CourtListener 10745010

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ACCEPTED
15-25-00022-CV
FIFTEENTH COURT OF APPEALS
AUSTIN, TEXAS
11/26/2025 4:18 PM
No. 15-25-00022-CV CHRISTOPHER A. PRINE
CLERK
FILED IN
IN THE COURT OF APPEALS 15th COURT OF APPEALS
FOR THE FIFTEENTH DISTRICT OF TEXAS AUSTIN, TEXAS
11/26/2025 4:18:35 PM
AUSTIN, TEXAS
CHRISTOPHER A. PRINE
Clerk

CITY OF COPPELL, TEXAS; CITY OF HUMBLE, TEXAS; CITY OF
DESOTO, TEXAS; CITY OF CARROLLTON, TEXAS; CITY OF
FARMER’S BRANCH, TEXAS,
Appellants/Cross-Appellees,
v.
KELLY HANCOCK, ACTING COMPTROLLER OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS,
Appellee/Cross-Appellant,
v.
CITY OF ROUND ROCK, TEXAS,
Cross-Appellee.

On Appeal from the 201st District Court of
Travis County, Texas, Cause No. D-1-GN-21-003198
(assigned to the 250th District Court; Hon. Karin Crump, Presiding)

BRIEF OF CITY OF ROUND ROCK, CROSS-APPELLEE

CINDY OLSON BOURLAND BRYAN DOTSON
State Bar No. 00790343 State Bar No. 24072769
bourland@bourlandlaw.com bryan.dotson@chamberlainlaw.com
Bourland Law Firm, PC Chamberlain, Hrdlicka, White,
Williams, & Aughtry, P.C.
P.O. Box 546 112 E. Pecan Street, Suite 1450
Round Rock, Texas 78680 San Antonio, Texas 78205
Tel: (512) 477-0100 Tel: (210) 278-5844

COUNSEL FOR CITY OF ROUND ROCK

ORAL ARGUMENT NOT REQUESTED
IDENTITY OF PARTIES AND COUNSEL

The lists of parties and counsel submitted by the Appellants and Cross-

Appellant are correct, except that Ms. Cindy Olson Bourland and Mr. Bryan Dotson

are Round Rock’s trial and current appellate counsel. See Tex. R. App. P.

38.2(a)(1)(A).

i
TABLE OF CONTENTS

INDEX OF AUTHORITIES.................................................................................... iv
STATEMENT REGARDING ORAL ARGUMENT ............................................. ix
STATEMENT REGARDING ROUND ROCK’S ....................................................x
POSTURE ON APPEAL ...........................................................................................x
ISSUES PRESENTED............................................................................................. xi
STATEMENT OF FACTS ........................................................................................1
I. Background ......................................................................................................1
A. Texas Local Sales Tax Sourcing Legal Framework .............................1
B. Local Sales Tax Policy Considerations .................................................2
C. Legislative History of Texas Local Sales Tax Framework ...................3
D. Municipal Economic Development Programs: Chapter 380 of the Local
Government Code..................................................................................5
E. Dell’s global headquarters is in Round Rock........................................5
F. The Comptroller’s disagreement with Chapter 380 Agreements .........7
G. The devastating fiscal impact the rule amendments will have on Round
Rock .....................................................................................................10
II. Procedural History .........................................................................................10
A. The 2020 Rulemaking .........................................................................10
B. Round Rock files this lawsuit and obtains a temporary injunction ....12
C. Trial Court holds 2020 Notice does not comply with APA ................12
D. The 2022 and 2023 Rulemakings ........................................................13
E. The 2024 Repeal and Rulemaking ......................................................14
F. Trial and Judgment ..............................................................................15
SUMMARY OF THE ARGUMENT ......................................................................16
ARGUMENT AND AUTHORITIES ......................................................................17
I. Rule 3.334 contravenes the Texas Tax Code ................................................17
A. Standard of Review .............................................................................17
B. Introduction and Statutory Framework ...............................................20
C. Several sections of Rule 3.334 contravene the Tax Code ...................23

ii
1. Rule 3.334(a)(9) Contravenes Existing Statutes [Definition of
“Fulfill”] ....................................................................................26
2. Rule 3.334(a)(18) Contravenes Specific Statutory Language
[Definition of “Place of Business”] ..........................................27
3. Rule 3.334(b)(5) Contravenes Specific Statutory Language [“A
Computer is Not a Place of Business” Proxy for Internet Orders]
...................................................................................................30
4. Rule 3.334(c) Contravenes Specific Statutory Language and the
Tax Code’s Statutory Scheme...................................................33
a. Rule 3.334(c) [(c)(1) and (c)(2) inclusive] Contravenes the
Statutory Scheme ............................................................35
b. The Trial Court Properly Enjoined All of Subsection (c)
[Severability] ..................................................................37
D. The Comptroller Exceeded Statutory Authority .................................40
E. Conclusion ...........................................................................................41
II. The Comptroller did not substantially comply with the APA notice
requirements. .................................................................................................43
A. The APA sets forth “minimum standards” of agency rulemaking
practice and procedure. .......................................................................43
B. The fiscal impact statements included in the 2024 Notice were
inadequate. ...........................................................................................46
C. The Comptroller did not substantially comply with the APA
requirement to estimate probable compliance costs. ..........................47
D. The Comptroller did not substantially comply with the APA
requirement to estimate revenue loss to local governments. ..............49
E. The Comptroller did not substantially comply with APA notice
requirements related to small businesses. ...........................................53
F. Conclusion ...........................................................................................54
III. The Comptroller did not substantially comply with the APA’s reasoned
justification requirement. ...............................................................................55
PRAYER ..................................................................................................................60
CERTIFICATE OF COMPLIANCE .......................................................................61
CERTIFICATE OF SERVICE ................................................................................62

iii
INDEX OF AUTHORITIES

Cases Page(s)
Accident Fund Ins. Co. of Am. v. Tex. Dep’t of Ins.,
707 S.W.3d 110 (Tex. 2025) ..............................................................................20

Bd. of Pilot Comm’rs for the Ports of Brazoria Cty. v. Gonzales,
No. 14-99-00397-CV, 2000 WL 977408 (Tex. App.—Houston
[14th Dist.] May 18, 2000, pet. denied)..............................................................39

Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.,
467 U. S. 837 (1984) ...........................................................................................19
Combs v. City of Webster,
52311 S.W.3d 85 (Tex. App.—Austin 2009, pet. denied) ...........................31, 32
Farm & Ranch Freedom All. v. Tex. Dep’t of Agric.,
No. 03-23-00459-CV, 2025 WL 994190
(Tex. App.—Austin Apr. 3, 2024, no pet.) .........................................................55

Hyde v. Harrison Cnty.,
710 S.W.3d 403 (Tex. App.—15th Dist. 2025, no pet.) .....................................19
Ikb Indus. v. Pro-Line Corp.,
938 S.W.2d 440 (Tex. 1997) ..............................................................................52
K Mart Corp. v. Cartier, Inc.,
486 U.S. 281 (1988) ............................................................................................39

Lambright v. Tex. Parks & Wildlife Dep’t,
157 S.W.3d 499 (Tex. App.—Austin 2005, no pet.) ..............................55, 56, 57

Loper Bright Enters. v. Raimondo,
603 U.S. 369 (2024) ............................................................................................19

Methodist Hosps. of Dallas v. Tex. Indus. Acc. Bd.,
798 S.W.2d 651 (Tex. App.—Austin 1990, writ dism’d w.o.j.) ..................45, 57

Moers v. Harris Cty. Appraisal Dist.,
469 S.W.3d 655 (Tex. App.—Houston [1st Dist.] 2015, pet.
denied).................................................................................................................36

iv
Nat’l Ass’n of Chain Drug Stores, Inv. v. Young,
No. 07.23-00175-CV, 2024 WL 2971681
(Tex. App.—Amarillo June 12, 2024, pet. denied) ............................................54

Nat’l Ass’n of Indep. Ins. v. Tex. Dep’t of Ins.,
925 S.W.2d 667 (Tex. 1996) ............................................................44, 45, 49, 54
Office of Pub. Util. Counsel v. Pub. Util Comm’n,
131 S.W.3d 314 (Tex. App.—Austin 2004, pet. denied) .............................36, 37

Pub. Util. Comm’n of Tex. v. Luminant Energy Co. LLC,
691 S.W.3d 448 (Tex. 2024) ..............................................................................18

Reliant Energy, Inc. v. Pub. Util. Comm’n of Tex.,
62 S.W.3d 833 (Tex. App.—Austin 2001, no pet.) ................................55, 56, 58
R.R. Comm’n v. Arco Oil & Gas Co.,
876 S.W.2d 473 (Tex. App.—Austin 1994, writ denied).......................55, 56, 57
RWE Renewables Ams., LLC v. Pub. Util. Comm’n of Tex.,
669 S.W.3d 566 (Tex. App.—Austin 2023, pet. granted) ............................50, 54
Sixth RMA Partners, L.P. v. Bradberry
111 S.W.3d 46 (Tex. 2003).................................................................................51

Shields Ltd. P’ship v. Bradberry,
526 S.W.3d 4714 (Tex. 2017) ............................................................................51
State v. Hollins,
620 S.W.3d 448 (Tex. 2024) ..............................................................................18

Sw. Bell Tel. Co. v. Pub. Util. Comm’n,
888 S.W.2d 921 (Tex. App.—Austin 1994, writ denied)...................................39

Tex. Bd. of Chiropractic Exam’rs v. Tex. Med. Ass’n,
616 S.W.3d 558 (Tex. 2021) ........................................................................18, 19
Tex. Dep’t of Banking v. Restland Funeral Home, Inc.,
847 S.W.2d 680 (Tex. App.—Austin 1993, no writ) .........................................39
Tex. Shrimp Ass’n v. Tex. Parks & Wildlife Dep’t,
No. 03-04-00788-CV, 2005 WL 1787453
(Tex. App.—Austin July 27, 2005, no pet.) (mem. op.).....................................45

v
Tex. State Bd. of Exam’rs of Marriage & Family Therapists v.
Tex. Med. Ass’n,
511 S.W.3d 28 (Tex. 2017).................................................................................19

TGS-NOPEC Geophysical Co. v. Combs,
340 S.W.3d 432 (Tex. 2011) ..................................................................17, 18, 21
Unified Loans, Inc. v. Pettijohn,
955 S.W.2d 649 (Tex. App.—Austin 1997, no pet.) ...................................passim

Statutes and Rules:

34 Tex. Admin. Code:
§ 3.334 ....................................................................................................passim

§ 3.334(a)(9) ...........................................................................................passim

§ 3.334(a)(18) ..............................................................................16, 23, 27, 28
§ 3.334(b)(5) ...........................................................................................passim
§ 3.334(c) ................................................................................................passim
Tex. Gov’t Code:

§ 2001.001(1) .................................................................................................49
§ 2001.024 ...............................................................................................44, 48

§ 2001.024(a)(4)(C) .................................................................................13, 46
§ 2001.024(a)(4)(D).......................................................................................13

§ 2001.024(a)(5) ......................................................................................46, 48

§ 2001.024(a)(8) ............................................................................................46
§ 2001.033(a)(1)(C) .......................................................................................57

§ 2001.035(a) .....................................................................................44, 48, 49

§ 2001.042 ...............................................................................................19, 20
§ 2006.002 ...............................................................................................14, 44

vi
§ 2006.002(c) ...........................................................................................44, 53

Tex. Tax Code:
§ 111.002(a) .................................................................................33, 40, 41, 42

§ 151.00393 ...................................................................................................29

§ 321.002(a)(3)(A).............................................................................16, 28, 42
§ 321.101(a) .....................................................................................................1

§ 321.201(a) .....................................................................................................1
§ 321.203 ................................................................................................passim
§ 321.203(a) .............................................................................................26, 37

§ 321.203(b) ............................................................................................passim

§ 321.203(d)(1) ..............................................................................................32

§ 321.203(e) ...................................................................................................21
§ 321.301 .........................................................................................................1
§ 321.502 .........................................................................................................2
§ 323.203 ................................................................................................passim

Tex. Loc. Gov’t Code:

§ 380.001(a) .....................................................................................................5

Other Authorities

Tex. R. App. P. 9.4(i)(1) ..........................................................................................61

Tex. R. App. P. 38.2(a)(1)(A) .....................................................................................i
Tex. R. App. P. 38.2(a)(1)(B) ....................................................................................1

Tex. R. App. P. 39.7..................................................................................................ix
Tex. Const. art. III, § 52-a ..........................................................................................5

vii
Tex. Atty. Gen. Op. DM-185, 1992 WL 525330 ...................................................... 6

Ron Beal, Challenging the Factual Basis and Rationality of a Rule
Under APTRA, 45 Baylor L. Rev. 1 (1993) .............................................................55

John J. Watkins & Debora S. Beck, Judicial Review of Rulemaking
Under the Texas Administrative Procedure and Texas Register Act, 34
Baylor L. Rev. 1 (1982) ...........................................................................................56

viii
STATEMENT REGARDING ORAL ARGUMENT

Round Rock disagrees with the Comptroller and Coppell Parties that oral

argument is warranted in this case because well-settled case law and statutory

authority govern the dispositive issues, and the facts and legal arguments are

adequately presented in the briefs and record. However, if this Court grants oral

argument to aid its decisional process, Round Rock respectfully requests to

participate in oral argument pursuant to Texas Rule of Appellate Procedure 39.7.

ix
STATEMENT REGARDING ROUND ROCK’S
POSTURE ON APPEAL

Prior to trial, Round Rock’s case was consolidated by agreement with the

Coppell Parties’ case, in an effort by all parties to be efficient with the trial court’s

time. All city parties challenged the same agency rule—34 Tex. Admin. Code

§ 3.334 (“Rule 3.334”)—and the trial court issued one Final Judgment, but because

Round Rock’s factual background differs in several ways from that of the Coppell

Parties, so did Round Rock’s legal arguments and analyses at trial.

On appeal, Round Rock is in the procedural posture of appellee and asserts

that the trial court's judgment should be affirmed in full. Round Rock does not join

in the Coppell Parties’ request for affirmative relief from this Court. Round Rock

believes that certain issues presented by the Comptroller and Coppell Parties seek

relief that may be advisory in nature.

x
ISSUES PRESENTED

1. Tax Code Section 321.203(b) provides that, for local sales tax purposes, all

sales are consummated at the retailer’s place of business if that retailer has

only one place of business in Texas. The Comptroller adopted amendments to

Rule 3.334 that cause certain orders to be consummated at a location other

than the retailer’s one place of business, such as the place of delivery.

Therefore, do the amendments to Rule 3.334 (i) conflict with Tax Code

Section 321.203, (ii) run counter to the general objectives of Tax Code Section

321.203, or (iii) impose burdens, conditions, or restrictions in excess of Tax

Code Section 321.203?

2. The Texas Administrative Procedure Act (“APA”) requires an administrative

agency to follow certain procedures before it can adopt a rule. One such

procedure is to publish a notice of the proposed rule in the Texas Register,

which must include, among other things, (i) a fiscal note stating the estimated

reduction in revenue to local governments, (ii) a note about the probable

economic costs to persons required to comply with the rule, and (iii) a

projection of how the rule will impact small businesses. The Comptroller did

not provide an estimate of the reduction in revenue to local government but

instead merely stated that the amendments “could result” in a net change of

revenue for local governments. Further, the Comptroller did not provide an

xi
estimate of probable compliance costs but instead stated that there “may be

additional economic costs” to those who will be required to comply with the

rule. Finally, the Comptroller stated it was unable to estimate the small

businesses subject to the rule and did not project of the impact of the rule on

small businesses. Did the Comptroller substantially comply with the APA’s

notice requirements?

3. The APA requires a state agency order finally adopting a rule to include,

among other things, “the reasons why the agency disagrees with the party

submissions and proposals.” Round Rock submitted comments in response to

the 2024 Notice that posed several questions regarding the proposed rule

amendments to which the Comptroller did not respond. Did the Comptroller

substantially comply with the APA’s reasoned justification requirements?

xii
STATEMENT OF FACTS

Round Rock is dissatisfied with the Comptroller’s Statement of Facts because

it does not thoroughly describe the background, context, and history of the rule

amendments that led to this lawsuit. Pursuant to Texas Rule of Appellate Procedure

38.2(a)(1)(B), Round Rock presents additional facts.

I. Background

A. Texas Local Sales Tax Sourcing Legal Framework

For decades, the Texas Tax Code has allowed municipalities to impose a local

sales tax as a means of raising revenue. See Tex. Tax Code § 321.101(a). Any such

local sales tax is imposed in addition to the 6.25% sales tax imposed by the State of

Texas. See id. § 321.201(a).

As will be more fully discussed below, a retail sale is subject to local sales tax

when it is “consummated” within the jurisdictional boundaries of a municipality that

has adopted a local sales tax. See id. § 321.203(a). Generally, the location at which

a sale is consummated for local sales tax purposes is a “place of business of the

retailer.” See id. § 321.203(b)-(d).

Although municipalities may impose a local sales tax, the Comptroller is

responsible for administering, collecting, and enforcing the tax. Id. § 321.301.

Retailers are generally responsible for reporting and remitting sales tax collected—

1
state and local—to the Comptroller. Id. The Comptroller then disburses the local

portion to the appropriate local taxing jurisdiction. See id. § 321.502.

B. Local Sales Tax Policy Considerations

Round Rock asserted at trial that the rule amendments in question were an

improper attempt by a state agency to effectuate policy changes that have been

rejected by the Texas Legislature. A big-picture discussion of state and local taxation

was provided to the trial court for context and will be summarized here.

Professor Richard Pomp, one of the country’s foremost experts on state and

local taxation, 7RR12-19; Ex. D-5, explained at trial that there are several competing

policy considerations state legislatures typically consider when deciding how to

structure a local sales tax scheme. He testified that a sales tax is imposed on a

transaction, which has two parties—the buyer and the seller, and that when the buyer

and seller are in different jurisdictions, there is generally a state-specific law

governing how to “source” the transaction, which means to decide which

government can tax the transaction. 7RR22.

Professor Pomp testified that state legislatures typically consider several

competing policy considerations when deciding how to structure a local sales tax

scheme and that there are two general approaches used to source local sales tax:

“origin” and “destination.” 7RR22-23. An origin-sourcing regime assigns the sale to

2
where it originated. 7RR23-24. A destination-sourcing regime assigns the sale to the

place where the purchaser takes delivery or possession. 7RR23-24.

Professor Pomp explained that the main advantage to an origin-sourcing

regime is simplicity: The seller must only master the sales tax laws and rates of the

jurisdiction in which it is located. 7RR27. An origin-sourcing regime is also easier

for the government to audit for the same reason. 7RR27. As indicated by the Tax

Code, Texas is generally an origin-sourcing state for retailers with one place of

business in the state, see Tex. Tax Code § 321.203(b), and Professor Pomp explained

that the simplicity of origin sourcing would be attractive to Texas because Texas is

a big state with about 1,700 local taxing jurisdictions, 7RR30-31. He also discussed

that origin sourcing makes the Comptroller’s job of auditing sales tax returns easier

(7RR28):

Can you imagine the poor auditor under a destination rule that is going
to have to verify whether the vendor properly identified the place of
destination, properly applied the rule of that place of destination, and
properly applied the rate of tax of that destination.

C. Legislative History of Texas Local Sales Tax Framework

In 1979, the 66th Texas Legislature enacted the predecessor to Tax Code

Section 321.203. See Ex. D-26. The House Committee on Ways and Means for the

66th Legislature issued an Interim Report on October 2, 1980, explaining the

changes the 66th Legislature made to the local sales tax. Ex. D-25. The Committee

3
also explained the various options to change the local sales tax framework and

balance competing interests. Ex. D-25 at 12.

The Committee further explained that the major reason the Legislature

adopted an origin-sourcing framework for Texas was to prevent disruption to city

revenue:

The major reason for rewriting the Local Tax Act last session was to
prevent disruption to city revenue. Re-inacting [stet] the present
statute would assure the same level of revenue to each city and not
disrupt any budgeting, planning or revenue forecasting.

Ex. D-25 at 18-19 (emphases added). The Committee also pointed out that a

significant advantage to the consummation framework applicable to retailers with a

single place of business is its simplicity:

The rules for single outlet taxpayers could not be easier – tax is
always reported to a single location.

Ex. D-25 at 19-20 (emphasis added). The 66th Legislature considered, but ultimately

rejected, a consummation framework that sources sales to the destination for a

variety of reasons, including:

Cities now receive revenue based on the retailer’s location. A
destination sale theory would result in a dramatic shift in revenue from
point of sale to point of use.

Ex. D-25 at 23 (emphasis added).

Since the late 1970s, the Texas Legislature has repeatedly considered

changing Texas’s general origin-sourcing framework for local sales tax. None of

4
those efforts resulted in substantial changes to the Texas Tax Code for retailers with

one place of business in the state.

D. Municipal Economic Development Programs: Chapter 380 of the
Local Government Code

The Texas Constitution authorizes the Legislature to “provide for the creation

of programs and the making of loans and grants of public money” for “public

purposes” that include the “development and diversification of the economy of the

state.” Tex. Const. art. III, § 52-a. The Texas Legislature established such a program

for municipalities in 1989 by enacting Chapter 380 of the Local Government Code.

Section 380.001(a) of that Code allows municipalities to

establish and provide for the administration of one or more programs
. . . to promote state or local economic development and stimulate
business and commercial activity in the municipality.

Tex. Loc. Gov’t Code § 380.001(a).

E. Dell’s global headquarters is in Round Rock

In the early 1990s, Dell was a growing company with its headquarters in

Austin, Texas. 6RR106. When the company was outgrowing its Austin location and

looking for somewhere to relocate, it hoped to stay in Central Texas but was also

considering moving to Tennessee or Ireland. 6RR106. Dell approached Round Rock

and said it wanted to stay in Central Texas but needed a reason to do so. 6RR106.

5
Round Rock and Dell entered into a Chapter 380 agreement, which is the

reason that Dell chose to remain in Texas. 6RR106; 6RR120; Ex. RR-29. 1 On

August 26, 1993, Charles Culpepper, then-Mayor of Round Rock, and Michael Dell,

CEO of Dell Computer Corporation, signed the agreement.2 6RR106; Ex. RR-29.

The terms of the Chapter 380 agreement generally provide that Round Rock will

make periodic “Economic Development Program Payments” to Dell, which are

computed in large part based on the level of local sales tax revenue Dell generates.

6RR182; Ex. RR-29.

Since 1993, Dell’s presence in Round Rock has grown dramatically. Exhibit

RR-31 shows how large Dell has grown just in terms of land use:

1
Round Rock’s trial exhibits were marked with the prefix “RR.” To distinguish exhibits from the
Reporter’s Record, exhibits will be referred to herein as “Ex. RR-##.”
2
This Chapter 380 agreement was the first in Texas of its kind, resulting in an opinion from the
Texas Attorney General regarding its constitutionality. 6RR106; Tex. Atty. Gen. Op. DM-185,
1992 WL 525330.

6
There is no other business in Round Rock that comes close in terms of office

space square footage and impact on the city. 6RR109. Dell employs thousands of

employees in Round Rock, including sales personnel, engineers, and administrators,

and Round Rock has spent tens of millions of dollars to improve city infrastructure

to keep up with Dell’s growth. 6RR109-111; Exs. RR-37 to RR-40.

The financial benefits to Texas from Round Rock’s Chapter 380 agreement

with Dell have been enormous. From inception of that agreement through September

30, 2023, Dell generated more than two billion dollars for the State of Texas. Ex.

RR-34. In that same time frame, Dell generated approximately $429,000,000 in

revenue for the City of Round Rock, which is a crucial part of Round Rock’s overall

city budget. Ex. RR-34.

F. The Comptroller’s disagreement with Chapter 380 Agreements

In October 2019, Susan Morgan, Chief Financial Officer for Round Rock,

6RR166-167, received an email from the Comptroller that included proposed

amendments to the Comptroller’s rule that governs local sales tax sourcing: Rule

3.334, 6RR171. Ms. Morgan immediately conferred with Round Rock’s city

attorney, Steve Sheets, who concluded that the amendments could cause Dell’s

internet sales to no longer be sourced to Round Rock. 6RR172.

Fearing the fiscal impact those amendments would have on Round Rock, Mr.

Sheets and Ms. Morgan requested a meeting with the Comptroller’s office. 6RR172.

