea Søna¿co. Inr. v. Compnvllcr $ Puh Accorutîs,No. G-1140462CV, 2lll3 Tex. Ap¡1. tE¡(il¡ 12013 (Ten App. - A¡sdn ScBtarbcr 26,?Ãl3,no pet h.), 7 PdÍtioncrsfiled varior¡¡ cormterclains as¡l¡¡tthostato. Howover, tc trial cor¡rt dl¡ni¡¡ed PctidonÊß' counterclaim¡ frr ladr ofjruisdictiq whiù dccision Poütioncn appealcd" Thc appeals court su¡t¡i¡cd PeddCIncß' clq|m thåt thË Compfolleds di¡edivc¡

t{ 'àgË 2l o! 3O6t

t t h AP 92 Êrd AP lZt w€re in fastn¡lcs and alco concludd thrt tbË uirl court had juridiaíon over Sandco's clafrn ûat AP q¿ E¡d AP 122 wcæ i¡vrlid rule¡ md that, thcrcfo¡q thc Ei¡|, court GGd ln dtsnissi¡g thir countcrclaim. Sec 1øtfu, Incn 2013 Tcr. App. tElfIS 12013, alry7.L-22.

8. Pcdtifllr SI wa¡ audltcd by thn Comptroltcr' Tar Divisiø (St¡tr) for s¡lcs ¡¡d u¡c t¡x compliancc for thß audit pedod, 8rd ü! ar¡ditor o¡üm¡tcd thc audit dus to incompleæ ¡Ecord¡.

9. Petition¡r SI did uot respond to tte Euditodr rcqucstr for record¡. Tlo audltor l¡su€d a Notificati¡¡n of E¡timado¡ ProcedurËr for Statc T¡¡ Audit &tcd January n ,2011, odvlstng Pcdtloocr SI th¡t tha utdit mutd bo estlmatcd rsing IIB I f dils, md tbat thc AP 122 pmccù¡es would b! fuUorvcd"

10. Whcu thÊ sudltu ¡¡itisbd thc audit frsldwodc Pcütloner SI no longrr opcratcd tha couveuicocc stont Tbãcfr¡q thc ¡ttditor could uot pcrform ¡ ¡hclf tcst md instcad t¡sd thc indr¡$ry Evcrrgo marhry pcmcntage! of 118.44ft 0!d 124.ür% rcspcctivdy frr bbacco snd alcohol prchrucs sct orü in AP lZL

11. ltc u¡dltor totaled tbc tobacco a¡d atcohol pnrcbascr nrdc þ Fctidonæ SI uslng tha HB I 1 d¡r¡ for tbo rcport pcriodr Jaarrary I, 2l)0E, thmugþ Iruc 30, 2009. fts ætat slcohot snd tobasco pt¡¡shrscs wcrs r[¡nitEd up by thcir respcctivc narlnrp pcæËntryc!.

t2. lþ gtnndt¡d AP 122pmùrct-mir perccnt¡BÊ sf il% fortoba¡co sndatcoholprodncb wu rpplled to s¡dvc et estlmnted t¡nblË sslË, becmso no purch¡¡! rrcords wcæ availabla

t3. Ite audio¡ afbrdcd ¡ 5ã ¡llowqnco br spollago a¡d thsft to dcæ(dtrc n¡t estlm¡tcd t¡xable sale¡. Crdit was givro frr reporæd taxablc slle$

14. Itc ¡esulttng adjutcd tarable sales werc thco red¡rced by thp ¡nounts asscssed in the BART exam for tho rcpo¡t pcriods Januory l, 200t, thror¡É ME¡ù 31, 2ü)9 to ¡¡¡ivc ¡t the addiÉonsl ta¡sblo sales.

15. Itc addidm¡l tarable sales we¡c multtplied by thc appllcablc tårß ratcs !o detetnino tbG t¡¡¡ dnc for tbc rcport pcriods ftoo Jrnuary 1, 2008, thrcugþ h¡¡c 30 2ü)9.

16. As thcm war no HB 11 dca availablc for Éc peçto& preædingJanrar¡r 1, 2008, th€ audito¡ cttim¡tcd thÊ addition¡l ux¡ble salc¡ fot tbic pcriod by first dclcrmtning tbc avetegÊ monthly nct est¡m¡tcd t¡x¡ble salcs for tbc rqort pcrtodr lanuary L zqlq tkougþ Juo 30, 20m. Tho poct-Dccanbcr 31, 20û7, toul ¡ct rstinstpd tuablo ¡alcs of $fr2,t,443.17 wqe dfuldcd by ths l8 rEpo¡t puiodr !o a¡rlvl d a montbly averago of $40,469.06.

ls rgs 25 of 3¿16)

I t 17. Tfu additionsl ta¡¡blc sslcc for thcprc.Innuary 1, 200E, ¡Wo¡tpcúiodt we¡t c¡lculatcd by rcduchg thc averago monthly nct eilimstcd t¡¡¡blo s¡les by ths t¿r¡blc mler rcportcd to thÊ Compbollor.

18, A 5É allownnco forspoilaç ¡dth¡frwa¡ ap'plted b deterabËtbs addttion¡l t¡xsblç srlês.

19. additioral tsrr¡bl€ ¡alc¡ wrre thco multiplicd by thc applicablo t¡f, rate to Ito rc¡ultlng detcminÊ thc t¡¡ duo for pr+Isruåry 1, 2008, psil of tbc audit pcdod.

24. Pedtío¡cr lsbawas üopnsidcntof Ptaitionet SL

2t. Pctiriøcr hbr rigncd cücctr hr rcuitting salor and usc tar paymrutr drutng thc atdtt pËriod"

2?,. Paltioncr Isba wle rcrporsiblc frr dcpositing thp ¡b¡e's raler ptncccdr fton Fcbruary Tl, 2lßÍ1, thot¡¡þ Ap¡il 30, 200t'

23, Pcdtion¡r Isba w¡s reoponsiblc for doposidng tb¡ storG's sales proeds Êom Fehrt¡sry tl, 2907, th¡ouih Atril 30, 200t.

24. Pcdtioner Isba was responslblo hr ondcing tho stors'c hvørtory from Fob,n¡sry 27 , '2ûgl tbrougb Aprit 30, 2008.

2:t. Pedtioner Isba was resBoruible furp¡ynm of tho sto¡c's invcqtøfiE¡rchases from Febrnary 27,z0lJl-, th¡utgh April 3Q zfXlt.

26. Pctido¡ec Isb¡ was the pcnon crüo rcceivçd tbe monthly b¡¡k statcmøs Êoln Fcbrnrary 27,2:ßVl, tbrot¡gh Ap¡il 3O 2008.

n. Pctitioncr [¡ba'¡ rcsponsibility fc thesc ' skr cnded on ìilay l, 2008, wbm hs entcred hto an agrüÊEer[ to ¡ell thc company to hir omplo¡rccs Ya¡¡ieq Si¡m and Sstr&¡Sal¡zãr.

28. Mr. Siam asil¡Esd Esponeibility fm thesa 'a"L. ûom lvhy l, 2008, r¡ntil thc cnd of thc auditpcriod.

29. Oû Apil l,201l, thÊ Statrissucdto Pctitimcr SI aTex¡¡ Notific¡tio¡ of AudttRcsulti assessingtax, thc st¡rdard t0% pcndty, thÊ Êddiüond sflqb Êaud pcnalty, sDd accrud irtsrcst, totaling S112381.02. with S64336.t1 ¡ttribr¡¡blc to t¿r.

30. Petitionersltimdyrequeotcdrcdctcrminrdon

31 St¡ff elso issued a jcopady daccminrtim m Ma¡frh 30, æ1 1, against Petitbner Isbo, punurnt b Tax Codc 0 I 11.061 1, arscsring pmooal li¡b¡lity for tho ta¡ liability of Pctitioffi SI b¡ tho pcríod May 1. ZM, tbrougþ Juno 30, 2ffi!1.

tú ågr 26 of 3{6,

o o 32- Tho pemonat tlùiltty a¡scssmcú con¡istcd of tar, tho staod¡¡d 109å pcnalç tlrc addido¡¡l50S pcndty, aad ocuued íltËæstthrongbthc date of úl¡fic¡tioü. ThË pcrsonal ti¡biüry sssciscd agahsthddon¡r Isb¡ toteled S5,620.96, with $55,168.E7 atuibut¡blc b tsr"

l!. St¡tr rcftrrcd thc c¡se¡ to tht StEt! Officc of Adminis¡aüvc Hoarhgp for oral hcuingr" StatrisstrcdNodcer of llcring th¡t ss6¡þs¿ s ¡tstûn€ût of thp dsÞ, d'¡G' ud place of tho hedng$ a stal€ûrcut dth! ün¡rc of thc hcarings; ¡ st¡tcmcú of ths lcg¡l üüborlty rnd jruisdicdon rndcß whtch tb hcaùÞ wcro to bo held¡ I rsfGrerc! to tho putioilar section¡ of tbc stah¡tcs ¡¡d rule¡ hvolvc{ a¡d a ¡bo¡ì pl¡t¡ sl¡trrncnt of tbc m¡tten¡ ssrcrtËd.

