The Double-Tax Problem in Texas Sales Tax Audits

Texas sales and use tax are structured to prevent the same tax from being collected more than once on a taxable transaction. However, under Texas law, the Comptroller may pursue both the seller and purchaser for tax arising from the same transaction.[1]

The law limits the Comptroller to collecting the tax only once.[2] However, courts have held that the taxpayer bears the burden of proving that the Comptroller has already collected the tax.[3] In practice, this burden can create a risk that tax is collected twice on the same transaction.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Consult an experienced attorney regarding your specific tax circumstances.

How Sales and Use Tax Work

Sales and use tax are complementary mechanisms. Sellers generally collect sales tax from purchasers and remit it to the Comptroller, while a buyer may be responsible for use tax when a seller does not charge Texas sales tax. This structure is intended to ensure consistent tax treatment of taxable transactions, whether or not the seller collects Texas sales tax.

This structure also allows the Comptroller to pursue tax owed on a transaction from the seller or buyer.[4] However, the regulations state that collection may continue only “until the tax, penalty, and interest have been paid.”[5]

In other words, the tax, penalties, and interest may only be collected once.

Scenario 1: One Transaction, Two Audits

Consider a Texas vendor that sells $1 million in taxable tangible personal property without collecting sales tax. The Comptroller later audits the vendor and, based on information found during that review, also audits the buyer. The same transaction is then included in both audits.

If the buyer pays the tax to the Comptroller, the vendor may not know unless the buyer discloses the audit and payment. Taxpayers may be reluctant to share details about past or present tax problems.

The taxpayer bears the burden of proving that the Comptroller has already collected the tax, even though the Comptroller has access to the records for both sides of the transaction. One possible solution would be to place that burden on the Comptroller, which could check whether tax on the transaction was already paid through the other party’s audit.

Scenario 2: Tax Paid but Not Remitted

In this scenario, a vendor without an active sales tax permit collects sales tax on a $1 million transaction but does not remit it to the Comptroller. The vendor has also never filed a sales tax return.

The buyer is later audited and assessed for the tax, even though the buyer already paid it to the vendor.

A receipt can show that the buyer paid the seller, but not that the seller remitted the tax to the Comptroller. In the author’s view, this is a collection issue between the seller and the Comptroller: buyers should not bear the risk of a vendor’s failure to remit tax. An invoice or receipt showing that the buyer paid tax to the seller should satisfy the burden of proving payment.

In practice, whether the transaction remains in the buyer’s audit may depend on the auditor’s interpretation of the law and burden of proof.

A Fairer Approach to Enforcement

These scenarios show room for improvement in the statutes and regulations governing double enforcement. Texas lawmakers should consider a fair and equitable approach that allows the Comptroller to collect the tax it is entitled to receive while protecting taxpayers from paying tax twice on the same transaction.

Under the current framework, businesses should focus on maintaining records that can establish whether tax was collected or paid.

Keep Transaction Records

Businesses should retain records related to their transactions, including:

• Proposals, contracts, bids, and change orders
• Invoices and receipts
• Proof of payment
• Exemption and resale certificates
• Other contemporaneous transaction records

These records may be important when demonstrating that tax was already paid during a Texas sales tax audit. Businesses facing a Texas sales or use tax dispute can learn more about The Wilson Firm’s State and Local Tax Matters practice.

Discuss Your Texas Sales Tax Audit

When a Texas sales tax audit raises questions about whether tax has already been paid, the underlying transaction records can become important in addressing the assessment. Invoices, receipts, and proof of payment may help establish what occurred and support the taxpayer’s position.

If your business is facing a Texas sales tax audit or assessment, contact The Wilson Firm to discuss your situation.

References

[1] Tex. Tax Code § 151.515.
[2] 34 Tex. Admin. Code §§ 3.282, 3.286.
[3] See Bullock v. Foley Bros. Dry Goods Corp., 802 S.W.2d 835 (Tex. App. 1990).
[4] Tex. Tax Code § 151.515; 34 Tex. Admin. Code § 3.286.
[5] 34 Tex. Admin. Code § 3.282.