### T E X A S C O U R T O F A P P E A L S , T H I R D D I S T R I C T , A T A U S T I N

NO. 03-11-00462- CV

Sanad co Inc., a Texas Cor poration; Mahm oud A. Isb a, a/k/a Mahmoud Ahme d Abu isba, a/k/a Mik e Isba; Walid Ab derrahm an; Majic Invest m ents, Inc.; F aisal Kahn; Isra Enterprises, Inc.; Hatt ab Al-Sh udi fat; Haif a Enterprises, Inc.; EID Cor p.; Moham m ed S. Al Hajeid; Maj di Raf

e Okla Nsairat; and Omar Unlimite d, In c. Indivi dual ly, Appellan ts

v. The Of fi ce of the Com ptroller of P ubl ic Acc ounts of the State of T exas; Susan Combs, Ind ividu ally and in h er Offi cial Capacity as Com ptroller of P ubl ic Acc ounts of the State of Texas; and Gre g Abbott in h is Of fi cial Capacity as Att orney G eneral for the State of T exas, Appellees

F ROM TH E DISTRI CT COURT O F TRAVIS CO UNTY, 98TH JUDICI AL DISTRICT NO. D-1 -GV-1 0-0 0090 2, H ONO RAB LE TIM SULAK , JUDGE P RESIDING

M E M O R A N D U M O P I N I O N

After the Comptroller o f P u blic Acc ounts perf ormed an audit on a convenie nce
store owned by Sanadco I nc., the Comptroller and the Attorney Gene ral (cumulatively the “Comptroller”) filed sui t ag ainst Sanadco to recove r delinquent taxes. I n response , Sanadco filed various counter claims ag ainst the Comptroller arg uing that the manner in which she calc ulated the amount of taxes due was under the terms of an unauthorized rule, that many of the actions that she eng ag ed in while conducting her audits wer e ultra vires, and that the provision of t h e tax code authorizing audits by sampling and p ro j ecting was unconstitutional. After Sanadco filed its
counter claims, the Comptroller filed a plea to the jurisdiction contending that the district c ourt didnot have jurisdictio n o v er t h e counter claims. Subsequent to revie wing the plea and convening a

h ear ing, the district court dismiss ed Sanadco’ s counter claims for lack of jurisdiction. On appeal , Sanadco challeng es the dismiss al of its counter claims, and we will reve rse the portion of the district
court’s order dismiss ing Sanadco’ s rule challeng e, aff irm the rema inder of the district court’s order dismiss ing Sana dco’s other counter claims, and re mand the ca se for further proce eding s.

RELEVANT ST ATUTORY SCHEME AND AUDITING MEMOS
Be fore delving into the backg round and issues in this case, a brief overvie w of the g overning fra

mework for this case as well as a brief sy nopsis of the actions by the Comptroller that form the subject of this case is helpful. Under the tax code, convenie nce stores are require d to maintain their sales re co rd s fo r tax purposes, Tex. Tax Code § 151.025, and the Comptroller is authorized to examine and audit the rec ords of convenie nce- store owner s, id. §§ 151.025, 111.004.
I n addition, the C omptr o l l er may use sampli ng and projection methods for estimating t he amount

o f ta xe s o w e d if “ th e ta

xp a y e r ’ s r e c o r d s a

r e in a d e q u a te o r in s u f f ic ie n t. ” I d

. § 1 1 1

. 0 0 4 2 ( b )

. M o r e o v e r , if the C omptroller “is not satisfied” with the calculated tax owed based on the t axpay er’ s rec ords, the Comptroller may deter mine t h e am o u n t of tax owed from “other information available to the comptroller.” Id. § 111.008(a)

.

I n addition to requiring con v en i en ce stores to maintain sales rec ords, the tax code also require s brew ers, manufa cture rs, wholesale rs, and distributors of alcoholic bever ag es to file

r e p o r ts c h r o n ic li n g th e ir s a le s to s to r e s a n d li s ti n g th e s to r e s b y n a

me . I d

. § § 1 5 1

. 4 6 1

- . 4 6 2

. Si mi la

r ly , the tax code authorizes the Comptroller to reque st wholesale rs and distributors of tobacc o products
to f il e th e s a me ty p e o f r e p o r

ts

. I d

. § § 1 5 4 ( a d d

r e s s in g c ig a

r e tt e s a le s ) , 1 5 5

. 1 0 5 ( c o v e r in g n o n - c ig a r e tt e
2tobacc o products). The ty pe of information require d in these repor ts is commonly ref

err ed to as H.B

. 11 information beca use the repor

ting require ments wer e enac ted by Hous e Bi l l 11 of the 80th leg islatu re. See Act of May 3, 2007, 80th. L eg ., R.S., ch. 129, §§ 1-3, 2007 Tex. Gen. L aws 159, 159-62.
Once an audit has been perf ormed, the store owner may reque st a rede termination from the Comptroller within 30 day s of rec eiving notice of the Comptroller’s assessment. Tex. Tax Code § 111.009(a) , (b). I n addition, the owner may also reque st a hea

ring on the re deter

mination, id. § 111.009(c) , befor e the State Offic e of Administrative Hea ring s, id. § 111.00455. I f no reque st for a re d et er m i n at ion is filed within 30 day s, “the deter mination is final on the expiration of the period.” Id. § 111.009(b). As an alterna tive to reque sting a rede termination, an individual may also
pay the assessed taxe s along with a written protest and then file a suit challeng ing the tax. Id. §§ 112.051(a) , (b), .052.

