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Detrimental Reliance & Texas Sales-Use Tax: 4 Key Considerations

author photo of Susan Goertz

You have relied (possibly for years) upon information communicated to you by someone who works for the Sales and Use Tax Division of the Texas Comptroller. Unfortunately, they were wrong in what they told you - and now you are going to have to pay the price.

Perhaps that incorrect information pertained to taxability – and you have been (incorrectly) collecting sales/use tax from your customers, although it is consistent with the rate on the sales and use tax return that you file with the Texas Comptroller every month. (In fact, when you log into the TexNet system to report and pay the sales tax due, there it is, your tax rate, on the Comptroller’s own website.) Life is good UNTIL - an audit notice shows up in your mailbox.

The auditor shows up, starts their work and informs you that you’ve been collecting and remitting the wrong tax amount. You should have been collecting and remitting 8.25% but you’ve only been collecting and remitting 6.25%. Because that’s what your return says. That’s what the Comptroller’s website says when you log in to report and remit your taxes. But unfortunately, as the auditor explains, you are now responsible for that other 2% for all your taxable Texas sales for the four-year audit period. WHAT?

It’s called detrimental reliance which essentially means that you relied on information from the Texas Comptroller to your own detriment.

According to US Legal, Inc.

"Detrimental reliance is a term commonly used to force another to perform their obligations under a contract, using the theory of promissory estoppel. Promissory estoppel may apply when the following elements are proven: i) A promise was made, ii) Relying on the promise was reasonable or foreseeable, iii) There was actual and reasonable reliance on the promise, iv) The reliance was detrimental and v) Injustice can only be prevented by enforcing the promise."

The Texas Comptroller’s policy of detrimental reliance is not mandated by either State law or judicial decision. It was merely adopted by the Comptroller to promote fairness and justice in the agency’s dealings with taxpayers. A decision published by the Comptroller in 1991 held that:

“The basic notion is that where the Comptroller’s Office by certain communications or conduct directed to a given taxpayer has induced that taxpayer to act in a particular manner, the Comptroller should not later adopt a contrary position or course of conduct that will cause the taxpayer loss, harm, or detriment as the result of its reliance on the earlier Comptroller action.”

However, there are four elements or conditions which a taxpayer must meet in order to claim “detrimental reliance”.

Four Key Elements/Conditions Regarding Detrimental Reliance:

  1. Advice provided must be in writing - The information or advice provided to the taxpayer is satisfactorily proven which means that you must have it in writing. You must produce a hard copy of the advice and written communication addressed to you and your business. In other words, you need a letter ruling from the State for your situation exactly. You cannot rely on a letter ruling from the State’s STAR system for detrimental reliance – nor will a phone call suffice - even if you can produce the date you called and the name of the person to whom you spoke.
  2. The taxpayer followed the advice given - This one is pretty easy to prove… Yes - you followed the advice and that’s why we’re now having a conversation about detrimental reliance.
  3. The taxpayer provided sufficient and accurate information to have resulted in correct advice and did not misrepresent information, nor deliberately withheld or concealed information which would affect the advice. This is one of the State’s favorite ways to back out of a detrimental reliance claim. “Well, we couldn’t possibly have given you good advice, you didn’t explain your situation correctly.”
  4. The taxpayer has (or will) suffer harm unless the Comptroller adheres to the advice. Like #2, this condition is fairly straight-forward. You wouldn’t be having this conversation if you hadn’t or weren’t about to suffer because you relied on something someone at the State told you.

One must also keep in mind that Administrative Law Judges will be all too happy to remind you that “taxpayers, like all citizens, are charged with the knowledge of the law and the responsibility to keep up with the changes in the law.” There are currently eighty-one different rules within Texas Tax Code 151: Limited Sales, Excise and Use Tax. Business owners and Controllers would need to become tax experts in order to analyze their business and transactions to ensure that they are fully compliant.

Let me offer you a real-life example how you might be charging an incorrect rate by relying on what your sales and use tax return says and what the online reporting system says.