!4. Ttc Adn¡dstrative law ludgo (ALD ordcred the cascr joincd.

35. Ito ALI coweocd thc headug m August t2"2OL3

36. 'lihc ALI ordsrcd the ¡ccord dosed on Nov@bq 12, 2013.

37. Its cor€ct ouhrp pcræút¡gÊ that thc urdimr should havc a¡pliod to thÊ tobaaco puchases wa¡ 118.ü19t, which AP lX¿ dìæcg should bc r¡s€d for ¡rcnre followlng 20û7.

38. Applyi¡rgtho coneacdmnùry p€rccûtagt to ûç tob¡cco prcbascs proùrcd cstlnâtd tobapco sal€! of $lü)"550.67 (tæcsur thc $100,90t 51 resultingfrom amartup of 118.44fr).

19. Tto applicaüon of ths corrcctcd marhp pcroEotagc to tobacco purcåasco rcdnccd tho asscssmÊnt of ta¡ fr'Dm $64,336.90 to appruùnaæly 964J05.

40. Tto orlgi¡¡l ovcrall e¡ror ratc for Pcdtioncr SPs audlt w¡s 66.459ó.

41. The ALI has rccalo¡latcd thc einr ratc using thc reù¡ccd prilc'ipal ¡mor¡nt of tar duc. Tltc ¡cc¡lo¡latcd audit cmot raic ls 66.44%, whích wa,r c¡ls¡latcd by dviding tho t¡x a¡¡esscd ($É{"30Ð by tho ¡um of thc as¡essed t¡¡ snd ¡cportd ts ($96,790.61).

rv. coNcl,rJslroNs or L.l\w

1. Itc Conptmllcr hu juisdicûion oyer this E¡üË pn¡sr¡¡trt to Te¡¡¡ Tar Codc ch. t I l.

L Ttrc Statc Offico of AdninisEadve Hearingp hrs Jruirdicttoc ovc¡ m¡ttcrs rÊlald to ths hÊtiry in th¡¡ Erttctr, including tbo autbrity to i¡¡uq ¿ proposal for dccision witb flrnrtínar of fncn nnd ennnlu¡irmr nf lnw ñrñ¡nrrrl tn T¡rqr fl¡ve+rrmcnl lrnde nh lflfl?

3. Ststr prwidcd propcr and ttmcly notlca of tho hearing purauant to Tox¡l Governmeot Code cb" 2001.

v åqll ?? ôt 346,

o o 4. Thc Compnoller i¡ u¡thodzed o usc tho bcst lnfrrmqdon waihblc to esd¡n¡ts ¡ tarpa¡rcr's liability whco rËcorù aro incouplen q r¡¡¡eliablc. Ter Tar Codo Ann 0 111.0042(d) a¡d 34 Ter. AdmirCode I 3.2t1(c).

5. Petidoncr SI mst show by a prrc,pondrrancc of thc evidcuce th¡t ths audit w¡s i¡ erm¿ 34 Tex. fi¡lml't. CodÊ $ 1.40(2XB),

6. Ttc ar¡dit of Petitioner SI wa¡ pcrfrnncd bqsed on tc best info@¡tbs evril¡ble

1, fta audím eæd in ¡ot rnhg thÊ cûrrcct p€scrûtlgo d llE.(n% in ndíng up thc tob¡cco purcha¡c¡ in order to ssrimaþ tob¡cco sal€s. ,Sea AP lüt

8. Tlc calaünttm of ¡dditiou¡l ¡r-ahlo salcs should bc rdjn$cd by u¡i¡g tbs cor¡cct narhry ¡rcsccr¡tsg€ of 118.0296 þ m¡reìrrg up tobscco pt¡fch¡¡G!.

9. Tto Comptollcr is autho¡ized m impose au addltlon¡l 50S penalty lf thc failuc to pay tsr or filc a re¡lort urüer duo was a rc¡r¡lt of fru¡d or m lntent to ovadc thc ta¡. Tcr T¡¡ CodGAn¡L ¡ 111.061(b).

10. Statrbesn the bu¡dco of pmof ùo sbowby clear andcorll¡cing cvldencc that Petitioncr SI acted with tntcst to cvadô ta¡. 34 Tcr. Admin Codo S 1.40(lXB).

11. Petitlmcr Sl hsd thg intcut to er¡adc tar r€qrdrcd by Tcx. Tar Codc A¡n ¡ 1 t 1.061(bX1), but ouly for thc ¡tpüt pcrtods fcbrtnry l,2ûïl,th¡or¡gh April 30, 200t.

t2. Tto rccorú ætabllshß! by clca¡ a¡d co¡vlncing wldcoæ th¡t tho grosr undccepødnþ of t¡¡was due to thc tntcntto cradc tax and that thc impoaition of thÉ additiud 50ft pcn¡lty w¡¡ wsr¡¡ted, hrt ody br thc rr?oû pGriods February 1,20(Xl. througþ April 30, 2008. Ter. Tsr CodcA¡n ü lll.06fGxl).

13. Ite additton¡l50fr poualty ehouldbÊddotcd forthe rçøtperlods ìil¡y 1,2008, lh¡ouib Junc 30,20(Xl.

14. Itc a¡scssucot agaiut Petitlon¡r SI sttould bo afñnncd exccpt fur tho adjutncntr rccommcudcdinConduslons of l¡rp Nos. E td 13.

15. ! Tex¡s Tar Codo lt 1.0611 hnpo¡e¡ pcffionat li¡bllity on an officcr, raFnnSGrr or direú:toÌ of a corpomdon who "a,s ao officcr, qrln¡lcEr di¡eaor, or po¡ütGfi took a¡ astioo or participrrcd tn a fraduhnt schcm¡ or fra¡¡dulent plrn to w¡d¿ tho pa¡mcnt of tarer." Tho pusonal Uability is for t¡xe¡, pcaaltics, irclrdiry an addition¡l 509å ponnlty and intcrest th¡t a¡o duo from thc coaporatiou Ten Tar Cods Atr¡. !1 U.06U(e).

16. Acdons th¡t i¡dic¡¡e ¡ fr¡udulcu sc,heuo or f¡¡udr¡lcot plan to ovado tho payment of ta¡cc i¡cludc frUng or caruing b bo ñlo4 a ftar¡duld tsr Éü¡r! or ¡Ëpott wlth tho Conpuoller m beh¡lf of ths brrrhress cotity, or ñling, or cauoing o bo filed, I tar ¡Ghrm

It rÀçt€ 28 of, 3¿l¡,

o o or rËPo¡t with tbo CoEFüollGr on bchalf of thc br¡slnpss cndty tbat cont¡in¡ an ùneuttonallyfalss st¡tcmmtth¡trcsultr inthc ¿mor¡¡t of the t¡rdræ exccediag thc ruuntoft¡rrcpqtdbyZS9É ormsc. Te¡. TqrcodcArD" Í 111.0611(b)(l), (3). 17. Stafre¡tabtisbcd th¡t Petidoncr bba war persmally liablc r¡nder Tcx¡s Tax Cdc | 1U.061f for ùc ûssqßEÊtrt mdo agahst Peido¡¡r SI, but ody fm thc rcport p€dods Ùfay 1,20(n, û¡ougb April 30, Zl0t.

18. Tbc pccuonal llsblllty üictsrt!úû aggiûtPetitioncß Isb¡ for npocpedods ilfny 1,200t, thmugþ Juc 30, 2009, ¡ho¡ld bo dolctcd.

19, Th¡ ¡ssccsmcnt agalnst Pedtiooer l¡ba shor¡ld bc uphel4 eubjcct !o rhp dcterim recom¡cudcd l¡ Couclusloq of I¿w No l8 and b thc adþtncot¡s ¡lsrmrledlng coqtcatc Îs¡ stsÊssücnt agÊinot Pctldoncr SI rccommooded in Conclu¡iou of Lcw No. 8.

