If the Comptroller issued you an estimate for this fee, then it is probably wrong. Defend yourself against it now.

Most, if not all, of these SOB fee estimated assessments are wrong. Very wrong. Consultants at Texas Tax Group (ex-Texas Comptroller auditors) have carefully reviewed the Texas Comptroller’s SOB fee estimation method on SOBF client assessments and found many errors. These audit methodology errors can easily DOUBLE what the business actually owes in SOB fee. Texas Tax Group can help you defend yourself against these harsh and significantly over stated assessments.

TAX RULE 3.722 – Sexually Oriented Business Fee

Tax Rule 7.322(a)(3)(A) states:

Sexually oriented business—A nightclub, bar, restaurant, or similar commercial enterprise that: (A) provides for an audience of two or more individuals live nude entertainment or live nude performances;

Tax Rule 3.722 (a)(b)(2) states:

“Nude–To be entirely unclothed, or clothed in a manner that leaves uncovered or visible through less than fully opaque clothing any portion of the breasts below the top of the areola of the breasts, if the person is female, or any portion of the genitals or buttocks.”

Background of the SOB fee (also known as the Pole Tax)

The SOB fee is a $5.00 per customer fee and is applicable to all Sexually Oriented Businesses in Texas. The SOB fee law was effective as of 1-1-2008 but was not actually enforced until a final 2014 Texas Supreme Court decision eventually upheld the law. Beginning soon after this Court decision, the Texas Comptroller began to issue extremely large over-estimated assessments against 200+ SOB establishments that failed to report or in their opinion, under-reported their SOB fees.

In almost all cases, these SOB assessments were significantly overestimated by as much as twice the correct amount due and in some extreme cases, nearly three times the correct liability due. These inaccurate overstated SOB FEE assessments are the direct result of a purposely flawed ‘short cut’ estimation technique to be discussed later in this article.

From 2008 through 2014 certain of the SOB clubs believed that the law would be found unconstitutional and filed dozens of District Court lawsuits. In the meantime, many clubs simply did not file any returns nor did they report any SOB Fees while these lawsuits made their way thru the Texas Court system.

During that time (2008-2014) the Comptroller sent out notices demanding that these clubs file and pay the $5 per head SOB fee for each customer entering these establishments (on a quarterly basis). Once the 2014 Supreme Court decision affirmed the SOB fee law the Texas Comptroller then incorrectly estimated and issued 200+ SOB Fee Desk Audit bills to those clubs which either did not file or did not, in the agency’s opinion, file enough SOB fees.

These above-described SOB fee estimates were issued by the Texas Comptroller Business Activity Research Team (BART) Division located in Austin, Texas. It is a fact that these assessments were based on crude and questionable estimation techniques which resulted in an average SOB fee assessment of between $500,000 to more than $1,000,000 to each club. These estimated tax bills would have the effect of simply putting most of these clubs out of business, which some believe to be the entire purpose of these inflated SOB fee assessments. It should be noted that many of the assessed clubs were small to medium sized operations.

Take a look at the following actual SOB fee Tax Bill that was issued in 2016 (LINK) to a client of ours. The original gross SOB fee tax bill assessment (tax, penalties, interest) was $870,842.47 and currently (as of Feb 2017) with additional penalties and interest the total assessment is near $1 million dollars.

Can you imagine receiving this Desk Audit SOB fee bill in the mail without the benefit of a regular Texas Comptroller field audit and no ability to debate it except for filing for a time consuming and uncertain Administrative Hearing.

I defended 100’s of other Texas Comptroller Tax Audits over the last 10 years (2007 – 2017) and have never seen anything like this (i.e., no proper field audit conducted and a vague / overestimated / poorly documented assessment suddenly issued.)

It is also troubling to note that the SOB fee billing package sent to these clubs via regular mail to their last known address provided a very incomplete explanation as to how the tax was estimated. In my opinion, these poorly documented billing packages contain a wholly incomplete description of how the estimation was conducted and contained obvious mistakes, omissions and misleading information.

In my opinion, many of these SOB fee assessments, if argued successfully in an Administrative Hearing (i.e., commonly referred to as the ‘Texas Comptroller Court’), could possibly be significantly reduced. 

