Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas v. Xerox Corporation
14-19-00358-CV
| Tex. App. | Aug 31, 2021Background:
- Xerox paid franchise taxes under protest for report years 2008–2009 after the Texas Comptroller assessed it at the 1.0% rate; Xerox claimed the 0.5% rate applied because it was primarily engaged in wholesale trade.
- Comptroller Glenn Hegar (and Attorney General Ken Paxton) counterclaimed that Xerox overstated its cost-of-goods-sold (COGS) and thus owed additional tax.
- Bench trial: court found Xerox primarily engaged in wholesale trade, treated revenue from FAS 13 sales-type leases as sales, found wholesale revenue ≈78–79% of total revenue, and accepted Xerox’s COGS calculations (including certain R&D and sales-type lease costs).
- Trial court ordered refund warrants totalling $4,349,568 plus statutory interest and entered a take-nothing judgment on the Comptroller Parties’ counterclaim.
- On appeal the Comptroller Parties argued (1) Xerox should not qualify for the 0.5% wholesale-trade rate because many transactions were leases/services, and (2) Xerox’s COGS was overstated and below 30% of revenue. The court affirmed.
Issues:
| Issue | Plaintiff's Argument (Xerox) | Defendant's Argument (Comptroller Parties) | Held |
|---|---|---|---|
| Whether Xerox was "primarily engaged in wholesale trade" for applying 0.5% rate | Sales-type leases under FAS 13 are sales in substance; revenue from those leases and related maintenance/financing properly classified in Division F, so wholesale revenue exceeded other revenue | "Selling"/"sale" requires passage of title; many transactions were leases/services, not sales, so revenue should not be in Division F and Xerox does not qualify for the lower rate | Court held ordinary meaning of "selling/sale" does not require transfer of title; sales-type leases may be treated as sales on substance-over-form grounds; trial findings that wholesale revenue exceeded other revenue affirmed and 0.5% rate applies |
| Whether Comptroller proved Xerox overstated COGS and was entitled to judgment reducing COGS (counterclaim) | Xerox properly included costs tied to sales-type leases, R&D, handling/quality-control costs, and mixed transactions per Tax Code and Comptroller rules | Many contested line items were service, rental, or distribution costs not allowable in COGS; some line items conceded or susceptible to reduction | Court held Comptroller failed to prove entitlement as a matter of law; contested reductions were either not conclusively established or too small to negate Xerox’s COGS; take-nothing on counterclaim affirmed |
Key Cases Cited
- American Multi-Cinema, Inc. v. Hegar, 605 S.W.3d 35 (Tex. 2020) (ordinary-meaning construction of tax terms; standard of review on statutory interpretation and factual sufficiency)
- Sunstate Equip. Co., LLC v. Hegar, 601 S.W.3d 685 (Tex. 2020) (treatment of COGS provisions; holding certain statutory provisions are not tax exemptions)
- Rent-A-Center, Inc. v. Hegar, 468 S.W.3d 220 (Tex. App.—Austin 2015, no pet.) (substance-over-form approach to rent-to-own transactions)
- City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005) (standards for reviewing legal and factual sufficiency of the evidence)
- Dow Chem. Co. v. Francis, 46 S.W.3d 237 (Tex. 2001) (conclusive-proof requirement for prevailing party when the trial court found against challenger)