Prior to the passag e of House Bill 11, the Comptroller issued a memo entitled AP 92, which provided g uidance to auditors p er fo rm i ng audits of convenie nce stores. I n the memo, the Comptroller explained that there had been a “lac k of uniformity in estimated conveni en ce s t o re audits” and that “mar

k-up perc entag es and product mix perc entag es” wer e develope d to be used in audits “whe n nece ssitated by lack of reliable rec ords” or if a store’s “re co rd s are unavailable , inadequa te or unreliable .” After House Bill 11 passed, the Comptroller issued another memo to audit personne l entitled AP 1 2 2

. The new memo updated AP 92 and require d auditors to use H.B

. 11 information “to produce the most acc urate audit results.” The issuance of these two memos along with various actions taken b y t h e C omptroller when perf orming convenie nce- store audits form the ba sis for this case.

3BACK GR OUND Turning to the fac ts of this case , Sanadco owns a convenie nce store, and Mahmoud
I sba opera tes the store and is desig nated as a responsible person for Sanadco. The Comptroller audited Sanadco and deter min ed that Sanadco had underr eporte d its taxable sales for alcohol and tobacc o products. The amount of the defic it was deter mined using H.B

. 11 data. After making her deter mination, the Comptroller sent a bill for the estimated amount o we d and for interest on that
amount as we ll as a pena lty

.

After rec eiving notice of the amount due, Sanadco did not file an administrative challeng e t o t h e as s essment, nor did it pay the amount due. Acc ording ly , the Attorney Gene ral filed suit to collect the deli n q u ent taxes. I n response , Sanadco filed an answe r and raised sever al
counter claims for decla

ratory relief

. Those counter claims wer e made ag ainst the Offic e of the Comptroller, Susan Combs in her officia l c apac ity as Comptroller, and Gr eg Abbott in his officia l
capa city as the Attorney Gene ral. I n its response , Sanadco also named as counter -plaintiffs other individuals and companies who had been assessed simil ar taxes. Those other individuals and companies are W al id Abder rahma n; Majic I nvestments, I nc.; Fa isal Kahn; I sra Enterpr ises, I nc.; Hattab Al-Shudifat; Haifa Enterpr ises, I nc.; EI D Corp.; Mohammed S. Al Hajeid; Majdi Rafe Okla Nsaira t; and Omar Unlimited, I nc. Unlike Sanadco, the other named counter -plaintiffs all soug ht 1

r e d e te r mi n a ti o n s o f th e ir a s s e s s e d ta

xe s th r o u g h a d mi n is tr a ti v e r e v ie w , b u t n o n e o f th e a d mi n is tr a ti v e
proce eding s had bee n completed by the time that the individuals were added to the la wsuit.

For ease of re ading , we will g ener ally ref er to a ll of the counter -plaintiffs as Sana dco. 1 4Reg arding its counter claims, Sanadco alleg ed six complaints rele vant to this appea l.

I n its fir st c ounterc laim, Sana dco asser ted that AP 92 and AP 122 are administrative rules but that they wer e not promulg ated in compliance with the require ments of the administrative proce dure act. Acc ording ly , Sanadco soug ht a decla ration that those memos are invalid administrative rules. I n its second counter claim, Sanadco alleg ed that the Comptroller eng ag ed in ultra vires actions when she issued AP 92 and AP 122 and there by authorized auditors to e stimate taxes owe d by convenie ncestore owner s without “first asce rtaining whether adequate rec ords are available ” from the taxpay er
to perf orm an audit. For those rea sons, Sanadco soug ht decla rations asser

ting that “the Comptroller is not authorized to estimate convenie nce s t o re au d i t s using the methods descr ibed in AP 92 or AP 122 until their proper adoption, and/or that the authorization of their use is a non-discre tionary ultra vires act committed without leg al authority .” I n its third counter claim, Sanadco contende d that the Comptroller acte d without leg al authority when she improperly instructed auditors to use H.B

. 11 information for convenie nce store audits “without first asce rtaining whether the deter mination can b e ma d e f r o m th e ta xp a y e r ’ s r e c o r d s . ” A c c o r d in g ly , Sa n a d c o in s is te d th a

t th e Co mp tr o ll e r ’ s d e c is io n
to require the use of H.B

. 11 data is an ultra vires act and, there fore , soug ht decla rations that the use of H.B

. 11 information was improper and that the g overning statutes do not allow “the Comptroller
to g ive conclusive eff

ect to the HB 11 data.” I n its fourth counter claim, Sanadco alleg ed that the 2 Comptroller improperly authorized auditors to “use an abbr ev i at ed proce dure which by passed

I n this counter claim, Sanadco also soug ht a decla ration that the Comptroller’s decision 2 to require the use of H.B

. 11 information constituted an impermissible and invalid rule. Beca use that decla ratory relief would seem to para llel the assertions made in S anadc o’s first counterclaim, our an al y sis reg arding the first counter claim i s intended to addre ss the declara tion reg arding H.B

. 11 as we ll. 5examination of the taxpay er’ s rec ords and authorized an estimation of his tax liability based solely

o n th e in v a li d H

. B

. 1 1 d a

ta , w it h o u t f ir s t d e te r mi n in g th e a d e q

u a c y o f th e ta

xp a y e r ’ s r e c o r d s . ” F o r th a

t

rea son, Sanadco insisted that the Comptroller was acting ultra vires and soug ht a decla ration that the
g overning tax code provisions do not authorize the abbre viated proce dure. I n its fifth counter claim, Sanadco alleg ed that the Comptroller acte d ultra vires by authorizi ng the imposit ion of a 50% penalty without proof of fra

ud or of an intent to avoid the tax as require d by the tax co d e. S ee T ex . Tax Code § 111.061(b). I n its six th counter claim, Sanadco soug ht a decla ration that the provision of the
t ax code authorizing sample and projection audits for estimating t axes owed is unconstitut i o n al l y
vag ue and is, “by its nature , a denial of substantive and proce dural due proce ss.” See id. § 111.0042.