Because of the careless, misleading and incomplete support documentation few, if any, of the clubs could understand the estimation technique nor could they defend themselves in court.

It should be noted that 90% of the estimation technique is based on the Texas Mixed Beverage Gross Receipts Tax (i.e., Liquor Tax) audit method. This will be referred to as the MB-PDA (Mixed Beverage Purchase Depletion Analysis) audit method. Few, if any, firms in Texas have any significant and meaningful experience in this complex area of State taxation. Texas Tax Group has defended over 300+ the MB-PDA (Mixed Beverage Purchase Depletion Analysis) audit, which makes us perfect suited to defend and possibly defeat these bogus assessments.

As a direct result of these SOB fee assessments many of these clubs either: (1) filed for a hearing to delay being closed down, (2) agreed to pay these overstated assessments or (3) simply went out of business. At this time (Feb. 2017) and to my knowledge, there are approximately 60+ SOB FEE cases (hearings) pending in the Texas Comptroller Administrative Hearings process.

SOB Fee – Estimation Technique Explained

All of the SOB FEE estimated assessments used the same flawed method which was based on the ‘Mixed Beverage ‘Purchase Depletion Analysis’ (MB-PDA) audit method’. The MB-PDA is the audit method used by the Texas Comptroller to audit for Texas Liquor Taxes since 1994.

NOTE: The liquor tax described above is the 14% embedded tax on all mixed drinks. As of 1-1-2014 the liquor tax was split into 8.25% on the selling price and 6.7% embedded for a total of 14.95% liquor tax.

It is interesting to note that this MB-PDA audit method could, if used properly, produce an accurate estimated amount of SOB fee due. To be more specific, the (MB-PDA) audit method could accurately estimate the number of drinks available, which is the entire basis for the SOB fee estimated assessments (more on that later).

However, instead taking the time and care to produce an accurate assessment, this (MB-PDA) method has been grossly and purposely ‘distorted’ by the BART (Business Activity Research Team) Division of the Texas Comptroller’s Office to issue inflated SOB fee assessments that few clubs could afford to pay.

Keep in mind that the $5 SOB fee is due on each patron entering the club and that the SOBF assessment period goes all the way back to 1-1-2008 (effective law date). So it is acknowledged that many of these affected clubs probably didn’t have sufficient ‘sales records’ to show how many patrons entered their businesses (i.e., register tapes for regular door cover charges). And that is because many of these clubs either didn’t charge an SOB fee or a regular cover charge and in most cases no cash register or POA system revenue data existed.

So there exists a serious lack of ‘door entry data’ for almost all these affected clubs because the SOB fee law clearly does require that adequate records be kept to keep track of how many customers entered the club. In 1000’s of Administrative Hearing for other types of tax assessments the judges have repeated the same exact ‘mantra’ that: ‘due to the lack of taxpayer (Petitioner) records the best available records were used to compute the assessment’.

However, the obvious lack of business records in most of these cases does not give the Comptroller the right to grossly overstate SOB fee assessments. 

If anyone would look carefully at what was done, it is obvious that the Texas Comptroller BART Division purposely manipulated the potentially accurate MB-PDA audit method (i.e., liquor tax audit method) in order to use it as a basis to overestimate the amount of SOB fee due. I will clearly explain below MB-PDA audit method and how it is being misused by the Texas Comptroller to overstate the SOB fee assessments.

Mixed Beverage Purchase Depletion Analysis (MB-PDA) Audit Method

The SOB fee estimation technique is almost entirely based on the Mixed Beverage Purchase Depletion Analysis (MB-PDA) Audit Method (i.e., Liquor Tax Audit Method). The MB-PDA audit method has been in constant use for over 20 years by the Texas Comptroller’s Office and for nearly 20 years before that by the Texas Alcoholic Beverage Commission (TABC). The MB-PDA is used to audit for Mixed Beverage Taxes (i.e., liquor tax).