7
Representatives from Round Rock and the Comptroller’s office met twice during

November and December 2019. 6RR115; 6RR195; 8RR63. Then-Comptroller

Hegar personally attended the second meeting, along with his two deputies. 6RR115;

8RR63. Representatives of Dell and the Round Rock Chamber of Commerce were

also present during these meetings. 6RR172; 8RR64.

The purpose of those meetings was for Round Rock to get an understanding

of why the Comptroller was proposing the amendments. 8RR63. Mr. Sheets believed

that if the Comptroller had concerns about the Chapter 380 agreement with Dell,

then Round Rock could alleviate some of those concerns. 8RR63.

During the meeting, Comptroller Hegar explained that he does not think

Chapter 380 agreements are good public policy. 6RR120; 8RR67. With respect to

Round Rock’s Chapter 380 agreement with Dell, Comptroller Hegar said that “we

don’t have a problem with the Dell agreement other than we think it’s too long.”

8RR64; 6RR192. The Comptroller’s staff indicated to Round Rock that the agency

was moving forward with the rule amendments despite Round Rock being

“collateral damage.” 6RR119.

In support of the proposed rule changes and to explain his position,

Comptroller Hegar published an opinion article, titled “How some Texas cities and

retailers are using a tax loophole to snatch sales tax revenue from other

communities,” in the February 4, 2020 edition of The Dallas Morning News. Ex.

8
RR-41. In the article, Comptroller Hegar claimed that “some cities and businesses

have cut deals to source local sales tax on sales made over the internet solely to

particular cities.” Ex. RR-41. Comptroller Hegar explained that these deals are

problematic because “[t]axpayers do not pay local sales tax on internet purchases

with the expectation that the revenue is then being distributed to businesses and cities

nowhere near their communities.” Ex. RR-41. Comptroller Hegar stated he was

taking the following actions to solve those problems:

Ex. RR-41.

The statements in the article were consistent with the impression Comptroller

Hegar left on Mr. Sheets after their face-to-face meeting. 6RR115-117. The article

was published on the same day as the Comptroller’s first public hearing to receive

testimony and comments on the rule amendments. Ex. RR-18 at 3500.

Comptroller Hegar made similar statements during his testimony before the

House Committee on Ways and Means on February 5, 2020, the day after the

Comptroller’s public hearing, Ex. RR-44, and in a letter to the Ways and Means

Committee on September 14, 2020, Ex. RR-43.

9
G. The devastating fiscal impact the rule amendments will have on
Round Rock

The local sales tax collections from Dell make up a significant portion of

Round Rock’s budget. See Exs. RR-32 to RR-34. The proposed rule amendments

would result in a reduction in revenue for Round Rock of $20,000,000 to

$30,000,000 per year. 6RR174. Such a reduction would be “devastating,” 6RR175,

and would have “significant impacts on every citizen in the City of Round Rock.”

6RR122; Ex. RR-53. The amount of revenue Round Rock could lose is equal to “half

of our police budget” or “all of our parks and rec budget, and library budget

combined.” 6RR195.

Round Rock provided data to the Comptroller showing the negative fiscal

impact the proposed rule amendments would have on its budget on several

occasions, including during the November and December 2019 meetings between

Round Rock and the Comptroller. 6RR150; 6RR172-173; 6RR175; 6RR116; Ex.

RR-53 to RR-56.

II. Procedural History

A. The 2020 Rulemaking

The Comptroller published the first round of proposed amendments to Rule

3.334 in the January 3, 2020 edition of the Texas Register (“2020 Notice”).3 Ex. RR-

3
For demonstrative purposes, Round Rock prepared a timeline that shows all pertinent
amendments to Rule 3.334. That timeline was admitted as Ex. RR-16.

10
17. The relevant proposed amendment was the addition of Subsection (c)(6), which

provided as follows:

Ex. RR-17 at 8. The Comptroller stated in the 2020 Notice that “[t]he proposed

amendments would have no significant fiscal impact on the state government, units

of local government, or individuals.” Ex. RR-17 at 102 (emphasis added).

Many parties, including the cities involved in this lawsuit, provided public

testimony and written comments in opposition to the amendments. Ultimately, the

Comptroller published an order adopting amendments to Rule 3.334 in the May 22,

2020 edition of the Texas Register (“2020 Order”). Ex. RR-18.

The Comptroller did not adopt Subsection (c)(6) as originally written. Instead,

the Comptroller added Subsection (b)(5), which used slightly different terminology

but achieved the same result:

11
Ex. RR-18 at 3551. The Comptroller delayed the effective date of Subsection (b)(5)

“to provide the Legislature opportunity to act if it so chooses, and also allow cities

and businesses times to shift from current practice.” Ex. RR-43.

B. Round Rock files this lawsuit and obtains a temporary injunction

Round Rock filed this lawsuit on July 12, 2021. On August 30, 2021, the trial

court held an evidentiary hearing on Round Rock’s application for a temporary

injunction. During the hearing, the Comptroller agreed to a temporary injunction of

Subsection (b)(5) of Rule 3.334. 3RR5-11. Subsection (b)(5) of Rule 3.334 has been

enjoined by agreement since that time. CR121; CR123; CR1338; CR1340; CR1342;

CR1344; CR1745.

The trial court consolidated Round Rock’s case with the Coppell Plaintiffs’

cases. CR1251-1252. Round Rock’s live pleadings at the time of trial, its Fourth

Amended Petition, are found on pages 2437 through 2570 of the Clerk’s Record.

C. Trial Court holds 2020 Notice does not comply with APA

In the 2020 Notice, the Comptroller stated that the rule amendments would

have “no significant fiscal impact” on local governments, as follows:

Ex. RR-17 at 102.

12
Round Rock and the other plaintiff cities filed motions for summary judgment

alleging that the fiscal note4 did not comply with the notice requirements of the APA.

Specifically, Round Rock alleged that the 2020 Notice did not contain the following:

(1) the estimated loss or increase in revenue to the state or to local governments as a

result of enforcing or administering the rule; and (2) a fiscal note that enforcing or

administering the rule will not have foreseeable implications relating to cost or

revenues of the state or local governments. See Tex. Gov’t Code § 2001.024(a)(C),

(D).

The Court granted Round Rock’s motion for summary judgment and found as

follows:

Defendant failed to substantially comply with one or more of the
procedural requirements of Section 2001.024 of the Texas Government
Code in adopting amendments to 34 TAC § 3.334 resulting in 34 TAC
§ 3.334(b)(5). As such, Plaintiff’s Motions are GRANTED, and the
pertinent portions of 34 TAC § 3.334 are remanded to the Texas
Comptroller of Public Accounts for revision or readoption through
established procedures within a reasonable time.

CR1336-1337.

D. The 2022 and 2023 Rulemakings

In response to the trial court’s order, the Comptroller went back into

rulemaking and published proposed amendments to Rule 3.334 in the September 23,

4
Round Rock also alleged that the fiscal note was demonstrably false, because Round Rock and
the other cities had provided information and data to the Comptroller’s office showing harmful
and significant fiscal impact prior to the publication of the notice.

13
2022 edition of the Texas Register (“2022 Notice”). Ex. RR-20. The Comptroller

published the order adopting the September 23, 2022 proposed amendments, with

several changes to the substantive rule language itself, in the January 27, 2023

edition of the Texas Register (“2022 Order”). Ex. RR-21.

On October 27, 2023, the Comptroller published another notice of proposed

amendments to Rule 3.334 in the Texas Register (“2023 Notice”). Ex. RR-22. That

proposed amendment added subsection (c)(7) to Rule 3.334, which prescribes where

an order is received by or on behalf of a seller. Ex. RR-22. The 2023 Notice did not

include an estimate of loss of revenue to local jurisdictions, and the Comptroller

again asserted that it was “infeasible” to do so. Ex. RR-22. The Comptroller

published the order adopting the addition of Subsection (c)(7) in the January 5, 2024

edition of the Texas Register (“2023 Order”).

E. The 2024 Repeal and Rulemaking

In response to the 2022 and 2023 rulemakings, Round Rock filed another

motion for summary judgment on March 4, 2024. CR1514-1702. Round Rock

asserted that the Comptroller had failed to provide an estimate of loss of revenue to

local jurisdictions in the 2022 Notice and 2023 Notice, as required by the APA and

the trial court’s prior order. CR1515-1517. Round Rock also asserted that the

Comptroller failed to include the economic impact statement and regulatory

flexibility analysis is required by Section 2006.002 of the Texas Government Code

14
in the recent rounds of rulemaking. CR1527-1532. In lieu of a hearing, the

Comptroller entered an agreed order with Round Rock and the other plaintiffs and

began another rulemaking process. CR1815-1816.

On April 19, 2024, the Comptroller published two notices in the Texas

proposed repeal of Rule 3.334, in order to replace it with a new Rule 3.334. Ex. RR-

25. Simultaneously, the Comptroller published the new proposed rule, found at 49

Tex. Reg. 2442-2457 (“2024 Notice”). Ex. RR-26. On June 28, 2024, the

Comptroller published two orders in the Texas Register. The first order adopted the

repeal of Rule 3.334. Ex. RR-28 at 1. The second order adopted the newly proposed

rule (“2024 Order”). Ex. RR-28. The version of Rule 3.334 that the Comptroller

adopted on June 28, 2024, is the current version at issue in this case.

F. Trial and Judgment

The trial court heard the merits of this case from October 14-16, 2024.

CR2797. At the conclusion of trial, the court rendered a Final Judgment. CR2797.

The Coppell plaintiffs requested Findings of Fact and Conclusions of Law but later

withdrew the request for Findings of Fact. CR2842; CR2848. The Comptroller did

not request Findings of Fact or Conclusions of Law. This appeal followed.

15
SUMMARY OF THE ARGUMENT

The trial court correctly found that Rule 3.334 contravenes the Texas Tax

Code. First, Rule 3.334(a)(9) contravenes existing statutes by adding a conflicting

definition at the agency level for which Tax Code Sections 321.203 and 323.203

already provide a detailed statutory scheme for determining where a sale of a taxable

item is “consummated.” Further, Rule 3.334(a)(18), (b)(5), and (c) contravene

specific statutory language set forth in Tax Code Sections 321.002(a)(3)(A),

321.203, and 323.203 by requiring retailers with one place of business in the state to

consummate sales at locations other than the retailer’s one place of business. Finally,

Rule 3.334(c) [(c)(1) and (c)(2) inclusive] contravenes the statutory scheme (set

forth in Tax Code Sections 321.203 and 323.203) for determining where a sale is

consummated by forcing retailers with only one place of business to follow the

consummation rules in Rule 3.334(c), rather than sourcing tax to the retailer’s single

place of business.

The trial court also correctly found that the Comptroller did not substantially

comply with the notice and reasoned justification requirements under the APA. The

discussion in the 2024 Notice is inadequate because it did not provide interested

parties “adequate notice” or show that the Comptroller “consider[ed], in detail and

in orchestration, the various factors named in the statute.” Unified Loans, Inc. v.

Pettijohn, 955 S.W.2d 649, 651 (Tex. App.—Austin 1997, no pet.). The Comptroller

16
did not substantially comply with the reasoned justification requirements because,

at a minimum, the four corners of the rule show the Comptroller did not respond to

certain comments Round Rock submitted.

ARGUMENT AND AUTHORITIES

As Round Rock will address in Sections II and III of this brief, the trial court

properly determined that the Comptroller did not comply with the APA in adopting

Rule 3.334. Therefore, this Court may affirm the trial court’s judgment on that

ground alone and need not reach the Comptroller’s issues relating to statutory

conflict and whether the rule runs afoul of the Texas Tax Code.

However, Round Rock has briefed the issues in the same order as the

Comptroller, starting with statutory contravention. As demonstrated in Section I, the

trial court also correctly found that the rule contravenes both specific statutory

language and the Tax Court’s general sales-tax framework for determining where a

sale is consummated.

I. Rule 3.334 contravenes the Texas Tax Code

A. Standard of Review

When construing a statute, courts seek “to ascertain and give effect to the

Legislature’s intent,” beginning with the statutory language. TGS-NOPEC

Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011). “If a statute uses a

term with a particular meaning or assigns a particular meaning to a term, we are

17
bound by the statutory usage,” and undefined terms are generally given their

ordinary meaning unless “a different or more precise definition is apparent from the

term's use in the context of the statute,” in which case courts should apply that

meaning. Id. In addition, courts must “consider statutes as a whole rather than their

isolated provisions,” assuming that the Legislature chose the statutory language with

purpose. Id.; see Pub. Util. Comm’n of Tex. v. Luminant Energy Co. LLC, 691

S.W.3d 448, 460–61 (Tex. 2024) (courts must “discern a statute’s objectives from

its plain text,” reading that text “in context—not isolation,” and considering statute’s

context and framework to find “a cohesive reflection of legislative intent” (quoting

State v. Hollins, 620 S.W.3d 400, 407 (Tex. 2020))). When a statute is unambiguous,

courts should “adopt the interpretation supported by its plain language unless such

an interpretation would lead to absurd results.” Luminant Energy, 691 S.W.3d at

460–61; TGS-NOPEC, 340 S.W.3d at 439.

An agency’s rule is presumed to be valid, and a challenger must prove its

invalidity by showing that the rule: (1) contravenes specific statutory language;

(2) runs counter to the statute’s general objectives; or (3) imposes burdens,

conditions, or restrictions beyond or inconsistent with the relevant statute. Luminant

Energy, 691 S.W.3d at 460. A reviewing court must determine whether the

definitions adopted by the agency in its rules are consistent with the meaning of the

terms used in the statute. Tex. Bd. of Chiropractic Exam’rs v. Tex. Med. Ass’n, 616

18
S.W.3d 558, 568 (Tex. 2021). The interpretation of statutes and their associated rules

involves questions of law that courts determine de novo. Tex. State Bd. of Exam’rs

of Marriage & Fam. Therapists v. Tex. Med. Ass’n, 511 S.W.3d 28, 33 (Tex. 2017);

Hyde v. Harrison Cnty., 710 S.W.3d 403, 408 (Tex. App.—15th Dist. 2025, no pet.)

(interpretation of administrative rules is reviewed de novo “using the same principles

that [courts] apply when construing statutes”).

Finally, Round Rock would note that in the last session, the Texas Legislature

enacted Section 2001.042 of the APA, codifying the holding in Loper Bright

Enterprises v. Raimondo, in which the U.S. Supreme Court stated, “Courts must

exercise their independent judgment in deciding whether an agency has acted within

its statutory authority, as the APA requires.” 603 U.S. 369, 412 (2024). In Loper

Bright, the Court overruled Chevron U.S.A. Inc. v. Natural Resources Defense

Council, Inc., 467 U. S. 837, 843 (1984), which had required courts to defer to an

agency’s reasonable interpretation of a statute that is silent or ambiguous as to the

issue in question. 603 U.S. at 412. Newly-enacted Section 2001.042 of the APA

provides:

Sec. 2001.042. JUDICIAL REVIEW OF STATE AGENCY LEGAL
DETERMINATION REGARDING LAWS AND RULES.
Notwithstanding any other law, in a judicial proceeding in this state,
including an action subject to Section 2001.038, a court is not required
to give deference to a state agency's legal determination regarding the
construction, validity, or applicability of the law or a rule adopted by
the state agency responsible for the rule’s administration,
implementation, or other enforcement. This section does not prohibit a

19
court from giving consideration to a legal determination made by a state
agency that is reasonable and does not conflict with the plain language
of the statute.

Tex. Gov’t Code § 2001.042. Although Section 2001.042 only applies to a rule

proposed after September 1, 2025, Round Rock believes that it is instructive as to

the Legislature’s most current views on agency overreach and the role of the courts.

Further, it supports Round Rock’s argument that the agency is not entitled to

deference simply because the Comptroller is charged with enforcing the tax statutes,

particularly given that the statute in question is unambiguous and that the

Comptroller’s rule would change the plain statutory language chosen by the

Legislature. See Accident Fund Ins. Co. of Am. v. Tex. Dep’t of Ins., 707 S.W.3d

110, 114–15 (Tex. 2025) (Young, J., concurring in denial of pet.) (“Administrative

agencies in Texas have seemingly never enjoyed the deference once endorsed by the

U.S. Supreme Court, although our cases have occasionally hinted that ‘the analysis

in which we engage is similar.’” (citations omitted)).

B. Introduction and Statutory Framework

The Comptroller’s amendments to Rule 3.334 were drafted to thwart Chapter

380 agreements and thereby reallocate sales-tax revenue by shifting internet orders

to destination sourcing. Because Rule 3.334 directly conflicts with the Tax Code’s

plain and unambiguous origin-sourcing mandate for retailers with one place of

business in Texas, the trial court correctly found that Rule 3.334 contravenes existing

20
statutes, specific statutory language, and the statutory scheme for determining where

a sale is consummated.

Under the Tax Code, where a sale of a taxable item is consummated, and thus

taxed, depends upon whether the retailer has one, or more than one, places of

business in Texas. See Tex. Tax Code § 321.203(b)-(d). If a retailer has a single

place of business in Texas, the consummation rule in the Tax Code is very

straightforward and simple:

If a retailer has only one place of business in this state, all of the
retailer’s retail sales of taxable items are consummated at that place of
business except as provided by Subsection (e). 5

Id. § 321.203(b) (emphases added). All parties agree that Section 321.203(b) is

unambiguous.6 Thus, this appeal requires this Court’s de novo review of whether the

agency rule conflicts with the unambiguous statutory language of Sections

321.203(b) and 323.203 of the Tax Code. 7 Under the plain language of Section

5
Subsection (e) addresses situations that are not relevant to Round Rock’s case, such as
sales by itinerant vendors. See Tex. Tax Code § 321.203(e).
6
Although the Comptroller seems now to indirectly argue that Section 321.203 is
ambiguous and in need of interpretation, see Comptroller Brief at 11-12, this position is
unavailing and may not be raised for the first time on appeal. Because Section 321.203(b)
is unambiguous there was no need for the trial court to do anything other than apply the
plain meaning of the statutory text. See TGS-NOPEC Geophysical Co. v. Combs, 340
S.W.3d 432, 439 (Tex. 2011). The Comptroller seems to inflate the role of the agency,
asserting that deference should be given to the agency’s interpretation of the statute, despite
it being unambiguous. Comptroller Brief at 9, 11.
7
Section 323.203 outlines the method for determining where a sale is consummated for the
purpose of collecting county sales and use taxes. This sourcing framework for counties

21
321.203(b), all sales by a retailer with one place of business in Texas are

consummated at that place of business. And because Rule 3.334 undoubtedly

requires some such sales (an amount other than “all”) to be considered consummated

elsewhere, the rule clearly contravenes the Tax Code.

The Comptroller admits that Rule 3.334 will result in some sales for one-

place-of-business retailers being consummated at a different location, ignoring the

obvious issue of statutory conflict and spinning out a hypothetical scenario which it

claims would be “an unreasonable reading of the statute that the Legislature could

not have intended.” Comptroller Brief at 21-22. 8 However, because the statute is

unambiguous, the trial court was only required to apply the plain text of Section

321.203 to the language of the rule rather than address the Comptroller’s

hypothetical scenario, in which an unnamed retailer took certain actions under the

pre-amendment version of Rule 3.334. To address such a scenario posed by the

Comptroller would have resulted in an improper advisory opinion. Instead, the trial

court compared the text of Tax Code Section 321.203, which provides clear guidance

mirrors that for municipal sales tax found in Section 321.203. Compare Tex. Tax Code
§ 321.203 with id. § 323.203. The same analysis applies to Section 323.203, and Round
Rock incorporates that analysis by reference for this and all pertinent sections.
8
The Comptroller attributes its hypothetical to Round Rock’s “interpretation” of the
statute. However, Round Rock has never asserted a hypothetical interpretation of Section
321.203 and instead has consistently cited the plain statutory language and asserted that
“all” means “all.” Round Rock also provided the Comptroller and the trial court with
extensive information and the actual, real-world example of Texas retailer Dell Computer,
which has one place of business in Round Rock and receives internet orders.

22
on how sales are consummated for retailers with one place of business, to determine

whether Rule 3.334 contravenes the statute. As the trial court correctly determined,

it does by requiring one-place-of-business retailers to consummate online sales at a

location other than the retailer’s one place of business.

C. Several sections of Rule 3.334 contravene the Tax Code

Rule 3.334 is quite confusing,9 so Round Rock will highlight certain

problematic portions of the rule, followed by more detailed analysis using the same

briefing order as the Comptroller. The following provisions, working together, result

in destination-sourcing of online orders, even for retailers with only one place of

business in Texas.

Subsection Invalid Rule Language

(a)(9) [Definition of “Fulfill”]

“To complete an order by transferring possession of a taxable item
to a purchaser, or to ship or deliver a taxable item to a location
designated by the purchaser.”

(a)(18) [within Definition of “Place of business of the seller”]

“The term does not include a computer server, Internet protocol
address, domain name, website, or software application.”

9
Rule 3.334 was amended and readopted multiple times during the pendency of this case,
each time, in Round Rock’s opinion, becoming more confusing. Therefore, Round Rock
focused its arguments at trial on the four provisions discussed herein while still standing
on its pleadings and all the challenges it made to Rule 3.334 in its entirety.

23
(b)(5) [within subsection (b)(5) “Determining the place of business of a
seller”]

“A computer that operates an automated shopping cart software
program is not ‘an established outlet, office, or location,’ and does
not constitute a ‘place of business of the seller.’ A computer that
operates an automated telephone ordering system is not ‘an
established outlet, office, or location,’ and does not constitute a
‘place of business of the seller.’”

“The following rules, taken from Tax Code, §321.203 and §323.203,
apply to all sellers engaged in business in Texas, regardless of
whether they have no place of business in Texas, a single place of
business in Texas, or multiple places of business in Texas.”

With the language above, the Comptroller laid the foundation to assert that

because an internet or website order is received by a computer, it is not received at

“a place of business.”10 Rule 3.334(c) goes on to expressly disregard the Tax Code’s

clear instruction that sales by a retailer with one place of business are treated

10
Confoundingly, the Comptroller never explains how a retailer could calculate and collect
sales tax if it did not “receive” the order due to the order being communicated via a
computer. The Comptroller also never explains how a retailer would have the authority to
collect sales tax if only a computer “receives” the order. Computers could not apply for or
receive a sales tax permit from the Comptroller’s office, a fact that was demonstrated at
trial. Ex. RR-70; 8RR46-59. Despite this logical gap, the Comptroller nevertheless
contends that the sentences highlighted above are necessary to effectuate the Legislature’s
intent for Tax Code Sections 321.203 and 323.203.

24
differently than sales by other retailers and are simply consummated at the place of

business, instructing that:

The following rules, taken from Tax Code, §321.203 and §323.203,
apply to all sellers engaged in business in Texas, regardless of
whether they have no place of business in Texas, a single place of
business in Texas, or multiple places of business in Texas.

Rule 3.334(c) (emphases added). The rule then provides standards to determine

where a sale is consummated, distinguishing between orders received at a place of

business from those that are not received at a place of business. In the latter case,

unless an order is “fulfilled” at the retailer’s place of business, the sale is

consummated wherever the order is shipped or delivered or where the buyer takes

possession. Rule 3.334(c)(2). Therefore, Subsection (c) works together with the rule

definitions of “fulfill” and “place of business” to create a conflict with the Tax

Code’s clear and straightforward scheme for determining where a sale by a single-

place-of-business retailer is consummated.

By carving out online sales from being considered “received” at a retailer’s

place of business, the Comptroller forces retailers with one place of business in

Texas to follow the myriad of “fulfilment” rules set out in Rule 3.334(c), resulting

in some sales being consummated at locations other than a retailer’s one place of

business. This achieves destination-sourcing of internet sales, which was the

Comptroller’s policy agenda from the beginning. Because the rule amendments

25
achieving this result conflict with the plain language of Tax Code Section

321.203(b), they are unlawful and were properly enjoined by the trial court.

1. Rule 3.334(a)(9) Contravenes Existing Statutes [Definition
of “Fulfill”]

The trial court correctly found that Rule 3.334(a)(9) contravenes existing

statutes by adding a definition at the agency level that has the effect of changing the

Legislature’s straightforward statutory scheme for determining where a sale is

“consummated.” Subsection (a)(9) of Rule 3.334 states:

(9) Fulfill—To complete an order by transferring possession of a
taxable item to a purchaser, or to ship or deliver a taxable item to a
location designated by the purchaser. The term does not include
receiving or tracking an order, determining shipping costs, managing
inventory, or other activities that do not involve the transfer, shipment,
or delivery of a taxable item to the purchaser or a location designated
by the purchaser.

As the Comptroller concedes, the Tax Code does not contain the concept or

definition of “fulfill” or “fulfillment.” Comptroller Brief at 13. Such terms are

superfluous as they relate to one-place-of-business retailers, who are statutorily

directed to consummate all sales at the location of their single place of business.

Indeed, Section 321.203(a) of the Tax Code provides that:

A sale of a taxable item occurs within the municipality in which the
sale is consummated. A sale is consummated as provided by this
section regardless of the place where transfer of title or possession
occurs.

Tex. Tax Code § 321.203(a) (emphasis added).

26
With this language, the Legislature makes it clear that where the transfer of

title or possession of the taxable item occurs does not matter. See id. Yet, the

Comptroller asserts that Rule 3.334(a)(9) provides “examples of specific acts that

do not qualify as fulfilling an order and thus will not qualify as consummation under

Tax Code section 321.203.” Comptroller Brief at 13 (emphasis added). This shows

that the Comptroller is trying to equate “fulfilment” with “consummation,” at least

for certain kinds of sales, thus creating a statutory conflict.

Any attempt by the Comptroller to substitute its definition of “fulfill” in place

of “consummation” in the Tax Code is improper overreach by the agency. The

Comptroller asserts, without supporting authority or analysis, that “[t]he

Comptroller’s definition of fulfill is needed to properly administer the statutory

language and is based on the Comptroller’s assessment of the clarity needed to

administer the controlling statutory provisions regarding receipt of orders.”

Comptroller Brief at 14. But there is no need to clarify the very clear expression of

legislative intent as to single-place-of-business retailers, and the Comptroller did not

show that it was somehow unable to administer the statutory language before adding

its definition of “fulfill.”

2. Rule 3.334(a)(18) Contravenes Specific Statutory Language
[Definition of “Place of Business”]

The trial court also correctly found that Rule 3.334(a)(18), defining “place of

business,” contravenes specific statutory language set forth in the Tax Code.

27
The Tax Code defines “Place of Business” as:

an established outlet, office, or location operated by the retailer or the
retailer’s agent or employee for the purpose of receiving orders for
taxable items and includes any location at which three or more orders
are received by the retailer during a calendar year. A warehouse,
storage yard, or manufacturing plant is not a “place of business of the
retailer” unless at least three orders are received by the retailer during
the calendar year at the warehouse, storage yard, or manufacturing
plant.

Tex. Tax Code § 321.002(a)(3)(A). The Comptroller has never asserted that that

definition is ambiguous or deficient, and yet, subsection (a)(18) of Rule 3.334 now

states:

(18) Place of business of the seller - general definition—A place of
business of the seller must be an established outlet, office, or location
operated by a seller for the purpose of receiving orders for taxable items
from persons other than employees, independent contractors, and
natural persons affiliated with the seller. An “established outlet, office,
or location” usually requires staffing by one or more sales personnel.
The term does not include a computer server, Internet protocol
address, domain name, website, or software application. The
“purpose” element of the definition may be established by proof that
the sales personnel of the seller receive three or more orders for taxable
items at the facility during the calendar year. Additional criteria for
determining when a location is a place of business of the seller are
provided in subsection (b) of this section . . . .

Rule 3.334(a)(18) (emphases added). By defining “place of business of the seller”

as not including “a computer server, Internet protocol address, domain name,

website, or software application,” the Comptroller lays the groundwork for shifting

online sales to destination-source taxation, mandating that online sales through a

28
website or shopping cart software are no longer considered “received” at a “place of

business.”

Ironically, the items within the Comptroller’s definitional exclusion––

“computer server, Internet protocol address, domain name, website, or software

application”––are generally considered assets owned by a business, although none

of those items, standing alone, could receive a sales tax permit.11 But carving them

out of its definition of “place of business” is necessary for the Comptroller to reach

the desired result of a different consummation scheme for online sales

communicated via the internet, a computer server, or website, regardless of whether

the retailer has only one place of business.

This shift to determining what is or is not a place of business in Texas based

on the method of communicating sales orders is a complete reversal in position for

the Comptroller, which prior to the attempted 2020 amendments, treated all online

11
Moreover, the amendments excluding “a computer server, Internet protocol address, domain
name, website, or software application” from the definition of “Place of business” also conflicts
with the definition of “Internet” found in Section 151.00393:

Sec. 151.00393. INTERNET. “Internet” means collectively the myriad of computer
and telecommunications facilities, including equipment and operating software,
that comprise the interconnected worldwide network of networks that employ the
Transmission Control Protocol/Internet Protocol, or any predecessor or successor
protocols to the protocol, to communicate information of all kinds by wire or
radio.

Tex. Tax Code § 151.00393 (emphasis added). The Comptroller’s effort to isolate certain methods
of communication and treat them differently from others, such as telecommunication facilities or
VoIP, results in rule language that contravenes the language and framework of the Tax Code.

29
and internet orders placed with retailers with one place of business in the state as

being received at the retailer’s place of business, consistent with Section 321.203.

3. Rule 3.334(b)(5) Contravenes Specific Statutory Language
[“A Computer is Not a Place of Business” Proxy for Internet
Orders]

The trial court correctly determined that Rule 3.334(b)(5) contravenes specific

statutory language set forth in the Tax Code. Subsection (b)(5) of Rule 3.334 states:

(b) Determining the place of business of a seller.

***

(5) A facility without sales personnel is usually not a “place of business
of the seller.” A vending machine is not “an established outlet, office,
or location,” and does not constitute a “place of business of the seller.”
Instead, a vending machine sale is treated as a sale by an itinerant
vendor. . . . However, a walk-in retail outlet with a stock of goods
available for immediate purchase through a cashier-less point of sale
terminal at the outlet would be “an established outlet, office, or
location” so as to constitute a “place of business of the seller” even
though sales personnel are not required for every sale. A computer
that operates an automated shopping cart software program is not
“an established outlet, office, or location,” and does not constitute
a “place of business of the seller.” A computer that operates an
automated telephone ordering system is not “an established outlet,
office, or location,” and does not constitute a “place of business of
the seller.”

Rule 3.334(b)(5) (emphasis added). Subsection (b)(5), when read in conjunction

with the rest of Rule 3.334, presents an obvious conflict with Section 321.203. The

effect of Rule 3.334(b)(5) is as follows: If an order for a taxable item is

communicated to a Texas retailer via a computer that operates shopping cart

30
software, then that order is not received at the retailer’s “place of business,” even if

the retailer has only one place of business in Texas. Therefore, the rule instructs that

a taxable sale is no longer consummated at that retailer’s one “place of business” in

direct contravention of express statutory language and authority, as well as the

overall statutory framework of the Tax Code. Subsection (b)(5) of the rule, working

together with the agency definitions, results in a different sourcing framework for

online orders, even for retailers with only one place of business in the state.

Subsection (b)(5) also makes a distinction between orders that are received by

sales personnel and orders that are not, whereas the Tax Code does not, instead

providing that when a retailer has only one place of business in this state, all of the

retailer’s sales of taxable items are consummated at that place of business without

distinction or differentiation between orders received via computers, servers,

software, or sales personnel. See Tex. Tax Code § 321.203(b).

In a relevant case from the Third Court of Appeals, Combs v. City of Webster,

311 S.W.3d 85, 95 (Tex. App.—Austin 2009, pet. denied), the court specifically

considered the statutory scheme under Texas Tax Code Chapter 321. The court

stated that, “[f]or purposes of local sales tax, the sale of a taxable item occurs within

the municipality in which the sale is consummated.” Id. (citing Tex. Tax Code

§ 321.203(a)). The court also noted that “[g]enerally, the location at which a sale is

consummated is a ‘place of business’ of the retailer.” Id. (citing Tex. Tax Code

31
§ 321.203(b)-(d)). The parties in that case did not dispute that the retail store

locations were places of business, and the court concluded that under Section

321.203, the sales were consummated at the retail store location in the city of

Webster, which was “the retailer’s place of business in this state where the order is

received.” Id. (citing Tex. Gov’t Code § 321.203(d)(1)).

The court in Webster specifically referred to the following statements made

by the Comptroller about internet orders:

According to statements by the Comptroller in the documents attached
to the plea to the jurisdiction and appellees' responsive filings, the three
orders required for a distribution center to be considered a place of
business under the tax code may be received at the distribution
center itself, or by any of the following . . . (3) a showroom or
clearance center with regular hours of operation open to the public for
sales of merchandise; or (4) an Internet computer system receiving
orders.

Id. at 97 (emphases added). The Comptroller’s assertion in Webster that orders may

be received at “an Internet computer system receiving orders” is exactly the opposite

of the Comptroller’s current position as reflected in Rule 3.334. Further, Rule 3.334

directly contradicts voluminous prior statements, published guidelines, periodicals,

and actions of the Comptroller, which, until recently, consistently treated online

orders as being received at a place of business and consummated pursuant to Section

321.203. The Comptroller’s change of position, given that there have been no

changes in the constitution, laws, or judicial interpretations relating to Section

32
321.203, demonstrates the extent to which the Comptroller has exceeded his

authority. See Tex. Tax Code § 111.002(a).

The awkward language of subsection (b)(5) is the foundation of the

Comptroller’s attempted end-run around the origin-sourcing statutory scheme and

plain language of the Tax Code. In addition, the Comptroller’s arbitrary method-of-

communication test will allow for inconsistent applications of the rule. For example,

if a buyer selects a product and places an order using a retailer’s shopping website

and then also calls to give credit card information by phone, it would be impossible

for the retailer to know how to source the sale. In addition to harming Round Rock,

this rule will be very confusing for retailers across Texas to understand, imposing

compliance burdens, conditions, or restrictions in excess of or inconsistent with the

relevant statutory provisions.

4. Rule 3.334(c) Contravenes Specific Statutory Language and
the Tax Code’s Statutory Scheme

The trial court correctly determined that Rule 3.334(c) contravenes specific

statutory language. Rule 3.334 states, with emphasis added:

(c) Local sales tax – Consummation of sale – determining the local
taxing jurisdictions to which sales tax is due. Except for the special
rules applicable to remote sellers in subsection (i)(3) of this section,
direct payment permit purchases in subsection (j) of this section, and
certain taxable items, including taxable items sold by a marketplace
provider, as provided in subsection (k) of this section, each sale of a
taxable item is consummated at the location indicated by the provisions
of this subsection. The following rules, taken from Tax Code
§ 321.203 and § 323.203, apply to all sellers engaged in business in

33
this state, regardless of whether they have no place of business in
Texas, a single place of business in Texas, or multiple places of
business in the state.

The emphasized sentence above highlights the head-to-head conflict between

Rule 3.334 and the Tax Code. Section 321.203 of the Tax Code contains words

carefully chosen by the Legislature to explain where sales of taxable items are

consummated. Rule 3.334(b)(5)’s provision that online orders are not received at “a

place of business” has the effect of forcing all retailers, including those with only

one place of business in the state, into following the complicated consummation

rules found in subsection (c).12

The Comptroller tacitly admits that Rule 3.334(c) conflicts with Section

321.203(b) but asserts in the 2024 Order that the statute cannot really mean “all”

sales for retailers with one place of business. The Comptroller states that “Tax Code,

§ 321.203(b) cannot reasonably be interpreted to mean that a sale is consummated

at the seller’s single place of business in Texas, even if that place of business did not

receive the order from the customer, did not fulfill the order from the customer, and

was not the location where the order was delivered.” Ex. RR-28 at 4805 (emphasis

added). According to the Comptroller, the Legislature could not have intended that

12
Although the prefatory statement within subsection (c) of Rule 3.334 states that the rules were
“taken from Tax Code § 321.203,” that statement is demonstrably false. Instead, the rule conflicts
with the Tax Code by dictating where a sale is consummated, ignoring statutory language to the
contrary.

34
its plain language be followed without an additional analysis regarding where an

order was received, fulfilled, and delivered. This is patently inconsistent with the

Legislature’s intent as clearly expressed in the Tax Code.

Furthermore, subsections (c)(1) and (2) distinguish between: orders received

at a place of business in Texas and placed in person; orders received and fulfilled at

a retailer’s place of business in Texas but not placed in person; orders received at

the retailer’s place of business in Texas but not placed in person and not fulfilled at

the seller’s place of business in Texas; orders not received at a retailer’s place of

business in Texas but fulfilled at such a location; orders not received or fulfilled at

a retailer’s place of business but fulfilled in Texas; and orders not received or

fulfilled at a retailer’s place of business and not fulfilled in Texas. Rule 3.334(c)(1),

(2). These labyrinthine consummation rules along with the confusing definitions of

“fulfill” and “place of business” are now imposed on retailers with only one place

of business in Texas, in clear violation of Section 321.203’s provision that “[i]f a

retailer has only one place of business in this state, all of the retailer’s retail sales of

taxable items are consummated at that place of business.” Tex. Tax Code

§ 321.203(b).

a. Rule 3.334(c) [(c)(1) and (c)(2) inclusive] Contravenes
the Statutory Scheme

The trial court correctly found that Rule 3.334(c) also contravenes the

statutory scheme for determining where a sale is consummated. As demonstrated

35
above, when the Comptroller’s rule amendments are compared to the overall

structure of the Tax Code Rule 3.334, there is an irreconcilable conflict with a

controlling statute.

The Comptroller notes that the trial court did not explain why it determined

that Rule 3.334(c) violated both specific statutory language and the statutory

scheme. Comptroller Brief at 22. However, the Comptroller did not request any such

explanation or otherwise inform the trial court that it was confused as to that issue.13

Moreover, although the Comptroller suggests a lack of relevant Texas caselaw

diﬀerentiating between when a rule contravenes specific statutory language and

when a rule contravenes a statutory scheme, that seems to be a distinction without a

difference. Instead, the trial court’s determinations that the rule violated both the

specific statutes and the overall tax scheme fit neatly into the approach a court should

take when conducting a rule challenge: “To establish [a] rule’s facial invalidity, a

challenger must show that the rule: (1) contravenes specific statutory language; (2)

runs counter to the general objectives of the statute; or (3) imposes additional

burdens, conditions, or restrictions in excess of or inconsistent with the relevant

statutory provisions.” Moers v. Harris Cty. Appraisal Dist., 469 S.W.3d 655, 664

(Tex. App.—Houston [1st Dist.] 2015, pet. denied) (quoting Office of Pub. Util.

13
The Comptroller did not request findings of fact or conclusions of law on any issue after the trial
court issued its Final Judgment.

36
Counsel v. Pub. Util. Comm’n, 131 S.W.3d 314, 321 (Tex. App.—Austin 2004, pet.

denied)) (emphasis added).

When examining the statutory scheme for consummation set out in the Tax

Code, it is clear that the Legislature chose to treat retailers with only one place of

business in Texas differently than other retailers. If that one place of business is

located within a municipality, all sales are consummated within that municipality,

and “[a] sale is consummated as provided by this section regardless of where transfer

of title or possession occurs.” Tex. Tax Code § 321.203(a), (b).

Throughout this case, the Comptroller has incorrectly asserted that Round

Rock seeks “special treatment” for one-place-of-business retailers. Comptroller

Brief at 20-21. However, the fact is that the Tax Code explicitly and unambiguously

treats retailers with one place of business in the state differently than other retailers.

b. The Trial Court Properly Enjoined All of Subsection
(c) [Severability]

The Comptroller argues that the trial court erred in invalidating all of

subsection (c) of Rule 3.334 because Round Rock primarily focused its arguments

on the final problematic sentence in the preface paragraph of subsection (c).

37
It is true that Round Rock took particular issue with the sentence highlighted

below:

Local sales tax - Consummation of sale - determining the local taxing
jurisdiction to which sales tax is due. Except for the special rules
applicable to remote sellers in subsection (i)(3) of this section, direct
payment permit purchases in subsection (j) of this section, and certain
taxable items, including taxable items sold by a marketplace provider,
as provided in subsection (k) of this section, each sale of a taxable item
is consummated at the location indicated by the provisions of this
subsection. The following rules, taken from Tax Code, §321.203
and §323.203, apply to all sellers engaged in business in Texas,
regardless of whether they have no place of business in Texas, a
single place of business in Texas, or multiple places of business in
Texas.

Rule 3.334(c) (emphases added).

After that prefatory paragraph, subsection (c) goes on to explain in sub-

subsections (1) through (7) where an order is considered to be consummated for

sales-tax purposes, distinguishing several different situations as noted above.

Because Round Rock specifically complained of that emphasized sentence and the

trial court invalidated subsection (c) in its entirety, including all the sub-subsections

explaining where a sale is considered consummated, the Comptroller argues that the

trial court improperly overturned language that had not been challenged. However,

it is false that Round Rock limited its challenge to that one sentence of subsection

(c). In its live pleadings, Round Rock challenged the entirety of subsection (c),

specifically noting that subsection (c)(1) “continu[ed] and add[ed] to the conflict

38
with statutory authority” and arguing that both subsections (c)(1) and (c)(2)

conflicted with the Tax Code. CR2474-2478, 2488, 2490-2493, 2497.

Even if Round Rock had only explicitly challenged the prefatory paragraph,

the trial court had to consider whether that paragraph could be severed from the rest

of subsection (c), by asking (i) whether the function of the rule as a whole would be

impaired without the invalid part of the rule and (ii) whether there was there any

indication that the Comptroller would not have adopted the rule without the invalid

part, and “[i]f the answer to either query [was] ‘yes,’ in the court’s view, then

severance [was] not justified and the entire rule must fall.” Sw. Bell Tel. Co. v. Pub.

Util. Comm’n, 888 S.W.2d 921, 929 (Tex. App.—Austin 1994, writ denied); Tex.

Dep’t of Banking v. Restland Funeral Home, Inc., 847 S.W.2d 680, 683 (Tex.

App.—Austin 1993, no writ) (citing K Mart Corp. v. Cartier, Inc., 486 U.S. 281,

295 (1988)); see Bd. of Pilot Comm’rs for the Ports of Brazoria Cty. v. Gonzales,

NO. 14-99-00397-CV, 2000 WL 977408, at *2 (Tex. App.—Houston [14th Dist.]

May 18, 2000, pet. denied) (not designated for publication) (applying test to

administrative agency’s order).

The trial court could reasonably have determined that the prefatory paragraph,

explaining exactly when the following rules applied, was a necessary part of the

subsection and that the Comptroller would not have written it without the invalidated

language. Further, because the trial court had determined that the main portion of

39
subsection (c) contravened statutory language, it necessarily had to invalidate the

rest of the subsection, which gave specifics about the way sales tax is calculated in

various kinds of sales, and which changed single-place-of-business sales from the

Legislature’s intended origin-sourcing model to the Comptroller’s preferred

destination-sourcing model. See Tex. Tax Code § 321.203(b). The trial court

therefore did not err in invalidating the entirety of subsection (c).

D. The Comptroller Exceeded Statutory Authority

The Comptroller’s authority to adopt or amend rules is set forth in Texas Tax

Code Section 111.002. A close review of the preamble to Rule 3.334, the

Comptroller’s public statements about the rule amendments, and the full text of

Section 111.002(a) demonstrate the improper use of the Comptroller’s rulemaking

authority. Section 111.002(a) reads in full as follows:

The comptroller may adopt rules that do not conflict with the laws of
this state or the constitution of this state or the United States for the
enforcement of the provisions of this title and the collection of taxes
and other revenues under this title. In addition to the discretion to
adopt, repeal, or amend such rules permitted under the constitution and
laws of this state and under the common law, the comptroller may
adopt, repeal, or amend such rules to reflect changes in the power of
this state to collect taxes and enforce the provisions of this title due to
changes in the constitution or laws of the United States and judicial
interpretations thereof.

Id. § 111.002(a) (emphases added). The Comptroller’s office has been receiving

sales tax collections for online, website, and internet sales for decades, yet has never

taken the position that the sourcing of such sales was so complex or devoid of clarity

40
as to require sweeping changes to its rules. Despite the Comptroller’s passing

reference to “the realities of online orders,” Comptroller Brief at 19, there is no

actual information, study, or data put forth by the Comptroller to support such a

general assertion, much less to tie that assertion to a legal and rational basis for a

need to clarify the Tax Code or drastically change Texas’s origin-sourcing

framework for single-place-of-business retailers. Instead, the Comptroller is simply

advancing a policy goal of reallocating sales tax revenues to destination cities,

without a change in the law or judicial interpretation necessitating such change.

In addition, the reference to “this title” in Tax Code Section 111.002(a) means

that the Comptroller has authority over the Tax Code, not other state statutes that fall

outside the Comptroller’s purview, such as Chapter 380 agreements, which are

specifically governed by the Local Government Code. Yet, then-Comptroller Hegar

admitted to Round Rock in face-to-face meetings as well as to the public in

newspaper articles that the reason for the rule amendments was to thwart Chapter

380 agreements. It is improper for the Comptroller to use the rulemaking process to

effectuate changes in statutes over which the agency has no authority to administer.

E. Conclusion

The Comptroller bases much of its analysis on a contrived scenario in which

a hypothetical taxpayer would source sales tax to a location extremely attenuated

from the retailer in an effort to game the system. Comptroller Brief at 21-22. As a

41
preliminary matter, the Comptroller lacks authority to adopt rules based on purely

hypothetical problems. See Tex. Tax Code § 111.002(a). Regardless, although the

Comptroller ignores them, the Tax Code already provides the Comptroller with the

tools to stop a retailer from manipulating what constitutes a place of business:

(B) An outlet, office, facility, or any location that contracts with a retail
or commercial business to process for that business invoices, purchase
orders, bills of lading, or other equivalent records onto which sales tax
is added, including an office operated for the purpose of buying and
selling taxable goods to be used or consumed by the retail or
commercial business, is not a "place of business of the retailer" if the
comptroller determines that the outlet, office, facility, or location
functions or exists to avoid the tax legally due under this chapter
or exists solely to rebate a portion of the tax imposed by this
chapter to the contracting business.

Id. § 321.002(a)(3)(B) (emphasis added).

Further, the Comptroller has never stated that it believed Round Rock’s

Chapter 380 agreement with Dell Computer is a sham, instead simply asserting that

the agreement was “too long.” 8RR64. The Comptroller’s attempted rulemaking

amounts to agency meddling and legislation-by-rulemaking, which exceeds the

Comptroller’s authority. Therefore, Round Rock requests that this Court affirm the

trial court’s judgment on the grounds of statutory contravention.

42
II. The Comptroller did not substantially comply with the APA notice
requirements.

A. The APA sets forth “minimum standards” of agency rulemaking
practice and procedure.

The APA provides “minimum standards” of uniform practice and procedure

for state agencies. Tex. Gov’t Code § 2001.001(1). Those minimum standards are

intended to provide for “adequate and proper public notice of proposed state agency

rules and state agency actions” and “public participation in the rulemaking process.”

See id. §§ 2001.001(1) & 2002.002. To that end, the Legislature adopted

Government Code Sections 2001.021 through 2001.033 to establish a system of

informal or “notice-and-comment” rulemaking.

A state agency is required to publish a notice in the Texas Register at least 30

days before it adopts a rule. Id. § 2001.023. That notice must include certain

information, such as the following:

• A fiscal note that states the estimated loss in revenue to local

governments as a result of enforcing or administering the rule, id.

§ 2001.024(a)(4)(C);

• A note that states the probable economic cost to persons required to

comply with the rule, id. § 2001.024(a)(5), and

• Any other statement required by law. Id. § 2001.024(a)(8).

43
The economic impact statement and regulatory flexibility analysis mandated

by Government Code Section 2006.002 are “other statement[s] required by law,”

which also must be included in a notice of proposed rulemaking. Id. § 2006.002(d);

Unified Loans, 955 S.W.2d at 651.

Section 2006.002(c) provides that:

Before adopting a rule that may have an adverse economic effect on
small businesses or rural communities, as applicable, a state agency
shall prepare:

(1) an economic impact statement that estimates the number
of small businesses or rural communities subject to the
proposed rule, projects the economic impact of the rule on
small businesses or rural communities, and describes
alternative methods of achieving the purpose of the
proposed rule; and

(2) a regulatory flexibility analysis that includes the agency’s
consideration of alternative methods of achieving the
purpose of the proposed rule.

