On May 23, 2017, Jimmy Martens presented argument on behalf of Gulf Copper before the Third Court of Appeals. The courtroom was packed with spectators interested in hearing both parties’ arguments 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.

Oral argument primarily focused on COGS qualification and calculation issues. Many of the Justices’ questions addressed the scope of Texas Tax Code § 171.1012(i), which states that 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 allowed costs in its COGS deduction. The Justices’ questions addressed how far removed a taxpayer could be from a real property and still qualify for the COGS deduction.

Hegar v. Gulf Copper & Manufacturing Corp. (No. 03-16-00250-CV) was submitted on oral argument. Our firm anticipates that the Court will issue an opinion later this year.