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Texas Tax Talk: Ruling May Erode Pro-Taxpayer Presumption

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Law360 recently published an article by Baker Botts Partner Matt Larsen, Senior Associate Ben Geslison, Associate Ali Foyt and Summer Associate Jonathan Diener.
A version of this piece can be read on Law360, here.

The Texas Supreme Court's recent decision in Hegar v. Health Care Service Corporation may have weakened the long-standing presumption that ambiguous tax statutes must be construed strictly against the taxing authority and liberally for the taxpayer.1

The pro-taxpayer presumption — which the appellate court characterized as ancient — traces its roots to an old English rule asserting that a sovereign is bound to express its intention to tax in clear and unambiguous language.2

As articulated by Health Care Service's dissenting opinion advocating for its application, the presumption is justified because "it is better for courts to admit that [a] statute is unclear and require the Legislature to clarify itself than to side with the government and thereby risk judicially imposing a tax the legislature never authorized."3

The majority opinion, however, refused to apply the presumption in the face of the taxpayer's reasonable alternative statutory construction, holding that the presumption should apply only as "a rule of last resort — a feather to tip the scale between equally plausible interpretations."4

This application of the presumption is contrary to how the Texas Supreme Court has historically implemented it, and could impact how taxpayers approach future statutory construction disputes.

Hegar v. Health Care Service Corporation

On a narrow 5-4 vote, the Texas Supreme Court overturned the Texas Court of Appeals for the Third District's ruling that Blue Cross Blue Shield of Texas' stop-loss policies were not subject to the insurance premium and maintenance tax.5

An insurance company issues stop-loss policies to employers who self-fund their employees' health insurance. These policies indemnify the policyholder for amounts paid to reimburse health care claims above certain thresholds.

The Texas Insurance Code provides that insurance premium and maintenance tax applies to premiums received "from any kind of ... insurance policy or contract covering risks on individuals or groups ... arising from the business of health insurance."6

The majority and dissenting opinions agreed that the policies arose from the business of health insurance but disagreed on whether a stop-loss policy covers "risks on individuals or groups."

Reviewing the dissent's approach first will highlight the majority's departure from precedent with respect to the pro-taxpayer presumption.

The Texas Comptroller of Public Accounts argued that the insurance premium and maintenance tax applies to stop-loss policies because those policies cover the risk that individuals or groups might incur health care expenses above certain thresholds.

The dissent agreed that the comptroller had a reasonable statutory interpretation, but maintained that Blue Cross' alternative interpretation was also reasonable.

Blue Cross argued that stop-loss policies are written to cover only the financial risk on the employing entity and not the health care risks of employees because the employer will pay benefits to the employees regardless of whether the stop-loss policy pays the employer.

They further contended that a corporation is neither an individual nor a group because an individual is defined as a natural person, and a group typically refers to multiple individuals. Thus, to Blue Cross, the stop-loss policies did not cover risks on individuals or groups but instead covered the financial risk to a corporation.

The dissent argued that because Blue Cross also had a reasonable interpretation of the code, the court should not "pretend it has discovered the statute's one true meaning and instead require the legislature to speak more clearly."

Notwithstanding Blue Cross' plausible interpretation, the majority declined to apply the pro-taxpayer presumption. Instead, after detailing why the comptroller's position was reasonable, the majority introduced its "rule of last resort — a feather to tip the scale" interpretation of the presumption, refusing to apply it because it did not consider the taxpayer's argument to be equally plausible.7

Based on how the pro-taxpayer presumption has been previously applied, the Supreme Court should have invoked it here.8 The fact that both the appellate court and four Supreme Court justices supported a different interpretation demonstrates a fair degree of ambiguity within the taxing statute.

The majority appears, however, to have raised the bar for the presumption's application, requiring two perfectly balanced interpretations before invoking the presumption, and only then as a last resort.

Characterizing the pro-taxpayer presumption as a last resort with the weight of a feather runs contrary to the court's previous decisions.

In the 2013 case of TracFone Wireless Inc. v. Commission on State Emergency Communications, the Texas Supreme Court gave the pro-taxpayer presumption more weight than the interpretive canon of agency deference — pursuant to which a governmental agency's interpretation of the laws it administers is typically afforded some measure of deference.

In that case, the court ruled that a prepaid phone service provider was entitled to a refund of taxes paid between 2001 and 2005 pursuant to a 1997 act that imposed a fee of 50 cents per month on wireless subscribers to fund the state's 911 emergency services — the e911 fee.

In 2010, the Legislature updated the e911 fee to specifically add a 2% upfront tax to prepaid services. The court said that it was unclear if the 1997 tax applied to the taxpayer's plans between 2001 and 2005 because "the mandatory mechanics of the pre-2010 statute seem[ed] nearly impossible to apply coherently to prepaid services."9

A governmental agency had ruled that the older tax applied. The court applied the pro-taxpayer presumption rather than granting deference to the agency's interpretation. If the presumption really was a last resort, the agency-deference canon would not have taken a backseat to the pro-taxpayer presumption.

Additionally, in TracFone the court reasoned that to avoid the pro-taxpayer presumption a tax must unequivocally apply.10 It is hard to reconcile this with the majority's opinion in Health Care Service.

If the taxpayer presents an alternative statutory reading that is reasonable or plausible the statute should not be considered unequivocal, and the pro-taxpayer presumption should apply, without requiring a further showing by the taxpayer that their reasonable reading is equally plausible or perfectly balanced with the taxing authority's reading such that only a feather is needed to tip the scales.

Looking to prior Texas Supreme Court authority, Texas appellate courts have applied the pro-taxpayer presumption when there is any doubt as to the construction of the tax code, any time the taxpayer presents a reasonable interpretation, and to have liberally construed tax statutes in favor of the taxpayer.

Health Care Services now casts some doubt on the ongoing vitality of cases like those described below.

Any Doubt

In Meyers v. State of Texas, the Court of Appeals of Texas, Austin, ruled in 2005 that an agent of a club holding a mixed-beverage permit is not liable for the mixed-beverage tax.

After wrestling with different interpretations under the tax code and the alcoholic beverage code regarding who is the actual permitee, the court invoked the pro-taxpayer presumption saying "to the extent that there is any doubt concerning the construction of the tax code, courts should strictly construe the applicability of taxation against the taxing authority and in favor of the taxpayer," and held for the taxpayer.11

Any Reasonable Interpretation

In Allstate Insurance Company v. Hegar, the Austin Court of Appeals granted Allstate's request for a refund of sales tax paid on insurance services. Insurance services are subject to Texas sales tax unless the services are performed by a temporary employment service.

Allstate hired Pilot Catastrophe Services to help process claims generated from large weather events. The court of appeals found that Pilot's services to Allstate counted as a tax-exempt temporary employment service.

The court was willing to reach this conclusion without determining that there was no statutory ambiguity, because the analysis at the very least demonstrated that Allstate's construction was a reasonable interpretation, and any reasonable interpretation triggers the pro-taxpayer presumption.12

Liberal Construction in Favor of Taxpayer

In its 2015 EXLP Leasing v. Webb County Appraisal District decision, the Texas Court of Appeals, San Antonio, stated that the meaning of a tax statute should be derived by "looking at the plain language of the [taxing] statute and liberally construing it in favor of [the taxpayer]." 13

The EXLP court applied this iteration of the pro-taxpayer presumption in determining that the taxpayer was not required to pay any portion of a disputed property tax assessment to Webb County prior to challenging that assessment in court.


Matt Larsen is a partner, Ben Geslison is a senior associate and Jonathan Diener is a summer associate at Baker Botts LLP.

Baker Botts associate, Ali Foyt, contributed to the article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

1 See Hegar v. Health Care Serv. Corp., 2022 WL 2183134 at 4 (Tex. Jun. 17, 2022).

2 TracFone Wireless, Inc. v. Comm'n on State Emergency Commc'ns, 397 S.W.3d 173, 182 (Tex. 2013).

3 Hegar, 2022 WL 2183134 at 7 (Blacklock, J., dissenting).

4 Id. at 4.

5 Id. at 1.

6 Texas Insurance Code §222.002(b).

7 Hegar, 2022 WL 2183134 at 4.

8 See, e.g., Bullock v. Stat. Tabulating Corp., 549 S.W.2d 166, 169 (Tex. 1977) (holding any ambiguity must be resolved in favor of the taxpayer); Wilson Communications Inc. v. Calvert, 450 S.W.2d 842, 844 (Tex. 1970) (holding that in construing the statutory reach of a tax the statute must be construed with strictness against the taxing authority); Tex. Unemployment Comp. Comm'n v. Bass, 151 S.W.2d 567, 570 (Tex. 1941) (applying the taxing statute so as to give the doubt in favor of those on whom the tax is imposed).

9 TracFone Wireless Inc., 397 S.W.3d at 178.

10 See Id. at 182.

11 Myers v. State, 169 S.W.3d 731, 735 (Tex. App.–Austin 2005).

12 Allstate Ins. Co. v. Hegar, 484 S.W.3d 611, 625 (Tex. App.–Austin 2016).

13 EXLP Leasing, LLC v. Webb Cnty. Appraisal Dist., 511 S.W.3d 227, 230 (Tex. App.–San Antonio 2015).

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