The Texas Comptroller’s Office took over the Mixed Beverage Liquor Tax audit function from the Texas Alcoholic Beverage Commission (TABC) back on 1-1-1994 and has continued to use the exact same audit method to this very day to audit for these taxes. In a nutshell the (MB-PDA) audit method used the purchases of Mixed Beverages (beer, liquor, wine) as the basis for estimating total Mixed Beverage Receipts (more on that later). Now you are probably wondering why the Texas Comptroller decided to use the MB-PDA audit method as the basis for estimating SOB fee assessments. The reason is that the MB-PDA audit method, as part of its computation, calculated what is called the Available Drink Units (ADU). The ADU is what is the main component of the SOB fee assessment method (more later).

As mentioned above, most, if not all of the affected clubs, did not have sufficient records which indicated how many patrons entered their clubs going all the way back to 2008. And so the Texas Comptroller had to figure out another way to estimate these SOB fee assessments. And since the SOB fee assessment needed to know an estimated Available Drink Units (ADU) it was a no brainer to rely on the MB-PDA audit method.

For those curious, the reason that the TABC nor the Comptroller did not rely on sales records from topless clubs (or men’s clubs) to conduct ‘Liquor Tax Audits’ is simply because the agency did not ‘trust’ the sales records from topless bars. Topless bars often receive a significant amount of their revenue from cash and in the Comptroller’s opinion, cash is easy to hide.

And so all specially trained Texas Comptroller Liquor Tax auditors (I was one of them for 11 years) were trained to mostly ignore the sales records (bank statements, register or POS accounting records) and rely almost entirely on the purchases of Mixed Beverages (beer, liquor, wine) to calculate an estimated amount of sales subject to the Liquor Tax using the (MB-PDA) audit method.

It should be noted that the MB-PDA Audit Method, if used carefully, will estimate the Available Drink Units (ADU) which is the primary factor for estimating the SOB fee assessment (more on that later).

To put it bluntly the ‘smoking gun’ is that the agency FAILED to use the potentially accurate MB-PDA audit method to calculate the Available Drink Units (ADU) in order to then accurately estimate the SOB fee assessments.

How is the SOB Fee Calculated?

The SOB fee estimation formula is almost entirely based on the Available Drink Units (ADU) which, after two other factors are applied, is then divided by five to determine the number of entries. The number of entries is then multiplied by $5 SOB fee to calculate the SOB fee due.

It is without doubt the MB-PDA does an acceptable job of calculating the ADU for the assessment period if certain steps are taken. However, many MB-PDA steps were indeed left out and others distorted. It should also be noted that the MB-PDA goes beyond estimating the ADU in order to estimate potential Liquor Tax due but that discussion is not relevant and will not be discussed in this article.

The bottom line is that for approximately 40 years, this ‘tried and true’ MB-PDA audit method has been used in 1000’s of Liquor Tax audits conducted by specially trained Texas Comptroller ‘Liquor Tax Field Auditors’. And now the Business Activity Research Team of the Texas Comptroller Office grossly misapplied it to overestimate possibly 100’s of SOB fee assessments.

As noted, this audit method was originally developed and used by the Texas Alcoholic Beverage Commission (TABC) to audit for liquor taxes prior to the Comptroller taking over this audit function in 1994. When the Texas Comptroller took over the Mixed Beverage Gross Receipts (Liquor) audit function on 1-1-1994 they continued to utilize the exact same audit method.

Basically, this same audit method has been in continuous use for approximately 40 years by both the TABC and the Texas Comptroller. And although it is time consuming and in some ways complex, it is by far the best audit method to use for estimating Available Drink Units (ADU) which is the main SOB fee factor.

TO REPEAT. The field auditing technique (MB-PDA Audit Method) if applied correctly, can result in an accurate Available Drink Units (ADU) which is the main factor for calculating SOB fee assessments.

The rest of this article will describe HOW the Comptroller misused the potentially accurate MB-PDA Audit Method and did purposely and significantly over-estimate hundreds of SOB assessments. This is basically a story of how the Comptroller inflated SOB fee assessments.

Comptroller Method of Overestimating the SOB Fee Explained

By 2014 when the Texas Supreme Court handed down its decision supporting the SOB fee law the Comptroller had a decision to make. They had mailed out a lot of warning letters to certain clubs to file and/or pay their SOB fee. In 2015 and 2016 they then decided to send out estimated SOB fee assessments to over 200 of these clubs.

