Recent changes in the law have significantly broadened the conduct and increased the penalties for criminal state tax violations. Given these changes and the State Comptroller’s increased enforcement efforts in this area, businesses need to understand where they may have exposure and how to limit it.

What used to be a routine civil sales tax audit may now lead to a criminal prosecution. These cases have generally resulted in felony convictions. Examples of some of the prosecutions can be found at the State Comptroller website at

I. Changes in the Law

Recordkeeping Requirements. Taxpayers now must keep their records open for inspection for at least four years. Taxpayers must now produce contemporaneous records and supporting documentation for transactions in question to enable verification. There is also a new crime for failing to produce records to the Comptroller documenting a taxable sale of beer, wine, malt liquor, cigarettes, cigars and tobacco products purchased using a resale certificate. These record keeping statutes have been used in many criminal cases.

Reporting Requirements. The Alcoholic Beverage Code and the Tax Code requires distributors and wholesalers who sell alcohol and tobacco products to Texas retailers to report those sales monthly to the Comptroller’s office. The Comptroller’s office reports that this audit tool has helped identify more than $368 million due to the state since fiscal 2009 and resulted in criminal referrals.

This has been a highly controversial methodology because sales tax liability is being calculated based upon records from a third party, which may or may not be accurate. Moreover, these records do not consider case specific issues such as spillage, theft or other matters. Finally, sometimes tax payers have not been allowed access to the records until later in the process, making it difficult to rebut the allegations.

Investigations. The Comptroller now has broader investigatory powers: The subject matter jurisdiction of the Comptroller’s investigators now includes investigation of any criminal offense under any law if the offense relates directly or indirectly to a tax, fee, penalty or charge administered, collected or enforced by the Comptroller. The Comptroller or Attorney General can also now use confidential tax information to enforce the criminal laws of Texas or the United States.

Litigation. Certain procedural changes also have been beneficial to the Comptroller. The state may request a judge make affirmative findings of tax fraud if the elements are proved by clear and convincing evidence during the proceedings.The statute of limitations may be tolled during the pendency of an indictment for a tax-related felony. Finally, statutory amendments make clear that there are no double jeopardy concerns from a civil penalty being pursued in an administrative action versus being pursued criminally.

Specific Crimes. Penal Code amendments have broadened criminal statutes affecting criminal tax violations. Tax Code felonies were added to the list of crimes that may be prosecuted as Engaging in Organized Crime, resulting in a one degree punishment enhancement when groups of three or more collaborate together for the purpose of committing a tax felony. The definition of “Proceeds” in the criminal money laundering statute was amended to include proceeds acquired or derived from conduct that constitutes an offense under § 151.7032 of the Tax Code, a first degree felony. Finally, the Tax Code was amended to make Criminal Conspiracy under the Penal Code applicable to Tax Code offenses.

Increased Penalties. One of the most significant amendments regarding criminal sales tax is the change in the penalty ladder. The Tax Code was amended to bring tax crime penalties up to par with theft statutes. It is now a Class A or B misdemeanor, punishable by county jail time up to 180 days or 1 year, to collect and fail to remit sales tax between $50 and $1,500. Felony penalties, including prison time, will now begin at $1,500, just as they do in the Penal Code. Amounts over $200,000 will be classified as 1st degree felonies, punishable by 5-99 years or life in prison. Also, tax collected and not paid pursuant to one continuous scheme or course of conduct may be aggregated when determining the grade of the offense. Therefore, any sizable business with a criminal sales tax issue will likely be charged with a first degree felony.

Please contact us at Xcellent Tax to help you with sales tax audits on the financial record keeping and tax side.