With today’s orders list, the Texas Supreme Court turned away the second recent challenge to the Texas franchise tax.
In November, the Court upheld the tax against a challenge brought under an unusual statute that vests the Court with original jurisdiction to hear certain cases in the first instance, entirely bypassing the trial court. In re Allcat Claims Service, L.P., No. 11-0589 (blog post). In today’s opinion, the Court refers to the provision authorizing these suits as “section 24.”
Just before Allcat oral argument, Nestle USA also filed a challenge to the franchise tax (blog post), with at least some issues that overlapped with Allcat.
In Allcat, the Court struggled to reconcile the relief the parties were seeking through section 24 (an injunction) with the background constitutional limits on the Court’s power to hear direct cases (which must be mandamus proceedings). Today, the Court struggled with how to reconcile section 24 with a competing statute — the requirement in the Texas Tax Code that a party who wants to challenge a franchise-tax assessment must begin by paying the challenged tax under protest. If a party does not comply, they cannot bring suit in district court. The question is: Does the same restriction apply to section 24 suits that bypass the district court?
The Court held that, yes, this lawsuit was barred because the taxpayers had not complied with this provision of the Tax Code. The Court explained its reasoning in terms of sovereign immunity: A suit to compel a tax refund requires a waiver of immunity, and because the taxpayers did not comply with the statutory directive to file their taxes under protest, immunity was not waived.
Although the Nestle case does not reach the merits of the parties’ claims, its procedural holding will likely make these section 24 suits less attractive alternatives to district court proceedings. For taxpayers seeking a refund, the district court is a much easier forum. For taxpayers seeking constitutional guidance, the normal appellate process may be a smoother path, without the quirky, limited jurisdiction afforded by section 24.