After Sanadco filed its counter claims, the Comptroller filed a plea to the jurisdiction.
I n her p l ea and brief in support of the plea, the Comptroller arg ued that the district court did not have jurisdiction over Sanadco’ s counter claims beca use Sanadco did not alleg e a proper rule ch al l en ge, beca

use the claims are barr ed by sovere ign immunit y , beca use Sanadco and the other named counter -plaintiffs failed to exhaust their administrative reme dies befor e filing suit, be cause

some of the counter claims wer e not ripe for review, and beca use Sanadco and the other counter

plaintiffs did not have standing to challeng e the a lleg edly unconstitutional tax statute. After revie wing the p l eading s, the plea, and Sanadco’ s response to the plea, the district cour t s i gn ed an order g ranting the Comptroller’s plea. On appea l, Sanadco contests the 3

I n addition to the six counter claims mentioned above, Sanadco also alleg ed the following 3 additional counter claims: (1) that the Comptroller eng ag ed in an unconstitutional t aking when she improperly collecte d sales and use taxes, and (2) that the tax code provision authorizing the Comptroller to impose a ten perc ent penalty if she believes that “the amount due for a tax period is jeopar dized by

delay ” is unconstitutional. 6district court’s order g ranting the Comptroller’s plea and, in six issues, challeng es the district court’s

dismiss al of its six counter claims. 4

STANDARD OF REVIEW
“A plea to the jurisdiction is a dilatory plea, the purpose of which is to defe at a cause of action without reg ard to whether the claims asser ted have merit.” Bland Indep. Sch. Dist. v. Blue , 34 S.W .3d 547, 554 (Tex. 2000). A party to a lawsuit may challeng e a trial court’s subjec t-matter

The re sponsive filing c ontaining the Comptroller’s plea to the jurisdiction also served as a motion for summary

judgme nt. I n the plea por tion of the filing, the Comptroller sought dismissal of the six counter claims discussed in the body of the opinion but did not discuss the two additional counter claims. I n the summary -judg ment portion, the Comptroller soug ht judgme n t in her favor reg arding the two additional counter claims as well as some of the other counter claims. I n a separ ate order , the district court g rante d the motion for summary judgme nt.
I n two issues on appea l, Sanadco arg ues that the district court err ed b y d i s m i s s ing the two additional counter claims listed above. How ever , those additional claims wer e disposed of by summary judgme nt. The leg islature has empower ed appellate revie w of a trial court’s interlocutory order g ranting a plea to the j urisdiction by a gover nmental uni t, see Tex. Civ. Prac. & Rem. Code § 51.014(a) , b u t h as not empower ed us with authority over interlocutory order s g ranting a g overnme ntal unit’s motion for summary judgme nt. Acc ording ly , in this appea l, we only addre ss the six counter claims listed in the body of the opinion t hat wer e attacke d and dismiss ed on jurisdictional gr ounds. I n its counter claims, Sanadco filed suit ag ainst the Comptroller in her individual capa city 4 and soug ht to initiate a class action on behalf of individuals who had simil arly been assessed taxes. I n her ple a to the jurisdiction and brie f in support of the plea, the Comptroller soug ht dismiss al of Sanadco’ s claims aga inst her in her individual capa city on the g round that Sanadco had failed to “plea d any fac ts that would expose [her] to in dividual liability ” and beca use the pleading s demonstrate that Sanadco “ cannot plead any fac ts that would g ive rise to such liability .” Simi larly , the Comptroller reque sted that the district court dismiss the class action claims for sever al rea sons, including that none of the convenie nce- store owner s had “satisfied the statutory prer equisite to filing a cl as s ac t i o n under” the tax code. See Tex. Tax Code § 112.055 (allowing for class actions b y persons who have paid their taxes under protest). The district court g rante d the Comptroller’s plea in its entirety , and S anadc o does not challeng e the dismiss al of its claims ag ainst t h e C o m p troller in her individual capa city or of its class-a ction claims. Acc ording ly , those claims are not considere d in this appeal and r emain dismissed. 7ju

r is d ic ti o n o v e r a c a s e b y f

il in g a p le a . H

o u s to n M u n
. E m p s
. P e n s io n S

y s
. v
. F e r r e ll , 2 4 8 S. W. 3 d 1 5 1 , 1 5 6 (T ex . 2007). Deter

minations reg arding whether a trial court has jurisdiction over a case ar e questions of law. Texas Dep’ t of Parks & W

ildlif e v. Miranda , 133 S.W .3d 217, 225-26 (Tex. 2004).
Su b je c t ma tt e r ju r is d ic ti o n is a q

