Can a Texas city or county hire a company on commission to find untaxed property?

Plain-English summary

A state representative asked the Attorney General about a constituent who wanted to start a business that would track down property left off the local appraisal rolls and get paid a percentage of the additional tax that the discovery generated for cities, counties, and school districts. The two questions were whether such a business is legal, and whether a taxing unit could hire it on that commission arrangement.

The Attorney General drew a sharp line between the two. The business itself is not illegal. A for-profit corporation may be organized for any lawful purpose, and nothing makes locating omitted property unlawful. But no taxing unit, including a home-rule municipality, may contract with a private company to find omitted property when the company will be paid on a contingent fee basis. This kind of arrangement is known as a "tax ferret" contract.

The reasoning turned on the rule that a taxing unit has only the powers the constitution or statutes expressly confer, or those necessarily implied from express powers, and that title 1 of the Tax Code supersedes any conflicting municipal charter or ordinance on property taxation. Older cases (decided before the 1979 Tax Code) had allowed tax ferret contracts under statutes that capped the ferret's compensation and required approval by the comptroller and the attorney general. Those safeguards were the point: the legislature had stepped in after such contracts "shocked the public conscience as being unfair and exorbitant." The Tax Code repealed the inconsistent older law, and where the legislature now permits contingent fee arrangements (for delinquent-tax collection attorneys under section 6.30, for example) it does so expressly and with limits. Section 25.01(b) actually voids contingent fee private appraisal contracts. The opinion found no statute that expressly authorizes, or necessarily implies authority for, a contingent fee tax ferret contract, so a taxing unit may not enter one.

Currency note

This opinion was issued in 2000. Subsequent statutory amendments, court decisions, or later Attorney General opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

What the opinion meant for those who asked

The would-be business owner (what the opinion held): The opinion held that organizing a for-profit corporation to locate omitted property is lawful in itself; nothing in the law makes that purpose illegal. The barrier was on the government side: no taxing unit could hire the business on a contingent fee.

Cities, counties, school districts, and special districts (what the opinion held for them): The opinion held they had no authority to enter a contingent fee tax ferret contract, because taxing units act only on expressly conferred or necessarily implied powers and no statute supplied that authority. It noted that even a home-rule municipality is bound here, because Tax Code section 1.02 makes title 1 supersede municipal charters and ordinances on property taxation.

Appraisal districts and chief appraisers (what the opinion held for them): The opinion noted that the chief appraiser, not a hired ferret, must add omitted property to the rolls (real property omitted in any of the prior five years, personal property in either of the prior two), and that section 25.01(b) voids a private appraisal contract whose compensation is contingent on the value appraised.

Common questions

Is it legal to run a business that finds property left off the tax rolls?
Yes. The opinion concluded a for-profit corporation may be organized for that purpose because it is not an illegal purpose. The problem was only with how a government could pay for it.

Can a Texas city or county pay that business a percentage of the recovered taxes?
No. The opinion concluded no taxing unit may enter a contingent fee tax ferret contract, because such authority is neither expressly granted nor necessarily implied by any statute.

Does a home-rule city have more room here because of its broad powers?
No. The opinion concluded that Tax Code section 1.02 makes title 1 supersede municipal charter and ordinance provisions on property taxation, so even a home-rule municipality could not enter the contract.

Didn't older Texas cases allow tax ferret contracts?
The opinion explained that pre-1979 cases like White and Marquart allowed them only under statutes that capped the fee at fifteen percent and required approval by the comptroller and the attorney general. The Tax Code repealed the inconsistent older law, and the current statutes contain no such authorization.

Background and statutory framework

The opinion started from the principle that the power to tax belongs to the sovereign and a subordinate body may exercise it only when the power is delegated by the constitution or the legislature. A taxing unit other than a home-rule municipality has only expressly conferred or necessarily implied powers (Texas Roofing Co. v. Whiteside; Canales v. Laughlin; Tri-City Fresh Water Supply Dist. v. Mann; Jackson County Hosp. Dist.; Harlingen Indep. Sch. Dist. v. C.H. Page & Bros.), and Tax Code section 1.02 makes title 1 govern even home-rule charter provisions on property taxation.

The opinion placed the question in the appraisal scheme: a taxing unit generally may not employ a person to appraise property (section 1.15); the appraisal district's chief appraiser prepares the records (sections 6.01, 22.27, 25.01(a)) and must add property omitted in prior years (section 25.21(a)). A contract under which a private entity finds omitted property for the taxing unit is a "tax ferret" contract (White v. McGill; Marquart v. Harris County; contrasted with Whitney v. City of Terrell and Crosby v. Marquess & Co., which were not tax ferret contracts).

Pre-Tax-Code decisions allowed such contracts under statutes (former Revised Civil Statutes articles 7335a and 7264a) that limited compensation to fifteen percent and required comptroller and attorney general approval. Because the 1979 Tax Code repealed inconsistent law (Grand Prairie Hosp. Dist. v. Dallas County Appraisal Dist.), those cases no longer controlled. The opinion read the current statutory landscape as confirming close legislative regulation of contingent fee arrangements: section 6.30 permits a contingent fee delinquent-tax attorney contract but caps it at twenty percent and voids nonconforming contracts; section 25.01(b) voids a contingent fee private appraisal contract; and Government Code chapter 2254, subchapter C (section 2254.103), adopted in 1999, restricts contingent fee legal-services contracts by governmental entities. Section 6.24, authorizing interlocal contracts "relating to the assessment or collection of taxes," came closest but lacked the safeguards present in White and Marquart and did not specifically authorize a contingent fee contract. Finding no express grant and nothing that necessarily implied the authority, the opinion concluded a taxing unit may not enter a contingent fee tax ferret contract.

Citations

Statutory provisions:

• Tex. Bus. Corp. Act Ann. art. 2.01(A) (Vernon Supp. 2000)
• Tex. Tax Code Ann. §§ 1.02, 1.04(12), 1.15, 6.01(a), (b), .02(a), 6.24(a), (b), 6.30, 6.30(c), (e), 22.27(a), (b), 25.01(a), (b), 25.21(a) (Vernon 1992 & Supp. 2000)
• Tex. Gov't Code Ann. § 2254.103(a)-(c) (Vernon 2000); Interlocal Cooperation Act, ch. 791
• Tex. Rev. Civ. Stat. Ann. arts. 7335a, 7264a

Cases:

• White v. McGill, 114 S.W.2d 860 (Tex. 1938)
• Marquart v. Harris County, 117 S.W.2d 494 (Tex. Civ. App.—Galveston 1938, writ dism'd)
• Whitney v. City of Terrell, 278 S.W.2d 909 (Tex. Civ. App.—Waco 1955, no writ)
• Crosby v. Marquess & Co., 226 S.W.2d 461 (Tex. Civ. App.—Beaumont 1950, writ ref'd n.r.e.)
• Texas Roofing Co. v. Whiteside, 385 S.W.2d 699 (Tex. Civ. App.—Amarillo 1965, writ ref'd n.r.e.)
• Canales v. Laughlin, 214 S.W.2d 451 (Tex. 1948)
• Tri-City Fresh Water Supply Dist. v. Mann, 142 S.W.2d 945 (Tex. 1940)
• Jackson County Hosp. Dist. v. Jackson County Citizens for Continued Hosp. Care, 669 S.W.2d 147 (Tex. App.—Corpus Christi 1984, no writ)
• Harlingen Indep. Sch. Dist. v. C.H. Page & Bros., 48 S.W.2d 983 (Tex. Comm'n App. 1932, holding approved)
• Grand Prairie Hosp. Dist. v. Dallas County Appraisal Dist., 730 S.W.2d 849 (Tex. App.—Dallas 1987, writ ref'd n.r.e.)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/john-cornyn/jc-0290
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2000/jc0290.pdf

Original opinion text

Best-effort transcription from the official scanned PDF. Minor character-level errors from the source OCR have been corrected; the linked PDF is authoritative.

