Lacy Leonard & John Grubb
A Texas appellate court sitting en banc recently made it easier for taxpayers to preserve refund claims for judicial review by quoting the relevant subsection(s) of the manufacturing exemption statute and including supporting documentation identifying the equipment and transactions at issue.
El Paso Electric Company (“El Paso”) seeks refund of sales tax paid in error on exempt manufacturing equipment.
El Paso is a fully integrated public utility in the business of manufacturing, generating, transmitting, and distributing electricity in west Texas and southern New Mexico. Hegar v. El Paso Electric Company, No. 03-18-00790-CV (Tex. App.—Austin Aug. 13, 2020, no pet. h.) (majority opinion). El Paso filed an administrative sales tax refund claim for different types of equipment under a variety of sales tax exemptions. Of the $5.1 million total refund El Paso sought, the Comptroller agreed to refund over $2.5 million.
The Comptroller would not agree to refund sales tax El Paso allegedly paid in error on the purchase of meters and disconnect collars that El Paso...more
Jimmy Martens & John Grubb
A Texas appellate court recently allowed the manufacturing exemption for equipment used to process real property into products.
Lignite begins as real property and ends as tangible personal property.
Texas Westmoreland Coal Company (“Westmoreland”) owned and operated a lignite coal mine in Texas. Lignite, also called brown coal, is the lowest grade of coal, but like other forms of coal, is found in large veins underground. Hegar v. Texas Westmoreland Coal Co., No. 03-20-00406-CV (Tex. App.—Austin Oct. 7, 2021, no pet. h.).
To extract the coal, Westmoreland first removes the top layer of soil using a dragline (which was not at issue in the case) to expose the lignite formation. Then it uses a variety of excavators with large, toothed buckets to crack, break, or rip apart the lignite into smaller pieces to meet its customer’s size requirements. Once the buckets are full, the excavators drop the lignite into dump trucks from approximately 12 feet high, further breaking the lignite apart. At the end of the process, the lignite...more
Jimmy Martens and John Grubb
Businesses that finance sales using leases should consider filing Texas franchise tax refund claims based upon a recent Texas court case.
A Texas appellate court recently held that Xerox Corporation (“Xerox”) was entitled to compute its franchise tax based upon the lower Texas franchise tax rate, which resulted in a refund of half of the Texas franchise tax Xerox had paid during the relevant periods.
Xerox leases printers long-term to businesses under financing lease agreements. Xerox’s finance lessees:
- Receive possession, but not title, to the equipment;
- Were responsible for insuring the equipment against loss;
- Were required to make all payments under the lease, even if the contract was terminated; and
- Could purchase the equipment at the end of the lease but typically did not because the lease was designed to last for the useful life of the equipment.
Wholesale sales qualify for lower Texas franchise tax rate, but rentals do not.
Generally, taxpayers pay Texas franchise tax at the...more
Martens, Todd & Leonard is pleased to announce the addition of R. John Grubb II to its Texas state and local tax controversy team.
Mr. Grubb will join the other members of the firm in representing Texas taxpayers before the State Office of Administrative Hearings, in the state district courts, Texas courts of appeals and Texas Supreme Court.
Prior to joining the firm, Mr. Grubb defended businesses in court and before state administrative agencies in his employment litigation practice for an elite litigation boutique. Mr. Grubb also gained considerable state and local tax litigation experience as an attorney for the Tennessee Department of Revenue.
Mr. Grubb graduated from Vanderbilt Law School in 2009 where he was Notes Editor for the Vanderbilt Law Review and received his Law & Business Certificate.
Mr. Grubb may be contacted at firstname.lastname@example.org
Lacy Leonard and Gordon Martens
Texas Taxpayers have reached a deal with the Comptroller to delay implementation of the Comptroller’s new local sales tax sourcing rules for internet and shopping app sales until a trial expected to occur the week of June 13, 2022.
On Monday, August 30, 2021, Travis County District Judge Karin Crump presided over hearings over whether to issue an injunction blocking an effort by Comptroller Glenn Hegar to unilaterally upend the local sales tax sourcing rules established under Texas law. The next morning, as the hearing reconvened, the parties announced an agreement to delay implementation of these new rules and the Comptroller acquiesced in the injunction.
