A state sales tax refund to "a large direct pay taxpayer" will cost the City of Stafford more than $2.5 million — a stunning bit of news for a municipality with an annual budget of about $20 million.

State Comptroller Carole Keeton Strayhorn's office sent the city a letter [1] saying a big taxpayer in that town overpaid its sales taxes from January 1995 through the end of 2003. The city got $2,557,340.98 more than it was due in those years, according to the letter and, as a result, has to pay it back to the state, which will pay it back to the taxpayer along with the sales tax money that went into the state's purse.

The taxpayer wasn't named in the letter. That's customary since the secrecy of tax records is protected by law. And neither the comptroller's office nor the City of Stafford would identify the taxpayer.

Taxpayers, of course, have the right to disclose almost anything they want about their business, and based on public documents, the taxpayer in this case appears to be Texas Instruments. That Dallas-based company makes chips in Stafford. And it reported a $57 million refund on state taxes from semiconductor sales in its second quarter financial reports, enough to add $.03 to the company's earnings per share for the quarter ended June 30. "Our tax refund was from the state of Texas," said Sharon Hampton, a spokeswoman for the company.

Stafford's local sales tax is two cents; the state's share is 6.25 cents; based on the assessment to the city, that means the total refund for that one plant totaled $10.5 million. TI has facilities in several other Texas cities like Richardson and Sherman that might, depending on the locations of the company's sales, could also be on the comptroller's dunning list. Our inquiries about those cities were pending at our deadline.

Leonard Scarcella, who's been Stafford's mayor since 1969 (that's no typo), is flabbergasted by the state's assessment. "We have done everything in our power, played by all the rules... now we find ourselves penalized by things beyond our control."

Scarcella, a tax attorney by trade, says it's unusual for the comptroller's office to go back more than four years in a case like this unless it's been going on for some time. If it's an old case, he says, the state never let the city know it was spending revenue that was being contested by the taxpayer. He takes care not to point to any particular taxpayer, but says he didn't get a heads up from the company involved and would have appreciated one.

Others familiar with state tax law and procedures say it's common to "leave the statutes open" for large taxpayers, both for overpayments than benefit them and for underpayments that benefit the state. On average, that's beneficial to both sides.

And the state's terms for local governments caught off-guard by refunds amount to interest-free loans. State tax collectors generally give local governments years to pay these things back, and Scarcella says someone on the city staff pointed out the bright side — that the city got the use of $2.5 million it wasn't really entitled to. But, he says, $2.5 million is a lot to swallow. "Let's say it was $50,000. I'd still be irritated that they kept the statute open for 11 years, but it would be something we could absorb."

Stafford has the distinction of being the biggest city in Texas without a local property tax. They have one for schools, but not for the city government. Scarcella says sales taxes bring in about $12.5 million annually, and the rest of the budget is funded with money from other sources.

He's concerned about the city's bond rating. If the state can pull back money that's already come in, the bond folks might wonder whether the income reported by a city is real and stable, he says. He's miffed that the city had no say in the negotiations that apparently took place between the comptroller and the taxpayer.

The city's lawyers and finance people are poring over the situation, but if they have to pay, Scarcella says they'll probably take ten years to do so. The state doesn't charge interest on these things, so that would amount to about $23,000 a month.