OFFICE OF THE ATTORNEY GENERAL - STATE OF TEXAS

JOHN CORNYN

October 10, 2000

The Honorable Gary L. Walker
Chair, Land & Resource Management Committee
Texas House of Representatives
P.O. Box 2910
Austin, Texas 78768-2910

Opinion No. JC-0290

Re: Legality of a business that locates property omitted from the appraisal rolls for a percentage of the amount of tax generated for a local taxing unit (RQ-0218-JC)

Dear Representative Walker:

A constituent has contacted you "concerning the legality of a business he is interested in starting. The business would involve locating omitted property for a fee that would be based on the tax generated to the local taxing units. These units might include city, county, and school taxing entities."[1] You inquire whether such a business, which we assume would be organized solely for the purpose you describe, is legal. See Request Letter, note 1, at 1. Because you describe the business as one that would receive a contingent fee "based on the tax generated to the local taxing units," we consider only a business that is compensated on a contingent fee basis.

Although the business you propose is not illegal, no taxing unit, including a home-rule municipality, may contract with a private entity to locate property omitted from the appraisal rolls on a contingent fee basis. No statute expressly authorizes a taxing unit to enter a contingent fee contract in these circumstances, as we believe is necessary for a taxing unit to execute a contingent fee contract of this type.

We begin by responding to your question "regarding the legality of a business that" locates property that has been omitted from the tax rolls. Id. A for-profit corporation may be organized for any legal purpose. See TEX. BUS. CORP. ACT ANN. art. 2.01(A) (Vernon Supp. 2000). Nothing deems the purpose your constituent proposes illegal.

But no taxing unit may contract with a private corporation to locate property that has been omitted from the tax rolls if the corporation will be compensated on a contingent fee basis. A taxing unit includes a county, a municipality, a school district, a special district or authority, and any other political unit of the state. See TEX. TAX CODE ANN. § 1.04(12) (Vernon Supp. 2000) (defining "taxing unit").

We begin by placing the type of contract about which you ask in the property-taxation context. A taxing unit generally may not employ a person to appraise property for taxation purposes. See id. § 1.15. Rather, the appraisal district of which a taxing unit is a part appraises property throughout a taxing unit. See id. § 6.01(b) (Vernon 1992). Using renditions received from property owners in the appraisal district, the district's chief appraiser annually prepares "appraisal records listing all property that is taxable in the district and stating the appraised value of each." Id. §§ 22.27(a), (b), 25.01(a) (Vernon 1992 & Supp. 2000); see id. §§ 6.01(a), .02(a) (Vernon 1992 & Supp. 2000) (establishing appraisal districts and articulating boundaries). The chief appraiser must add to the appraisal records any real or personal property that he or she discovers has been omitted in previous years:

If the chief appraiser discovers that real property was omitted from an appraisal roll in any one of the five preceding years or that personal property was omitted from an appraisal roll in one of the two preceding years, he shall appraise the property as of January 1 of each year that it was omitted and enter the property and its appraised value in the appraisal records.

Id. § 25.21(a) (Vernon 1992).

The type of contract you describe, wherein a private entity contracts with a taxing unit to locate property omitted from the tax rolls, is known as a tax ferret contract. See White v. McGill, 114 S.W.2d 860, 861 (Tex. 1938); see also Marquart v. Harris County, 117 S.W.2d 494, 502 (Tex. Civ. App.—Galveston 1938, writ dism'd); V OXFORD ENGLISH DICTIONARY 844 (2d ed. 1989) (defining "to ferret out" as "[t]o search out, discover, bring to light"); cf. Whitney v. City of Terrell, 278 S.W.2d 909, 911 (Tex. Civ. App.—Waco 1955, no writ) (evaluating contract that does not provide for collecting delinquent taxes, and that is not, therefore, tax ferret contract); Crosby v. Marquess & Co., 226 S.W.2d 461, 463-64 (Tex. Civ. App.—Beaumont 1950, writ ref'd n.r.e.) (describing contract that is not tax ferret contract).

