Texas Comptroller Lowers Burden of Proof for Tax Exemptions After Supreme Court Ruling

AUSTIN, Texas – The Texas Comptroller of Public Accounts has amended its rules of practice and procedure, lowering the evidentiary standard for businesses claiming tax exemptions in a significant policy shift that follows a state Supreme Court decision earlier this year. The amendment to 34 Texas Administrative Code § 1.26 changes the requirement for taxpayers from providing “clear and convincing evidence” to a “preponderance of the evidence” to prove their eligibility for a tax exemption or deduction. This change directly aligns the agency’s rules with the Texas Supreme Court's March 14, 2025, ruling in GEO Grp., Inc. v. Hegar. The distinction between the two standards is critical for businesses involved in tax disputes. “Clear and convincing evidence” is a high legal bar, requiring proof that a fact is substantially more likely to be true than not. In contrast, “preponderance of the evidence” is the standard used in most civil cases and simply requires showing that a claim is more likely true than not. The Comptroller’s previous, higher standard placed a heavy burden on businesses, often making it difficult to successfully defend legitimate exemption claims during an audit. The rule change stems from a legal battle involving The GEO Group, a private operator of correctional facilities. The company argued that its purchases of supplies to operate these facilities were exempt from sales tax because it was acting as an agent or instrumentality of the government. As part of its case, GEO Group challenged the Comptroller's use of the “clear and convincing evidence” standard, arguing that the correct standard should be the lower “preponderance of the evidence.” While the Supreme Court ultimately ruled against GEO Group on the substance of its exemption claim—finding the company did not qualify as an arm of the government—it crucially sided with the taxpayer on the standard of proof. The court’s decision effectively invalidated the Comptroller's long-standing rule, compelling the agency to amend its regulations to reflect the lower standard. This rule change is a welcome and long-overdue correction for Texas businesses. For years, the “clear and convincing” standard has been a significant and often unfair hurdle, particularly for small and mid-sized companies that may not have the extensive legal and administrative resources to meet such a high bar. We've seen clients with legitimate exemption claims face uphill battles during audits simply because the documentation, while substantial, was deemed insufficient under this stringent rule. This shift to a “preponderance of the evidence” standard levels the playing field, aligning the state's tax dispute process with common civil litigation standards and reducing uncertainty for business owners. For Texas companies, this amendment means that defending a tax exemption during an audit or administrative hearing will now be a more attainable goal. Businesses will still need to present credible and organized evidence, but that evidence will no longer be judged against an exceptionally high threshold. This could result in fewer protracted disputes and more favorable outcomes for taxpayers who have acted in good faith. The adjustment to the burden of proof is one of several significant regulatory updates issued by the Texas Comptroller’s office recently. In an active period of rulemaking, the agency also adopted final amendments to the franchise (margin) tax rule concerning the calculation of total revenue, which became effective earlier this year. Additionally, the Comptroller published an expansive amended rule, effective April 2, 2025, clarifying the sales and use tax treatment of data processing services, a complex area affecting many modern businesses. However, businesses should not misinterpret this as a free pass. While the evidentiary standard is lower, the burden of proof still rests squarely on the taxpayer. Meticulous documentation and a clear, defensible position for every claimed exemption remain non-negotiable. This is precisely the kind of complex regulatory shift where professional guidance is critical. Proactively ensuring your records can withstand scrutiny under the new standard is key to successful tax preparation and compliance. For assistance in navigating these changes and preparing for audits, business owners can contact C&S Finance Group LLC at csfinancegroup.com. This change could also have retroactive implications. Businesses that have been denied exemptions in prior, still-open tax periods under the “clear and convincing” standard may now have grounds to seek a re-evaluation of those decisions. Tax professionals will be closely monitoring how Comptroller auditors apply the new standard in practice during upcoming examinations. Moving forward, Texas businesses and their advisors should review their internal processes for documenting tax-exempt transactions to ensure they align with the new standard. While the bar has been lowered, the fundamental need for robust record-keeping to support any tax position remains unchanged.