State agency memos are in fact “rules” subject to Administrative Procedures Act.

Sanadco Inc., et al. v Susan Combs, Comptroller of Public Accounts, et al. 03-11-00462-CV (Tex. App. – Austin, September 26, 2013).

This case reflects under what conditions a plaintiff can sue to challenge an administrate rule and the standards used in determining whether a public official performs an ultra vires act (acting outside of their authority).

While this is a delinquent tax suit, the crux of the case has to do with the authority of the Comptroller to issue controlling memos. Sanadco, a convenient store company, was audited but did not administratively challenge the audit results, nor did it pay the delinquent taxes. The Comptroller (and AG) sued for delinquent taxes, but Sanadco countersued alleging the audits were ultra vires acts (entitling it to sue the Comptroller individually) and challenging the Comptroller memos. The trial court granted the Comptroller’s plea to the jurisdiction and Sanadco appealed.

Sanadco first asserted that two Comptroller memos intended to provide guidance to auditor’s examining convenient stores were in fact administrative rules which did not comply with the Administrative Procedure Act. The two memos authorized auditors to estimate taxes owed without first ascertaining whether adequate records existed with the store. Further, the Comptroller gave conclusive effect to what is considered HB 11 data (intermediate reports required by HB 11 of the 80th Legislature) without first examining the sales records which actually existed.

The Austin Court of Appeals determined the Comptrollers memos were in fact “rules” and therefore the trial court erred in dismissing Sanadco’s challenge to them. A “rule” is defined by Tex. Gov’t Code § 2001.003(6)(A) as a “state agency statement of general applicability that: (i) implements, interprets, or prescribes law or policy; or (ii) describes the procedure or practice requirements of a state agency.”  The way the Comptroller and auditors were treating the memos was essentially that of an administrative rule.  [Editorial comment: many state agencies issue memos or guidelines which they treat as a rule under the guise of being advisory statements or comments of internal procedures.  Cities, counties, and other special local governmental entities have to deal with these all the time when interacting with the State, many times to their detriment.]  As a result, the trial court erred in dismissing the challenge to those rules.

As to the remaining ultra vires claims, Sanadco did not exhaust its administrative remedies before bringing suit. A challenge to an administrative rule does not require exhaustion, however, challenges to the method the Comptroller was using to perform statutorily authorized audits could only be brought after exhaustion of administrative procedures.  As a result, the trial court did not abuse its discretion in dismissing the ultra vires claims.

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