¡f, râgË 29 ot 3r¡51

o o HearlngNo& 106rûf5 snd 1üt006

OADER, OF THE COMPI.ROLT,ER

Ou Ilcccmbcr l?,2Ûll,thc Stato Officc of Adoi¡i¡E¡tivolleuingr' Adninistntiv€ Iåw Iudæ (ALf), PcÈt B¡ookr, iosucd a Pnopos¡l fc Dcdsim in tho above'¡ef€ûEoccd m¡tH¡ to whlchTa¡ Divi¡ionfiledErcsptim¡ onDcccmbcr 17,2013. fbConpuollcrh¡¡ ætsidc¡cd thc Excoptions sûd tbo ALI's æcor"'lcodation lcüGtr fto Comptmllcr f¡s dctñn¡Bcd thc thc ALI'¡ hoposal for Dccision, ef,ccpt for minfi chqngÊo b MGGt tJpogrôpbical or clcrical snots' should bo adopEd withq¡t ch¡[gs üd thís Decislm npreseoE thc nûíng thctcon

Thc abwc Dcci¡ion ¡csultlng i¡ Petit¡oüc(s' ll¡btlltiæ as sct or¡t l¡, Anachnoat¡ A, whlch ar! irco¡pcstdby ¡¡fe¡cncq lr appmræd s¡d sdspbd in all upcctr, ThÊ Deciston bccoucr fusl tw€uty dayr afrer thc d¡Ë Faiüoscrs rcccivo nodcc of thiç l}cdrlon, and thË tot¡l sus of ths ts4 pg'rnltt, Erd l¡tcrcst anormtr is dus and peyablc withh hflcoty dayr thacafrcr. If rue.h sum l¡ not paid withi¡ rucb timo, an additim¡l pcoalty of tco poccnt of tho tarer ú¡G wíll accrilqqdintäcrtwillcmti¡rætoaccnro' Ifoithcpartyde¡i¡e¡¡rehcsrin&thatpertymust filc ¡ modo¡ fu ¡chcr¡ng whicü El¡rt ctlt! tbo grouud¡ fü fiücãrhg, no latu th"" twcuty dayr affcr tho duo Faitlono¡¡ rccçivo notlco of ihl¡ Dcci¡ion Nodcc of thi¡ Deci¡ion ic prtsumcd to oaq¡ron üo &td dryafrcr ttc.lajg of thl. H¡lo¡.

SisrGd qrr rhii JËh, of lr¡¡s 2014.

ST,TSAN COMBS¡ Ter¡¡ Corytollcr of Rtblic fi¡ser¡ntr

bp 7 -mnf'Pi

Compüollcß

ru ?sg€ 30 of 3461

Þ739 (Rev I -9619) I o TEXAS NOT1RCAT1ON OF HEARINGS RESULTS -AtlachmentA ETATEIT¡ENT DATE Junc 17, 2014

Ta:çeyer Number Audlt Pedod Headng Number 32014146158 u1t07 THRU 8ßm0 1(F815 Typa ofTar Llmltad Salæ, Edss, and Use FIGURESWERE AMENOED

STATE LOCAL TOTAL TÆ( $¡t8,876.09 s15,576.0r¿ $84,2õ3.31 FEI.¿ALTY 18,768.89 I,m6.07 u,n4,98 ¡ NTEREST THRU STATEMENT DATE 17.797.n 4.41.!,9* lE.rqsj[ TOTAL OUEAS OF ÍITATEMENT OATE 981,23it.85 $2õ,994.e3 t107,2ãt.¡tE n$¡Lqflf9% Penal$ g per the Proposel lbr Oeclelon. InÞrpd v¡lll conünua to accrue at I Z.4B psr d€y aþ¡6117114 thmugh lhc dab of paymenl H1,.9

lj99q p9qÊlly.qlll. ba assss¡ed on tax süll duc 43 dayc after lhe Older of the Comptouer (TEX TÆ( CODE ANN. SEe. 111.008'l (c¡.

For payment lnhrmaüon call 1-800-531-6441, erû 3€800 bü free naüonrrtdg or celt siz¡t8lgg0o. paye]¡le b STATE COMFÍROLLER and mall to Compfollcr of Pubtb Accounts, i 11 E [.ake.Vqur thegk 17',r Sbeet Autün, Texas 787744100.

' Per annurn lntemst ratot rra aubleotto chenge on Janurry ld of e¡ch yrae For rnon lnteruet nto lnlbrmatlon, refer b Publlcetlon 98.00¿, crlll1'{,77.44l1-Zttrl, w rslof to htto:lrutWw.wlndow.¡t¡ûe,t¡.prne,xl¡lo/tnt ile.html

(CutAnd Rct¡r¡r Bottom lb¡tlon ltlirh P¡y,mcnr)

0G,z¡m TË'(AS NOTIFICATION OF HEARING RESULTS¡ Hearlng Nunbor - AttactrmentA 1ffi816 STATEÍTIENT DATE June 17.2014

Type ofTar Llmlted Sales, E¡¡clss, ald Use Taxpayr Name E Malllng Address SANADCO,INC. 3801 E ROSEI¡ALE Sr EflEl? tr¡/tEl'FL¡ l"V¡\¡ lU\rl\l l l Tt lt\ tQa,lÊ tl,ll,r¡- .rqt t l tù¡r3 Arnount qfYour Payment

.PMD- lcode laxpayer Number 'Perlod 'Audlt 'Twc 'StaÞ Amount .Type'Ld Amou¡rt 260¡10 32014146160 0s00 001 02 81232.86 04 26994.63 (Påg€ 31 of 297i

qÞ739 o o (Hev 9 -9€/91

TEXAS NOTIFICATION OF HEARINGS RESULTS . Attschmenl A STATEMENT DATE

Tarçayer Number Pedod Headng Number æ LfiiãGütIBT{1ã5 W T¡rye olTar I s"A_l-Es. ExcsE.AND u_gF_.. _.""_." " -.:l F rcu n Es WERE [:!EEEñ_-:¡fl CTÄTtr I ñôÂt TôTÀ¡ TÆ( ;ú610fõ!3ð PFNÂI TY :i¡a.UUOiW INTFFIFST THFIT I STÀTtrMFÀfT NATtr ¡t¡!J¡ll,t,:

TOTAL DUE AS OF STATEMEI.IT DATE Thl¡ notlar rullcotr tño lot¡l smoutrt du] Pa¡n.nla mado by Sanadcq lno. wlll b cr¡dlt¡d wtrcr thcy Þccom¡ ¡v¡llrblr You wlll nood lo conlacl Fwlnu. A¡Gounüng/8uccæror Llablllty d (t001 6t1-641t or locally rt (5t4 4eg¡¡æ fbr queatlonr on updñ rt¡l¡lnontt

(lntereelwlllcontln¡etoaccruoÊtf,!!i!þperdayafter|@|thrcughthgdaleolpaymenl..) A 10% penalty wlll be assessed on tar stlll due ¡lft dep efter thË Older ol the Comptrollor (IEX TÆ( CODE ANN, SEc.111.0081 (c).

For paymenl lnlormellon call 1 -80G631.5441 . e:û. 3-3900 toll frse nallonwlde, or call 512/46$3900.

Make your check payable to STATE COMPTROLLEH and mall to Comptrcller of Publlc Accounts, 111 E. 1?0' Slrs€t, Austln, Texas 7077+0100.

Ò Por annum lntsrltl taþr rrr cubtcct lo changc on January 1ú of cacNr ycea For more lnlorud fate lnlonnrtlon, rl'lor lo Publlc¡tlon 9811Oq c¡¡ll14774f-283r1, or rebr to hþ://wwrv.wlndsw,sleto.bç usltÐd nf oilnLret€. html

(CutAnd Rctum Bo$oE PoÍlon With Paymeat)

*2N TH(AS} NOTIFICATION OF HEARING BESULTS Hearlng Number - Anachm€nt A STATEMENT DATE "T,Lf-o?,oqotl l$lË?!r?gruK:5;:l Twe ol Tar :Il:;rä,q Tarpayer Name & Malllng AddEEs I snms, EXcTSEAND usE :I [\inHruöt$ÃF" iSBAþ':;.ir,":ñ1 Amount of Your Payment r i]¿t, lil oqii evtø

'PMD- 'Tcode 'Taroâver Number 'Perlod 'Audll 'Ty?e 'Slate Amount 'Type 'Local Amount f@-i::&4iir.rlo51:t9j:iLlaqgl oog vz .:l$9Þ,s-eo,riíö5'tl 04 -. 0¡2,7.q9,nril Tab G

Appellants’ Post-Submission Letter Brief Sanadco I, No. 03-11-00462-CV Third Court of Appeals.

