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. | Jul 21, 2015Background
- CGG Veritas Services (U.S.), Inc. (CGG) acquires and processes seismic sound recordings into seismic images used by oil & gas exploration and production (E&P) companies; CGG sells proprietary products and licenses non‑exclusive products through a multi‑client data library (MCDL).
- Producing seismic data involves substantial physical and mental labor (field crews, explosives/vibroseis/airguns, vessel and equipment use) and expensive processing (specialized algorithms, hardware), often funded up front by CGG for MCDL projects.
- For Texas franchise tax year 2008 CGG claimed a cost‑of‑goods‑sold (COGS) deduction of $567,600,223 on a combined group return; the Comptroller reviewed, denied the COGS deduction, and assessed ~$1.3 million additional tax plus interest.
- CGG paid the assessment under protest and sued for refund; the Comptroller did not present evidence at the bench trial and limited its challenge to whether CGG qualified for the COGS deduction under Tex. Tax Code §171.1012(i).
- The trial court found CGG both (a) a "deemed owner" because it furnishes labor or materials to real‑property projects (oil & gas wells) and (b) an "actual owner" for MCDL sales, concluded all costs claimed fell within §171.1012(c),(d),(f), and entered judgment awarding the full COGS deduction and refund. The Comptroller appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CGG qualifies as a "deemed owner" under §171.1012(i) (i.e., furnishes labor or materials to real‑property projects) | CGG: seismic acquisition and processing are labor/materials that are difficult, fatiguing, specialized, and integral to oil & gas well construction—thus furnishing labor/materials "to a project" qualifies CGG as a deemed owner. | Comptroller: CGG provides services/intellectual products only; the activity is too remote and does not effect a physical change to property (thus not qualifying as furnishing labor/materials). | Court: CGG furnishes labor and materials sufficiently connected to well construction; qualifies as a deemed owner. |
| Whether CGG is an "actual owner" of "goods" under §171.1012(a) for MCDL sales | CGG: it owns seismic data and intends mass distribution via MCDL; statute treats certain intellectual property (films, sound recordings, etc.) as "tangible personal property" for COGS purposes, so seismic data fits §171.1012(a)(3)(A)(ii). | Comptroller: seismic data is intangible; COGS TPP definition should not encompass CGG's products; mass distribution and substantial unalteration elements not met. | Court: seismic data sold via MCDL meets the statutory special definition of TPP for COGS and CGG is an actual owner for those sales. |
| Scope of allowable costs once taxpayer qualifies for COGS | CGG: once qualified (actual or deemed owner), it may deduct all direct and allowable indirect costs listed in §171.1012(c),(d),(f); CGG's worksheets identify those costs and combined‑group rules apply. | Comptroller: if deemed owner, deduction should be limited to labor/materials; Comptroller sought parsing of costs by activity/category. | Court: statute permits deducting costs "as allowed by this section" (c,d,f); Comptroller waived challenges to specific cost items at trial; CGG entitled to the full $567,600,223. |
| Whether agency deference applies to Comptroller's interpretation | CGG: statute is unambiguous; Comptroller's differing policy positions are unreasonable and have been publicly revised; no deference owed. | Comptroller: its interpretations and enforcement positions merit deference. | Court: §171.1012 not ambiguous; deference not required; even if considered, Comptroller positions were inconsistent or previously rejected. |
Key Cases Cited
- Combs v. Newpark, 422 S.W.3d 46 (Tex. App.—Austin 2013, no pet.) (interpreting "labor" and deemed‑owner COGS analysis applied to oil‑field service activities)
- TGS‑NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432 (Tex. 2011) (treatment of seismic data and licensing for apportionment/sales‑tax contexts; distinctions noted for COGS statute)
- Titan Transp., L.P. v. Combs, 433 S.W.3d 625 (Tex. App.—Austin 2014, pet. denied) (flow‑through subcontractor payments exclusion under §171.1011(g)(3) and related analysis)
- In re Nestle USA, Inc., 387 S.W.3d 610 (Tex. 2012) (standard that statutory construction is reviewed de novo and plain text controls)
- Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632 (Tex. 2013) (principles on statutory construction in tax disputes; strict construction against taxing authority)
- Zimmer US, Inc. v. Combs, 368 S.W.3d 579 (Tex. App.—Austin 2012, no pet.) (statutory interpretation principles in franchise tax context)