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 costs as costs relating to distribution or rehandling, and not costs of producing the ready-mixed concrete. The Comptroller also capped the company’s dispatcher costs at 4% as indirect costs.
The Third Court of Appeals found for the Comptroller, rejecting U.S. Concrete’s argument that unhardened concrete becomes a “good” for purposes of COGS only upon being poured from the truck at the job site because, even in its unhardened state, it is still personal property that can be seen, weighed, measured, felt, touched and otherwise perceive by the senses, and therefore constitutes a “good” well before it is delivered to job sites. The court also found that evidence in the record supported the Comptroller’s distinction between costs that U.S. Concrete incurred related to its trucks manufacturing and costs related to disallowed types of transportation.
The court further determined that U.S. Concrete’s dispatchers were not directly involved in the manufacture of the ready-mixed concrete and, therefore, it could not subtract the costs related to the mixer-truck dispatchers.