Appellees’ Responsive Brief page 7 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV ProDoc Fäxservice Page 5 of 5

tøwffia af Mail: P.O, Box 170633; AtlingÉo+ TX 26003-0639

ffi Sæu¿stû, Xn6#6Mt (817) 751*715s -(2i4) 628-0e77 *(512) 6s2-62æ TollFree: (800) 969-5023*Fax: (866) 974-0164

3113t2012

Hon, Jeffrey D, Kyle, Clerk Third Court of Appeals P0 Box L2547 Austin TX7871,I

RBI No, 03-11.00462-CV; In re Sanadco Inc., and Mahmaud A. Isba; Panell Justices Puryear, Henson and Goodwin; Post-Submlssion Letter Brief

To the Honorable Clerk of the Court of Appeals:

Enclosed is the letter brÍef approved for filing by the court on February 24,Z}LZ, please accèpt nry apologies for the delay in filing this documerlt, å$ I wâs not måde aware of the necessity of flling e separete copy until recently,

Respectfully submitted,

Løw Offícø oJsatnuef ,Í. Jøcf,uson

P,CI. Box 170633 Arlington, TX7â017 Tel: (817) 751-7155 Fax: (866) 374-0164 jackson law@hotmail,com

$amuel T, Jackson State Bar No, 10495700 Attorney for Taxpayer ProDoc FaxService Page 2 of l-0

ßfrstAffict oÍ Mail: P.O. Box 170633; Arlington, TX 760t3-0633 jttfi¡on ffi' Særuatú, (8r7) 751-7155 - (2r4) 628-0977 - (512) 692-6260 Toll Free: (800) 969-5023*Fax: (866) 374-0t64

3/13/20L2

Hon, Jeffrey D, KylÉ, Clerk Third Court of Appeals P0 Box L2547 Ar.rstln TY,787LL

RE No.03-11,00462.CV; In re Sanadco Inc., and Mahmaud A.lsba; Paneh Justices Puryear, Henson and Çoodwin; Post.Submission Letter Brief

To the Honorable Court ofAppoals Panelr This letter brief is ín response to a question raised by the Honorable f ustice Puryear during the submission of this case on fanuary LL,20LZ in which he inquired of the effect the finality of the administrative hearing has on the rights of Appellants, Sanadco Inc., and Mahmaud Isba [hereinafter, "Sânâdco"J, as well âs thè class claimants, to raise defenses and counterclaims in this cause, Fackground The Comptroller issued a Texas Notiftcatían af Exam Resülts to Sanadco, Inc. on Juiy Z, 20L0, assessing âdditiolrâl taxes due of $23, 593,60, including täxÊs, penâlties ånd interest through the date of the notice. Sanadco was advised that this assessrnent woulcl beconre finalon luly 22,2009, "unless you request a redetermination hearing by this date," Sanadco was further aclvised that this assessment was not clue to an audit but was an estimâtion of taxes due basecl on ân estimâte cônducted as a BART HB ll Distributor Data Assignment based on third-party information. Sanadco ciicl not request a redetermination hearing ând thê assessment became final on luly 22,2009, On )uly 6, 2010, the Office of the Attorney General filed suit against Sanaclco pursuâr1t to Tax Code $ 1.1L.01"01 by which he is authorized to recover delinquent tâxes on

Ig i t t.oto rAX. suitto R.ecovcr Taxcs (a) The âttoftoy general shall bru:g suit in the narne of the stâfo ,0 recover delt4uent state ta)

behalf of the state by filing suit in Travis County, It should be nored, howevÊr, thât eâch class complaínant was currently engaged in contested case proceedings seeking a final decision from the Conptroller, ârìd no final determínation had been nrade regarding rhe taxes due. filed its suit in avoidance of the state's ättempt to collect the delinquent Sanaclco taxes, pqrsuälltto Tax Code 5 111,101Z2 ou September 23, 201,0 and im First Amended Answer, alleging affirmative defenses and class action cross.clairns on January lZ, Z}l11 Appellants filed a sworn written denial specifically identifying the taxes, penalties, and interest they asserted were not due and the amounts of tax, penalties, ancl interest that were llot due as required by Tax Code $ 111,013 [b)3, On March 30, 20LL, the Comptroller notifiecl Mahmaud Isba that he was being helcl personally liable for Sanadco's tax liabilify for the period May 30, 2007 through June 80, 2009 in the amount of 995,620.96, significantly more than sanadco,s liability, ancl without subjecting this determination to any contestecl administrative proceeding or other adm inistrative process.

Issues Presented

[1] Þld the flnal ludgment ln the admlnlstratlve proceedlng preclude Sanadco from raising affirmative defenses or counter-clairns in the tax recovery proceedlngs?

Defendants have challenged the valldity of the audit and the constitutionality of the statutes relevant to the audit as well as the Comptroller's authority to concluct the audit by the chosÈn nethodology as well as othÊr ultra vires cônduct, In addition, Defendants have raised a challenge to the validity of rules implicated in the conducr of the audi! alleging that the comptroller failed to properly adopr rhem in âccôrdânce wlth rhe APA. Sanadco's right to raise these claims ancl defenses in District Court despite the Comptroìler's unappealed final decision is unequivocal. lexas v, Crockett,257 S.W,3d 412, 41,4 [Tex,App,-Corpus Christi 2008J addressÈs the State's posture when it sues to recover damages as in this suit to recover clelinquent taxes:

(c) Venuo for ønd jwiscliction of a zuit arising under this section is exclusively confenecl upon the distriol courts of Travis County. (d) ThE state is entitlecl to interest at the rate of l0 percont å yeâr on the amount of a juclgment for the ståto begiruring on the day the jurlgrnent is sþned anrl oncbng on tho day the juclgmont is satisfied,

? ç t t i.OtOZ TAX: Sirir Challenging Collection Action Venue fo¡ and jwisdiction of a suit that challenges or is for the puri:ose of evoiding n cornptroller coliection nction or st¿,te tax lien in any manner is e>

3 g tt t.Ott TAX Evidencet TaxClaims (b) The defendsnt msy not deny er claim for taxes, pennlties, or interest unlçss the defendant timely files B swom written deni$l thst specifically identifies the texes, penalties, and intcrest the defendant flsËeftô are not due and the nmounts of tax, pennlties, nnd interest thnt a¡s not due,

-2-ll,agcr Lettø Briof; In re Sanadco Inc,, and Malunaud A Isba; No, 03-i1-00 462-Cy ProDoc FaxService Page 4 of 10

"ln Reata constr. corp. v. cìty of Dallas L9T s.w.3d z7 L,274 (Tex. 2006), rhe Texas Supreme Court iterated tltat when a governnêntâl entity files a lawsuit for damages against a private p¡rrty, it is not lrnmune from suit for claims against it that are "germane to, cottnected with, and properly defensive t0" clairns that thÈ entity âsserts, except for the arnounts that exceecl the amounts necessary to offset the governmental entity's claim. Id. at 37 6-77,In Reata, thÊ cout t explained:

When the govêrnmental entity interJects itself into or chooses to êngage in litigation to assert affirmative claims for monetary danrageÐ the entity will presunrably have made a decision to expend rêsourcês to pay litigation costs, , , , In thís situation, we believe that it would be fundamentally unfair to allow e governmental entity to assert affirmative claims against a party while claiming it had immunity as to the party's claims against it, Id, at375-76."

The Defendants' claims unquestionably meet these criteria, and therefore mey nÕt be dismlssed on immunity grounds ând âre properly before the District court, Further, in suits filed pursuant to Tex, Tax Code Ann. $1Lt,01-0, officers and directors âre entitled to a full and complete hearlng on rheir tax liability in district court, .5e¿ Tex. Tax Code Ann. $ L1-L,0L0 (West 2008) [authorizlng ettorney general to file suit to recovertaxes), Thecaseistrieddenovo. Greenev,State,324S,W.3d 276,288 (Tex,App.- Austln 2010, no pet,l [111,010 allows for a de novo review of the pârty's tax liability), Herrera v. State, No, 03.01-0010L-CV, 2002WL L85476, at *L n. 4,2002 Tex.App..-Austin Feb' 7, 2002, no pet,J lnot designated for publication) [identifying suit under sÊction 1LL,0L0 as "de novo action by the State to collect dellnquent tax"), The Adninistrative Procedure Act [APA) provides that wlren "the mânner of review authorized by law for the decision in a contested case .., is by trial de novo, the reviewing court shall ffy each issue of fact and law ,,, as though there had not been an intervening agency action or clecision." Tex, Gov't Code Ann. $ 2001.173(a) fWest 2000), A de novo hearing has been defined âs "a rlew and independent action in which the whole case is gone into as if no trial whatever had been hacl in the court below." Trial de novo is not an "appeal", but is a new and independent action. Key Western Life Ins. Co. v. State Bd. of Ins., 350 S,W,zd 839,846 [Tex, 1961), The sine quâ non of a de novo trial is the nullificatiotl of the judgment or orcler of the first tribunal and a retriâl of the issues on whlch the judgment or order was founded, When jurisdiction of the second tribunal attaches, the judgment or order of the first tribunal is not merely suspended, but is nullified, Iexas Dept, of Public Safety v, Banks Transp, Co,, 417 S,W,Zd 593, (Tex,Sup. 1968); Sauthern Canal Co, v. State Bd, afWater Engineers, SlB S,W,2d 619; 159 Tex, 227 [Tex, 1.958), Accordingly, "res judicata" and "final Judgment" are inapplicable in de novo proceeclings because the original aclministrative order that is the subject of appeal is nullified in a de novo proceeding, State Bd, of Ins, v, Republic Nat'l lns, Co,,384 S.W.zd 369,372 [Tex.Civ,App. - Austin 1964, writ refd n.r,e,), Thus, each of the issues raised in the cause before the District Court may be addressed by the court without consideration 0f the fìnality of the adnrinistrative judgments, -3-lP¡rr,'.- Letter Bricf; In ro Sanadco lnc,, and \4alunaud A Isba; No, 03-11-00 462-CV ProDoc Faxservice Pâge 5 of t0