In our opinion, any taxing unit's powers relating to property taxation are coextensive with title 1 of the Tax Code. A taxing unit other than a home-rule municipality has, by its very nature, only those powers that the constitution or statutes expressly confer or those necessarily implied from the express powers. See Texas Roofing Co. v. Whiteside, 385 S.W.2d 699, 701 (Tex. Civ. App.—Amarillo 1965, writ ref'd n.r.e.); see also Canales v. Laughlin, 214 S.W.2d 451, 453 (Tex. 1948) (discussing county powers); Tri-City Fresh Water Supply Dist. v. Mann, 142 S.W.2d 945, 946 (Tex. 1940) (discussing powers of special-purpose district); Jackson County Hosp. Dist. v. Jackson County Citizens for Continued Hosp. Care, 669 S.W.2d 147, 154 (Tex. App.—Corpus Christi 1984, no writ) (discussing hospital district's powers); Harlingen Indep. Sch. Dist. v. C.H. Page & Bros., 48 S.W.2d 983, 986 (Tex. Comm'n App. 1932, holding approved) (discussing school district's powers). All taxing units, including home-rule municipalities, are subject to section 1.02 of the Tax Code, which strictly circumscribes a taxing unit's authority to adopt a law that differs from the Tax Code:

This title applies to a taxing unit that is created by or pursuant to any general, special, or local law enacted before or after the enactment of this title unless a law enacted after enactment of this title by or pursuant to which the taxing unit is created expressly provides that this title does not apply. This title supersedes any provision of a municipal charter or ordinance relating to property taxation.

TEX. TAX CODE ANN. § 1.02 (Vernon 1992). Thus, title 1 of the Tax Code supersedes even a home-rule municipality's enactments relating to property taxation.

Judicial opinions issued before the 1979 adoption of the Tax Code determined that a contingent fee, tax ferret contract relates to "the collection of delinquent taxes" and that a taxing unit might enter one in strict compliance with applicable law. See White, 114 S.W.2d at 863; Marquart, 117 S.W.2d at 501. Because the law has been substantially amended since the tax ferret cases were decided, the cases do not dispose of the issue you raise. See Grand Prairie Hosp. Dist. v. Dallas County Appraisal Dist., 730 S.W.2d 849, 851 (Tex. App.—Dallas 1987, writ ref'd n.r.e.) (stating that adoption of Tax Code repeals all inconsistent general, local, and special laws).

We believe the legislature intends to closely regulate contingent fee contracts involving taxing units. According to the 1938 White decision, the legislature has reasons to restrict a taxing unit's use of a contract under which a tax ferret is paid on a contingent fee basis. See White, 114 S.W.2d at 862-63. Prior to 1930, a commissioners court legally could enter a contingent fee, tax ferret contract. See id. at 862. But the contracts many counties entered "shocked the public conscience as being unfair and exorbitant." Id. Immediately after some courts upheld these contracts, "the Legislature took steps to declare the public policy of this State with respect to" this kind of contract. Id. "[T]o avoid the execution of contracts calling for excessive and unreasonable compensation," the legislature adopted statutes limiting the compensation to no more than fifteen percent of the amount collected and establishing an approval process for the contracts. Id.

The Legislature found that the laws on the statute books [before 1930] permitted contracts to be made that were unfair and unjust to the public. It was desired that such evils should be stopped. Hence the Legislature enacted these articles for that purpose, and limited the compensation to be paid in an amount not to exceed 15[%] of the sum collected. It also further provided that such contracts must be approved by both the Comptroller and the Attorney General, and, unless such contracts were executed in compliance with the provisions of the act, same should be void.

Id. at 863.

In those rare circumstances where such a contingent fee contract is permitted, it is expressly allowed by a statute that circumscribes the amount of compensation a private entity may receive. Section 6.30 of the Tax Code, for example, strictly regulates the percentage by which a taxing unit may compensate an attorney who contracts with the taxing unit to enforce the collection of delinquent taxes. TEX. TAX CODE ANN. § 6.30 (Vernon 1992). Subsection (c) permits any taxing unit to contract with a competent attorney to enforce the collection of delinquent taxes. See id. § 6.30(c). But the subsection restricts the amount of compensation the attorney may receive: "The attorney's compensation is set in the contract, but the total amount of compensation provided may not exceed 20[%] of the amount of delinquent tax, penalty, and interest collected." Id. Any "contract with an attorney that does not conform to" the contingent fee limitations is void. Id. § 6.30(e).

