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

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
 APPENDIX

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<)
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: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¡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<-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.

Page 19 of26
ProDoc FaxService Page 2I of. 27

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 incing 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