In Hegar v. CGG Veritas Services (U.S.), Inc., a Texas court of appeals held that CGG was entitled to claim a Cost of Goods Sold deduction for the costs that it incurred in acquiring seismic data and processing that data into seismic images, which it then sold to its customers.

Subsequently, the Comptroller signaled his intention to appeal to the Texas Supreme Court by seeking an extension of time to file a petition for review. However, the Comptroller notified the Court that it would not pursue the appeal, thereby allowing CGG’s appellate court victory to stand.

CGG’s customers are oil & gas exploration and production companies. CGG licenses seismic images to them so that they may efficiently explore and drill for oil & gas. At trial, CGG presented evidence that its services and products were an integral, essential, and direct component of the oil & gas drilling process. CGG qualified for the Cost of Goods Sold deduction because it sent employees and materials (dynamite, geophones, air guns, marine vessels, and vibroseis trucks) to prospective oilfield sites. The court ruled that this activity was sufficient to allow CGG to claim the Cost of Goods Sold deduction on its Texas franchise tax reports.