By contrast, section 25.01 of the Tax Code expressly forbids a chief appraiser to enter a contract for private appraisal services under which the private appraisal firm is compensated on a contingent fee basis:

The chief appraiser with the approval of the board of directors of the district may contract with a private appraisal firm to perform appraisal services for the district, subject to his approval. A contract for private appraisal services is void if the amount of compensation to be paid the private appraisal firm is contingent on the amount of or increase in appraised, assessed, or taxable value of property appraised by the appraisal firm.

TEX. TAX CODE ANN. § 25.01(b) (Vernon 1992).

The legislature has spoken further on the issue of contingent fee contracts involving governmental entities as recently as 1999. In 1999 the legislature adopted chapter 2254, subchapter C of the Government Code, which restricts the authority of a state governmental entity, the attorney general, or the state to enter a contingent fee contract for legal services:

(a) A state governmental entity that has authority to enter into a contract for legal services in its own name may enter into a contingent fee contract for legal services only if [two requirements]:

(b) The attorney general may enter into a contingent fee contract for legal services in the name of the state . . . only if the [referring] state governmental entity approves and signs the contract in accordance with Subsection (a).

(c) A state governmental entity, including the state, may enter into a contingent fee contract for legal services that is not described by Subsection (a) or (b) only if the governor approves and signs the contract.

TEX. GOV'T CODE ANN. § 2254.103(a)-(c) (Vernon 2000).

No similar statute authorizes a taxing unit to enter a contingent fee, tax ferret contract. Certainly, nothing expressly grants the authority. Moreover, we find nothing that necessarily implies the authority.

Section 6.24 of the Tax Code comes the closest, but, ultimately, it does not authorize a contingent fee, tax ferret contract between a taxing unit and a private corporation. That section authorizes a taxing unit to enter a contract with another taxing unit under the Interlocal Cooperation Act, chapter 791 of the Government Code, "to perform duties relating to the assessment or collection of taxes." TEX. TAX CODE ANN. § 6.24(a), (b) (Vernon 1992). By referring to all contracts "relating to the . . . collection of taxes," section 6.24 mirrors the statutory language examined in White and Marquart, under which the court found that a taxing unit had strictly circumscribed powers to enter a contingent fee, tax ferret contract. See White, 114 S.W.2d at 863; Marquart, 117 S.W.2d at 501; see also Whitney, 278 S.W.2d at 911. But the language of section 6.24 is insufficient to authorize a contingent fee contract. First, section 6.24 contains none of the safeguards that were built into the statute considered in White and Marquart. For example, at the time of White and Marquart the statute limited the compensation a ferret could receive to no more than fifteen per cent of the amount of delinquent taxes collected. See White, 114 S.W.2d at 862 (quoting TEX. REV. CIV. STAT. ANN. art. 7335a and citing id. art. 7264a). In addition, a contingent fee contract at the time of White and Marquart had to be approved by the state comptroller and the attorney general. See id. (quoting TEX. REV. CIV. STAT. ANN. art. 7335a). Second, section 6.24 does not specifically authorize a taxing unit to enter a contingent fee contract.

We conclude that, without express authority, no taxing unit, including a home-rule municipality, may enter a contingent fee, tax ferret contract. See TEX. TAX CODE ANN. § 1.02 (Vernon 1992) (prohibiting taxing unit from adopting law that varies from Tax Code). In light of the legislative policy against a taxing unit entering a contingent fee contract, authority to do so should not be implied. Because there is no such express authority, a taxing unit may not enter a contingent fee, tax ferret contract.

SUMMARY

A corporation that locates property that has been omitted from the appraisal rolls in return for a percentage of the increase in tax revenues may be organized, but no taxing unit may enter a contingent fee, tax ferret contract with the corporation.

Very truly yours,

JOHN CORNYN
Attorney General of Texas

ANDY TAYLOR
First Assistant Attorney General

CLARK KENT ERVIN
Deputy Attorney General - General Counsel

SUSAN D. GUSKY
Chair, Opinion Committee

Kymberly K. Oltrogge
Assistant Attorney General - Opinion Committee

[1] Letter from Honorable Gary L. Walker, Chair, Land & Resource Management Committee, Texas House of Representatives, to Honorable John Cornyn, Texas Attorney General (Mar. 23, 2000) (on file with Opinion Committee) [hereinafter Request Letter].