The Supreme Court of Texas has ruled on a case regarding Franchise Tax exclusions where ADKF had a hand in the litigation. See the full text below.
Texas—Income Tax: Comptroller’s Petition for Review of Decision Allowing Aggregate Transporter Franchise Tax Exclusion Denied
The Texas Supreme Court denied the Texas Comptroller of Public Accounts’ petition for review of Titan Transportation, LP v. Combs, Comptroller of Public Accounts, Court of Appeals of Texas, Third District, Austin, No. 03-13-00034-CV, March 14, 2014. The Texas appellate court held that a company (taxpayer) in the business of hauling, delivering and depositing “aggregate” at real property construction sites was permitted to exclude “flow-through” payments to subcontractors for purposes of determining its franchise tax liability.
The taxpayer delivered “aggregate” to construction sites where it was used as an ingredient in concrete or as a foundation for the construction of roads, buildings, and parking lots. The taxpayer provided this service primarily through the use of subcontractors, to whom it was contractually obligated to share a portion of the gross receipts from the provision of those services.
The taxpayer filed its 2008 franchise tax report using the E-Z computation method after excluding from its total revenue certain “flow-through” payments to subcontractors, which reduced its gross revenue from $12.6 million to a little over $2 million. However, the Texas Comptroller argued that the taxpayer was not entitled to exclude the payments to its subcontractors and assessed the taxpayer additional taxes. The comptroller opined that the taxpayer was not a construction company, but rather a trucking company, and therefore was not qualified for the revenue exclusion.
The appellate court held that the taxpayer was entitled to exclude the subcontractor payments from its total revenue and, therefore, did not need to rule on the cost of goods sold (COGS) issue. In finding the taxpayer entitled to the exclusion, the court held that the services provided by the taxpayer were logically and reasonably connected with the construction of improvements on real property and were directly related to the construction of such improvements. The appellate court determined that the taxpayer sufficiently met the statutory definition for the exclusion.
The appellate court decision led to the comptroller revising its policy with regard to subcontracting payments eligible for exclusion under §171.1011(g)(3) and qualifying activities for the COGS deduction under §171.1012(i). Hegar, Comptroller of Public Accounts v. Titan Transportation, Texas Supreme Court, No. 14-0307, petition for review denied, May 1, 2015
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