[Z] Dltl the flnal ludgment ln the admlnlstratlve proceedlng prectude the class litigants frorn raising affirnrative defenses or counter'claims not addressed in the admlnlstratlve prücee dlngs?

Aside from the Sanadco audit, the remaining class issues are independent of the contested case proceedings in the administrative process. Each claim was filed before the administrative process had been c0mpleted, alleging ultra vires conducr and unconstitutionality of statutes under the UDIA, and invalidity of agency rules under the APA-all of which would render the respective audits voi'd, The filing of these complain$ prior to completion of the administrative process has no effect on the court's jurisdiction as exhaustíon was not requirecl because these claims are not within the Comptroller's exclusive jurisdictlon, and independently invoked the Dishict Court's jurisdiction, thereby perrnitting the court to abate its proceedings pending the exhaustlon of admlnistratlve remêdies, LÌndig v. Johnson CiÐl, 03-08-00574-cV (Tex,App,-Austin l0-21-200g); Marblø Falls Independent school Dìsttiôt v, scott, 275 s,w.3d 558 (Tex. App.-Ausrin 200g, pet, denied). A UD)A clainr is sui generis and, âll otlrer things being equal, the distríct coutt's subject-matter jurisdiction over it exists independently of any administrative remedies. Texas Llquor contrll Bd, v, canyon creek Land corp,,456 s,w,zd Bg1, B9s [Tex, 1g70); cobb v. Harrington,I44 Tex. 360, L90 S.W,zd 709,713 (1945), . If a gôvÊrnmental ageucy acts beyond its statutory powêrs, or ultra vires, lts actions are void ancl may be challenged at any time, Tn-Cify Fresh Water Supply Disr, iVo. 2 of Harris Cnty, v, Mønn,142 S,W,Zd 945,946,947 [Tex, 1940); see also Mobil 0il Corp, v, Matagorda County Drainage Dist, No, 3, 597 S,W.zd 910, 913 [Tex, 1980) [holding that drainage district's attempt to ennex Iancts was beyond its statutory power and therefore null). If a governmental authorityrs actions are voicl, the actions can be challenged by affectecl persons. See City of Irv:ing v. Callaway,363 S.W.U d 832, 834 [Tex.Civ.App..Dallas 1962, writ refld n,r,e,J [quo warranto proceeding necessary where åctions are voidable, but quo warranto proceeding not necessary and claim may be brought by private citizens affected by action when annexation ordinance attacked on grounds alleging âction void), Bexør Metra. Water v, Cíty af Bulverde,l"56 S.W,3d 79,88 (Tex,App, -Anstin 2005). The general rule in Texas is that courts do not irrterfere with the statutorily conferrecl dutles and functÍons of an aclministrative agency, Westheimer Indep, Sch. Dist- v. Êrockette, 567 S,W,zd 780, 7BS [Tex. 1978), However, courts mây inrervene in aclministrative proceedings when an agency exercises authority beyond its statutorily conferred powers, Id. See also City of Houston v. Williams, gg S.W,3d 709,717 [Tex.App,- Houstou [14th Dist,] 2003, no pet,), "ln such a case, the purposês underlying the exhaustion of renredies rule are not applicable, judicial and admini$trâtive efficacies ârê n0t served, and agency polices and expertise is irrelevant if thê agêncy's final action will be a nullity," MAG-T, L.P,,L61, S.W.3d at625. Further, the doctrine has no application where the legal question is one of whether a stalute is constitutional, because aclministrative agencies have no power to deterrnine the cônstitutionality of statutes, Id.; see Texas Educ, Agency v, Cypress-Fairbanks lndep, Sch, Dist,, -4-ll:tag* Lçttor Brief;In re Sanadco hrc,, and Mahmaud À Isba;No, 03-i1-00462-Qy ProDoc FaxService Page I of 5

830 S'W'Zd BB,9A'91. (Tex. L992),Accorclingly, there is no sound reason for forcing a litigant through the adnlinistrâdvê process when ln good fâirh he is advancirrg a zubstautial complaint that the statute that he is charged with violating is unconstitutional. Grounds, 707 S'W'2d ât 892. In other wôrds, "Whên the only issue raised is consritutionally of rhe statute, a court may decide it without waltlng for an adminísffatíve proce.eding." 4 K. Davis, Administratìve Law Treqtise 435 (Znd Ed, 1983) [ernphasis addedJ; see Cent,þower & Light Ca, v, Sharp,960 S.W,Zd 6l-7, 618 (Tex, t_997). Witlt respect to the challenge of thè agency rules, the administr.ative proceedings present no bârriêr to the District Court's jurisdiction because the Comptroller has deternrined that she has no Jurisdictton over thê issue and declined to âddress ir, Comptroller's Decision Nos, 103,683; 103,961 [2011) and104,277 (2012). Additionally, "[t]he APA proviclei two modes of iudicial review case decisions aud thÈ othêr for rules - one for contested that âre significantly differÊnr, The only time limitation on iudlcial review of a rule -is thar a proceeding to contest compliance with certain procedural requirements must be initiated wfthin two yêars of the rule's effective date, Otherwise, judicial review of a rule may be sought at any time, .,. The APA does not restrict thê scopê of juclicial review of rules but says only: The validity or applicability of a rule . , . may be determinecl in an action for declaratory judgment if it is alleged that the rutre or its threatênÊd applicåtion interferes with or lmpairs, or threâtens to interfere with or impair, a legal right or privilege of the plaintiff. No standard of review is prescribed. The statltte adds that plaintÍff need not have challenged the rule before the agency, fudicial review of rules is thus largely unlimited in time and scope," Rdilrodd Comm'n v, WBD )il E¿ Gas Co.104 S.W,3d 69,75 [Tex.2003).

t3). Is the comptroller authorized to estimate audits under Tax code $111.0042?

The Appellants have briefed and argued its contention rhâr the Comprroller is not authorizecl to estÍmate aurllts performerl pursuant to $ ttt,O04Z. At oral argumenf, Appellants cited two stâtutes establishing the circumsrånces undÊr which rhe Cotnptroller is authorized to estimate audits which were not included in the briefs. Tex. Tax Code Ann, $ 1-51.501-4 directs the cletermination of taxes clue when the taxpayer has filecl a sales tax report, It instt:ucts tlte Comptroller to issue a determination under 5111.00S which åuthorizes a determination under $ 111,0042 which only authorizes detailed and sample and projection audits, The only circumstance under which the Comptroller is aurhorized to estimate an audit is when the taxpayer fails to file a report. Tex. Tax, Code Ann, $ 151,503s,

45 t S LSOI TAX, Dete¡minotion Afrer the Filing of a Report If a person hæ fileci a tax report, thn comptroilcr may issue a clefroicncy detcrmination uncler Section I I i .008 of thig ccdç,

' 5 1Sl,¡03 TAX, Determinstion if No Report Filed (o) If n per,ron fails to file B report, the com¡rtroller shali estimste the amount of receipts of the person subject to the sales to4 ths smount oftotal sales prices oftaxnble items sold, bnsed, or rcntçd by the person to nnother for storage,