u e s ti o n o f la

w th a t a p p e ll a te c o u r ts r e v ie w d e n o v o , S

ta te v
. H o ll a n d , 221 S.W .3d 639, 642 (Tex

. 2007), and may be raised for the first time in an interlocutory appea l, Rusk State Hosp. v. Black , 392 S.W .3d 88, 95-96 (Tex. 2012). Moreove r, appellate courts must consider their jurisdiction “eve n if that consideration is sua sponte.” Freedom C ommc’ ns., Inc. v. Coronado , 372 S.W .3d 621, 624 (Tex. 2012) (per curia m).
O n a p p e a l, w e r e v ie w d e n o v o a tr ia l c o u r t’ s d e c is io n to g r a

n t a p le a to th e ju

r is d ic ti o n . Ferrell , 248 S.W .3d at 156. I n perf orming this jurisdictional analy sis, courts look to the “plaintiff’ s petition to deter

mine whether the fac ts pled aff irmatively demonstrate that jurisd i ct i o n exis ts.”
Ho l l a nd , 221 S.W .3d at 642. “I f t he pleadings are insufficient t o establish jurisdiction but do not aff irmatively demonstrate an i n cura ble defe ct, the plaintiff should be aff orded the opportunity to reple ad.” Id. at 643. Howeve r, if “the pleading s aff irmatively neg ate the exis tence of jurisdiction, then a pl ea to the jurisdiction may be g rante d without allowing the plaintiffs an opportunity to amend.” Miranda , 133 S.W .3d at 227.

DISCUSSIO N

As mentioned above, Sanadco challenges t h e dismiss al of its six counter claims in six separ ate issues on a

ppeal.

8Sanad co’s F irst Issue
I n its fir st issue on appea l, Sana dco urg es that the district court e rre d by dismiss ing its counter claim re gar d i n g AP 92 and AP 122. I n its counter claim, Sanadco soug ht a decla ration that the memos are invalid administrative rules. Essentially , Sanadco contends that t h e memos require d the C o m p t ro ller’s auditors to use cer tain methods when perf orming audits of all convenie nce stores and that the Comptroller used the proce dures specifie d in t he memos when perf orming the audits at issue in this case . I n challeng ing the district court’s order , Sanadco insists that the memos constituted administrative rules as define d by the administrative proc edure act but that the rules wer e not adopted in compliance with the act. See Tex. Gov’t Code §§ 2001.021-.041;

see also id. § 2001.003(6) (def ining “rule ”). Acc ording ly , Sanadco contends that the district court had jurisdiction to consider its challeng e to the rules beca u s e t h e ad minist rative proce dure act
empower s a party to seek a decla ration challeng ing the validity or applicability of a rule, see id. § 2001.038, including one not adopted in compliance with the act, see El Paso Cnty. Hosp. Dist. v. Texas He alth & Human Serv s. Comm’n , 247 S.W .3d 709, 715 (Tex. 2008).
I n supporting the district court’s dismiss al of this counter claim, the Comp t ro l l er contends that the provision of the administrative proce dure act authorizing rule challenges d o es
not a pply in this case beca

use the memos do not qua lify as rules under the ac t. As support for this proposition, the Comptroller arg ues that t h e m em o s are simply statements reg arding the internal
manag ement of the ag ency an d d o not impose any duties or require ments on convenie nce- store

owner s. On the contra

ry , the Comptroller i nsists that the memos are desig ned to improve the

a c c u r a c y o f a u d it s b y r e q

u ir in g a u d it o r s , n o t ta

xp a y e r s , to u s e c e r

ta in a u d it in g me th o d s . F u

r th e r mo r e ,

9the Comptroller urg es that althoug h the memos may help auditors asce rtain whether taxpay ers owe

money , the taxpay er may challeng e the deter mination. Acc ording ly , the Comptroller insists that any eff ect on a taxpay er cause d by the implementation of AP 92 and AP 122 would only be binding afte r

a n a d mi n is tr a ti v e h e a r in g , w h ic h s h e c o n te n d s s u p p o r ts th e c o n c lu s io n th a

t th o s e me mo s a

r e n o t r u le s . Be cause we believe t hat AP 92 and AP 122 are rules, we must conclude that the district court err ed by dismiss ing Sanadco’ s first counter claim. Under the administrative proce dure act, a rule is define d as “a s t at e age n cy s tatement of g ener al applicability that: (i) implements, interpre ts, or presc ribes law or policy ; or (ii) descr ibes the proce dure or prac tice require ments of a
state ag ency .” Tex. Gov’ t C o d e § 2 0 0 1

. 0 0 3 ( 6 ) ( A )

. F o r r u le d e te r mi n a ti o n s , “ g e n e r a l a

p p li c a b il it y ”

r e f e r s to s ta te me n ts a f

f e c ti n g the interest of the public and does not ref er to statements issued when deter

mining the rig hts of individuals. Combs v. Entertainment Publ’ns, Inc. , 292 S.W .3d 712,
721 (Tex. A

pp.—Austin 2009, no pet.). Fur ther, the statutory definition “includes the amendment

or repe al of a prior rule” but excludes “a statement reg arding only the internal m an agement or
org anization of a state ag ency and no t af fec ting private rig hts or proce dures.” Tex. Gov’t Code § 2001.003(6)( B) -(C). I n deter mining whether an ag ency statement is a rule , courts consider “the intent of the ag ency , the presc riptive nature of the g uidelines, and the context in which the statement was made .” Entertainment Publ’ns , 292 S.W .3d at 722.

