Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas v. Gulf Copper and Manufacturing Corporation
17-0894
| Tex. | Dec 20, 2017Background
- Gulf Copper (with subsidiary Sabine Surveyors) repairs, outfits, and surveys offshore drilling rigs at waterfront yards; it does not own or sell the rigs. Work includes manufacturing components, installation, welding, painting, blasting, coating, and vessel surveys.
- For franchise-tax year 2009 Gulf Copper filed a combined report, excluded $79,405,230 of subcontractor payments as a (g)(3) "flow-through" revenue exclusion, and elected the cost-of-goods-sold (COGS) subtraction to compute margin.
- The Comptroller audited and disallowed the (g)(3) exclusion for those subcontractor payments (treating them instead as part of revenue/costs), and significantly limited Gulf Copper’s claimed COGS.
- Trial court found Gulf Copper entitled to exclude the $79.4M as flow-through funds (or alternatively include them in COGS) and allowed a large COGS subtraction, entering judgment for full refund of Gulf Copper’s protested payment.
- The Third Court of Appeals affirmed the revenue-exclusion ruling (the $79.4M) but held the record lacked a proper cost-by-cost showing to support the trial court’s COGS total; it reversed and remanded to determine COGS under the statute.
Issues
| Issue | Plaintiff's Argument (Gulf Copper) | Defendant's Argument (Comptroller) | Held |
|---|---|---|---|
| Whether Gulf Copper’s rig repairs/outfitting and Sabine’s surveying qualify as "labor or materials furnished to a project for construction/improvement of real property" under Tex. Tax Code §171.1012(i) so costs may be included in COGS | Gulf Copper: its work is integral to rigs used to drill oil wells (improvements to real property), so the labor/materials are "furnished to a project" and COGS-eligible under (i) | Comptroller: Gulf Copper is at least two steps removed from well construction; work is on tangible personal property at Gulf Copper’s yards (not on the real-property project), so it is not (i)-qualifying labor | Court of Appeals: Some subcontractor labor is sufficiently connected to well construction for (g)(3) exclusion; but the record lacks the required cost-by-cost analysis to support the trial court’s broad COGS findings—remand for proper COGS calculation |
| Whether payments to subcontractors qualify as "flow-through funds mandated by contract to be distributed to other entities" under Tex. Tax Code §171.1011(g)(3) | Gulf Copper: customer billing/practices and contracts (including contracts with subcontractors) show amounts were mandated flow-through payments to subcontractors; thus excludable from revenue | Comptroller: Gulf Copper’s customer contracts do not mandate that customer payments flow through to subcontractors; many payments are ordinary contract payments and not excludable | Court of Appeals: Payments—both specialty cost-plus and labor-hour payments—qualified as mandated flow-through funds (the taxpayer’s contracts with subcontractors can satisfy the contractual mandate); entire $79.4M exclusion upheld |
| Whether the Comptroller’s methodology (using facility percentages and excluding entire categories like Sabine’s costs) properly calculated COGS | Gulf Copper: it used federal COGS accounting and the statute permits using federal methods as the starting point (per §171.1012(h)); reallocating by proxy is improper | Comptroller: Gulf Copper’s federal COGS overbroad; none of Sabine’s costs qualify; use percentages and proxies to segregate fabrication vs nonfabrication costs | Court of Appeals: §171.1012(h) requires using federal accounting methods (cash/accrual) but does not permit substituting federal COGS wholesale for the state COGS categories; Comptroller’s percentage-proxy method and 0% for Sabine improperly depart from statutory, cost-by-cost analysis—Comptroller’s calculation is incorrect; remand required |
| Whether trial court should have rendered judgment rather than remand given Gulf Copper’s failure to present cost-by-cost evidence | Comptroller: Gulf Copper had the burden and failed to present the requisite itemized evidence; judgment should be rendered for the State | Gulf Copper: relied on federal COGS methods and aggregated evidence; trial court properly credited combined-group proof | Court of Appeals: Gulf Copper did not present the itemized analysis needed to sustain the trial court’s COGS totals; because some COGS is likely allowable but amounts uncertain, remand for further proceedings to determine proper COGS was required |
Key Cases Cited
- Combs v. Newpark Res., Inc., 422 S.W.3d 46 (Tex. App.—Austin 2013) (interpreting §171.1012(i) — labor qualifies when it is an "essential and direct component" of the real-property project)
- Titan Transp., LP v. Combs, 433 S.W.3d 627 (Tex. App.—Austin 2014) ("in connection with" in §171.1011(g)(3) requires a reasonable nexus—not merely tangential—to real-property construction)
- Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632 (Tex. 2013) (statutory interpretation principles for tax statutes; give unambiguous language its plain meaning)
- In re Nestle USA, Inc., 387 S.W.3d 610 (Tex. 2012) (overview of franchise-tax scheme and purpose of flow-through-funds exclusions)
- Sheshunoff v. Sheshunoff, 172 S.W.3d 686 (Tex. App.—Austin 2005) (similar statutory-term usage in different statutes may be given same meaning)