The problem was these assessments were significantly over stated as described above. On top of that problem is the fact that no ‘field audit’ was ever conducted. That is, a single Desk Auditor was told to estimate the SOB fee assessment without very meeting with the business owner or reviewing any of his business records.

This was a huge mistake. It is almost unbelievable that SOB fee estimated assessment was issued by a single Business Activity Research Team (BART) Desk Auditor (Cindy Williams) who has since left the agency. It is not known if this BART employee had ever been trained as a Liquor Tax auditor in the use of the MB-PDA audit method nor who actually dreamed up this SOB fee estimation method.

It is a shame that the Comptroller decided to cut corners to save time and came up with an inaccurate short cut method based on the potentially accurate MB-PDA audit method. This was a serious mistake. Here is what should have happened.

The agency should have:

  • Assigned all SOB fee examinations (audits) to a specially trained Mixed Beverage Gross Receipts (Liquor) tax field auditor who would have conducted a ‘face-to-face’ field audit instead of a Desk Auditor with little to know experience using the (MB-PDA) audit method,
  • Used the much more accurate Mixed Beverage Purchase Depletion Analysis (MB-PDA) method which involved a custom excel spreadsheet with over 20 linked tabs
  • Reconciled the Business purchase records for purchases of Mixed Beverages against the Comptroller’s ‘Retail Inventory Tracking System’ (RITS)
  • Conducted an on-site Liquor Pour Test with the owner and bartender in attendance
  • Reviewed applicable records and interview manager, owner and/or bartenders in order to: identify all Excluded Secondary Liquors, Drink Batches, Drink formulas, Register Tapes and/or POS system printouts,
  • Reviewed all Complimentary Drink documents and discuss with the business owner
  • Reviewed all Spill documents and discuss with the business owner
  • Interviewed employees, bar managers and general managers about various activities related to the audit,
  • Completed the standard Audit Plan, which documents ALL activates taken by the auditor,
  • Issued the required Notification of Estimation documents,
  • Conducted a ‘field audit’ using the correct unmodified MB-PDA audit method to estimate the Available Drink Units,
  • Allowed for a reduction of the Available Drink Units for Comps and Spills
  • Allowed for a reduction of the Available Drink Units for Dancer Drinks – DD (i.e., drinks bought by dancers),
  • Allowed for a reduction of the Available Drink Units for Customer Dancer Drinks – CDD (i.e., drinks bought by customers for dancers),
  • Calculated the correct SOB fee assessment based on the above described actions,
  • Conducted the Required Exit Interview and explain the entire SOB fee audit process,
  • Given the required time for the client or representative to review the audit,
  • Given the Right to Request a Reconciliation Conference with the auditors supervisor and manager,
  • Given the Right to Request an IARC (Independent Audit Review Conference) before billing the audit.

Recall that the MB-PDA audit method yields a much more accurate estimation of Available Drink Units which is the entire basis for the SOB fee estimation.

The right answer was to:

(1) Assign a specially trained Texas Comptroller Mixed Beverage Gross Receipts (Liquor) Tax field auditor to conduct the audit and

(2) Utilize and not purposely manipulate the 40+ year plus accurate MB-PDA audit method to calculate the proper Available Drink Units in order to estimate the SOB FEE due.

The wrong answer was to:

  • Assign all 200+ SOB fee audits to a Business Activity Research Team (BART) Desk Auditor (Cindy Williams) who herself had very limited experience and whose immediate superior (Group Manager) had absolutely no past experience with conducting MB-PDA field audits (i.e., Liquor Tax Audits).
  • Purposely manipulate the potentially accurate MB-PDA audit method to grossly overstate the number of Available Drink Units (ADU) which immediately resulted in an overstated and inaccurate SOB fee estimated.

Retail Inventory Tracking System (RITS)

It is a fact that the Comptroller BART Desk Auditor (Cindy Williams) relied solely on the Comptroller’s Retail Inventory Tracking System (RITS) to conduct all 200+ of the SOB fee Desk audits. The RITS data is purported to be a list sent by the Texas distributors to the Comptroller of all Mixed Beverages (Beer, Liquor, Wine products) to all bars.

