Texas Comptroller Sales Tax Audit Redetermination Protest

The situation

Janet, 51, owns El Sabor Texano, a Tex-Mex restaurant in San Antonio with 42 seats and $1.6M in annual revenue. Three weeks ago, a Texas Comptroller auditor completed a 4-day field audit covering January 2020 through December 2023. Yesterday, she received the Notice of Tax Due by certified mail: "Additional Sales and Use Tax: $52,400 (including penalty of $9,200 and interest of $3,800)."

Janet has 30 days from the date on the notice to file a Petition for Redetermination. She has 25 days remaining.

(a) The auditor used January-June 2021 as the sample period. During the first half of 2021, El Sabor Texano was operating at limited capacity due to Texas Governor Abbott's COVID-19 occupancy restrictions (lifted fully in March 2021, but Janet kept 50% occupancy through June for customer safety). Her H1 2021 revenue was $280,000 vs. her normal semi-annual average of $400,000. The auditor calculated a 19% underreporting rate from this atypical period and extrapolated it across 4 years, turning $19,600 in sample-period findings into $52,400 in total assessment. The sampling period is challengeable: Janet can demonstrate that H1 2021 was atypical (lower volume + higher proportion of takeout orders, which have different taxability profiles than dine-in) and request a re-audit using H2 2022 or H1 2023 as the sample period.

(b) The auditor misclassified packaged items. Janet sells individual-serve bags of Takis and Doritos from a display at the counter ($1.50 each, in original sealed packaging). The auditor treated all counter sales as taxable prepared food. Under Texas Tax Code §151.314(c), food ingredients sold in their original sealed manufacturer's packaging for home consumption are EXEMPT. Janet's packaged chips are tax-exempt (customer takes them home or in the car, not consumed with eating utensils at the restaurant). Additionally, Janet sells individual 20oz bottled Jarritos sodas from a refrigerator. The auditor taxed these as restaurant beverages. However, Jarritos sold in original sealed manufacturer's bottles is a "soft drink", which IS taxable in Texas, so this classification is actually correct. But the packaged chips ($28,000/year in sales) were incorrectly included in the taxable base, generating ~$2,100 in misassessed tax.

(c) The $9,200 penalty is separately abatable. Texas Tax Code §111.103 grants penalty waiver when the taxpayer shows reasonable cause, which Texas courts have defined as including: reliance on prior audit results (if the Comptroller audited this restaurant before and didn't flag a particular issue, taxpayer can argue reasonable reliance on prior audit), good-faith compliance effort (regular tax filings, no prior deficiencies), and unusual circumstances (COVID disruption to records). Janet has filed Texas sales tax returns monthly for 14 years without a prior delinquency. Under §111.103, she has a strong reasonable-cause argument.

(d) The Statement of Grounds is the most important document. The Texas Comptroller's Hearings Division responds most favorably to Petitions for Redetermination that include a detailed, issue-by-issue Statement of Grounds, one that explains the specific factual and legal basis for each challenged assessment item, with supporting exhibits organized by tab. The petition itself is a 1-2 page cover document; the Statement of Grounds is where the substantive argument is made. A sales tax attorney at Brown Tax PC quoted Janet $8,500 for "full protest preparation through pre-hearing settlement." The Petition + Statement of Grounds (the time-sensitive component) is largely self-executable if Janet knows the structure and the relevant Texas Tax Code sections.

Who receives this

Texas small retailers, restaurants, and online sellers who receive Texas Comptroller Notices of Tax Due after a sales tax audit. Primary industries: restaurants and food service (most frequently audited, complex food/beverage taxability), retail businesses (clothing, electronics, sporting goods, all with complex exempt/taxable distinctions), construction contractors (materials vs. services taxability), and online sellers with Texas economic nexus. Secondary: Texas service businesses (data processing services, insurance services, security services, all taxable under Texas Tax Code Chapter 151). NOT suitable for: large retailers with in-house tax departments; businesses facing criminal tax fraud charges.

Why the agency will not advise you

The Texas Comptroller is the enforcement and collection agency, it cannot advise audit respondents on how to contest its own assessments. The Comptroller's November 2024 publication 96-1253 describes the taxpayer rights framework but provides no guidance on how to construct a Statement of Grounds, identify sampling period challenges, or argue specific taxability misclassifications. Sales tax attorneys serve the large-employer market; the $5,000-$15,000 attorney cost makes legal representation irrational for restaurants with assessments of $20,000-$60,000.