Our client moved from Lubbock (6.75% tax rate) to Georgetown (8.25% tax rate). They reported the new address to the Comptroller and received new returns, however, the new returns indicated that their rate was 6.25%. Our client called the Comptroller’s office to inquire about the rate and were told that their rate was 6.25%. A query of the State’s own “Sales Tax Rate Locator” page indicated that based on their address, they were in a 6.25% tax rate. No local taxes should be charged. They operated like this for three years before they were subjected to a sales and use tax audit. The auditor determined that they were in fact, inside the city limits and that they should have been charging 8.25% and assessed them the additional tax on their sales for the three years they had been in Georgetown.

Despite this taxpayer thinking that they had satisfied all the conditions:

  1. They had it in writing, their returns indicated that their rate was 6.25%
  2. They relied on the information
  3. They thought they gave sufficient information. How can you get more sufficient than the address?
  4. They suffered a great financial blow because they were now assessed an additional 2% due on their taxable sales for three years!

The Texas Comptroller ruled that it is the taxpayer’s responsibility to know the law and comply with the law. Although, the taxpayer complied with the four conditions of a detrimental reliance argument, they were held responsible for the additional tax due.

As I said above, make no mistake, it will always be your fault for relying on their information.

So, what can you do? An ounce of prevention here might be the best advice. Take the time and spend the money to hire a competent sales tax expert to review your business and counsel you in appropriate taxation for your situation. You can avoid ever having to hear the disappointing news that you relied on the State to give you good information and now you are faced with a very large tax assessment because that information was incorrect. Good luck out there people—sales taxes in Texas are not for the faint of heart!

Susan Brown-Goertz is the Senior Partner of Brown Goertz & Co., a firm which offers state and local transaction services including refund engagements, compliance, sales and use tax planning, due diligence, audit representation, exposure analysis, and taxability matrices. Susan has extensive experience in the hospitality, technology, construction and manufacturing sectors.

Do you have questions about TEXAS (and/or multi-state) sales tax - or does your business need assistance with other tax issues? Susan welcomes inquiries from SalesTaxSupport.com users and offers a complimentary 30 minute consultation to established businesses with sales or use tax issues or concerns. Please use the "Request a Consultation" link on FIRM PROFILE page to submit your question or consultation request.

Other recent “Texas (TX)” posts by Susan Goertz:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

5 Responses to Detrimental Reliance & Texas Sales-Use Tax: 4 Key Considerations

  • Posted by Pat on November 9, 2017 9:22am:

    My daughters house was flooded and destroyed by the flood and insurance check arrived to late. As a interior designer , I would like to use my sales tax no. To help her put it back together and save her money. Do I still have to charge her tax on purchases?

    • Posted by Author photo of Susan Goertzsusangoertz on November 9, 2017 11:25am:

      Hi Pat. Thank you for your question. Tax will need to be paid somewhere, so you can either pay tax when your purchase the items and just pass everything through to your daughter at cost or don't pay tax when you purchase the items and charge her cost but add tax. Either way, the amount will be the same it just depends on do you want to pay your vendor the tax or remit the tax to the State on the sale. Hope that helps.

      Please let me know if I can assist you further. Thank you!

      Susan

  • Posted by Leslie on October 20, 2017 8:18am:

    We are a manufacturer of coil tubing in Houston. Customer is in Colorado. They sent their own equipment to have new tubing installed, then returned to Colorado. Are the required to pay TX sales tax?

    • Posted by Susan on November 6, 2017 1:00pm:

      Hi Leslie. Thank you for your question. I would need more information about the transaction to be able to answer your question. If you would like to call me, you can reach me at 469-742-1159. Thank you!
      Susan

  • Posted by Bob on October 19, 2017 6:52am:

    Similar situation in Indiana. Middleton Motors v. IN Dept. of Revenue, 3380 N.E.2d 79 (1978). Issue was whether the State could be estopped from raising affirmative defense because of erroneous representations made by a Deputy Director. IN sup. Ct. found that the taxpayer's reliance on the representations of the deputy director were unjustified. The IN Sup Ct. held that the trial court properly dismissed the case for lack of subject matter jurisdiction.

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