The Comptroller’s rule amendments would switch online sales to being sourced to the customer’s location, instead of the business location of the seller. This would apply to many sellers who have only one place of business in Texas. Sourcing online sales to these sellers’ business locations enhanced local taxing authorities’ ability to incentivize taxpayers to locate large facilities within their boundaries,...more
Katy Ballard and Gordon Martens
New Option to Challenge Audit Assessments
Generally, to bring a protest suit in state court, a taxpayer must pay the audit assessment under protest and submit a written protest letter raising the arguments that it will raise in its protest suit. Under the current “pay-to-play” provision of the Texas Tax Code, a taxpayer must pay the entire amount of the audit assessment to challenge it in court.
A newly-enacted law, HB 2080, eases that burden by allowing the taxpayer to pay only the undisputed portion of its audit assessment. Importantly, however, any portion of a disputed amount that is not initially paid but...more
Texas Franchise Tax Update: Texas Taxpayers Spared from Tax Increase Arising from PPP Loan Forgiveness
Gordon Martens and Katy Ballard
Texas taxpayers can breathe a collective sigh of relief since House Bill 1195 was signed into law on May 8, 2021. The bill provides that forgiveness on Paycheck Protection Program (PPP) loans will not be considered revenue for Texas franchise tax purposes. Additionally, HB 1195 clarifies that taxpayers may include qualifying expenses paid with PPP loans into their Texas franchise tax compensation or cost of goods sold calculations (if they otherwise qualify).
Prior to the passage of this bill, the Comptroller’s position was that taxpayers must include the proceeds from the forgiven PPP loans in total revenue on their franchise tax reports for the year in which the loan was forgiven. For a significant number of taxpayers, this would have resulted in the taxpayers being hit with an increased tax bill stemming from PPP loan forgiveness.
The 2020 CARES Act stipulated that PPP loan forgiveness would not be classified as taxable income for federal tax purposes even though loan forgiveness is usually taxed under federal income tax law as cancellation-of-debt (COD) income....more
Texas Franchise Tax Update: Congressman Fires Back with Proposed Bill After Texas Comptroller Threatens to Tax PPP Loan Forgiveness
A Texas lawmaker has introduced a bill in the current legislative session reversing the Comptroller’s policy of treating federal Paycheck Protection Program (PPP) loan forgiveness as revenue for Texas franchise tax. The proposed bill also allows taxpayers to include the corresponding costs when calculating their compensation or cost of goods sold subtraction.
During the 2021 Texas Comptroller’s Tax Policy Update, an official at the Comptroller’s office stated that the Comptroller plans to require taxpayers to add any forgiven portion of a PPP loan they received to their total revenue, which is the starting point for the Texas franchise tax margin calculation. Although cancellation-of-debt (COD) income is typically taxed under federal income tax law, the U.S....more
Jimmy Martens, Allison Cunningham and Gordon Martens
In May of 2020, the Texas Supreme Court held in EBS Solutions, Inc. v. Hegar that a taxpayer may gain access to the Texas courts without first paying the tax assessment against it in full, if the taxpayer satisfies the appropriate jurisdictional requirements. EBS Solutions was audited for Texas franchise tax and received an assessment of tax, penalties, and interest for four year of almost $300,000. EBS disagreed with the Comptroller’s assessment and sought to challenge it. However, EBS was unable to pay the full assessment.
Generally, a taxpayer...more
John LaBorde, Andersen & Gordon Martens, Martens, Todd & Leonard
The Texas Comptroller has adopted broad amendments to his Rule 3.591 governing franchise tax apportionment. In doing so, the agency rewrote numerous detailed rules for sourcing dozens of different types of receipts. Notably, for receipts from services that don’t fall under one of the specific rules, the Comptroller’s rule codifies the “end-product act” test which first appeared in a 1980 Comptroller Hearing (Decision No. 10,028) and was recently employed by the Third Court of Appeals in Hegar v. Sirius XM Radio, Inc., No 03-18-00573-CV (Tex. App.—Austin 2020, pet. filed). The Comptroller intends to apply the adopted rule retroactively except for a few provisions which he concedes are changes in policy.
The adopted rule also:
· Codifies recent policy excluding net...more