The 15th Court of Appeals has affirmed a trial court judgment against two taxpayers whose franchise tax audit resulted in a deficiency.
Toro Rojo, Inc. and Casco Hauling and Excavating Co. v. Kelly Hancock, Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the State of Texas (No. 15-24-00041-CV; June 4, 2026) arose from a franchise tax dispute. Toro Rojo, a transportation company that hauls demolition and construction waste to landfills, used the cost-of-goods-sold deduction to calculate its franchise tax for 2008 and 2009. A 2010 audit by the Comptroller found that the COGS deduction didn’t apply. The auditor recalculated the taxpayer’s liability based on the E-Z Computation and assessed additional franchise taxes of $30,885.33. The taxpayer paid up and filed a tax-protest suit in district court, later adding a declaratory judgment claim asserting that removal and hauling of construction waste was an improvement of real property to which the COGS deduction applied. A jury found that Toro Rojo incurred over $1.8 million in COGS for those tax years and that Casco incurred $0 if COGS. Based on the jury’s findings, the district court ruled that Plaintiffs take nothing on their claims because the deduction wouldn’t have reduced Plaintiffs’ tax liability anyway. The trial court further denied Plaintiffs’ UDJA claim, including their attorney’s fees. Plaintiffs appealed.
In an opinion by Justice Field, the court of appeals affirmed. First, Plaintiffs argued that the trial court erred in rejecting their UDJA claim that they were entitled to the COGS deduction. They further contended that the trial court erred in failing to submit their requested jury questions. The Comptroller, on the other hand, asserted that the UDJA claim was barred by sovereign immunity. Observing that the UDJA “does not confer a broad right to sue the government to obtain statutory construction or a declaration of rights,” the court concluded that Plaintiffs’ request for declaratory relief “falls outside the scope of the UDJA’s limited waiver of immunity.” Plaintiffs attempted to argue that the Comptroller acted ultra vires and that its claim for declaratory relief was aimed at “restraining the ultra vires conduct.” This ploy didn’t work because a franchise tax audit hardly implicates a ministerial act over which a government official had no discretion. Instead, the Tax Code gives the Comptroller “broad authority to assess and collect taxes,” including “discretion as to how to carry out these statutorily-mandated duties” (citations omitted). This discretion easily covers the Comptroller’s “authority to compute franchise taxes and to determine, in certain cases, whether a taxable entity is entitled to a COGS deduction in calculating its franchise taxes.”
Absent a valid ultra vires claim, Plaintiffs fell back on the position that the Comptroller never asserted that they miscalculated the amount of the COGS deduction, but only determined that it didn’t apply. This somewhat mystifying argument didn’t work, either. Plaintiffs had the burden in their tax-protest suit of proving “not only that they were entitled to deduct COGS for their activities in 2008 and 2009—the reason for recovery expressed in their written protest—but also that, as a result, ‘all of part of the [$30,885.33] paid under protest was unlawfully demanded [by the Comptroller].” Consequently, Plaintiffs had to produce contemporaneous records and supporting documention showing that the amount of the COGS deduction “would result in a lower tax liability than that calculated by the Comptroller.” The jury determined that Plaintiffs failed to do that, so their refund suit likewise failed.
