State v. Crawford
| Decision Date | 21 August 2008 |
| Docket Number | No. 03-07-00622-CV.,03-07-00622-CV. |
| Parties | The STATE of Texas; the City of Houston, Texas, and the Transit Authority of Houston, Texas, Appellants v. Steve CRAWFORD, a/k/a Steven Lynn Crawford, and Robert Wills, a/k/a Robert William Wills, Appellees. |
| Court | Texas Court of Appeals |
David Randell, Karen R. Bartlett, Asst. Attys. Gen., Bankruptcy and Collections Div., Austin, for appellants.
David Smith, Houston, Doug W. Ray, Raymond Bonilla Jr., Ray, Wood & Bonilla, Austin, for appellees.
Before Chief Justice LAW, Justices PEMBERTON and WALDROP.
Appellants the State of Texas; the City of Houston, Texas; and the Transit Authority of Houston, Texas (collectively, the "State") sued appellees Steve Crawford and Robert Wills, as responsible individuals, for the sales tax liability of S.L. Crawford Construction, Inc. Seeking to establish appellees' individual liability under section 111.016(b) of the Texas Tax Code, the State asserted that Crawford and Wills willfully failed to pay or cause to be paid the delinquent sales tax amounts. Following a bench trial, the district court concluded that Crawford and Wills did not act willfully, and the court entered judgment that the State take nothing by its suit. The State appeals, asserting that: (1) the district court erred in construing the willfulness requirement of section 111.016(b) to encompass knowledge, but not reckless disregard of the risk that taxes were not remitted, (2) the defendant taxpayers should have had the burden of proof on the issue of willfulness, and (3) the evidence was legally and factually insufficient to support the district court's judgment on the issue of willfulness. We conclude that the district court properly placed the burden of proof on the State to establish willfulness. As to the State's first point on appeal, we agree that the term "wilfully" in section 111.016(b) encompasses both knowledge and reckless disregard. However, because we find the evidence sufficient to establish that the defendants did not act with knowledge or reckless disregard, we affirm the judgment of the district court.
S.L. Crawford Construction, Inc. (the "Company") was engaged in the construction business in the Houston area, specializing in the interior finish-out of commercial properties. Appellees Crawford and Wills were officers of the Company during the events at issue in this suit. Crawford formed the Company in 1982, and was its president until 2001 when he became the chief executive officer. He had ultimate decision-making authority on all Company matters. Wills joined the Company in 1996, and was its chief financial officer until 2001 when he became the president. He reported solely to Crawford. Crawford and Wills made all financial decisions, had check-writing authority, signed the Company's sales tax returns, and had the authority to hire and fire employees.
In November 2000, the Texas Comptroller of Public Accounts commenced a sales tax audit of the Company for the period of October 1, 1997, through September 30, 2000. By mid-January 2001, the Comptroller had narrowed its inquiry to two construction jobs, only one of which—the "McCord-Reliant job"—is at issue in this suit.
In its regular course of business, the Company performed jobs that were subject to sales tax and jobs that were not subject to sales tax. Similarly, some of the work performed for the client on the McCord-Reliant job was taxable, and some was non-taxable. The job at issue was taxable, and the Company collected sales tax from the client in the amount of $158,912.27. However, the Company's bookkeeper, Linda Delgado, incorrectly marked the job as non-taxable in the Company's monthly sales tax worksheets. As a result of this error, the Company's sales tax returns and payments to the Comptroller for the months that included the McCord-Reliant job did not include the sales tax collected on the McCord-Reliant job. Thus, the sales tax was collected by the Company but not remitted to the State.
Vernon Wallace, a senior auditor for the Comptroller, conducted the sales tax audit. When the audit began, Wills executed a limited power of attorney authorizing John P. Wade, an outside certified public accountant, to act on behalf of the Company with regard to sales tax matters during the audit period. According to Wills, he "turned everything over" to Wade. During the course of the audit, Wallace dealt only with Wade in obtaining documentation and an explanation of the Company's sales tax collections and payments.
By letter dated March 7, 2001, Wallace informed Wade that the audit was complete and attached documents showing an unpaid tax amount on the McCord-Reliant job of $179,743.17. Wills was copied on the letter. By letter dated April 2, 2001, Wade formally requested a redetermination hearing on the audit results. Wade did not contest that the McCord-Reliant job was taxable or that the Company had not paid sales tax on the job. Instead, Wade stated the Company's intention "to submit documentation that would show the sales tax applicable to this job was timely paid by [the Company] with a credit from previous periods." In response, as part of the Comptroller's administrative hearings process, the Comptroller informed Wade that he had sixty days in which to submit documentation to support the Company's claim regarding preexisting credits. Wade did not provide any supporting documentation during the sixty-day period or at any other time. On September 28, 2001, the Comptroller issued a Position Letter regarding the audit, rejecting Wade's arguments on the McCord-Reliant job because the Company "has presented nothing to identify and to have properly determined any overpayment [or] any period in which the overpayment allegedly occurred." Prior to any hearing before the administrative law judge taking place, Wade announced, by letter dated October 16, 2002, that the Company was withdrawing its petition for redetermination and requested that the hearing be dismissed. By the Comptroller's order, the dismissal became final on November 15, 2002, and the tax, penalty, and interest amounts were "due and payable within twenty (20) days thereafter."
The Comptroller sent the Company notice of its order, but sent the notice to the wrong address. The Company had changed addresses at some point in 2001 or earlier in 2002. According to Crawford and Wills, they did not become aware of the final determination (or Wade's request for dismissal) until they discovered that the Comptroller had frozen the Company's bank accounts.1 On that date, they went in person to the Comptroller's Houston branch office and proposed an initial payment of $70,000 and the remainder to be paid within "the next few months." On February 11, the Comptroller obtained $70,000 from the Company's bank account. Before the end of that month, due to the hold on the Company's accounts and its impact on the Company's payment capabilities, lines of credit, and customer perception, the Company went out of business.
On June 2, 2003, the Comptroller issued a jeopardy determination against Crawford and Wills in their individual capacities for $179,743.17, plus penalties and interest. According to Jeremy Davies, an accounts examiner for the Comptroller, the determination to impose individual liability was based on records showing that during the time period at issue both Crawford and Wills were officers of the Company, signed the sales tax returns, and had the authority to sign Company checks. The tax liability was subsequently amended to $158,912.27 — the amount actually collected by the Company—and then reduced by a portion of the $70,000 already paid.
The State filed suit against Crawford and Wills in district court on January 23, 2004, and the case was tried without a jury on September 10 and 11, 2007. At trial, under the authority of section 111.016 of the Texas Tax Code, the State sought $95,817.75 in unpaid sales tax, plus $25,473.01 in penalties and $62,726.29 in interest. Crawford and Wills conceded at trial that they were "responsible individuals" with the requisite control over the sales tax payments. See Tex. Tax Code Ann. § 111.016(d)(1) (West 2008) (defining "responsible individual"). Appellees also stipulated at trial to the amounts alleged due and that the Company had collected the sales tax at issue. See id. § 111.016(a) (). The only issue was whether Crawford and Wills "wilfully" failed to pay or cause to be paid the sales tax from the McCord-Reliant job. See id. § 111.016(b).
The district court entered judgment on October 2, 2007, that the State take nothing by its suit. In its conclusions of law, the district court ruled that the term "wilfully" requires a higher mental state than reckless disregard and that the State has the burden of proof on the issue of willfulness. The State presents four points on appeal: (1) the willfulness requirement of tax code section 111.016(b) should be construed in accordance with federal law so as to encompass both knowledge and reckless disregard, (2) defendant taxpayers should bear the burden of proof to establish their lack of willfulness, (3) the trial court's finding that Crawford and Wills had no actual knowledge of their failure to pay collected taxes is not supported by legally or factually sufficient evidence, and (4) the trial court's finding that Crawford and Wills did not recklessly disregard the risk that collected taxes would not be paid is not supported by legally or factually sufficient evidence.
Under section 111.016(a) of the tax code, the Company was obligated to remit to the State sales tax collected from its clients on taxable jobs. In addition, the Company held the collected sales tax "in trust" for the State until the taxes were remitted to the State:
(a) Any person who...
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