It is a fact that these reports have been known to contain errors. Some errors include overstating the amount of Mixed Beverages sold to a club, misstating the identity of certain products which could be considered excluded secondary liquors as well as identifying nonalcoholic beverages as Mixed Beverages. The actual business records (purchase invoices, statements, checks, financial records, etc.) should have been reviewed during a standard field audit in order to confirm accurate purchases of Mixed Beverages (beer, liquor, wine).

It is unfortunate that the BART auditor (Cindy Williams) probably spent no more than 8 to 10 hours coming up with these over stated SOB fee assessments. All work was literally done at her desk and based SOLELY of Mixed Beverage Vendor Distributor RITS data and the grossly misused MB-PAD audit method. A regular face-to-face Texas Comptroller Liquor Tax field audit can take 60 to 80 hours and 4 to 6 months to complete.

Cindy Williams, located in a small Texas Comptroller Audit Office in San Antonio, never met with any of the business owners or looked at a single business record before she issued the SOB fee assessments. Instead, these Desk Auditors simply took Distributor Reports RITS which purported to show purchases of Mixed Beverages (Beer, Liquor, Wine) for the audit period and then applied unrealistic variables to purposely manipulate and overstate the SOB fee assessment. It is unknown WHO at the agency actually decided the estimation method to be used.

It is a fact that the 100% of the employees of the BART Group are Desk Auditors. That is, they don’t actually conduct any type of ‘face-to-face’ field audits and none of them have significant experience with Mixed Beverage Purchase Depletion Analysis (MB-PDA) audits. These auditors are mostly involved with conducting remote audits on out of state businesses that do business in Texas. It is worth noting that a single inexperienced Desk Auditor (Cindy Williams) was for some mysterious reason given the task of estimating possibly over $100 million in SOB fee assessment for over 200 Texas clubs. It just doesn’t make sense.

Now let me finally explain in detail how the Business Activity Research Team came up with this distorted estimation technique.

Cindy Williams, or someone who directed her, took the MB-PDA audit method and incorrectly modified it to calculate what was believed to be the total Available Drink Units (ADU) from the purchases of mixed beverages for the possible assessment periods of 2008 thru mid 2014. Keep in mind that almost the entire accuracy of the SOB fee estimate used by the Comptroller depends on HOW MANY drinks are available. That is, the ADU figure controls the entire SOB fee estimation formula.

And, as mentioned several times before, if you use the MB-PDA method correctly, you can actually estimate an accurate Available Drink Units (ADU) for the audit / assessment period. If you significantly overstate the ADU, then you overstate the SOB fee estimate. And this is exactly what happened.

Another thing to remember is that the affected clubs were never given a chance to debate the audits until they received an SOB fee assessment bill in the mail. For instance a business subject to a Mixed Beverage liquor tax field audit would be given a notice of audit and then an auditor would come to the business and review records. In these Liquor Tax field audits there is plenty of time to work with the auditor to hopefully come up with the correct tax due. As stated many of these liquor tax field audits can easily last 4 to 6 months.

This is not the case with 100% of the SOB fee Desk Audits. Every one of the 200+ clubs simply received an SOB fee tax bill in the mail without getting a fair chance to dispute it with the Desk Auditor. That is because the Desk Auditor never even looked at any business records, except for the Mixed Beverage Distributor / Vendor reports (RITS data) apparently showing what was purchased by the club for the audit period. It is assumed that the auditor (Cindy Williams) never even issued a ‘Record Demand Notice’ which is standard procedure for all other field audits conducted by the Texas Comptroller’s Office.

If the club wanted to debate these SOB fee assessments they suddenly received in the mail they must file for an administrative hearing and then debate it with a Texas Comptroller hearing attorney who would simply say the Texas Comptroller has the right to use ANY estimation technique if the business owner did not keep perfectly detailed relevant records. This is not right. The Taxpayers do have rights as listed in the Taxpayer Bill of Rights brochure issued by the current Texas Comptroller (Glenn Hager).