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The statute provides, in pertinent part, "lf a person fails to file a repor!, the cornptroller shall estimate the âmount rf rècÊipts of the person subject to the sâles tâx , , , ,,, By specifying failure to file a report under whidr estimation is permitted, the Legislature in effêct êxplêssecl its intention to exclurlê all other circumstances, It is a genêrâl rule of stetutory construction that the express rnention or enumeretion of one person or thing or cÖnsêquênce is tantamount to ân êxpress excluslon of all others , Foshee ReflnÍng Co, v, State et q1.,73 S,W,Zd 1098, 1-100, The nraxim, Expressio unius est excìusio alterius [the narning of one thing excludes ânother) is applicable here, It has often been applied in determining the powers which have been or have not been delegated by the Legislature to administrative boards, commissions, licensÍng authorities ancl others. CommercÍal Standard Ins, Co. v. Board of Ins. commissioners, 34 s,w.2d 343 (Tex,civ,App.); Foshee Refining co. v, state, 73 s.w,zd 1099, 1L00 [Tex,civ'App,); state v, Mapel, 61 s,w,zd L49, Lsz [Tex,civ,App,]; srate v, Mauritz- Wells Co,, 141 Tex. 634, L75 S,W.Zd 28B; Ex parte Halsted,, LAT Tex,Crim. R., t_BZ S,W.Zd 479,484; Harris coung v, crooker, 1"L2 Tex, 450,248 s,w,6s2,6s5; Hunrress v, state, BB 5,w.2d 630 643 (Tex.civ,App.); Mccamey v. Hollisrer oil co., Tex.civ.App., 241 s.w, 689 [aff, by ].15 Tex, 49,27+ S,W,562); Clarkv, Briscoe lrr, Co,, Z00 S,W,Zd 67q,682, Accordlngly, the Legislature has expressþ excluded cases in which a sales tax report has been from an estimatêd auclit, and this court should so hold,

Conclusion

It is therefore apparent that the District Court m¡¡sf permit Sanarlco to pursue its claims and defenses in this proceeding because Reata requires it since tlìê StarÊ has brought its action seeking the recovery of damages, Because the standartì of review is cle novt, the District C0urt proceeding is ä nêw and independent åction, and the original aclministrative order that is the subject of appeal is nullified, Accordingly, there is no final judgntent upon which to base a judgnrent of res judicata or orhÊrwise conflict with the Di strict Court's jurisdiction. The independent claims raised by the class claimanm arspursuÊd under the UD)A or Gov't Code $ 2001,03B by which the District Court obtains jurisdiction outside the purview of the administrative contested case proceeding. Whether or not the aclministrative order ostensibly resolved the issue, the District Court would proceed de novo âs though no Judgment ltad been entered, The ultra vires clainrs prèsume tlìât the state agency acted

or consumption without the pâyrnônt of the use tax tn a retailer for each period or the totâi period for which the person feriled to report es required by this chapter, (b) The estimate require cl by Subsection (a) of this section may be made on any information avaiìable to the comptroiler, (o) On thn basis of thÊ estimatc, the comptroller shail oompute ancl determinc the amow:t requlcd to be paid to thr stete for each period, (d) The comptroller shell add to the determirurtion an nmount equel to l0 percent pf the smount computed under Subsection (c) of this section ns tr penelty,

-6-lPar¡* Letter Brief; In re Sanadco Inc., and ivlahmaud A Isba; No. 03-I1-00462-CV ProDoc FaxService Page 3 of 5

outslde its statutory authority, thereby invaliclating the audlts, which may be challenged independent of the adnrinistrative proceedings under thÊ UDJA, Likewise, the rules challenges may be pursuecl inclepenclent of the administrative procÊedlngs beøuse the Cotnpffoller presumed.thât it did not have jurisclicrion and therefore refused to rule on the issue, The Dlstrict Court takes jurisclictton, therefore, without the indicía of an administrative ruling pursuârlr ro 2001,098, uninhibired by restrictions of neither time nor scope.

Respectfully sl¿bmittecl"

Law Affice of SønuefÍ, Jacñçon

P.O. Box 770633 Arlingtorç 'IX76OL7 Tet (81/) 751-7155 Fax: (866)374-0164 j adssonlaw@hobnail,com

$amuelT. Jaikson State Bar No. 10495700 Attorney for Relat¡rrs

ccl Jack Hohengarten, Assistant Attor.ney General

-7-lllaqr: Lette,r Briof; In rs Sanadco Inc,, and M¿hmaud A lsba; No, 03-li-00 462-CV ProDoc FaxService Page 4 of 5

Dutside fts stahrtory-authority, thereby lnvalidating the audi$, which may bê chalienged independent of the admtnlshative proceedlngs under the UDT4" Llkewfsq the rules challenges may be pursued. lndependent of the administrative proceedtngs Ïecause tJre Comptroller presumed that it dld not have jurfsdfction and therefore refused to rule on the issue. The Dish'ict Court takes jurisdi'rtion, therefore, without the indîcia of an admjnistrative ruling pursuant to 2001.088, uninhibited by restrictiorus of neither time nor scope,

Ræp ætf uJIy subanitte d,

tøw We ofsømuøttî, Ja.cftgon

P.O,Box170619 Arlington, TX76017 TeL (817) 7s1-715s rax (866) 37+0L& jacke onlau@holmailcom

T. Jadcson State Bar N0.10495700 Attomeyfor Relato¡e

cc: JacJ< Hohengarten, Aooretant Atinmey Gcneral

-7-lPage Letter Brief; In ro Sanadco I¡ç,, süd Mahmaud A. Iabq Nq, 03.i i-00 462-CV Tab H

State Officials’ Response to Appellants’ Post-Submission Brief Sanadco I, No. 03-11-00462-CV Third Court of Appeals.

Appellees’ Responsive Brief page 8 Sanadco v. Glenn Hegar, et al., 03-14-00771-CV NO. 03-11-00462-CV

fin tÍlt @ourt of $pseuts tor tbe (trbtrù luùici¡t Dístrír Hagtin, U,exug

S¿rr{anco INc., L Tnx¿,s Conpon¡TroN, ¡,xu Manuoun A. IsB.L, ilxl¡.M¡,Hn¿loun Anunn ABursna, N rcl ¡Mmn IsBA., INntvlnu^l.Ll,v, 4ppellants,

V

SusaN Comnsr l¡¡ntvrnu¡,Ll,y, AND IN HER Orrrcul, Clplcrtv ¡,s ConnprnollERor Punr,lc Accouxrs oF THE Sr¿rB or Tnx¡,s; ar.¡n Gnnc AnnorrrN Hrs Orntcr,ll C¡,pacrrv, ETAL., Appellees.

On Appeal from the 98th Judicial District Court of Travis County, Texas Trial Court Cause No. D-l-GV-10-000902; The Honorable Tim Sulak, Judge Presiding

STATE OFF'ICIALS' RESPONSE TO APPELLANTS' POST-SUBMISSION BRIEF'

GREG ABBOTT JACK HOHENGARTEN Attorney General of Texas Assistant Attorney General Financial and Tax Litigation Division DANIEL T. IIODGE State Bar No. 09812200 First Assistant Attorney General P.O. Box 12548 Austin, Texas 7 87 ll-2548 DAVID C. MATTAX Tel: (512) 47s-3503 Deputy Attorney General for Defense Litigation Fax: (512) 477-2348 j ack. hohen garten@oag. state.tx. us JEFF M. GRAHAM Counselfor Appellees Chief, Financial and T ax Litigation TABLE OF CONTENTS

PAGE

TABLE OF CONTENTS .....11

INDEX OF AUTHORITIES

I. SUMMARY OF ARGUMENT 2

il. ARGUMENTS AND AUTHORITIES 2

A. The State's flrling suit against Sanadco for tax collection waives sovereign immunity only for def'ensive counterclaims operating as an offset 2

B The waiver of immunity in APA section 2001.171 does not apply, because the legislature has set out a specializedprocedure for tax protest suits 4

C The ulha vires claim relating to Tax Code section I I 1.0042 and HB 11 was disposed of by summary judgment and is notbefore this court; alternatively, the Cornptroller did not exceed her statutory authorþ 7

CONCLUSION ...10 CERTIFICATE OF SERVICE 1l

ll INDEX OF AUTHORITIES

STATE CASES PAGE

Central Power & Light Co. v. Sharp, 919 S.W.2d 485 (Tex. App.-Austin 1996, writ denied) 5

City of El Paso v. Heínrich, 284 S.W.3d 366 (Tex. 2009) 4,9

Combs v. Chevrari, 319 S.V/.3d 836 (Tex. App.-Austin 2010, pet. denied) 5

County of Bexar v. Bruton, 256 S.W.3d 345 (Tex. App.- San Antonio 2008, no pet.) 7

Dubai Pelroleum v, Kazí, 12 S.w.3d 71 (Tex. 2000) 6

In re: NestleUSA, Inc., 359 S.W.3 d 207 (Tex. 20tz) 6

R Communícatíons v. Sharp, 87s S.W.2d3t4 (Tex. 1994) 416

Reata Constr. Corp. v. Cíty of Dallas, 197 S.W.3d37l (Tex. 2006) 3

Scottv. Presidío Indep. Sch. Dist., 266 S.V/.3d 531 (Tex. App.- Austin 2008, pet. filed) . . . 7

