The Texas Supreme Court declined to overturn a lower court’s ruling that companies may not include payments made as part of a products liability case settlement as a “cost of quality control” within their cost of goods sold deduction for the Texas franchise tax. “Costs of quality control” are limited to expenditures for “the product or good itself to improve its quality.”

In Owens Corning v. Hegar, the taxpayer argued that its payments to a trust fund to compensate plaintiffs for asbestos-related personal injuries caused by use of the taxpayer’s products should qualify as a “cost of quality control” properly included in its cost of goods sold deduction. In its opinion, the Fourth Court of Appeal rejected this argument, noting that the asbestos fund payment was attributable to products that Owens Corning stopped producing in 1973 and, therefore, was not money spent to improve the quality of the asbestos-containing products or goods themselves.