Hegar v. Gulf Copper & Manufacturing Corp. (No. 03-16-00250-CV) is set for oral argument before the Third Court of Appeals on May 23, 2017. Jimmy Martens will present argument on behalf of Gulf Copper.
Gulf Copper inspects, repairs, and upgrades rigs for offshore drilling. Its work includes manufacturing and installing large, steel components on the rigs. Gulf Copper was audited and assessed additional Texas franchise tax. Gulf Copper disputed the assessment, alleging that the auditor improperly (1) disallowed the entire amount of Gulf Copper’s revenue exclusion attributable to subcontractor costs and (2) limited Gulf Copper’s COGS deduction to one half of the amount Gulf Copper claimed. The trial court ruled in favor of Gulf Copper and the Comptroller brought this appeal.
The Third Court of Appeals’ opinion will result in important determinations for Texas taxpayers about two key franchise tax provisions of the Texas Tax Code: First, whether the revenue exclusion for subcontractors is only available in those narrow circumstances where the parties contract in writing to share fees on a percentage basis. Second, whether taxpayers may calculate their Texas cost of goods sold deduction by starting with their federal deductions and adjusting them for the Texas-specific list of disallowed costs and 4% cap on service department costs.