Tex. Dep't of Protective & Regulatory Servs, v. Mega Child Care, 14s S.V/.3d 170 (Tex.2004) 5

Tex. Dep't of Transp. v. Crockett, a 257 S.W.3 d 412 (Tex. App.- Corpus Christi 2008, pet. denied) J

rll STATE STATUTES

Tex. Civ. Prac. & Rem. Code g 5 l.0 ta(a)(B) (West 2008) I Tex. Govot Code Ann. 9,2001.03S (Wesr 2008) 4

Tex. Gov't Code Ann. $ 2001.121 (West 200S) 4, 5,7

Tex. Gov't Code Ann. g 3l 1.034 ('V/est 2005) 6

Tex. Gov't Code Ann. g 2001.144 (West 200S) 7

Tex. Tax Code Ann. $ 711.0A42 (V/esr 200S) 4,7,8 Tex, Tax Code Ann $ 111.008 (West 2008) . I Tex. Tax Code Ann g 111.022 (Wesr 200S) 8

Tex. Tax Code Ann, $ 151.461(Wesr 2008) 9

Tex. Tax Codç Ann. $ 154.212 (West 2008) . I Tex. Tax Code Ann. $ I55.105 (West 200S) 9

Tex. Tax Code Ann. $$112.051-.060 (West 2008 & Supp. 2011) 5

Tex. Tax. Code Ann. $ I I 1.009 (\Mest 200S) 3

Tex. Tax. Code Ann. $ 11 1.010 (West 2008) 4

Tex. Tax. Code Ann. li 1l 1.0013 (West 2008) .....3 Tex. Tax. Code Ann. $ 111.0102 (V/est 2008) 3,4

1V OTHER AUTHORITIES

Tex. S. Comm. on Business and Commerce, Bill Analysis, HB 11, 80th L.g., R,S. (2007) 2,7-9

v NO. 03-1t-00462-CV

5n t$e @ourt of ß[ppedr for tüe (ÍDirù luùícist Þistriú Hastin, îllex¡s

s¡,F¡anco rNc.r .l Tnxas conpoRauoN, AND M.¿.nruoun A. rsnl, Nxt¡,Mtun¿oun Annnun Anursn,l, Nrcln Mlxn Isnl, INnrvrnulll,v, 4ppellants,

v

Susa¡l Connnso INDIVIDUALLv, AND IN HER Orrrcu.l, C¿.p¡crty ¿s Con¡rrnoLLER on Puslrc Accouivrs oF THE Sr¿.rp or Tnx.l,s; nnn Gnnc Asnorr IN HIs Orrlcr¡¡ Cap^lcrry, ET AL., Appellees.

On Appeal from the 98th Judicial District Court of Travis County, Texas Trial Court Cause No. D-l-GV-10-000902; The Honorable Tim Sulak, Judge Presiding

STATE OF'FICIALS' RESPONSE TO APPET-,LANTS' POST-SUBMISSION BRIEF

TO THE IIONORABLE JUSTICES OF SAID COURT:

Appellees, Susan Combs, Individually and in her Official Capacity as Comptroller of

Public Accounts of the State of Texas, and Greg Abbott in his Official Capacity as Attomey

General of Texas (the "State Officials"), file this re3ponse to Sanadco's post-submission

brief, I.

First, although its failure to contest the tax at the administrative level does not prevent

Sanadco from asserting properly defensive offset claims in the district court, its claims still

must fall within the court's subject-matter jurisdiction. And they must be viable as a matter

of law. Sanadco's claims are neither. Second,APA section 2001.171 does not provide an

alternative basis forjurisdiction here, because the agency's organic law specifically sets out

the statutory prerequisites for challenging a determination of tax liability in district court. Application of the APA, provisions for judicial review would render meaningless the

statutory requirements in the Chapter 112 of the Tax Code. Those requirements serve as

legislative safeguards to the fiscal operations of the State and ensure the Comptroller is not

unduly hindered in her collection of taxes, penalties and interest. Thírd,the State Offrcials

have already shown, in their initial brief, that the Comptroller's guidelines in Ap 92 and 122, and her use of desk audits, are expressly authorized by sections 111.0042 and ^P 111.008, and by HB 11.

il. ÄRGUMENTS AND AUTHORITIES

A. The State's filing suit against Sanadco for tax collection waives sovereign immunity only for defensive counterclaims operating as an offset.

Because the State of Texas filed suit against it, Sanadco may assert claims that arc

"germane to, connected with, and properly defensive to" claims asserted by the State of

) Texas, except for amounts that exceed the amounts necessary to offset the government,s

claims. Reata constr. corp. v. city ofDallas,lg7 s.w.3d 371,37UTex.2006 );Tex. Dep,t ofTransp- v' crockett,zs7 s.w.3d 412,414 (Tex. App. Corpus christi 200g, pet. denied); - see also Tex' Tax' Code Ann. 1 I 1.0102 (West 200s) $ fiurisdiction of suit to challenge or avoid comptroller collection action exclusively conferred on Travis County district courts);

I I I '013 (certificate oftax delinquency is prima facie evidence, requiring sworn denial); Tex.

R. Civ. P.97

InReata,the Supreme Courtstressedthe limitednature ofthe waiver ofimmunity and the policy considerations underlying it. It explained that when: The governmental entity interjects itself into or chooses to engage in litigation to assert affirmative claims for monetary damages, the entityïill presuãrably have made a decision to expend resources to pay litigation costs, If the opposing party's claims can operate only ur * oifr.t to reduce the goverrrment's recovery, ûo tax resources will be called upon to pay a judgment, and the fiscal planning of the governmental entity shout¿ noi ue disrupted.

Reata, 197 S.W.3 d at375.

To the extent Sanadco's counterclaims for "compensatory relief' exceed this limited

waiver, the district court lacks jurisdiction.r C.R. 74, 104. For claims that are properly

gennane and defensive to the State's suit, the Tax Code does not require, as a statutory

prerequisite, that the taxpayer first challenge the Comptroller's determination at the

administrative level" ,See Tex. Tax, Code Ann. $ I I 1.009 (West 200S) (authorizi¡ gtaxpayer

I Sanadco is the only appeliant against which the State of Texas has brought claims in district court to coilect taxes, penalties and interest.

J to administratively petition Comptroller for redetermination of tax liability); 111.010

(authorizing Attorney General to bring suit to recover taxes); 111.0102 (authorizing claims

to challenge or avoid collection action.); compare Tex. Gov't CodeAnn. 2001.t71(West $ 2008) (person who has exhausted administrative remedies is entitled to judicial review).

Although failure to contest the tax at the administrative level does not preclude offset

claims in the district court, Sanadco's claims still must fall within the court's subject-matter

jurisdiction, and they must be legally viable. Sanadco's claims are neither. First, ApA section 2001.03S cannot confer jwisdiction, because internal agency memos written by

division directors to their auditors are not APA "rules." Second, Sanadco has failed to plead

a legally viable claim that the Comptroller engaged in ultra vires acts, warranting relief under

the UDJA . See Cíty of El Paso v. Heinrich, 284 S.W.3d 366 (Tex. 2009); R Communications

v. Sharp,875 S.W.2 d374,3 17 (Tex. 1994). Third. Sanadco has no standing to challenge Tax

Code section 111.0042, and any such ruling by the courtwould amount to an advisory

opinion that does not resolve a live controversy. Sanadco's remaining constitutional claims

were decided on summary judgment and are not before this court.

B. The waiver of immunity in APA section 2001.171 does not apply, because the legislature has set out a specialized procedure for tax protest suits.

The intervening convenience stores theorize in their post-subrnission brief that APA

section 200L171, which authorizes judicial review of frnal agency decisions, provides an

alternative basis for jurisdiction here. According to these appellants, once the Comptroller's

administrative decisions have become final, they can invoke the APA as grounds for

/l challenging the administrative detennination of tax riability.

But APA section 2001.171 does not apply to the Tax Code. The ApA provides an independent rÍght to judiciat review only where the agency's enabling statute neither

specifically authorizes norprohibits judicial review ofthe decision. Tex. Dep,t of protectíve

& Regulatory servs. v. Mega chitd careo 145 s.w.3d 170 (Tex. 2004).

