Recent Texas Tax Appellate Court Opinions

The Texas Third Court of Appeals recently issued several Texas tax opinions, regarding both Texas franchise tax and Texas sales tax.  This blog post summarizes those Texas tax opinions.

Texas Sales and Use Tax

Cantu Enterprises, LLC v. Hegar, et al.  The Third Court of Appeals held that a taxpayer was not entitled to the sale-for-resale exemption from Texas sales tax on its purchase of an aircraft, which it purchased to lease to a related entity.  This aircraft purchase occurred before the Texas Legislature passed its amendments clarifying the Texas sales tax exemptions available on purchases of aircraft.  The Third Court of Appeals held that the taxpayer did not qualify for the sale-for-resale exemption from Texas sales tax on its purchase of the aircraft because it did not purchase the aircraft for the sole purpose of leasing it.  No. 03-15-00516-CV (Tex. App. – Austin, Jul. 7, 2017) (No Petition for Review filed yet).

Hegar, et al. v. Anatole Partners III, LLC.  A trial court judge found that the taxpayer, a hotel, could claim the sale for resale exemption on its purchases of health club and room amenities, but not on purchases of common area amenities.  The judge also found that the hotel owed sales tax on resales of room amenities to hotel guests.  As a result, the trial court’s judgment granted the taxpayer only a small amount of the original refund it requested.  The state appealed the decision to the extent it allowed the taxpayer to claim the sale for resale exemption on its purchases of health club and room amenities. The taxpayer filed a motion to dismiss the appeal, arguing that the appeal was moot as the taxpayer had conceded the small amount the state sought in its appeal.  The Third Court of Appeals granted the motion to dismiss the appeal.  No. 03-17-00097-CV (Tex. App. – Austin, Jul. 31, 2017) (No Petition for Review filed yet).

The GEO Group, Inc. v. Hegar, et al.  The Third Court of Appeals held that a private company that operated jails and prisons did not qualify for the residential use exemption from sales and use tax on gas and electricity it purchased for jail and prison use.  The Third Court of Appeals found that the company did not qualify for the exemption because the jails and prisons were not “occupied as a home or residence.” Further, the Third Court of Appeals noted that the prisoners, not the company, used the electricity purchased in the residential sense, and if the company used the electricity, it was for commercial and not residential purposes.  No. 03-15-00726-CV (Tex. App. – Austin, Aug. 10, 2017)  (No Motion for Rehearing filed yet).

Texas Franchise Tax

Gulf Copper & Manufacturing Corp. v. Hegar, et al. The Comptroller appealed the trial court’s ruling that a company primarily engaged in the business of repair and upgrade of offshore drilling rigs was entitled to both the revenue exclusion for real property subcontractors and the cost of goods sold deduction. The Third Court of Appeals held that the company qualified for the revenue exclusion for real property subcontractors.  However, it held that the taxpayer provided insufficient evidence of which of its costs were includible in the cost of goods sold deduction, and remanded the case to the trial court for further proceedings on that issue.  No. 03-16-00250-CV (Tex. App.—Austin, Aug. 11, 2017) (No Motion for Rehearing filed yet).

Conclusion

All of these decisions may have a significant impact for at least some Texas taxpayers.  Please note that none of these decisions have yet become final.  We will post updates regarding these Texas tax decisions on our blog, if necessary.  In the meantime, in the wake of these decision, taxpayers who find themselves uncertain of their Texas sales tax and Texas franchise tax obligations may wish to seek the advice of a Texas tax professional, such as a Texas tax attorney, in order to clarify their obligations.

(Note to attendees of our presentation at the State Bar of Texas’s Advanced Tax Law course: this blog post serves as a supplement to your course materials and summarizes all opinions issued after those materials went to press.)


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