AP 92 states that formulas we re de veloped for estimating convenie nce- store audits
to promote uniformity

. Essen t ially , the memo sets out mark-up perc entag es that wer e to be used in a ll c ases wher e “re cords are unavailable , inadequa te or unreliable .” Simi larly , AP 122 provides
g uidelines for convenie nce- store audits and instructs that H.B

. 11 information “ m ust be the starting point” for a ll convenienc e-store audits conducte d afte r the da te of the me mo.
10By their lang uag e, b o t h m em os are statements implementing, interpre ting, or

p r e s c r ib in g la

w o r p o li c y . Cf

. id

. a t 7 2 1 ( c o n c lu d in g th a

t le tt e r s b y Co mp tr o ll e r in d ic a ti n g h e r in te n ti o n
to apply statute in all case s “involving brochur e fundra ising firms” witho u t rega rd to individual fac tors wer e rules). The direc tives in the memo apply to audits perf ormed on all convenie nce- store

owner s and not just to the named counter -plaintiffs, and the memos, particula rly AP 122, reve al the Comptroller’s intention to apply particula r information and methods when perf orming all audits of convenie nce stores in all future case s and reg ardle ss of any individual circ umstances. S ee Tri nity Settlement Servs., LLC v. Texas State Sec. Bd. , No. 03-10-00639- CV, 2013 Tex. App. L EXI S 9487, at *15-16 (T ex. App.—Austin Aug . 1, 2013, no pet. h.) (c oncluding that ag ency statement did not qualify as rule b ec au s e it applied only to particula r company and beca

use ag ency did not express intention to apply

statement to all future case s). Another fac t o r weig hing in favor of a deter mination that the memos are rules is Sanadco’ s alleg ation that the Comptroller is in fac t g ener ally using direc tives and formulas in those

memos when performing audits on convenie nce stores and that the Comptroller used the memos d uring the audits of t he convenience stores at issue in this case . I n other words, the m emos had a tang ible eff

ect and wer e not simply advisory s tatements. See Brinkley v. Texas Lottery Comm’n , 986 S.W .2d 764, 770 (Tex. App.—Austin 1999, no pet.) (explaining that letters from Commi ssion setting forth criter ia by which licensee s could deter mine if their ei gh t -l i n er machines wer e leg al

wer e not rules beca

use they wer e mere ly informal views bear ing upon internal ag ency manag ement i n absenc e of statute g iving letters leg al eff ect or attempt by ag ency to enfor ce statem en t aga i n s t licensee ). Given that the m emos had effec ts on conveni en ce s tores at larg e, we also cannot ag ree

11with the Comptroller’s asser tion that the memos wer e only statements direc ted to auditing personne l

“ r e g a r d in g o n ly th e in

te r n a l ma n a g e me n t o r o r g a

n iz a ti o n ” o f th e Co mp tr o ll e r ’ s o f f ic e . S e e T e x. G o v ’ t Code § 2001.003(6)( C); cf. Texas Mut. Ins. Co. v. Vista Cmty. Med. Ctr., LLP , 275 S.W .3d 538, 555 (Tex. App.—Austin 2008, pet. denied) (dete rmining that staff repor t conce rning inconsistent i m p l em en t ation of rule was not itself rule beca use repor t was prese nted to ag ency but ag en cy took no officia l action reg arding repor t and beca

use it simp ly prese nted possible corr ection to stop inconsistency

). Although we need not thoroug hly pursue the issue here , we are also persua ded that AP 122 is a rule beca use that memo require s the use of H.B

. 11 information as a primary tool for estimating taxes reg ardle ss of the condition of the taxpay er’ s rec ords. That require ment is noteworthy beca

use it seems like a d ep ar t u re from the provisions of the tax code authorizing estimating techniques when the taxpay er’ s rec o rds are somehow inadequa te and when the Comptroller is “not satisfied” with a tax repor t that has been filed “or the amount of the tax require d
to be paid.” See Tex. Tax Code §§ 111.0042, .008; see also El Paso Cnty. Hosp. Dist. , 247 S.W .3d
at 714 (conc luding that ag ency letter setting cutoff date for seeking reimburse ment was rule beca use it was statement of g ener al applica bility , aff ecte d all hospitals, a

nd implemented ag ency

policy by modify ing pre- exis ting base- y ear rule). This ty pe of modification to prior prac tices and g overning frameworks would seem to more properly fall under the categ ory of a rule rather t han a statement about an a g ency ’s interna l org anization.

I n addition, we are also not persua ded by the Comptroller’s asser tion that the ability of a taxpay er to challeng e an audit perf ormed under the met h o d s descr ibed in the memos

12somehow pre cludes a conclusion that the memos are rules. Assuming that the ability to challeng e

a tax assessment could aff ec t whether the audit was perf ormed under the terms of a rule, the
assessment would seem to be final and binding upon those individuals who do not contest their assessmen t s. Reg ardle ss, formally promulg ated rules may contain provisions authorizing administrative challeng es without aff ecting their status as ru l es , and for that rea son, we do not believe that the ability to seek administrative revie w fore cl oses a challeng e to whether ag ency direc tives were enac ted under the terms of a

n improperly

promulg ated r

ule.
I n rea ching our result, we wo u l d b e remiss if we did not mention that the line that
separ ates rules from statements of “interna l manag ement or org anization” is a blurry one. See Tex. Gov’t Code § 2001.003(6); see Slay v. Texas Comm’n on Envtl. Quality , 351 S.W .3d 532, 546 (Tex. App.—Austin 2011, pet. denied) (desc ribing distinction as “elusive” ). Although the leg islature has attempted to distinguish the two throug h leg islation, making the distinction is often not an easy task, particula rly g iven the varie d functions that ag encie s are char g ed with underta king. I n discussing the difficulty in making these deter minations, this Court has explained that the core conce pt to consider is whether the ag ency statement has “a binding eff ect on private parties.” Slay , 351 S.W .3d at 546;

see also id. at 546, 548 (conc luding that evidenc e supported trial court’s deter mination that ag ency
statement was not rule beca use ther e wa s ev idence that ag ency commissioners “we re not bound
to follow [st atement’ s] methodology when ex er ci s ing their leg islatively confe rre d discretion to im p o s e p e n a lt ie s ” )

. A lt

h o u g h th is is a

n e xtr e me ly c lo s e c a s e , w e b e li e v e th a t th e r e c o r d a s it h a s b e e n develope d at this stag e of the lawsuit compels a conclusion that the memos at issue have sufficie nt eff ect on pr ivate par

ties to render

them rules.