Flere, in clear contr astto Mega Chitd Care, tn'e Comptroller's organic law specifically

sets out the statutory prerequisites for challenging the Comptroller's determination of tax

liability in district courr,

The legislature has created a limited waiver of sovereign immunity for tax protest suits, but mandated specific prerequisites which must be satisfied prior to filing suit against

the state. ,9ee Tex. Tax code Ann. ggl12.05t-.060 (west 200g & supp. 20ll).2 The

undisputedjurisdictional facts show that none ofthe intervening convenience stores have met

the statutory prerequisites in sections 112.051 and ll2.0SZ. C.R. 2g, 5g-61(Affidavit of David Rock). Compliance with the procedural requirements of the tax-protest law is a

jurisdictional prerequisíte to suit. ,See Central Power & Lìght Co. v. Sharp,gl9 S.W.2d 4g5,

491 (Tex. App.-Austin t996, writ denied); Combs v. Chevron 319 S.W.3d g36, 844-45

(Tex. App.-Austin 2010, pet. denied). Further, none of the "counter-plaintiffs" have

satisfied the statutory prerequisites for filing a class action under section 1 12.055 of the Tax

2 Like suits chalienging, or in avoidance of, the State's tax collection suit, the statutory prerequisites for filing a tax-protest suit do not require the taxpayer to first contest the tax at the administrative level.

5 Code. As a result, the trial court lacked jurisdiction over the putative class action as well. These explicit prerequisites serve as legislative safeguards to the fiscal operations of the State by ensuring that the Comptroller is not unduly hindered in her obligation to collect

onfinaltaxassessments.,seeR communicationsv.sharp,sTss.w.2d 314,317(Tex. lgg4).

The counter-plaintiffs cannot circumvent these safeguards simply by characterízing their claims as APA claims forjudicial review. Such an outcome would be contrary to the holding

in Mega Chíld Care. More importantly, Sanadco's argument, if accepted by this court,

would effectively read out of the Tax Code the statutory prerequisites for bringing a tax-

protest suit in district court. The APA procedure for judicial review would swallow and

render meaningless those prerequisites-an outcome the legislature could not have intended.

See In re; Nestle (JSA, ?nc.,359 S.W.3 d 207,211-12(Tex. Z[lz)(holding that statutory

prerequisites for taxpayer suits are conditions on the legislative waiver of immunity and

dismissing original proceeding for want ofjurisdiction).

In 2005, the legislature amended the Code Construction Actto reiterate that statutory

prerequisites to suit are both rnandatory and jurisdictional. Tex. Gov't Code Ann. g 3 1 L034

(West 2005). The amendment was in response to confusion about which, if any, statutory

prerequisites to suit were actuallyjurisdictional after the Supreme Cour{'s decision in Dubaí

Petroleum v. Kazi, 12 S.W.3d 71,76 (Tex. 2000). Since the amendment to the Code

Construction Act, the courts of appeal have considered carefully whether a plaintiff has

properly complied with statutory mandates and exhausted administrative remedies where

6 required. Scott v. Presìdio Indep Sch. Díst.,266 S.w.3d 531 (Tex.App.- Austin 200g, pet.

filed); see, e.g., county of Bexar v. Bruton,256 s.v/.3d 345 (Tex, App.- San Antonio 200g,

no pet,).

Sanadco itself never challenged the assessment administratively, so it became final.

The State of Texas and other taxing authorities then filed suit against it and Mahmoud A. Isba under Chapter 111 to collect the tax, interest, and statutory penalties. Sanadco, to the

extent it relies on APA section 200l.77l,tries to have it both ways. It argues, in effect, that

the APA judicial review provisions apply, but that the Act's exhaustion-of-remedies

requirement does not. ,see Tex. Gov't code Ann. 2001.144,2001.171 (west $ 200s) (party

seeking judicial review must exhaust administrative remedies, including the filing of a

motion for rehearing).

C' The ultra vires claÍm relating to Tax Code section 111.0042 and HB Ll was disposed of by summary judgment and is not before this court; alternatively, the Comptroller did not exceed her statutory authority.

In its last point, Sanadco simply re-urges arguments relating to Tax Code section

111.0042 that have been fully briefed by the parties. As part of its ultra vires ârgumenr,

Sanadco contends that the Comptroller has acted outside section 1 I 1.0042(b)(2) of the Tax

Code, which authorizes audit "sampling" under certain circumstances. According to

Sanadco, both the guidelines in AP 92 and AP 122 and the use of abbreviated, or

"desk,"audits exceed the limitations in that section. This issue, however, was resolved by

summary judgment and is therefore not before the court. C.R. 28, 49-50,128. Intheir brief

7 in support of plea to the jurisdiction and motion for summary judgment, the State Officials

explicitly argued that:

Because the collection and use of HB I 1 data is specifically authorized by the Legislature, collection and use of the data by the Comptroller cannot be an ultra vires act. Ultra vires acts are acts beyond the statutory authority granted to state officials. See cip of El paso v. Heinrtch, 2g4 s.w.3d 366, 371-73 (Tex. 2009). As a matter of law, when the Legislature specifically grants a state fficíal the power to perþrm an act, that act, by deJìnitíon, cannot be outside the ffi¿¡61's statutory authority. c.R. 50 (emphasis added).

Section 5l '014 of the Civil Practice and Remedies Code authorizes interlocutory appeal of

an order granting or denying apleato the jurisdiction. It does not authorize an interlocutory

appeal of the trial court's sunmary judgrnent.

Even though the issue is not befbre the court, the State Officials have also shown in

their initial brief that the desk audits, as well as the guidelines in Ap 92 and Ap IZ2, arc entirely consistent with section I I 1 .0042and HB 1 l. They have also pointed out that the Tax Code expressly authorizes the Comptroller

to make an estimated assessment when taxpayers fail to file a return or when the filed return

is incorrect. Tex. Tax Code Ann $ I11.008, lll.A22 (West 200S). Subsection 111.008(a),

in particular, expressly provides that:

If the comptroller is not satisfîed with a tax report or the amount of the tax required to be paid to the state by a person, the comptroller may compute and determine the amount of tax to be paid from information contained in the report or from any other information at¡ailable to the comptroller. (emphasis added).

I Thus, the Comptrollçr is expressly empowered to calculate the amount of tax due by examining any information available to her.

Further, the legislature has expressly authorized the Comptroller to collect and use

wholesaler reports of beer, wine, malt liquor, cigar, and tobacco product sales to convenience

stores' Tex. Tax Code Ann. $ 151.461 (forrnerly 151.433) (beer, wine, and {i malt liquor

reports), 154.212 (cigarette reports), and 155.105 (cigars and tobacco pro¿uct reports). As

the legislative history for HB I I shows, these reports are intended to enable the Comptroller

to cross-check a convenience store's reports or returns with wholesaler records of sales to

that store. Tex. S. Comm. on Business and Commerce, Bill Analysis, HB l, gO,h .l Leg., R.S.

(2ooT.3

Where the cross-check indicates a discrepancy-usually in the form of substantial

under-reporting of taxable sales by the convenienca store, as was the case with

Sanadco-section I I 1.008 authorizes the Comptroller to compute the amount actually owed.

The convenience store owners, in response, baldly theorize that while HB I I requires

wholesaler reporting to the Comptroller, it does not authorize the agency to use that data.

This contention, however, is undermined by the statutory language itself.a

3 The bill analysis is included in the appendix, at Tab 2, to the State Officials' initial brief. a Sections 151.433(b), 154,21"2(a) and155.105(a) of the Tax Code are included in rhe appendix, atTab 1, to the State Officials' initial brief.

I CONCLUSION

WHEREFORE, PREMISES CONSIDERED, the State officials requesr tharthis courr

affirm the trial court's order granting their plea to the jurisdiction.

Respectfully submitted,

GREG ABBOTT Attorney General of Texas

DANIEL T, HODGE First Assistant Attorney General

DAVID C. MATTAX Deputy Attorney General for Defense Litigation

JEFF GRAI-IAM Chief, Financial and Tax Litigation Division

/s/ .Inck Enrten JACK HOHENGARTEN State Bar No. 09812200 Assistant Attorney General Financial and Tax Litigation Division P.O. Box 12548 Austin, Texas 781 1I-2548 TEL: (512) 475-3503 FAX: (sr2) 477-2348 j ack.hohen qarten@texasattorney gen eral. gov Counselþr Appellees

10 CERTIFICATE OF SERVICE

I heteby certi$r that on April 12, 2A12, a true and correct copy of the foregoing document, State Officials' Response to Appellants' Fost-Submission Brief, was sent by electronic filing with the court and counsel of record to the following:

Samuel T. Jackson Lew Orprcg oF SAMUEL JACKSoN P.O, Box 170633 Arlington, Texas 76003-0633 TEL: (817) 751-7lss FAX: (866) 374-0164 E-mail : j acksonlaw@hotmail.com Attorneyþr Appellants

JACK HOHENGARTEN

I1