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. | Sep 2, 2015Background
- CGG Veritas Services (taxpayer) provides seismic data acquisition, processing, and interpretation services to oil & gas companies; it treated those costs as cost-of-goods-sold (COGS) under Tex. Tax Code § 171.1012 and sought a large refund.
- Comptroller appealed the trial-court judgment that allowed CGG’s claimed COGS deduction, arguing statutory construction and eligibility of the costs rather than contesting undisputed factual descriptions of CGG’s business.
- Central statutory provision: § 171.1012 defines "goods" and enumerates which cost categories qualify for COGS; subsection (i) limits COGS to entities that own goods but creates a narrow exception for entities "furnishing labor or materials to a project" to be considered owners of that labor/materials.
- Comptroller contends CGG provides services and intangible property (seismic data), not goods, and thus most of CGG’s costs are ineligible; at best, § 171.1012(i) permits deduction only for costs of furnishing the actual labor or materials to a real-property construction project.
- CGG relied on being a "deemed owner" under § 171.1012(i) and argued that status allows claiming all COGS categories; it also asserted some Multi-Client Data Library (MCDL) data met the mass-distribution test in § 171.1012(a)(3)(A)(ii).
- Comptroller maintains (1) the statutory ownership requirement limits which entities may claim COGS, (2) the § 171.1012(i) exception is narrow and applies only to costs of furnishing that labor/materials to an actual construction project, and (3) seismic data is intangible and not mass-distributed in substantially unaltered form.
Issues
| Issue | Plaintiff's Argument (CGG) | Defendant's Argument (Comptroller) | Held (Appellate focus) |
|---|---|---|---|
| Whether CGG may deduct its seismic-related costs as COGS under § 171.1012 | CGG claims it qualifies as a “deemed owner” under § 171.1012(i) and may deduct COGS available to owners, including categories in (c), (d), and (f) | § 171.1012(i) only permits deduction of costs incurred in furnishing the actual labor or materials; deemed-owner status does not unlock unrelated COGS categories | Court reviews statutory construction de novo; Comptroller argues narrow reading limits COGS to costs tied to furnishing labor/materials |
| Whether seismic data are “goods” (tangible personal property) for § 171.1012 purposes | CGG contends some seismic products (MCDL) fit the expanded TPP definition (films/books/similar property) and are intended for mass distribution | Seismic data are intangible, service-driven products reflecting professional opinion, not goods; mass-distribution and substantially-unaltered requirements are not met (especially for proprietary data) | Seismic data characterized as intangible services; mass-distribution test not satisfied for proprietary data; affects refund availability |
| Whether CGG’s services qualify as “furnishing labor or materials to a project” under § 171.1012(i) | CGG argues its acquisition/processing services are sufficiently connected to drilling projects and thus furnish labor/materials to a project | Services are professional, highly technical work (not ordinary construction labor); CGG furnishes information in advance of any actual construction—not "to a project" as the statute requires | Comptroller: the statute targets contractors supplying labor/materials directly to real-property projects; CGG’s services are too remote and professional to qualify |
| Burden and segregation of eligible vs. ineligible costs | CGG argues Comptroller waived challenges about segregation and focused only on § 171.1012(i) qualification | Taxpayer bears burden to produce contemporaneous records segregating deductible COGS; Comptroller did not waive challenges and properly contested eligibility | Record obligations and burden rest with CGG; failure to segregate undermines broad COGS recovery claim |
Key Cases Cited
- Newpark Res., Inc. v. State, 422 S.W.3d 46 (Tex. App.—Austin 2013) (interpreting § 171.1012(i) to allow deduction only for labor/materials furnished to improvement projects)
- TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432 (Tex. 2011) (characterizing seismic data as intangible property in related franchise-tax context)
- Titan Transp., LP v. Combs, 433 S.W.3d 625 (Tex. App.—Austin 2014) (statutory interpretation of franchise-tax provisions reviewed de novo; application to undisputed business facts)
- Traxler v. Entergy Gulf States, Inc., 376 S.W.3d 742 (Tex. 2012) (questions of statutory construction are legal issues for the court)
- Leordeanu v. Am. Protection Ins. Co., 330 S.W.3d 239 (Tex. 2010) (statutes must be construed to give effect to every provision; avoid surplusage)
- Upjohn Co. v. Rylander, 38 S.W.3d 600 (Tex. App.—Austin 2000) (expert testimony about statutory meaning is not a substitute for judicial statutory construction)