And to top it all off, these businesses were deprived of their right to: (1) Reconciliation Conference and (2) an IARC (Independent Audit Review Conference). The IARC is a mini-hearing that is held PRIOR to an audit bill being issued and whose primary purpose is to look for faulty audits (which is exactly what these SOB fee assessments are).

  • Let’s describe ‘step by step’ how these SOB fee assessments should have been estimated. Remember that we need to start with an accurate (ADU – Available Drink Units).
  • Use the correct MB-PDA (liquor tax) audit method to determine an accurate estimated Available Drink Units (ADU).
  • Provide a Credit (reduction of the ADU) for Customer Complimentary Drinks (CCD),
  • Provide a Credit (reduction of the ADU) for Customer Spill Drinks (CSD),
  • Provide a Credit (reduction of the ADU) for Customer Dancer Drinks (CDD),
  • Provide a Credit (reduction of the ADU) for Dancer Drinks (DD),
  • Divide the adjusted Available Drink Units (ADU) amount by 5 (i.e., 5 drinks per customer (DPC) which yields the number of entries Number of Entries (NOE).
  • The Number of Entries (NOE) is then multiplied by the $5 per entry SOB fee, which produces the total SOB fee due.

SOB Fee Formula

(ADU – CCD – CSD – CDD – DD) / 5 drinks per entry = number of entries x $5.00 SOB fee = SOB fee due

However, keep in mind with the Texas Comptroller’s estimation method the Available Drink Units is SIGNIFICANTLY over stated and additionally no credits or reductions were allowed for:

Complimentary Drinks, Spills, Dancer Drinks

  1. Customer Complimentary Drinks (CCD)
  2. Customer Spill Drinks (CSD)
  3. Customer Dancer Drinks (CDD) – customers buy dancers drinks
  4. Dancer Drinks (DD) – dancers buy their own drinks

If these serious flaws as described above are correct then the rest of this formula (5 drinks per customer, $5 per entry) is accurate and the SOB fee can be accurately estimated.

So How Do We Get the Right Number of Available Drink Units (ADU)?

Once that is done and the above described four credits are applied, then we can then simply, and correctly, divide the adjusted ADU number by 5 drinks per customer (DPC) to get the number of entries and then multiply that number again by $5 (tax per entry) to get the estimated SOB fee due. So let’s see how we can get to the correct Available Drink Units using the correct MB-PDA audit method.

Recall that the Texas Comptroller auditor (Cindy Williams) started with the Mixed Beverage Distributor (RITS) data (purchases of beer, liquor and wine) for the audit period for each club.

For the liquor category, the Desk Auditor then added up all the distilled spirits ounces purchased for all distilled spirits and divided that total by 1.25 ounces to get the ADU. This was their first serious mistake. The problem is that they did not: (1) verify this purchase data against the business records and (2) delete all the nonalcoholic and secondary liquors out of the liquor purchase date before they estimated ADU.

To address the 2nd issue mentioned above, we need to get the distributor data and delete all nonalcoholic and secondary liquors. Then we will get the correct primary distilled spirits ounces (PDSO).

Average Distilled Spirits Liquor Pour (2.35 ounces)

After Primary Distilled Spirit Ounces (PDSO) are determined we will need to divide those ounces by 2.35 ounces to get ADU. The 2.35 ounces is the average distilled spirits pour used when considering the following factors described below.

It should be noted first that Cindy Williams (Desk Auditor) used 1.25 ounces for AVERAGE DISTILLED SPIRITS LIQUOR POUR (single shot, multi-shot, batches) and that is far too low. It is better to use 2.35 ounces because the single pour shot is closer to 2.0 ounces and an estimated extra .25 ounces would be for the multi-pour drinks plus the standard .10 ounce spillage factor (total = 2.35 ounces). See formula below.

2.0 Base Liquor Pour + .25 Ounce (Multi-pour Drinks) + .10 Spillage Factor = 2.35 Average Liquor Pour

The auditor used a 1.25 ounce gross liquor pour and I believe it should be 2.35 ounces. So you can see already that the Comptroller’s 125 ounce pour is incorrectly inflating the Average Drink Units.