Tex. Gov’t Code § 2006.002(c).

The APA notice requirements are mandatory, not optional at the discretion of

the agency, and an agency rule that is not adopted in substantial compliance with

APA procedures is voidable. Id. § 2001.035(a). An agency action substantially

complies with an APA procedural requirement only if that action “(1) accomplishes

the legislative objectives underlying the requirement and (2) comes fairly within the

character and scope of each of the statute’s requirements in specific and

unambiguous terms.” Nat’l Ass’n of Indep. Ins. v. Tex. Dep’t of Ins., 925 S.W.2d

44
667, 669 (Tex. 1996) (“NAII”); Methodist Hosps. of Dall. v. Tex. Indus. Acc. Bd.,

798 S.W.2d 651, 654 (Tex. App.—Austin 1990, writ dism’d w.o.j.); see also Tex.

Shrimp Ass’n v. Tex. Parks & Wildlife Dep’t, No. 03-04-00788-CV, 2005 WL

1787453, at *2 (Tex. App.—Austin July 27, 2005, no pet.) (mem. op.) (“Substantial

compliance with a statutory requirement contemplates acts that secure the legislative

objectives while coming fairly within the character and scope of each action or thing

required in concise, specific, and unambiguous terms.”).

The Third Court of Appeals has explained that the APA’s notice provisions,

Sections 2001.024 and 2006.002, “have two objectives.” Unified Loans, 955 S.W.2d

at 652. The first objective is for the public “to obtain . . . an objective assessment of

the agency’s proposed action” “as early as possible in the rulemaking proceeding.”

Id. The public obtains that objective assessment by “forcing [the agency] to consider,

in detail and in orchestration, the various factors named in the statute . . . .” Id.

“The second objective is to afford adequate notice.” Id. Adequate notice is

important because “interested persons might comment intelligently on the proposed

rules” and “the agency might exercise its responsibilities intelligently.” Id. Those

responsibilities include the following: (i) “arriving at the contents of the rule as

finally adopted,” (ii) “in stating reasons for and against adoption, and” (iii) “in

formulating the required contents of the adopting order, including a ‘reasoned

justification’ for the rule.” Id.

45
B. The fiscal impact statements included in the 2024 Notice were
inadequate.

The APA requires rule notices to include, among other things, (1) the

estimated reduction in revenue to local governments; (2) the probable economic

costs of the public; and (3) an economic impact statement and regulatory flexibility

analysis. Tex. Gov’t Code §§ 2001.024(a)(4)(C), (a)(5), (a)(8), 2006.002(c); Unified

Loans, 955 S.W.2d at 651.

The entire discussion of the potential fiscal impact of the new rule on local

government revenue included in the 2024 Notice is as follows:

Change in sourcing of transactions subject to local sales taxation could
result in net change in sales tax revenue of local taxing authorities
generally, with the net change quite significant for some jurisdictions.
Most, but not all, reductions in taxable transactions sourced to some
jurisdictions would be increases in taxable transactions sourced to other
jurisdictions. But to the extent that transactions previously sourced
within an incorporated municipality would be sourced to an
unincorporated area without a cumulative local tax rate levied by
municipal (pursuant to a limited purpose annexation agreement),
county, and/or special purpose taxing authorities commensurate with
the cumulative local tax rate levied by the municipal, county, and/or
special purpose taxing authorities applicable where the transactions
were formerly sourced, there would be a reduction in aggregate local
sales tax levies and consequent reduction in state service charge
revenues under §§ 321.503, 322.303, and 323.503, Tax Code.

For reasons further discussed, reliable estimates of net changes in
revenue by individual jurisdictions for the 1,759 local sales taxing
jurisdictions that might stem from compliance with the rule cannot
feasibly be produced by the comptroller.

Ex. RR-26 at 2443 (emphases added).

46
The Comptroller followed that discussion with an analysis of estimates

various parties provided to the Comptroller after this lawsuit was filed. Ex. RR-26

at 2443-2446. Using the data from those estimates, with slight modifications, the

Comptroller concluded that the rule amendments could result in a “$28.5 million

reduction in aggregate local tax levies.” Ex. RR-26 at 2447. The Comptroller,

however, included the following disclaimer with that conclusion:

[T]he comptroller has not been provided with sufficient information to
verify the estimates, and the data from the estimates cannot be
extrapolated to other local tax jurisdictions.

Ex. RR-26 at 2447.

The Comptroller included similar statements in the 2024 Notice regarding the

probable compliance costs and effects on small businesses:

• Compliance costs: “There may be additional economic costs to a
person required to comply with the rule.”

• Effects on small businesses: “[T]he comptroller does not have
sufficient data on the business operations or each business to identify
and quantify the businesses and transactions that might be affected, and
the positive or negative revenue impact on each tax jurisdiction.”

Ex. RR-26 at 2447 (emphases added).

C. The Comptroller did not substantially comply with the APA
requirement to estimate probable compliance costs.

The Comptroller argues in its brief that the trial court erred because the 2024

Notice “substantially complied with both the Fiscal Note and Adverse Economic

Effect Notice.” Comptroller Brief at 25. The Comptroller also complains that the

47
trial court “did not specify which specific statutes the Comptroller violated.”

Comptroller Brief at 25. As a result, the Comptroller limited its appellant issues to

the sufficiency of its Fiscal Note and Adverse Economic Effect Notice, citing the

parties’ trial briefs as support. Comptroller Brief at 25.

Round Rock, however, also asserted at trial that the Comptroller did not

substantially comply with the APA requirement to estimate probable compliance

costs to the public. CR2635-2637; see Tex. Gov’t Code § 2001.024. In fact, the

portion of Round Rock’s trial brief the Comptroller cites is included in the section

titled: “Even after being ordered to do so by the Court, the Comptroller did not

estimate the loss in revenue to local governments or the cost to comply with the rule

amendments.” CR2635 (emphasis added). Further, the specific page the Comptroller

cites contains an explanation of the APA requirement to estimate probable

compliance costs and a citation to Government Code Section 2001.024(a)(5).

CR2636.

Accordingly, the Comptroller has failed to rebut all the notice challenges

asserted by Round Rock, and the Comptroller’s failure to comply with the probable-

compliance-costs requirement alone invalidates Rule 3.334. See Tex. Gov’t Code

§ 2001.035(a).

48
D. The Comptroller did not substantially comply with the APA
requirement to estimate revenue loss to local governments.

An agency action substantially complies with the APA if it “accomplishes the

legislative objectives underlying the requirement.” NAII, 925 S.W.2d at 669. The

notice procedures of the APA have two objectives: (i) “forc[e] [the agency] to

consider, in detail and in orchestration, the various factors named in the statute,”;

and (ii) “afford adequate notice.” Unified Loans, 955 S.W.2d at 652.

The Comptroller argues that it substantially complied with the APA

requirement to estimate the loss in revenue to local governments by including the

following in the 2024 Notice: (i) notice of potential loss of revenue and fiscal impact;

(ii) information the Comptroller would need to provide a comprehensive analysis;

and (iii) its claimed reasons why it was unable to provide a detailed analysis.

Comptroller Brief at 29. The Comptroller is wrong as a matter of law and fact.

First, the Comptroller is wrong that it is excused from APA procedural

requirements because those requirements might be difficult to comply with. The

APA provides “minimum standards” of practice and procedure for state agencies.

Tex. Gov’t Code § 2001.001(1). A rule that is not adopted in substantial compliance

with the APA is voidable. Id. § 2001.035(a). Accordingly, if the Comptroller cannot

substantially comply with the APA procedural requirements, then it may not issue

rules.

49
Further, nothing in the APA’s statutory language indicates that an agency may

simply decide that including a useful and informational fiscal note is just “too hard.”

See, e.g., RWE Renewables Ams., LLC v. Pub. Util. Comm’n of Tex., 669 S.W.3d

566, 582 (Tex. App.—Austin 2023), vacated, dism’d, 691 S.W.3d 484 (Tex. 2024)

(rejecting agency’s argument that requiring it to comply with APA rulemaking

procedures “would be a ‘massive waste of precious [agency] resources,’” and stating

that although APA process “undoubtedly take[s] some time and effort,” “[t]he

importance of the APA requirements cannot be overstated” because process

“‘assures notice to the public and affected persons and an opportunity to be heard on

matters that affect them’”); Unified Loans, 955 S.W.2d at 652-54 (refusing to accept

agency’s vague statement about effects of rule on small businesses, despite agency’s

assertion that there was “no information reasonably available from which to estimate

a specific cost amount”; court stated that although agency was not required to include

in notice “every piece of information [it] relied upon in reaching [its] conclusions,”

it was required to include “some basis in order that interested persons might know

and confront that basis in a meaningful way in their comments” because without

such information, the agency’s “invitation to comment on the proposed rules was a

masquerade, a disingenuous and counterfeit compliance with the invitation to

comment required by [the] APA”).

50
Round Rock agrees with the Comptroller that the APA allows for substantial

compliance rather than exacting, precise compliance, but does not agree that it

allows an agency to opt out of or gloss over a requirement by simply stating that the

proposed rule’s fiscal effect “might be significant” and shrugging its shoulders as to

how significant it might be. See, e.g., Tex. Gov’t Code §§ 2001.021-.042. In other

words, Round Rock does not argue that the Comptroller should have provided a

definitive and exact amount of revenue that would be lost to Round Rock, the other

plaintiff cities, and other local taxing jurisdictions. Round Rock does argue that the

Comptroller was required to do something more than virtually nothing. Such

abdication of responsibility by an agency cannot equate to substantial compliance.

Second, the Comptroller has not established that it lacked the information

necessary to provide a more specific fiscal impact statement. If, as here, the parties

to a lawsuit do not request findings of fact following a bench trial, all findings

necessary to support the trial court’s judgment are implied, although if a reporter’s

record is filed, those implied findings may be challenged on sufficiency grounds in

the same manner as a jury’s findings. Shields Ltd. P’ship v. Bradberry, 526 S.W.3d

4714, 480 (Tex. 2017) (quoting Sixth RMA Partners, L.P. v. Sibley, 111 S.W.3d 46,

52 (Tex. 2003)). “When an appellant does not request or file findings and

conclusions by the trial court, the appellate court presumes the trial court found all

fact questions in support of its judgment, and the reviewing court must affirm that

51
judgment on any legal theory finding support in the pleadings and evidence.” Ikb

Indus. v. Pro-Line Corp., 938 S.W.2d 440, 445 (Tex. 1997).

The trial court found that the Comptroller failed to substantially comply with

the notice requirements of the APA. CR2798. The implied findings supporting the

judgment include a finding that it was possible for the Comptroller to provide a more

detailed fiscal impact statement, but that it did not do so. The trial court could

reasonably have concluded that the face of the 2024 Notice did not satisfy the

Legislative objectives of the APA notice procedures: “forcing [the agency] to

consider, in detail and in orchestration, the various factors named in the statute” and

affording “adequate notice.” See Unified Loans, 955 S.W.2d at 652.

Third, the Comptroller’s “notice of potential loss of revenue and fiscal

impact” was really no notice at all:

Change in sourcing of transactions subject to local sales taxation could
result in net change in sales tax revenue of local taxing entities
generally, with the net change quite significant for some jurisdictions.

Ex. RR-26 at 2443 (emphasis added). The phrase “could result” would not provide

a local taxing jurisdiction with any actual information or tools to plan for a change

in sales tax revenue and related budgeting. Further, local taxing entities could not

readily understand how the Comptroller quantifies or defines the terms “net change”

and “quite significant” as used in the notice. The transparency and fair-notice

rationales underpinning the APA should not allow a government agency to provide

52
only an amorphous and vague description of the effect of its own rule, especially

when the information would only be known by the agency itself. 8RR6-54. The trial

court could reasonably have found that the Comptroller did not consider or disclose

the significant and harmful revenue impact on cities when it developed the rule, and

that interested parties were not given adequate notice.

E. The Comptroller did not substantially comply with APA notice
requirements related to small businesses.

The first requirement of an economic impact statement is that it “estimates the

number of small businesses or rural communities subject to the proposed rule.” Tex.

Gov’t Code § 2006.002(c)(1). The Comptroller stated in its brief that “it could not

identify and quantify the businesses and transactions that might be affected or the

positive or negative revenue impact on each tax jurisdiction.” Comptroller Brief at

32.

