Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas v. Autohaus LP, LLP
03-15-00427-CV
| Tex. | Oct 7, 2016Background
- The dispute concerns whether Autohaus’s labor and related costs for installing automobile parts in customer-owned vehicles qualify as "costs of goods sold" (COGS) under Tex. Tax Code § 171.1012.
- Autohaus buys parts, transfers ownership to customers when installed, and seeks to deduct both the parts and installation labor as COGS on its Texas franchise tax return.
- The Comptroller (appellants) argue the statute limits COGS to costs related to acquiring or producing tangible personal property sold in the ordinary course of business and certain enumerated additional costs; installation labor here is not covered.
- Non-parties (Amici) proposed a two-step test: (1) determine whether the taxpayer “qualifies” for the COGS deduction by selling goods, and (2) allow nearly all federal deductions (with limited state adjustments) as COGS if the taxpayer qualifies.
- The State’s response contends Amici’s two-step test lacks statutory basis, misreads § 171.1012(h) and (g), improperly imports federal income tax deductions and accounting rules, and would eviscerate the statute’s defined categories of includable costs.
Issues
| Issue | Plaintiff's Argument (Autohaus / Amici) | Defendant's Argument (Comptroller) | Held (Appellants’ position) |
|---|---|---|---|
| Whether labor to install parts in customer-owned vehicles is COGS | Installation labor is part of producing/selling goods and thus deductible as COGS | Labor installing parts is not a direct cost of acquiring or producing goods sold under § 171.1012(c)/(d) | Installation labor is not COGS for Autohaus; trial court erred granting summary judgment for Autohaus |
| Validity of Amici’s two-step test (qualification + federal-costs-as-COGS) | Taxpayers who sell goods "qualify" and can use federal deductions (minus adjustments) as COGS | No statutory support; costs are categorized, not taxpayers; statute defines which costs qualify | Two-step test is legally unsupported and should be rejected |
| Whether federal accounting/deductions (IRC §263A, §446) control Texas COGS | Texas should ‘‘start with’’ federal accounting and costs reported on federal returns as the baseline | §171.1012(h) only adopts federal accounting methods for timing/capitalization, not categories of deductible costs | Federal deduction categories are irrelevant to what §171.1012 permits except for accounting method/timing adjustments |
| Relevance of "service costs" vs. "labor costs" distinction | Some service-type labor can be COGS; Amici argue federal distinctions show broader inclusion | Only labor that is a direct cost of acquiring/producing tangible goods (or fits statutory exceptions) is COGS; construction-project rule is inapplicable here | Service/labor debate is misplaced; statutory text controls and construction-project precedents do not apply to Autohaus’s facts |
Key Cases Cited
- In re Nestle USA, Inc., 387 S.W.3d 610 (Tex. 2012) (interpreting what costs qualify as COGS under Texas tax statute)
- Combs v. Newpark Res., Inc., 422 S.W.3d 46 (Tex. App.—Austin 2013) (holding some service-related costs may be COGS where statute treats furnished labor/materials as ownership for construction projects)