Key facts, with sources

• The Texas Comptroller of Public Accounts conducts sales and use tax audits of Texas businesses, using the same statistical sampling methodology as other state tax authorities: auditors select a 'representative' sample period (typically 6-12 months of sales records), calculate an error rate (the ratio of taxable sales not reported to total sales), and extrapolate that rate across the full audit period (typically 4 years, Texas's 4-year statute of limitations for sales tax assessments). After the audit, the Comptroller issues a Notice of Tax Due. Taxpayers have exactly 30 days from the date on the Notice of Tax Due to file a formal protest, called a Petition for Redetermination, or the assessment becomes final. The Texas Comptroller's November 2024 publication 96-1253 describes taxpayer rights during the audit process, including the right to protest any assessed tax, penalty, or interest. The most common Texas sales tax audit triggers: (1) Restaurants and food service (complex food/beverage taxability rules, high cash transaction volume); (2) Online sellers with Texas nexus (economic nexus threshold: $500,000 in total Texas sales in the preceding 12 months); (3) Construction contractors (complex 'real property vs. tangible personal property' taxability on materials vs. services); (4) Service businesses (Texas taxes many services that other states exempt, data processing, insurance services, personnel services, credit reporting). The 30-day protest deadline is a hard deadline, missing it means the assessment becomes final and collectible. Source: Protesting a Texas Sales Tax Audit: Deadlines That Can Kill Your Case — Brown Tax PC · What Happens at a Texas Comptroller Redetermination Hearing — Brown Tax PC · Auditing Fundamentals — Texas Comptroller
• Texas food and beverage taxability rules under Texas Tax Code §151.314 are among the most complex of any state, and auditor misclassification of food/beverage items is one of the most common protest arguments for Texas restaurants. Key rules: (1) Food and food ingredients sold for home preparation and consumption are EXEMPT, this includes cold grocery-style items sold in original manufacturer's sealed packaging; (2) Prepared food, sold in a heated state, sold with eating utensils, or consisting of two or more food ingredients mixed together by the seller, is TAXABLE; (3) Soft drinks (sweetened carbonated beverages, energy drinks, sports drinks) are TAXABLE regardless of where sold; (4) Food sold from self-serve buffets or salad bars is TAXABLE as prepared food; (5) Bakery items (bread, rolls, donuts, pastries) sold WITHOUT eating utensils at a bakery or coffee shop are EXEMPT; the same items sold with eating utensils (coffee + donut + plate) are TAXABLE; (6) Candy is TAXABLE; gum is TAXABLE; (7) Ice (for cooling beverages, not food preservation) is TAXABLE; ice in a sold beverage is part of the beverage. Texas auditors frequently misclassify exempt packaged foods sold at restaurant counters (individual chips, sealed bottled water, packaged candy bars) as taxable restaurant food sales, these misclassifications are challengeable in the Petition for Redetermination's Statement of Grounds. Source: Texas Sales Tax Audit Guide — Sales Tax Helper (March 2026) · How to Appeal Texas Sales Tax Audit Results — Sales Tax Helper (April 2026) · Texas Sales Tax Audit Defence Guide — Hands Off Sales Tax
• Texas Comptroller's Hearings Division conducts informal Redetermination Hearings when a taxpayer formally protests a Notice of Tax Due. The Redetermination Hearing is an informal administrative proceeding (not a court hearing) presided over by an Administrative Law Judge (ALJ). The format: both parties submit written briefs and documentary evidence; the ALJ may hold a telephonic or in-person hearing if requested. The ALJ issues a proposal for decision; the Comptroller's Deputy Comptroller issues the final determination. If unsatisfied, the taxpayer can pay under protest and sue for refund in Travis County district court (Texas Tax Code §112.052). Texas's Comptroller Hearing Division has informal authority to settle cases before the Redetermination Hearing, 40-60% of protested cases settle at the pre-hearing stage when the taxpayer provides strong documentation. The key leverage points: (1) sampling period replacement (if auditor's sample period was COVID-era or otherwise atypical); (2) specific item reclassification (food/beverage taxability misclassifications, resale certificate corrections); (3) penalty abatement under Texas Tax Code §111.103 for first-time violations with reasonable cause. Sales tax attorneys (Brown Tax PC, Stinnett & Associates, Law Offices of Mose) charge $5,000-$15,000 for full Redetermination Hearing representation; the initial Petition for Redetermination and Statement of Grounds is the most time-sensitive component and most self-executable for well-documented cases. Source: Texas Comptroller Guidance on Contesting Disagreed Audits — Sales Tax Institute · Facing a Texas Comptroller Sales-Tax Audit — Sales Tax Helper (July 2025)

When to bring in a professional

Self-serve responses fit routine cases: clear facts, amounts a business can absorb, and a deadline still ahead of you. Bring in a licensed professional when the amount at stake is large relative to their fee, the facts are genuinely disputed, criminal exposure is possible, or the deadline has already passed. A short paid consultation to sanity-check your plan is often worth it even when you handle the filing yourself.

All sources for this guide

1. Protesting a Texas Sales Tax Audit: Deadlines That Can Kill Your Case — Brown Tax PC
2. What Happens at a Texas Comptroller Redetermination Hearing — Brown Tax PC
3. Auditing Fundamentals — Texas Comptroller
4. Texas Sales Tax Audit Guide — Sales Tax Helper (March 2026)
5. How to Appeal Texas Sales Tax Audit Results — Sales Tax Helper (April 2026)
6. Texas Sales Tax Audit Defence Guide — Hands Off Sales Tax
7. Texas Comptroller Guidance on Contesting Disagreed Audits — Sales Tax Institute
8. Facing a Texas Comptroller Sales-Tax Audit — Sales Tax Helper (July 2025)