The Comptroller did not substantially comply with the APA notice

requirements that concern small businesses when it opted to not “estimate the

number of small businesses . . . subject to the proposed rule.” Comptroller Brief at

32. The Comptroller also did not “project[ ] the economic impact of the rule on small

businesses.” Comptroller Brief at 32. The trial court therefore did not err in finding

that the Comptroller did not substantially comply with the APA notice requirements.

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F. Conclusion

The Texas Supreme Court described the important role courts play in the

rulemaking process as follows:

Judicial review of administrative rulemaking is especially important
because, although the executive and legislative branches may serve as
political checks on the consequences of administrative rulemaking, the
judiciary is assigned the process of rulemaking. Given the vast power
allocated to governmental agencies in the modern administrative state,
and the broad discretion ordinarily afforded those agencies, judicial
oversight of the rulemaking process represents an important check on
government power that might otherwise exist without meaningful limits.”

NAII, 925 S.W.2d at 670 (internal citations omitted; italics in original).

“[S]ubstantial compliance requires more than a faint effort or hollow

rhetoric.” RWE Renewables, 669 S.W.3d at 581; see also Nat’l Ass’n of Chain Drug

Stores, Inc. v. Young, No. 07-23-00175-CV, 2024 WL 2971681, at *7 (Tex. App.—

Amarillo June 12, 2024, pet. denied) (“An agency must substantially comply with

the APA rulemaking requirements and constitute more than a ‘faint effort or hollow

rhetoric.’”) (quoting RWE Renewables, 669 S.W.3d at 581). It is hard to imagine a

standard for substantial compliance that is lower than the one advocated by the

Comptroller. The 2024 Notice’s discussion regarding the fiscal impacts of the

proposed rule was vague, argumentative, and accompanied by disclaimers. In fact,

the discussion was so vague that it arguably could be used for any rule the

Comptroller proposes. That discussion does not substantially comply with the APA

notice requirements because it does not give interested parties “adequate notice” or

54
show the Comptroller “consider[ed], in detail and in orchestration, the various

factors named in the statute.” See Unified Loans, 955 S.W.2d at 652.

III. The Comptroller did not substantially comply with the APA’s reasoned
justification requirement.

The APA’s reasoned-justification requirement is intended to ensure that an

agency fully considers all comments submitted by interested parties and that the

public learns the agency’s factual basis and rationale for a rule. Farm & Ranch

Freedom All. v. Tex. Dep’t of Agric., No. 03-23-00459-CV, 2025 WL 994190, at *6

(Tex. App.—Austin Apr. 3, 2025, no pet.) (mem. op.); Reliant Energy v. Pub. Util.

Comm’n of Tex., 62 S.W.3d 833, 841 (Tex. App.—Austin 2001, no pet.). Therefore,

an agency seeking to promulgate a rule has three affirmative duties: (i) to “create a

‘legislative record’” summarizing the evidence presented to it during the comment

period; (ii) to provide a justification based on that evidence for the rule adopted,

“including why the agency gave less weight or disregarded evidence to the

contrary”; and (iii) to demonstrate that its justification is reasoned. R.R. Comm’n v.

Arco Oil & Gas Co., 876 S.W.2d 473, 491 (Tex. App.—Austin 1994, writ denied)

(quoting Ron Beal, Challenging the Factual Basis and Rationality of a Rule Under

APTRA, 45 Baylor L. Rev. 1, 40 (1993)).

Courts should review a challenge to an agency’s reasoned justification under

the “arbitrary and capricious” standard, without presuming that facts exist to support

the agency’s order. Lambright v. Tex. Parks & Wildlife Dep’t, 157 S.W.3d 499, 504

55
(Tex. App.—Austin 2005, no pet.); Reliant Energy, 62 S.W.3d at 841. “A reviewing

court must confine its search for a reasoned justification to the four corners of the

order finally adopting the rule, and the agency must provide a reasoned justification

for the rule as a whole, not clause by clause.” Lambright, 157 S.W.3d at 504; see

Reliant Energy, 62 S.W.3d at 840; Arco, 876 S.W.2d at 491. To satisfy the APA, the

four corners of an agency’s order must include “(1) a summary of the comments

from interested persons; (2) a summary of the factual basis for the rule; and (3) the

reasons why [the agency] disagreed with a party’s comments.” 14 Lambright, 157

S.W.3d at 504. Courts should ask whether the agency’s explanations of the facts and

policy concerns it relied on show that the agency considered all the relevant factors

and engaged in reasoned decision-making. Reliant Energy, 62 S.W.3d at 841; see

Arco, 876 S.W.2d at 491 (“courts insist upon an explanation of the facts and policy

concerns relied upon by the agency, determine whether the agency has considered

the relevant factors, and ensure that the agency has given the problem a ‘hard look’

and engaged in reasoned decision making” (quoting John J. Watkins & Debora S.

Beck, Judicial Review of Rulemaking Under the Texas Administrative Procedure

and Texas Register Act, 34 Baylor L. Rev. 1, 32-33 (1982))).

14
The Comptroller seems to view the “four corners” rule as cutting in its favor, but that rule
actually places the burden on the agency to ensure that the four corners of the order contain all of
the information relied upon and the full reasoning employed.

56
An agency acts arbitrarily if it omits from its consideration a factor that the

Legislature intended it to consider, includes an irrelevant factor in its consideration,

or “reaches a completely unreasonable result after weighing only relevant factors.”

Lambright, 157 S.W.3d at 505; Reliant Energy, 62 S.W.3d at 841. Even an order

that contains “the minimum components” “does not necessarily state a reasoned

justification”—the order “must present the agency’s justification in a relatively

clear, precise, and logical fashion. Otherwise, even an order stated in terms that were

vague, ambiguous, conclusory, or logically incomplete or inconsistent would be

virtually unassailable.” Arco, 876 S.W.2d at 492; see Methodist Hosps., 798 S.W.2d

at 659 (rejecting as “untenable” board’s argument that its adoption of Rule after

receiving comments and proposals amounted to sufficient “reply” to comments and

holding that APA “requires in explicit terms that the Board’s reasons for disagreeing

with party submissions and proposals be stated in the order as part of the agency’s

‘reasoned justification’ for its newly adopted rule”).

Government Code Section 2001.033(a)(1)(C) requires that a state agency

order finally adopting a rule must include, among other things, “the reasons why the

agency disagrees with the party submissions and proposals.” Tex. Gov’t Code

§ 2001.003(a)(1)(C). Round Rock timely submitted a written comment in response

to the 2024 Notice. Ex. RR-27.

57
That comment included, among other things, the two following submissions:

• If the Comptroller cannot accurately estimate how the rule
amendments will impact the revenue of local governments or the
public, then why is the Comptroller adopting such amendments
at all? (Submission II), Ex. RR-27 at 2-4.

• The way the Comptroller can minimize adverse economic effects
on small businesses is to apply the plain meaning of the Tax
Code, which sources sales for retailers with a single place of
business to that location. (Submission IV), Ex. RR-27 at 6-7.

The Comptroller makes the following argument with respect to Round Rock’s

Submission II:

[T]he Comptroller substantially complied with the notice requirements
of the APA. The City of Round Rock improperly framed the
Comptroller’s detailed and thorough explanation of each notice
requirement of the APA as an inability to comply. See 49 Tex. Reg.
4808. The Comptroller gave reasons why the agency disagreed with
Round Rock’s notice comments.

Comptroller Brief at 48. The Comptroller, however, does not explain how any

statement in the 2024 Order responds to Round Rock’s question: Why is the

Comptroller moving forward with the rule amendments with so much uncertainty?

See Reliant Energy, 62 S.W.3d at 840 (“the four corners of the agency’s final notice

must present the agency’s justification in a ‘relatively clear, precise, and logical

fashion’”).

In addition, Round Rock explained the following in its Submission IV:

[T]he burden the rule amendments impose on small businesses is not
determining whether its single location is a place of business. Rather,
the burden imposed on small businesses is the requirement to track how

58
an order is received, fulfilled, and delivered. Under Tax Code
§ 321.203(b), a retailer with a single place of business sources all its
sales to that location. You cannot get a compliance burden that is lower
than that. The best way the Comptroller can minimize adverse
economic effects on small businesses, and all of Texas, is to apply the
plain meaning of the Tax Code, which sources sales for retailers with a
single place of business to that location.

Ex. RR-27 at 7. The Comptroller did not explain in the 2024 Order why a rule that

sources sales for retailers with a single place of business to that location was not a

preferable alternative that reduces compliance burdens for small businesses.

The Comptroller did not provide a substantive reply to two of Round Rock’s

objections raised during the rulemaking process. It, therefore, did not substantially

comply with the reasoned justification requirement of the APA, as the trial court

correctly determined.

59
PRAYER

For the foregoing reasons, Round Rock respectfully prays that this Court

affirm the trial court’s judgment in full and grant all such other and further relief to

which Round Rock may show itself justly entitled to receive.

Respectfully submitted,

/s/ Cindy Olson Bourland
Cindy Olson Bourland
State Bar No. 00790343
Bourland Law Firm, P.C.
P.O. Box 546
Round Rock, Texas 78680
Tel: (512) 477-0100
bourland@bourlandlaw.com

Bryan J. Dotson
State Bar No. 24072769
Chamberlain, Hrdlicka, White, Williams, &
Aughtry, P.C.
112 E. Pecan Street, Suite 1450
San Antonio, Texas 78205
Tel: (210) 278-5844
bryan.dotson@chamberlainlaw.com

Counsel for Cross-Appellee,
The City of Round Rock, Texas

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CERTIFICATE OF COMPLIANCE

I certify that the foregoing Brief of Cross-Appellee, City of Round Rock,

Texas, was prepared using Microsoft Word 365 and that, according to its word-count

function, the sections of the foregoing brief covered by Texas Rule of Appellate

Procedure 9.4(i)(1) contain 14,122 words in 14-point font and footnotes in 12-point

font. I further certify that the number of words within all images were counted by

hand and total 143. Therefore, the combined words in the brief covered by Texas

Rule of Appellate Procedure 9.4(i)(1) total 14,265.

/s/ Cindy Olson Bourland
CINDY OLSON BOURLAND

61
CERTIFICATE OF SERVICE

I certify that a true and correct copy of the foregoing has been served on all

counsel of record via electronic service on November 26, 2025.

/s/ Cindy Olson Bourland
CINDY OLSON BOURLAND

62
Automated Certificate of eService
This automated certificate of service was created by the efiling system.
The filer served this document via email generated by the efiling system
on the date and to the persons listed below. The rules governing
certificates of service have not changed. Filers must still provide a
certificate of service that complies with all applicable rules.

Cindy Bourland on behalf of Cindy Bourland
Bar No. 790343
bourland@bourlandlaw.com
Envelope ID: 108514374
Filing Code Description: Brief Not Requesting Oral Argument
Filing Description: Brief of City of Round Rock, Cross-Appellee
Status as of 11/26/2025 4:41 PM CST

Associated Case Party: City of Coppell, Texas

Name BarNumber Email TimestampSubmitted Status

Richard Phillips 24032833 Rich.Phillips@hklaw.com 11/26/2025 4:18:35 PM SENT

Reed Randel 24075780 Reed.Randel@hklaw.com 11/26/2025 4:18:35 PM SENT

Stephen Fink 7013500 Stephen.Fink@hklaw.com 11/26/2025 4:18:35 PM SENT

James Harris 9065400 jim.harris@hklaw.com 11/26/2025 4:18:35 PM SENT

Case Contacts

Name BarNumber Email TimestampSubmitted Status

Bryan Dotson 24072769 bryan.dotson@chamberlainlaw.com 11/26/2025 4:18:35 PM SENT

Cynthia Bourland 790343 bourland@bourlandlaw.com 11/26/2025 4:18:35 PM SENT

Brandon L.King brandon.king@hklaw.com 11/26/2025 4:18:35 PM SENT

Associated Case Party: Glenn Hegar, in his official capacity as Texas Comptroller of
Public Accounts

Name BarNumber Email TimestampSubmitted Status

Ray Langenberg 11911200 ray.langenberg@cpa.texas.gov 11/26/2025 4:18:35 PM SENT

Kyle Counce 24082862 Kyle.Counce@oag.texas.gov 11/26/2025 4:18:35 PM SENT

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