TITAN TRANSPORTATION, LP, Appellant v. Susan COMBS, Comptroller of Public Accounts of the State of Texas; and Greg Abbott, Attorney General of the State of Texas, Appellees.
No. 03-13-00034-CV.
Court of Appeals of Texas, Austin.
March 14, 2014.
427 S.W.3d 625
Conclusion
A hospital‘s management of the autopsy of a patient who died in its care is a professional or administrative service directly related to health care; Chapter 74 therefore governs a judgment of liability for fraud arising out of that management. The panel‘s decision to the contrary neither comports with the applicable statutory language, nor with an earlier decision of our court, nor with a decision by the Dallas Court of Appeals. For these reasons, we should grant en banc review. Accordingly, I respectfully dissent from our denial of en banc review.
James F. Martens, Lacy L. Leonard, Danielle V. Ahlrich, Martens, Todd & Leonard, Austin, TX, Amanda G. Taylor, Hohmann, Taube & Summers, L.L.P., Austin, TX, for Appellant.
Before Chief Justice JONES, Justices PEMBERTON and FIELD.
OPINION
J. WOODFIN JONES, Chief Justice.
Titan Transportation, LP, appellant, sued Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas (collectively, the State), seeking a refund of franchise taxes that Titan paid
OVERVIEW OF THE FRANCHISE-TAX STATUTE
Under the current franchise-tax scheme, franchise taxes are assessed against a taxable entity‘s “taxable margin.”
- Calculate Total Revenue;
- Subtract applicable deductions to determine Margin:
- no deductions if Total Revenue is $10 million or less (qualifying taxpayer to use E-Z computation method); or
- deduct the greater of COGS, compensation, or a flat 30%;
- Multiply Margin by the percentage of gross receipts from Texas business to determine Apportioned Margin (or Apportioned Total Revenue for E-Z computation filers);
- Subtract any other allowable deductions to determine the taxable entity‘s Taxable Margin;
- Multiply Taxable Margin by the applicable tax rate (.575% for E-Z computation filers, 0.5% for entities primarily engaged in wholesale or retail trade, or 1% for all others) to determine franchise-tax obligation; and
- Subtract any allowable credits or discounts.
See
Section 171.1011 of the Tax Code provides the method for calculating a taxable entity‘s total revenue. In general, total revenue is income reported to the federal IRS less various categories of revenue that the statute specifies are to be excluded, excepted, deducted, or otherwise limited.
After calculating total revenue, taxpayers may then employ the method of determining taxable margin that produces the lowest franchise-tax obligation.
After applicable deductions have been taken, taxable margin is determined by apportioning the adjusted revenue between in-state and out-of-state business and, except for E-Z computation filers, subtracting any other allowable deductions.
TITAN‘S FRANCHISE-TAX DISPUTE
Titan is in the business of hauling, delivering, and depositing “aggregate” at real-property construction sites, where it is used as an ingredient in concrete or as a foundation for the construction of roads, buildings, and parking lots.4 Titan provides this service primarily through the use of subcontractors, to whom it is contractually obligated to share a portion of the gross receipts from the provision of those services.
The underlying tax protest concerns Titan‘s 2008 franchise-tax report. Titan filed that report using the E-Z computation method after excluding from its total revenue certain “flow-through” payments to subcontractors, which reduced its gross revenue from $12.6 million to a little over $2 million. At that time, Titan apportioned 100% of its total revenue to Texas-based business. Based on Titan‘s apportioned total-revenue calculation and application of the lower E-Z computation tax rate, Titan reported a franchise-tax obligation of $11,524, which it timely paid in full.
In claiming a substantial revenue exclusion, Titan relied on former section 171.1011(g)(3) of the franchise-tax statute, which provided as follows:
A taxable entity shall exclude from its total revenue, to the extent [reported to the federal IRS as income], only the following flow-through funds that are mandated by contract to be distributed to other entities:
....
(3) subcontracting payments handled by the taxable entity to provide services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of the boundaries of real property.
