Oil & Gas Seismic Company Entitled to Franchise Tax COGS Deduction

In Hegar v. CGG Veritas Services (U.S.), Inc., the Third Court of Appeals held that CGG, a fully-integrated geoseismic company, was entitled to claim a cost of goods sold deduction.

CGG is primarily engaged in acquiring seismic data and processing that data into seismic images, which it then sells to companies engaged in oil and gas exploration and production. CGG’s customers use the seismic images as a blueprint for drilling projects because the images provide insight about where and how deep to drill oil and gas wells. Given its integral connection to drilling projects, CGG claimed the cost of goods sold deduction based on the following provision:

“A taxable entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance [ ] of real property is considered to be an owner of that labor or materials and may include the costs, as allowed by [the cost of goods sold] section, in the computation of costs of goods sold.” Tex. Tax Code § 171.1012(i).

The Court agreed, holding that CGG was, in fact, entitled to claim a cost of goods sold deduction given the largely uncontroverted evidence that CGG was an integral, essential, and direct component of the oil and gas construction projects to which it furnished labor and materials.

Given the Court’s ruling under Texas Tax Code § 171.1012(i), it did not need to reach CGG’s alternative cost of goods sold argument that the seismic images constituted tangible personal property within the meaning of Texas Tax Code § 171.1012(a)(3)(A), a definition unique to the franchise tax.

For more information, contact Jimmy Martens, Lacy Leonard, Danielle Ahlrich, or Amanda Taylor with Martens, Todd, Leonard, Taylor & Ahlrich, the law firm that handled CGG’s state court trial and resulting appeal.