The Texas Supreme Court recently issued its opinion in Graphic Packaging Corp. v. Hegar. It upheld the Third Court of Appeals’s ruling that taxpayers may not choose to use the Multistate Tax Compact’s three-factor apportionment method to apportion their taxable margin under the Texas franchise tax. However, in doing so, it relied on different reasoning than the Third Court of Appeals. Unlike the Third Court of Appeals, it did not rule on whether the Texas franchise tax was an “income tax” as defined by the Multistate Tax Compact. Instead, the Texas Supreme Court held that it was within the Texas Legislature’s power to require the use of only single sales factor apportionment under the Texas Franchise Tax because the member states of the Multistate Tax Compact did not intend for the Compact to be a binding reciprocal agreement. We discuss this decision and its implications for Texas taxpayers in further detail below.
Tax Deadlines Extended after Hurricane Harvey
The Texas Comptroller announced possible Texas tax deadline extensions of some tax deadlines for those affected by Hurricane Harvey. The Comptroller may grant tax deadline extensions to file state tax returns and pay certain taxes, such as the Texas sales and use tax, of up to 90 days. Such Texas tax deadline extensions are available to taxpayers in areas that have been declared disaster areas. This declaration from the Governor of Texas lists the 54 counties currently declared disaster areas as a result of Hurricane Harvey. Businesses in these areas seeking Texas tax deadline extensions may request them by calling the Texas Comptroller’s tax assistance hotline at 1-800-252-5555. For more information on tax deadline extensions, please see this statement from the Texas Comptroller.
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).
Appeals Court: No COGS for Heavy Equipment Delivery/Pick-up Fees
The Texas Third Court of Appeals recently held in Hegar v. Sunstate Equipment Co., LLC, that a company that leased heavy equipment to contractors could not include its delivery and pick-up fees for the equipment in its cost of goods sold deduction for Texas franchise tax COGS deduction purposes. In doing so, the Third Court of Appeals overturned a trial court decision in the company’s favor. The Third Court of Appeals found that the company could neither deduct its delivery and pick-up fees under the provision that allows heavy equipment rental companies to deduct as cost of goods sold costs associated with the property they lease, nor under the provision that allows those who provide labor or materials to real property construction projects to deduct as cost of goods sold the labor and materials. We discuss the opinion and its implications for taxpayers in more detail below.
Business Buyer Owes Tax Not Assessed Until After Purchase, Appeals Court Says
The Texas Third Court of Appeals held today in Agri-Plex Heating and Cooling, LLC v. Hegar that the purchaser of a business may be liable for Texas sales and use tax assessed against the business for the time before the purchase, even if the Texas Comptroller did not audit the business and assess the tax until after the purchase occurred. This opinion further illuminates (and arguably expands) the Texas Tax Code’s successor liability laws, and highlights the importance of taking appropriate precautions when purchasing an existing business to avoid successor liability. We discuss the opinion and its implications for Texas taxpayers below.
Movie Theaters Still Qualify for COGS, Appeals Court Says
The Third Court of Appeals issued a new opinion today in American Multi-Cinema, Inc. v. Hegar, over a year and a half after the Texas Comptroller filed a motion for rehearing. The new opinion leaves in places the Third Court of Appeals’ prior ruling that a movie theater company may include costs of exhibiting films in its Texas franchise tax COGS deduction, because films meet the definition of “tangible personal property,” and are, therefore, goods. However, the court changed its reasoning in the new opinion in a manner that makes the opinion more limited in scope. We discuss the differences between the two opinions and the implications of the new opinion below.
U.S. Supreme Court Denies Three-Factor Apportionment Review
The United States Supreme Court denied review of Gillette Co. v. California Franchise Tax Board, the California Supreme Court case holding that taxpayers may not use the Multistate Tax Compact’s three-factor apportionment method to apportion their income under the California Business Income Tax. As is customary, the Court didn’t explain its reasons for denying review. This means the Court will not weigh in on an issue that has arisen in many states, including Texas. We discuss the issue in more detail, including what it means for Texas taxpayers and Texas tax law, below.
Southwest Royalties: No New Manufacturing Exemption for Oil & Gas, Texas Supreme Court Says
Today, the Texas Supreme Court released its long-awaited opinion in Southwest Royalties, Inc. v. Hegar. It held that oil and gas above-ground and downhole production equipment doesn’t qualify for the manufacturing exemption from Texas sales and use tax, affirming the ruling of both the Third Court of Appeals and the trial court. This case has drawn some attention due to the large potential financial impact it would have had on the State of Texas if the taxpayers ultimately prevailed — after a trial court judge initially stated after an oral hearing that he was inclined to side with the taxpayers, the Texas Comptroller announced her estimate that a taxpayer win could cost Texas as much as $4.4 billion in tax refunds and lost revenue. (After another hearing, that trial court judge sided with the Texas Comptroller in his written opinion.) This blog post discusses the Texas Supreme Court’s opinion and its possible implications in more detail.
No Resale Exemption for Health Club Equipment, Appeals Court Finds
The Texas Third Court of Appeals issued its opinion today in Fitness International, LLC v. Hegar. It held that certain equipment, such as cardio machines and weight racks, that a health club purchased for its customers’ use, was not exempt from Texas sales and use tax under the sale for resale exemption. The court based this decision on its finding that the health club did not ever legally transfer title or possession of the equipment to its customers. This opinion may narrow the scope of the sale for resale exemption for taxpayers who provide taxable services. We discuss the court’s opinion and its implications for taxpayers below.
Appeals Court Finds Bill Pay Service Not Taxable
The Texas Fourteenth Court of Appeals issued its opinion Tuesday in Hegar v. CheckFree Services Corporation. It held that an online bill pay service was not a taxable data processing service under the Texas sales tax. The court based its ruling on the fairly extensive role of individuals with specialized, professional knowledge in providing the online bill pay service. The court’s opinion clarifies the circumstances under which a service becomes a taxable data processing service under the Texas sales tax. This opinion may be especially important to taxpayers given the relative lack of guidance regarding the taxation under the Texas sales tax of services provided online. We discuss the court’s opinion and its implications for taxpayers below.
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