Act of May 19, 2006, 79th Leg., 3d C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 10 (amended 2013) (“the (g)(3) revenue exclusion” or “former section 171.1011(g)(3)“). However, after conducting a “desk audit,” the Comptroller determined that (1) Titan was a trucking company rather than a construction company and thus was not engaged in a type of business that qualifies to claim the (g)(3) revenue exclusion; (2) without the (g)(3) revenue exclusion, Titan did not qualify to use the E-Z computation method; and (3) Titan had not timely elected to use the COGS or compensation methods.5 Accordingly, the Comptroller defaulted Titan to a 30% flat deduction on $12.6 million of total revenue, applied a 1% tax rate to the entire sum, and recalculated Titan‘s franchise-tax obligation to produce a $77,290.81 deficiency for the relevant tax year, after having credited its prior payment.
Titan paid the assessed deficiency plus interest ($88,461) under protest, which resulted in its making a cumulative 2008 franchise-tax payment of nearly $99,985. See
In the alternative, Titan asserted that the subcontractor payments could be properly deducted as a “cost of goods sold” under section 171.1012 of the franchise-tax statute and that it should be allowed to amend its tax report to claim the deduction. See
A taxable entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair or industrial maintenance ... of real property is considered to be an owner of that labor or materials and may include the costs, as allowed by this section, in the computation of cost of goods sold.
Titan also sought recalculation of its tax obligation because it had applied an incorrect apportionment factor in determining its taxable margin. Although Titan had originally applied a 100% apportionment factor, it claimed in its lawsuit that only 20.18% of its total revenue was actually generated from business in Texas. See
While the case was pending, the Comptroller ultimately agreed that Titan was entitled to apply a 20.18% apportionment factor and issued an amended tax assessment solely on that basis. The Comptroller also determined that taxpayers are not precluded from taking a COGS or compensation deduction if they need to recalculate returns based on the denial of a previously claimed exclusion or deduction.
However, the Comptroller continued to maintain that Titan was not eligible for either the (g)(3) revenue exclusion or the COGS deduction because she interpreted the relevant statutory provisions to require, among other things, that the taxpayer be a “construction company” that provides services, labor, or materials that effect a physical change to the property. The Comptroller asserted that Titan considered itself to be, and was in fact, a “transportation company,” not a construction company. Furthermore, the Comptroller did not agree that Titan‘s subcontractors provided any service, labor, or materials that effected a physical change on real property. Instead, she likened Titan to a mere courier who would drop mail off at the front desk of a construction site or a delivery service who might deposit bricks in a pile on or near the site. Based on these conclusions, the Comptroller recalculated Titan‘s total franchise-tax obligation applying both a 30% flat deduction and a 20.18% apportionment factor and determined that Titan‘s total franchise-tax obligation for the 2008 report year was actually $17,922.75. The Comptroller issued an amended tax statement to that effect but only credited Titan with its original payment of $11,524, leaving a deficiency of $6,399.12.8
At trial, the evidence concerning Titan‘s business operations was essentially uncontroverted. Moreover, the State conceded that Titan was entitled to a 20.18% apportionment factor, but only if the trial court agreed that Titan could neither exclude the subcontractor payments from total revenue nor include those sums as part of a COGS deduction. The principal areas of conflict concerned the correct interpretation of the applicable statutory provisions and the proper characterization of Titan‘s business activities given the undisputed evidence.
