New Developments in the Determination of the Texas Franchise Tax Liability

by Liskow & Lewis
Contact

The Texas Franchise Tax is imposed on taxable entities that do business in Texas or that are chartered or organized in the state.  Taxpayers subject to the Texas Franchise Tax may compute their tax liabilities under several alternative methods to determine which one results in the lowest amount of tax due.

One such method is to start with the total revenue from the entire business and subtract from that amount either a deduction for the taxpayer’s cost of goods sold (“COGS”) or a deduction for the compensation the taxpayer pays to its officers, directors, owners, partners and employees in determining taxable margin and the resulting tax liability.   A Texas appellate court decision last week may have made the deduction for COGS more valuable to taxpayers liable for Texas Franchise Tax.

In a Memorandum Opinion filed on March 9, 2016, the Texas Court of Appeals for the Third District (Austin, TX) affirmed the trial court’s decision that CGG Veritas Services (U.S.), Inc. ( “CGG Veritas”) was entitled to include its costs of labor and materials incurred to acquire and process seismic data for its clients in its deduction of COGS for Texas Franchise Tax purposes.  Hegar v. CGG Veritas Services (U.S.), Inc., No. 03-14-00713-CV (Mar. 9, 2016).   In computing its Texas Franchise Tax liability, CGG Veritas made the determination that deducting its COGS would provide a larger benefit than deducting its compensation paid.  Included in its COGS deduction were the costs of labor and materials incurred to acquire and process seismic data that it sold to clients who used the data to determine where to drill oil and gas wells.  CGG Veritas took the position that these costs were furnished “to a project for the construction, improvement . . . of real property” for purposes of Tex. Tax Code § 171.1012(i) and, pursuant to that section, it was entitled to include those costs in the computation of its COGS deduction.  Important to this position was that an oil and gas well was “real property” and that the drilling of such a well was a project for the construction of real property.  The State, on audit, at the trial court, and on appeal argued that CGG Veritas was a service provider who could not include the disputed costs in its deduction for COGS.

The appeals court applied its interpretation of the meaning of the term “labor” previously stated in Combs v. Newpark Resources, Inc., 422 S.W. 3d 46 (Tex. App. – Austin 2013) and concluded that the Texas legislature intended that entities subject to the Texas Franchise Tax could deduct a wide range of labor expenses, even those that might be described “services”, pursuant to section 171.1012(i).  According to the court, the test for whether a labor or material cost is includible in the COGS deduction in this context is whether the activity is an “essential and direct” component of the project for the construction of real property.

The appeals court then reviewed the findings of the trial court on this issue and found evidentiary support for the trial court’s determination that CGG Veritas’ costs for seismic data acquisition and processing activities were an integral, essential and direct component of the drilling process, a process clearly “a project for the construction of real property”.  Accordingly, the appeals court affirmed the trial court’s judgment in favor of CGG Veritas.

The decision in CGG Veritas Services (U.S.), Inc. indicates that “labor and materials for a project for the construction or improvement of real property” will be broadly interpreted for purposes of the Texas Franchise Tax COGS deduction.  The decision is important for other oilfield services companies who now also may find that a COGS deduction is preferable to a compensation deduction in determining taxable margin and the resulting tax liability.

The decision also has implications for taxpayers outside of the oilfield business who produce and sell or license intellectual property to customers for the construction or improvement of real property.  These latter taxpayers may find like CGG Veritas that the sum of (a) essential and direct labor and materials incurred for a project for the construction or improvement of real property and (b) all other costs that properly are includible in COGS will exceed the compensation deduction in arriving at taxable margin for Texas Franchise Tax purposes.

Written by:

Liskow & Lewis
Contact
more
less

Liskow & Lewis on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.