Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas v. CGG Veritas Services (U.S.), Inc.
03-14-00713-CV
| Tex. App. | Apr 20, 2015Background
- CGG Veritas is a geo‑sciences company that acquires seismic sound recordings and processes them into interpreted visual images, selling proprietary products to individual clients and licensing non‑proprietary products through a multi‑client data library (MCDL).
- For Texas franchise tax Report Year 2008 CGG claimed a cost‑of‑goods‑sold (COGS) deduction of approximately $567.6 million; the Comptroller disallowed the deduction and CGG paid the assessed tax under protest and sued for a refund.
- The trial court found CGG provided both services and ‘‘products,’’ concluded the seismic recordings/images qualified as "tangible personal property" under Tex. Tax Code §171.1012(a)(3)(A)(ii), held CGG furnished labor/materials to oil‑well projects under §171.1012(i), and entered judgment awarding the full refund.
- The State (Comptroller/Attorney General) appeals, arguing (1) seismic work is services or intangible property excluded from the COGS definition, (2) CGG’s data are not the sort of mass‑distributed tangible property enumerated in §171.1012(a)(3)(A)(ii), and (3) CGG does not furnish "labor" or "materials" to a qualifying construction project for §171.1012(i) purposes.
- The dispositive legal question is statutory interpretation of §171.1012: what counts as "goods," "tangible personal property," "intangible property," and when a furnisher of services/materials may be treated as an owner for COGS purposes.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CGG’s seismic recordings/images qualify as "tangible personal property" under §171.1012(a)(3)(A)(ii) | CGG: its products embody sound/images and are intended for licensing/mass distribution via MCDL, so they fit the listed categories | State: recordings/images are services or intangible intellectual property (trade secrets), not mass‑distributed tangible property; proprietary sales especially are the opposite of mass distribution | Trial court held they were tangible and eligible; State appeals urging reversal (statutory interpretation contested) |
| Whether CGG’s work is excluded as "services" or "intangible property" under §171.1012(a)(3)(B) | CGG: some offerings are products/licensable goods rather than services | State: CGG pleaded and the court found it provides services; statute excludes services and intangibles from goods | Trial court treated offerings as goods; State argues that statutory text and precedent (seismic data = intangible) compel exclusion |
| Whether CGG may be deemed owner by "furnishing labor or materials" to a construction project under §171.1012(i) | CGG: its seismic labor/materials to oil/gas development qualify it as a deemed owner eligible to deduct costs | State: legislature treats geological/geophysical costs separately and did not intend those services to count as "labor" or "materials" for deemed‑owner purposes; services are too remote from an actual drilling "project" | Trial court found Furnisher rule applied; State argues statutory structure and caselaw (too remote/potential projects) require reversal |
| Burden/standard: whether ambiguous provisions require construing doubts against claimant (i.e., COGS is an exemption) | CGG: COGS is an available deduction under statute; reliance on trial court’s findings | State: COGS functions as a tax exemption; ambiguous provisions construed against claimant and in deference to Comptroller | State urges appellate court to treat ambiguity against CGG and defer to Comptroller; trial court did not resolve ambiguity question explicitly |
Key Cases Cited
- TGS‑NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432 (Tex. 2011) (seismic/geophysical data characterized as intangible intellectual property for franchise‑tax purposes)
- In re Nestle U.S.A., Inc., 387 S.W.3d 610 (Tex. 2012) (franchise tax is payment for privilege of doing business and describes the margin/COGS framework)
- Combs v. Newpark Res., Inc., 422 S.W.3d 46 (Tex. App.—Austin 2013) (construction of §171.1012; limits on COGS and deemed ownership analysis)
- Bullock v. Nat'l Bancshares Corp., 584 S.W.2d 268 (Tex. 1979) (tax exemptions construed narrowly; burden on claimant)
- In re Bass, 113 S.W.3d 735 (Tex. 2003) (industry practice treating seismic data as trade secrets/intangibles)
- Upjohn Co. v. Rylander, 38 S.W.3d 600 (Tex. App.—Austin 2000) (deduction as exemption principle cited in tax litigation)