While there was no dispute that Titan provides trucking and hauling services (and is a licensed motor carrier), the parties disputed whether Titan provides any “construction” services, labor, or materials, which the State asserted is essential to qualify for either the (g)(3) exclusion or the COGS deduction. The State argued that Titan provides only trucking and hauling services and merely delivers construction materials to real-property construction sites. Titan, on the other hand, argued that it also “installs” construction materials as part of its service, but it principally maintained that it is not required to do any construction work to benefit from the relevant tax provisions. Other disputed issues included whether the (g)(3) revenue exclusion requires a contract between Titan and its customers that mandates Titan‘s use of and payment to subcontractors. According to the State,
As established at trial, aggregate is a material that is integral to the construction of roads, parking lots, and building foundations and is also used as a component in concrete. Titan‘s business involves hauling, delivering, and depositing aggregate at real-property construction sites. Titan provides this service primarily through the use of subcontractors, with whom it executes written contracts typically requiring that the subcontractors provide their own specialized trucks and equipment and that Titan pay the subcontractors 84% of the gross receipts Titan‘s customers pay for the services provided. The contracts also permit Titan to deduct from the 84% fee any amounts the subcontractors owe to Titan, such as fuel expenses. The standard contract obligates Titan‘s subcontractors to provide “a complete transportation service” including “loading and unloading” and “delivery of commodities from origin to destination in accordance with customer delivery instruction.” While the truck drivers are required to have commercial driver‘s licenses and licensed trucks, they are not contractually required to have any construction or installation licenses or permits. The contracts neither mention installation or deposition of the materials onsite nor require that the truck drivers receive specialized training to install or deposit the aggregate materials.
Titan does not have written contracts with its customers; thus, the only contractual arrangements concerning subcontractor payments are in Titan‘s written agreements with its subcontractors. Although Titan‘s customers may generally be aware
When a subcontractor completes a job for Titan, a “delivery ticket” is issued to the customer. The delivery ticket includes information identifying the subcontractor who performed the services. Titan in turn issues its customer an invoice using the same subcontractor-identification system so that (1) the invoice can be matched to the delivery ticket and (2) Titan can calculate the amount owed to the particular contractor who provided the service on Titan‘s behalf, in accordance with the parties’ fee-splitting agreement. The record reflects that Titan‘s customers are billed by the ton and that the length of time to complete the hauling, delivery, and deposition of the construction materials also affects the fee charged. The State maintains that this evidence establishes that Titan is only being paid for transportation services and not construction work.
Titan uses an accrual method of accounting, which means that Titan records its income the moment the payment obligation accrues rather than when payment is collected. Under this method, when the customer invoice is generated, the receipts are booked as revenue and the subcontractor is simultaneously credited with the full contractually mandated percentage. This accounting process typically results in the subcontractor receiving the contractually mandated payment (less any reimbursable expenses) from Titan before Titan has received any payment from its customer. Although Titan does not maintain separate accounts to segregate funds payable to each subcontractor individually, Titan creates weekly “settlement statements” showing the revenue the subcontractor generated on the top and the expenses owed to Titan on the bottom. On occasion, a subcontractor may actually owe Titan money for a particular week, due to fuel or other expenses owed to Titan. Based on the above-described payment process, the State contends that no customer payments actually “flow through” Titan because those payments are not handed directly from the customers to Titan and then to the specific subcontractors who performed the services.
Although Titan always provides aggregate to construction sites, the construction companies are not necessarily Titan‘s customers. For any given transaction, Titan‘s customer may be a quarry (which is not engaged in any construction activities) or a construction company developing or improving real property. In every case, the aggregate is owned by someone other than Titan; neither Titan nor its subcontractors ever takes ownership of the aggregate that is provided to construction sites. The State contends that this circumstance is fatal to Titan‘s COGS-deduction claim and any claimed deduction that requires that the taxpayer has “provided” or “furnished” materials to a construction project.
Upon arriving at a construction site, Titan‘s subcontractors use specialized trucks to deposit the aggregate where directed by the general contractor or site foreman. Sometimes, the aggregate is deposited in a specified area so that it can be made into concrete. In most cases, the material is deposited by Titan‘s subcontractors in its final resting place at the construction site through the use of end-dump or belly-dump trailers that are driven slowly across a designated area to distribute the full load of aggregate. The aggregate is not “affixed” to the ground when Titan‘s subcontractor leaves. In addition, the aggregate frequently has to be leveled or “topped off” by the construction company after it is
The undisputed evidence shows, however, that the service Titan provides in picking up, transporting, and depositing the aggregate is more efficient for the construction companies and saves them from having to use additional labor to put the aggregate to a useful purpose. Lynrell Wesley, one of Titan‘s customers, testified that “[Titan] would bring a trailer [of] rock, however many a day I want, and space them out on a pad to save me labor.” He further observed, “Well, if you‘ve got drivers that will put material where you need it as opposed to just piling it up somewhere and leaving, it saves me time and money and labor,” and stated that “[Titan] help[s] installation ... because they‘re putting [the aggregate] where I need it.” He said he would “probably not” use Titan solely for transportation of the material.
After taking the case under advisement, the trial court concluded that Titan was not entitled to a revenue exclusion under former section 171.1011(g)(3) of the Tax Code or a COGS deduction under section 171.1012(i). The court agreed, however, that Titan was entitled to an apportionment factor of 20.18%. At Titan‘s request, the trial court issued findings of fact and conclusions of law in support of the final judgment. This appeal followed. The State does not challenge the 20.18% apportionment factor on appeal.
DISCUSSION
The decisive issues in this case concern the appropriate interpretation of provisions of the franchise-tax statute as applied to undisputed evidence about the nature of Titan‘s business. In issue one, Titan argues that the trial court applied an incorrect interpretation of the (g)(3) revenue exclusion because the evidence conclusively establishes that (1) Titan was contractually obligated to pay 84% of its revenue to independent-operator subcontractors who provided the services for which Titan received payment and (2) the subcontractors provided “services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property.” See Act of May 19, 2006, 79th Leg., 3d C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 10 (amended 2013). Titan further challenges the trial court‘s contrary conclusions of law 2 and 5 as being incorrect as a matter of law and fact findings 4, 5, 6, 9, 13, and 14 as immaterial or unsupported by factually or legally sufficient evidence.10
Standard of Review
The dominant issue in this case concerns a matter of statutory construction, which we review de novo. See State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006). Our primary objective in construing statutes is to give effect to the legislature‘s intent and, ordinarily, “‘the truest manifestation’ of what lawmakers intended is what they enacted.” First Am. Title Ins. Co. v. Combs, 258 S.W.3d 627, 632 (Tex. 2008) (quoting Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651-52 (Tex. 2006)). The language emerging from the legislative process “constitutes the law, and when a statute‘s words are unambiguous and yield but one interpretation, ‘the judge‘s inquiry is at an end.‘” Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 635 (Tex. 2013) (quoting Johnson, 209 S.W.3d at 651-52). We give an unambiguous statute its plain meaning without resorting to rules of construction or extrinsic aids. Id.; see also Texas Lottery Comm‘n v. First State Bank of DeQueen, 325 S.W.3d 628, 635, 637 (Tex. 2010) (branding such reliance “improper,” because “[w]hen a statute‘s language is clear and unambiguous, it is inappropriate to resort to rules of construction or extrinsic aids to construe the language“); City of Rockwall v. Hughes, 246 S.W.3d 621, 626 (Tex. 2008). Accordingly, rules of construction such as agency deference and strict construction generally come into play only when a statute is ambiguous. See, e.g., Roark Amusement, 422 S.W.3d at 635 (courts defer to agency interpretation of ambiguous statute unless plainly erroneous or inconsistent with statutory language); Texas Unemployment Comp. Comm‘n v. Bass, 137 Tex. 1, 151 S.W.2d 567, 570 (1941) (explaining when ambiguous tax statutes must be strictly construed in favor of or against parties).
Secondary issues in this case involve the trial court‘s findings of fact and conclusions of law. We do not defer to the trial court on questions of law. Perry Homes v. Cull, 258 S.W.3d 580, 598 (Tex. 2008). We do defer to a trial court‘s fact-findings if they are supported by legally and factually sufficient evidence. Id. For mixed questions of law and fact, we similarly defer to the trial court‘s factual determinations if supported by the evidence but review its legal determinations de novo. Brainard v. State, 12 S.W.3d 6, 30 (Tex. 1999).
The principal issue in this case concerns the proper construction and application of former section 171.1011(g)(3) of the Tax Code, which provided:
A taxable entity shall exclude from its total revenue, to the extent [reported to the federal IRS as income], only the following flow-through funds that are mandated by contract to be distributed to other entities:
....
(3) subcontracting payments handled by the taxable entity to provide services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of the boundaries of real property.
Act of May 19, 2006, 79th Leg., 3d C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 10 (amended 2013). The State construes this provision to impose a number of requirements that it contends neither Titan nor its subcontractors have satisfied. Those requirements, summarily stated, are that the taxable entity (1) must provide “design, construction, remodeling, or repair” services, labor, or materials; (2) must have a written contract with its customers that prescribes the fee-splitting arrangement between the taxable entity and its subcontractors; and (3) can only meet the “flow-through” requirement if third-party payments are segregated and paid in a manner that guarantees that a subcontractor only receives the actual dollars that the customer paid to the taxable entity for the subcontractor‘s work. The fundamental flaw in the State‘s analysis is that the limitations it advances are extra-textual and alter the statute‘s plain meaning. See Roark Amusement, 422 S.W.3d at 636 (Comptroller‘s “arguments that are incompatible with the statutory text” are “unpersuasive“). The limitations are likewise not found in the related administrative rule, which merely echoes the statutory language. See
As a threshold matter, the State asserts that Titan cannot claim the (g)(3) revenue exclusion because it is not a construction company. According to the State, “[t]he issue that drives every other issue in this case is whether [Titan] is only a transportation company, whether it is instead a construction company, or whether it is a transportation company that is also a construction company (and if so, to what extent).” As the State reads the (g)(3) revenue exclusion, “transportation costs are not deductible, but construction costs are.” In arriving at this conclusion, the State contends the phrase “services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of the boundaries of real property” can only be read as applying the terms “design, construction, remodeling, or repair” as individual modifiers to the terms “services, labor, and materials.” And when so read, the State argues, it is clear that only taxable entities that are design, construction, remodeling, or repair companies can claim the exclusion when they are subcontracting for services, labor, or materials.
In restructuring the language in former subsection (g)(3) to support its conclusion, however, the State ignores the statute‘s “in connection with” language. “In connection with” is a phrase of intentional breadth. Indeed, depending on the context in which it is used, the scope of the phrase “in connection with” can sometimes be so broad as to be ambiguous. Compare Maracich v. Spears, 570 U.S. 48, 59-60 (2013) (ac-
As used in former section 171.1011(g)(3), the phrase “in connection with” can only be read as requiring some reasonable nexus between the services, labor, and materials for which the taxpayer pays a subcontractor and “the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of boundaries of real property.” It would be inconsistent with the purpose of the franchise-tax statute as a whole to read the phrase as applying whenever any connection—however remote or attenuated—exists between services, labor, and materials and actual or proposed construction, remodeling, design, or repair work for real property. Because the (g)(3) revenue exclusion removes certain gross receipts from the franchise-tax base, the legislature must have intended the phrase “in connection with” to have a logical limit.
The State suggests that the only reasonable limit is to impose a requirement that the taxpayer‘s subcontractor be engaged in activities that effect a material or physical change in the property itself. This cannot be a proper construction of the statute, however, because it expressly applies to “proposed” design, construction, remodeling, or repair work on real property and also includes work pertaining to “the location of boundaries of real property,” neither of which would involve an actual change to the physical character of real property. Given its context, the only plausible interpretation of the “in connection with” language employed in the (g)(3) revenue exclusion is that there must be a reasonable—i.e., more than tangential or incidental—relationship between the activities delineated in the statute and the services, labor, or materials for which the subcontractors receive payment. Given the breadth of the statute‘s language, there is no textual support for the State‘s position that the statute is limited to construction companies and excludes transportation companies. The critical inquiry, as it pertains to the dispute in this case, is whether the services, labor, or materials provided have a reasonable connection to
In the present case, the required nexus is established by evidence that Titan provided services that were logically and reasonably connected with the construction of improvements on real property and, indeed, were directly related to the construction of such improvements. The undisputed testimony at trial was that the use of aggregate is indispensable to the types of construction projects for which Titan claimed the exclusion; the service of picking up and transporting the aggregate to the construction sites was necessary and integral to the construction of improvements on real property; and in most cases, the aggregate Titan hauled to the construction sites had to be placed in a particular location on the site to be useful, and Titan‘s subcontractors deposited the material in a manner that saved the construction companies time, labor, and money. The general contractors at the construction sites could have used their own laborers to complete these indispensable tasks, and the fact that Titan was paid to undertake this work is the very definition of a “service.” See Webster‘s Third New Int‘l Dictionary 2075 (2002) (defining “service” as “the performance of work commanded or paid for by another“). Accordingly, we conclude that, as a matter of law, Titan paid its subcontractors “to provide services ... in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property.” Act of May 19, 2006, 79th Leg., 3d C.S., ch. 1, § 5, 2006 Tex. Gen. Laws 1, 10 (amended 2013). It is immaterial whether the subcontractors’ activities could also be properly characterized as providing labor or materials, as Titan maintains, because the provision of services is sufficient under the statute‘s plain language.
The State contends that Titan‘s operations are functionally similar to traditional courier services that might be provided by an entity like FedEx. Based on this analogy, the State contends that an interpretation of former section 171.1011(g)(3) that would permit Titan to exclude its subcontractor payments from total revenue would lead to the “absurd result” that any courier service making deliveries to a construction site could qualify for the (g)(3) revenue exclusion. To some extent, the State‘s proffered analogy embodies a logical fallacy. There are a number of statutory requirements that must be satisfied before a taxpayer is entitled to claim the (g)(3) revenue exclusion; however, the State‘s analogy focuses only on discrete aspects of the statute and Titan‘s services to extrapolate to an “absurd result.” Assuming the courier services could meet the other requirements to qualify for the exclusion in the first place, it is unlikely that such taxpayers would be able to establish anything other than the most tangential relationship between the courier services provided and the activities listed in former section 171.1011(g)(3). It seems to us highly unlikely that a courier like FedEx would either know or care what is in packages it would be called on to deliver to a construction site, and it would therefore be unable to establish a nexus between the delivery service and the actual or proposed design or construction of improvements on real property (or any of the other qualifying activities).
We are also not persuaded that absurd consequences necessarily ensue from the plain language of the statute based on the mere possibility that a courier service could theoretically qualify for the exclusion to the extent of any deliveries to construction sites. A manifest purpose of former section 171.1011(g)(3) has always been to avoid double taxation. Given such a purpose, we fail to see how it would necessari-
In any event, we need not consider whether the types of services FedEx might provide to a construction site would be too remote or attenuated to qualify for the exclusion provided in former section 171.1011(g)(3). It is sufficient that the record in the present case establishes that the services Titan provides have a reasonable nexus with the actual construction of improvements on real property, which satisfies the statutory requirement that services qualifying for the exclusion be rendered “in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of boundaries of real property.”
The State next argues that the evidence establishes that Titan does not qualify for the (g)(3) revenue exclusion for three additional reasons, all of which the State contends show that there were not any payments that actually “flowed through” Titan to its subcontractors. First, the State construes the statutory language “mandated by contract to be distributed to other entities” as requiring that the taxable entity have a contract with its customers that requires the taxpayer to subcontract out a specified portion of the work for which it is to receive payment.
As used in the (g)(3) revenue exclusion, we read the term “other” to mean someone other than the taxable entity. Although a tripartite contractual relationship could give rise to a qualifying payment obligation, such an arrangement is not required under a plain reading of the statute. As previously stated, an evident purpose of the (g)(3) revenue exclusion is to prevent double taxation of funds that are not truly gain or income to the taxpayer, and this purpose is satisfied regardless of whether the mandate is contained in a contract with a customer or with a subcontractor. Before any work has been completed, Titan executes contracts with its independent-contractor truck drivers that require Titan to pass on a fixed percentage of the gross receipts for services provided; these contracts thus satisfy the statutory requirement that qualifying payments be contractually mandated to someone other than the taxpayer. Imposing the more stringent requirement the State suggests would result in judicial rewriting of the statute.
Second, the State argues that the revenue exclusion in former section 171.1011(g)(3) must require a tripartite relationship because any other reading would conflict with section 171.1011(i), which states: “Except as provided by [section 171.1011(g)], a payment made under an ordinary contract for the provision of services in the regular course of business may not be excluded.”
Finally, the State asserts that funds can only be considered to “flow through” the taxable entity if the taxpayer receives the payment first and then pays the subcontractor only when the taxpayer has the money in hand. The State further argues that deduction of any reimbursable expenses from a contractually mandated payment negates its character as “flow-through funds.” Titan aptly refers to this as a “segregate, wait, and trace” requirement. Once again, the State seeks to impose overly formalistic requirements neither found in the statute‘s plain language nor supported by the related administrative rule. The undisputed evidence at trial established that Titan employed sufficient procedures to ensure that its subcontractors were paid from gross receipts attributable to the work the subcontractors performed. The evidence showed that Titan and its subcontractors entered into their engagement contracts before any services were performed. Upon making a delivery, each subcontractor would provide a “deliv-
Applying a proper construction of the statute, it becomes clear that the challenged portions of the trial court‘s findings of fact 4, 5, 6, and 9 are immaterial and that findings of fact 13 and 14 and conclusions of law 2 and 5 are erroneous as a matter of law. Accordingly, Titan is entitled to claim the (g)(3) revenue exclusion for those subcontractor payments it made in accordance with its contractual agreements to pay its subcontractors 84% of the gross receipts it received for subcontractor services to haul, deliver, and deposit aggregate at real-property construction sites.
CONCLUSION
The evidence admitted at trial conclusively establishes that a portion of Titan‘s gross revenue qualifies for the total-revenue exclusion in former section 171.1011(g)(3) of the franchise-tax statute. Because the trial court concluded otherwise, we reverse the portion of the trial court‘s judgment denying Titan the (g)(3) revenue exclusion and render judgment that Titan is entitled to claim that exclusion for the relevant tax year. We remand the cause to the trial court for further proceedings to determine the exact amount of refund to which Titan is entitled.
Michael Channing McCANN, Appellant v. The STATE of Texas, Appellee.
No. 01-13-00325-CR.
Court of Appeals of Texas, Houston (1st Dist.).
March 25, 2014.
Notes
FOF 4: “Titan Transportation‘s customers paid Titan Transportation for transportation services. Specifically, Titan Transportation‘s customers paid Titan Transportation to deliver aggregate, a building material.”
FOF 5: “Titan Transportation‘s gross receipts were from purchases of ... transportation services.”
FOF 6: “Titan Transportation‘s customers did not pay Titan Transportation for construction services, construction labor, or construction materials. Titan Transportation‘s customers did not pay Titan Transportation to install aggregate it transported.”
FOF 7: “Titan Transportation did not own any of the aggregate it transported.”
FOF 8: “Titan Transportation did not acquire or produce any goods sold in the ordinary course of business.”
FOF 9: “Titan Transportation did not provide labor or materials to a construction project.”
FOF 13: “Payments from Titan Transportation‘s customers did not flow through Titan Transportation to [its] subcontractors.”
FOF 14: “Payments from Titan Transportation‘s customers were not payments handled by Titan Transportation to provide services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property.”
COL 2: “Titan Transportation may not exclude its $10,683,668 in payments to its subcontractors from gross revenue under
COL 3: “Titan Transportation is not entitled to take a cost of goods sold deduction under
COL 5: “Titan Transportation‘s Franchise tax is correctly calculated in Column E of [the Comptroller‘s amended tax statement]. Titan Transportation‘s correct tax due was $17,922.75.”