It is important to get the correct total primary distilled spirits ounces and then divide that number by 2.35 ounces to get to the proper estimated unadjusted Average Drink Units. After the four credit items listed above are applied, then the result will be correct adjusted Average Drink Units number which will then lead directly to a much more accurate SOB fee estimated assessment.

Beer and Wine Calculation

Lastly, you also need to calculate beer Average Drink Units (ADU), which is easy if you are dealing with container beer (cases). If there is draft beer purchased then various MB-PDA audit methods could be utilized to determine the correct unadjusted ADU units. The four comp, spills and dancer drink credits would then be applied to compute an accurate adjusted ADU. If there is wine and champagne products then a method needs to be used to best determine the correct adjusted ADU as well.


Every business that has received an SOB fee estimation notice should have serious concerns about its accuracy and how it was calculated. In 2016 Cindy Williams (BART Desk Auditor) quit from the Comptroller’s Office and that means she is possibly not available to testify in either Administrative or District Court regarding her role in the faulty estimated SOB fee assessments.

Texas Tax Group is in the process of defending a few of these SOB fee cases and would be glad to discuss your case as well. Don’t just sit back and take it. Know your rights and pursue them aggressively. Thanks and good luck.

Status of SOB Fee Administrative Hearing

Note 1: There are over 60 active SOB fee Administrative Hearing cases pending with the Texas Comptroller’s Office (all assigned to the same hearing attorney). These are all clubs that have been assessed large SOB Fee tax bills and have filed for an administrative hearing to debate the assessments. It should be noted that almost all of these estimated fee/tax bills are based on a seriously flawed estimation technique.

Note 2: As of February 2017, there have been only 4 final Texas Comptroller Administrative Hearing decisions. In three cases (Hearing # 111,866-111,867, Hearing #112,639, Hearing 113,095) the entire SOB fee assessment was affirmed.

In 1 case the entire SOB fee assessment was dismissed (Hearing #112,927). In this case the judge found that the Comptroller auditor did not have sufficient evidence to prove that the club provided ‘nude entertainment’ as required by law. It is very interesting to note that approximately two weeks prior to this hearing, Ms. Cindy Williams resigned her position as a BART auditor. Ms. Williams was the auditor who conducted all of the SOB fee estimated assessments and would have been a key Comptroller expert witness at this hearing. We will discuss Ms. Williams later in this article.

In Administrative Hearing No. 112,927 Judge Victor Simonds stated that:

Taxing statutes must be strictly construed against the taxing authority and liberally construed in favor of the person or entity sought to be held taxable. See Bullock v. Statistical Tabulating Corp., 549 S.W. 2d 166, 169 (Tex. 1977). When the issue involved is the propriety of the imposition of a tax on the person or object of the tax, any doubts are to be resolved against the taxing entity and in favor of the taxpayer. See Bullock v. Ramada Texas, Inc., 586 S.W.2d 651, 653 (Tex. App.—Austin, 1979, writ ref’d n.r.e.). Thus, Staff must make a prima facie showing that Petitioner’s business was subject to the SOBF during the assessment periods. A prima facie case is one that allows a fact finder to infer the fact at issue and rule in the party’s favor. See Black’s Law Dictionary, Tenth Ed. (2014, Thomson Reuters). If Staff makes a prima face case, the burden shifts to Petitioner to prove by a preponderance of the evidence that his club was not subject to the SOBF during the assessment periods. See 34 Tex. Admin. Code § 1.40(2)(B).

Due to Ms. Williams’ departure from the agency, Staff’s evidence demonstrating that Petitioner’s dancers were nude is limited to an ITS Work Manager statement that Petitioner operated a nude BYOB club. Ms. Williams’ statement is conclusory and lacks the detail that is necessary to meet even a prima facie burden of proof. Because Staff’s evidence does not establish, prima facie, that COMPANY C was a sexually oriented business during the periods at issue, the assessment against Petitioner should be dismissed.

It should be noted that this case was dismissed because the Comptroller could not establish that the Petitioner (club) owner had nude entertainment. If this is valid defensive argument (hearing contention) then it should also be presented.

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