On September 27, 2019, the Texas Comptroller proposed amendments to his Texas franchise tax nexus rules that would make out-of-state entities with no physical presence in Texas subject to Texas franchise tax. The preamble to the proposed amendments explains that the amendments are “in response to the United States Supreme Court decision in South Dakota v. Wayfair, Inc.” 138 S. Ct. 2080 (2018); 44 Tex. Reg. 5605 (2019) (to be codified as an amendment to 34 Tex. Admin. Code § 3.586). The Comptroller’s proposed amendments may violate the U.S. Supreme Court’s precedents setting limits on states’ taxing powers.

For decades, states were prohibited from imposing sales taxes on out-of-state entities that lacked a physical presence inside the state. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). This physical presence requirement gave out-of-state e-retailers a competitive advantage—the ability to makes sales without charging tax—over their in-state counterparts. Then, in 2018, the U.S. Supreme Court struck down the “physical presence” requirement....

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The Texas Supreme Court has scheduled three important Texas franchise tax cases for oral argument on the morning of October 9th. The arguments will be available by livestream.

All three cases concern critical aspects of the Cost of Goods Sold subtraction. The last case set for argument on October 9th, Gulf Copper & Manufacturing, also addresses important aspects of the Revenue Exclusion for businesses in the oilfield services and construction industries.

Here’s the schedule:

9:00 am Sunstate Equipment Co. – Is a heavy equipment rental company allowed to subtract its costs to delivery and later pick up the equipment from the construction site? Val Perkins will argue for the taxpayer

9:50 am American Multi-Cinema, Inc. – Is a movie theatre allowed to subtract its movie exhibition (auditorium) costs when computing...


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: