Case Information
*0 FILED IN 15th COURT OF APPEALS AUSTIN, TEXAS 4/7/2025 8:50:02 PM CHRISTOPHER A. PRINE Clerk *1 ACCEPTED 15-24-00113-CV FIFTEENTH COURT OF APPEALS AUSTIN, TEXAS 4/7/2025 8:50 PM Cause No. 15-24-00113-CV CHRISTOPHER A. PRINE CLERK In the Court of Appeals for the Fifteenth District of Texas Glen Hegar, Comptroller of Public Accounts of The State of Texas and Ken Paxton, Attorney General of The State of Texas, Appellants, v.
American Airlines, Inc., Appellee. Brief of Appellee Mary A. McNulty
State Bar No. 13839680 Mary.McNulty@hklaw.com Leonora Meyercord
State Bar No. 24074711 Lee.Meyercord@hklaw.com Richard B. Phillips, Jr.
State Bar No. 24032833 Rich.Phillips@hklaw.com Holland & Knight LLP 1722 Routh Street, Suite 1500 Dallas, Texas 75201
214-964-9500
Fax: 214-964-9501 Counsel for Appellee Oral Argument Requested *2
Identity of Parties and Counsel Appellants Counsel for Appellants
Glenn Hegar, Comptroller of Kyle Pierce Counce
Public Accounts of the State of kyle.counce@oag.texas.gov Texas Amanda Romenesko Ken Paxton, Attorney General of mandy.romenesko@oag.texas.gov
the State of Texas Ray Langenberg ray.langenberg@cpa.texas.gov Deborah J. Rao deborah.rao@oag.texas.gov Alyson “Ally” Thompson ally.thompson@oag.texas.gov Office of the Attorney General Tax Litigation Division P.O. Box 12548 Austin, Texas 78711 Tel: 512-463-3112 Fax: 512-478-4013 -i-
Appellee Counsel for Appellee
American Airlines, Inc. Mary A. McNulty
Mary.McNulty@hklaw.com Leonora Meyercord Lee.Meyercord@hklaw.com Richard B. Phillips, Jr. Rich.Phillips@hklaw.com Meghan McCaig [1] Holland & Knight LLP 1722 Routh Street, Suite 1500 Dallas, Texas 75201 214-964-9500 Fax: 214-964-9501 *4 Table of Contents Page Identity of Parties and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . i
Index of Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
Statement of the Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Statement Regarding Record References . . . . . . . . . . . . . . . . . . . x Issues Presented . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. xi
Statement of Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(1) American’s Franchise Tax Reports and
Refund Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (2) The Parties’ Dispute . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (3) The Trial Court’s Judgment, Findings of
Fact, and Conclusions of Law . . . . . . . . . . . . . . . . . . . . . 4 Summary of the Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 9
1. The AHTA preempts state taxes on the gross receipts from air commerce or transportation, regardless of the label the state gives to the tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 9 -iii-
Page A. The AHTA forbids states from taxing gross receipts from air commerce or transportation. . . . . . . . . . 9 B. AHTA preemption applies no matter how the state labels the tax. . . . . . . . . . . . . . . . . . . . . . . . . 11 2. As applied to American’s AHTA revenues, the franchise tax is an improper gross-receipts tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 13 A. There is no dispute that the AHTA revenues are receipts from air commerce or transportation. . . . . . . . . . 13 B. As the trial court properly held, the franchise tax is illegally imposed on the AHTA revenues. . . . . . . . . . .14 C. Contrary to the Comptroller’s assertion, this Court can decide that the AHTA bars taxation of discrete revenue streams. . . . . . . . . . . . . . . . . . . . 16 3. The Comptroller’s other arguments are
unavailing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 A. The AHTA preempts gross-receipts taxes of general applicability to the extent they seek to tax air commerce or air transportation. . . . . . . . . . . . . 20 B. The limited exclusions from “total revenue” do not preclude preemption. . . . . . . . . . . . . . . . . . . . . 23 C. There is more than sufficient evidence to support Finding of Fact 8. . . . . . . . . . . . . . . . . . . . 24 D. The Comptroller’s “Catch-22” argument is nonsensical. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 -iv-
Page E. The 70% adjustment does not change the analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 F. The other parts of the franchise tax
determination do not affect the analysis. . . . . . . . . . . . . 31 4. The trial court correctly rejected the
Comptroller’s counterclaim. . . . . . . . . . . . . . . . . . . . . .33 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 34
Certificate of Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
-v- *7 Index of Authorities Page Cases
Air Transp. Ass’n of Am. v. New York State Dep’t of Tax’n &
Fin. ,
91 A.D.2d 169 (N.Y. App. Div. 1983) . . . . . . . . . . . . . 10, 12, 18, 19 Aloha Airlines, Inc. v. Dir. Of Tax’n of Hawaii ,
464 U.S. 7 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
Arraby Props., LLC v. Brown ,
695 S.W.3d 532 (Tex. App.—Houston [1st Dist.] 2023, pet. denied) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 25 Balloons Over the Rainbow, Inc. v. Dir. of Revenue ,
427 S.W.3d 815 (Mo. 2014) . . . . . . . . . . . . . . . . . . 10, 16, 21, 22 Boggs v. Boggs ,
520 U.S. 833 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Cain v. Bain ,
709 S.W.2d 175 (Tex. 1986) . . . . . . . . . . . . . . . . . . . . . . . . 26 City of Keller v. Wilson ,
168 S.W.3d 802 (Tex. 2005) . . . . . . . . . . . . . . . . . . . . . . . . 26 Hegar v. Am. Multi-Cinema, Inc. ,
605 S.W.3d 35 (Tex. 2020) . . . . . . . . . . . . . . . . . . . . . . . . . 18 Hegar v. Gulf Copper & Mfg. Corp. ,
601 S.W.3d 668 (Tex. 2020) . . . . . . . . . . . . . . . . . . . . . . . . . 18 Kamikawa v. Lynden Air Freight, Inc. ,
968 P.2d 653 (Haw. 1998) . . . . . . . . . . . . . . . . . . . . . 10, 22, 32 Secured Env’t Mgmt., Inc. v. Tex. Nat. Res. Conservation
Comm’n ,
97 S.W.3d 246 (Tex. App.—Austin 2002, pet. denied) . . . . . . . . . 17 -vi-
Page Skilled Craftsmen of Tex., Inc. v. Tex. Workers’ Comp. Comm’n ,
158 S.W.3d 89 (Tex. App.—Austin 2005, pet. dism’d) . . . . . . . 16, 17 Syed v. Masihuddin ,
521 S.W.3d 840 (Tex. App.—Houston [1st Dist.] 2017, no pet.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 27 United Rentals N. Am., Inc. v. Evans ,
668 S.W.3d 627 (Tex. 2023) . . . . . . . . . . . . . . . . . . . . . . . . 25 Statutes
49 U.S.C. § 40102(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
49 U.S.C. § 40102(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
49 U.S.C. § 40102(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
49 U.S.C. § 40102(a)(22)-(25) . . . . . . . . . . . . . . . . . . . . . . . . . 14
49 U.S.C. § 40116(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 10, 17
49 U.S.C. § 40116(b)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 16
29 U.S.C. § 40116(e)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
FAA Reauthorization Act of 2018, Pub. L. No. 115-254, § 159,
132 Stat. 3186, 3220 (2018) . . . . . . . . . . . . . . . . . . . . . . . . . 10 Haw. Rev. Stat. § 239–6 (1976) . . . . . . . . . . . . . . . . . . . . . . 11
Tex. Tax Code § 151.007(c) . . . . . . . . . . . . . . . . . . . . . . . 23
Tex. Tax Code §§ 151.301–.3595 . . . . . . . . . . . . . . . . . . . . . 23
Tex. Tax Code § 151.426 . . . . . . . . . . . . . . . . . . . . . . . . . 23
Tex. Tax Code § 151.4261 . . . . . . . . . . . . . . . . . . . . . . . . . 23
Tex. Tax Code § 171.001 . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Tex. Tax Code § 171.101(a) . . . . . . . . . . . . . . . . . . . . . . . 14, 31
-vii-
Page Tex. Tax Code § 171.1011(c)(1) . . . . . . . . . . . . . . . . . . . . . 14, 15
Tex. Tax Code § 171.1121 . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Other Authorities 34 Tex. Admin. Code § 3.591(b)(3) . . . . . . . . . . . . . . . . . . . . . . . 15
State Office of Admin. Hearings Dkt. No. 304-15-3326.26,
Comptroller of Public Accounts, 2017 WL 3842067 (May 3, 2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . passim -viii-
Statement of the Case Nature of This appeal arises from a dispute between American
the Case: Airlines, Inc. and the Texas Comptroller of Public Accounts
about the calculation of American’s franchise tax. (2CR:5– 7.) American contends that the federal Anti-Head Tax Act (49 U.S.C. § 40116) preempts the franchise tax as it applies to American’s gross receipts from baggage fees, passenger ticket sales, and freight transportation. ( Id .) American seeks a refund of the portion of its franchise tax attributable to its receipts from baggage fees. (2CR:14.) The Comptroller counterclaimed for recovery of additional franchise tax because American excluded receipts from passenger ticket sales and freight transportation from its franchise tax calculation. (2CR:28.)
Course of The case was tried to the bench (the 200th Judicial District
Proceedings: Court, Travis County, the Honorable Jessica Mangrum
presiding). (1RR:1.)
Trial Court’s The trial court concluded that the Anti-Head Tax Act
Disposition: preempts the franchise tax to the extent the Comptroller
seeks to tax American’s gross receipts from baggage fees, passenger ticket sales, and freight transportation. (2CR:549– 50.) Accordingly, the trial court rendered judgment for American on its refund claim. (2CR:232.) The court also rendered judgment that the Comptroller take nothing on its counterclaim. (2CR:232.)
-ix- *11 Statement Regarding Record References The record on appeal comprises the following: • The clerk’s record from Cause No. D-1-GN-15-003101, which was filed in this Court on November 18, 2024. Following the Comptroller’s pattern, this will be cited as 1CR:[page number].
• The clerk’s record from Cause No. D-1-GN-16-000621, which was filed in this Court on November 18, 2024. Following the Comptroller’s pattern, this will be cited as 2CR:[page number].
• The 4 volume reporter’s record, which was filed in this Court on December 5, 2024 and will be cited as [volume]RR:[page].
• Plaintiff’s exhibits admitted at trial will be cited as PX[number]. • Defendant’s exhibits admitted at trial will be cited DX[number]. -x-
Issues Presented 1. The trial court correctly concluded that the Anti-Head Tax Act preempts the Texas franchise tax as applied to American’s gross receipts from baggage fees and that American is entitled to a refund of the tax paid on those receipts.
2. The trial court correctly rendered judgment that the Comptroller take nothing on his counterclaim for additional tax because the Anti-Head Tax Act also preempts the Texas franchise tax as applied to American’s gross receipts from passenger ticket sales and freight transportation.
-xi- *13 Statement of Facts (1) American’s Franchise Tax Reports and Refund Claims
American Airlines, Inc. is an air carrier based in Fort Worth, Texas.
(2RR:53; 2CR:547.) It operates a fleet of approximately 1,000 aircraft and
transports people, baggage, and freight to destinations in North America, the
Caribbean, Latin America, Europe, and the Asia-Pacific Region. (2RR:53;
2CR:547.) Because American does business in Texas, it is subject to the Texas
franchise tax. See generally Tex. Tax Code § 171.001. To pay the franchise
tax, taxpayers file a franchise tax report for a “report year.” ( See 2RR:41.) A
“report year” refers to the year the franchise tax report is due, but the
franchise tax report covers the prior calendar year. (2RR:55.) Therefore, the
2015 franchise tax report at issue here covers calendar year 2014.
In late 2013, American filed refund claims with the Comptroller for a portion of the Texas franchise tax it paid for report years 2009 through 2013.
(1CR:6.) American’s refund claims were premised on the federal Anti-Head
Tax Act (“AHTA”). (1CR:4–5.) The AHTA preempts state gross-receipts
taxes on air commerce or air transportation. 49 U.S.C. § 40116(b). American
contends that the AHTA preempts the Texas franchise tax as applied to
American’s receipts from baggage fees, passenger tickets sales, and freight
transportation (collectively, “AHTA revenues”). (1CR:4–5.) When Ameri-
can filed its franchise tax report for report year 2014, it paid the portion of the
tax attributable to its AHTA revenues under protest. (1CR:6.)
In 2014, the Comptroller sought an opinion from the federal Department of Transportation (the agency responsible for administering the AHTA) about
whether the AHTA preempted the Texas franchise tax as applied to AHTA
revenues. (PX11; 2CR:548.) The Comptroller’s letter made many of the same
arguments he makes in this Court. (PX11.) The Department of Transportation
disagreed with the Comptroller’s position. (2CR:548; 2RR:183–84.)
After receiving the Department of Transportation’s opinion in 2014, the Comptroller told American that it agreed that the AHTA preempted the
Texas franchise tax on AHTA revenues. (2CR:548.) The Comptroller thus
refunded the franchise tax that American paid under protest with its 2014
franchise tax report. (2RR:59; 2CR:548.) [2]
*15 (2) The Parties’ Dispute
In 2015, the Comptroller changed its position about whether the AHTA preempts the Texas franchise tax as applied to AHTA revenues. (2RR:185.)
The Comptroller’s staff encouraged American to file its 2015 franchise tax
report under protest and then to file a refund suit to expedite resolution of the
dispute. (2CR:548.) American did so, and the case was docketed as Cause No.
D-1-GN-15-003101. (1CR:3.) American’s 2015 franchise tax report included
American’s gross receipts from baggage fees, but it did not include gross
receipts from passenger ticket sales or freight transportation. (PX2; 2RR:55.)
Despite the Comptroller staff’s encouragement of this procedure, the
Comptroller filed a plea to the jurisdiction, arguing that American had not
exhausted its administrative remedies. (1CR:21.)
The Comptroller refunded American $107,577.04—the amount of franchise tax attributable to the inclusion of the gross receipts from baggage
fees in the 2015 report. (2RR:60.) The Comptroller then issued a determina-
tion that American owed the $107,577.04 and demanded immediate payment.
(2RR:60.) American repaid the $107,577.04 under protest and filed suit,
which was docketed as Cause No. D-1-GN-16-000621. (2CR:4.) The refund,
determination, and repayment under protest resolved any issues about the
trial court’s jurisdiction to consider American’s complaints. In the new case,
the Comptroller counterclaimed arguing that American should have included
the gross receipts from passenger ticket sales and freight transportation in its
franchise tax calculation and seeking recovery of additional franchise tax.
(2CR:28.) The two cases were consolidated. (1CR:38.)
(3) The Trial Court’s Judgment, Findings of Fact, and Conclusions of
Law
The case was tried over two days without a jury. (1RR:1.) The trial court heard testimony from American’s chief tax officer (2RR:51–52) and from two
Comptroller employees. (2RR:172–73; 3RR16.) The court rendered judgment
for American on the refund of the franchise tax paid under protest. (2CR:232.)
The court also rendered judgment that the Comptroller take nothing on his
counterclaim. (2CR:232.)
The Comptroller requested findings of fact and conclusions of law (2CR:234), which the trial court made and filed. (2CR:546.) The trial court
concluded that the Texas franchise tax is a gross-receipts tax as applied to
American’s AHTA revenues. (2CR:549–50.) The trial court’s key finding is
Finding of Fact 8:
There are no deductions or exclusions from American’s revenues from passenger ticket sales, passenger baggage fees, and freight transportation. American would pay the franchise tax *17 on 70% of the gross receipts from those sources that are apportioned to the State of Texas.
(2CR:547.) Based on that finding, the court concluded that the AHTA
preempts the Texas franchise tax as applied to those receipts. (2CR:549–50.)
As a result, the court rendered judgment that American recover the franchise
tax it paid under protest. (2CR:232.) The court also rendered judgment that
the Comptroller take nothing on his counterclaim. (2CR:232.)
Summary of the Argument This case depends on the answer to a narrow question—is the Texas franchise tax a gross-receipts tax as it applies to American’s AHTA revenues?
The answer is yes, which means that the AHTA preempts the franchise tax as
to those receipts.
The AHTA bars states from levying or collecting a tax on the gross receipts from air commerce or air transportation. That bar applies to any
gross-receipts tax, whatever label the state gives it. Courts have held that the
AHTA preempts taxes labeled as “property tax” or “franchise tax” when
those taxes were, in fact, gross-receipts taxes. The Comptroller himself has
recognized that the Texas sales tax is a gross-receipts tax and that the AHTA
preempts that tax as applied to air commerce or air transportation.
There is no dispute that the AHTA revenues are receipts from air commerce or air transportation. And the trial court made a fact finding that
there are no deductions or exclusions from American’s gross receipts from
these sources in calculating the amount of franchise tax due. Accordingly, the
trial court correctly concluded that, as to these sources, the franchise tax is a
gross-receipts tax, and it is preempted by the AHTA.
To avoid this straightforward result, the Comptroller attempts to change the question and to confuse the issue. The Court should reject these efforts,
as the trial court did. The Comptroller attempts to change the question by
arguing that the preemption analysis must be made by looking at American’s
entire business, rather than individual revenue sources. But the Comptroller
cites no authority for this assertion and ignores the case most on point. A New
York appellate court held that the AHTA preempts the portion of a franchise
tax that taxes gross receipts from air commerce or air transportation, while
leaving the remainder of the franchise tax in place.
The Comptroller next argues that the Texas franchise tax is not preempted because it is not specifically directed at air commerce or air
transportation. But the AHTA’s preemption is not limited to taxes specifically
directed at airlines. Even the Comptroller has recognized that the AHTA
preempts sales tax on air commerce or air transportation, even though the
sales tax is not specifically directed at air commerce or air transportation.
The Comptroller next argues that the franchise tax is not a gross-receipts tax because there are limited exclusions and deductions from “total revenue”
before the amount of tax is determined. There are two primary problems with
this argument. First, as the Comptroller’s witness admitted at trial, the
purpose of these deductions and exclusions is to remove items from “total
revenue” that are not actually received by the taxpayer or that are taxed
elsewhere. These deductions and exclusions are not actually receipts. Second,
in Finding of Fact 8, the trial court found that none of these deductions or
exclusions applies to the AHTA revenues. Thus, the deductions and
exclusions do not change the franchise tax’s nature as a gross-receipts tax as
applied to the AHTA revenues.
The Comptroller also seeks to challenge Finding of Fact 8. But there is much more than sufficient evidence for that finding, including testimony from
one of the Comptroller’s witnesses. The Comptroller ignores that testimony.
Instead, he focuses on his counterfactual “Catch-22” argument. According to
the Comptroller, if the AHTA revenues are excluded from “total revenue,”
the franchise tax would be calculated differently. The Comptroller posits that
compensation would be deducted from “total revenue” in this alternative
calculation and prove that the franchise tax is not a gross-receipts tax. This
“Catch-22” argument is nonsensical. If AHTA revenues are excluded from
the franchise tax, then American would not be arguing that the tax violates the
AHTA. It would not matter how the tax would be computed in that
counterfactual scenario; American’s AHTA revenues would not be taxed.
There is no “Catch-22.”
Finally, the Comptroller points to other portions of the franchise tax calculation to argue that the franchise tax is not a gross-receipts tax on the
revenues at issue. But those calculations do not change the tax’s nature as a
gross-receipts tax as applied to American’s AHTA revenues. First, the 70%
adjustment does not prevent the tax from being a gross-receipts tax. Even with
the percentage reduction of “total revenue,” American is still being taxed on
its gross receipts from air commerce or air transportation. If the state instead
reduced the applicable tax rate by 30%, it would result in the same tax being
due. Second, the apportionment of revenues between Texas sources and non-
Texas sources is immaterial. After apportionment, American would still be
taxed on the Texas portion of its gross receipts from air commerce or air
transportation. Third, it makes no difference that the tax rate depends on the
taxpayer’s entire business. Whatever tax rate is applied, American would still
be taxed on its gross receipts from air commerce or air transportation.
The trial court correctly rejected the Comptroller’s efforts to muddle the sole issue here. The Texas franchise tax would levy a tax on American’s gross
receipts from air commerce or air transportation. The AHTA therefore
preempts the franchise tax as it applies to American’s AHTA revenues. This
Court should affirm the trial court’s judgment.
Argument
1. The AHTA preempts state taxes on the gross receipts from air
commerce or transportation, regardless of the label the state gives to the tax.
A. The AHTA forbids states from taxing gross receipts from air commerce or transportation.
The AHTA prohibits a state from levying or collecting a tax, fee, head charge, or other charge on— (1) an individual traveling in air commerce; (2) the transportation of an individual traveling in air commerce;
(3) the sale of air transportation; or
(4) the gross receipts from that air commerce or transportation. *22 49 U.S.C. § 40116(b). [3] The AHTA’s purpose is to prevent double taxation on
air travelers and the interstate air transportation industry. See Aloha Airlines,
Inc. v. Dir. Of Tax’n of Hawaii , 464 U.S. 7, 9–10 (1983) (citing the legislative
history of the AHTA’s predecessor statute, 49 U.S.C. § 1513)).
Courts have repeatedly held that the AHTA preempts state taxes on gross receipts from air commerce or air transportation. See Aloha Airlines , 464 U.S.
at 13–14 (rejecting Hawaii’s attempt to impose a “property tax” on airline
revenues because the tax was measured by gross receipts); Balloons Over the
Rainbow, Inc. v. Dir. of Revenue , 427 S.W.3d 815, 824 (Mo. 2014) (holding that
the AHTA preempted Missouri sales tax on gross receipts from hot air balloon
rides); Air Transp. Ass’n of Am. v. New York State Dep’t of Tax’n & Fin. , 91
A.D.2d 169, 170–71 (N.Y. App. Div. 1983) (holding that the AHTA
preempted New York franchise tax on gross earnings in the state to the extent
it included gross receipts from air carriage); Kamikawa v. Lynden Air Freight,
Inc. , 968 P.2d 653, 657 (Haw. 1998) (noting that Hawaii’s general excise tax
*23 was preempted by federal law to the extent it taxed revenue from air trans-
portation). In fact, the Comptroller himself, in an administrative proceeding,
concluded that the imposition of sales tax on skydiving revenue is preempted
by the AHTA. See State Office of Admin. Hearings Dkt. No. 304-15-3326.26,
Comptroller of Public Accounts, 2017 WL 3842067, at *7 (May 3, 2017).
B. AHTA preemption applies no matter how the state labels the tax. The AHTA does permit certain taxes, including franchise, property, and sales taxes. 49 U.S.C. § 40116(e)(1). But a state cannot disguise an imper-
missible gross-receipts tax simply by giving it the label of a permissible tax. See
Aloha Airlines, Inc. , 464 U.S. at 13–14. In Aloha Airlines , the United States
Supreme Court considered whether the State of Hawaii could impose what
the state termed a “property tax” on airlines. Id. at 10–11. The statute stated
that the tax was
a means of taxing the personal property of the airline or other carrier, tangible and intangible, including going concern value, and is in lieu of the [general excise] tax imposed by chapter 237 but is not in lieu of any other tax.
Id. (quoting Haw. Rev. Stat. § 239–6 (1976) (emphasis added;
modification in original)). The tax imposed was “four per cent [sic] of [the
airline’s] gross income each year from the airline business.” Id.
In the Supreme Court, Hawaii argued that the tax was not preempted because it was styled as a “property tax,” which is permissible under the
AHTA. Id. at 13. Hawaii asserted that the tax was “a property tax measured
by gross receipts rather than a straight-forward gross receipts tax.” Id . The
Supreme Court rejected that argument. Id. The Court reasoned that “the
manner in which the state legislature has described and categorized” the tax
could not disguise that it “impose[d] a levy upon the gross receipts of air-
lines.” Id. at 13–14. The Court held that it was “beyond question” that the
state was taxing gross receipts and that the AHTA therefore preempted the
tax. Id. at 14.
Similarly, in Air Transportation Association , the New York appellate court addressed whether the AHTA preempted a tax on air carriers that was labeled
a “franchise tax.” Air Transp. Ass’n , 91 A.D.2d at 170. The court rejected the
state’s argument that the tax was permissible because it was called a “fran-
chise tax.” Id. at 171. The court looked at how the tax was calculated and held
that the AHTA preempted the portion of the tax on gross receipts from air
commerce or air transportation. Id.
The Comptroller has also ruled that the AHTA preempts the sales tax when applied to gross receipts from skydiving jumps. State Office of Admin.
Hearings Dkt. No. 304-15-3326.26, 2017 WL 3842067, at *7.
Thus, a state cannot avoid the AHTA by giving a gross-receipts tax applied to air commerce or air transportation a different label. The preemption
analysis requires looking at whether the tax imposed on air commerce or air
transportation is “measured by gross receipts.” Aloha Airlines , 464 U.S. at 14.
And as the trial court correctly held, a tax on air commerce or air
transportation measured by gross receipts is preempted.
2. As applied to American’s AHTA revenues, the franchise tax is an
improper gross-receipts tax.
A. There is no dispute that the AHTA revenues are receipts from air commerce or transportation.
The parties agree that the AHTA revenues are receipts from “air commerce or transportation.” 49 U.S.C. § 40116(b)(4). The trial court found
that American is an air carrier that transports people and property by aircraft
both interstate and internationally. (2CR:228; see also 49 U.S.C. § 40102(a)(2)
(defining “air carrier” as “a citizen of the United States undertaking by any
means, directly or indirectly, to provide air transportation”).) It also found
that American collects revenue from transporting passengers, from trans-
porting baggage, and from transporting freight on flights operating in federal
airways. (2CR:228.) Finally, the trial court found that “transporting people,
baggage, and freight by air constitutes air commerce and air transportation
under the AHTA.” ( Id. ; see also 49 U.S.C. § 40102(a)(3), (5), (22)–(25)
(defining “air transportation” and “air commerce” to include “transport-
ation of passengers or property by aircraft … for compensation”).) The
Comptroller has not challenged these findings.
B. As the trial court properly held, the franchise tax is illegally imposed on the AHTA revenues.
The basic process for determining the franchise tax is: • Step 1: Determine “total revenue.”
• Step 2 : Determine the lesser of: (1) seventy percent of total revenue; (2) total revenue less cost of goods sold; (3) total revenue less $1 million; or (4) total revenue less compensation.
• Step 3 : Multiply the amount from Step 2 by the percentage of gross receipts apportioned to the entity’s Texas business.
• Step 4 : Multiply the amount from Step 3 by the applicable tax rate.
See Tex. Tax Code §§ 171.101(a)(1)–(3). [4] “Total revenue” begins with
the taxpayer’s total revenue reportable on its federal income tax return. See id.
§ 171.1011(c)(1)(A). The Comptroller has stated that “total revenue” and
“gross receipts” are “almost always” synonymous. (PX18 (“Everywhere
*27 Gross Receipts will almost always equal Total Revenue.”); 2RR:185–86, 206
(testimony of Theresa Bostick).) The Texas Tax Code similarly recognizes
that “gross receipts” equals revenues reportable on a federal tax return. See
Tex. Tax Code § 171.1121 (providing that “‘gross receipts’ means all
revenues reportable … on [a taxpayer’s] federal tax return”); 34 Tex. Admin.
Code § 3.591(b)(3) (defining “gross receipts” as the amount determined as
total revenue, with certain, limited exclusions).
The statute does allow certain limited exclusions from the “total revenue” shown on the federal tax return, such as returns and allowances,
bad-debt expense, and foreign royalties and dividends. See Tex. Tax Code
§ 171.1011(c)(1)(B). But those exclusions do not make “total revenue”
different from “gross receipts.” At trial, Theresa Bostick (a Comptroller
employee) conceded that the exclusions from the taxpayer’s total revenue as
shown on its federal return “are either excluded because they were never
actually receipts by the taxpayer or because they’re taxed elsewhere.”
(2RR:209–11.)
American’s “total revenues” from the AHTA revenues are identical to its “gross receipts” from those sources. (2RR:80–81.) None of the exclusions
from “total revenue” permitted by the Tax Code applies to the revenues from
these sources. ( Id .) Ms. Bostick testified at her deposition that she was
unaware of any revenue exclusions that specifically applied to the AHTA
revenues. (2RR:209.) Thus, all of American’s gross receipts from these
sources are included in total revenue for purposes of calculating the Texas
franchise tax. The Comptroller agrees that if American’s AHTA revenues are
included in “total revenue,” American is required to use the 70% adjustment
at Step 2. (3RR:36.) [5]
In sum, if “total revenue” includes the AHTA revenues, the Texas fran- chise tax is a tax on American’s gross receipts from air transportation or air
commerce, and it violates the AHTA. See 49 U.S.C. § 40116(b)(4); Aloha
Airlines, Inc. , 464 U.S. at 13–14; Balloons Over the Rainbow, Inc. , 427 S.W.3d
at 824; State Office of Admin. Hearings Dkt. No. 304-15-3326.26, 2017 WL
3842067, at *7. The Court should therefore affirm the trial court’s judgment.
C. Contrary to the Comptroller’s assertion, this Court can decide that the AHTA bars taxation of discrete revenue streams.
The Comptroller is correct that preemption is a question of law that this Court reviews de novo. See, e.g. , Skilled Craftsmen of Tex., Inc. v. Tex. Workers’
*29 Comp. Comm’n , 158 S.W.3d 89, 93 (Tex. App.—Austin 2005, pet. dism’d).
But the Comptroller is wrong in arguing that preemption must be construed
narrowly. (Comptroller Br. at 11, 16.) Instead, the Court should apply the
AHTA as written, discerning Congressional intent from the words Congress
chose to use. Skilled Craftsmen , 158 S.W.3d at 93. “When Congress clearly
manifests its intent to preempt state regulation, however, the supremacy
clause grants it that power.” Secured Env’t Mgmt., Inc. v. Tex. Nat. Res.
Conservation Comm’n , 97 S.W.3d 246, 251–52 (Tex. App.—Austin 2002, pet.
denied) (citing Boggs v. Boggs , 520 U.S. 833, 844 (1997)). Contrary to the
Comptroller’s assertion, the AHTA is susceptible to only one meaning.
Congress spoke clearly —states are not allowed to impose a tax on the gross
receipts from air commerce or air transportation. 49 U.S.C. § 40116(b).
The Comptroller attempts to avoid the question here by arguing that the franchise tax applies to the entirety of American’s business. (Comptroller Br.
at 15–16, 18.) But American is not challenging Texas’s ability to impose the
franchise tax on American’s revenues other than AHTA revenues; it is
challenging only the application of the Texas franchise tax to those air
commerce or air transportation revenues.
Rather than address that issue, however, the Comptroller focuses on the franchise tax as applied to American’s entire business and on the statutory
scheme as a whole. (Comptroller Br. at 15–16, 17–18.) In a not-so-subtle
attempt to reframe the issue, the Comptroller argues that the franchise tax is
applied to the business as a whole and cannot be separated out and considered
with respect to individual transactions (baggage fee, airfare, and freight
revenues). ( Id .) He then contends that the Texas franchise tax as a whole is
not a gross-receipts tax, so imposing the franchise tax on American’s AHTA
revenues cannot be preempted by the AHTA. ( Id .)
Tellingly, the Comptroller cites no authority for his argument that the Court cannot consider whether the AHTA bars taxation of American’s
AHTA revenues. (Comptroller Br. at 17–18.) [6] The Comptroller instead
ignores the case most like this case, which held that the AHTA preempts the
portion of a franchise tax that taxes gross receipts from air commerce or air
transportation, while leaving the remainder of the franchise tax in place. In Air
Transport Association , the tax at issue was labeled a “franchise” tax. 91 A.D.2d
*31 at 170. The state’s “central argument” was that “the gross earnings of [the
franchise tax] are not entirely composed of gross receipts from the sale of air
coverage, but have other components.” Id. at 170. Even though the tax
included gross receipts in its measurement, the state claimed that it was not a
gross-receipts tax prohibited by the AHTA. Id. The court rejected that
argument because the AHTA’s plain language preempts any taxation of gross
receipts, even if they are only a part of the tax’s calculation. Id. The court
therefore held that the AHTA required the state to exclude gross receipts
from air commerce or air transportation in the franchise tax calculation. Id.
Just as the trial court did, this Court should reject the Comptroller’s attempt to frame the issue as implicating the franchise tax as a whole. As
shown in Section 2.B. and discussed in Section 3, the Comptroller is simply
wrong when he claims that the question here “is not determinable.”
(Comptroller Br. at 18.) If the Court focuses on the narrow issue in this
lawsuit, it cannot escape the conclusion that the Comptroller seeks to tax
American’s gross receipts from air commerce and air transportation.
3. The Comptroller’s other arguments are unavailing.
The Comptroller posits several other arguments to try to avoid this straightforward application of the AHTA. Relying on the United States
Supreme Court’s decision in Aloha Airlines , the Comptroller argues that
“neither the purpose nor the effect of the Texas franchise tax is to impose a
tax on the gross receipts of airlines.” (Comptroller Br. at 14–15.) He also
repeatedly asserts that the AHTA does not bar the franchise tax because it is
a tax on the entire business rather than a tax on gross receipts. (Comptroller
Br. at 9, 15, 18, 25–26, 38.) But the AHTA is not limited to taxes directed
specifically at airlines. And as discussed in Sections 1.B. and 2.C., a state can-
not avoid the AHTA by including an impermissible gross-receipts tax as a
component of a franchise tax or by labeling a gross-receipts tax as a franchise
tax. Moreover, none of the Comptroller’s arguments negates that he would
levy the Texas franchise tax on American’s AHTA revenues. In Finding of
Fact 8, the trial court correctly found that there are no deductions or
exclusions from American’s AHTA revenues. The Texas franchise tax is
therefore a gross-receipts tax on those revenues. The Court should disregard
the Comptroller’s attempts to confuse the issues.
A. The AHTA preempts gross-receipts taxes of general applicability to the extent they seek to tax air commerce or air transportation.
The Comptroller argues that the Texas franchise tax is different from the tax at issue in Aloha Airlines because the Texas franchise tax is not a special
tax on airlines. (Comptroller Br. at 15.) That is a distinction that makes no
difference. The AHTA preempts gross-receipts taxes on air commerce or air
transportation, regardless of whether they are specifically targeted at airlines.
Nothing in Aloha Airlines suggests that the tax’s specific nature affected the
result. 464 U.S. at 12–14. To the contrary, the Supreme Court focused only
on the fact that Hawaii imposed a gross-receipts tax on air commerce or air
transportation. Id.
This argument is also belied by the Comptroller’s own decision that the AHTA preempted the sales tax as applied to gross receipts from skydiving
jumps. State Office of Admin. Hearings Dkt. No. 304-15-3326.26, 2017 WL
3842067, at *7. The sales tax is not directed at a specific industry or type of
commerce. Yet the Comptroller concluded that it was preempted by the
AHTA to the extent that it applied to “air commerce.” Id. at *8.
Similarly, courts in other states have found that generally applicable taxes were preempted because they constituted gross-receipts taxes. In Balloons
Over the Rainbow , the Missouri Supreme Court considered whether the
AHTA precluded the application of Missouri’s sales tax to the sale of hot-air
balloon rides. 427 S.W.3d at 818. The tax statute at issue was not specifically
aimed at airlines; it imposed a tax on “all sellers for the privilege of engaging
in the business of selling tangible personal property or rendering taxable
service at retail in this state.” Id. at 820 (quoting tax statute). It was not a tax
directed specifically at hot air ballooning or even air commerce. Id. The
Missouri Supreme Court concluded that hot air ballooning constituted “air
commerce” for the AHTA’s purposes. Id. at 824. As a result, the Court held
that the AHTA preempted the sales tax to the extent it applied to the sale of
hot air balloon rides. Id .
In Kamikawa , the Hawaii Supreme Court addressed whether the AHTA preempted a general excise tax as applied to a freight forwarder. 968 P.2d at
654. Although the court held that the AHTA did not preempt the tax to extent
it was levied on non-air services, the court stated that it felt “compelled to
reiterate that the State may not assess taxes against the gross receipts that [the
freight forwarder], or any other taxpayer, derives from ‘the sale of air
transportation.’” Id. at 659 (quoting the AHTA).
The Court should therefore reject the Comptroller’s attempt to avoid preemption because the franchise tax is a generally applicable tax rather than
a special tax on air commerce or air transportation.
B. The limited exclusions from “total revenue” do not preclude preemption.
The Comptroller next argues that the franchise tax is not a gross-receipts tax because it allows exclusions or deductions from total revenue. (Comp-
troller Br. at 28.) But limited deductions and exclusions from gross receipts—
such as bad debt expense or returns and allowances—do not prevent a tax
from being a gross-receipts tax. The Comptroller has already concluded that
the sales tax is a gross-receipts tax and that the AHTA preempts the sales tax
on revenues from skydiving. See State Office of Admin. Hearings Dkt. No.
304-15-3326.26, 2017 WL 3842067, at *7. Like the franchise tax, the sales tax
also allows certain limited exclusions or adjustments in calculating the tax. See
Tex. Tax Code §§ 151.007(c)(2)-(3), 151.426, 151.4261. For example,
Texas’s sales tax allows various exclusions and adjustments, such as for re-
turns and allowances or bad debts. See, e.g. , Tex. Tax Code §§ 151.301–
.3595 (outlining various exemptions); id. § 151.426 (allowing adjustments for
bad debts, returned merchandise, and repossessions). Those deductions did
not affect the Comptroller’s conclusion that the AHTA preempted the sales
tax on skydiving.
And, as discussed in Section 2.B. above, the exclusions from total revenue for franchise-tax purposes “are either excluded because they were never
actually receipts by the taxpayer or because they’re taxed elsewhere.”
(2RR:209–11.) Thus, any exclusions do not prevent the franchise tax from
being a gross-receipts tax.
The Comptroller also argues that some amounts that are included in total revenue for federal income tax purposes are “net” revenues that necessarily
include deductions for losses. (Comptroller Br. at 30.) This argument is
immaterial to the issue here because the evidence conclusively establishes that
there are no deductions from the AHTA revenues. As discussed more fully in
section 3.C., the evidence fully supports the trial court’s finding that there are
no deductions from these receipts when calculating the franchise tax on those
receipts. Thus, the Court can disregard the Comptroller’s discussion of the
different lines on the franchise tax report. (Comptroller’s Br. at 28–32.)
Whatever other amounts are included in “total revenue” for franchise-tax
purposes, the evidence establishes that the Comptroller wants to tax the gross
receipts from American’s AHTA revenues. The AHTA prohibits the state
from levying a tax on those gross receipts.
C. There is more than sufficient evidence to support Finding of Fact 8.
The Comptroller has challenged Finding of Fact 8. (Comptroller Br. at 19.) In that finding, the trial court found that
There are no deductions or exclusions from American’s reven- ues from passenger ticket sales, passenger baggage fees, and freight transportation. American would pay the franchise tax on 70% of the gross receipts from those sources that are apportioned to the State of Texas.
(2CR:547.) This finding underpins the trial court’s conclusion that the
franchise tax is a gross-receipts tax when applied to the AHTA revenues.
Because there are no deductions from those receipts, the franchise tax is a
gross-receipts tax on American’s AHTA revenues, and it is therefore
preempted by the AHTA.
To succeed on its legal sufficiency challenge, the Comptroller must show that
(1) the record discloses a complete absence of evidence of a vital fact; (2) the court is barred by rules of law or of evidence from giving weight to the only evidence offered to prove a vital fact; (3) the evidence offered to prove a vital fact is no more than a mere scintilla; or (4) the evidence establishes conclusively the opposite of a vital fact.
United Rentals N. Am., Inc. v. Evans , 668 S.W.3d 627, 640 (Tex. 2023). To
succeed on its factual sufficiency challenge, the Comptroller must show that
“the evidence that supports the finding is so weak or so contrary to the
overwhelming weight of the evidence as to make the verdict clearly wrong and
manifestly unjust.” Arraby Props., LLC v. Brown , 695 S.W.3d 532, 540 (Tex.
App.—Houston [1st Dist.] 2023, pet. denied) (citing Cain v. Bain , 709 S.W.2d
175, 176 (Tex. 1986)). The Comptroller cannot carry either burden.
Both legal and factual sufficiency require the Court to consider the evi- dence that supports the finding. E.g. , City of Keller v. Wilson , 168 S.W.3d 802,
810 (Tex. 2005). The Comptroller makes no effort to discuss the evidence that
supports Finding of Fact 8. (Comptroller Br. at 19–25.) The finding is based
on testimony from Patrick Smith, American’s Chief Tax Officer. (2RR:52.)
He testified that there were no deductions taken from the AHTA revenues:
Q. Mr. Smith, were there any—going back to the calculation of the franchise tax imposed on bag fees and other transportation items, in that top number where it shows the total receipts from baggage fees and if you also included ticket sales and freight transportation, are there any deductions or exclusions made from those specific buckets of gross receipts?
A. There are not, no. It’s based on 100 percent of those gross receipts.
(2RR:80–81.) By itself, this testimony is more than sufficient to support
Finding of Fact 8.
The trial court also heard evidence that Ms. Bostick (the Comptroller’s employee) testified at her deposition that she was unaware of any revenue
exclusions that specifically applied to the AHTA revenues. (2RR:209.) While
Ms. Bostick tried to backtrack from that testimony at trial, the court per-
missibly credited her prior testimony and discredited her attempt to avoid it.
See, e.g. , Syed v. Masihuddin , 521 S.W.3d 840, 848 (Tex. App.—Houston [1st
Dist.] 2017, no pet.) (“When the testimony of witnesses is conflicting, we will
not disturb the credibility determinations made by the fact finder, and we will
presume that it resolved any conflict in favor of the verdict.”).
In short, there is much more than sufficient evidence to support the trial court’s finding that there were no deductions or exclusions from American’s
AHTA revenues.
Rather than address the evidence supporting Finding of Fact 8, the Comptroller bases his argument challenging the finding on his “Catch-22”
argument. (Comptroller Br. at 19–25.) He asserts that no evidence supports
Finding of Fact 8 because the franchise tax would be calculated using the
compensation deduction if the AHTA revenues are not included in “total
revenue.” ( Id. ) This is not an attack on the sufficiency of the evidence to
support Finding of Fact 8. And as discussed in Section 3.D., this argument
cannot result in the reversal of trial court’s judgment. The Court’s analysis of
the issues must therefore be based on Finding of Fact 8.
Finding of Fact 8 undercuts much of the Comptroller’s argument on appeal. The Comptroller’s arguments about the calculation of “total reve-
nue” and the margin determination all hinge on the Comptroller’s assertion
that these calculations somehow mean that the franchise tax is not being
imposed on American’s AHTA revenues. (Comptroller Br. at 27–32.) But
there are no deductions or exclusions from those gross receipts to reach “total
revenue.” And if those receipts are included in “total revenue,” then the only
statutory method for determining the margin is the 70% adjustment. For the
reasons discussed in Section 3.E., the 70% adjustment still would result in the
Comptroller levying a gross-receipts tax on those receipts. In sum, because
there is more than sufficient evidence to support Finding of Fact 8, the
Comptroller’s arguments about the franchise tax calculation cannot support
reversing the trial court’s judgment.
D. The Comptroller’s “Catch-22” argument is nonsensical. The Comptroller next asserts that American’s argument about gross receipts creates a supposed “Catch-22.” (Comptroller Br. at 19–25.) The
Comptroller posits that if the AHTA revenues are excluded from “total
revenue,” then the 70% adjustment to “total revenue” would no longer pro-
duce the lowest margin. ( Id .) Instead, according to the Comptroller, deducting
compensation would result in a lower margin. ( Id. ) And in that event, the
Comptroller asserts, there would be deductions from the AHTA revenues.
( Id. )
This argument suffers from two fatal flaws. First, it is internally inconsis- tent. If the AHTA revenues are removed from “total revenue” and if
compensation is deducted from “total revenue” to reach the taxable margin,
there would still be no deduction from the AHTA revenues because those
receipts will have already been removed from the calculation. Thus, the
deduction for compensation that the Comptroller wants to rely on for this
argument would apply only if the AHTA revenues are not included in “total
revenue.” But if those receipts are not included in “total revenue,” then there
would be no issue before this Court because the Comptroller would not be
attempting to levy a tax in violation of the AHTA.
If, on the other hand, those receipts are included in “total revenue” (as the Comptroller insists they should be), then the 70% adjustment would still
apply. And then there would be no deductions or exclusions from the gross
receipts from the AHTA revenues, so the franchise tax would be a gross-
receipts tax on those receipts. Thus, under the Comptroller’s own argument
about how the receipts should be treated, the franchise tax is a gross-receipts
tax.
Second, the entire exercise of the alternative calculation is irrelevant. The question before the Court is not what would happen if the AHTA revenues
are not included in the franchise tax calculation. The question is whether, if
the AHTA revenues are included, the franchise tax is an impermissible gross-
receipts tax. Thus, the only relevant analysis is how those receipts are treated
if they are included in “total revenue.” And as discussed above, there are no
deductions or exclusions from those receipts, so the franchise tax is an im-
permissible gross-receipts tax of those receipts.
E. The 70% adjustment does not change the analysis.
The Comptroller next argues that the application of an adjustment to “total revenue” means that the franchise tax is not a gross-receipts tax.
(Comptroller Br. at 32.) The only adjustment that the Court needs to consider
is the 70% adjustment. [7] As discussed in Section 2.B., above, if the AHTA
revenues are included in “total revenue,” the only option for Step 2 of the
franchise tax calculation is applying the 70% adjustment because that option
yields the lowest number.
When the 70% adjustment is applied, American would still be taxed on its gross receipts from air commerce or air transportation. The trial court heard
evidence that, mathematically, the 70% adjustment is equivalent to applying a
*43 lower tax rate. Rather than applying a 70% adjustment to “total revenue,” the
state could have simply lowered the tax rate by 30%. (2RR:201–03.) [8] Thus, a
tax on a fixed percentage of gross receipts from air commerce or air trans-
portation is still a gross-receipts tax preempted by the AHTA. The trial court
correctly rejected the Comptroller’s argument that the 70% adjustment
changes the franchise tax’s nature and causes it to no longer be preempted by
the AHTA.
F. The other parts of the franchise tax determination do not affect the analysis.
The Comptroller finally points to two other aspects of the franchise tax calculation. First, the statute requires application of a formula to apportion a
part of the revenues to Texas. Second, the statute provides for different tax
rates depending on the type of business and the amount of apportioned
revenues. See Tex. Tax Code §§ 171.101(a)(1)–(3). The Comptroller
argues that these calculations require looking at the business as a whole, so the
*44 Court cannot determine whether the franchise tax is a gross-receipts tax on
the AHTA revenues. (Comptroller Br. at 33–36.) Not so.
First, apportioning revenues between Texas sources and non-Texas sources does not affect the tax’s nature. In Kamikawa , the general excise tax
at issue apportioned revenues between Hawaiian and non-Hawaiian sources.
968 P.2d at 655. Even so, the Hawaii Supreme Court held that an excise tax
on receipts from air transportation violated the AHTA. Id. at 659. Thus,
apportionment does not affect the AHTA’s application.
Moreover, the franchise tax as applied to American’s AHTA revenues is a gross-receipts tax, even though it taxes only gross receipts related to
activities in Texas. The apportionment factor would be applied to American’s
AHTA revenues based on a fraction that includes the gross receipts in Texas
in the numerator and the gross receipts from American’s entire business in
the denominator. The franchise tax remains a tax on the gross receipts from
the AHTA revenues.
Second, the Comptroller argues that determining the proper tax rate also requires looking at the taxpayer’s entire business, so the Court cannot
determine whether the franchise tax is a gross-receipts tax as applied to
American’s revenues at issue. (Comptroller Br. at 35.) But calculating the
proper tax rate has even less impact on determining whether Texas would be
levying a gross-receipts tax on American’s AHTA revenues. Whatever tax
rate applies, the rate applies to the gross receipts from those revenue sources.
The need to look at the entire business to determine the proper tax rate is
therefore irrelevant to the issue before the Court.
4. The trial court correctly rejected the Comptroller’s counterclaim.
In addition to seeking to tax baggage fees, the Comptroller seeks to tax the receipts from passenger ticket sales and freight transportation. (Comptroller
Br. at 36–38.) As discussed above, although American’s calculation of its
franchise tax for report year 2015 included receipts from baggage fees under
protest, the calculation did not include receipts from passenger ticket sales and
freight transportation. (PX2; 2RR:55.) Thus, in addition to opposing Ameri-
can’s claim for a refund of the tax paid on baggage fees, the Comptroller
brought a counterclaim seeking to recover additional franchise tax on the gross
receipts from passenger ticket sales and freight transportation. (2CR:29.)
Because the trial court correctly concluded that American can exclude gross
receipts from baggage fees in calculating its franchise tax liability, it also
correctly rejected the Comptroller’s counterclaim. The Court should
therefore affirm the trial court’s judgment that the Comptroller take nothing
on its counterclaim. (2CR:232.)
Conclusion This Court should affirm the trial court’s judgment for the simple reason that the Texas franchise tax as applied to American’s AHTA revenues is a
gross-receipts tax that is preempted by the AHTA. The trial court correctly
found that there are no deductions or exclusions from those receipts in the
calculation of the franchise tax, and the Comptroller’s challenge to that fact
finding must fail. The Court should therefore reject the Comptroller’s efforts
to avoid this clear-cut analysis and affirm the judgment in its entirety.
American further requests general relief.
Dated: April 7, 2025
Respectfully submitted, Holland & Knight LLP By: /s/ Richard B. Phillips, Jr. Mary A. McNulty State Bar No. 13839680 Mary.McNulty@hklaw.com Leonora Meyercord State Bar No. 24074711 Lee.Meyercord@hklaw.com Richard B. Phillips, Jr. State Bar No. 24032833 Rich.Phillips@hklaw.com One Arts Plaza 1722 Routh Street, Suite 1500 Dallas, Texas 75201 214-964-9500 Fax: 214-964-9501 Counsel for Appellee *48 Certificate of Compliance This brief complies with the typeface requirements of Tex. R. App. P. 9.4(e), because it has been prepared in Equity font in 14-point for text and 13-
point for footnotes. This document also complies with the word-count
limitations of Tex. R. App. P. 9.4(i), because it contains 7,204 words,
excluding any parts exempted by Tex. R. App. P. 9.4(i)(1).
/s/ Richard B. Phillips, Jr.
Richard B. Phillips, Jr. *49 Automated Certificate of eService This automated certificate of service was created by the efiling system.
The filer served this document via email generated by the efiling system
on the date and to the persons listed below. The rules governing
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Richard Phillips on behalf of Richard Phillips Jr.
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Rich.Phillips@hklaw.com
Envelope ID: 99384139
Filing Code Description: Brief Requesting Oral Argument
Filing Description: Brief of Appellee
Status as of 4/8/2025 7:56 AM CST
Associated Case Party: GLENN HEGAR COMPTROLLER
Name BarNumber Email TimestampSubmitted Status
Ray Langenberg 11911200 ray.langenberg@cpa.texas.gov 4/7/2025 8:50:02 PM SENT
Kyle PierceCounce kyle.counce@oag.texas.gov 4/7/2025 8:50:02 PM SENT
Deborah Rao Deborah.Rao@oag.texas.gov 4/7/2025 8:50:02 PM SENT
Alyson “Ally” Thompson ally.thompson@oag.texas.gov 4/7/2025 8:50:02 PM SENT
Associated Case Party: AMERICAN AIRLINES, INC
Name BarNumber Email TimestampSubmitted Status
Richard Phillips 24032833 Rich.Phillips@hklaw.com 4/7/2025 8:50:02 PM SENT
Leonora Meyercord 24074711 Lee.Meyercord@hklaw.com 4/7/2025 8:50:02 PM SENT
Mary McNulty 13839680 Mary.McNulty@hklaw.com 4/7/2025 8:50:02 PM SENT
Meghan McCaig meghan.mccaig@hklaw.com 4/7/2025 8:50:02 PM SENT
[1] Ms. McCaig was counsel for Appellee in the trial court. She is no longer associated with Holland & Knight LLP, and she has withdrawn from representing Appellee in this appeal. -ii-
[2] Despite informally agreeing to refund the disputed amounts for the 2009–2013 report years after DOT issued its opinion, the Comptroller changed course and denied those refund claims. (2CR:6; PX9.) American timely requested refund hearings, which the Comptroller put on hold indefinitely pending the outcome of this case.
[3] In 2018, after American filed suit, Congress amended the AHTA. FAA Reauthorization Act of 2018, Pub. L. No. 115-254, § 159, 132 Stat. 3186, 3220 (2018) (amending 49 U.S.C. § 40116 (1996)). As noted in the Comptroller’s opening brief, the 2018 amendment does not affect the issue in this case. Therefore, references to 49 U.S.C. § 40116 in this brief are to the statute’s current version.
[4] See also 2CR:228.
[5] In fact, the Comptroller’s alternative tax calculation (which includes American’s AHTA’s revenues) uses the 70% adjustment. ( See PX19 at Tab TAS- Margin (App. 21 to Comptroller’s Br.).)
[6] The Comptroller cites two cases for the proposition that the franchise tax is a “margin” tax. (Comptroller Br. at 5, 9 (citing Hegar v. Am. Multi-Cinema, Inc. , 605 S.W.3d 35, 38 (Tex. 2020); Hegar v. Gulf Copper & Mfg. Corp. , 601 S.W.3d 668, 673 (Tex. 2020)).) Neither of these cases addresses the issues presented in this appeal. And as discussed in Section 1.B., the label applied to the tax is immaterial.
[7] The Comptroller asserts that the cost of goods sold deduction should also be taken into account. (Comptroller Br. at 25, 32.) But American had no cost of goods sold. (PX7 at line 2.)
[8] That is, if the taxable amount is $10, the 70% adjustment would make it $7. If all that revenue is apportioned to Texas and the tax rate is 1%, the tax due would be $0.07. But if instead of making the 70% adjustment to the taxable amount, the State made a similar adjustment to the tax rate (making it 0.7% instead of 1%), the resulting tax would be the same. (2RR:202–06.)