Texas Contractors Beware of the Unforeseen Texas Sales and Use Tax
By David E. Colmenero and Alex J. Pilawski on March 17, 2025
We often find ourselves advising clients that Texas tax auditors and investigators are not their friends. Taxpayers can sometimes be lured into a false sense of confidence with a “friendly” auditor – that is, until they receive a large tax assessment. Tax auditors are hired for one reason and one reason only, and that is to find money. As such, they are not disinterested parties when it comes to auditing or investigating taxpayers.
A logical extension of their role in the tax administration process is that tax auditors generally take positions that favor the State, especially when it comes to issues that may be arguable. While taxpayers may or should very well disagree with some of these positions, the unfortunate fact is that a taxpayer may not even be aware that an auditor has taken a questionable position, and the auditor is not likely to disclose any such weaknesses. This can and does exist in different areas of tax law, and we see many varieties of it through the course of representing taxpayers in challenging tax assessments or refund claim denials.
But one such area that has engendered much controversy has to do with the so-called “contractor” rules that exist for Texas sales and use tax purposes. These rules are technical, often complex and apply to a broad swath of taxpayers and transactions. And given the large dollar transactions often at issue, this is an area where tax assessments can be large, thereby upending the economics of some transactions. To the frustration of taxpayers, assessments often occur long after contract prices have been negotiated and, in many instances, well after work has been completed and the contracting parties have moved on.
Taxpayers and tax practitioners should be clear on one important fact though. While an auditor may very well take a position on a particular transaction, that position could be wrong or at least questionable. Being equipped with adequate knowledge and proper representation is the best defense against such assessments or refund claim denials. Over the next few articles, we will highlight some important areas that have proven to be the most controversial and problematic for taxpayers under the Texas Comptroller’s contractor rules, highlighting the opportunities that exist to defend against assessments and refund claim denials.
We would also remind taxpayers and tax practitioners that, if they become aware of a potential issue in their business or transactions that could result in an assessment, it is sometimes best to proactively address it rather than wait for an auditor to arrive. However, a taxpayer should think twice about immediately contacting the Texas Comptroller’s office as doing so could expose a taxpayer to substantial unnecessary liability and also limit their options. The adage, “Anything you say can and will be used against you” remains especially true in the tax world. A taxpayer wanting to challenge a tax assessment, request a refund of tax or mitigate their potential exposure to a tax liability should first seek legal counsel. Our team stands ready to provide the professional guidance and representation needed on these important matters.
If you have questions regarding the information disclosed above or on any other State Tax related matter, please contact David Colmenero at dcolmenero@meadowscollier.com or Alex Pilawski at apilawski@meadowscollier.com. To contact them by phone, please call (214)744-3700.
A logical extension of their role in the tax administration process is that tax auditors generally take positions that favor the State, especially when it comes to issues that may be arguable. While taxpayers may or should very well disagree with some of these positions, the unfortunate fact is that a taxpayer may not even be aware that an auditor has taken a questionable position, and the auditor is not likely to disclose any such weaknesses. This can and does exist in different areas of tax law, and we see many varieties of it through the course of representing taxpayers in challenging tax assessments or refund claim denials.
But one such area that has engendered much controversy has to do with the so-called “contractor” rules that exist for Texas sales and use tax purposes. These rules are technical, often complex and apply to a broad swath of taxpayers and transactions. And given the large dollar transactions often at issue, this is an area where tax assessments can be large, thereby upending the economics of some transactions. To the frustration of taxpayers, assessments often occur long after contract prices have been negotiated and, in many instances, well after work has been completed and the contracting parties have moved on.
Taxpayers and tax practitioners should be clear on one important fact though. While an auditor may very well take a position on a particular transaction, that position could be wrong or at least questionable. Being equipped with adequate knowledge and proper representation is the best defense against such assessments or refund claim denials. Over the next few articles, we will highlight some important areas that have proven to be the most controversial and problematic for taxpayers under the Texas Comptroller’s contractor rules, highlighting the opportunities that exist to defend against assessments and refund claim denials.
We would also remind taxpayers and tax practitioners that, if they become aware of a potential issue in their business or transactions that could result in an assessment, it is sometimes best to proactively address it rather than wait for an auditor to arrive. However, a taxpayer should think twice about immediately contacting the Texas Comptroller’s office as doing so could expose a taxpayer to substantial unnecessary liability and also limit their options. The adage, “Anything you say can and will be used against you” remains especially true in the tax world. A taxpayer wanting to challenge a tax assessment, request a refund of tax or mitigate their potential exposure to a tax liability should first seek legal counsel. Our team stands ready to provide the professional guidance and representation needed on these important matters.
If you have questions regarding the information disclosed above or on any other State Tax related matter, please contact David Colmenero at dcolmenero@meadowscollier.com or Alex Pilawski at apilawski@meadowscollier.com. To contact them by phone, please call (214)744-3700.
