On August 21, 2019, the Texarkana Court of Appeals ruled that a telecommunication service provider, Metropolitan Telecommunications (“MetTel”), is not entitled to calculate its franchise tax margin using the cost of goods sold (“COGS”) subtraction. See Metropolitan Telecomms. Holding Co. v. Hegar. This holding is consistent with the Austin Court of Appeals’ opinion in NTS Communications, Inc. v. Hegar.

The Comptroller audited MetTel and disallowed the company’s COGS subtraction, claiming that MetTel was not eligible for the subtraction because it did not sell tangible personal property—i.e., goods. Rather, the Comptroller...

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As the Texas Supreme Court prepares to hear oral argument in three franchise tax COGS cases on October 9th, the Third Court of Appeals continues to issue opinions restricting the COGS subtraction. In March, the court greatly reduced the taxpayer’s COGS subtraction in U.S. Concrete v. Hegar, 03-17-00315-CV, 2019 WL 1388714, at *3 (Tex. App.—Austin Mar. 28, 2019, no pet. h.).

U.S. Concrete manufactured and delivered ready-mixed concrete using mixer-trucks whose constantly rotating drums kept the product in an unhardened state on its way to its customer’s job sites. U.S. Concrete argued that its mixer-trucks constituted manufacturing plants on wheels, and that the unhardened concrete becomes a good only when poured from the truck at a job site.

Accordingly, U.S. Concrete argued that it was entitled to subtract all of its costs related to its mixer-trucks, mixer-truck drivers, and the dispatchers who oversaw orders for ready-mixed concrete. The Comptroller disagreed and disallowed 70% of U.S. Concrete’s mixer-truck costs and 41% of its mixer-truck driver...

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On June 28, 2019, the Texas Supreme Court accepted and scheduled for oral argument three important Texas franchise tax cases involving excluded revenue and the COGS calculation.

The Gulf Copper case concerns whether a company that builds and repairs offshore drilling rigs may exclude from its revenue payments made to the company’s hourly contractors that work on the rigs. It also concerns whether the company may include the costs of manufacturing incurred throughout its installation processes.

The AMC Theaters case asks whether showing movies to the public for a fee constitutes the sale of tangible personal property and, thus, whether a movie theater can include costs to exhibit movies in its COGS calculation.

The Sunstate Equipment case concerns whether a lessor of heavy construction equipment may include in its COGS calculation the costs of delivering the rented equipment to construction sites, and, later picking it up.

All three cases are schedule to be heard October 9, 2019. An in-depth analysis is forthcoming.


Rent-A-Center is a leading provider of furniture and electronics to consumers through rent-to-own agreements in which customers become the owners of property if they do not terminate or breach the agreement during the lease term. Federal income tax law required Rent-A-Center to capitalize the costs it in incurred to purchase furniture and electronics that it leased to customers. Rent-A-Center claimed depreciation on its federal income tax return on the items while they were being leased.

On its 2008 franchise tax report, Rent-A-Center elected to subtract COGS related to “rental-purchase sales” when computing its taxable margin. Rent-A-Center calculated its COGS subtraction based upon the costs it had incurred to purchase the leased items, but did not reduce the costs by the amounts claimed for federal depreciation. Effectively, Rent-A-Center subtracted the full, original cost of the leased items. Rent-A-Center then calculated its margin tax using the lower tax rate available to retailers and wholesalers.

The Comptroller audited Rent-A-Center and rejected...


The jurisdictional tide may be turning in Texas. Prior to May 9, 2019, Texas taxpayers were generally barred from pursuing claims for “declaratory relief” in tax protest and tax refund suits. As a result, taxpayers were unable to seek attorney’s fees otherwise available for declaratory claims. In general, a claim for “declaratory relief” asks the court to determine the litigating parties’ rights under a statute or rule. In a tax suit, a claim for “declaratory relief” would seek the court’s ruling construing tax statutes and rules for the future.

Historically, courts have barred taxpayers from raising claims for “declaratory relief,” reasoning that a court’s judgment awarding recovery of the overpaid taxes implicitly provides the future guidance that taxpayers seek. As a result, the courts considered the claims for “declaratory relief” to be unnecessary and redundant.

However, times have changed. The Texas Comptroller no longer treats a court decision or judgment ordering the refund of taxes as providing any guidance on how the tax laws apply in the future. In...

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Danielle Ahlrich wrote an article for Austin Lawyer titled "Present, Not Perfect" about her experience offering pro bono assistance to asylum seekers. As part of her call for others to join in pro bono service, Danielle explained: "The help for which my client was so grateful was something that we lawyers, of all stripes, do every day in our practices: break an issue into manageable steps and demystify the process." You can read the full article in Austin Lawyer here:

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On March 1, 2019, Representative Springer filed HB 2915 in the Texas House of Representatives. The bill was introduced as a comprehensive means to reduce local property taxes. Notably, the bill would amend the Tax Code to make the following services taxable:

  • · Accounting and audit services
  • · Automotive services
  • · Barbering or cosmetology services
  • · Dating services
  • · Debt management services
  • · Funeral services
  • · Hunting or fishing guide services
  • · Interior design and decorating
  • · Massage therapy
  • · Packing services
  • · Personal instruction services
  • · Transport services
  • · Veterinary services

In addition, the proposed legislation would also amend the Texas Tax Code to make real property “construction” services, a term which the bill defines broadly to include...

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Martens, Todd, Leonard & Ahlrich is pleased to announce that Danielle Ahlrich has been selected as a Texas Rising Star in business tax for the third year in a row. The Rising Stars list is comprised of the top up-and-coming Texas attorneys who are 40 or younger or have been in practice for 10 years or less. No more than 2.5 percent of Texas attorneys were chosen for this honor.

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Seeking to turn the tide of numerous court loses, the Texas Comptroller has adopted a new strategy to use against Texas businesses. Specifically, the Comptroller directs our legislature to amend Texas sales tax statutes and label the amendments as “clarifications” of existing law so that he may retroactively tax Texas businesses. The Comptroller seeks to do this through amendments offered this legislative session. The amendments, if passed, would overturn at least one pro-business Texas Supreme Court opinion, and bolster the Comptroller’s litigating positions in several pending cases. It seems as though the Comptroller used the list of litigation pending against him to craft his proposed legislation.

For instance, in Senate Bill 1525, the Comptroller seeks to overturn the Texas Supreme Court’s opinion in Combs v. Roark Amusement & Vending. In Roark, the court held that the resale exemption applies to...

Texas State Capitol

On February 19, 2019, Legislators in the Texas House and Senate filed identical bills mandating sales tax collection by marketplace providers, such as Amazon, Etsy, and EBay. If enacted, the bills would require “marketplace providers” to report as taxable sales, and collect and remit Texas sales tax on, sales of items by third parties through their marketplaces. “Marketplace providers” means “a person who owns or operates a marketplace and directly or indirectly processes sales or payments for marketplace sellers.” The proposed legislation is intended to shift the compliance responsibilities from smaller retailers who sell taxable items, to the marketplace platforms through which the retailers sell their products. The marketplace providers will likely have the algorithms, software, and know-how, to comply with Texas’s confusing web of sales and use tax laws.

The legislation comes on the heels of the Comptroller’s recent amendments to his administrative rule regarding sellers’ and purchasers’ responsibilities. He amended his rules to implement a safe harbor from the duty to...