13I n light of the prec eding , we conclude that the direc tives in AP 92 and AP 122 are in

f a c t r u le s . F o r th a

t r e a s o n , w e mu s t a ls o c o n c lu d e th a t th e d is tr ic t c o u r t h a d ju r is d ic ti o n o v e r Sa

n a d c o ’ s claim that AP 92 an d AP 1 22 wer e invalid rules and that, there fore , the district court err ed by dismiss ing Sanadco’ s first counter claim. Acc ording ly , we sustain Sana dco’s first issue on appea l.

Sanad co’s Sec ond, T hird, Fourth, and Fifth Issu es

I n its second, third, an d fo u rt h issues, Sanadco challeng es the dismiss al of its
reque sted decla

ratory relief reg arding actions taken by the Comptroller that it contends are ultra vires
acts. Specifica lly , Sanadco urg es t hat t he following actions by the C omptrolle r ar e n o t supported by any g overning law: the Comp t ro l l er ’s decision to require auditors to estimate taxes owed by using t h e m et h o d s d escr ibed in AP 92 and AP 122 and to authorize her auditors to use H.B

. 11 information to conduct abbre viated tax audits. I n asser ting that these actions are ultra vires, Sanadco points to section 111.0042 of the tax code, which allows auditors to use sampling auditing methods when a taxpay er’ s rec ords are unsatisfac tory

. See Tex. Ta x Code § 111.0042. Simi larly , Sanadco ref ers to a rule in the ad m i n i s t rative code that authorizes the Comptroller to use “a sample and projec tion auditing method to deter mine tax liability ” when a taxpay er’ s rec ords are unsatisfac tory

. See 34 Tex. Admin. C ode § 3.282(c ), (d)

. I n light of the statutory provision a nd the rule, Sanadco insists that the Comptroller’s decision to perfor m the audits in the manner de scribed is contra ry to th e g o v e r n in g la w . I n it s f if th is s u e , Sa

n a d c o c h a ll e n g e s th e d is mi s s a l o f h is d e c la r a to r y c la im a ll e g in g that the Comptroller acte d ultra vires by authorizing a 50% penalty for fra ud. Specifica lly , Sanadco i n s i sts that althoug h subsection 111.061(b) of the tax code authorizes the Comptroller to impos e penalties, the provision limit s its imposit ion to circ umstances in which it is deter mined that a failure

14to pa

y the tax “due was a result of fra ud or an intent to evade the tax” or that the taxpay er eng ag ed in fra udulent conduct to aff

ect the “outcome of an audit.” See Tex. Tax Code § 111.061(b). Rely ing

on that statute, Sanadco insists that the Comptroller did not make the requisite deter minations befor e imposing the fr aud pena lty on convenie nce- store owne rs. F u r th e r mo r e , Sa n a d c o c o n tends that even though none of the named c o u n te r - p la in ti f f s had fully exhausted their administrative reme dies reg arding the Comptroller’s tax assessments, the district court sti ll had jurisdi ction to consider the se dec lara tory complaints beca

use par ties are not

r e q u ir e d to e xh a

u s t th e ir a d

mi n is tr a ti v e r e me d ie s f

o r p r o p e r ly p le a d e d u lt

r a - v ir e s c la im s . A c c o r d in g ly , Sanadco insists that the district court had jurisdiction over its d ec l ar at o ry claims reque sting the Comptroller to comply

with the g overning statutes and rule s. Gene rally speaking , a party must exhaust all of its administrative reme dies befor e seeking judicial revie w of a n ag ency deter mination. Friends of Canyon Lake, Inc . v. GuadalupeB l a n co R iver Auth. , 96 S.W .3d 519, 525 (Tex. App.—Austin 2002, pet. denied) ; cf. Burgess v. Gallery Model Homes, Inc. , 1 0 1 S.W .3d 550, 558 (Tex. App.—Houston [1st Dist.] 2003, pet. denied) (explaining that Comptroller has exclusive jurisdiction to resolve tax ref unds and that party
must e x haust such reme dy befor e filing ref und suit); cf. Tex. Gov’t Code § 2001.171(empowe ring
person who has exhausted his administrative reme dies and who is ag g rieve d by final ag ency decision
to seek judicial revie w). Ex haustion of ad m i n istrative reme dies is nece ssary in order to waive

sovere ign immuni ty , which otherwise t y pically fore closes sui ts ag ain s t g overnme nt officia ls. See Assignees of Best Buy v. Combs , 395 S.W .3d 847, 869 (Tex. App.—Austin 2013, pet. filed). I n its brief, Sanadco corr ectly po i n t s o u t t hat the supreme court has rec og nized an exception to the

15g ener al rule for claims alleg ing that g overnme nt officia ls have eng ag ed in ultra vires acts. See

