Most people think if a representative of the state taxing authority makes a statement that is incorrect and they owe tax as a direct result of following inaccurate advice, they can challenge a deficiency based on a detrimental reliance argument. This is not true. Detrimental reliance is a legal term of art that has been defined. In order to mount a successful challenge to a deficiency finding in Texas, you must satisfy all of the following requirements:
- Information or advice from the Comptroller (both substance and its direct communication to the taxpayer) is proven. This typically means the taxpayer must produce a hard copy of the advice and the written communication must be addressed to the taxpayer. There are few instances in which the state’s failure to include a disclaimer in the audit package can satisfy this requirement. However, it is Comptroller policy to include the disclaimer. he failure to do so is not typically noted. Phone calls and letter rulings won’t satisfy this requirement.
- The taxpayer followed the advice given.
- The taxpayer gave sufficient information to reach the right taxability decision and no information was misrepresented or deliberately withheld. Any information withheld that would change the taxability position will mean this requirement is not satisfied.
- The taxpayer has suffered, or will suffer harm, if the Comptroller does not adhere to the advice given.
In Texas, the rules regarding detrimental reliance make it imprudent to call the Comptroller and get a verbal response regarding the taxability of a transaction. Taxpayers may request a written letter ruling. However, letter rulings are currently onerous, in my opinion, to receive. Letter rulings found on the STAR System do not have the force of law. However, hearings do have the force of law. Before relying on anything, know the nature of the document you are relying upon and whether it reflects current law. Superseded hearings may not have the force of law if the document is superseded due to a change in the law or policy that is related to the issue you are researching.
Some taxpayers do have the sophistication required to conduct their own state tax research. However, if you have questions about how to find the answers you seek or if the matter is so material that an error will put you out of business or out of a job, seek professional help.