Franchise Tax Hot Topics

March 7, 2014
Three-factor litigation.  In January, litigation over the three-factor apportionment issue went the Comptroller’s way when a Travis County district judge in Graphic Packaging v. Combs granted the State’s motion for summary judgment and denied the taxpayer’s motion.  We previously reported on this issue, in which taxpayers are claiming the right to elect three-factor apportionment under the Multistate Tax Compact even though the Texas franchise tax statute mandates single factor apportionment based on gross receipts.

The judge did not issue a letter ruling explaining the decision, and the order is interlocutory, meaning that is neither final nor appealable because other issues remain in the lawsuit.  If Graphic Packaging does not resolve the other issues soon, other taxpayers with the same issue may proceed with their litigation an appeal if necessary.

The Texas litigation is lagging behind similar litigation in California and Michigan.  Appellate decisions in those states could influence the Texas judiciary.

Even though the Comptroller is temporarily victorious, we think this issue has considerable merit and taxpayers should be taking steps to preserve refund claims that might be bumping against the statute of limitations.

Cost-of-goods-sold litigation.  In December of last year, the taxpayer won a victory regarding the cost-of-goods-sold issue in Combs v. Newpark Resources.  This case involved a peculiar aspect of the Texas franchise tax in which “goods” may include labor.   Tax Code § 171.1012(i) provides: “A taxable entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance. . . of real property is considered to be an owner of that labor or materials and may include the costs, as allowed by this section, in the computation of cost of goods sold.”

Newpark’s labor involved the disposal of drilling mud, and the Austin Court of Appeals held that “the trial court could have reasonably concluded that the removal and disposal of this waste material was labor furnished to a project for the construction and improvement of real property.”  In February, the Court of Appeals denied the Comptroller’s motion for rehearing and we expect the Comptroller to appeal to the Texas Supreme Court.
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