City of El Paso v. Heinrich , 284 S.W .3d 366, 372-73, 380 (Tex. 2009) (explaining th at wi t h o n e exception, “g overnme ntal immunit y protec ts g overnme nt office rs sued in their officia l capa cities to the extent that it protec ts their employ ers” and that suits filed ag ainst g overnme nt officia ls seeking
“to require state officia ls to comply with statutory or constitutional provisions are not prohibited by

sovere ign immunit y ”); Appraisal Re view Bd. of H arris Cnty. v. O ’Connor & Assocs. , 267 S.W .3d 413, 418-19 (Tex. App.—Houston [14t h Dist.] 2008, no pet.) (outlining ex ce p t ion to exhaustion require ment for ultra vires claims and stating that g ener ally courts may only interfe re with duties of

a g e n c y w h e n o f

f ic ia ls e x cee d statutorily confe rre d power s even though administrative reme dies have not been e x hausted).

Howeve r, we do not believe that the exception applies to Sanad co ’s cl ai ms. I n

o rd er t o fa l l within the exception, a party must alleg e that the officia l “ac ted wholly outside [hi s] jurisdiction,” and alleg ations that an ag ency o fficial failed to fully comply “with all of the intricac ies” of the g overning statutes and rules are insufficient to confer jurisdiction. Friends of Canyon Lake , 96 S

. W

. 3 d at 528; see O’Connor & Assocs. , 267 S.W .3d at 419. As a preliminary matter, we note that the H.B

. 11 inform at i o n that the Comptroller used for calc ulating the audits

was information that the leg islature require d wholesale rs to provide reg arding their sales of alcohol and tobacc o products to conve n i en ce- store owner s. See Tex. Tax Code §§ 151.462, 154.212.
Moreove r, the bill analy sis for H.B

. 11 reve als that the law was enac ted beca use of “g rowing conce rn

over fra ud among convenie nce store owner s in the are a of sales tax repor ting” and that the leg islature

16was r eq u i ring the i nformation in order to help t he C omptroller perform her audits of convenience

stores. Senate Comm. on Bus. & Commerce, B ill Analy sis, Tex . H.B . 11, 80th L eg ., R.S. (2007).

I n addition, the l eg islature ha s s pecif ically empower ed the Comptroller to perf orm
tax audits of convenie nce stores. See Tex. Tax Code §§ 111.001 (empowe ring Comptroller to coll ect sales taxes), .004-.0041 (authorizing Comptroller to examine rec ords of taxpay ers)

. I mportantly , the leg islature has also allowed the Comptroller to estimate the amount of taxes d u e in cer tain circ umstances. See id. §§ 111.0042 (allowing Comptroller to use sampling a uditing tec hniques if

cer tain conditions are met),

. 0 0 8 (a u thorizi ng Comptroller to use other information if she is dissatisfied with tax repor t). Moreove r, the tax code direc ts the Comptroller to impose a penalty of 50% of the taxes due if the Comptroller co n cludes that a taxpay er’ s failure to pay was the “re sult of fr aud or a

n intent to evade the tax.” Id. § 111.061(b). Although Sanadco may disagree with the manner in which the Comptroller is perf orming her duties and her decision to use leg islatively presc ribed information for estimating the
amount o wed in her audits, we cannot ag ree that Sanadco has alleg ed complaints about actions wh o l l y outside of t he C omptroller’s authority

. Alleg ations that the C omptroller i s not compl y i n g compl etely with ever

y statutory require ment when perf orming the duties that she is authori z ed t o perf orm are not sufficie nt to invoke the ultra-vire s exception. See Creedmoor-M aha W ater Supply Corp. v. Texas Comm’n on Env tl. Quality , 307 S.W .3d 505, 517-18 (Te x . App.—Austin 2010, no pet.) (dete rmining that alleg ations that ag ency rea ched incorre ct result when exercising its deleg ated authority does not constitute u lt r a - v ir e s c la im s ) ; O’Connor & Assocs. , 267 S.W .3d at 419 (explaining that asser tions that age n cy hear ings did not fully comply with statutory proce dural require ments

17wer e not e noug h to invoke ultra-vire s exception); Friends of Cany on Lake, Inc. , 96 S.W .3d at 528

(conc lu d i n g t h at arg uments that ag ency did not provide require d notice and information during applica tion proce ss wer e insufficient to invoke exception); cf. Texas Comm’n of Licensing & Regulation v. Model Search Am., Inc. , 953 S.W .2d 289, 292 (Tex. App.—Austin 1997, n o wr i t ) (re lating that claim that ag ency had authority to interpre t s t at u t e but had interpre ted provision incorre ctly was insufficient to invoke ultra-vire s exception beca use possibil i ty that ag ency might interpre t provision incorrec tly does not destroy

ag ency ’s ability

to make that dete rmination).
I n light of the fact t hat Sanadco’ s petition failed to demonstrate that the named

c o u n te r - p la in ti f f s h a d f a il e d to e xh a

u s t th e ir a d

mi n is tr a ti v e r e me d ie s a

n d in li g h t o f o u

r d e te r mi n a ti o n
t h at S anadco’s alleg ations did not proper ly invoke the ultra-vire s exception to the exhaust i o n require ment, we must conclude that Sanadco’ s petition did not invoke the jurisdiction of the district
court to consider its reque sted decla ratory relief

. For these rea sons, we cannot co n clude that the district court err ed by dismiss ing Sanadco’ s reque sted decla ratory relief

, and there fore , we overr

ule Sanadco’ s second, third, fourth, and fifth issues on appea l. See Creedmoor-M aha W ater Supply Corp. , 307 S.W .3d at 515 (noting that party does not avoid jurisdictional limit ation by filing claim under unifor

m declar atory

judgme nt act and tha t act is not g ener al waive r of immunity ). 5

On appea l, Sanad c o c o ntends that exhaustion of administrative reme dies was not war rante d 5 in this case beca

use its claims prese nted pure questions of law and wer e based on uncontested fac ts. Assuming without deciding that Sanadco invokes a viable exception to the exhaustion-of-re medies doctrine, we d i s agr ee with Sanadco’ s asser tion that the relief that it soug ht only involved pure questio n s o f l aw. I n addition to seeking decla rations reg arding whether cer tain proce dures by the Comptroller complied with rele vant g overning law, San ad co al so soug ht in its counter claims to have the counter -plaintiffs be relieve d of the obliga tion to pay their respe ctive tax es , t o re cover compensa tory damag es from the Comptroller as well as interest and attorney ’s fee s, and to obtain a judgment di rect i n g the C omptroller “to acc ount

. . . for all of t he damag es caused to” the 18Sanad co’s Sixth Issue
I n its final issue on appea l, Sanadco asser ts that the district court err ed by dismiss ing

on jurisdictional g rounds the counter claim that section 111.0042 of the tax code is unconstitutional. That provision authorizes the Comptroller to use sam p l ing auditing methods if cer tain criter ia

are met. Tex. Tax Code § 1 1 1.0042. I n its six th counter claim, S anadc o soug ht a declara tion that the provision is unconstituti onally vag ue as w ritten and a s applied to the counte r-plaintiffs.
I n order for a trial court to have jurisdiction over a decla ratory -j udg ment claim, a party must a lleg e “a justiciable controve rsy as to the rig hts a nd status of parties actua lly befor e the court for adjudication, and the declara tion soug ht must actual l y re s o lve t he controversy .” Brooks

v. N orthglen Ass’n , 141 S.W .3d 158, 163-64 (Tex. 2004). “A justiciable controve rsy is one in which a rea l and substantial controve rsy exis ts involving a g enuine conflict of tang ible interests and
not mere ly a theore tical dispute.” Texas Dep’ t of Pub. Safety v. Moore , 985 S.W .2d 149, 153 (Tex. App.—Austin 1998, no pet.). I f there is no case or controve rsy , then any decla ration issued by a trial court would c onstitut e an imper missibl e advisory

opinion. Brooks , 141 S.W .3d at 164. Although Sanadco urg es th e s ta tu te ’ s u n c o n s ti tu ti onality , neither his filing containing the counter claim nor his appellate briefs contain any al l ega t ion reg arding a dispute betwee n the
Co mp tr o ll e r a

n d th e n a me d c o u n te r - p la in ti f f s in v o lv in g th e s ta

tu te in q u e s ti o n . I n p a r ti c u la r , Sa n a d c o does not asser

t that the Comptroller used or thre atene d to use the sampli ng methods authorized in

counter -plaintiffs. Cf. Harris Cnty. Appraisal Dist. v. ETC Mktg. , 399 S.W .3d 364, 36 8 (T ex . App.—Houston [14t h Dist.] 2013, pet. filed) (di s agr eeing with asser tions that claims wer e just questions of law and that exhaustion require ment did not need to be met beca use party was seeking to have its tax assessments set aside and c ould not, therefor e, be pur suing pur e question of law ). 19th e p r o v is io n w h e n p e r f o r mi n g th e a u d it s f o r a ny o f th e c o u

n te r - p la in ti f f s . T o th e c o n

tr a r y , Sa n a d c o ’ s filings in the district court and in his appellate briefs all alleg e that the Comptroller improperly used H.B

. 11 information when perf orming audits. Acc ording ly , Sanadco did not plead any conflict
reg arding the statute, and there was no justiciable controve rsy betwee n the named counter -plaintiffs and the Comptroller. For that rea son, we cannot conclude that the district court err ed by dismiss ing its requested de clar atory

relief , and ther efor e, we overr

ule Sanadc o’s six th issue on appea l.

CONCLUSION Having overr

uled Sanadco’ s second, third, fourth, fifth, and six th issues, we aff irm the portion of the district court’s order dismiss ing on jurisdictional g rounds th e f o ll o wing decla

ratory
counter claims urg ed by Sanadco: that the Comptroller acte d ultra vires by implementing AP 92 and
AP 122 , t h at t h e C omptroller acted ul tra vires by requiring the us e of H.B

. 11 information during audits of convenie nce stores, that the Comptroller acte d ultra vires by authorizing abbre viated audits and by g iving prec lusive eff ect to H.B

. 11 information during those audits, that the Comptroller acte d ultra vi res by authorizing the imposit i o n o f a fraud penalty without requiring a determination that all the statutory criter ia had been met, and that section 111.0042 is unconstitutional. Having sustained Sanadco’ s first issue on appea l, we reve rse that portion of the district court’s order dismiss ing the counter claim asser ting that AP 92 and AP 122 wer e improper ly promulg ated r

ules.
Acc ording ly , we r emand the c ase f or proc eeding s consistent with this opi nion.

20__________________________________________ David Pury ear , J ustice
Be fore J ustices Pury ear , Henson, a nd Goodwin J ustice He nson not participating Affir med in Part; Reverse d and Remande d in Part Filed: September

26, 2013

21